UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM N-CSRS
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number 811-05387
Franklin Mutual Series Funds
(Exact name of registrant as specified in charter)
101 John F. Kennedy Parkway, Short Hills, NJ 07078-2705
(Address of principal executive offices) (Zip code)
Craig S. Tyle, One Franklin Parkway, San Mateo, CA 94403-1906
(Name and address of agent for service)
Registrant's telephone number, including area code: (210) 912-2100
Date of fiscal year end: _12/31
Date of reporting period: 6/30/16
Item 1. Reports to Stockholders.
Contents | |
Semiannual Report | |
Franklin Mutual Beacon Fund | 3 |
Performance Summary | 9 |
Your Fund’s Expenses | 12 |
Financial Highlights and Statement of Investments | 14 |
Financial Statements | 26 |
Notes to Financial Statements | 30 |
Shareholder Information | 42 |
Visit franklintempleton.com for fund updates, to access your account, or to find helpful financial planning tools.
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Franklin Mutual Beacon Fund
We are pleased to bring you Franklin Mutual Beacon Fund’s semiannual report for the period ended June 30, 2016.
Your Fund’s Goals and Main Investments
The Fund seeks capital appreciation, which may occasionally be short term, with income as a secondary goal. The Fund focuses mainly on what the investment manager believes are undervalued mid- and large-cap equity securities with a significant portion of its assets in foreign securities and, to a lesser extent, in the securities of distressed companies and merger arbitrage securities. The Fund may invest up to 100% of its assets in foreign securities.
Performance Overview
The Fund’s Class Z shares delivered a +4.55% cumulative total return for the six months ended June 30, 2016. In comparison, the Fund’s new benchmark, the MSCI World Index, which tracks stock performance in global developed markets, posted a +1.02% total return, while its old equity benchmark, the Standard & Poor’s 500 Index (S&P 500®), which is a broad measure of U.S. stock performance, generated a +3.84% total return.1 As the investment manager believes the composition of the MSCI World Index more accurately reflects the Fund’s holdings, it has replaced the S&P 500 as the Fund’s benchmark. You can find more of the Fund’s performance data in the Performance Summary beginning on page 9.
Performance data represent past performance, which does not guarantee future results. Investment return and principal value will fluctuate, and you may have a gain or loss when you sell your shares. Current performance may differ from figures shown. For most recent month-end performance, go to franklintempleton.com or call (800) 342-5236.
Economic and Market Overview
The global economy expanded during the six months under review. An improvement in commodity prices including a rally in crude oil prices, accommodative monetary policy from various global central banks, finalization of the new debt deal for Greece and encouraging Chinese trade data toward period-end boosted market sentiment. However, global equity market volatility increased after the U.S. Federal Reserve’s (Fed’s) June decision to keep its federal funds target range unchanged, while providing a cautious stance on further interest rate hikes. In addition, global economic concerns and the U.K.’s historic referendum to leave the European Union (EU), also known as the “Brexit,” contributed to volatile global stock markets.
*Figures are stated as a percentage of total and may not equal 100% or may be negative due to rounding, use of any derivatives, unsettled trades or other factors. The Fund held 33.0% of total net assets in foreign securities.
1. Source: Morningstar.
The indexes are unmanaged and include reinvestment of any income or distributions. They do not reflect any fees, expenses or sales charges. One cannot invest directly in an
index, and an index is not representative of the Fund’s portfolio.
The dollar value, number of shares or principal amount, and names of all portfolio holdings are listed in the Fund’s Statement of Investments (SOI). The SOI
begins on page 19.
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Oil prices fell at the beginning of the review period, largely due to a strong global supply, but recovered in the period’s second half amid oilfield outages and continued demand growth. Meanwhile, commodity prices increased for most of the review period as oversupply for a host of commodities shrank and the market appeared to be on the path of rebalancing after hitting a glut-induced bottom earlier in the year. Gold prices continued to rise following the Brexit referendum as some investors turned to safe haven investing. The U.S. dollar generally depreciated against most currencies during the period, which increased returns of many foreign assets in U.S. dollar terms. In this environment, global developed market stocks overall, as measured by the MSCI World Index, rose slightly during the period.
The U.S. economy grew moderately, as measured by gross domestic product (GDP) in 2016’s first and second quarters, driven by consumer spending and exports. A decline in private inventory investment and non-residential fixed investment contributed to the moderation. The Fed maintained its target interest rate during the review period after raising it for the first time in nine years at its December 2015 meeting. The Fed kept its target rate unchanged in its June meeting mainly due to a substantial slowdown in job additions toward period-end. The Fed expects economic conditions to evolve in a manner that could warrant only gradual increases in the federal funds rate.
In Europe, slower U.K. economic growth continued in 2016’s first quarter as output slowed in construction, production and agriculture. Immediate effects of the Brexit materialized as U.K. stocks significantly declined and the pound sterling hit a three-decade low amid intensified selling. Credit rating agencies Standard & Poor’s and Fitch also downgraded the U.K.’s credit rating. In the eurozone, despite investors’ concerns about banking sector weakness, low corporate earnings and post-Brexit political repercussions, some regions benefited due to rising consumer spending resulting from a cheaper euro, low inflation and signs of sustained economic growth. The euro-zone’s annual inflation rate remained in negative territory for most of the review period; however, it rose marginally above zero in June.
Japan’s economy posted mixed results, contracting in 2015’s fourth quarter stemming from declining private and household consumption. However, the economy expanded during 2016’s first quarter as private consumption increased and business investment decreased less than anticipated. The Bank of Japan (BOJ) took several actions during the review period. In January, to boost lending and support inflation, the BOJ introduced a negative interest rate on excess reserves held at the central bank by financial institutions. In April, the BOJ further reduced its
Top 10 Sectors/Industries | ||
Based on Equity Securities as of 6/30/16 | ||
% of Total | ||
Net Assets | ||
Pharmaceuticals | 11.3 | % |
Software | 11.0 | % |
Banks | 9.9 | % |
Media | 8.6 | % |
Health Care Equipment & Supplies | 5.7 | % |
Communications Equipment | 3.9 | % |
Insurance | 3.9 | % |
Technology Hardware, Storage & Peripherals | 3.3 | % |
Oil, Gas & Consumable Fuels | 3.2 | % |
Tobacco | 3.1 | % |
GDP and inflation forecasts for fiscal year 2016, and decided against additional quantitative easing measures. However, after the U.K.’s vote in June to leave the EU, the BOJ hinted at carrying out flexible open market operations to stabilize its financial markets.
In emerging markets, economic growth generally moderated during the review period. Brazil’s economy witnessed its longest recession since the 1930s amid political and economic turmoil, while Russia’s economy continued to contract. The Bank of Russia reduced its key interest rate in an attempt to revive its economy. China’s economic growth slowed marginally in 2016’s first quarter compared to the previous quarter, but remained largely in line with the government’s target. The People’s Bank of China cut its cash reserve requirement ratio for the country’s banks and effectively devalued the renminbi against the U.S. dollar to the lowest level in more than five years. Overall, emerging market stocks, as measured by the MSCI Emerging Markets Index, rose for the six-month period under review.
Investment Strategy
At Franklin Mutual Series, we are committed to our distinctive value approach to investing, which we believe can generate above-average risk-adjusted returns over time for our shareholders. Our major investment strategy is investing in undervalued stocks. When selecting undervalued equities, we are attracted to what we believe are fundamentally strong companies with healthy balance sheets, high-quality assets, substantial free cash flow and shareholder-oriented management teams and whose stocks are trading at discounts to our assessment of the companies’ intrinsic or business value. We also look for asset rich companies whose shares may be trading at depressed levels due to concerns over short-term earnings disappointments, litigation, management strategy or other
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perceived negatives. This strict value approach is not only intended to improve the likelihood of upside potential, but it is also intended to reduce the risk of substantial declines. While the vast majority of our undervalued equity investments are made in publicly traded companies globally, we may invest occasionally in privately held companies as well.
We complement this more traditional investment strategy with two others. One is distressed investing, a highly specialized field that has proven quite profitable during certain periods over the years. Distressed investing is complex and can take many forms. The most common distressed investment the Fund undertakes is the purchase of financially troubled or bankrupt companies’ debt at a substantial discount to face value. After the financially distressed company is reorganized, often in bankruptcy court, the old debt is typically replaced with new securities issued by the financially stronger company.
The other piece of our investment strategy is participating in arbitrage situations, another highly specialized field. When companies announce proposed mergers or takeovers, commonly referred to as “deals,” the target company may trade at a discount to the bid it ultimately accepts. One form of arbitrage involves purchasing the target company’s stock when it is trading below the value we believe it would receive in a deal. In keeping with our commitment to a relatively conservative investment approach, we typically focus our arbitrage efforts on announced deals, and avoid rumored deals or other situations we consider relatively risky.
In addition, it is our practice to hedge the Fund’s currency exposure when we deem it advantageous for our shareholders.
What is meant by “hedge”?
To hedge an investment is to take a position intended to offset potential losses/gains that may be incurred by a companion financial instrument.
Manager’s Discussion
Economic and political uncertainty influenced markets during the six months under review. The year 2016 began with severe economic uncertainty. Brent oil prices plunged below US$30 per barrel as fears of a global recession spread. Global equity markets dropped from the start of the year, continuing a downward move from mid-2015 highs, before bottoming in mid-February. Commodity and equity prices rose over the following four months, before a late June surprise: the result of the Brexit vote, signaling the beginning of the end of the U.K.’s 43-year membership in the EU. Uncertainty about the future status of
the U.K. as well as implications for the EU and the global economy weighed on markets at the end of the period.
Equity prices are typically forward looking, reflecting investors’ beliefs about how various factors and events will play out in the future. Global equity prices at period-end were down from mid-2015 highs, reflecting increased uncertainty among investors regarding the consequences of Brexit in addition to long-standing concerns about China, commodity prices, interest rates and geopolitical events.
Following the momentous decision by U.K. voters on June 23 to leave the EU, we believe it is probable that the U.K. will face a heightened risk of an economic slowdown, as businesses will likely put investment decisions on hold while waiting for greater clarity. The negative impact on the rest of the EU will likely be less severe, although economic growth in the region was already running at a modest pace before the vote, and we do not believe the region will be immune. Among the region’s equity markets, we believe that financial and domestically oriented cyclical stocks were being perceived by some investors as more vulnerable. Those stocks that were viewed as defensive, as well as stocks with what we consider attractive dividend yields, will likely remain in favor among many investors, in our view, causing them to trade at even higher valuation multiples. Within the U.K., large multinational companies that generate most of their earnings abroad should benefit from the precipitous fall of the British pound that followed the Brexit vote. In this respect, the Fund’s exposure to U.K. equities was predominantly through a number of these global companies. Also, the Fund has only a modest exposure to European financials, particularly in banks.
Although the Brexit vote is clearly a negative surprise, we do not believe it will usher in a new global financial crisis similar to the one experienced eight years ago. While markets reacted brutally to the U.K.’s decision to leave the EU, we have not seen any systemic shock like the one that followed the fall of Lehman Brothers in 2008. We also believe that, eventually, the U.K. and the EU will come to an acceptable agreement concerning trade relations.
Three of the Fund’s top 10 positions at period-end were in health care.2 Merck, Medtronic and Switzerland-based Novartis are global companies that meet important customer needs with products protected by intellectual property. This focus on innovation that improves the lives of customers gives us confidence in the sustainability of their businesses. In addition, each has strong financial characteristics, including the ability to invest in research and development and acquisitions, while also
2. The health care sector comprises health care equipment and supplies and pharmaceuticals in the SOI.
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providing material returns to shareholders, and trading at valuations that are attractive from our perspective as value investors.
The Fund also featured three information technology (IT) firms in its top ten positions: Microsoft, Symantec and Samsung Electronics.3 Microsoft features a strong global business based on innovation and meeting customer needs, including its fast-growing cloud business, while also returning excess capital to shareholders through dividends and share buybacks. Symantec also competes through innovation in providing security software to individuals and enterprises. Following a restructuring of its activities, the company is now focused on the fast-growing market for web-related security, while also returning capital to shareholders. South Korea-based Samsung Electronics, another meaningful position of the Fund in this sector, competes in more capital intensive commodity markets such as memory semiconductors and smartphones. In these areas, we believe that Samsung has advantages of scale and expertise relative to many of its competitors. In our view, these firms, like the health care firms mentioned previously, share these positive attributes as well as valuations that we, as value investors, find compelling.
Merger and acquisition (M&A) activity continued to be strong in the first half of 2016, helping to support valuations. Although deal volumes remained near historical highs, regulators globally continued to be more aggressive in their scrutiny of potentially negative effects of high industry concentration. We were disappointed to see regulators successfully sue to block the merger of Office Depot and Staples. Less surprising was the collapse of Halliburton’s attempt to acquire Baker Hughes (a Fund holding) on antitrust grounds, or the largest failure, Pfizer’s withdrawn attempt to acquire Allergan in the face of the U.S. Treasury Department’s new rules on tax inversions. We continue to be active in this space and work to ensure the potential rewards are big enough to outweigh the clear risks that exist in the current environment.
Credit spreads widened dramatically across industries and countries early in the period and subsequently narrowed. This was particularly apparent in subinvestment-grade credit, which created additional challenges for sectors, including energy, metals and mining that were already experiencing distress. The precipitous decline in commodity prices globally over the past two years resulted in heightened bankruptcy activity. Dislocations in debt capital markets created some unique opportunities, in our view, especially in stressed and event-driven credit situations where we feel that the yield reached attractive levels and that cheap enterprise valuation protected the downside. By the end of the period, credit spreads had tightened materially from their intra-period highs. Although the current environment seems less attractive to us than a few months ago, volatility remained at heightened levels. In our experience, we believe that patience will be rewarded and the increase in global risk premiums will result in more opportunities.
Turning to Fund performance, top contributors included British American Tobacco, oil and gas and exploration and production company Marathon Oil and metals and mining company Free-port McMoRan.
Shares of U.K.-based British American Tobacco rose as many equity market investors showed a preference for defensive stocks (perceived to be less sensitive to economic conditions and/or having an attractive dividend yield, such as consumer staples) amid tepid global economic conditions, the low interest-rate environment and the late June U.K. referendum result in favor of leaving the EU. In our view, British American Tobacco remains an attractive position given the current management team, its portfolio of brands and track record of returning capital to shareholders.
Improved crude oil prices during the period helped many energy sector stocks, including U.S.-based Marathon Oil. The company announced solid first-quarter results in May that were aided by lower-than-expected cash costs, solid production volume and the continued trend of capital expenditures running below guidance. In April, the company announced the sale of some sizable non-core assets which further strengthened its balance sheet. These positive events and a recently completed equity offering led to a reassessment of the risk faced by Marathon in the current environment, which we believe was substantively misperceived earlier in the year. Finally, in late June, Marathon announced an acquisition of Payrock Energy (not a Fund holding) which was well received by the market. We believe the price paid for the assets was reasonable and may significantly augment Marathon Oil’s attractive holdings in Oklahoma.
The Fund’s equity holdings in Freeport McMoRan moved in line with the general improvement of commodity prices through April, particularly for copper. In February, our position also benefited from positive events that were part of our investment thesis. Indonesia’s Energy and Mineral Resources Ministry granted Freeport a new six-month copper export permit. The permit ended a stoppage in the company’s Indonesia copper mining activities related to a dispute between Freeport and Indonesia’s government regarding payment for a new metal smelter. Later in the month, Freeport announced an agreement
3. The IT sector comprises communications equipment; Internet software and services; software; and technology hardware, storage and peripherals in the SOI.
See www.franklintempletondatasources.com for additional data provider information.
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to sell its partial interest in an Arizona copper mine to Sumitomo Metal Mining for US$1 billion. In May, Freeport announced the sale of its stake in an African copper operation to China Molybdenum for US$2.7 billion. These transactions support Freeport’s efforts to sell US$5–$10 billion in assets and use the proceeds to reduce debt. The prices paid for the assets implied a copper price of $2.75–$3.00 per pound—compared to $2.15 per pound at period-end—which indicates an industry view of medium- to long-term prices.
During the period under review, Fund investments that detracted from performance included banking and financial services companies Société Générale and Wells Fargo and pharmaceutical services company Teva Pharmaceutical Industries.
The stock price of France-based lender Société Générale dropped sharply in late June as investors reacted negatively to the U.K.’s referendum vote in June to leave the EU. Earlier in the period, the company’s shares declined on full-year results that missed consensus estimates, largely due to soft investment banking numbers. Company management also stated that it would likely miss return targets in 2016 because of historically low interest rates and volatile financial markets.
Shares of U.S.-based lender Wells Fargo followed the broad-based decline in financial stocks in late June after the U.K.’s Brexit referendum result. The stock also dropped sharply in January and early February, driven by ongoing investor concerns about the health of the global economy, the bank’s loan exposure to U.S. energy companies as oil prices deteriorated, and scaled-back expectations regarding potential interest rate hikes by the U.S. Fed. We believe that investor concerns regarding Wells Fargo’s lending exposure to energy companies were overdone, the bank’s energy-related loan portfolio has performed in line with expectations and that, in our view, substantial reserves have already been set aside.
Shares of Israel-based Teva Pharmaceutical Industries followed the broad-based retreat in global financial markets in January and early February. The stock slid further in March after the company announced a delay in the closing of its acquisition of Allergan’s generics unit. Teva has been working to obtain approval from the U.S. Federal Trade Commission, including multiple asset sales agreements in June, in an effort to close the deal in July 2016. In our view, a delay of three to four months will postpone the potential realization of synergies but not have a meaningful impact on the expected medium-term value of the deal. Heightened concerns around generic price deflation were also a significant drag on the stock price despite Teva’s management stating that the company did not experience the sharp price declines affecting some competitors.
Top 10 Equity Holdings | ||
6/30/16 | ||
Company | % of Total | |
Sector/Industry, Country | Net Assets | |
Merck & Co. Inc. | 3.7 | % |
Pharmaceuticals, U.S. | ||
Medtronic PLC | 3.6 | % |
Health Care Equipment & Supplies, U.S. | ||
Samsung Electronics Co. Ltd. | 3.3 | % |
Technology Hardware, Storage & Peripherals, | ||
South Korea | ||
British American Tobacco PLC | 3.1 | % |
Tobacco, U.K. | ||
JPMorgan Chase & Co. | 3.1 | % |
Banks, U.S. | ||
Microsoft Corp. | 3.1 | % |
Software, U.S. | ||
Novartis AG | 3.1 | % |
Pharmaceuticals, Switzerland | ||
Symantec Corp. | 3.0 | % |
Software, U.S. | ||
Wells Fargo & Co. | 2.9 | % |
Banks, U.S. | ||
Vodaphone Group PLC | 2.8 | % |
Wireless Telecommunication Services, U.K. |
During the period, the Fund held currency forwards and futures to hedge a significant portion of the currency risk of the portfolio’s non-U.S. dollar investments. The currency forwards had a positive impact on the Fund’s performance, while currency futures had a negligible impact.
What is a currency forward?
A currency forward is an agreement between the Fund and a counterparty to buy or sell a foreign currency in exchange for another currency at a specific exchange rate on a future date.
What is a future?
A future is an agreement between the Fund and a counterparty made through a U.S. or foreign futures exchange to buy or sell an underlying instrument or asset at a specific price on a future date.
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Thank you for your continued participation in Franklin Mutual Beacon Fund. We look forward to continuing to serve your investment needs.
The foregoing information reflects our analysis, opinions and portfolio holdings as of June 30, 2016, the end of the reporting period. The way we implement our main investment strategies and the resulting portfolio holdings may change depending on factors such as market and economic conditions. These opinions may not be relied upon as investment advice or an offer for a particular security. The information is not a complete analysis of every aspect of any market, country, industry, security or the Fund. Statements of fact are from sources considered reliable, but the investment manager makes no representation or warranty as to their completeness or accuracy. Although historical performance is no guarantee of future results, these insights may help you understand our investment management philosophy.
CFA® is a trademark owned by CFA Institute.
Christian Correa has been portfolio manager for Franklin Mutual Beacon Fund since 2007 and a co-portfolio manager since December 2010. He joined Franklin Temple-ton Investments in 2003 and serves as Director of Research for Franklin Mutual Advisers. Previously, he covered merger arbitrage and special situations at Lehman Brothers Holdings Inc.
Mandana Hormozi has been a co-portfolio manager for Franklin Mutual Beacon Fund since 2010 and was assistant portfolio manager for the Fund since 2009. Before that, she was assistant portfolio manager for Franklin Mutual Global Discovery Fund since 2007. She has been an analyst for Franklin Mutual Advisers since 2003, when she joined Franklin Templeton Investments. Previously, she was a senior vice president in the equity research department at Lazard Freres. Also, she was an economic research analyst at Mitsubishi Bank.
Aman Gupta has been assistant portfolio manager for Franklin Mutual Beacon Fund since December 2013 and has been an analyst for Franklin Mutual Advisers since 2010. Previously, Mr. Gupta was a senior equity analyst and director at Evergreen Investments, where he covered the health care industry with additional responsibilities in the consumer and industrials sectors.
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Performance Summary as of June 30, 2016
Your dividend income will vary depending on dividends or interest paid by securities in the Fund’s portfolio, adjusted for operating expenses of each class. Capital gain distributions are net profits realized from the sale of portfolio securities. The performance table does not reflect any taxes that a shareholder would pay on Fund dividends, capital gain distributions, if any, or any realized gains on the sale of Fund shares. Total return reflects reinvestment of the Fund’s dividends and capital gain distributions, if any, and any unrealized gains or losses.
Net Asset Value | |||||
Share Class (Symbol) | 6/30/16 | 12/31/15 | Change | ||
Z (BEGRX) | $ | 14.95 | $ | 14.30 | +$0.65 |
A (TEBIX) | $ | 14.82 | $ | 14.20 | +$0.62 |
C (TEMEX) | $ | 14.66 | $ | 14.10 | +$0.56 |
R (n/a) | $ | 14.65 | $ | 14.05 | +$0.60 |
R6 (FMBRX) | $ | 14.95 | $ | 14.30 | +$0.65 |
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Performance as of 6/30/16
Cumulative total return excludes sales charges. Average annual total return and value of $10,000 investment include maximum sales charges. Class Z/R/R6: no sales charges; Class A: 5.75% maximum initial sales charge; Class C: 1% contingent deferred sales charge in first year only.
Cumulative | Average Annual | Value of $10,000 | Total Annual | |||||
Share Class | Total Return1 | Total Return2 | Investment3 | Operating Expenses4 | ||||
Z | 0.84 | % | ||||||
6-Month | +4.55 | % | +4.55 | % | $ | 10,455 | ||
1-Year | -2.89 | % | -2.89 | % | $ | 9,711 | ||
5-Year | +48.68 | % | +8.26 | % | $ | 14,868 | ||
10-Year | +58.05 | % | +4.68 | % | $ | 15,805 | ||
A | 1.09 | % | ||||||
6-Month | +4.37 | % | -1.66 | % | $ | 9,834 | ||
1-Year | -3.09 | % | -8.69 | % | $ | 9,131 | ||
5-Year | +46.61 | % | +6.68 | % | $ | 13,817 | ||
10-Year | +53.47 | % | +3.76 | % | $ | 14,462 | ||
C | 1.84 | % | ||||||
6-Month | +3.97 | % | +2.97 | % | $ | 10,297 | ||
1-Year | -3.87 | % | -4.74 | % | $ | 9,526 | ||
5-Year | +41.43 | % | +7.18 | % | $ | 14,143 | ||
10-Year | +43.07 | % | +3.65 | % | $ | 14,307 | ||
R | 1.34 | % | ||||||
6-Month | +4.27 | % | +4.27 | % | $ | 10,427 | ||
1-Year | -3.37 | % | -3.37 | % | $ | 9,663 | ||
5-Year | +45.02 | % | +7.72 | % | $ | 14,502 | ||
Since Inception (10/30/09) | +79.96 | % | +9.21 | % | $ | 17,996 | ||
R6 | 0.74 | % | ||||||
6-Month | +4.55 | % | +4.55 | % | $ | 10,455 | ||
1-Year | -2.78 | % | -2.78 | % | $ | 9,722 | ||
3-Year | +22.41 | % | +6.97 | % | $ | 12,241 | ||
Since Inception (5/1/13) | +25.39 | % | +7.41 | % | $ | 12,539 |
Performance data represent past performance, which does not guarantee future results. Investment return and principal value will fluctuate, and you may have a gain or loss when you sell your shares. Current performance may differ from figures shown. For most recent month-end performance, go to franklintempleton.com or call (800) 342-5236.
See page 11 for Performance Summary footnotes.
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All investments involve risks, including possible loss of principal. Value securities may not increase in price as anticipated or may decline further in value. Special risks are associated with foreign investing, including currency fluctuations, economic instability and political developments. Smaller company stocks have exhibited greater price volatility than larger company stocks, particularly over the short term. The Fund’s investments in companies engaged in mergers, reorganizations or liquidations also involve special risks as pending deals may not be completed on time or on favorable terms. The Fund may invest in lower rated bonds, which entail higher credit risk. The Fund is actively managed but there is no guarantee that the manager’s investment decisions will produce the desired results. The Fund’s prospectus also includes a description of the main investment risks.
Class Z: | Shares are available to certain eligible investors as described in the prospectus. |
Class C: | These shares have higher annual fees and expenses than Class A shares. |
Class R: | Shares are available to certain eligible investors as described in the prospectus. These shares have higher annual fees and expenses than Class A shares. |
Class R6: | Shares are available to certain eligible investors as described in the prospectus. |
1. Cumulative total return represents the change in value of an investment over the periods indicated.
2. Average annual total return represents the average annual change in value of an investment over the periods indicated. Return for less than one year, ifany,has not
been annualized.
3. These figures represent the value of a hypothetical $10,000 investment in the Fund over the periods indicated.
4. Figures are as stated in the Fund’s current prospectus and may differ from the expense ratios disclosed in the Financial Highlights in this report. In periods of market vola-
tility, assets may decline significantly, causing total annual Fund operating expenses to become higher than the figures shown.
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Your Fund’s Expenses
As a Fund shareholder, you can incur two types of costs:
- Transaction costs, including sales charges (loads) on Fund purchases; and
- Ongoing Fund costs, including management fees, distribution and service (12b-1) fees, and other Fund expenses. All mutual funds have ongoing costs, sometimes referred to as operat- ing expenses.
The following table shows ongoing costs of investing in the Fund and can help you understand these costs and compare them with those of other mutual funds. The table assumes a $1,000 investment held for the six months indicated.
Actual Fund Expenses
The first line (Actual) for each share class listed in the table provides actual account values and expenses. The “Ending Account Value” is derived from the Fund’s actual return, which includes the effect of Fund expenses.
You can estimate the expenses you paid during the period by following these steps. Of course, your account value and expenses will differ from those in this illustration:
1. Divide your account value by $1,000.
If an account had an $8,600 value, then $8,600 ÷ $1,000 = 8.6.
2. Multiply the result by the number under the heading “Expenses Paid During Period.”
If Expenses Paid During Period were $7.50, then 8.6 × $7.50 = $64.50.
In this illustration, the estimated expenses paid this period are $64.50.
Hypothetical Example for Comparison with Other Funds
Information in the second line (Hypothetical) for each class in the table can help you compare ongoing costs of investing in the Fund with those of other mutual funds. This information may not be used to estimate the actual ending account balance or expenses you paid during the period. The hypothetical “Ending Account Value” is based on the actual expense ratio for each class and an assumed 5% annual rate of return before expenses, which does not represent the Fund’s actual return. The figure under the heading “Expenses Paid During Period” shows the hypothetical expenses your account would have incurred under this scenario. You can compare this figure with the 5% hypothetical examples that appear in shareholder reports of other funds.
Please note that expenses shown in the table are meant to highlight ongoing costs and do not reflect any transaction costs, such as sales charges. Therefore, the second line for each class is useful in comparing ongoing costs only, and will not help you compare total costs of owning different funds. In addition, if transaction costs were included, your total costs would have been higher. Please refer to the Fund prospectus for additional information on operating expenses.
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YOUR FUND’S EXPENSES
Beginning Account | Ending Account | Expenses Paid During | ||||
Share Class | Value 1/1/16 | Value 6/30/16 | Period* 1/1/16–6/30/16 | |||
Z | ||||||
Actual | $ | 1,000 | $ | 1,045.50 | $ | 4.07 |
Hypothetical (5% return before expenses) | $ | 1,000 | $ | 1,020.89 | $ | 4.02 |
A | ||||||
Actual | $ | 1,000 | $ | 1,043.70 | $ | 5.34 |
Hypothetical (5% return before expenses) | $ | 1,000 | $ | 1,019.64 | $ | 5.27 |
C | ||||||
Actual | $ | 1,000 | $ | 1,039.70 | $ | 9.13 |
Hypothetical (5% return before expenses) | $ | 1,000 | $ | 1,015.91 | $ | 9.02 |
R | ||||||
Actual | $ | 1,000 | $ | 1,042.70 | $ | 6.60 |
Hypothetical (5% return before expenses) | $ | 1,000 | $ | 1,018.40 | $ | 6.52 |
R6 | ||||||
Actual | $ | 1,000 | $ | 1,045.50 | $ | 3.56 |
Hypothetical (5% return before expenses) | $ | 1,000 | $ | 1,021.38 | $ | 3.52 |
*Expenses are calculated using the most recent six-month expense ratio, annualized for each class (Z: 0.80%; A: 1.05%; C: 1.80%; R: 1.30%; and R6: 0.70%), multiplied by the average account value over the period, multiplied by 182/366 to reflect the one-half year period.
franklintempleton.com
Semiannual Report 13
FRANKLIN MUTUAL BEACON FUND
Financial Highlights | ||||||||||||||||||
Six Months Ended | Year Ended December 31, | |||||||||||||||||
June 30, 2016 | ||||||||||||||||||
(unaudited) | 2015 | 2014 | 2013 | 2012 | 2011 | |||||||||||||
Class Z | ||||||||||||||||||
Per share operating performance | ||||||||||||||||||
(for a share outstanding throughout the period) | ||||||||||||||||||
Net asset value, beginning of period | $ | 14.30 | $ | 16.59 | $ | 16.91 | $ | 13.36 | $ | 11.68 | $ | 12.32 | ||||||
Income from investment operationsa: | ||||||||||||||||||
Net investment incomeb | 0.28 | c | 0.29 | 0.54 | d | 0.31 | 0.24 | 0.28 | ||||||||||
Net realized and unrealized gains (losses) | 0.37 | (0.99 | ) | 0.62 | �� | 3.56 | 1.68 | (0.57 | ) | |||||||||
Total from investment operations | 0.65 | (0.70 | ) | 1.16 | 3.87 | 1.92 | (0.29 | ) | ||||||||||
Less distributions from: | ||||||||||||||||||
Net investment income | — | (0.37 | ) | (0.69 | ) | (0.32 | ) | (0.24 | ) | (0.35 | ) | |||||||
Net realized gains | — | (1.22 | ) | (0.79 | ) | — | — | — | ||||||||||
Total distributions | — | (1.59 | ) | (1.48 | ) | (0.32 | ) | (0.24 | ) | (0.35 | ) | |||||||
Net asset value, end of period | $ | 14.95 | $ | 14.30 | $ | 16.59 | $ | 16.91 | $ | 13.36 | $ | 11.68 | ||||||
Total returne | 4.55 | % | (4.14 | )% | 6.82 | % | 29.11 | % | 16.44 | % | (2.15 | )% | ||||||
Ratios to average net assetsf | ||||||||||||||||||
Expensesg | 0.80 | %h | 0.84 | %h,i | 0.83 | %h | 0.80 | %h | 0.84 | % | 0.84 | % | ||||||
Expenses incurred in connection with securities | ||||||||||||||||||
sold short | —%j | 0.04 | % | 0.04 | % | —%j | 0.01 | % | —%j | |||||||||
Net investment income | 3.99 | %c | 1.73 | % | 3.14 | %d | 2.02 | % | 1.87 | % | 2.24 | % | ||||||
Supplemental data | ||||||||||||||||||
Net assets, end of period (000’s) | $ | 2,384,510 | $ | 2,420,165 | $ | 2,774,929 | $ | 2,876,322 | $ | 2,450,546 | $ | 2,423,177 | ||||||
Portfolio turnover rate | 13.33 | % | 35.80 | % | 40.06 | % | 32.95 | % | 43.23 | % | 51.38 | % |
aThe amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases
of the Fund’s shares in relation to income earned and/or fluctuating fair value of the investments of the Fund.
bBased on average daily shares outstanding.
cNet investment income per share includes approximately $0.08 per share related to income received in the form of special dividends in connection with certain Fund holdings.
Excluding this amount, the ratio of net investment income to average net assets would have been 2.78%.
dNet investment income per share includes approximately $0.24 per share related to income received in the form of a special dividend in connection with certain Fund holdings.
Excluding this amount, the ratio of net investment income to average net assets would have been 1.74%.
eTotal return is not annualized for periods less than one year.
fRatios are annualized for periods less than one year.
gIncludes dividend and/or interest expense on securities sold short and security borrowing fees, if any. See below for the ratios of such expenses to average net assets for the
periods presented. See Note 1(f).
hBenefit of expense reduction rounds to less than 0.01%.
iBenefit of waiver and payments by affiliates rounds to less than 0.01%.
jRounds to less than 0.01%.
14 Semiannual Report | The accompanying notes are an integral part of these financial statements.
franklintempleton.com
FRANKLIN MUTUAL BEACON FUND
FINANCIAL H IGHLIGHTS
Six Months Ended | Year Ended December 31, | |||||||||||||||||
June 30, 2016 | ||||||||||||||||||
(unaudited) | 2015 | 2014 | 2013 | 2012 | 2011 | |||||||||||||
Class A | ||||||||||||||||||
Per share operating performance | ||||||||||||||||||
(for a share outstanding throughout the | ||||||||||||||||||
period) | ||||||||||||||||||
Net asset value, beginning of period | $ | 14.20 | $ | 16.47 | $ | 16.80 | $ | 13.28 | $ | 11.61 | $ | 12.24 | ||||||
Income from investment operationsa: | ||||||||||||||||||
Net investment incomeb | 0.26 | c | 0.24 | 0.49 | d | 0.26 | 0.20 | 0.24 | ||||||||||
Net realized and unrealized gains | ||||||||||||||||||
(losses) | 0.36 | (0.97 | ) | 0.60 | 3.54 | 1.67 | (0.56 | ) | ||||||||||
Total from investment operations | 0.62 | (0.73 | ) | 1.09 | 3.80 | 1.87 | (0.32 | ) | ||||||||||
Less distributions from: | ||||||||||||||||||
Net investment income | — | (0.32 | ) | (0.63 | ) | (0.28 | ) | (0.20 | ) | (0.31 | ) | |||||||
Net realized gains | — | (1.22 | ) | (0.79 | ) | — | — | — | ||||||||||
Total distributions | — | (1.54 | ) | (1.42 | ) | (0.28 | ) | (0.20 | ) | (0.31 | ) | |||||||
Net asset value, end of period | $ | 14.82 | $ | 14.20 | $ | 16.47 | $ | 16.80 | $ | 13.28 | $ | 11.61 | ||||||
Total returne | 4.37 | % | (4.33 | )% | 6.48 | % | 28.70 | % | 16.10 | % | (2.50 | )% | ||||||
Ratios to average net assetsf | ||||||||||||||||||
Expensesg | 1.05 | %h | 1.12 | %h,i | 1.13 | %h | 1.10 | %h | 1.14 | % | 1.14 | % | ||||||
Expenses incurred in connection with | ||||||||||||||||||
securities sold short | —%j | 0.04 | % | 0.04 | % | —%j | 0.01 | % | —%j | |||||||||
Net investment income | 3.74 | %c | 1.45 | % | 2.84 | %d | 1.72 | % | 1.57 | % | 1.94 | % | ||||||
Supplemental data | ||||||||||||||||||
Net assets, end of period (000’s) | $ | 979,737 | $ | 1,019,568 | $ | 1,101,706 | $ | 1,148,409 | $ | 983,981 | $ | 1,062,477 | ||||||
Portfolio turnover rate | 13.33 | % | 35.80 | % | 40.06 | % | 32.95 | % | 43.23 | % | 51.38 | % |
aThe amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases
of the Fund’s shares in relation to income earned and/or fluctuating fair value of the investments of the Fund.
bBased on average daily shares outstanding.
cNet investment income per share includes approximately $0.08 per share related to income received in the form of special dividends in connection with certain Fund holdings.
Excluding this amount, the ratio of net investment income to average net assets would have been 2.53%.
dNet investment income per share includes approximately $0.24 per share related to income received in the form of a special dividend in connection with certain Fund
holdings. Excluding this amount, the ratio of net investment income to average net assets would have been 1.44%.
eTotal return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year.
fRatios are annualized for periods less than one year.
gIncludes dividend and/or interest expense on securities sold short and security borrowing fees, if any. See below for the ratios of such expenses to average net assets for the
periods presented. See Note 1(f).
hBenefit of expense reduction rounds to less than 0.01%.
iBenefit of waiver and payments by affiliates rounds to less than 0.01%.
jRounds to less than 0.01%.
franklintempleton.com
The accompanying notes are an integral part of these financial statements. | Semiannual Report 15
FRANKLIN MUTUAL BEACON FUND
FINANCIAL H IGHLIGHTS
Six Months Ended | Year Ended December 31, | |||||||||||||||||
June 30, 2016 | ||||||||||||||||||
(unaudited) | 2015 | 2014 | 2013 | 2012 | 2011 | |||||||||||||
Class C | ||||||||||||||||||
Per share operating performance | ||||||||||||||||||
(for a share outstanding throughout the period) | ||||||||||||||||||
Net asset value, beginning of period | $ | 14.10 | $ | 16.36 | $ | 16.70 | $ | 13.21 | $ | 11.54 | $ | 12.16 | ||||||
Income from investment operationsa: | ||||||||||||||||||
Net investment incomeb | 0.21 | c | 0.12 | 0.37 | d | 0.15 | 0.11 | 0.15 | ||||||||||
Net realized and unrealized gains (losses) | 0.35 | (0.96 | ) | 0.59 | 3.51 | 1.66 | (0.55 | ) | ||||||||||
Total from investment operations | 0.56 | (0.84 | ) | 0.96 | 3.66 | 1.77 | (0.40 | ) | ||||||||||
Less distributions from: | ||||||||||||||||||
Net investment income | — | (0.20 | ) | (0.51 | ) | (0.17 | ) | (0.10 | ) | (0.22 | ) | |||||||
Net realized gains | — | (1.22 | ) | (0.79 | ) | — | — | — | ||||||||||
Total distributions | — | (1.42 | ) | (1.30 | ) | (0.17 | ) | (0.10 | ) | (0.22 | ) | |||||||
Net asset value, end of period | $ | 14.66 | $ | 14.10 | $ | 16.36 | $ | 16.70 | $ | 13.21 | $ | 11.54 | ||||||
Total returne | 3.97 | % | (5.06 | )% | 5.78 | % | 27.79 | % | 15.29 | % | (3.15 | )% | ||||||
Ratios to average net assetsf | ||||||||||||||||||
Expensesg | 1.80 | %h | 1.84 | %h,i | 1.83 | %h | 1.80 | %h | 1.84 | % | 1.84 | % | ||||||
Expenses incurred in connection with securities sold | ||||||||||||||||||
short | —%j | 0.04 | % | 0.04 | % | —%j | 0.01 | % | —%j | |||||||||
Net investment income | 2.99 | %c | 0.73 | % | 2.14 | %d | 1.02 | % | 0.87 | % | 1.24 | % | ||||||
Supplemental data | ||||||||||||||||||
Net assets, end of period (000’s) | $ | 269,699 | $ | 285,333 | $ | 320,832 | $ | 336,222 | $ | 295,958 | $ | 315,390 | ||||||
Portfolio turnover rate | 13.33 | % | 35.80 | % | 40.06 | % | 32.95 | % | 43.23 | % | 51.38 | % |
aThe amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases
of the Fund’s shares in relation to income earned and/or fluctuating fair value of the investments of the Fund.
bBased on average daily shares outstanding.
cNet investment income per share includes approximately $0.08 per share related to income received in the form of special dividends in connection with certain Fund holdings.
Excluding this amount, the ratio of net investment income to average net assets would have been 1.78%.
dNet investment income per share includes approximately $0.24 per share related to income received in the form of a special dividend in connection with certain Fund holdings.
Excluding this amount, the ratio of net investment income to average net assets would have been 0.74%.
eTotal return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year.
fRatios are annualized for periods less than one year.
gIncludes dividend and/or interest expense on securities sold short and security borrowing fees, if any. See below for the ratios of such expenses to average net assets for the
periods presented. See Note 1(f).
hBenefit of expense reduction rounds to less than 0.01%.
iBenefit of waiver and payments by affiliates rounds to less than 0.01%.
jRounds to less than 0.01%.
16 Semiannual Report | The accompanying notes are an integral part of these financial statements.
franklintempleton.com
FRANKLIN MUTUAL BEACON FUND
FINANCIAL H IGHLIGHTS
Six Months Ended | Year Ended December 31, | |||||||||||||||||
June 30, 2016 | ||||||||||||||||||
(unaudited) | 2015 | 2014 | 2013 | 2012 | 2011 | |||||||||||||
Class R | ||||||||||||||||||
Per share operating performance | ||||||||||||||||||
(for a share outstanding throughout the period) | ||||||||||||||||||
Net asset value, beginning of period | $ | 14.05 | $ | 16.33 | $ | 16.68 | $ | 13.19 | $ | 11.52 | $ | 12.16 | ||||||
Income from investment operationsa: | ||||||||||||||||||
Net investment incomeb | 0.25 | c | 0.20 | 0.44 | d | 0.23 | 0.18 | 0.21 | ||||||||||
Net realized and unrealized gains (losses) | 0.35 | (0.97 | ) | 0.61 | 3.50 | 1.66 | (0.55 | ) | ||||||||||
Total from investment operations | 0.60 | (0.77 | ) | 1.05 | 3.73 | 1.84 | (0.34 | ) | ||||||||||
Less distributions from: | ||||||||||||||||||
Net investment income | — | (0.29 | ) | (0.61 | ) | (0.24 | ) | (0.17 | ) | (0.30 | ) | |||||||
Net realized gains | — | (1.22 | ) | (0.79 | ) | — | — | — | ||||||||||
Total distributions | — | (1.51 | ) | (1.40 | ) | (0.24 | ) | (0.17 | ) | (0.30 | ) | |||||||
Net asset value, end of period | $ | 14.65 | $ | 14.05 | $ | 16.33 | $ | 16.68 | $ | 13.19 | $ | 11.52 | ||||||
Total returne | 4.27 | % | (4.61 | )% | 6.31 | % | 28.34 | % | 15.95 | % | (2.69 | )% | ||||||
Ratios to average net assetsf | ||||||||||||||||||
Expensesg | 1.30 | %h | 1.34 | %h,i | 1.33 | %h | 1.30 | %h | 1.34 | % | 1.34 | % | ||||||
Expenses incurred in connection with securities | ||||||||||||||||||
sold short | —%j | 0.04 | % | 0.04 | % | —%j | 0.01 | % | —%j | |||||||||
Net investment income | 3.49 | %c | 1.23 | % | 2.64 | %d | 1.52 | % | 1.37 | % | 1.74 | % | ||||||
Supplemental data | ||||||||||||||||||
Net assets, end of period (000’s) | $ | 1,782 | $ | 2,343 | $ | 2,246 | $ | 1,956 | $ | 1,905 | $ | 2,039 | ||||||
Portfolio turnover rate | 13.33 | % | 35.80 | % | 40.06 | % | 32.95 | % | 43.23 | % | 51.38 | % |
aThe amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases
of the Fund’s shares in relation to income earned and/or fluctuating fair value of the investments of the Fund.
bBased on average daily shares outstanding.
cNet investment income per share includes approximately $0.08 per share related to income received in the form of special dividends in connection with certain Fund holdings.
Excluding this amount, the ratio of net investment income to average net assets would have been 2.28%.
dNet investment income per share includes approximately $0.24 per share related to income received in the form of a special dividend in connection with certain Fund holdings.
Excluding this amount, the ratio of net investment income to average net assets would have been 1.24%.
eTotal return is not annualized for periods less than one year.
fRatios are annualized for periods less than one year.
gIncludes dividend and/or interest expense on securities sold short and security borrowing fees, if any. See below for the ratios of such expenses to average net assets for the
periods presented. See Note 1(f).
hBenefit of expense reduction rounds to less than 0.01%.
iBenefit of waiver and payments by affiliates rounds to less than 0.01%.
jRounds to less than 0.01%.
franklintempleton.com
The accompanying notes are an integral part of these financial statements. | Semiannual Report 17
FRANKLIN MUTUAL BEACON FUND
FINANCIAL H IGHLIGHTS
Six Months Ended | Year Ended December 31, | |||||||||||
June 30, 2016 | ||||||||||||
(unaudited) | 2015 | 2014 | 2013 | a | ||||||||
Class R6 | ||||||||||||
Per share operating performance | ||||||||||||
(for a share outstanding throughout the period) | ||||||||||||
Net asset value, beginning of period | $ | 14.30 | $ | 16.58 | $ | 16.88 | $ | 14.77 | ||||
Income from investment operationsb: | ||||||||||||
Net investment incomec | 0.29 | d | 0.30 | 0.56 | e | 0.24 | ||||||
Net realized and unrealized gains (losses) | 0.36 | (0.98 | ) | 0.63 | 2.21 | |||||||
Total from investment operations | 0.65 | (0.68 | ) | 1.19 | 2.45 | |||||||
Less distributions from: | ||||||||||||
Net investment income | — | (0.38 | ) | (0.70 | ) | (0.34 | ) | |||||
Net realized gains | — | (1.22 | ) | (0.79 | ) | — | ||||||
Total distributions | — | (1.60 | ) | (1.49 | ) | (0.34 | ) | |||||
Net asset value, end of period | $ | 14.95 | $ | 14.30 | $ | 16.58 | $ | 16.88 | ||||
Total returnf | 4.55 | % | (3.98 | )% | 6.91 | % | 16.83 | % | ||||
Ratios to average net assetsg | ||||||||||||
Expenses before waiver, payments by affiliates and expense reductionh | 0.70 | % | 0.74 | % | 0.74 | % | 2.10 | % | ||||
Expenses net of waiver, payments by affiliates and expense reductionh,i | 0.70 | % | 0.74 | %j | 0.74 | % | 0.71 | % | ||||
Expenses incurred in connection with securities sold short | —%k | 0.04 | % | 0.04 | % | —%k | ||||||
Net investment income | 4.09 | %d | 1.83 | % | 3.23 | %e | 2.11 | % | ||||
Supplemental data | ||||||||||||
Net assets, end of period (000’s) | $ | 48,338 | $ | 48,844 | $ | 50,868 | $ | 6 | ||||
Portfolio turnover rate | 13.33 | % | 35.80 | % | 40.06 | % | 32.95 | % |
aFor the period May 1, 2013 (effective date) to December 31, 2013.
bThe amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases
of the Fund’s shares in relation to income earned and/or fluctuating fair value of the investments of the Fund.
cBased on average daily shares outstanding.
dNet investment income per share includes approximately $0.08 per share related to income received in the form of special dividends in connection with certain Fund holdings.
Excluding this amount, the ratio of net investment income to average net assets would have been 2.88%.
eNet investment income per share includes approximately $0.24 per share related to income received in the form of a special dividend in connection with certain Fund hold-
ings. Excluding this amount, the ratio of net investment income to average net assets would have been 1.83%.
fTotal return is not annualized for periods less than one year.
gRatios are annualized for periods less than one year.
hIncludes dividend and/or interest expense on securities sold short and security borrowing fees, if any. See below for the ratios of such expenses to average net assets for the
periods presented. See Note 1(f).
iBenefit of expense reduction rounds to less than 0.01%.
jBenefit of waiver and payments by affiliates rounds to less than 0.01%.
kRounds to less than 0.01%.
18 Semiannual Report | The accompanying notes are an integral part of these financial statements.
franklintempleton.com
FRANKLIN MUTUAL BEACON FUND
Statement of Investments, June 30, 2016 (unaudited) | ||||
Country | Shares/Units | Value | ||
Common Stocks and Other Equity Interests 86.8% | ||||
Aerospace & Defense 2.3% | ||||
a,b KLX Inc | United States | 2,761,040 | $ | 85,592,240 |
Auto Components 0.3% | ||||
a,c International Automotive Components Group Brazil LLC | Brazil | 2,846,329 | 46,859 | |
a,c,d International Automotive Components Group North America LLC | United States | 22,836,904 | 10,074,866 | |
10,121,725 | ||||
Banks 9.9% | ||||
JPMorgan Chase & Co | United States | 1,854,380 | 115,232,002 | |
Societe Generale SA | France | 2,239,390 | 70,119,083 | |
Standard Chartered PLC | United Kingdom | 9,642,557 | 72,592,799 | |
Wells Fargo & Co | United States | 2,226,980 | 105,402,963 | |
363,346,847 | ||||
Chemicals 1.9% | ||||
The Chemours Co. LLC | United States | 2,561,641 | 21,107,922 | |
a,e,f Dow Corning Corp., Contingent Distribution | United States | 12,598,548 | — | |
Syngenta AG | Switzerland | 65,090 | 24,946,388 | |
Tronox Ltd., A | United States | 5,442,927 | 24,003,308 | |
70,057,618 | ||||
Communications Equipment 3.9% | ||||
Cisco Systems Inc | United States | 2,338,442 | 67,089,901 | |
Nokia Corp., ADR | Finland | 13,490,744 | 76,762,333 | |
143,852,234 | ||||
Construction & Engineering 1.0% | ||||
Sinopec Engineering Group Co. Ltd | China | 40,135,700 | 35,901,728 | |
Consumer Finance 2.4% | ||||
Capital One Financial Corp | United States | 1,408,418 | 89,448,627 | |
Diversified Telecommunication Services 2.8% | ||||
a,e,f Global Crossing Holdings Ltd., Contingent Distribution | United States | 60,632,757 | — | |
Koninklijke KPN NV | Netherlands | 28,086,580 | 101,473,645 | |
101,473,645 | ||||
Electrical Equipment 0.1% | ||||
a Sensata Technologies Holding NV | United States | 107,710 | 3,758,002 | |
Energy Equipment & Services 1.8% | ||||
Baker Hughes Inc | United States | 1,462,257 | 65,991,658 | |
Food & Staples Retailing 3.1% | ||||
a Rite Aid Corp | United States | 2,379,041 | 17,819,017 | |
Walgreens Boots Alliance Inc | United States | 1,177,451 | 98,046,345 | |
115,865,362 | ||||
Health Care Equipment & Supplies 6.2% | ||||
Medtronic PLC | United States | 1,544,700 | 134,033,619 | |
St. Jude Medical Inc | United States | 490,820 | 38,283,960 | |
Stryker Corp | United States | 483,703 | 57,962,130 | |
230,279,709 | ||||
Insurance 3.9% | ||||
The Allstate Corp | United States | 808,866 | 56,580,177 | |
White Mountains Insurance Group Ltd | United States | 102,299 | 86,135,758 | |
142,715,935 |
franklintempleton.com
Semiannual Report 19
FRANKLIN MUTUAL BEACON FUND
STATEMENT OF INVESTMENTS (UNAUDITED)
Country | Shares/Units | Value | ||
Common Stocks and Other Equity Interests (continued) | ||||
Internet Software & Services 1.4% | ||||
a Baidu Inc., ADR | China | 313,577 | $ | 51,787,241 |
IT Services 0.8% | ||||
Xerox Corp | United States | 2,957,703 | 28,068,601 | |
Machinery 1.9% | ||||
Caterpillar Inc | United States | 929,960 | 70,500,268 | |
Media 8.6% | ||||
a Charter Communications Inc., A | United States | 239,187 | 54,687,716 | |
a DISH Network Corp., A | United States | 520,481 | 27,273,204 | |
a Liberty Global PLC LiLAC, C | United Kingdom | 247,867 | 8,053,201 | |
a Liberty Global PLC, C | United Kingdom | 1,986,610 | 56,916,377 | |
Time Warner Inc | United States | 1,351,872 | 99,416,667 | |
Twenty-First Century Fox Inc., B | United States | 2,574,318 | 70,150,165 | |
316,497,330 | ||||
Metals & Mining 1.4% | ||||
g,h Freeport-McMoRan Inc., B | United States | 4,791,069 | 53,372,509 | |
Oil, Gas & Consumable Fuels 3.2% | ||||
Marathon Oil Corp | United States | 6,204,169 | 93,124,577 | |
a,c,d Warrior Met Coal LLC, A | United States | 10,273 | 1,035,687 | |
a,c,d Warrior Met Coal LLC, B | United States | 24,026 | 2,422,215 | |
The Williams Cos. Inc | United States | 947,112 | 20,486,032 | |
117,068,511 | ||||
Pharmaceuticals 11.3% | ||||
Eli Lilly & Co | United States | 1,023,009 | 80,561,959 | |
GlaxoSmithKline PLC | United Kingdom | 2,150,447 | 46,007,530 | |
Merck & Co. Inc | United States | 2,342,630 | 134,958,914 | |
Novartis AG, ADR | Switzerland | 1,361,860 | 112,367,068 | |
Teva Pharmaceutical Industries Ltd., ADR | Israel | 869,603 | 43,680,159 | |
417,575,630 | ||||
Software 11.0% | ||||
CA Inc | United States | 2,331,659 | 76,548,365 | |
a Check Point Software Technologies Ltd | Israel | 613,666 | 48,896,907 | |
Microsoft Corp | United States | 2,210,782 | 113,125,715 | |
Open Text Corp | Canada | 926,638 | 54,819,904 | |
Symantec Corp | United States | 5,413,230 | 111,187,744 | |
404,578,635 | ||||
Specialty Retail 0.3% | ||||
a Office Depot Inc | United States | 3,481,770 | 11,524,659 | |
Technology Hardware, Storage & Peripherals 1.4% | ||||
Samsung Electronics Co. Ltd | South Korea | 41,103 | 50,810,916 | |
Tobacco 3.1% | ||||
British American Tobacco PLC | United Kingdom | 1,796,882 | 116,036,462 | |
Wireless Telecommunication Services 2.8% | ||||
Vodafone Group PLC | United Kingdom | 33,931,619 | 102,998,924 | |
Total Common Stocks and Other Equity Interests | ||||
(Cost $2,804,571,778) | 3,199,225,016 |
20 Semiannual Report
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FRANKLIN MUTUAL BEACON FUND
STATEMENT OF INVESTMENTS (UNAUDITED)
Country | Shares/Units | Value | |||
Preferred Stocks 3.9% | |||||
Automobiles 2.0% | |||||
i Porsche Automobil Holding SE, 2.446% pfd | Germany | 389,371 | $ | 17,864,257 | |
i Volkswagen AG, 0.157% pfd | Germany | 449,777 | 54,066,606 | ||
71,930,863 | |||||
Technology Hardware, Storage & Peripherals 1.9% | |||||
i Samsung Electronics Co. Ltd., 1.775% pfd | South Korea | 70,039 | 71,877,558 | ||
Total Preferred Stocks (Cost $134,357,213) | 143,808,421 | ||||
Principal | |||||
Amount* | |||||
Corporate Bonds, Notes and Senior Floating Rate Interests 2.5% | |||||
iHeartCommunications Inc., | |||||
senior secured note, first lien, 9.00%, 12/15/19 | United States | 18,873,000 | 14,414,254 | ||
j,k Tranche D Term Loan, 7.21%, 1/30/19 | United States | 15,813,482 | 11,622,910 | ||
j,k Tranche E Term Loan, 7.96%, 7/30/19 | United States | 5,080,935 | 3,737,663 | ||
l Valeant Pharmaceuticals International, | |||||
senior bond, 144A, 6.75%, 8/15/21 | United States | 2,208,000 | 1,893,360 | ||
senior bond, 144A, 7.25%, 7/15/22 | United States | 1,654,000 | 1,426,906 | ||
senior note, 144A, 6.375%, 10/15/20 | United States | 16,366,000 | 14,156,590 | ||
j,k,m Veritas Software Corp., | |||||
Term Loan B1, 6.625%, 6/15/23 | United States | 118,703 | EUR | 112,430 | |
Term Loan B1, 6.625%, 1/27/23 | United States | 11,349,733 | 9,931,016 | ||
Term Loan B2, 8.625%, 1/27/23 | United States | 10,956,295 | 9,408,718 | ||
l Veritas U.S. Inc./Veritas Bermuda Ltd., senior note, 144A, 10.50%, 2/01/24 | United States | 13,577,000 | 11,608,335 | ||
l Western Digital Corp., senior note, 144A, 10.50%, 4/01/24 | United States | 13,099,000 | 14,048,677 | ||
Total Corporate Bonds, Notes and Senior Floating Rate | |||||
Interests (Cost $98,532,590) | 92,360,859 | ||||
Corporate Notes and Senior Floating Rate Interests in | |||||
Reorganization 2.1% | |||||
c,n Broadband Ventures III LLC, secured promissory note, 5.00%, 2/01/12 | United States | 10,848 | — | ||
j,k,n Caesars Entertainment Operating Co. Inc., 1.50%, 3/01/17, | |||||
Term B-5-B Loans | United States | 7,949,777 | 7,843,783 | ||
Term B-6-B Loans | United States | 33,533,690 | 33,617,524 | ||
Term B-7 Loans | United States | 10,720,130 | 10,836,261 | ||
n Samson Investment Co., senior note, 9.75%, 2/15/20 | United States | 14,349,000 | 322,853 | ||
j,k,n Texas Competitive Electric Holdings Co. LLC, Term Loans, 4.943%, 10/10/17 | United States | 46,282,735 | 15,524,016 | ||
l,n Texas Competitive Electric Holdings Co. LLC/Texas Competitive Electric | |||||
Holdings Finance Inc., senior secured note, first lien, 144A, | |||||
4.934%, 10/01/20 | United States | 28,306,000 | 9,694,805 | ||
l,n,o Walter Energy Inc., second lien, 144A, PIK, 11.50%, 4/01/20 | United States | 4,557,750 | 1,595 | ||
Total Corporate Notes and Senior Floating Rate Interests in | |||||
Reorganization (Cost $123,589,931) | 77,840,837 | ||||
Shares | |||||
Companies in Liquidation 0.2% | |||||
a Adelphia Recovery Trust | United States | 48,268,724 | 101,364 | ||
a,e Adelphia Recovery Trust, Arahova Contingent Value Vehicle, Contingent | |||||
Distribution | United States | 6,161,087 | 61,611 | ||
a,b,c,d CB FIM Coinvestors LLC | United States | 15,831,950 | — | ||
a,e,f Century Communications Corp., Contingent Distribution | United States | 16,986,000 | — | ||
a,c FIM Coinvestor Holdings I, LLC | United States | 19,805,560 | — |
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Semiannual Report 21
FRANKLIN MUTUAL BEACON FUND
STATEMENT OF INVESTMENTS (UNAUDITED)
Country | Shares | Value | ||||
Companies in Liquidation (continued) | ||||||
a,p Lehman Brothers Holdings Inc., Bankruptcy Claim | United States | 163,140,446 | $ | 5,098,139 | ||
a,e,f Tribune Media Litigation Trust, Contingent Distribution | United States | 496,810 | — | |||
Total Companies in Liquidation (Cost $15,480,090) | 5,261,114 | |||||
Principal | ||||||
Amount* | ||||||
Municipal Bonds (Cost $14,893,432) 0.3% | ||||||
Puerto Rico Commonwealth GO, Refunding, Series A, 8.00%, 7/01/35 | United States | 17,038,000 | 11,394,162 | |||
Notional | ||||||
Counterparty | Amount* | |||||
Options Purchased 0.0%† | ||||||
Puts - Over-the-Counter | ||||||
Currency Options 0.0%† | ||||||
CNY/USD, August Strike Price 7.387 CNY, Expires 8/03/16 | FBCO | 72,563,026 | CNY | 29 | ||
CNY/USD, August Strike Price 7.398 CNY, Expires 8/03/16 | HSBC | 215,783,503 | CNY | 58 | ||
CNY/USD, August Strike Price 7.43 CNY, Expires 8/03/16 | FBCO | 36,495,179 | CNY | 5 | ||
CNY/USD, August Strike Price 7.44 CNY, Expires 8/03/16 | HSBC | 58,470,878 | CNY | 8 | ||
CNY/USD, August Strike Price 7.51 CNY, Expires 8/03/16 | FBCO | 184,439,404 | CNY | 25 | ||
CNY/USD, December Strike Price 7.255 CNY, Expires 12/14/16 | HSBC | 101,885,593 | CNY | 64,544 | ||
CNY/USD, December Strike Price 7.27 CNY, Expires 12/15/16 | HSBC | 115,149,530 | CNY | 70,959 | ||
CNY/USD, December Strike Price 7.27 CNY, Expires 12/15/16 | MSCS | 65,544,866 | CNY | 40,391 | ||
Total Options Purchased (Cost $988,744) | 176,019 | |||||
Total Investments before Short Term Investments | ||||||
(Cost $3,192,413,778) | 3,530,066,428 | |||||
Principal | ||||||
Country | Amount* | |||||
Short Term Investments 3.6% | ||||||
U.S. Government and Agency Securities 3.6% | ||||||
FHLB, 7/01/16 | United States | 47,900,000 | 47,900,000 | |||
g,q U.S. Treasury Bill, 7/07/16 - 12/08/16 | United States | 83,915,000 | 83,859,709 | |||
Total U.S. Government and Agency Securities | ||||||
(Cost $131,726,630) | 131,759,709 | |||||
Total Investments (Cost $3,324,140,408) 99.4% | 3,661,826,137 | |||||
Options Written (0.0)%† | (165,255 | ) | ||||
Securities Sold Short (0.5)% | (16,801,330 | ) | ||||
Other Assets, less Liabilities 1.1% | 39,206,317 | |||||
Net Assets 100.0% | $ | 3,684,065,869 | ||||
Number of | ||||||
Contracts | ||||||
r Options Written (Premiums Received $227,495) (0.0)%† | ||||||
Calls - Exchange-Traded | ||||||
Metals & Mining (0.0)%† | ||||||
Freeport-McMoRan Inc., B, August Strike Price $12, Expires 8/19/16 | United States | 2,395 | $ | (165,255 | ) |
22 Semiannual Report
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FRANKLIN MUTUAL BEACON FUND
STATEMENT OF INVESTMENTS (UNAUDITED)
Country | Shares | Value | |||
s Securities Sold Short (Proceeds $16,551,206) (0.5)% | |||||
Common Stocks | |||||
Health Care Equipment & Supplies (0.5)% | |||||
Abbott Laboratories | United States | 427,406 | $ | (16,801,330 | ) |
†Rounds to less than 0.1% of net assets.
*The principal/notional amount is stated in U.S. dollars unless otherwise indicated.
aNon-income producing.
bSee Note 11 regarding holdings of 5% voting securities.
cSee Note 9 regarding restricted securities.
dAt June 30, 2016, pursuant to the Fund’s policies and the requirements of applicable securities law, the Fund is restricted from trading these securities at period end.
eContingent distributions represent the right to receive additional distributions, if any, during the reorganization of the underlying company. Shares represent total underlying
principal of debt securities.
fSecurity has been deemed illiquid because it may not be able to be sold within seven days.
gA portion or all of the security has been segregated as collateral for securities sold short and open written options contracts. At June 30, 2016, the aggregate value of these
securities and/or cash pledged amounted to $28,116,765, representing 0.8% of net assets
hA portion or all of the security is held in connection with written option contracts open at period end.
iVariable rate security. The rate shown represents the yield at period end.
jSee Note 1(h) regarding senior floating rate interests.
kThe coupon rate shown represents the rate at period end.
lSecurity was purchased pursuant to Rule 144A under the Securities Act of 1933 and may be sold in transactions exempt from registration only to qualified institutional buyers
or in a public offering registered under the Securities Act of 1933. These securities have been deemed liquid under guidelines approved by the Trust’s Board of Trustees. At
June 30, 2016, the aggregate value of these securities was $52,830,268, representing 1.4% of net assets.
mSecurity purchased on a delayed delivery basis. See Note 1(c).
nSee Note 8 regarding credit risk and defaulted securities.
oIncome may be received in additional securities and/or cash.
pBankruptcy claims represent the right to receive distributions, if any, during the liquidation of the underlying pool of assets. Shares represent amount of allowed unsecured claims.
qThe security is traded on a discount basis with no stated coupon rate.
rSee Note 1(d) regarding written options.
sSee Note 1(f) regarding securities sold short.
franklintempleton.com
Semiannual Report 23
FRANKLIN MUTUAL BEACON FUND
STATEMENT OF INVESTMENTS (UNAUDITED)
At June 30, 2016, the Fund had the following futures contracts outstanding. See Note 1(d). | |||||||||||||
Futures Contracts | |||||||||||||
Number of | Notional | Expiration | Unrealized | Unrealized | |||||||||
Description | Type | Contracts | Value | Date | Appreciation | Depreciation | |||||||
Currency Contracts | |||||||||||||
EUR/USD | Short | 953 | $132,318,094 | 9/19/16 | $ | 3,696,526 | $ | — | |||||
GBP/USD | Short | 1,705 | 141,174,000 | 9/19/16 | 13,434,984 | — | |||||||
Total Futures Contracts | $ | 17,131,510 | $ | — | |||||||||
Net unrealized appreciation (depreciation) | $ | 17,131,510 | |||||||||||
At June 30, 2016, the Fund had the following forward exchange contracts outstanding. See Note 1(d). | |||||||||||||
Forward Exchange Contracts | |||||||||||||
Contract | Settlement | Unrealized | Unrealized | ||||||||||
Currency | Counterpartya Type | Quantity | Amount | Date | Appreciation | Depreciation | |||||||
OTC Forward Exchange Contracts | |||||||||||||
Euro | BANT | Buy | 5,487,865 | $ | 6,138,585 | 7/06/16 | $ | 5,880 | $ | (51,844 | ) | ||
Euro | BANT | Sell | 14,942,958 | 16,325,874 | 7/06/16 | 9,394 | (273,172 | ) | |||||
Euro | BONY | Buy | 6,192,665 | 6,938,120 | 7/06/16 | — | (63,031 | ) | |||||
Euro | FBCO | Buy | 7,396,606 | 8,298,757 | 7/06/16 | — | (87,054 | ) | |||||
Euro | FBCO | Sell | 1,912,905 | 2,166,694 | 7/06/16 | 42,989 | — | ||||||
Euro | HSBC | Buy | 5,615,575 | 6,292,133 | 7/06/16 | — | (57,729 | ) | |||||
Euro | HSBC | Sell | 14,988,723 | 16,378,021 | 7/06/16 | 11,056 | (273,497 | ) | |||||
Euro | SSBT | Buy | 7,151,875 | 8,014,016 | 7/06/16 | — | (74,014 | ) | |||||
British Pound | BANT | Buy | 5,051,843 | 7,095,749 | 7/21/16 | 9,924 | (368,300 | ) | |||||
British Pound | BANT | Sell | 21,541,396 | 30,545,506 | 7/21/16 | 1,816,894 | — | ||||||
British Pound | DBFX | Sell | 728,544 | 1,048,593 | 7/21/16 | 76,973 | — | ||||||
British Pound | FBCO | Sell | 1,101,397 | 1,573,136 | 7/21/16 | 104,262 | — | ||||||
British Pound | HSBC | Buy | 3,237,326 | 4,459,066 | 7/21/16 | 16,265 | (157,882 | ) | |||||
British Pound | HSBC | Sell | 17,604,529 | 24,950,183 | 7/21/16 | 1,471,960 | — | ||||||
British Pound | SSBT | Buy | 2,291,241 | 3,274,645 | 7/21/16 | — | (218,939 | ) | |||||
British Pound | SSBT | Sell | 1,233,769 | 1,764,697 | 7/21/16 | 119,285 | — | ||||||
Euro | BANT | Buy | 2,363,231 | 2,600,113 | 7/21/16 | 25,014 | — | ||||||
Euro | BANT | Sell | 53,284,672 | 58,606,566 | 7/21/16 | 89,278 | (672,453 | ) | |||||
Euro | BONY | Buy | 2,839,547 | 3,125,583 | 7/21/16 | 28,646 | — | ||||||
Euro | BONY | Sell | 4,237,950 | 4,671,250 | 7/21/16 | 13,616 | (49,971 | ) | |||||
Euro | DBFX | Sell | 176,000 | 192,815 | 7/21/16 | — | (2,690 | ) | |||||
Euro | FBCO | Buy | 3,718,284 | 4,093,916 | 7/21/16 | 36,432 | — | ||||||
Euro | FBCO | Sell | 3,788,000 | 4,253,415 | 7/21/16 | 65,780 | (20,155 | ) | |||||
Euro | HSBC | Buy | 3,718,284 | 4,094,760 | 7/21/16 | 35,588 | — | ||||||
Euro | HSBC | Sell | 11,701,861 | 12,945,360 | 7/21/16 | 21,829 | (75,143 | ) | |||||
Euro | SSBT | Buy | 3,718,284 | 4,089,715 | 7/21/16 | 40,634 | — | ||||||
Euro | SSBT | Sell | 13,143,679 | 14,574,958 | 7/21/16 | 54,539 | (79,858 | ) | |||||
South Korean Won | BANT | Buy | 13,496,795,884 | 11,474,740 | 8/12/16 | 235,307 | (7,834 | ) | |||||
South Korean Won | BANT | Sell | 20,260,642,585 | 16,884,783 | 8/12/16 | 3,083 | (685,013 | ) | |||||
South Korean Won | FBCO | Sell | 35,903,807,971 | 30,800,529 | 8/12/16 | 254,076 | (583,455 | ) | |||||
South Korean Won | HSBC | Buy | 5,153,308,970 | 4,453,451 | 8/12/16 | 30,176 | (15,521 | ) | |||||
South Korean Won | HSBC | Sell | 37,788,684,915 | 31,316,547 | 8/12/16 | 5,720 | (1,453,337 | ) | |||||
British Pound | BANT | Sell | 7,113,929 | 10,144,630 | 8/19/16 | 654,494 | — | ||||||
British Pound | FBCO | Sell | 3,000,000 | 4,283,550 | 8/19/16 | 281,485 | — | ||||||
British Pound | HSBC | Sell | 1,867,388 | 2,662,262 | 8/19/16 | 171,126 | — | ||||||
Euro | HSBC | Sell | 7,658,283 | 8,724,478 | 10/03/16 | 193,368 | — | ||||||
Euro | SSBT | Sell | 6,233,454 | 7,109,230 | 10/03/16 | 165,338 | — | ||||||
Euro | BANT | Sell | 4,093,670 | 4,659,130 | 10/18/16 | 96,154 | — | ||||||
Euro | SSBT | Sell | 3,230,387 | 3,660,164 | 10/18/16 | 59,440 | — | ||||||
British Pound | SSBT | Sell | 3,429,894 | 4,933,868 | 10/24/16 | 354,645 | — | ||||||
Euro | BANT | Sell | 15,107,699 | 17,494,715 | 11/04/16 | 643,552 | — | ||||||
Euro | HSBC | Sell | 15,107,699 | 17,502,269 | 11/04/16 | 651,106 | — | ||||||
South Korean Won | BANT | Sell | 15,376,612,591 | 13,319,028 | 11/14/16 | — | (5,311 | ) | |||||
South Korean Won | FBCO | Sell | 14,183,133,306 | 12,304,856 | 11/14/16 | 15,511 | (805 | ) | |||||
South Korean Won | HSBC | Sell | 33,736,577,246 | 29,537,368 | 11/14/16 | 319,509 | (15,991 | ) |
24 Semiannual Report
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FRANKLIN MUTUAL BEACON FUND
STATEMENT OF INVESTMENTS (UNAUDITED)
Forward Exchange Contracts (continued) | |||||||||||
Contract | Settlement | Unrealized | Unrealized | ||||||||
Currency | Counterpartya Type | Quantity | Amount | Date | Appreciation | Depreciation | |||||
OTC Forward Exchange Contracts (continued) | |||||||||||
Euro | BANT | Sell | 3,170,837 | $ | 3,545,498 | 11/18/16 | $ | 6,751 | $ | — | |
Euro | BONY | Sell | 13,976,930 | 15,877,776 | 11/18/16 | 279,693 | (583 | ) | |||
Euro | HSBC | Sell | 20,243,557 | 22,931,756 | 11/18/16 | 339,429 | (79 | ) | |||
Euro | SSBT | Sell | 3,503,492 | 3,948,387 | 11/18/16 | 38,527 | (141 | ) | |||
British Pound | BANT | Sell | 1,684,587 | 2,257,305 | 11/23/16 | 9,899 | (2,570 | ) | |||
British Pound | BONY | Sell | 23,081,905 | 33,644,621 | 11/23/16 | 2,815,850 | — | ||||
British Pound | FBCO | Sell | 414,688 | 560,814 | 11/23/16 | 6,946 | — | ||||
British Pound | HSBC | Sell | 17,366,777 | 25,007,296 | 11/23/16 | 1,816,728 | (4,935 | ) | |||
British Pound | SSBT | Sell | 3,036,581 | 4,066,439 | 11/23/16 | 16,606 | (5,900 | ) | |||
Total Forward Exchange Contracts | $ | 13,560,757 | $ | (5,307,207 | ) | ||||||
Net unrealized appreciation (depreciation) | $ | 8,253,550 | |||||||||
aMay be comprised of multiple contracts with the same counterparty, currency and settlement date. | |||||||||||
See Abbreviations on page 41. |
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The accompanying notes are an integral part of these financial statements. | Semiannual Report 25
FRANKLIN MUTUAL BEACON FUND
Financial Statements | ||
Statement of Assets and Liabilities | ||
June 30, 2016 (unaudited) | ||
Assets: | ||
Investments in securities: | ||
Cost - Unaffiliated issuers | $ | 3,217,669,673 |
Cost - Non-controlled affiliates (Note 11) | 106,470,735 | |
Total cost of investments | $ | 3,324,140,408 |
Value - Unaffiliated issuers | $ | 3,576,233,897 |
Value - Non-controlled affiliates (Note 11) | 85,592,240 | |
Total value of investments | 3,661,826,137 | |
Cash | 2,804,856 | |
Restricted Cash (Note 1e) | 700,000 | |
Foreign currency, at value (cost $2,594,625) | 2 ,589,979 | |
Receivables: | ||
Investment securities sold | 8,576,196 | |
Capital shares sold | 1,107,163 | |
Dividends and interest | 20,890,549 | |
European Union tax reclaims | 1,876,063 | |
Due from brokers | 26,914,250 | |
Variation margin | 2,324,081 | |
Unrealized appreciation on OTC forward exchange contracts | 13,560,757 | |
Other assets | 1,929 | |
Total assets | 3,743,171,960 | |
Liabilities: | ||
Payables: | ||
Investment securities purchased | 27,809,218 | |
Capital shares redeemed | 3,238,701 | |
Management fees | 2,033,007 | |
Distribution fees | 860,815 | |
Transfer agent fees | 655,589 | |
Trustees’ fees and expenses | 226,853 | |
Options written, at value (premiums received $227,495) | 165,255 | |
Securities sold short, at value (proceeds $16,551,206) | 16,801,330 | |
Due to brokers | 1,800,000 | |
Unrealized depreciation on OTC forward exchange contracts | 5,307,207 | |
Accrued expenses and other liabilities | 208,116 | |
Total liabilities | 59,106,091 | |
Net assets, at value | $ | 3,684,065,869 |
Net assets consist of: | ||
Paid-in capital | $ | 3,137,801,047 |
Undistributed net investment income | 65,324,954 | |
Net unrealized appreciation (depreciation) | 362,255,223 | |
Accumulated net realized gain (loss) | 118,684,645 | |
Net assets, at value | $ | 3,684,065,869 |
26 Semiannual Report | The accompanying notes are an integral part of these financial statements.
franklintempleton.com
FRANKLIN MUTUAL BEACON FUND
FINANCIAL STATEMENTS
Statement of Assets and Liabilities (continued) | ||
June 30, 2016 (unaudited) | ||
Class Z: | ||
Net assets, at value | $ | 2,384,509,508 |
Shares outstanding | 159,550,542 | |
Net asset value and maximum offering price per share | $ | 14.95 |
Class A: | ||
Net assets, at value | $ | 979,737,066 |
Shares outstanding | 66,127,320 | |
Net asset value per sharea | $ | 14.82 |
Maximum offering price per share (net asset value per share ÷ 94.25%) | $ | 15.72 |
Class C: | ||
Net assets, at value | $ | 269,699,136 |
Shares outstanding | 18,394,630 | |
Net asset value and maximum offering price per sharea | $ | 14.66 |
Class R: | ||
Net assets, at value | $ | 1,781,708 |
Shares outstanding | 121,624 | |
Net asset value and maximum offering price per share | $ | 14.65 |
Class R6: | ||
Net assets, at value | $ | 48,338,451 |
Shares outstanding | 3,233,291 | |
Net asset value and maximum offering price per share | $ | 14.95 |
aRedemption price is equal to net asset value less contingent deferred sales charges, if applicable. |
franklintempleton.com
The accompanying notes are an integral part of these financial statements. | Semiannual Report 27
FRANKLIN MUTUAL BEACON FUND
FINANCIAL STATEMENTS
Statement of Operations | |||
for the six months ended June 30, 2016 (unaudited) | |||
Investment income: | |||
Dividends | $ | 80,599,991 | |
Interest | 5,484,057 | ||
Total investment income | 86,084,048 | ||
Expenses: | |||
Management fees (Note 3a) | 12,130,375 | ||
Distribution fees: (Note 3c) | |||
Class A | 1,202,786 | ||
Class C | 1,337,830 | ||
Class R | 4,656 | ||
Transfer agent fees: (Note 3e) | |||
Class Z | 1,195,202 | ||
Class A | 497,083 | ||
Class C | 138,205 | ||
Class R | 962 | ||
Class R6 | 380 | ||
Custodian fees (Note 4) | 67,605 | ||
Reports to shareholders | 106,643 | ||
Registration and filing fees | 56,391 | ||
Professional fees | 105,563 | ||
Trustees’ fees and expenses | 63,959 | ||
Dividends and/or interest on securities sold short | 16,342 | ||
Other | 39,802 | ||
Total expenses | 16,963,784 | ||
Expense reductions (Note 4) | (2,150 | ) | |
Net expenses | 16,961,634 | ||
Net investment income | 69,122,414 | ||
Realized and unrealized gains (losses): | |||
Net realized gain (loss) from: | |||
Investments: | |||
Unaffiliated issuers | 94,692,546 | ||
Controlled affiliates (Note 11) | (216,447 | ) | |
Written options | 256,163 | ||
Foreign currency transactions | 14,168,422 | ||
Futures contracts | 749,515 | ||
Securities sold short | (659,832 | ) | |
Net realized gain (loss) | 108,990,367 | ||
Net change in unrealized appreciation (depreciation) on: | |||
Investments | (30,540,129 | ) | |
Translation of other assets and liabilities denominated in foreign currencies | (7,533,537 | ) | |
Written options | 62,240 | ||
Futures contracts | 12,982,856 | ||
Net change in unrealized appreciation (depreciation) | (25,028,570 | ) | |
Net realized and unrealized gain (loss) | 83,961,797 | ||
Net increase (decrease) in net assets resulting from operations | $ | 153,084,211 |
28 Semiannual Report | The accompanying notes are an integral part of these financial statements.
franklintempleton.com
FRANKLIN MUTUAL BEACON FUND
FINANCIAL STATEMENTS
Statements of Changes in Net Assets | ||||||
Six Months Ended | ||||||
June 30, 2016 | Year Ended | |||||
(unaudited) | December 31, 2015 | |||||
Increase (decrease) in net assets: | ||||||
Operations: | ||||||
Net investment income | $ | 69,122,414 | $ | 66,294,977 | ||
Net realized gain (loss) | 108,990,367 | 283,496,093 | ||||
Net change in unrealized appreciation (depreciation) | (25,028,570 | ) | (520,319,967 | ) | ||
Net increase (decrease) in net assets resulting from operations | 153,084,211 | (170,528,897 | ) | |||
Distributions to shareholders from: | ||||||
Net investment income: | ||||||
Class Z | — | (58,009,414 | ) | |||
Class A | — | (21,453,939 | ) | |||
Class C | — | (3,841,292 | ) | |||
Class R | — | (47,012 | ) | |||
Class R6 | — | (1,193,201 | ) | |||
Net realized gains: | ||||||
Class Z | — | (192,557,510 | ) | |||
Class A | — | (81,200,001 | ) | |||
Class C | — | (23,270,842 | ) | |||
Class R | — | (194,535 | ) | |||
Class R6 | — | (3,774,972 | ) | |||
Total distributions to shareholders | — | (385,542,718 | ) | |||
Capital share transactions: (Note 2) | ||||||
Class Z | (136,608,481 | ) | 767,996 | |||
Class A | (79,768,856 | ) | 68,017,445 | |||
Class C | (25,590,958 | ) | 7,516,255 | |||
Class R | (618,482 | ) | 458,707 | |||
Class R6 | (2,683,088 | ) | 4,982,646 | |||
Total capital share transactions | (245,269,865 | ) | 81,743,049 | |||
Net increase (decrease) in net assets | (92,185,654 | ) | (474,328,566 | ) | ||
Net assets: | ||||||
Beginning of period | 3,776,251,523 | 4,250,580,089 | ||||
End of period | $ | 3,684,065,869 | $ | 3,776,251,523 | ||
Undistributed net investment income (distributions in excess of net investment income) | ||||||
included in net assets: | ||||||
End of period | $ | 65,324,954 | $ | (3,797,460 | ) |
franklintempleton.com
The accompanying notes are an integral part of these financial statements. | Semiannual Report 29
FRANKLIN MUTUAL BEACON FUND
Notes to Financial Statements (unaudited)
1. Organization and Significant Accounting Policies
Franklin Mutual Series Funds (Trust) is registered under the Investment Company Act of 1940 (1940 Act) as an open-end management investment company, consisting of seven separate funds and applies the specialized accounting and reporting guidance in U.S. Generally Accepted Accounting Principles (U.S. GAAP). Franklin Mutual Beacon Fund (Fund) is included in this report. The financial statements of the remaining funds in the Trust are presented separately. The Fund offers five classes of shares: Class Z, Class A, Class C, Class R and Class R6. Each class of shares differs by its initial sales load, contingent deferred sales charges, voting rights on matters affecting a single class, its exchange privilege and fees primarily due to differing arrangements for distribution and transfer agent fees.
The following summarizes the Fund’s significant accounting policies.
a. Financial Instrument Valuation
The Fund’s investments in financial instruments are carried at fair value daily. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date. The Fund calculates the net asset value per share as of 4 p.m. Eastern time each day the New York Stock Exchange (NYSE) is open for trading. Under compliance policies and procedures approved by the Trust’s Board of Trustees (the Board), the Fund’s administrator has responsibility for oversight of valuation, including leading the cross-functional Valuation Committee (VC). The VC provides administration and oversight of the Fund’s valuation policies and procedures, which are approved annually by the Board. Among other things, these procedures allow the Fund to utilize independent pricing services, quotations from securities and financial instrument dealers, and other market sources to determine fair value.
Equity securities and derivative financial instruments (derivatives) listed on an exchange or on the NASDAQ National Market System are valued at the last quoted sale price or the official closing price of the day, respectively. Foreign equity securities are valued as of the close of trading on the foreign stock exchange on which the security is primarily traded or as of 4 p.m. Eastern time whichever is earlier. The value is then converted into its U.S. dollar equivalent at the foreign exchange rate in effect at 4 p.m. Eastern time on the day that the value of the security is determined. Over-the-counter (OTC) securities are valued within the range of the most recent quoted bid and ask prices. Securities that trade in multiple markets or on multiple exchanges are valued according to the broadest and most representative market. Certain equity securities are valued based upon fundamental characteristics or relationships to similar securities.
Debt securities generally trade in the OTC market rather than on a securities exchange. The Fund’s pricing services use multiple valuation techniques to determine fair value. In instances where sufficient market activity exists, the pricing services may utilize a market-based approach through which quotes from market makers are used to determine fair value. In instances where sufficient market activity may not exist or is limited, the pricing services also utilize proprietary valuation models which may consider market characteristics such as benchmark yield curves, credit spreads, estimated default rates, anticipated market interest rate volatility, coupon rates, anticipated timing of principal repayments, underlying collateral, and other unique security features in order to estimate the relevant cash flows, which are then discounted to calculate the fair value. Securities denominated in a foreign currency are converted into their U.S. dollar equivalent at the foreign exchange rate in effect at 4 p.m. Eastern time on the date that the values of the foreign debt securities are determined.
Certain derivatives trade in the OTC market. The Fund’s pricing services use various techniques including industry standard option pricing models and proprietary discounted cash flow models to determine the fair value of those instruments. The Fund’s net benefit or obligation under the derivative contract, as measured by the fair value of the contract, is included in net assets.
The Fund has procedures to determine the fair value of financial instruments for which market prices are not reliable or readily available. Under these procedures, the VC convenes on a regular basis to review such financial instruments and considers a number of factors, including significant unobservable valuation inputs, when arriving at fair value. The VC primarily employs a market-based approach which may use related or comparable assets or liabilities, recent transactions, market multiples, book values, and other relevant information for the investment to determine the fair value of the investment. An income-based valuation approach may also be used in which the anticipated future cash flows of the investment are discounted to calculate fair value. Discounts may also be applied due to the nature or duration of any restrictions on the disposition of the
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FRANKLIN MUTUAL BEACON FUND
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
investments. Due to the inherent uncertainty of valuations of such investments, the fair values may differ significantly from the values that would have been used had an active market existed. The VC employs various methods for calibrating these valuation approaches including a regular review of key inputs and assumptions, transactional back-testing or disposition analysis, and reviews of any related market activity.
Trading in securities on foreign securities stock exchanges and OTC markets may be completed before 4 p.m. Eastern time. In addition, trading in certain foreign markets may not take place on every NYSE business day. Occasionally, events occur between the time at which trading in a foreign security is completed and the close of the NYSE that might call into question the reliability of the value of a portfolio security held by the Fund. As a result, differences may arise between the value of the Fund’s portfolio securities as determined at the foreign market close and the latest indications of value at the close of the NYSE. In order to minimize the potential for these differences, the VC monitors price movements following the close of trading in foreign stock markets through a series of country specific market proxies (such as baskets of American Depositary Receipts, futures contracts and exchange traded funds). These price movements are measured against established trigger thresholds for each specific market proxy to assist in determining if an event has occurred that may call into question the reliability of the values of the foreign securities held by the Fund. If such an event occurs, the securities may be valued using fair value procedures, which may include the use of independent pricing services.
When the last day of the reporting period is a non-business day, certain foreign markets may be open on those days that the NYSE is closed, which could result in differences between the value of the Fund’s portfolio securities on the last business day and the last calendar day of the reporting period. Any significant security valuation changes due to an open foreign market are adjusted and reflected by the Fund for financial reporting purposes.
b. Foreign Currency Translation
Portfolio securities and other assets and liabilities denominated in foreign currencies are translated into U.S. dollars based on the exchange rate of such currencies against U.S. dollars on the date of valuation. The Fund may enter into foreign currency exchange contracts to facilitate transactions denominated in a foreign currency. Purchases and sales of securities, income and expense items denominated in foreign currencies are translated into U.S. dollars at the exchange rate in effect on the transaction date. Portfolio securities and assets and liabilities denominated in foreign currencies contain risks that those currencies will decline in value relative to the U.S. dollar. Occasionally, events may impact the availability or reliability of foreign exchange rates used to convert the U.S. dollar equivalent value. If such an event occurs, the foreign exchange rate will be valued at fair value using procedures established and approved by the Board.
The Fund does not separately report the effect of changes in foreign exchange rates from changes in market prices on securities held. Such changes are included in net realized and unrealized gain or loss from investments in the Statement of Operations.
Realized foreign exchange gains or losses arise from sales of foreign currencies, currency gains or losses realized between the trade and settlement dates on securities transactions and the difference between the recorded amounts of dividends, interest, and foreign withholding taxes and the U.S. dollar equivalent of the amounts actually received or paid. Net unrealized foreign exchange gains and losses arise from changes in foreign exchange rates on foreign denominated assets and liabilities other than investments in securities held at the end of the reporting period.
c. Securities Purchased on a Delayed Delivery Basis
The Fund purchases securities on a delayed delivery basis, with payment and delivery scheduled for a future date. These transactions are subject to market fluctuations and are subject to the risk that the value at delivery may be more or less than the trade date purchase price. Although the Fund will generally purchase these securities with the intention of holding the securities, it may sell the securities before the settlement date. Sufficient assets have been segregated for these securities.
d. Derivative Financial Instruments
The Fund invested in derivatives in order to manage risk or gain exposure to various other investments or markets. Derivatives are financial contracts based on an underlying or notional amount, require no initial investment or an initial net investment that is smaller than would normally be required to have a similar response to changes in market factors, and require or permit net settlement. Derivatives contain various risks including the potential inability of the counterparty to fulfill their obligations under the terms of the contract, the potential for an
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Semiannual Report 31
FRANKLIN MUTUAL BEACON FUND
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
1. Organization and Significant Accounting
Policies (continued)
d. Derivative Financial Instruments (continued)
illiquid secondary market, and/or the potential for market movements which expose the Fund to gains or losses in excess of the amounts shown in the Statement of Assets and Liabilities. Realized gain and loss and unrealized appreciation and depreciation on these contracts for the period are included in the Statement of Operations.
Derivative counterparty credit risk is managed through a formal evaluation of the creditworthiness of all potential counter-parties. The Fund attempts to reduce its exposure to counterparty credit risk on OTC derivatives, whenever possible, by entering into International Swaps and Derivatives Association (ISDA) master agreements with certain counterparties. These agreements contain various provisions, including but not limited to collateral requirements, events of default, or early termination. Termination events applicable to the counterparty include certain deteriorations in the credit quality of the counterparty. Termination events applicable to the Fund include failure of the Fund to maintain certain net asset levels and/or limit the decline in net assets over various periods of time. In the event of default or early termination, the ISDA master agreement gives the non-defaulting party the right to net and close-out all transactions traded, whether or not arising under the ISDA agreement, to one net amount payable by one counterparty to the other. However, absent an event of default or early termination, OTC derivative assets and liabilities are presented gross and not offset in the Statement of Assets and Liabilities. Early termination by the counterparty may result in an immediate payment by the Fund of any net liability owed to that counterparty under the ISDA agreement. At June 30, 2016, the Fund had no OTC derivatives in a net liability position for such contracts.
Collateral requirements differ by type of derivative. Collateral or initial margin requirements are set by the broker or exchange clearing house for exchange traded and centrally cleared derivatives. Initial margin deposited is held at the exchange and can be in the form of cash and/or securities. For OTC derivatives traded under an ISDA master agreement, posting of collateral is required by either the Fund or the applicable coun-terparty if the total net exposure of all OTC derivatives with the applicable counterparty exceeds the minimum transfer amount, which typically ranges from $100,000 to $250,000, and can vary depending on the counterparty and the type of the agreement. Generally, collateral is determined at the close of Fund business each day and any additional collateral required due to changes in derivative values may be delivered by the Fund or the counterparty within a few business days. Collateral pledged and/or received by the Fund for OTC derivatives, if any, is held in segregated accounts with the Fund’s custodian/counterparty broker and can be in the form of cash and/or securities. Unrestricted cash may be invested according to the Fund’s investment objectives. To the extent that the amounts due to the Fund from its counterparties are not subject to collateralization or are not fully collateralized, the Fund bears the risk of loss from counterparty non-performance.
At June 30, 2016, the Fund received $7,910,766 in United Kingdom Treasury Bonds and U.S. Treasury Bills and Notes as collateral for derivatives.
The Fund entered into exchange traded futures contracts primarily to manage exposure to certain foreign currencies. A futures contract is an agreement between the Fund and a counterparty to buy or sell an asset for a specified price on a future date. Required initial margins are pledged by the Fund, and the daily change in fair value is accounted for as a variation margin payable or receivable in the Statement of Assets and Liabilities.
The Fund entered into OTC forward exchange contracts primarily to manage exposure to certain foreign currencies. A forward exchange contract is an agreement between the Fund and a counterparty to buy or sell a foreign currency at a specific exchange rate on a future date.
The Fund purchased or wrote exchange traded and OTC option contracts primarily to manage exposure to equity price and foreign exchange rate risk. An option is a contract entitling the holder to purchase or sell a specific amount of shares or units of an asset or notional amount of a swap (swaption), at a specified price. When an option is purchased or written, an amount equal to the premium paid or received is recorded as an asset or liability, respectively. Upon exercise of an option, the acquisition cost or sales proceeds of the underlying investment is adjusted by any premium received or paid. Upon expiration of an option, any premium received or paid is recorded as a realized gain or loss. Upon closing an option other than through expiration or exercise, the difference between the premium received or paid and the cost to close the position is recorded as a realized gain or loss.
See Notes 7 and 10 regarding investment transactions and other derivative information, respectively.
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NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
e. Restricted Cash
At June 30, 2016, the Fund held restricted cash in connection with investments in certain derivative securities. Restricted cash is held in a segregated account with the Fund’s custodian/ counterparty broker and is reflected in the Statement of Assets and Liabilities.
f. Securities Sold Short
The Fund is engaged in selling securities short, which obligates the Fund to replace a borrowed security with the same security at current fair value. The Fund incurs a loss if the price of the security increases between the date of the short sale and the date on which the Fund replaces the borrowed security. The Fund realizes a gain if the price of the security declines between those dates. Gains are limited to the price at which the Fund sold the security short, while losses are potentially unlimited in size.
The Fund is required to establish a margin account with the broker lending the security sold short. While the short sale is outstanding, the broker retains the proceeds of the short sale to the extent necessary to meet margin requirements until the short position is closed out. A deposit must also be maintained with the Fund’s custodian/counterparty broker consisting of cash and/or securities having a value equal to a specified percentage of the value of the securities sold short. The Fund is obligated to pay fees for borrowing the securities sold short and is required to pay the counterparty any dividends and/or interest due on securities sold short. Such dividends and/or interest and any security borrowing fees are recorded as an expense to the Fund.
g. Securities Lending
The Fund participates in an agency based securities lending program to earn additional income. The Fund receives cash collateral against the loaned securities in an amount equal to at least 102% of the fair value of the loaned securities. Collateral is maintained over the life of the loan in an amount not less than 100% of the fair value of loaned securities, as determined at the close of Fund business each day; any additional collateral required due to changes in security values is delivered to the Fund on the next business day. The collateral is deposited into a joint cash account with other funds and is used to invest in a money market fund managed by Franklin Advisers, Inc., an affiliate of the Fund, and/or a joint repurchase agreement. The Fund may receive income from the investment of cash collateral, in addition to lending fees and rebates paid by the borrower. Income from securities loaned, net of fees paid to the securities lending agent and/or third-party vendor, is reported separately in the Statement of Operations. The Fund bears the market risk with respect to the collateral investment, securities loaned, and the risk that the agent may default on its obligations to the Fund. If the borrower defaults on its obligation to return the securities loaned, the Fund has the right to repurchase the securities in the open market using the collateral received. The securities lending agent has agreed to indemnify the Fund in the event of default by a third party borrower. At June 30, 2016, the Fund had no securities on loan.
h. Senior Floating Rate Interests
The Fund invests in senior secured corporate loans that pay interest at rates which are periodically reset by reference to a base lending rate plus a spread. These base lending rates are generally the prime rate offered by a designated U.S. bank or the London InterBank Offered Rate (LIBOR). Senior secured corporate loans often require prepayment of principal from excess cash flows or at the discretion of the borrower. As a result, actual maturity may be substantially less than the stated maturity. Senior secured corporate loans in which the Fund invests are generally readily marketable, but may be subject to certain restrictions on resale.
i. Income and Deferred Taxes
It is the Fund’s policy to qualify as a regulated investment company under the Internal Revenue Code. The Fund intends to distribute to shareholders substantially all of its taxable income and net realized gains to relieve it from federal income and excise taxes. As a result, no provision for U.S. federal income taxes is required.
The Fund may be subject to foreign taxation related to income received, capital gains on the sale of securities and certain foreign currency transactions in the foreign jurisdictions in which it invests. Foreign taxes, if any, are recorded based on the tax regulations and rates that exist in the foreign markets in which the Fund invests. When a capital gain tax is determined to apply, the Fund records an estimated deferred tax liability in an amount that would be payable if the securities were disposed of on the valuation date. As a result of several court cases, in certain countries across the European Union, the Fund filed additional tax reclaims for previously withheld taxes on dividends earned in those countries (EU reclaims). These additional filings are subject to various administrative proceedings by the local jurisdictions’ tax authorities within the European Union, as well as a number of related judicial proceedings. Income
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Semiannual Report 33
FRANKLIN MUTUAL BEACON FUND
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
1. Organization and Significant Accounting
Policies (continued)
i. Income and Deferred Taxes (continued)
recognized, if any, for EU reclaims is reflected as other income in the Statement of Operations and any related receivable, if any, is reflected as European Union tax reclaims in the Statement of Assets and Liabilities. When uncertainty exists as to the ultimate resolution of these proceedings, the likelihood of receipt of these EU reclaims, and the potential timing of payment, no amounts are reflected in the financial statements.
The Fund may recognize an income tax liability related to its uncertain tax positions under U.S. GAAP when the uncertain tax position has a less than 50% probability that it will be sustained upon examination by the tax authorities based on its technical merits. As of June 30, 2016, the Fund has determined that no tax liability is required in its financial statements related to uncertain tax positions for any open tax years (or expected to be taken in future tax years). Open tax years are those that remain subject to examination and are based on each tax jurisdiction’s statute of limitation.
j. Security Transactions, Investment Income, Expenses and Distributions
Security transactions are accounted for on trade date. Realized gains and losses on security transactions are determined on a specific identification basis. Interest income and estimated expenses are accrued daily. Amortization of premium and accretion of discount on debt securities are included in interest income. Dividend income and dividends declared on securities sold short are recorded on the ex-dividend date except for certain dividends from foreign securities where the dividend rate is not available. In such cases, the dividend is recorded as soon as the information is received by the Fund. Distributions to shareholders are recorded on the ex-dividend date and are determined according to income tax regulations (tax basis). Distributable earnings determined on a tax basis may differ from earnings recorded in accordance with U.S. GAAP. These differences may be permanent or temporary. Permanent differences are reclassified among capital accounts to reflect their tax character. These reclassifications have no impact on net assets or the results of operations. Temporary differences are not reclassified, as they may reverse in subsequent periods.
Common expenses incurred by the Trust are allocated among the funds based on the ratio of net assets of each fund to the combined net assets of the Trust. Fund specific expenses are charged directly to the fund that incurred the expense.
Realized and unrealized gains and losses and net investment income, not including class specific expenses, are allocated daily to each class of shares based upon the relative proportion of net assets of each class. Differences in per share distributions, by class, are generally due to differences in class specific expenses.
k. Accounting Estimates
The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the amounts of income and expenses during the reporting period. Actual results could differ from those estimates.
l. Guarantees and Indemnifications
Under the Trust’s organizational documents, its officers and trustees are indemnified by the Trust against certain liabilities arising out of the performance of their duties to the Trust. Additionally, in the normal course of business, the Trust, on behalf of the Fund, enters into contracts with service providers that contain general indemnification clauses. The Trust’s maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Trust that have not yet occurred. Currently, the Trust expects the risk of loss to be remote.
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NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
2. Shares of Beneficial Interest
At June 30, 2016, there were an unlimited number of shares authorized (without par value). Transactions in the Fund’s shares were as follows:
Six Months Ended | Year Ended | ||||||||||
June 30, 2016 | December 31, 2015 | ||||||||||
Shares | Amount | Shares | Amount | ||||||||
Class Z Shares: | |||||||||||
Shares sold | 2,623,763 | $ | 37,565,299 | 6,184,343 | $ | 103,977,966 | |||||
Shares issued in reinvestment of distributions | — | — | 16,350,016 | 235,028,910 | |||||||
Shares redeemed | (12,293,107 | ) | (174,173,780 | ) | (20,624,311 | ) | (338,238,880 | ) | |||
Net increase (decrease) | (9,669,344 | ) | $ | (136,608,481 | ) | 1,910,048 | $ | 767,996 | |||
Class A Shares: | |||||||||||
Shares sold | 2,209,107 | $ | 31,097,440 | 9,371,751 | $ | 155,165,698 | |||||
Shares issued in reinvestment of distributions | — | — | 7,035,175 | 100,397,421 | |||||||
Shares redeemed | (7,903,403 | ) | (110,866,296 | ) | (11,467,151 | ) | (187,545,674 | ) | |||
Net increase (decrease) | (5,694,296 | ) | $ | (79,768,856 | ) | 4,939,775 | $ | 68,017,445 | |||
Class C Shares: | |||||||||||
Shares sold | 308,096 | $ | 4,292,202 | 1,843,908 | $ | 30,482,924 | |||||
Shares issued in reinvestment of distributions | — | — | 1,808,301 | 25,661,223 | |||||||
Shares redeemed | (2,148,832 | ) | (29,883,160 | ) | (3,024,983 | ) | (48,627,892 | ) | |||
Net increase (decrease) | (1,840,736 | ) | $ | (25,590,958 | ) | 627,226 | $ | 7,516,255 | |||
Class R Shares: | |||||||||||
Shares sold | 19,399 | $ | 266,203 | 32,967 | $ | 537,011 | |||||
Shares issued in reinvestment of distributions | — | — | 17,101 | 241,547 | |||||||
Shares redeemed | (64,476 | ) | (884,685 | ) | (20,923 | ) | (319,851 | ) | |||
Net increase (decrease) | (45,077 | ) | $ | (618,482 | ) | 29,145 | $ | 458,707 | |||
Class R6 Shares: | |||||||||||
Shares sold | 164,726 | $ | 2,342,073 | 757,819 | $ | 11,893,414 | |||||
Shares issued in reinvestment of distributions | — | — | 5,769 | 82,858 | |||||||
Shares redeemed | (347,201 | ) | (5,025,161 | ) | (415,071 | ) | (6,993,626 | ) | |||
Net increase (decrease) | (182,475 | ) | $ | (2,683,088 | ) | 348,517 | $ | 4,982,646 |
3. Transactions with Affiliates
Franklin Resources, Inc. is the holding company for various subsidiaries that together are referred to as Franklin Templeton Investments. Certain officers and trustees of the Fund are also officers and/or directors of the following subsidiaries:
Subsidiary | Affiliation |
Franklin Mutual Advisers, LLC (Franklin Mutual) | Investment manager |
Franklin Templeton Services, LLC (FT Services) | Administrative manager |
Franklin Templeton Distributors, Inc. (Distributors) | Principal underwriter |
Franklin Templeton Investor Services, LLC (Investor Services) | Transfer agent |
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Semiannual Report 35
FRANKLIN MUTUAL BEACON FUND
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
3. Transactions with Affiliates (continued)
a. Management Fees
The Fund pays an investment management fee to Franklin Mutual based on the average daily net assets of the Fund as follows:
Annualized Fee Rate | Net Assets | |
0.675% | Up to and including $5 billion | |
0.645% | Over $5 billion, up to and including $7 billion | |
0.625% | Over $7 billion, up to and including $10 billion | |
0.615% | In excess of $10 billion |
For the period ended June 30, 2016, the annualized effective investment management fee rate was 0.675% of the Fund’s average daily net assets.
b. Administrative Fees
Under an agreement with Franklin Mutual, FT Services provides administrative services to the Fund. The fee is paid by Franklin Mutual based on the Fund’s average daily net assets, and is not an additional expense of the Fund.
c. Distribution Fees
The Board has adopted distribution plans for each share class, with the exception of Class Z and Class R6 shares, pursuant to Rule 12b-1 under the 1940 Act. Under the Fund’s Class A reimbursement distribution plan, the Fund reimburses Distributors for costs incurred in connection with the servicing, sale and distribution of the Fund’s shares up to the maximum annual plan rate. Under the Class A reimbursement distribution plan, costs exceeding the maximum for the current plan year cannot be reimbursed in subsequent periods. In addition, under the Fund’s Class C and R compensation distribution plans, the Fund pays Distributors for costs incurred in connection with the servicing, sale and distribution of the Fund’s shares up to the maximum annual plan rate for each class. The plan year, for purposes of monitoring compliance with the maximum annual plan rates, is February 1 through January 31 for each fund.
The maximum annual plan rates, based on the average daily net assets, for each class, are as follows:
Class A | 0.35 | % |
Class C | 1.00 | % |
Class R | 0.50 | % |
The Board has set the current rate at 0.25% per year for Class A shares until further notice and approval by the Board.
d. Sales Charges/Underwriting Agreements
Front-end sales charges and contingent deferred sales charges (CDSC) do not represent expenses of the Fund. These charges are deducted from the proceeds of sales of Fund shares prior to investment or from redemption proceeds prior to remittance, as applicable. Distributors has advised the Fund of the following commission transactions related to the sales and redemptions of the Fund’s shares for the period:
Sales charges retained net of commissions paid to unaffiliated broker/dealers | $ | 67,744 |
CDSC retained | $ | 4,279 |
e. Transfer Agent Fees
Each class of shares, except for Class R6, pays transfer agent fees to Investor Services for its performance of shareholder servicing obligations and reimburses Investor Services for out of pocket expenses incurred, including shareholder servicing fees paid to third parties. These fees are allocated daily based upon their relative proportion of such classes’ aggregate net assets. Class R6 pays Investor Services transfer agent fees specific to that class.
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NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
For the period ended June 30, 2016, the Fund paid transfer agent fees of $1,831,832, of which $777,631 was retained by Investor Services.
f. Waiver and Expense Reimbursements
Investor Services has contractually agreed in advance to waive or limit its fees so that the Class R6 transfer agent fees do not exceed 0.01% until April 30, 2017. There were no Class R6 transfer agent fees waived during the period ended June 30, 2016.
4. Expense Offset Arrangement
The Fund has entered into an arrangement with its custodian whereby credits realized as a result of uninvested cash balances are used to reduce a portion of the Fund’s custodian expenses. During the period ended June 30, 2016, the custodian fees were reduced as noted in the Statement of Operations.
5. Independent Trustees’ Retirement Plan
On January 1, 1993, the Trust adopted an Independent Trustees’ Retirement Plan (Plan). The Plan is an unfunded defined benefit plan that provides benefit payments to Trustees whose length of service and retirement age meets the eligibility requirements of the Plan. Benefits under the Plan are based on years of service and fees paid to each trustee at the time of retirement. Effective in December 1996, the Plan was closed to new participants.
During the period ended June 30, 2016, the Fund’s projected benefit obligation and benefit payments under the Plan were as follows:
aProjected benefit obligation at June 30, 2016 | $ | 227,296 | |
bIncrease in projected benefit obligation | $ | 6,049 | |
Benefit payments made to retired trustees | $ | (1,844 | ) |
aThe projected benefit obligation is included in trustees’ fees and expenses in the Statement of Assets and Liabilities.
bThe increase in projected benefit obligation is included in trustees’ fees and expenses in the Statement of Operations.
6. Income Taxes
At June 30, 2016, the cost of investments and net unrealized appreciation (depreciation) for income tax purposes were as follows:
Cost of investments | $ | 3,343,899,869 | |
Unrealized appreciation | $ | 694,703,893 | |
Unrealized depreciation | (376,777,625 | ) | |
Net unrealized appreciation (depreciation) | $ | 317,926,268 |
Differences between income and/or capital gains as determined on a book basis and a tax basis are primarily due to differing treatment of foreign currency transactions.
7. Investment Transactions
Purchases and sales of investments (excluding short term securities and securities sold short) for the period ended June 30, 2016, aggregated $473,969,772 and $651,911,891, respectively.
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FRANKLIN MUTUAL BEACON FUND
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
7. Investment Transactions (continued)
Transactions in options written during the period ended June 30, 2016, were as follows:
Number of | |||||
Contracts | Premiums | ||||
Options outstanding at December 31, 2015 | — | $ | — | ||
Options written | 4,790 | 483,658 | |||
Options expired | (2,395 | ) | (256,163 | ) | |
Options exercised | — | — | |||
Options closed | — | — | |||
Options outstanding at June 30, 2016 | 2,395 | $ | 227,495 |
See Notes 1(d) and 10 regarding derivative financial instruments and other derivative information, respectively.
8. Credit Risk and Defaulted Securities
The Fund may purchase the pre-default or defaulted debt of distressed companies. Distressed companies are financially troubled and could be or are already involved in financial restructuring or bankruptcy. Risks associated with purchasing these securities include the possibility that the bankruptcy or other restructuring process takes longer than expected, or that distributions in restructuring are less than anticipated, either or both of which may result in unfavorable consequences to the Fund. If it becomes probable that the income on debt securities, including those of distressed companies, will not be collected, the Fund discontinues accruing income and recognizes an adjustment for uncollectible interest.
At June 30, 2016, the aggregate long value of distressed company securities for which interest recognition has been discontinued was $77,840,837, representing 2.1% of the Fund’s net assets. For information as to specific securities, see the accompanying Statement of Investments.
9. Restricted Securities
The Fund invests in securities that are restricted under the Securities Act of 1933 (1933 Act) or which are subject to legal, contractual, or other agreed upon restrictions on resale. Restricted securities are often purchased in private placement transactions, and cannot be sold without prior registration unless the sale is pursuant to an exemption under the 1933 Act. Disposal of these securities may require greater effort and expense, and prompt sale at an acceptable price may be difficult. The Fund may have registration rights for restricted securities. The issuer generally incurs all registration costs.
At June 30, 2016, the Fund held investments in restricted securities, excluding certain securities exempt from registration under the 1933 Act deemed to be liquid, as follows:
Principal | |||||||
Amount/ | |||||||
Shares/ | Acquisition | ||||||
Units | Issuer | Dates | Cost | Value | |||
10,848 | Broadband Ventures III LLC, secured promissory note, | ||||||
5.00%, 2/01/12 | 7/01/10 - 11/30/12 | $ | 10,848 | $ | — | ||
15,831,950 | CB FIM Coinvestors LLC | 1/15/09 - | 6/02/09 | — | — | ||
19,805,560 | FIM Coinvestor Holdings I, LLC | 11/20/06 - | 6/02/09 | — | — | ||
2,846,329 | International Automotive Components Group Brazil LLC | 4/13/06 - 12/26/08 | 1,890,264 | 46,859 | |||
22,836,904 | International Automotive Components Group North America LLC | 1/12/06 - | 3/18/13 | 18,692,218 | 10,074,866 | ||
10,273 | Warrior Met Coal LLC, A | 9/19/14 - 12/04/14 | 13,493,478 | 1,035,687 | |||
24,026 | Warrior Met Coal LLC, B | 3/31/16 - | 6/23/16 | 1,922,095 | 2,422,215 | ||
Total Restricted Securities (Value is 0.4% of Net Assets) | $ | 36,008,903 | $ | 13,579,627 |
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NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
10. Other Derivative Information
At June 30, 2016, the Fund’s investments in derivative contracts are reflected in the Statement of Assets and Liabilities as follows:
Asset Derivatives | Liability Derivatives | ||||||
Derivative Contracts | |||||||
Not Accounted for as | Statement of Assets and | Statement of Assets and | |||||
Hedging Instruments | Liabilities Location | Fair Value | Liabilities Location | Fair Value | |||
Foreign exchange contracts | Investments in securities, at | $ | 176,019 | a | |||
value | |||||||
Variation margin | 17,131,510 | b | |||||
Unrealized appreciation on | 13,560,757 | Unrealized depreciation on | $ | 5,307,207 | |||
OTC forward exchange | OTC forward exchange | ||||||
contracts | contracts | ||||||
Equity contracts | Options written, at value | 165,255 | |||||
Totals | $ | 30,868,286 | $ | 5,472,462 |
aPurchased option contracts are included in investments in securities, at value in the Statement of Assets and Liabilities.
bThis amount reflects the cumulative appreciation (depreciation) of futures contracts as reported in the Statement of Investments. Only the variation margin receivable/payable
at period end is separately reported within the Statement of Assets and Liabilities. Prior variation margin movements were recorded to cash upon receipt or payment.
For the period ended June 30, 2016, the effect of derivative contracts in the Fund’s Statement of Operations was as follows:
Net Change in | ||||||||
Unrealized | ||||||||
Derivative Contracts | Net Realized | Appreciation | ||||||
Not Accounted for as | Statement of | Gain (Loss) | Statement of | (Depreciation) | ||||
Hedging Instruments | Operations Locations | for the Period | Operations Locations | for the Period | ||||
Net realized gain (loss) | Net change in unrealized | |||||||
from: | appreciation (depreciation) | |||||||
on: | ||||||||
Foreign exchange contracts | Investments | $ | (812,725 | )a | ||||
Foreign currency | $ | 14,716,530 | b | Translation of other assets | (7,125,123 | )b | ||
transactions | and liabilities denominated | |||||||
in foreign currencies | ||||||||
Futures contracts | 749,515 | Futures contracts | 12,982,856 | |||||
Equity contracts | Written options | 256,163 | Written options | 62,240 | ||||
Totals | $ | 15,722,208 | $ | 5,107,248 |
aPurchased option contracts are included in net change in unrealized appreciation (depreciation) on investments in the Statement of Operations.
bForward exchange contracts are included in net realized gain (loss) from foreign currency transactions and net change in unrealized appreciation (depreciation) on translation
of other assets and liabilities denominated in foreign currencies in the Statement of Operations.
For the period ended June 30, 2016, the average month end fair value of derivatives represented 0.9% of average month end net
assets. The average month end number of open derivative contracts for the period was 138.
See Notes 1(d) and 7 regarding derivative financial instruments and investment transactions, respectively.
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Semiannual Report 39
FRANKLIN MUTUAL BEACON FUND
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
11. Holdings of 5% Voting Securities of Portfolio Companies
The 1940 Act defines “affiliated companies” to include investments in portfolio companies in which a fund owns 5% or more of the outstanding voting securities. Investments in “affiliated companies” for the Fund for the period ended June 30, 2016, were as shown below.
Number | ||||||||||||
of Shares | Number of | |||||||||||
Held at | Shares Held | Value | Realized | |||||||||
Beginning | Gross | Gross | at End | at End | Investment | Gain | ||||||
Name of Issuer | of Period | Additions | Reductions | of Period | of Period | Income | (Loss) | |||||
Controlled Affiliatesa | ||||||||||||
PMG LLC | 5,455 | — | (5,455 | ) | — | $ | — | $ | — | $ | (216,447 | ) |
Non-Controlled Affiliates | ||||||||||||
CB FIM Coinvestors LLC | 15,831,950 | — | — | 15,831,950 | $ | — | $ | — | $ | — | ||
KLX Inc | 2,576,340 | 184,700 | — | 2,761,040 | 85,592,240 | — | — | |||||
Total Non-Controlled Affiliates | 85,592,240 | — | — | |||||||||
Total Affiliated Securities (Value is 2.3% of Net Assets) | $ | 85,592,240 | $ | — | $ | (216,447 | ) | |||||
aIssuer in which the Fund owns 25% or more of the outstanding voting securities. |
12. Credit Facility
The Fund, together with other U.S. registered and foreign investment funds (collectively, Borrowers), managed by Franklin Temple-ton Investments, are borrowers in a joint syndicated senior unsecured credit facility totaling $2 billion (Global Credit Facility) which matures on February 10, 2017. This Global Credit Facility provides a source of funds to the Borrowers for temporary and emergency purposes, including the ability to meet future unanticipated or unusually large redemption requests.
Under the terms of the Global Credit Facility, the Fund shall, in addition to interest charged on any borrowings made by the Fund and other costs incurred by the Fund, pay its share of fees and expenses incurred in connection with the implementation and maintenance of the Global Credit Facility, based upon its relative share of the aggregate net assets of all of the Borrowers, including an annual commitment fee of 0.07% based upon the unused portion of the Global Credit Facility. Effective February 12, 2016, the annual commitment fee is 0.15%. These fees are reflected in other expenses in the Statement of Operations. During the period ended June 30, 2016, the Fund did not use the Global Credit Facility.
13. Fair Value Measurements
The Fund follows a fair value hierarchy that distinguishes between market data obtained from independent sources (observable inputs) and the Fund’s own market assumptions (unobservable inputs). These inputs are used in determining the value of the Fund’s financial instruments and are summarized in the following fair value hierarchy:
- Level 1 – quoted prices in active markets for identical financial instruments
- Level 2 – other significant observable inputs (including quoted prices for similar financial instruments, interest rates, prepay- ment speed, credit risk, etc.)
- Level 3 – significant unobservable inputs (including the Fund’s own assumptions in determining the fair value of financial instruments)
The input levels are not necessarily an indication of the risk or liquidity associated with financial instruments at that level.
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NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
For movements between the levels within the fair value hierarchy, the Fund has adopted a policy of recognizing the transfers as of the date of the underlying event which caused the movement.
A summary of inputs used as of June 30, 2016, in valuing the Fund’s assets and liabilities carried at fair value, is as follows:
Level 1 | Level 2 | Level 3 | Total | |||||
Assets: | ||||||||
Investments in Securities: | ||||||||
Equity Investments:a | ||||||||
Auto Components | $ | — | $ | — | $ | 10,121,725 | $ | 10,121,725 |
Oil, Gas & Consumable Fuels | 113,610,609 | — | 3,457,902 | 117,068,511 | ||||
All other Equity Investmentsb | 3,215,843,201 | — | —c | 3,215,843,201 | ||||
Corporate Bonds, Notes and Senior Floating Rate | ||||||||
Interests | — | 92,360,859 | — | 92,360,859 | ||||
Corporate Notes and Senior Floating Rate Interests in | ||||||||
Reorganization | — | 77,840,837 | —c | 77,840,837 | ||||
Companies in Liquidation | 101,364 | 5,159,750 | —c | 5,261,114 | ||||
Municipal Bonds | — | 11,394,162 | — | 11,394,162 | ||||
Options Purchased | — | 176,019 | — | 176,019 | ||||
Short Term Investments | 83,859,709 | 47,900,000 | — | 131,759,709 | ||||
Total Investments in Securities | $ | 3,413,414,883 | $ | 234,831,627 | $ | 13,579,627 | $ | 3,661,826,137 |
Other Financial Instruments | ||||||||
Futures Contracts | $ | 17,131,510 | $ | — | $ | — | $ | 17,131,510 |
Forward Exchange Contracts | — | 13,560,757 | — | 13,560,757 | ||||
Total Other Financial Instruments | $ | 17,131,510 | $ | 13,560,757 | $ | — | $ | 30,692,267 |
Liabilities: | ||||||||
Other Financial Instruments | ||||||||
Options Written | $ | 165,255 | $ | — | $ | — | $ | 165,255 |
Securities Sold Short | 16,801,330 | — | — | 16,801,330 | ||||
Forward Exchange Contracts | — | 5,307,207 | — | 5,307,207 | ||||
Total Other Financial Instruments | $ | 16,966,585 | $ | 5,307,207 | $ | — | $ | 22,273,792 |
aIncludes common and preferred stocks as well as other equity investments.
bFor detailed categories, see the accompanying Statement of Investments.
cIncludes securities determined to have no value at June 30, 2016.
A reconciliation of assets in which Level 3 inputs are used in determining fair value is presented when there are significant Level 3 financial instruments at the end of the period.
14. Subsequent Events
The Fund has evaluated subsequent events through the issuance of the financial statements and determined that no events have occurred that require disclosure.
Abbreviations | |||||
Counterparty | Currency | Selected Portfolio | |||
BANT | Bank of America N.A. | CNY | Chinese Yuan | ADR | American Depositary Receipt |
BONY | Bank of New York Mellon | EUR | Euro | FHLB | Federal Home Loan Bank |
DBFX | Deutsche Bank AG | GBP | British Pound | GO | General Obligation |
FBCO | Credit Suisse International | USD | United States Dollar | PIK | Payment-In-Kind |
HSBC | HSBC Bank PLC | ||||
MSCS | Morgan Stanley Capital Services LLC | ||||
SSBT | State Street Bank and Trust Co., N.A. |
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Semiannual Report 41
FRANKLIN MUTUAL BEACON FUND
Shareholder Information
Board Review of Investment Management Agreement
The Board of Trustees (Board), including the independent trustees, at a Board meeting held on May 16, 2016, unanimously approved the renewal of the Fund’s investment management agreement. Prior to a meeting of all of the trustees for the purpose of considering such approval, the independent trustees participated in two other meetings held in connection with the renewal process (those trustees unable to attend in person were present by telephonic conference means). Throughout the process, the independent trustees received assistance and advice from and met separately with independent counsel. The independent trustees met with and interviewed officers of the investment manager (including portfolio managers), the transfer agent and shareholder services group and the distributor. In approving the renewal of the investment management agreement for the Fund, the Board, including the independent trustees, determined that the investment management fee structure was fair and reasonable and that continuance of the agreement was in the best interests of the Fund and its shareholders.
In reaching their decision on the investment management agreement, the trustees took into account information furnished throughout the year at regular Board meetings, as well as information specifically requested and furnished for the renewal process, which culminated in the meetings referred to above for the specific purpose of considering such agreement. Information furnished throughout the year included, among others, reports on the Fund’s investment performance, expenses, portfolio composition, portfolio brokerage execution, client commission arrangements, derivatives, securities lending, asset segregation, portfolio turnover, Rule 12b-1 plans, distribution, shareholder servicing, legal and compliance matters, pricing of securities and sales and redemptions, and marketing support payments made to financial intermediaries, as well as a third-party survey of transfer agent fees charged funds within the Franklin Templeton Investments (FTI) complex in comparison with those charged other fund complexes deemed comparable. Also, related financial statements and other information about the scope and quality of services provided by the investment manager and its affiliates and enhancements to such services over the past year were provided. In addition, the trustees received periodic reports throughout the year and during the renewal process relating to compliance with the Fund’s investment policies and restrictions. During the renewal process, the independent trustees considered the investment manager’s methods of operation within the Franklin Templeton group and its activities on behalf of other clients.
The information obtained by the trustees during the renewal process also included a special report prepared by Broadridge Financial Solutions, Inc. (Broadridge), an independent third-party analyst that utilizes data from Lipper, Inc. (“Lipper”), an independent third-party analyst,, comparing the Fund’s investment performance and expenses with those of other mutual funds deemed comparable to the Fund as selected by Lipper (Broadridge Section 15(c) Report). The trustees reviewed the Broadridge Section 15(c) Report and its usefulness in the approval process with respect to matters such as comparative fees, expenses, expense ratios, performance and volatility. They concluded that the report continues to be a reliable resource in the performance of their duties.
In addition, the trustees received a Profitability Study (Profitability Study) prepared by management discussing the profitability to FTI from its overall U.S. Fund operations, as well as on an individual fund-by-fund basis. Over the past year, the Board and counsel to the independent trustees continued to receive reports on management’s handling of recent regulatory inquiries and pending legal actions against the investment manager and its affiliates. The independent trustees were satisfied with the actions taken to date by management in response to such regulatory and legal matters.
Particular attention was given to management’s diligent risk management program, including continual monitoring and management of counterparty credit risk and attention given to derivatives and other complex instruments that are held and expected to be held by the Fund and how such instruments are used to carry out the Fund’s investment goals. The Board also took into account, among other things, management’s efforts in establishing a global credit facility for the benefit of the Fund and other accounts managed by FTI to provide a source of cash for temporary and emergency purposes or to meet unusual redemption requests as well as the strong financial position of the investment manager’s parent company and its commitment to the mutual fund business. In addition, the Board received updates from management on the Securities and Exchange Commission’s (SEC) progress in implementing the rule-making requirements established by the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), which was enacted July 21, 2010, and the investment manager’s compliance with rules and regulations already promulgated by the SEC under such act. The Board also noted that they received an annual report on all marketing support payments made by FTI to financial intermediaries, as well as a memorandum relating to third-party servicing arrangements in response to a Guidance Update from the SEC relating to mutual fund distribution and sub accounting fees.
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In addition to the above and other matters considered by the trustees throughout the course of the year, the following discussion relates to certain primary factors relevant to the Board’s decision. This discussion of the information and factors considered by the Board (as well as the discussion above) is not intended to be exhaustive, but rather summarizes certain factors considered by the Board. In view of the wide variety of factors considered, the Board did not, unless otherwise noted, find it practicable to quantify or otherwise assign relative weights to the foregoing factors. In addition, individual trustees may have assigned different weights to various factors.
NATURE, EXTENT AND QUALITY OF SERVICES. The trustees reviewed the nature, extent and quality of the services provided by the investment manager. In this regard, they reviewed the Fund’s investment approach and concluded that, in their view, it continues to differentiate the Fund from typical core investment products in the mutual fund field. The trustees cited the investment manager’s ability to implement the Fund’s disciplined value investment approach and its long-term relationship with the Fund as reasons that shareholders choose to invest, and remain invested, in the Fund. The trustees reviewed the Fund’s portfolio management team, including its performance, staffing, skills and compensation program. With respect to portfolio manager compensation, management assured the trustees that the Fund’s long-term performance is a significant component of incentive-based compensation and noted that a portion of a portfolio manager’s incentive-based compensation is paid in shares of predesignated funds from the portfolio manager’s fund management area. The trustees noted that the portfolio manager compensation program aligned the interests of the portfolio managers with that of Fund shareholders. The trustees discussed with management various other products, portfolios and entities that are advised by the investment manager and the allocation of assets and expenses among and within them, as well as their relative fees and reasons for differences with respect thereto and any potential conflicts. During regular Board meetings and the aforementioned meetings of the independent trustees, the trustees received reports and presentations on the investment manager’s best execution trading policies. The trustees considered periodic reports provided to them showing that the investment manager complied with the investment policies and restrictions of the Fund as well as other reports periodically furnished to the Board covering matters such as the compliance of portfolio managers and other management personnel with the code of ethics covering the investment management personnel, the adherence to fair value pricing procedures established by the Board and the accuracy of net asset value calculations. The Board noted the extent of the benefits provided to Fund shareholders from being part of the Franklin Templeton group, including the right to exchange investments between funds (same class) without a sales charge, the ability to reinvest Fund dividends into other funds and the right to combine holdings of other funds to obtain reduced sales charges. The trustees considered the investment manager’s significant efforts in developing and implementing compliance procedures established in accordance with SEC and other requirements.
The trustees also reviewed the nature, extent and quality of the Fund’s other service agreements to determine that, on an overall basis, Fund shareholders were well served. In this connection, the Board also took into account transfer agent and shareholder services provided to Fund shareholders by an affiliate of the investment manager, noting continuing expenditures by management to increase and improve the scope of such services and favorable periodic reports on shareholder services conducted by independent third parties. While such considerations directly affected the trustees’ decision in renewing the Fund’s transfer agent and shareholder services agreement, the Board also considered these commitments as incidental benefits to Fund shareholders deriving from the investment management relationship.
Based on their review, the trustees were satisfied with the nature and quality of the overall services provided by the investment manager and its affiliates to the Fund and its shareholders and were confident in the abilities of the management team to continue the disciplined value investment approach of the Fund and to provide quality services to the Fund and its shareholders.
INVESTMENT PERFORMANCE. The trustees reviewed and placed significant emphasis on the investment performance of the Fund over the one-, three-, five- and 10-year periods ended December 31, 2015. They considered the history of successful performance of the Fund relative to various benchmarks. As part of their review, they inquired of management regarding benchmarks, style drift and restrictions on permitted investments. Consideration was also given to performance in the context of available levels of cash during the periods. The trustees had meetings during the year, including the meetings referred to above held in connection with the approval process, with the Fund’s portfolio managers to discuss performance and the management of the Fund. In addition, particular attention in assessing performance was given to the Broadridge Section 15(c) Report. That report showed the investment performance of the Fund (Class A shares) in comparison to other funds determined comparable by Lipper.
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Semiannual Report 43
FRANKLIN MUTUAL BEACON FUND
SHAREHOLDER INFORMATION
The comparable funds to the Fund, as chosen by Lipper, included all retail and institutional global multi-cap value funds. The Fund had total returns in the middle performing quintile for the one-year period ended December 31, 2015, and had annualized total returns for the three- and five-year periods in the second-best and best performing quintiles, respectively. The trustees noted that the Fund’s total return on an annualized basis for the 10-year period ended December 31, 2015, was in the middle performing quintile. The Board was satisfied with such comparative performance.
The trustees also compared Fund performance to other industry benchmarks, including measures of risk-adjusted performance of a fund, as part of their evaluation of investment performance. The trustees concluded that the Fund had continued to perform well in comparison to its various benchmarks and in the context of the Fund’s objectives.
COMPARATIVE EXPENSES AND MANAGEMENT PROFITABILITY. The trustees considered the cost of the services provided and to be provided and the profits realized by the investment manager and its affiliates from their respective relationships with the Fund. As part of the approval process, they explored with management the trends in expense ratios over the past three fiscal years and the reasons for any increases in the Fund’s expense ratios (or components thereof). In considering the appropriateness of the management fee and other expenses charged to the Fund, the Board took into account various factors including investment performance and matters relating to Fund operations, including, but not limited to, the quality and experience of its portfolio managers and research staff. Consideration was also given to a comparative analysis in the Broadridge Section 15(c) Report of the investment management fee and total expense ratio of the Fund in comparison with those of a group of other funds selected by Lipper as its appropriate Lipper expense group. Lipper expense data is based upon information taken from the Fund’s most recent annual report, which reflects historical asset levels that may be quite different from those currently existing, particularly in a period of market volatility. While recognizing such inherent limitation and the fact that expense ratios generally increase as assets decline and decrease as assets grow, the Board believed the independent analysis conducted by Lipper to be an appropriate measure of comparative expenses.
In reviewing comparative costs, emphasis was given to the Fund’s contractual management fee in comparison with the contractual management fee that would have been charged by other funds within its Lipper expense group assuming they were similar in size to the Fund, as well as the actual total expenses of the Fund in comparison with those of its Lipper expense group. The Lipper contractual management fee analysis includes administrative charges as being part of the management fee, and total expenses, for comparative consistency, are shown by Lipper for Fund Class A shares.
The Fund’s contractual management fee rate was in the least expensive quintile of its Lipper expense group and its total expenses were in the least expensive quintile of such group. The Board was satisfied with such comparative fees and expenses.
The trustees also reviewed the Profitability Study addressing profitability of Franklin Resources, Inc., from its overall U.S. fund business, as well as profitability to the Fund’s investment manager and its affiliates, from providing investment management and other services to the Fund during the 12-month period ended September 30, 2015, the most recent fiscal year-end of Franklin Resources, Inc. The trustees reviewed the basis on which such reports are prepared and the cost allocation methodology utilized in the Profitability Study, it being recognized that allocation methodologies may each be reasonable while producing different results. In this respect, the Board noted that the reasonableness of the cost allocation methodologies was reviewed by independent accountants on an every other year basis.
The independent trustees met with management to discuss the Profitability Study. This included, among other things, a comparison of investment management income with investment management expenses of the Fund; comparison of underwriting revenues and expenses; the relative relationship of investment management and underwriting expenses; shareholder servicing profitability; economies of scale; and the relative contribution of the Fund to the profitability of the investment manager and its parent. In discussing the Profitability Study with the Board, the investment manager stated its belief that the costs incurred in establishing the infrastructure necessary to operate the type of mutual fund operations conducted by it and its affiliates may not be fully reflected in the expenses allocated to the Fund in determining its profitability.
The Board also took into account management’s expenditures in improving shareholder services provided to the Fund, as well as the need to meet additional regulatory and compliance requirements resulting from the Sarbanes-Oxley Act, the Dodd-Frank Act and recent SEC and other regulatory requirements. The trustees also considered the extent to which the investment manager may derive ancillary benefits from Fund operations,
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SHAREHOLDER INFORMATION
including those derived from economies of scale, discussed below, the allocation of Fund brokerage and the use of commission dollars to pay for research and other similar services.
Based upon their consideration of all these factors, the trustees determined that the level of profits realized by the investment manager and its affiliates in providing services to the Fund was not excessive in view of the nature, quality and extent of services provided.
ECONOMIES OF SCALE. The trustees considered economies of scale realized by the investment manager and its affiliates as the Fund grows larger and the extent to which they are shared with Fund shareholders, as for example, in the level of the investment management fee charged, in the quality and efficiency of services rendered and in increased capital commitments benefiting the Fund directly or indirectly. While recognizing that any precise determination is inherently subjective, the trustees noted that, based upon the Profitability Study, as some funds increase in size, at some point economies of scale may result in the investment manager realizing a larger profit margin on investment management services provided to such a fund. The trustees also noted that benefits of economies of scale will be shared with Fund shareholders due to the decline in the effective investment management fee rate as breakpoints are achieved by the Fund.
The trustees noted that breakpoints had been instituted as part of the Fund’s investment management fee in 2004. The trustees assessed the breakpoints and believed they were, and continue to be, appropriate and they agreed to continue to monitor the appropriateness of the breakpoints. The trustees also considered the effects an increase in assets under management would have on the investment management fee and expense ratio of the Fund. To the extent further economies of scale may be realized by the investment manager and its affiliates, the Board believed the investment management and administrative fees provide a sharing of benefits with the Fund and its shareholders.
Proxy Voting Policies and Procedures
The Fund’s investment manager has established Proxy Voting Policies and Procedures (Policies) that the Fund uses to determine how to vote proxies relating to portfolio securities. Shareholders may view the Fund’s complete Policies online at franklintempleton.com. Alternatively, shareholders may request copies of the Policies free of charge by calling the Proxy Group collect at (954) 527-7678 or by sending a written request to: Franklin Templeton Companies, LLC, 300 S.E. 2nd Street, Fort Lauderdale, FL 33301, Attention: Proxy Group. Copies of the Fund’s proxy voting records are also made available online at franklintempleton.com and posted on the U.S. Securities and Exchange Commission’s website at sec.gov and reflect the most recent 12-month period ended June 30.
Quarterly Statement of Investments
The Fund files a complete statement of investments with the U.S. Securities and Exchange Commission for the first and third quarters for each fiscal year on Form N-Q. Shareholders may view the filed Form N-Q by visiting the Commission’s website at sec.gov. The filed form may also be viewed and copied at the Commission’s Public Reference Room in Washington, DC. Information regarding the operations of the Public Reference Room may be obtained by calling (800) SEC-0330.
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Semiannual Report
and Shareholder Letter
June 30, 2016
Franklin Mutual European Fund
A SERIES OF FRANKLIN MUTUAL SERIES FUNDS
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Contents | |
Semiannual Report | |
Franklin Mutual European Fund | 3 |
Performance Summary | 7 |
Your Fund’s Expenses | 10 |
Financial Highlights and Statement of Investments | 11 |
Financial Statements | 21 |
Notes to Financial Statements | 25 |
Shareholder Information | 37 |
Visit franklintempleton.com for fund updates, to access your account, or to find helpful financial planning tools.
2 Semiannual Report
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Semiannual Report
Franklin Mutual European Fund
This semiannual report for Franklin Mutual European Fund covers the period ended June 30, 2016.
Your Fund’s Goals and Main Investments
The Fund seeks capital appreciation, which may occasionally be short term, with income as a secondary goal, by investing at least 80% of its net assets in securities of European companies. It focuses mainly on what the investment manager believes are undervalued mid- and large cap equity securities and, to a lesser extent, the securities of distressed companies and merger arbi-trage securities.
Performance Overview
The Fund’s Class Z shares had a -8.16% cumulative total return for the six months under review. In comparison, the Fund’s benchmark, the MSCI Europe Index, which tracks equity performance in Europe’s developed markets, had a -3.75% total return in local currency terms.1 Also for comparison, the MSCI Europe Index had a -4.61% total return in U.S. dollar terms.1 You can find more of the Fund’s performance data in the Performance Summary beginning on page 7.
Performance data represent past performance, which does not guarantee future results. Investment return and principal value will fluctuate, and you may have a gain or loss when you sell your shares. Current performance may differ from figures shown. For most recent month-end performance, go to franklintempleton.com or call (800) 342-5236.
Economic and Market Overview
Although the eurozone economy grew moderately during the six months ended June 30, 2016, European equity markets as a group fell, mainly due to the historic U.K. referendum vote to leave the European Union (EU), also known as the “Brexit.” However, market sentiment was more positive early in the period amid rising oil prices and a new debt deal for Greece soon after the country adopted fresh tax increases and budget cuts. Overall, the period brought stock market declines in many of the region’s developed and emerging markets. The immediate effects of the Brexit vote included the resignation of the U.K.’s prime minister, as well as downgrades of U.K. sovereign
*Figures are stated as a percentage of total and may not equal 100% or may be negative due to rounding, use of any derivatives, unsettled trades or other factors.
debt by several credit rating agencies. At period-end, much was still unclear surrounding the country’s future leadership and the process for leaving the EU. The U.K. stock market declined significantly, and the British pound hit a three-decade low versus the U.S. dollar as selling intensified. Earlier in the period, the U.K.’s quarter-on-quarter economic growth slowed in the first quarter of 2016 as construction and production declined.
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1. Source: Morningstar.
The indexes are unmanaged and include reinvestment of any income or distributions. They do not reflect any fees, expenses or sales charges. One cannot invest directly in an
index, and an index is not representative of the Fund’s portfolio.
The dollar value, number of shares or principal amount, and names of all portfolio holdings are listed in the Fund’s Statement of Investments (SOI).
The SOI begins on page 16.
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Elsewhere in Europe, the eurozone’s first quarter economic growth rose as household consumption increased. Germany’s gross domestic product (GDP) gained in the first quarter, led by strong domestic consumption and brisk construction activity. France revised its economic growth rate upward, led by consumer spending and a rise in consumer confidence. In addition, the eurozone’s unemployment rate held steady in May, while its annual inflation rate rose above zero in June after two consecutive declines. Likewise, industrial production gained momentum in April after declines earlier in the period.
Investment Strategy
We follow a distinctive value investment approach that combines investments in what we believe are undervalued common stocks with distressed debt investing and risk arbitrage. Our style aims to provide our shareholders with superior risk-adjusted results over time. We employ rigorous, fundamental analysis to find compelling situations. In our opinion, successful investing is as much about assessing risk and containing losses as it is about achieving profits. In choosing investments, we look at the market price of an individual company’s securities relative to our evaluation of its intrinsic value based on factors including book value, cash flow generation, long-term earnings potential and earnings multiples. We may invest in bankrupt or distressed companies if we believe the market overreacted to adverse developments or failed to appreciate positive changes.
In addition, it is our practice to hedge the Fund’s currency exposure when we deem it advantageous for our shareholders.
What is meant by “hedge”?
To hedge an investment is to take a position intended to offset potential losses/gains that may be incurred by a companion financial instrument.
Manager’s Discussion
European equity markets experienced a turbulent first half of 2016. Stocks in Europe started the new year lower due to renewed concern regarding China’s economy and a further deterioration in crude oil prices. Markets recovered by the middle of February, aided by an improvement in oil prices, and continued to rise as investors reacted positively to additional stimulus measures announced by the European Central Bank (ECB) in early March. Overall, eurozone economic data indicated a continuing modest recovery fueled mostly by consumer spending and increased household lending. Manufacturing-related data during the period were generally soft.
Top 10 Sectors/Industries | ||
Based on Equity Securities as of 6/30/16 | ||
% of Total | ||
Net Assets | ||
Insurance | 14.7 | % |
Pharmaceuticals | 7.2 | % |
Diversified Telecommunication Services | 7.0 | % |
Oil, Gas & Consumable Fuels | 6.4 | % |
Specialty Retail | 4.1 | % |
Chemicals | 3.9 | % |
Auto Components | 3.3 | % |
Banks | 3.2 | % |
Electric Utilities | 2.9 | % |
Wireless Telecommunication Services | 2.7 | % |
The momentous decision by U.K. voters on June 23 to leave the EU has introduced significant economic, financial and political uncertainty to the region. We believe it is probable that the U.K. will face a heightened risk of an economic slowdown, as businesses will likely put investment decisions on hold while waiting for clarity as to what the new reality may look like. The negative impact on the rest of the EU will likely be less severe, although economic growth in the region was already running at a modest pace before the vote, and we do not believe the region will be immune.
We anticipate prices in European financial markets will reflect increasing political and economic risk. The prospects of continuing low or even lower interest rates, as well as uncertainty as to the future of London as Europe’s main financial center will likely weigh on financial stocks. Potentially slower economic growth and the regional trade implications of the Brexit will also weigh on domestically oriented cyclical stocks. With this in mind, we have notably reduced the Fund’s exposure to the financials sector, primarily by reducing our exposure to banks, resulting in higher cash levels.2 Areas of the equity markets that were viewed as defensive, as well as stocks with what we consider attractive dividend yields, will likely remain in favor among many investors, in our view, causing them to trade at even higher valuation multiples. Within the U.K., large multinational companies that generate most of their earnings abroad should benefit from the precipitous fall of the British pound that followed the Brexit vote. In this respect, the Fund’s exposure to U.K. equities was predominantly through a number of these global companies.
Although the Brexit vote is clearly a negative surprise, we do not believe it will usher in a new global financial crisis similar
2. The financials sector comprises banks, capital markets, diversified financial services and insurance in the SOI.
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to the one experienced eight years ago. Although markets reacted brutally to the U.K.’s decision to leave the EU, we have not seen any systemic shock like the one that followed the fall of Lehman Brothers in 2008. We also believe that, eventually, the U.K. and the EU will come to an acceptable agreement concerning trade relations.
Turning to Fund performance, top contributors included integrated oil and gas companies Royal Dutch Shell and BP, and pharmaceutical company GlaxoSmithKline.
Improved crude oil prices during the period helped many energy sector stocks, including Royal Dutch Shell. In January, company shareholders approved the acquisition of BG Group and both companies released quarterly results indicating strong cash flow and results in their natural gas operations. In June, investors reacted favorably to Royal Dutch Shell’s strategy update, which included an upward revision to synergies related to the BG Group acquisition, including a lower cost base, a limit on capital spending and an implicit lower oil-price breakeven point. The company also reiterated its intention to dispose of US$30 billion in assets through 2018, maintain its dividend, eliminate the scrip dividend and buy back US$25 billion of shares over time.
Shares of U.K.-based BP also benefited from the improvement in crude oil prices during the period. In April, positive quarterly results along with a positive guidance update for 2016 and 2017—covering capital spending, costs and the breakeven cost per barrel of oil—boosted the stock price. In addition, shares of BP and Royal Dutch Shell did not follow the broad equity market decline after the Brexit referendum result in June. Both companies are U.S. dollar-based businesses that report and declare dividends in U.S. dollars, with some level of British pound based costs, resulting in what we consider more attractive valuations in their local markets, given the decline of the pound.
GlaxoSmithKline is a U.K.-based pharmaceutical company. In April, the company reported solid quarterly results that exceeded consensus expectations for sales and operating margins, resulting in a robust bottom-line result. Margin progression was especially solid in vaccines and consumer health, which are longer duration businesses. In March, the company also announced that chief executive officer Andrew Witty will retire in March 2017; a move that was viewed positively given the company’s numerous disappointments in the past and investor perception that he added limited value during his tenure. Shares of GlaxoSmithKline also did not follow the broad equity market decline following the June Brexit vote. The company has significant global exposure and in our view would
3. Not held at period-end.
See www.franklintempletondatasources.com for additional data provider information.
Top 10 Equity Holdings | ||
6/30/16 | ||
Company | % of Total | |
Sector/Industry, Country | Net Assets | |
Royal Dutch Shell PLC | 3.0 | % |
Oil, Gas & Consumable Fuels, U.K. | ||
Novartis AG | 3.0 | % |
Pharmaceuticals, Switzerland | ||
Enel SpA | 2.9 | % |
Electric Utilities, Italy | ||
NN Group NV | 2.8 | % |
Insurance, Netherlands | ||
Koninklijke KPN NV | 2.7 | % |
Diversified Telecommunication Services, Netherlands | ||
Vodafone Group PLC | 2.7 | % |
Wireless Telecommunication Services, U.K. | ||
Koninklijke Philips NV | 2.7 | % |
Industrial Conglomerates, Netherlands | ||
Deutsche Telekom AG | 2.7 | % |
Diversified Telecommunication Services, Germany | ||
Metro AG | 2.6 | % |
Food & Staples Retailing, Germany | ||
RSA Insurance Group PLC | 2.6 | % |
Insurance, U.K. |
likely experience a currency-related boost to profits from a weaker British pound.
During the period under review, Fund investments that detracted from performance included insurance and financial services firm Assicurazioni Generali, banking and financial services company Société Générale and insurer Ageas.
Similar to many other major European financial companies, shares of the Italy-based Assicurazioni Generali declined sharply in late June following the U.K. referendum to leave the EU.3 Italian financials were among the hardest hit as investors became concerned that the decision by U.K. voters may have negative implications for Italy, especially considering that the eurosceptic Five Star Movement political party fared well in the June local elections. Assicurazioni Generali’s share price also declined in January and early February. The financial sector in Europe was hindered by the potentially detrimental effect of the ECB’s negative interest rate policy, ongoing concerns about global economic health, and challenging capital market conditions. In addition, investors reacted negatively to the January announcement that chief executive officer (CEO) Mario Greco was leaving Assicurazioni Generali to take the CEO position at Zurich Insurance Group.
The stock price of France-based lender Société Générale dropped sharply in late June as investors reacted negatively to the
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U.K.’s referendum vote in June to leave the EU.3 Earlier in the period, the company’s shares declined on full-year results that missed consensus estimates, largely due to soft investment banking numbers. Company management also stated that it would likely miss return targets in 2016 because of historically low interest rates and volatile financial markets.
Shares of Belgium-based insurer Ageas followed the broad based decline of European financial stocks in late June following the Brexit referendum result. In our view, the outcome had negative implications for the insurance industry by increasing economic uncertainty, adding immediate downward pressure on global interest rates and increasing the possibility that the U.S. Fed will further delay its next interest rate hike. Ageas also declined in January and early February as Europe’s financials sector was hurt by the potentially detrimental effect of the ECB’s negative interest rate policy. On an encouraging note, the company announced solid quarterly results in mid-February and May, as well as raising its dividend in February.
During the period, the Fund held currency forwards and futures to hedge a significant portion of the currency risk of the portfolio’s non-U.S. dollar investments. The currency forwards had a positive impact on the Fund’s performance, while currency futures had a negligible impact.
What is a currency forward?
A currency forward is an agreement between the Fund and a counterparty to buy or sell a foreign currency in exchange for another currency at a specific exchange rate on a future date.
What is a future?
A future is an agreement between the Fund and a counterparty made through a U.S. or foreign futures exchange to buy or sell an underlying instrument or asset at a specific price on a future date.
We are closely following the market repercussions from Brexit and maintain, for the time being, a cautious approach as there is still little clarity on how this fluid situation will evolve. However, we are ready to take advantage of market dislocations to buy companies at a discount to intrinsic value, particularly those with a catalyst which will help generate returns that are idiosyncratic to the daily vagaries of global markets.
As fellow shareholders, we found recent relative performance disappointing. We remain committed to our disciplined, value investment approach as we seek to generate attractive, long-term, risk-adjusted returns for shareholders. Thank you for your continued participation in Franklin Mutual European Fund. We look forward to continuing to serve your investment needs.
CFA® is a trademark owned by CFA Institute.
The foregoing information reflects our analysis, opinions and portfolio holdings as of June 30, 2016, the end of the reporting period. The way we implement our main investment strategies and the resulting portfolio holdings may change depending on factors such as market and economic conditions. These opinions may not be relied upon as investment advice or an offer for a particular security. The information is not a complete analysis of every aspect of any market, country, industry, security or the Fund. Statements of fact are from sources considered reliable, but the investment manager makes no representation or warranty as to their completeness or accuracy. Although historical performance is no guarantee of future results, these insights may help you understand our investment management philosophy.
Philippe Brugere-Trelat has been co-portfolio manager for Franklin Mutual European Fund since 2010 and portfolio manager since 2005. He also has been portfolio manager for Franklin Mutual Global Discovery Fund since 2009. He has been a member of the management team of the Franklin Mutual Series Funds since 2004, when he rejoined Franklin Templeton Investments. Previously, he was president and portfolio manager of Eurovest. Between 1984 and 1994, Mr. Brugere-Trelat was employed at Heine Securities Corporation, the Fund’s former manager.
Katrina Dudley has been co-portfolio manager for Franklin Mutual European Fund since 2010 and was assistant portfolio manager since 2007. She follows industrial companies including transportation, manufacturers, machinery, electrical equipment and general industrial, as well as health care services companies. Prior to joining Franklin Templeton Investments in 2002, Ms. Dudley was an investment analyst at Federated Investors, Inc., responsible for the technology and health care sectors. From 1995 to 2001, Ms. Dudley was a senior manager in the corporate finance division of Ernst & Young LLP, where she specialized in valuation and litigation consulting.
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Performance Summary as of June 30, 2016
Your dividend income will vary depending on dividends or interest paid by securities in the Fund’s portfolio, adjusted for operating expenses of each class. Capital gain distributions are net profits realized from the sale of portfolio securities. The performance table does not reflect any taxes that a shareholder would pay on Fund dividends, capital gain distributions, if any, or any realized gains on the sale of Fund shares. Total return reflects reinvestment of the Fund’s dividends and capital gain distributions, if any, and any unrealized gains or losses.
Net Asset Value | ||||||
Share Class (Symbol) | 6/30/16 | 12/31/15 | Change | |||
Z (MEURX) | $ | 17.89 | $ | 19.48 | -$ | 1.59 |
A (TEMIX) | $ | 17.38 | $ | 18.95 | -$ | 1.57 |
C (TEURX) | $ | 17.34 | $ | 18.97 | -$ | 1.63 |
R (n/a) | $ | 17.06 | $ | 18.62 | -$ | 1.56 |
R6 (FMEUX) | $ | 17.90 | $ | 19.47 | -$ | 1.57 |
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Performance as of 6/30/161
Cumulative total return excludes sales charges. Average annual total return and value of $10,000 investment include maximum sales charges. Class Z/R/R6: no sales charges; Class A: 5.75% maximum initial sales charge; Class C: 1% contingent deferred sales charge in first year only.
Total Annual | ||||||||
Cumulative | Average Annual | Value of $10,000 | Operating | |||||
Share Class | Total Return2 | Total Return3 | Investment4 | Expenses5 | ||||
Z | 1.05 | % | ||||||
6-Month | -8.16 | % | -8.16 | % | $ | 9,184 | ||
1-Year | -12.60 | % | -12.60 | % | $ | 8,740 | ||
5-Year | +15.79 | % | +2.97 | % | $ | 11,579 | ||
10-Year | +50.30 | % | +4.16 | % | $ | 15,030 | ||
A | 1.30 | % | ||||||
6-Month | -8.28 | % | -14.03 | % | $ | 8,597 | ||
1-Year | -12.82 | % | -17.82 | % | $ | 8,218 | ||
5-Year | +14.17 | % | +1.48 | % | $ | 10,761 | ||
10-Year | +46.02 | % | +3.25 | % | $ | 13,763 | ||
C | 2.05 | % | ||||||
6-Month | -8.59 | % | -9.59 | % | $ | 9,041 | ||
1-Year | -13.46 | % | -14.26 | % | $ | 8,574 | ||
5-Year | +10.17 | % | +1.96 | % | $ | 11,017 | ||
10-Year | +36.10 | % | +3.13 | % | $ | 13,610 | ||
R | 1.55 | % | ||||||
6-Month | -8.38 | % | -8.38 | % | $ | 9,162 | ||
1-Year | -12.99 | % | -12.99 | % | $ | 8,701 | ||
5-Year | +13.01 | % | +2.48 | % | $ | 11,301 | ||
Since Inception (10/30/09) | +33.66 | % | +4.45 | % | $ | 13,366 | ||
R6 | 0.89 | % | ||||||
6-Month | -8.06 | % | -8.06 | % | $ | 9,194 | ||
1-Year | -12.41 | % | -12.41 | % | $ | 8,759 | ||
3-Year | +6.42 | % | +2.09 | % | $ | 10,642 | ||
Since Inception (5/1/13) | +6.18 | % | +1.91 | % | $ | 10,618 |
Performance data represent past performance, which does not guarantee future results. Investment return and principal value will fluctuate, and you may have a gain or loss when you sell your shares. Current performance may differ from figures shown. For most recent month-end performance, go to franklintempleton.com or call (800) 342-5236.
See page 9 for Performance Summary footnotes.
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All investments involve risks, including possible loss of principal. Value securities may not increase in price as anticipated or may decline further in value. Special risks are associated with foreign investing, including currency fluctuations, economic instability and political developments. Because the Fund invests its assets primarily in companies in a specific region, it is subject to greater risks of adverse developments in that region and/or the surrounding regions than a fund that is more broadly diversified geographically. Political, social or economic disruptions in the region, even in countries in which the Fund is not invested, may adversely affect the value of securities held by the Fund. The Fund’s investments in smaller company stocks carry an increased risk of price fluctuation, especially over the short term. The Fund’s investments in companies engaged in mergers, reorganizations or liquidations also involve special risks as pending deals may not be completed on time or on favorable terms. The Fund is actively managed but there is no guarantee that the manager’s investment decisions will produce the desired results. The Fund’s prospectus also includes a discussion of the main investment risks.
Class Z: | Shares are available to certain eligible investors as described in the prospectus. |
Class C: | These shares have higher annual fees and expenses than Class A shares. |
Class R: | Shares are available to certain eligible investors as described in the prospectus. These shares have higher annual fees and expenses than Class A shares. |
Class R6: | Shares are available to certain eligible investors as described in the prospectus. |
1. The Fund has a fee waiver associated with any investment in a Franklin Templeton money fund and/or other Franklin Templeton fund, as applicable, contractually guaran-
teed through at least the Fund’s current fiscal year-end. Fund investment results reflect the fee waiver, to the extent applicable; without this reduction, the results would have
been lower.
2. Cumulative total return represents the change in value of an investment over the periods indicated.
3. Average annual total return represents the average annual change in value of an investment over the periods indicated. Return for less than one year, if any, has not been annualized.
4. These figures represent the value of a hypothetical $10,000 investment in the Fund over the periods indicated.
5. Figures are as stated in the Fund’s current prospectus and may differ from the expense ratios disclosed in the Financial Highlights in this report. In periods of market vola-
tility, assets may decline significantly, causing total annual Fund operating expenses to become higher than the figures shown.
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Your Fund’s Expenses
As a Fund shareholder, you can incur two types of costs:
- Transaction costs, including sales charges (loads) on Fund purchases; and
- Ongoing Fund costs, including management fees, distribution and service (12b-1) fees, and other Fund expenses. All mutual funds have ongoing costs, sometimes referred to as operating expenses.
The following table shows ongoing costs of investing in the Fund and can help you understand these costs and compare them with those of other mutual funds. The table assumes a $1,000 investment held for the six months indicated.
Actual Fund Expenses
The first line (Actual) for each share class listed in the table provides actual account values and expenses. The “Ending Account Value” is derived from the Fund’s actual return, which includes the effect of Fund expenses.
You can estimate the expenses you paid during the period by following these steps. Of course, your account value and expenses will differ from those in this illustration:
1. Divide your account value by $1,000.
If an account had an $8,600 value, then $8,600 ÷ $1,000 = 8.6.
2. Multiply the result by the number under the heading “Expenses Paid During Period.”
If Expenses Paid During Period were $7.50, then 8.6 × $7.50 = $64.50.
In this illustration, the estimated expenses paid this period are $64.50.
Hypothetical Example for Comparison with Other Funds
Information in the second line (Hypothetical) for each class in the table can help you compare ongoing costs of investing in the Fund with those of other mutual funds. This information may not be used to estimate the actual ending account balance or expenses you paid during the period. The hypothetical “Ending Account Value” is based on the actual expense ratio for each class and an assumed 5% annual rate of return before expenses, which does not represent the Fund’s actual return. The figure under the heading “Expenses Paid During Period” shows the hypothetical expenses your account would have incurred under this scenario. You can compare this figure with the 5% hypothetical examples that appear in shareholder reports of other funds.
Please note that expenses shown in the table are meant to highlight ongoing costs and do not reflect any transaction costs, such as sales charges. Therefore, the second line for each class is useful in comparing ongoing costs only, and will not help you compare total costs of owning different funds. In addition, if transaction costs were included, your total costs would have been higher. Please refer to the Fund prospectus for additional information on operating expenses.
Beginning Account | Ending Account | Expenses Paid During | |
Share Class | Value 1/1/16 | Value 6/30/16 | Period* 1/1/16–6/30/16 |
Z | |||
Actual | $1,000 | $918.40 | $5.01 |
Hypothetical (5% return before expenses) | $1,000 | $1,019.64 | $5.27 |
A | |||
Actual | $1,000 | $917.20 | $6.20 |
Hypothetical (5% return before expenses) | $1,000 | $1,018.40 | $6.52 |
C | |||
Actual | $1,000 | $914.10 | $9.76 |
Hypothetical (5% return before expenses) | $1,000 | $1,014.67 | $10.27 |
R | |||
Actual | $1,000 | $916.20 | $7.38 |
Hypothetical (5% return before expenses) | $1,000 | $1,017.16 | $7.77 |
R6 | |||
Actual | $1,000 | $919.40 | $4.25 |
Hypothetical (5% return before expenses) | $1,000 | $1,020.44 | $4.47 |
*Expenses are calculated using the most recent six-month expense ratio, net of expense waivers, annualized for each class (Z: 1.05%; A: 1.30%; C: 2.05%; R: 1.55%; and R6: 0.89%), multiplied by the average account value over the period, multiplied by 182/366 to reflect the one-half year period.
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Financial Highlights | ||||||||||||||||||
Six Months Ended | Year Ended December 31, | |||||||||||||||||
June 30, 2016 | ||||||||||||||||||
(unaudited) | 2015 | 2014 | 2013 | 2012 | 2011 | |||||||||||||
Class Z | ||||||||||||||||||
Per share operating performance | ||||||||||||||||||
(for a share outstanding throughout the period) | ||||||||||||||||||
Net asset value, beginning of period | $ | 19.48 | $ | 20.86 | $ | 24.76 | $ | 21.13 | $ | 18.95 | $ | 21.47 | ||||||
Income from investment operationsa: | ||||||||||||||||||
Net investment incomeb | 0.56 | 0.42 | 0.73 | c | 0.49 | 0.44 | 0.50 | |||||||||||
Net realized and unrealized gains (losses) | (2.15 | ) | (0.27 | ) | (1.73 | ) | 5.12 | 2.89 | (2.25 | ) | ||||||||
Total from investment operations | (1.59 | ) | 0.15 | (1.00 | ) | 5.61 | 3.33 | (1.75 | ) | |||||||||
Less distributions from: | ||||||||||||||||||
Net investment income | — | (0.46 | ) | (0.67 | ) | (0.46 | ) | (0.68 | ) | (0.77 | ) | |||||||
Net realized gains | — | (1.07 | ) | (2.23 | ) | (1.52 | ) | (0.47 | ) | — | ||||||||
Total distributions | — | (1.53 | ) | (2.90 | ) | (1.98 | ) | (1.15 | ) | (0.77 | ) | |||||||
Net asset value, end of period | $ | 17.89 | $ | 19.48 | $ | 20.86 | $ | 24.76 | $ | 21.13 | $ | 18.95 | ||||||
Total returnd | (8.16 | )% | 0.82 | % | (4.00 | )% | 26.68 | % | 17.73 | % | (8.01 | )% | ||||||
Ratios to average net assetse | ||||||||||||||||||
Expensesf | 1.05 | %g,h | 1.05 | % | 1.04 | %g | 1.07 | %g | 1.13 | % | 1.11 | % | ||||||
Expenses incurred in connection with securities | ||||||||||||||||||
sold short | —% | —%i | 0.01 | % | —%i | —% | —% | |||||||||||
Net investment income | 6.19 | %j | 1.93 | % | 2.93 | %c | 2.04 | % | 2.16 | % | 2.43 | % | ||||||
Supplemental data | ||||||||||||||||||
Net assets, end of period (000’s) | $ | 1,190,113 | $ | 1,355,780 | $ | 1,128,769 | $ | 1,399,294 | $ | 1,101,659 | $ | 964,069 | ||||||
Portfolio turnover rate | 10.73 | % | 32.59 | % | 54.05 | % | 39.05 | % | 41.69 | % | 32.60 | % |
aThe amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases
of the Fund’s shares in relation to income earned and/or fluctuating fair value of the investments of the Fund.
bBased on average daily shares outstanding.
cNet investment income per share includes approximately $0.29 per share related to income received in the form of a special dividend in connection with certain Fund
holdings. Excluding this amount, the ratio of net investment income to average net assets would have been 1.74%.
dTotal return is not annualized for periods less than one year.
eRatios are annualized for periods less than one year.
fIncludes dividend and/or interest expense on securities sold short and security borrowing fees, if any. See below for the ratios of such expenses to average net assets for the
periods presented. See Note 1(e).
gBenefit of expense reduction rounds to less than 0.01%.
hBenefit of waiver and payments by affiliates rounds to less than 0.01%.
iRounds to less than 0.01%.
j The net investment income ratio is annualized and may not be indicative of operating results for a full year.
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FINANCIAL H IGHLIGHTS
Six Months Ended | Year Ended December 31, | |||||||||||||||||
June 30, 2016 | ||||||||||||||||||
(unaudited) | 2015 | 2014 | 2013 | 2012 | 2011 | |||||||||||||
Class A | ||||||||||||||||||
Per share operating performance | ||||||||||||||||||
(for a share outstanding throughout the period) | ||||||||||||||||||
Net asset value, beginning of period | $ | 18.95 | $ | 20.33 | $ | 24.21 | $ | 20.71 | $ | 18.59 | $ | 21.06 | ||||||
Income from investment operationsa: | ||||||||||||||||||
Net investment incomeb | 0.52 | 0.35 | 0.61 | c | 0.42 | 0.37 | 0.44 | |||||||||||
Net realized and unrealized gains (losses) | (2.09 | ) | (0.26 | ) | (1.66 | ) | 4.99 | 2.84 | (2.20 | ) | ||||||||
Total from investment operations | (1.57 | ) | 0.09 | (1.05 | ) | 5.41 | 3.21 | (1.76 | ) | |||||||||
Less distributions from: | ||||||||||||||||||
Net investment income | — | (0.40 | ) | (0.60 | ) | (0.39 | ) | (0.62 | ) | (0.71 | ) | |||||||
Net realized gains | — | (1.07 | ) | (2.23 | ) | (1.52 | ) | (0.47 | ) | — | ||||||||
Total distributions | — | (1.47 | ) | (2.83 | ) | (1.91 | ) | (1.09 | ) | (0.71 | ) | |||||||
Net asset value, end of period | $ | 17.38 | $ | 18.95 | $ | 20.33 | $ | 24.21 | $ | 20.71 | $ | 18.59 | ||||||
Total returnd | (8.28 | )% | 0.57 | % | (4.31 | )% | 26.30 | % | 17.37 | % | (8.27 | )% | ||||||
Ratios to average net assetse | ||||||||||||||||||
Expensesf | 1.30 | %g,h | 1.33 | % | 1.34 | %g | 1.37 | %g | 1.43 | % | 1.41 | % | ||||||
Expenses incurred in connection with securities | ||||||||||||||||||
sold short | —% | —%i | 0.01 | % | —%i | —% | —% | |||||||||||
Net investment income | 5.94 | %j | 1.65 | % | 2.63 | %c | 1.74 | % | 1.86 | % | 2.13 | % | ||||||
Supplemental data | ||||||||||||||||||
Net assets, end of period (000’s) | $ | 852,128 | $ | 1,033,307 | $ | 843,836 | $ | 839,655 | $ | 653,435 | $ | 593,825 | ||||||
Portfolio turnover rate | 10.73 | % | 32.59 | % | 54.05 | % | 39.05 | % | 41.69 | % | 32.60 | % |
aThe amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases
of the Fund’s shares in relation to income earned and/or fluctuating fair value of the investments of the Fund.
bBased on average daily shares outstanding.
cNet investment income per share includes approximately $0.29 per share related to income received in the form of a special dividend in connection with certain Fund
holdings. Excluding this amount, the ratio of net investment income to average net assets would have been 1.44%.
dTotal return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year.
eRatios are annualized for periods less than one year.
fIncludes dividend and/or interest expense on securities sold short and security borrowing fees, if any. See below for the ratios of such expenses to average net assets for the
periods presented. See Note 1(e).
gBenefit of expense reduction rounds to less than 0.01%.
hBenefit of waiver and payments by affiliates rounds to less than 0.01%.
i Rounds to less than 0.01%.
j The net investment income ratio is annualized and may not be indicative of operating results for a full year.
12 Semiannual Report | The accompanying notes are an integral part of these financial statements.
franklintempleton.com
FRANKLIN MUTUAL EUROPEAN FUND
FINANCIAL H IGHLIGHTS
Six Months Ended | Year Ended December 31, | |||||||||||||||||
June 30, 2016 | ||||||||||||||||||
(unaudited) | 2015 | 2014 | 2013 | 2012 | 2011 | |||||||||||||
Class C | ||||||||||||||||||
Per share operating performance | ||||||||||||||||||
(for a share outstanding throughout the period) | ||||||||||||||||||
Net asset value, beginning of period | $ | 18.97 | $ | 20.37 | $ | 24.25 | $ | 20.79 | $ | 18.66 | $ | 21.10 | ||||||
Income from investment operationsa: | ||||||||||||||||||
Net investment incomeb | 0.45 | 0.19 | 0.43 | c | 0.24 | 0.24 | 0.31 | |||||||||||
Net realized and unrealized gains (losses) | (2.08 | ) | (0.25 | ) | (1.64 | ) | 5.02 | 2.83 | (2.20 | ) | ||||||||
Total from investment operations | (1.63 | ) | (0.06 | ) | (1.21 | ) | 5.26 | 3.07 | (1.89 | ) | ||||||||
Less distributions from: | ||||||||||||||||||
Net investment income | — | (0.27 | ) | (0.44 | ) | (0.28 | ) | (0.47 | ) | (0.55 | ) | |||||||
Net realized gains | — | (1.07 | ) | (2.23 | ) | (1.52 | ) | (0.47 | ) | — | ||||||||
Total distributions | — | (1.34 | ) | (2.67 | ) | (1.80 | ) | (0.94 | ) | (0.55 | ) | |||||||
Net asset value, end of period | $ | 17.34 | $ | 18.97 | $ | 20.37 | $ | 24.25 | $ | 20.79 | $ | 18.66 | ||||||
Total returnd | (8.59 | )% | (0.16 | )% | (4.97 | )% | 25.44 | % | 16.54 | % | (8.90 | )% | ||||||
Ratios to average net assetse | ||||||||||||||||||
Expensesf | 2.05 | %g,h | 2.05 | % | 2.04 | %g | 2.07 | %g | 2.13 | % | 2.11 | % | ||||||
Expenses incurred in connection with securities | ||||||||||||||||||
sold short | —% | —%i | 0.01 | % | —%i | —% | —% | |||||||||||
Net investment income | 5.19 | %j | 0.93 | % | 1.93 | %c | 1.04 | % | 1.16 | % | 1.43 | % | ||||||
Supplemental data | ||||||||||||||||||
Net assets, end of period (000’s) | $ | 230,623 | $ | 291,752 | $ | 216,258 | $ | 198,491 | $ | 122,438 | $ | 127,012 | ||||||
Portfolio turnover rate | 10.73 | % | 32.59 | % | 54.05 | % | 39.05 | % | 41.69 | % | 32.60 | % |
aThe amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases
of the Fund’s shares in relation to income earned and/or fluctuating fair value of the investments of the Fund.
bBased on average daily shares outstanding.
cNet investment income per share includes approximately $0.29 per share related to income received in the form of a special dividend in connection with certain Fund
holdings. Excluding this amount, the ratio of net investment income to average net assets would have been 0.74%.
dTotal return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year.
eRatios are annualized for periods less than one year.
fIncludes dividend and/or interest expense on securities sold short and security borrowing fees, if any. See below for the ratios of such expenses to average net assets for the
periods presented. See Note 1(e).
gBenefit of expense reduction rounds to less than 0.01%.
hBenefit of waiver and payments by affiliates rounds to less than 0.01%.
i Rounds to less than 0.01%.
j The net investment income ratio is annualized and may not be indicative of operating results for a full year.
franklintempleton.com
The accompanying notes are an integral part of these financial statements. | Semiannual Report 13
FRANKLIN MUTUAL EUROPEAN FUND
FINANCIAL H IGHLIGHTS
Six Months Ended | Year Ended December 31, | |||||||||||||||||
June 30, 2016 | ||||||||||||||||||
(unaudited) | 2015 | 2014 | 2013 | 2012 | 2011 | |||||||||||||
Class R | ||||||||||||||||||
Per share operating performance | ||||||||||||||||||
(for a share outstanding throughout the period) | ||||||||||||||||||
Net asset value, beginning of period | $ | 18.62 | $ | 20.04 | $ | 23.95 | $ | 20.55 | $ | 18.47 | $ | 21.00 | ||||||
Income from investment operationsa: | ||||||||||||||||||
Net investment incomeb | 0.47 | 0.27 | 0.41 | c | 0.31 | 0.33 | 0.16 | |||||||||||
Net realized and unrealized gains (losses) | (2.03 | ) | (0.23 | ) | (1.49 | ) | 5.02 | 2.81 | (1.97 | ) | ||||||||
Total from investment operations | (1.56 | ) | 0.04 | (1.08 | ) | 5.33 | 3.14 | (1.81 | ) | |||||||||
Less distributions from: | ||||||||||||||||||
Net investment income | — | (0.39 | ) | (0.60 | ) | (0.41 | ) | (0.59 | ) | (0.72 | ) | |||||||
Net realized gains | — | (1.07 | ) | (2.23 | ) | (1.52 | ) | (0.47 | ) | — | ||||||||
Total distributions | — | (1.46 | ) | (2.83 | ) | (1.93 | ) | (1.06 | ) | (0.72 | ) | |||||||
Net asset value, end of period | $ | 17.06 | $ | 18.62 | $ | 20.04 | $ | 23.95 | $ | 20.55 | $ | 18.47 | ||||||
Total returnd | (8.38 | )% | 0.37 | % | (4.52 | )% | 26.05 | % | 17.16 | % | (8.45 | )% | ||||||
Ratios to average net assetse | ||||||||||||||||||
Expensesf | 1.55 | %g,h | 1.55 | % | 1.54 | %g | 1.57 | %g | 1.63 | % | 1.61 | % | ||||||
Expenses incurred in connection with securities sold | ||||||||||||||||||
short | —% | —%i | 0.01 | % | —%i | —% | —% | |||||||||||
Net investment income | 5.69 | %j | 1.43 | % | 2.43 | %c | 1.54 | % | 1.66 | % | 1.93 | % | ||||||
Supplemental data | ||||||||||||||||||
Net assets, end of period (000’s) | $ | 759 | $ | 997 | $ | 421 | $ | 133 | $ | 46 | $ | 31 | ||||||
Portfolio turnover rate | 10.73 | % | 32.59 | % | 54.05 | % | 39.05 | % | 41.69 | % | 32.60 | % |
aThe amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases
of the Fund’s shares in relation to income earned and/or fluctuating fair value of the investments of the Fund.
bBased on average daily shares outstanding.
cNet investment income per share includes approximately $0.29 per share related to income received in the form of a special dividend in connection with certain Fund
holdings. Excluding this amount, the ratio of net investment income to average net assets would have been 1.24%.
dTotal return is not annualized for periods less than one year.
eRatios are annualized for periods less than one year.
fIncludes dividend and/or interest expense on securities sold short and security borrowing fees, if any. See below for the ratios of such expenses to average net assets for the
periods presented. See Note 1(e).
gBenefit of expense reduction rounds to less than 0.01%.
hBenefit of waiver and payments by affiliates rounds to less than 0.01%.
iRounds to less than 0.01%.
jThe net investment income ratio is annualized and may not be indicative of operating results for a full year.
14 Semiannual Report | The accompanying notes are an integral part of these financial statements.
franklintempleton.com
FRANKLIN MUTUAL EUROPEAN FUND
FINANCIAL H IGHLIGHTS
Six Months Ended | Year Ended December 31, | |||||||||||
June 30, 2016 | ||||||||||||
(unaudited) | 2015 | 2014 | 2013 | a | ||||||||
Class R6 | ||||||||||||
Per share operating performance | ||||||||||||
(for a share outstanding throughout the period) | ||||||||||||
Net asset value, beginning of period | $ | 19.47 | $ | 20.85 | $ | 24.75 | $ | 22.54 | ||||
Income from investment operationsb: | ||||||||||||
Net investment incomec | 0.57 | 0.46 | 0.75 | d | 0.28 | |||||||
Net realized and unrealized gains (losses) | (2.14 | ) | (0.28 | ) | (1.71 | ) | 3.95 | |||||
Total from investment operations | (1.57 | ) | 0.18 | (0.96 | ) | 4.23 | ||||||
Less distributions from: | ||||||||||||
Net investment income | — | (0.49 | ) | (0.71 | ) | (0.50 | ) | |||||
Net realized gains | — | (1.07 | ) | (2.23 | ) | (1.52 | ) | |||||
Total distributions | — | (1.56 | ) | (2.94 | ) | (2.02 | ) | |||||
Net asset value, end of period | $ | 17.90 | $ | 19.47 | $ | 20.85 | $ | 24.75 | ||||
Total returne | (8.06 | )% | 0.98 | % | (3.88 | )% | 18.99 | % | ||||
Ratios to average net assetsf | ||||||||||||
Expensesg | 0.89 | %h,i | 0.89 | % | 0.89 | %h | 0.90 | %h | ||||
Expenses incurred in connection with securities sold short | —% | —%j | 0.01 | % | —%j | |||||||
Net investment income | 6.35 | %k | 2.09 | % | 3.08 | %d | 2.21 | % | ||||
Supplemental data | ||||||||||||
Net assets, end of period (000’s) | $ | 326,165 | $ | 373,904 | $ | 334,396 | $ | 317,690 | ||||
Portfolio turnover rate | 10.73 | % | 32.59 | % | 54.05 | % | 39.05 | % |
aFor the period May 1, 2013 (effective date) to December 31, 2013.
bThe amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases
of the Fund’s shares in relation to income earned and/or fluctuating fair value of the investments of the Fund.
cBased on average daily shares outstanding.
dNet investment income per share includes approximately $0.29 per share related to income received in the form of a special dividend in connection with certain Fund
holdings. Excluding this amount, the ratio of net investment income to average net assets would have been 1.89%.
eTotal return is not annualized for periods less than one year.
fRatios are annualized for periods less than one year.
gIncludes dividend and/or interest expense on securities sold short and security borrowing fees, if any. See below for the ratios of such expenses to average net assets for the
periods presented. See Note 1(e).
hBenefit of expense reduction rounds to less than 0.01%.
iBenefit of waiver and payments by affiliates rounds to less than 0.01%.
jRounds to less than 0.01%.
kThe net investment income ratio is annualized and may not be indicative of operating results for a full year.
franklintempleton.com
The accompanying notes are an integral part of these financial statements. | Semiannual Report 15
FRANKLIN MUTUAL EUROPEAN FUND
Statement of Investments, June 30, 2016 (unaudited) | ||||
Country | Shares | Value | ||
Common Stocks 82.4% | ||||
Air Freight & Logistics 1.5% | ||||
Deutsche Post AG | Germany | 1,444,550 | $ | 40,365,047 |
Auto Components 1.9% | ||||
Cie Generale des Etablissements Michelin, B | France | 515,350 | 48,741,204 | |
Banks 3.2% | ||||
Barclays PLC | United Kingdom | 927,522 | 1,714,146 | |
BNP Paribas SA | France | 368,240 | 16,248,981 | |
a Commerzbank AG | Germany | 1,198,716 | 7,748,918 | |
HSBC Holdings PLC | United Kingdom | 3,715,286 | 23,080,511 | |
Standard Chartered PLC | United Kingdom | 4,500,030 | 33, 877,920 | |
82,670,476 | ||||
Capital Markets 0.5% | ||||
UBS Group AG | Switzerland | 1,004,184 | 12,931,660 | |
Chemicals 3.9% | ||||
Arkema SA | France | 864,355 | 66,265,124 | |
Lanxess AG | Germany | 613,827 | 26,762,142 | |
Syngenta AG | Switzerland | 20,230 | 7,753,348 | |
100,780,614 | ||||
Commercial Services & Supplies 1.0% | ||||
G4S PLC | United Kingdom | 10,283,548 | 25,079,400 | |
Communications Equipment 2.3% | ||||
Nokia Corp., ADR | Finland | 5,416,684 | 30,820,932 | |
Nokia OYJ, A | Finland | 5,254,934 | 29,776,004 | |
60,596,936 | ||||
Construction & Engineering 2.7% | ||||
a Balfour Beatty PLC | United Kingdom | 10,005,175 | 28,682,936 | |
FLSmidth & Co. A/S | Denmark | 1,157,049 | 41,080,195 | |
69,763,131 | ||||
Construction Materials 1.9% | ||||
a LafargeHolcim Ltd., B | Switzerland | 1,216,211 | 50,512,441 | |
Diversified Financial Services 0.1% | ||||
Oslo Bors VPS Holding ASA | Norway | 340,000 | 3,449,543 | |
Diversified Telecommunication Services 7.0% | ||||
Deutsche Telekom AG | Germany | 4,071,986 | 69,061,028 | |
Hellenic Telecommunications Organization SA | Greece | 3,445,216 | 30,859,820 | |
Koninklijke KPN NV | Netherlands | 19,594,565 | 70,792,953 | |
a Telecom Italia SpA | Italy | 14,187,068 | 11,573,998 | |
182,287,799 | ||||
Electric Utilities 2.9% | ||||
Enel SpA | Italy | 17,391,006 | 76,826,524 | |
Energy Equipment & Services 0.1% | ||||
a,b DeepOcean Group Holding BV | Netherlands | 915,467 | 2,288,667 | |
Food & Staples Retailing 2.6% | ||||
Metro AG | Germany | 2,253,361 | 68,705,711 | |
Hotels, Restaurants & Leisure 2.5% | ||||
Accor SA | France | 1,660,611 | 63,940,440 | |
Industrial Conglomerates 2.7% | ||||
Koninklijke Philips NV | Netherlands | 2,795,546 | 69,489,809 |
16 Semiannual Report
franklintempleton.com
FRANKLIN MUTUAL EUROPEAN FUND
STATEMENT OF INVESTMENTS (UNAUDITED)
Country | Shares | Value | ||
Common Stocks (continued) | ||||
Insurance 14.7% | ||||
Ageas | Belgium | 1,719,689 | $ | 59,143,200 |
Direct Line Insurance Group PLC | United Kingdom | 13,726,245 | 63,107,279 | |
Lancashire Holdings Ltd | United Kingdom | 3,612,800 | 28,277,595 | |
NN Group NV | Netherlands | 2,620,354 | 72,115,312 | |
RSA Insurance Group PLC | United Kingdom | 10,023,189 | 66,757,777 | |
a Storebrand ASA | Norway | 221,125 | 828,928 | |
UNIQA Insurance Group AG | Austria | 5,362,759 | 31,988,167 | |
XL Group PLC | Ireland | 1,794,560 | 59,776,794 | |
381,995,052 | ||||
Machinery 1.8% | ||||
CNH Industrial NV | United Kingdom | 2,999,447 | 21,573,450 | |
CNH Industrial NV, special voting | United Kingdom | 833,461 | 5,994,648 | |
a Vossloh AG | Germany | 293,290 | 18,086,849 | |
45,654,947 | ||||
Marine 2.1% | ||||
A.P. Moeller-Maersk AS, B | Denmark | 41,622 | 54,072,696 | |
Media 2.0% | ||||
a Liberty Global PLC LiLAC, C | United Kingdom | 123,518 | 4,013,106 | |
a Liberty Global PLC, C | United Kingdom | 989,976 | 28,362,812 | |
Relx PLC | United Kingdom | 1,136,018 | 20,843,186 | |
53,219,104 | ||||
Metals & Mining 1.6% | ||||
ThyssenKrupp AG | Germany | 859,109 | 17,173,760 | |
Voestalpine AG | Austria | 762,829 | 25,417,995 | |
42,591,755 | ||||
Oil, Gas & Consumable Fuels 6.4% | ||||
BP PLC | United Kingdom | 8,930,241 | 52,173,076 | |
a Cairn Energy PLC | United Kingdom | 12,829,784 | 35,514,618 | |
Royal Dutch Shell PLC, A (EUR Traded) | United Kingdom | 1,241,414 | 33,992,977 | |
Royal Dutch Shell PLC, A (GBP Traded) | United Kingdom | 1,603,748 | 43,784,510 | |
165,465,181 | ||||
Pharmaceuticals 7.2% | ||||
GlaxoSmithKline PLC | United Kingdom | 2,554,947 | 54,661,566 | |
Meda AB, A | Sweden | 1,060,000 | 19,162,440 | |
Novartis AG | Switzerland | 941,204 | 77,284,603 | |
Sanofi | France | 450,899 | 37,495,612 | |
188,604,221 | ||||
Road & Rail 0.0% | ||||
c,d Euro Wagon LP | Jersey Islands | 16,127,149 | — | |
Specialty Retail 4.1% | ||||
a Dufry AG | Switzerland | 345,245 | 41,135,123 | |
Hornbach Holding AG & Co. KGaA | Germany | 144,613 | 9,791,305 | |
Kingfisher PLC | United Kingdom | 12,840,634 | 55,217,487 | |
106,143,915 | ||||
Tobacco 0.9% | ||||
Imperial Brands PLC | United Kingdom | 414,760 | 22,417,516 |
franklintempleton.com
Semiannual Report 17
FRANKLIN MUTUAL EUROPEAN FUND
STATEMENT OF INVESTMENTS (UNAUDITED)
Country | Shares | Value | ||||
Common Stocks (continued) | ||||||
Trading Companies & Distributors 2.1% | ||||||
a Kloeckner & Co. SE | Germany | 3,031,653 | $ | 33,387,363 | ||
Rexel SA | France | 1,652,310 | 20,751,500 | |||
54,138,863 | ||||||
Wireless Telecommunication Services 2.7% | ||||||
Vodafone Group PLC | United Kingdom | 23,038,468 | 69,932,927 | |||
Total Common Stocks (Cost $2,383,773,707) | 2,142,665,579 | |||||
Preferred Stocks 3.5% | ||||||
Auto Components 1.4% | ||||||
e Schaeffler AG, 4.224%, pfd | Germany | 2,810,458 | 36,965,694 | |||
Automobiles 2.1% | ||||||
e Volkswagen AG, 0.157%, pfd | Germany | 446,068 | 53,620,756 | |||
Total Preferred Stocks (Cost $111,994,281) | 90,586,450 | |||||
Total Investments before Short Term Investments | ||||||
(Cost $2,495,767,988) | 2,233,252,029 | |||||
Principal | ||||||
Amount | ||||||
Short Term Investments 10.7% | ||||||
U.S. Government and Agency Securities 10.7% | ||||||
FHLB, 7/01/16 | United States | $ | 150,900,000 | 150,900,000 | ||
f U.S. Treasury Bill, | ||||||
8/25/16 | United States | 35,000,000 | 34,988,555 | |||
g 7/07/16 - 12/08/16 | United States | 93,000,000 | 92,941,121 | |||
Total U.S. Government and Agency Securities | ||||||
(Cost $278,778,961) | 278,829,676 | |||||
Total Investments (Cost $2,774,546,949) 96.6% | 2,512,081,705 | |||||
Securities Sold Short (0.0)%† | (1,833,376 | ) | ||||
Other Assets, less Liabilities 3.4% | 89,540,247 | |||||
Net Assets 100.0% | $ | 2,599,788,576 | ||||
Shares | ||||||
h Securities Sold Short (Proceeds $1,964,641) (0.0)%† | ||||||
Common Stocks (0.0)%† | ||||||
Pharmaceuticals (0.0)%† | ||||||
Mylan NV | United States | 42,400 | $ | (1,833,376 | ) |
†Rounds to less than 0.1% of net assets.
aNon-income producing.
bSecurity has been deemed illiquid because it may not be able to be sold within seven days.
cSee Note 9 regarding restricted securities.
dSee Note 11 regarding holdings of 5% voting securities.
eVariable rate security. The rate shown represents the yield at period end.
fThe security is traded on a discount basis with no stated coupon rate.
gA portion or all of the security has been segregated as collateral for securities sold short. At June 30, 2016, the value of this security and/or cash pledged amounted to
$3,138,264, representing 0.1% of net assets.
hSee Note 1(e) regarding securities sold short.
18 Semiannual Report
franklintempleton.com
FRANKLIN MUTUAL EUROPEAN FUND
STATEMENT OF INVESTMENTS (UNAUDITED)
At June 30, 2016, the Fund had the following futures contracts outstanding. See Note 1(c). | ||||||||||||
Futures Contracts | ||||||||||||
Number of | Notional Expiration | Unrealized | Unrealized | |||||||||
Description | Type | Contracts | Value | Date | Appreciation | Depreciation | ||||||
Currency Contracts | ||||||||||||
CHF/USD | Short | 25 | $ | 3,207,500 | 9/19/16 | $ | 7,880 | $ | — | |||
EUR/USD | Short | 3,572 | 495,949,875 | 9/19/16 | 13,848,338 | — | ||||||
GBP/USD | Short | 2,019 | 167,173,200 | 9/19/16 | 15,900,758 | — | ||||||
Total Futures Contracts | $ | 29,756,976 | $ | — | ||||||||
Net unrealized appreciation (depreciation) | $ | 29,756,976 | ||||||||||
At June 30, 2016, the Fund had the following forward exchange contracts outstanding. See Note 1(c). | ||||||||||||
Forward Exchange Contracts | ||||||||||||
Contract | Settlement | Unrealized | Unrealized | |||||||||
Currency | Counterpartya | Type | Quantity | Amount | Date | Appreciation | Depreciation | |||||
OTC Forward Exchange Contracts | ||||||||||||
Euro | BANT | Buy | 55,148,712 | $ | 62,019,500 | 7/06/16 | $ | 76,247 | $ | (869,716 | ) | |
Euro | BANT | Sell | 75,758,067 | 83,141,316 | 7/06/16 | 125,300 | (1,090,494 | ) | ||||
Euro | BONY | Buy | 18,953,204 | 21,247,414 | 7/06/16 | — | (205,591 | ) | ||||
Euro | BONY | Sell | 2,993,226 | 3,344,630 | 7/06/16 | 21,555 | — | |||||
Euro | FBCO | Buy | 30,496,469 | 33,980,827 | 7/06/16 | 97,100 | (220,786 | ) | ||||
Euro | FBCO | Sell | 18,315,622 | 20,686,951 | 7/06/16 | 352,970 | — | |||||
Euro | HSBC | Buy | 26,796,537 | 29,864,719 | 7/06/16 | 83,739 | (198,976 | ) | ||||
Euro | HSBC | Sell | 59,302,350 | 64,896,432 | 7/06/16 | 94,526 | (1,035,489 | ) | ||||
Euro | SSBT | Buy | 31,367,218 | 34,981,755 | 7/06/16 | 96,197 | (254,106 | ) | ||||
Euro | SSBT | Sell | 6,392,875 | 7,219,371 | 7/06/16 | 122,010 | — | |||||
British Pound | BANT | Buy | 11,377,387 | 15,955,357 | 7/21/16 | 16,375 | (798,317 | ) | ||||
British Pound | BANT | Sell | 34,028,369 | 48,301,455 | 7/21/16 | 2,919,633 | — | |||||
British Pound | DBFX | Sell | 1,377,125 | 1,982,096 | 7/21/16 | 145,498 | — | |||||
British Pound | FBCO | Buy | 14,225,000 | 19,367,266 | 7/21/16 | — | (396,141 | ) | ||||
British Pound | FBCO | Sell | 4,543,807 | 6,522,799 | 7/21/16 | 462,965 | — | |||||
British Pound | HSBC | Buy | 10,590,019 | 14,299,286 | 7/21/16 | 93,522 | (269,464 | ) | ||||
British Pound | HSBC | Sell | 31,703,444 | 44,963,215 | 7/21/16 | 2,682,020 | — | |||||
British Pound | SSBT | Buy | 1,797,761 | 2,532,491 | 7/21/16 | — | (134,914 | ) | ||||
Euro | BANT | Buy | 27,707,076 | 30,831,864 | 7/21/16 | 81,939 | (136,196 | ) | ||||
Euro | BANT | Sell | 48,982,756 | 54,190,202 | 7/21/16 | 179,897 | (400,777 | ) | ||||
Euro | BONY | Buy | 9,113,669 | 10,114,535 | 7/21/16 | 67,350 | (58,229 | ) | ||||
Euro | BONY | Sell | 17,741,940 | 19,524,390 | 7/21/16 | 33,143 | (216,875 | ) | ||||
Euro | FBCO | Buy | 43,360,584 | 48,018,086 | 7/21/16 | 147,768 | — | |||||
Euro | FBCO | Sell | 1,518,309 | 1,722,887 | 7/21/16 | 36,318 | — | |||||
Euro | HSBC | Buy | 25,923,248 | 28,700,406 | 7/21/16 | 95,687 | — | |||||
Euro | HSBC | Sell | 52,747,634 | 58,523,270 | 7/21/16 | 167,620 | (237,538 | ) | ||||
Euro | SSBT | Buy | 3,378,724 | 3,757,366 | 7/21/16 | 11,763 | (15,971 | ) | ||||
Euro | SSBT | Sell | 28,902,233 | 32,036,581 | 7/21/16 | 171,516 | (240,148 | ) | ||||
Norwegian Krone | HSBC | Buy | 1,174,000 | 136,858 | 7/25/16 | 3,475 | — | |||||
Norwegian Krone | HSBC | Sell | 36,250,210 | 4,351,659 | 7/25/16 | 18,765 | (223 | ) | ||||
Swiss Franc | BONY | Buy | 244,765 | 253,968 | 8/12/16 | — | (2,529 | ) | ||||
Swiss Franc | BONY | Sell | 397,900 | 410,839 | 8/12/16 | 4,341 | (2,250 | ) | ||||
Swiss Franc | HSBC | Sell | 842,582 | 868,391 | 8/12/16 | 2,836 | — | |||||
Swiss Franc | SSBT | Buy | 371,300 | 381,408 | 8/12/16 | 141 | (126 | ) | ||||
British Pound | BANT | Sell | 49,700,103 | 71,118,781 | 8/19/16 | 4,817,763 | — | |||||
British Pound | HSBC | Sell | 2,219,391 | 3,117,258 | 8/19/16 | 156,542 | — | |||||
Swedish Krona | SSBT | Sell | 139,912,000 | 16,386,976 | 8/29/16 | — | (200,031 | ) | ||||
Euro | BANT | Sell | 3,283,326 | 3,766,746 | 10/03/16 | 109,214 | — | |||||
Euro | HSBC | Sell | 57,538,682 | 65,585,754 | 10/03/16 | 1,489,292 | — | |||||
Euro | SSBT | Sell | 74,293,339 | 84,750,112 | 10/03/16 | 1,989,437 | — | |||||
Euro | BANT | Sell | 64,607,000 | 73,289,547 | 10/18/16 | 1,275,881 | — | |||||
Euro | HSBC | Sell | 6,116,326 | 6,968,357 | 10/18/16 | 150,844 | — | |||||
Euro | SSBT | Sell | 68,839,757 | 77,999,888 | 10/18/16 | 1,268,213 | — |
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Semiannual Report 19
FRANKLIN MUTUAL EUROPEAN FUND
STATEMENT OF INVESTMENTS (UNAUDITED)
Forward Exchange Contracts (continued) | |||||||||||
Contract | Settlement | Unrealized | Unrealized | ||||||||
Currency | Counterpartya | Type | Quantity | Amount | Date | Appreciation | Depreciation | ||||
OTC Forward Exchange Contracts (continued) | |||||||||||
British Pound | SSBT | Sell | 55,687,570 | $ | 80,106,013 | 10/24/16 | $ | 5,757,992 | $ | — | |
Euro | BANT | Sell | 89,486,802 | 103,625,717 | 11/04/16 | 3,811,926 | — | ||||
Euro | HSBC | Sell | 91,035,710 | 105,463,615 | 11/04/16 | 3,922,169 | — | ||||
Euro | BANT | Sell | 223,066 | 250,374 | 11/18/16 | 1,426 | — | ||||
Euro | BONY | Sell | 89,554,909 | 102,026,972 | 11/18/16 | 2,081,056 | — | ||||
Euro | HSBC | Sell | 89,523,851 | 102,027,925 | 11/18/16 | 2,116,672 | — | ||||
Euro | SSBT | Sell | 446,132 | 500,531 | 11/18/16 | 2,635 | — | ||||
British Pound | BONY | Sell | 42,176,168 | 61,333,674 | 11/23/16 | 5,002,126 | — | ||||
British Pound | HSBC | Sell | 39,727,055 | 57,079,006 | 11/23/16 | 4,048,984 | (30,430 | ) | |||
British Pound | SSBT | Sell | 1,000,000 | 1,472,185 | 11/23/16 | 136,560 | — | ||||
Total Forward Exchange Contracts | $ | 46,550,948 | $ | (7,015,317 | ) | ||||||
Net unrealized appreciation (depreciation) | $ | 39,535,631 | |||||||||
aMay be comprised of multiple contracts with the same counterparty, currency and settlement date. | |||||||||||
See Abbreviations on page 36. |
20 Semiannual Report | The accompanying notes are an integral part of these financial statements.
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FRANKLIN MUTUAL EUROPEAN FUND
Financial Statements | |||
Statement of Assets and Liabilities | |||
June 30, 2016 (unaudited) | |||
Assets: | |||
Investments in securities: | |||
Cost - Unaffiliated issuers | $ | 2,768,264,440 | |
Cost - Controlled affiliates (Note 11) | 6,282,509 | ||
Total cost of investments | $ | 2,774,546,949 | |
Value | $ | 2,512,081,705 | |
Cash | 5,555,209 | ||
Restricted Cash (Note 1d) | 10,400,000 | ||
Foreign currency, at value (cost $8,635,195) | 8,460,984 | ||
Receivables: | |||
Investment securities sold | 13,138,340 | ||
Capital shares sold | 4,125,995 | ||
Dividends and interest | 18,258,152 | ||
European Union tax reclaims | 2,242,625 | ||
Due from brokers | 23,390,309 | ||
Variation margin | 3,678,363 | ||
Unrealized appreciation on OTC forward exchange contracts | 46,550,948 | ||
Other assets | 1,402 | ||
Total assets | 2,647,884,032 | ||
Liabilities: | |||
Payables: | |||
Investment securities purchased | 16,047,255 | ||
Capital shares redeemed | 9,000,465 | ||
Management fees | 1,887,387 | ||
Distribution fees | 794,484 | ||
Transfer agent fees | 466,234 | ||
Trustees’ fees and expenses | 95,396 | ||
Securities sold short, at value (proceeds $1,964,641) | 1,833,376 | ||
Due to brokers | 10,700,000 | ||
Unrealized depreciation on OTC forward exchange contracts | 7,015,317 | ||
Accrued expenses and other liabilities | 255,542 | ||
Total liabilities | 48,095,456 | ||
Net assets, at value | $ | 2,599,788,576 | |
Net assets consist of: | |||
Paid-in capital | $ | 2,953,785,802 | |
Undistributed net investment income | 84,853,253 | ||
Net unrealized appreciation (depreciation) | (193,780,538 | ) | |
Accumulated net realized gain (loss) | (245,069,941 | ) | |
Net assets, at value | $ | 2,599,788,576 |
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The accompanying notes are an integral part of these financial statements. | Semiannual Report 21
FRANKLIN MUTUAL EUROPEAN FUND
FINANCIAL STATEMENTS
Statement of Assets and Liabilities (continued) | ||
June 30, 2016 (unaudited) | ||
Class Z: | ||
Net assets, at value | $ | 1,190,113,279 |
Shares outstanding | 66,510,562 | |
Net asset value and maximum offering price per share | $ | 17.89 |
Class A: | ||
Net assets, at value | $ | 852,127,643 |
Shares outstanding | 49,031,083 | |
Net asset value per sharea | $ | 17.38 |
Maximum offering price per share (net asset value per share ÷ 94.25%) | $ | 18.44 |
Class C: | ||
Net assets, at value | $ | 230,623,290 |
Shares outstanding | 13,299,463 | |
Net asset value and maximum offering price per sharea | $ | 17.34 |
Class R: | ||
Net assets, at value | $ | 759,055 |
Shares outstanding | 44,501 | |
Net asset value and maximum offering price per share | $ | 17.06 |
Class R6: | ||
Net assets, at value | $ | 326,165,309 |
Shares outstanding | 18,226,165 | |
Net asset value and maximum offering price per share | $ | 17.90 |
aRedemption price is equal to net asset value less contingent deferred sales charges, if applicable.
22 Semiannual Report | The accompanying notes are an integral part of these financial statements.
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FRANKLIN MUTUAL EUROPEAN FUND
FINANCIAL STATEMENTS
Statement of Operations | |||
for the six months ended June 30, 2016 (unaudited) | |||
Investment income: | |||
Dividends: (net of foreign taxes of $7,127,815) | |||
Unaffiliated issuers | $ | 74,514,586 | |
Controlled affiliates (Note 11) | 24,376,923 | ||
Interest | 227,196 | ||
Income from securities loaned (net of fees and rebates) | 906,295 | ||
Total investment income | 100,025,000 | ||
Expenses: | |||
Management fees (Note 3a) | 11,752,902 | ||
Distribution fees: (Note 3c) | |||
Class A | 1,150,515 | ||
Class C | 1,272,403 | ||
Class R | 2,259 | ||
Transfer agent fees: (Note 3e) | |||
Class Z | 1,018,797 | ||
Class A | 753,816 | ||
Class C | 208,419 | ||
Class R | 739 | ||
Class R6 | 1,137 | ||
Custodian fees (Note 4) | 147,741 | ||
Reports to shareholders | 108,806 | ||
Registration and filing fees | 90,825 | ||
Professional fees | 116,347 | ||
Trustees’ fees and expenses | 47,333 | ||
Other | 31,711 | ||
Total expenses | 16,703,750 | ||
Expense reductions (Note 4) | (4,488 | ) | |
Expenses waived/paid by affiliates (Note 3f) | (23,905 | ) | |
Net expenses | 16,675,357 | ||
Net investment income | 83,349,643 | ||
Realized and unrealized gains (losses): | |||
Net realized gain (loss) from: | |||
Investments | (225,916,137 | ) | |
Foreign currency transactions | 14,795,670 | ||
Futures contracts | (13,052,433 | ) | |
Net realized gain (loss) | (224,172,900 | ) | |
Net change in unrealized appreciation (depreciation) on: | |||
Investments | (131,387,167 | ) | |
Translation of other assets and liabilities denominated in foreign currencies | (1,224,990 | ) | |
Futures contracts | 24,582,144 | ||
Net change in unrealized appreciation (depreciation) | (108,030,013 | ) | |
Net realized and unrealized gain (loss) | (332,202,913 | ) | |
Net increase (decrease) in net assets resulting from operations | $ | (248,853,270 | ) |
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The accompanying notes are an integral part of these financial statements. | Semiannual Report 23
FRANKLIN MUTUAL EUROPEAN FUND
FINANCIAL STATEMENTS
Statements of Changes in Net Assets | ||||||
Six Months Ended | ||||||
June 30, 2016 | Year Ended | |||||
(unaudited) | December 31, 2015 | |||||
Increase (decrease) in net assets: | ||||||
Operations: | ||||||
Net investment income | $ | 83,349,643 | $ | 55,161,607 | ||
Net realized gain (loss) | (224,172,900 | ) | 201,204,153 | |||
Net change in unrealized appreciation (depreciation) | (108,030,013 | ) | (293,381,827 | ) | ||
Net increase (decrease) in net assets resulting from operations | (248,853,270 | ) | (37,016,067 | ) | ||
Distributions to shareholders from: | ||||||
Net investment income: | ||||||
Class Z | — | (31,114,277 | ) | |||
Class A | — | (21,144,357 | ) | |||
Class C | — | (3,964,425 | ) | |||
Class R | — | (19,419 | ) | |||
Class R6 | — | (8,882,402 | ) | |||
Net realized gains: | ||||||
Class Z | — | (73,683,072 | ) | |||
Class A | — | (56,764,217 | ) | |||
Class C | — | (15,827,677 | ) | |||
Class R | — | (50,917 | ) | |||
Class R6 | — | (19,461,990 | ) | |||
Total distributions to shareholders | — | (230,912,753 | ) | |||
Capital share transactions: (Note 2) | ||||||
Class Z | (55,233,844 | ) | 346,269,841 | |||
Class A | (96,686,643 | ) | 283,078,189 | |||
Class C | (36,396,579 | ) | 102,973,077 | |||
Class R | (160,221 | ) | 682,210 | |||
Class R6 | (18,621,686 | ) | 66,985,459 | |||
Total capital share transactions | (207,098,973 | ) | 799,988,776 | |||
Net increase (decrease) in net assets | (455,952,243 | ) | 532,059,956 | |||
Net assets: | ||||||
Beginning of period | 3,055,740,819 | 2,523,680,863 | ||||
End of period | $ | 2,599,788,576 | $ | 3,055,740,819 | ||
Undistributed net investment income included in net assets: | ||||||
End of period | $ | 84,853,253 | $ | 1,503,610 |
24 Semiannual Report | The accompanying notes are an integral part of these financial statements.
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FRANKLIN MUTUAL EUROPEAN FUND
Notes to Financial Statements (unaudited)
1. Organization and Significant Accounting Policies
Franklin Mutual Series Funds (Trust) is registered under the Investment Company Act of 1940 (1940 Act) as an open-end management investment company, consisting of seven separate funds and applies the specialized accounting and reporting guidance in U.S. Generally Accepted Accounting Principles (U.S. GAAP). Franklin Mutual European Fund (Fund) is included in this report. The financial statements of the remaining funds in the Trust are presented separately. The Fund offers five classes of shares: Class Z, Class A, Class C, Class R and Class R6. Each class of shares differs by its initial sales load, contingent deferred sales charges, voting rights on matters affecting a single class, its exchange privilege and fees primarily due to differing arrangements for distribution and transfer agent fees.
The following summarizes the Fund’s significant accounting policies.
a. Financial Instrument Valuation
The Fund’s investments in financial instruments are carried at fair value daily. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date. The Fund calculates the net asset value per share as of 4 p.m. Eastern time each day the New York Stock Exchange (NYSE) is open for trading. Under compliance policies and procedures approved by the Trust’s Board of Trustees (the Board), the Fund’s administrator has responsibility for oversight of valuation, including leading the cross-functional Valuation Committee (VC). The VC provides administration and oversight of the Fund’s valuation policies and procedures, which are approved annually by the Board. Among other things, these procedures allow the Fund to utilize independent pricing services, quotations from securities and financial instrument dealers, and other market sources to determine fair value.
Equity securities and derivative financial instruments (derivatives) listed on an exchange or on the NASDAQ National Market System are valued at the last quoted sale price or the official closing price of the day, respectively. Foreign equity securities are valued as of the close of trading on the foreign stock exchange on which the security is primarily traded or as of 4 p.m. Eastern time whichever is earlier. The value is then converted into its U.S. dollar equivalent at the foreign exchange rate in effect at 4 p.m. Eastern time on the day that the value of the security is determined. Over-the-counter (OTC) securities are valued within the range of the most recent quoted bid and ask prices. Securities that trade in multiple markets or on multiple exchanges are valued according to the broadest and most representative market. Certain equity securities are valued based upon fundamental characteristics or relationships to similar securities.
Debt securities generally trade in the OTC market rather than on a securities exchange. The Fund’s pricing services use multiple valuation techniques to determine fair value. In instances where sufficient market activity exists, the pricing services may utilize a market-based approach through which quotes from market makers are used to determine fair value. In instances where sufficient market activity may not exist or is limited, the pricing services also utilize proprietary valuation models which may consider market characteristics such as benchmark yield curves, credit spreads, estimated default rates, anticipated market interest rate volatility, coupon rates, anticipated timing of principal repayments, underlying collateral, and other unique security features in order to estimate the relevant cash flows, which are then discounted to calculate the fair value. Securities denominated in a foreign currency are converted into their U.S. dollar equivalent at the foreign exchange rate in effect at 4 p.m. Eastern time on the date that the values of the foreign debt securities are determined.
Certain derivatives trade in the OTC market. The Fund’s pricing services use various techniques including industry standard option pricing models and proprietary discounted cash flow models to determine the fair value of those instruments. The Fund’s net benefit or obligation under the derivative contract, as measured by the fair value of the contract, is included in net assets.
The Fund has procedures to determine the fair value of financial instruments for which market prices are not reliable or readily available. Under these procedures, the VC convenes on a regular basis to review such financial instruments and considers a number of factors, including significant unobservable valuation inputs, when arriving at fair value. The VC primarily employs a market-based approach which may use related or comparable assets or liabilities, recent transactions, market multiples, book values, and other relevant information for the investment to determine the fair value of the investment. An income-based valuation approach may also be used in which the anticipated future cash flows of the investment are discounted to calculate fair value. Discounts may also be applied due to the nature or duration of any restrictions on the disposition of the investments.
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Semiannual Report 25
FRANKLIN MUTUAL EUROPEAN FUND
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
1. Organization and Significant Accounting
Policies (continued)
a. Financial Instrument Valuation (continued)
Due to the inherent uncertainty of valuations of such investments, the fair values may differ significantly from the values that would have been used had an active market existed. The VC employs various methods for calibrating these valuation approaches including a regular review of key inputs and assumptions, transactional back-testing or disposition analysis, and reviews of any related market activity.
Trading in securities on foreign securities stock exchanges and OTC markets may be completed before 4 p.m. Eastern time. In addition, trading in certain foreign markets may not take place on every NYSE business day. Occasionally, events occur between the time at which trading in a foreign security is completed and the close of the NYSE that might call into question the reliability of the value of a portfolio security held by the Fund. As a result, differences may arise between the value of the Fund’s portfolio securities as determined at the foreign market close and the latest indications of value at the close of the NYSE. In order to minimize the potential for these differences, the VC monitors price movements following the close of trading in foreign stock markets through a series of country specific market proxies (such as baskets of American Depositary Receipts, futures contracts and exchange traded funds). These price movements are measured against established trigger thresholds for each specific market proxy to assist in determining if an event has occurred that may call into question the reliability of the values of the foreign securities held by the Fund. If such an event occurs, the securities may be valued using fair value procedures, which may include the use of independent pricing services.
When the last day of the reporting period is a non-business day, certain foreign markets may be open on those days that the NYSE is closed, which could result in differences between the value of the Fund’s portfolio securities on the last business day and the last calendar day of the reporting period. Any significant security valuation changes due to an open foreign market are adjusted and reflected by the Fund for financial reporting purposes.
b. Foreign Currency Translation
Portfolio securities and other assets and liabilities denominated in foreign currencies are translated into U.S. dollars based on the exchange rate of such currencies against U.S. dollars on the date of valuation. The Fund may enter into foreign currency exchange contracts to facilitate transactions denominated in a foreign currency. Purchases and sales of securities, income and expense items denominated in foreign currencies are translated into U.S. dollars at the exchange rate in effect on the transaction date. Portfolio securities and assets and liabilities denominated in foreign currencies contain risks that those currencies will decline in value relative to the U.S. dollar. Occasionally, events may impact the availability or reliability of foreign exchange rates used to convert the U.S. dollar equivalent value. If such an event occurs, the foreign exchange rate will be valued at fair value using procedures established and approved by the Board.
The Fund does not separately report the effect of changes in foreign exchange rates from changes in market prices on securities held. Such changes are included in net realized and unrealized gain or loss from investments in the Statement of Operations.
Realized foreign exchange gains or losses arise from sales of foreign currencies, currency gains or losses realized between the trade and settlement dates on securities transactions and the difference between the recorded amounts of dividends, interest, and foreign withholding taxes and the U.S. dollar equivalent of the amounts actually received or paid. Net unrealized foreign exchange gains and losses arise from changes in foreign exchange rates on foreign denominated assets and liabilities other than investments in securities held at the end of the reporting period.
c. Derivative Financial Instruments
The Fund invested in derivatives in order to manage risk or gain exposure to various other investments or markets. Derivatives are financial contracts based on an underlying or notional amount, require no initial investment or an initial net investment that is smaller than would normally be required to have a similar response to changes in market factors, and require or permit net settlement. Derivatives contain various risks including the potential inability of the counterparty to fulfill their obligations under the terms of the contract, the potential for an illiquid secondary market, and/or the potential for market movements which expose the Fund to gains or losses in excess of the amounts shown in the Statement of Assets and Liabilities. Realized gain and loss and unrealized appreciation and depreciation on these contracts for the period are included in the Statement of Operations.
Derivative counterparty credit risk is managed through a formal evaluation of the creditworthiness of all potential counterparties.
26 Semiannual Report
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FRANKLIN MUTUAL EUROPEAN FUND
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
The Fund attempts to reduce its exposure to counterparty credit risk on OTC derivatives, whenever possible, by entering into International Swaps and Derivatives Association (ISDA) master agreements with certain counterparties. These agreements contain various provisions, including but not limited to collateral requirements, events of default, or early termination. Termination events applicable to the counterparty include certain deteriorations in the credit quality of the counterparty. Termination events applicable to the Fund include failure of the Fund to maintain certain net asset levels and/or limit the decline in net assets over various periods of time. In the event of default or early termination, the ISDA master agreement gives the non-defaulting party the right to net and close-out all transactions traded, whether or not arising under the ISDA agreement, to one net amount payable by one counterparty to the other. However, absent an event of default or early termination, OTC derivative assets and liabilities are presented gross and not offset in the Statement of Assets and Liabilities. Early termination by the counterparty may result in an immediate payment by the Fund of any net liability owed to that counterparty under the ISDA agreement.
Collateral requirements differ by type of derivative. Collateral or initial margin requirements are set by the broker or exchange clearing house for exchange traded and centrally cleared derivatives. Initial margin deposited is held at the exchange and can be in the form of cash and/or securities. For OTC derivatives traded under an ISDA master agreement, posting of collateral is required by either the Fund or the applicable coun-terparty if the total net exposure of all OTC derivatives with the applicable counterparty exceeds the minimum transfer amount, which typically ranges from $100,000 to $250,000, and can vary depending on the counterparty and the type of the agreement. Generally, collateral is determined at the close of Fund business each day and any additional collateral required due to changes in derivative values may be delivered by the Fund or the counterparty within a few business days. Collateral pledged and/or received by the Fund for OTC derivatives, if any, is held in segregated accounts with the Fund’s custodian/counterparty broker and can be in the form of cash and/or securities. Unrestricted cash may be invested according to the Fund’s investment objectives. To the extent that the amounts due to the Fund from its counterparties are not subject to collateralization or are not fully collateralized, the Fund bears the risk of loss from counterparty non-performance.
The Fund entered into exchange traded futures contracts primarily to manage exposure to certain foreign currencies. A futures contract is an agreement between the Fund and a counterparty to buy or sell an asset for a specified price on a future date. Required initial margins are pledged by the Fund, and the daily change in fair value is accounted for as a variation margin payable or receivable in the Statement of Assets and Liabilities.
The Fund entered into OTC forward exchange contracts primarily to manage exposure to certain foreign currencies. A forward exchange contract is an agreement between the Fund and a counterparty to buy or sell a foreign currency at a specific exchange rate on a future date.
See Note 10 regarding other derivative information.
d. Restricted Cash
At June 30, 2016, the Fund held restricted cash in connection with investments in certain derivative securities. Restricted cash is held in a segregated account with the Fund’s custodian/ counterparty broker and is reflected in the Statement of Assets and Liabilities.
e. Securities Sold Short
The Fund is engaged in selling securities short, which obligates the Fund to replace a borrowed security with the same security at current fair value. The Fund incurs a loss if the price of the security increases between the date of the short sale and the date on which the Fund replaces the borrowed security. The Fund realizes a gain if the price of the security declines between those dates. Gains are limited to the price at which the Fund sold the security short, while losses are potentially unlimited in size.
The Fund is required to establish a margin account with the broker lending the security sold short. While the short sale is outstanding, the broker retains the proceeds of the short sale to the extent necessary to meet margin requirements until the short position is closed out. A deposit must also be maintained with the Fund’s custodian/counterparty broker consisting of cash and/ or securities having a value equal to a specified percentage of the value of the securities sold short. The Fund is obligated to pay fees for borrowing the securities sold short and is required to pay the counterparty any dividends and/or interest due on securities sold short. Such dividends and/or interest and any security borrowing fees are recorded as an expense to the Fund.
f. Securities Lending
The Fund participates in an agency based securities lending program to earn additional income. The Fund receives cash collateral against the loaned securities in an amount equal to at
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Semiannual Report 27
FRANKLIN MUTUAL EUROPEAN FUND
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
1. Organization and Significant Accounting Policies (continued)
f. Securities Lending (continued)
least 102% of the fair value of the loaned securities. Collateral is maintained over the life of the loan in an amount not less than 100% of the fair value of loaned securities, as determined at the close of Fund business each day; any additional collateral required due to changes in security values is delivered to the Fund on the next business day. The collateral is deposited into a joint cash account with other funds and is used to invest in a money market fund managed by Franklin Advisers, Inc., an affiliate of the Fund, and/or a joint repurchase agreement. The Fund may receive income from the investment of cash collateral, in addition to lending fees and rebates paid by the borrower. Income from securities loaned, net of fees paid to the securities lending agent and/or third-party vendor, is reported separately in the Statement of Operations. The Fund bears the market risk with respect to the collateral investment, securities loaned, and the risk that the agent may default on its obligations to the Fund. If the borrower defaults on its obligation to return the securities loaned, the Fund has the right to repurchase the securities in the open market using the collateral received. The securities lending agent has agreed to indemnify the Fund in the event of default by a third party borrower. At June 30, 2016, the Fund had no securities on loan.
g. Income and Deferred Taxes
It is the Fund’s policy to qualify as a regulated investment company under the Internal Revenue Code. The Fund intends to distribute to shareholders substantially all of its taxable income and net realized gains to relieve it from federal income and excise taxes. As a result, no provision for U.S. federal income taxes is required.
The Fund may be subject to foreign taxation related to income received, capital gains on the sale of securities and certain foreign currency transactions in the foreign jurisdictions in which it invests. Foreign taxes, if any, are recorded based on the tax regulations and rates that exist in the foreign markets in which the Fund invests. When a capital gain tax is determined to apply, the Fund records an estimated deferred tax liability in an amount that would be payable if the securities were disposed of on the valuation date. As a result of several court cases, in certain countries across the European Union, the Fund filed additional tax reclaims for previously withheld taxes on dividends earned in those countries (EU reclaims). These additional filings are subject to various administrative proceedings by the local jurisdictions’ tax authorities within the European Union, as well as a number of related judicial proceedings. Income recognized, if any, for EU reclaims is reflected as other income in the Statement of Operations and any related receivable, if any, is reflected as European Union tax reclaims in the Statement of Assets and Liabilities. When uncertainty exists as to the ultimate resolution of these proceedings, the likelihood of receipt of these EU reclaims, and the potential timing of payment, no amounts are reflected in the financial statements.
The Fund may recognize an income tax liability related to its uncertain tax positions under U.S. GAAP when the uncertain tax position has a less than 50% probability that it will be sustained upon examination by the tax authorities based on its technical merits. As of June 30, 2016, the Fund has determined that no tax liability is required in its financial statements related to uncertain tax positions for any open tax years (or expected to be taken in future tax years). Open tax years are those that remain subject to examination and are based on each tax jurisdiction’s statute of limitation.
h. Security Transactions, Investment Income, Expenses and Distributions
Security transactions are accounted for on trade date. Realized gains and losses on security transactions are determined on a specific identification basis. Interest income and estimated expenses are accrued daily. Amortization of premium and accretion of discount on debt securities are included in interest income. Dividend income and dividends declared on securities sold short are recorded on the ex-dividend date except for certain dividends from foreign securities where the dividend rate is not available. In such cases, the dividend is recorded as soon as the information is received by the Fund. Distributions to shareholders are recorded on the ex-dividend date and are determined according to income tax regulations (tax basis). Distributable earnings determined on a tax basis may differ from earnings recorded in accordance with U.S. GAAP. These differences may be permanent or temporary. Permanent differences are reclassified among capital accounts to reflect their tax character. These reclassifications have no impact on net assets or the results of operations. Temporary differences are not reclassified, as they may reverse in subsequent periods.
Common expenses incurred by the Trust are allocated among the funds based on the ratio of net assets of each fund to the combined net assets of the Trust. Fund specific expenses are charged directly to the fund that incurred the expense.
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NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
Realized and unrealized gains and losses and net investment income, not including class specific expenses, are allocated daily to each class of shares based upon the relative proportion of net assets of each class. Differences in per share distributions, by class, are generally due to differences in class specific expenses.
i. Accounting Estimates
The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the amounts of income and expenses during the reporting period. Actual results could differ from those estimates.
j. Guarantees and Indemnifications
Under the Trust’s organizational documents, its officers and trustees are indemnified by the Trust against certain liabilities arising out of the performance of their duties to the Trust. Additionally, in the normal course of business, the Trust, on behalf of the Fund, enters into contracts with service providers that contain general indemnification clauses. The Trust’s maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Trust that have not yet occurred. Currently, the Trust expects the risk of loss to be remote.
2. Shares of Beneficial Interest
At June 30, 2016, there were an unlimited number of shares authorized (without par value). Transactions in the Fund’s shares were as follows:
Six Months Ended | Year Ended | ||||||||||
June 30, 2016 | December 31, 2015 | ||||||||||
Shares | Amount | Shares | Amount | ||||||||
Class Z Shares: | |||||||||||
Shares sold | 9,482,840 | $ | 170,277,254 | 31,157,604 | $ | 682,962,755 | |||||
Shares issued in reinvestment of distributions | — | — | 4,845,079 | 94,687,945 | |||||||
Shares redeemed | (12,561,963 | ) | (225,511,098 | ) | (20,523,943 | ) | (431,380,859 | ) | |||
Net increase (decrease) | (3,079,123 | ) | $ | (55,233,844 | ) | 15,478,740 | $ | 346,269,841 | |||
Class A Shares: | |||||||||||
Shares sold | 4,486,124 | $ | 78,469,758 | 24,404,654 | $ | 524,110,675 | |||||
Shares issued in reinvestment of distributions | — | — | 3,489,444 | 66,343,462 | |||||||
Shares redeemed | (9,994,040 | ) | (175,156,401 | ) | (14,862,145 | ) | (307,375,948 | ) | |||
Net increase (decrease) | (5,507,916 | ) | $ | (96,686,643 | ) | 13,031,953 | $ | 283,078,189 | |||
Class C Shares: | |||||||||||
Shares sold | 721,800 | $ | 12,604,418 | 6,548,213 | $ | 141,414,212 | |||||
Shares issued in reinvestment of distributions | — | — | 960,581 | 18,300,147 | |||||||
Shares redeemed | (2,797,964 | ) | (49,000,997 | ) | (2,750,303 | ) | (56,741,282 | ) | |||
Net increase (decrease) | (2,076,164 | ) | $ | (36,396,579 | ) | 4,758,491 | $ | 102,973,077 | |||
Class R Shares: | |||||||||||
Shares sold | 5,090 | $ | 86,492 | 36,230 | $ | 764,990 | |||||
Shares issued in reinvestment of distributions | — | — | 3,771 | 70,336 | |||||||
Shares redeemed | (14,148 | ) | (246,713 | ) | (7,477 | ) | (153,116 | ) | |||
Net increase (decrease) | (9,058 | ) | $ | (160,221 | ) | 32,524 | $ | 682,210 | |||
Class R6 Shares: | |||||||||||
Shares sold | 3,809,898 | $ | 69,671,564 | 3,899,003 | $ | 85,801,878 | |||||
Shares issued in reinvestment of distributions | — | — | 1,283,929 | 25,056,065 | |||||||
Shares redeemed | (4,789,129 | ) | (88,293,250 | ) | (2,018,882 | ) | (43,872,484 | ) | |||
Net increase (decrease) | (979,231 | ) | $ | (18,621,686 | ) | 3,164,050 | $ | 66,985,459 |
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FRANKLIN MUTUAL EUROPEAN FUND
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
3. Transactions with Affiliates
Franklin Resources, Inc. is the holding company for various subsidiaries that together are referred to as Franklin Templeton Investments. Certain officers and trustees of the Fund are also officers and/or directors of the following subsidiaries:
Subsidiary | Affiliation |
Franklin Mutual Advisers, LLC (Franklin Mutual) | Investment manager |
Franklin Templeton Services, LLC (FT Services) | Administrative manager |
Franklin Templeton Distributors, Inc. (Distributors) | Principal underwriter |
Franklin Templeton Investor Services, LLC (Investor Services) | Transfer agent |
a. Management Fees
The Fund pays an investment management fee to Franklin Mutual based on the average daily net assets of the Fund as follows:
Annualized Fee Rate | Net Assets | |
0.875 | % | Up to and including $1 billion |
0.845 | % | Over $1 billion, up to and including $2 billion |
0.825 | % | Over $2 billion, up to and including $5 billion |
0.805 | % | In excess of $5 billion |
For the period ended June 30, 2016, the annualized effective investment management fee rate was 0.851% of the Fund’s average daily net assets.
b. Administrative Fees
Under an agreement with Franklin Mutual, FT Services provides administrative services to the Fund. The fee is paid by Franklin Mutual based on the Fund’s average daily net assets, and is not an additional expense of the Fund.
c. Distribution Fees
The Board has adopted distribution plans for each share class, with the exception of Class Z and Class R6 shares, pursuant to Rule 12b-1 under the 1940 Act. Under the Fund’s Class A reimbursement distribution plan, the Fund reimburses Distributors for costs incurred in connection with the servicing, sale and distribution of the Fund’s shares up to the maximum annual plan rate. Under the Class A reimbursement distribution plan, costs exceeding the maximum for the current plan year cannot be reimbursed in subsequent periods. In addition, under the Fund’s Class C and R compensation distribution plans, the Fund pays Distributors for costs incurred in connection with the servicing, sale and distribution of the Fund’s shares up to the maximum annual plan rate for each class. The plan year, for purposes of monitoring compliance with the maximum annual plan rates, is February 1 through January 31 for each fund.
The maximum annual plan rates, based on the average daily net assets, for each class, are as follows:
Class A | 0.35 | % |
Class C | 1.00 | % |
Class R | 0.50 | % |
The Board has set the current rate at 0.25% per year for Class A shares until further notice and approval by the Board.
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d. Sales Charges/Underwriting Agreements
Front-end sales charges and contingent deferred sales charges (CDSC) do not represent expenses of the Fund. These charges are deducted from the proceeds of sales of Fund shares prior to investment or from redemption proceeds prior to remittance, as applicable. Distributors has advised the Fund of the following commission transactions related to the sales and redemptions of the Fund’s shares for the period:
Sales charges retained net of commissions paid to unaffiliated broker/dealers | $ | 74,101 |
CDSC retained | $ | 98,837 |
e. Transfer Agent Fees
Each class of shares, except for Class R6, pays transfer agent fees to Investor Services for its performance of shareholder servicing obligations and reimburses Investor Services for out of pocket expenses incurred, including shareholder servicing fees paid to third parties. These fees are allocated daily based upon their relative proportion of such classes’ aggregate net assets. Class R6 pays Investor Services transfer agent fees specific to that class.
For the period ended June 30, 2016, the Fund paid transfer agent fees of $1,982,908, of which $1,036,460 was retained by Investor Services.
f. Investments in Affiliated Management Investment Companies
The Fund invests in one or more affiliated management investment companies for purposes other than exercising a controlling influence over the management or policies. Management fees paid by the Fund are waived on assets invested in the affiliated management investment companies, as noted in the Statement of Operations, in an amount not to exceed the management and administrative fees paid directly or indirectly by each affiliate.
Number | % of Affiliated | ||||||||
of Shares | Number of | Fund Shares | |||||||
Held at | Shares Held | Value | Realized | Outstanding | |||||
Beginning | Gross | Gross | at End | at End | Investment | Gain | Held at End | ||
of Period | Additions | Reductions | of Period | of Period | Income | (Loss) | of Period | ||
Non-Controlled Affiliates | |||||||||
Institutional Fiduciary Trust | |||||||||
Money Market Portfolio | — | 343,377,000 | (343,377,000 | ) | — | $ — | $ — | $ — | —% |
g. Waiver and Expense Reimbursements
Investor Services has contractually agreed in advance to waive or limit its fees so that the Class R6 transfer agent fees do not exceed 0.01% until April 30, 2017. There were no Class R6 transfer agent fees waived during the period ended June 30, 2016.
h. Other Affiliated Transactions
At June 30, 2016, one or more of the funds in Franklin Fund Allocator Series owned 9.30% of the Fund’s outstanding shares.
4. Expense Offset Arrangement
The Fund has entered into an arrangement with its custodian whereby credits realized as a result of uninvested cash balances are used to reduce a portion of the Fund’s custodian expenses. During the period ended June 30, 2016, the custodian fees were reduced as noted in the Statement of Operations.
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FRANKLIN MUTUAL EUROPEAN FUND
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
5. Independent Trustees’ Retirement Plan
On January 1, 1993, the Trust adopted an Independent Trustees’ Retirement Plan (Plan). The Plan is an unfunded defined benefit plan that provides benefit payments to Trustees whose length of service and retirement age meets the eligibility requirements of the Plan. Benefits under the Plan are based on years of service and fees paid to each trustee at the time of retirement. Effective in December 1996, the Plan was closed to new participants.
During the period ended June 30, 2016, the Fund’s projected benefit obligation and benefit payments under the Plan were as follows:
aProjected benefit obligation at June 30, 2016 | $ | 99,781 | |
bIncrease in projected benefit obligation | $ | 4,863 | |
Benefit payments made to retired trustees | $ | (1,456 | ) |
aThe projected benefit obligation is included in trustees’ fees and expenses in the Statement of Assets and Liabilities.
bThe increase in projected benefit obligation is included in trustees’ fees and expenses in the Statement of Operations.
6. Income Taxes
At June 30, 2016, the cost of investments and net unrealized appreciation (depreciation) for income tax purposes were as follows:
Cost of investments | $ | 2,784,060,225 | |
Unrealized appreciation | $ | 69,378,686 | |
Unrealized depreciation | (341,357,206 | ) | |
Net unrealized appreciation (depreciation) | $ | (271,978,520 | ) |
Differences between income and/or capital gains as determined on a book basis and a tax basis are primarily due to differing treatment of foreign currency transactions.
7. Investment Transactions
Purchases and sales of investments (excluding short term securities and securities sold short) for the period ended June 30, 2016, aggregated $278,253,612 and $555,980,240, respectively.
8. Concentration of Risk
Investing in foreign securities may include certain risks and considerations not typically associated with investing in U.S. securities, such as fluctuating currency values and changing local and regional economic, political and social conditions, which may result in greater market volatility. In addition, certain foreign securities may not be as liquid as U.S. securities.
9. Restricted Securities
The Fund invests in securities that are restricted under the Securities Act of 1933 (1933 Act) or which are subject to legal, contractual, or other agreed upon restrictions on resale. Restricted securities are often purchased in private placement transactions, and cannot be sold without prior registration unless the sale is pursuant to an exemption under the 1933 Act. Disposal of these securities may require greater effort and expense, and prompt sale at an acceptable price may be difficult. The Fund may have registration rights for restricted securities. The issuer generally incurs all registration costs.
At June 30, 2016, the Fund held investments in restricted securities, excluding certain securities exempt from registration under the 1933 Act deemed to be liquid, as follows:
Acquisition | |||||
Shares | Issuer | Dates | Cost | Value | |
16,127,149 | Euro Wagon LP (Value is -% of Net Assets) | 12/08/05 - 1/02/08 | $ | 6,282,509 | $ — |
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10. Other Derivative Information
At June 30, 2016, the Fund’s investments in derivative contracts are reflected in the Statement of Assets and Liabilities as follows:
Asset Derivatives | Liability Derivatives | ||||||
Derivative Contracts | |||||||
Not Accounted for as | Statement of Assets and | Statement of Assets and | |||||
Hedging Instruments | Liabilities Location | Fair Value | Liabilities Location | Fair Value | |||
Foreign exchange contracts | Variation margin | $ | 29,756,976 | a | Variation margin | $ | — |
Unrealized appreciation on | 46,550,948 | Unrealized depreciation on | 7,015,317 | ||||
OTC forward exchange | OTC forward exchange | ||||||
contracts | contracts | ||||||
Totals | $ | 76,307,924 | $ | 7,015,317 |
aThis amount reflects the cumulative appreciation (depreciation) of futures contracts as reported in the Statement of Investments. Only the variation margin receivable/payable
at period end is separately reported within the Statement of Assets and Liabilities. Prior variation margin movements were recorded to cash upon receipt or payment.
For the period ended June 30, 2016, the effect of derivative contracts in the Fund’s Statement of Operations was as follows:
Net Change in | ||||||||
Unrealized | ||||||||
Derivative Contracts | Statement of | Net Realized | Statement of | Appreciation | ||||
Not Accounted for as | Operations | Gain (Loss) | Operations | (Depreciation) | ||||
Hedging Instruments | Locations | for the Period | Locations | for the Period | ||||
Net realized gain (loss) from: | Net change in unrealized | |||||||
appreciation (depreciation) on: | ||||||||
Foreign exchange contracts | Foreign currency transactions | $ | 15,301,840 | a | Translation of other assets and | $ | (892,616 | )a |
liabilities denominated in | ||||||||
foreign currencies | ||||||||
Futures contracts | (13,052,433 | ) | Futures contracts | 24,582,144 | ||||
Totals | $ | 2,249,407 | $ | 23,689,528 |
aForward exchange contracts are included in net realized gain (loss) from foreign currency transactions and net change in unrealized appreciation (depreciation) on translation of other assets and liabilities denominated in foreign currencies in the Statement of Operations.
For the period ended June 30, 2016, the average month end fair value of derivatives represented 2.1% of average month end net assets. The average month end number of open derivative contracts for the period was 174.
At June 30, 2016, the Fund’s OTC derivative assets and liabilities are as follows:
Gross and Net Amounts | ||||
of Assets and Liabilities | ||||
Presented in the | ||||
Statement of | ||||
Assets and Liabilities | ||||
Assetsa | Liabilitiesa | |||
Derivatives | ||||
Forward exchange contracts | $ | 46,550,948 | $ | 7,015,317 |
aAbsent an event of default or early termination, OTC derivative assets and liabilities are presented gross and not offset in the Statement of Assets and Liabilities.
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NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
10. Other Derivative Information (continued)
At June 30, 2016, the Fund’s OTC derivative assets, which may be offset against the Fund’s OTC derivative liabilities and collateral received from the counterparty, are as follows:
Amounts Not Offset in the | ||||||||||||||
Statement of Assets and Liabilities | ||||||||||||||
Gross and Net | ||||||||||||||
Amounts of Assets | Financial | |||||||||||||
Presented in the | Financial | Instruments | Cash | |||||||||||
Statement of | Instruments | Collateral | Collateral | Net Amount (Not | ||||||||||
Assets and Liabilities | Available for Offset | Receiveda,b | Receivedb | less than zero) | ||||||||||
Counterparty | ||||||||||||||
BANT | $ | 13,415,601 | $ | (3,295,500 | ) | $ | (10,120,101 | ) | $ | — | $ | — | ||
BONY | 7,209,571 | (485,474 | ) | (6,724,097 | ) | — | — | |||||||
DBFX | 145,498 | — | — | (145,498 | ) | — | ||||||||
FBCO | 1,097,121 | (616,927 | ) | — | (300,000 | ) | 180,194 | |||||||
HSBC | 15,126,693 | (1,772,120 | ) | (8,834,194 | ) | — | 4,520,379 | |||||||
SSBT | 9,556,464 | (845,296 | ) | — | (8,711,168 | ) | — | |||||||
Total | $ | 46,550,948 | $ | (7,015,317 | ) | $ | (25,678,392 | ) | $ | (9,156,666 | ) | $ | 4,700,573 |
aAt June 30, 2016, the Fund received United Kingdom Treasury Bonds and U.S. Treasury Bills and Notes as collateral for derivatives.
bIn some instances, the collateral amounts disclosed in the table above were adjusted due to the requirement to limit collateral amounts to avoid the effect of over-
collateralization. Actual collateral received and/or pledged may be more than the amounts disclosed herein.
At June 30, 2016, the Fund’s OTC derivative liabilities, which may be offset against the Fund’s OTC derivative assets and collateral
pledged to the counterparty, are as follows:
Amounts Not Offset in the | |||||||||||
Statement of Assets and Liabilities | |||||||||||
Gross and Net | |||||||||||
Amounts of Liabilities | Financial | ||||||||||
Presented in the | Financial | Instruments | Cash | ||||||||
Statement of | Instruments | Collateral | Collateral | Net Amount (Not | |||||||
Assets and Liabilities | Available for Offset | Pledged | Pledged | less than zero) | |||||||
Counterparty | |||||||||||
BANT | $ | 3,295,500 | $ | (3,295,500 | ) | $ | — | $ | — | $ | — |
BONY | 485,474 | (485,474 | ) | — | — | — | |||||
DBFX | — | — | — | — | — | ||||||
FBCO | 616,927 | (616,927 | ) | — | — | — | |||||
HSBC | 1,772,120 | (1,772,120 | ) | — | — | — | |||||
SSBT | 845,296 | (845,296 | ) | — | — | — | |||||
Total | $ | 7,015,317 | $ | (7,015,317 | ) | $ | — | $ | — | $ | — |
See Note 1(c) regarding derivative financial instruments. | |||||||||||
See Abbreviations on page 36. |
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NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
11. Holdings of 5% Voting Securities of Portfolio Companies
The 1940 Act defines “affiliated companies” to include investments in portfolio companies in which a fund owns 5% or more of the outstanding voting securities. Investments in “affiliated companies” for the Fund for the period ended June 30, 2016, were as shown below.
Number | ||||||||
of Shares | Number of | |||||||
Held at | Shares Held | Value | Realized | |||||
Beginning | Gross | Gross | at End | at End | Investment | Gain | ||
Name of Issuer | of Period | Additions | Reductions | of Period | of Period | Income | (Loss) | |
Controlled Affiliatesa | ||||||||
Euro Wagon LP (Value | ||||||||
is -% of Net Assets) | 16,127,149 | — | — | 16,127,149 | $ — | $ | 24,376,923 | $ — |
aIssuer in which the Fund owns 25% or more of the outstanding voting securities. |
12. Credit Facility
The Fund, together with other U.S. registered and foreign investment funds (collectively, Borrowers), managed by Franklin Temple-ton Investments, are borrowers in a joint syndicated senior unsecured credit facility totaling $2 billion (Global Credit Facility) which matures on February 10, 2017. This Global Credit Facility provides a source of funds to the Borrowers for temporary and emergency purposes, including the ability to meet future unanticipated or unusually large redemption requests.
Under the terms of the Global Credit Facility, the Fund shall, in addition to interest charged on any borrowings made by the Fund and other costs incurred by the Fund, pay its share of fees and expenses incurred in connection with the implementation and maintenance of the Global Credit Facility, based upon its relative share of the aggregate net assets of all of the Borrowers, including an annual commitment fee of 0.07% based upon the unused portion of the Global Credit Facility. Effective February 12, 2016, the annual commitment fee is 0.15%. These fees are reflected in other expenses in the Statement of Operations. During the period ended June 30, 2016, the Fund did not use the Global Credit Facility.
13. Fair Value Measurements
The Fund follows a fair value hierarchy that distinguishes between market data obtained from independent sources (observable inputs) and the Fund’s own market assumptions (unobservable inputs). These inputs are used in determining the value of the Fund’s financial instruments and are summarized in the following fair value hierarchy:
- Level 1 – quoted prices in active markets for identical financial instruments
- Level 2 – other significant observable inputs (including quoted prices for similar financial instruments, interest rates, prepay- ment speed, credit risk, etc.)
- Level 3 – significant unobservable inputs (including the Fund’s own assumptions in determining the fair value of financial instruments)
The input levels are not necessarily an indication of the risk or liquidity associated with financial instruments at that level.
For movements between the levels within the fair value hierarchy, the Fund has adopted a policy of recognizing the transfers as of the date of the underlying event which caused the movement.
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NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
13. Fair Value Measurements (continued)
A summary of inputs used as of June 30, 2016, in valuing the Fund’s assets and liabilities carried at fair value, is as follows:
Level 1 | Level 2 | Level 3 | Total | |||||
Assets: | ||||||||
Investments in Securities: | ||||||||
Equity Investments:a | ||||||||
Energy Equipment & Services | $ | — | $ | — | $ | 2,288,667 | $ | 2,288,667 |
Machinery | 39,660,299 | 5,994,648 | — | 45,654,947 | ||||
All Other Equity Investmentsb | 2,185,308,415 | — | —c | 2,185,308,415 | ||||
Short Term Investments | 127,929,676 | 150,900,000 | — | 278,829,676 | ||||
Total Investments in Securities | $ | 2,352,898,390 | $ | 156,894,648 | $ | 2,288,667 | $ | 2,512,081,705 |
Other Financial Instruments | ||||||||
Futures Contracts | $ | 29,756,976 | $ | — | $ | — | $ | 29,756,976 |
Forward Exchange Contracts | — | 46,550,948 | — | 46,550,948 | ||||
Total Other Financial Instruments | $ | 29,756,976 | $ | 46,550,948 | $ | — | $ | 76,307,924 |
Liabilities: | ||||||||
Other Financial Instruments | ||||||||
Securities Sold Short | $ | 1,833,376 | $ | — | $ | — | $ | 1,833,376 |
Forward Exchange Contracts | — | 7,015,317 | — | 7,015,317 | ||||
Total Other Financial Instruments | $ | 1,833,376 | $ | 7,015,317 | $ | — | $ | 8,848,693 |
aIncludes common and preferred stocks.
bFor detailed categories, see the accompanying Statement of Investments.
cIncludes securities determined to have no value at June 30, 2016.
A reconciliation of assets in which Level 3 inputs are used in determining fair value is presented when there are significant Level 3 financial instruments at the end of the period.
14. Subsequent Events
The Fund has evaluated subsequent events through the issuance of the financial statements and determined that no events have occurred that require disclosure.
Abbreviations | |||||
Counterparty | Currency | Selected Portfolio | |||
BANT | Bank of America N.A. | CHF | Swiss Franc | ADR | American Depositary Receipt |
BONY | Bank of New York Mellon | EUR | Euro | FHLB | Federal Home Loan Bank |
DBFX | Deutsche Bank AG | GBP | British Pound | ||
FBCO | Credit Suisse International | USD | United States Dollar | ||
HSBC | HSBC Bank PLC | ||||
SSBT | State Street Bank and Trust Co., N.A. |
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Shareholder Information
Board Review of Investment Management Agreement
The Board of Trustees (Board), including the independent trustees, at a Board meeting held on May 16, 2016, unanimously approved the renewal of the Fund’s investment management agreement. Prior to a meeting of all of the trustees for the purpose of considering such approval, the independent trustees participated in two other meetings held in connection with the renewal process (those trustees unable to attend in person were present by telephonic conference means). Throughout the process, the independent trustees received assistance and advice from and met separately with independent counsel. The independent trustees met with and interviewed officers of the investment manager (including portfolio managers), the transfer agent and shareholder services group and the distributor. In approving the renewal of the investment management agreement for the Fund, the Board, including the independent trustees, determined that the investment management fee structure was fair and reasonable and that continuance of the agreement was in the best interests of the Fund and its shareholders.
In reaching their decision on the investment management agreement, the trustees took into account information furnished throughout the year at regular Board meetings, as well as information specifically requested and furnished for the renewal process, which culminated in the meetings referred to above for the specific purpose of considering such agreement. Information furnished throughout the year included, among others, reports on the Fund’s investment performance, expenses, portfolio composition, portfolio brokerage execution, client commission arrangements, derivatives, securities lending, asset segregation, portfolio turnover, Rule 12b-1 plans, distribution, shareholder servicing, legal and compliance matters, pricing of securities and sales and redemptions, and marketing support payments made to financial intermediaries, as well as a third-party survey of transfer agent fees charged funds within the Franklin Templeton Investments (FTI) complex in comparison with those charged other fund complexes deemed comparable. Also, related financial statements and other information about the scope and quality of services provided by the investment manager and its affiliates and enhancements to such services over the past year were provided. In addition, the trustees received periodic reports throughout the year and during the renewal process relating to compliance with the Fund’s investment policies and restrictions. During the renewal process, the independent trustees considered the investment manager’s methods of operation within the Franklin Templeton group and its activities on behalf of other clients.
The information obtained by the trustees during the renewal process also included a special report prepared by Broadridge Financial Solutions, Inc. (Broadridge), an independent third-party analyst that utilizes data from Lipper, Inc. (“Lipper”), an independent third-party analyst, comparing the Fund’s investment performance and expenses with those of other mutual funds deemed comparable to the Fund as selected by Lipper (Broadridge Section 15(c) Report). The trustees reviewed the Broadridge Section 15(c) Report and its usefulness in the approval process with respect to matters such as comparative fees, expenses, expense ratios, performance and volatility. They concluded that the report continues to be a reliable resource in the performance of their duties.
In addition, the trustees received a Profitability Study (Profitability Study) prepared by management discussing the profitability to FTI from its overall U.S. Fund operations, as well as on an individual fund-by-fund basis. Over the past year, the Board and counsel to the independent trustees continued to receive reports on management’s handling of recent regulatory inquiries and pending legal actions against the investment manager and its affiliates. The independent trustees were satisfied with the actions taken to date by management in response to such regulatory and legal matters.
Particular attention was given to management’s diligent risk management program, including continual monitoring and management of counterparty credit risk and attention given to derivatives and other complex instruments that are held and expected to be held by the Fund and how such instruments are used to carry out the Fund’s investment goals. The Board also took into account, among other things, management’s efforts in establishing a global credit facility for the benefit of the Fund and other accounts managed by FTI to provide a source of cash for temporary and emergency purposes or to meet unusual redemption requests as well as the strong financial position of the investment manager’s parent company and its commitment to the mutual fund business. In addition, the Board received updates from management on the Securities and Exchange Commission’s (SEC) progress in implementing the rule-making requirements established by the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), which was enacted July 21, 2010, and the investment manager’s compliance with rules and regulations already promulgated by the SEC under such act. The Board also noted that they received an annual report on all marketing support payments made by FTI to financial intermediaries, as well as a memorandum relating to third-party servicing arrangements in response to a Guidance Update from the SEC relating to mutual fund distribution and sub accounting fees.
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SHAREHOLDER INFORMATION
In addition to the above and other matters considered by the trustees throughout the course of the year, the following discussion relates to certain primary factors relevant to the Board’s decision. This discussion of the information and factors considered by the Board (as well as the discussion above) is not intended to be exhaustive, but rather summarizes certain factors considered by the Board. In view of the wide variety of factors considered, the Board did not, unless otherwise noted, find it practicable to quantify or otherwise assign relative weights to the foregoing factors. In addition, individual trustees may have assigned different weights to various factors.
NATURE, EXTENT AND QUALITY OF SERVICES. The trustees reviewed the nature, extent and quality of the services provided by the investment manager. In this regard, they reviewed the Fund’s investment approach and concluded that, in their view, it continues to differentiate the Fund from typical core investment products in the mutual fund field. The trustees cited the investment manager’s ability to implement the Fund’s disciplined value investment approach and its long-term relationship with the Fund as reasons that shareholders choose to invest, and remain invested, in the Fund. The trustees reviewed the Fund’s portfolio management team, including its performance, staffing, skills and compensation program. With respect to portfolio manager compensation, management assured the trustees that the Fund’s long-term performance is a significant component of incentive-based compensation and noted that a portion of a portfolio manager’s incentive-based compensation is paid in shares of pre-designated funds from the portfolio manager’s fund management area. The trustees noted that the portfolio manager compensation program aligned the interests of the portfolio managers with that of Fund shareholders. The trustees discussed with management various other products, portfolios and entities that are advised by the investment manager and the allocation of assets and expenses among and within them, as well as their relative fees and reasons for differences with respect thereto and any potential conflicts. During regular Board meetings and the aforementioned meetings of the independent trustees, the trustees received reports and presentations on the investment manager’s best execution trading policies. The trustees considered periodic reports provided to them showing that the investment manager complied with the investment policies and restrictions of the Fund as well as other reports periodically furnished to the Board covering matters such as the compliance of portfolio managers and other management personnel with the code of ethics covering the investment management personnel, the adherence to fair value pricing procedures established by the Board and the accuracy of net asset value calculations. The Board noted the extent of the benefits provided to Fund shareholders from being part of the Franklin Templeton group, including the right to exchange investments between funds (same class) without a sales charge, the ability to reinvest Fund dividends into other funds and the right to combine holdings of other funds to obtain reduced sales charges. The trustees considered the investment manager’s significant efforts in developing and implementing compliance procedures established in accordance with SEC and other requirements.
The trustees also reviewed the nature, extent and quality of the Fund’s other service agreements to determine that, on an overall basis, Fund shareholders were well served. In this connection, the Board also took into account transfer agent and shareholder services provided to Fund shareholders by an affiliate of the investment manager, noting continuing expenditures by management to increase and improve the scope of such services and favorable periodic reports on shareholder services conducted by independent third parties. While such considerations directly affected the trustees’ decision in renewing the Fund’s transfer agent and shareholder services agreement, the Board also considered these commitments as incidental benefits to Fund shareholders deriving from the investment management relationship.
Based on their review, the trustees were satisfied with the nature and quality of the overall services provided by the investment manager and its affiliates to the Fund and its shareholders and were confident in the abilities of the management team to continue the disciplined value investment approach of the Fund and to provide quality services to the Fund and its shareholders.
INVESTMENT PERFORMANCE. The trustees reviewed and placed significant emphasis on the investment performance of the Fund over the one-, three-, five- and 10-year periods ended December 31, 2015. They considered the history of successful performance of the Fund relative to various benchmarks. As part of their review, they inquired of management regarding benchmarks, style drift and restrictions on permitted investments. Consideration was also given to performance in the context of available levels of cash during the periods. The trustees had meetings during the year, including the meetings referred to above held in connection with the approval process, with the Fund’s portfolio managers to discuss performance and the management of the Fund. In addition, particular attention in assessing performance was given to the Broadridge Section 15(c) Report. That report showed the investment performance of the Fund (Class A shares) in comparison to other funds determined comparable by Lipper.
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SHAREHOLDER INFORMATION
The comparable funds to the Fund, as chosen by Lipper, included all retail and institutional European region funds. The Fund had total returns in the second-lowest performing quintile for the one-year period ended December 31, 2015, and had annualized total returns for the three- and five-year periods in the middle performing quintile. The trustees noted that the Fund’s total return on an annualized basis for the 10-year period ended December 31, 2015, was in the second-best performing quintile, as shown in the Broadridge Section 15(c) Report. The Board discussed with management the reasons for the relative underperformance for the one-year period ended December 31, 2015. As part of such discussions, management discussed in detail the attractive risk-adjusted performance of the Fund. While noting such discussions, the Board, overall, found such comparative performance to be acceptable.
The trustees also compared Fund performance to other industry benchmarks, including measures of risk-adjusted performance of a fund, as part of their evaluation of investment performance. The trustees concluded that the Fund had continued to perform well in comparison to its various benchmarks and in the context of the Fund’s objectives.
COMPARATIVE EXPENSES AND MANAGEMENT PROFITABILITY. The trustees considered the cost of the services provided and to be provided and the profits realized by the investment manager and its affiliates from their respective relationships with the Fund. As part of the approval process, they explored with management the trends in expense ratios over the past three fiscal years and the reasons for any increases in the Fund’s expense ratios (or components thereof). In considering the appropriateness of the management fee and other expenses charged to the Fund, the Board took into account various factors including investment performance and matters relating to Fund operations, including, but not limited to, the quality and experience of its portfolio managers and research staff. Consideration was also given to a comparative analysis in the Broadridge Section 15(c) Report of the investment management fee and total expense ratio of the Fund in comparison with those of a group of other funds selected by Lipper as its appropriate Lipper expense group. Lipper expense data is based upon information taken from the Fund’s most recent annual report, which reflects historical asset levels that may be quite different from those currently existing, particularly in a period of market volatility. While recognizing such inherent limitation and the fact that expense ratios generally increase as assets decline and decrease as assets grow, the Board believed the independent analysis conducted by Lipper to be an appropriate measure of comparative expenses.
In reviewing comparative costs, emphasis was given to the Fund’s contractual management fee in comparison with the contractual management fee that would have been charged by other funds within its Lipper expense group assuming they were similar in size to the Fund, as well as the actual total expenses of the Fund in comparison with those of its Lipper expense group. The Lipper contractual management fee analysis includes administrative charges as being part of the management fee, and total expenses, for comparative consistency, are shown by Lipper for Fund Class A shares.
The Fund’s contractual management fee rate was in the second-most expensive quintile of its Lipper expense group and its total expenses were in the middle quintile of such group. The Board noted that the Fund’s contractual management fee rate was within 8.2 basis points of its Lipper expense group median. The Board found such comparative fees and expenses to be acceptable in view of factors relating to the Fund’s operations, such as the quality and experience of its portfolio managers.
The trustees also reviewed the Profitability Study addressing profitability of Franklin Resources, Inc., from its overall U.S. fund business, as well as profitability to the Fund’s investment manager and its affiliates, from providing investment management and other services to the Fund during the 12-month period ended September 30, 2015, the most recent fiscal year-end of Franklin Resources, Inc. The trustees reviewed the basis on which such reports are prepared and the cost allocation methodology utilized in the Profitability Study, it being recognized that allocation methodologies may each be reasonable while producing different results. In this respect, the Board noted that the reasonableness of the cost allocation methodologies was reviewed by independent accountants on an every other year basis.
The independent trustees met with management to discuss the Profitability Study. This included, among other things, a comparison of investment management income with investment management expenses of the Fund; comparison of underwriting revenues and expenses; the relative relationship of investment management and underwriting expenses; shareholder servicing profitability; economies of scale; and the relative contribution of the Fund to the profitability of the investment manager and its parent. In discussing the Profitability Study with the Board, the investment manager stated its belief that the costs incurred in establishing the infrastructure necessary to operate the type of mutual fund operations conducted by it and its affiliates may not be fully reflected in the expenses allocated to the Fund in determining its profitability.
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SHAREHOLDER INFORMATION
The Board also took into account management’s expenditures in improving shareholder services provided to the Fund, as well as the need to meet additional regulatory and compliance requirements resulting from the Sarbanes-Oxley Act, the Dodd-Frank Act and recent SEC and other regulatory requirements. The trustees also considered the extent to which the investment manager may derive ancillary benefits from Fund operations, including those derived from economies of scale, discussed below, the allocation of Fund brokerage and the use of commission dollars to pay for research and other similar services.
Based upon their consideration of all these factors, the trustees determined that the level of profits realized by the investment manager and its affiliates in providing services to the Fund was not excessive in view of the nature, quality and extent of services provided.
ECONOMIES OF SCALE. The trustees considered economies of scale realized by the investment manager and its affiliates as the Fund grows larger and the extent to which they are shared with Fund shareholders, as for example, in the level of the investment management fee charged, in the quality and efficiency of services rendered and in increased capital commitments benefiting the Fund directly or indirectly. While recognizing that any precise determination is inherently subjective, the trustees noted that, based upon the Profitability Study, as some funds increase in size, at some point economies of scale may result in the investment manager realizing a larger profit margin on investment management services provided to such a fund. The trustees also noted that benefits of economies of scale will be shared with Fund shareholders due to the decline in the effective investment management fee rate as breakpoints are achieved by the Fund.
The trustees noted that breakpoints had been instituted as part of the Fund’s investment management fee in 2004. The trustees assessed the savings to shareholders resulting from such break-points and believed they were, and continue to be, appropriate and they agreed to continue to monitor the appropriateness of the breakpoints. The trustees also considered the effects an increase in assets under management would have on the investment management fee and expense ratio of the Fund. To the extent further economies of scale may be realized by the investment manager and its affiliates, the Board believed the investment management and administrative fees provide a sharing of benefits with the Fund and its shareholders.
Proxy Voting Policies and Procedures
The Fund’s investment manager has established Proxy Voting Policies and Procedures (Policies) that the Fund uses to determine how to vote proxies relating to portfolio securities. Shareholders may view the Fund’s complete Policies online at franklintempleton.com. Alternatively, shareholders may request copies of the Policies free of charge by calling the Proxy Group collect at (954) 527-7678 or by sending a written request to: Franklin Templeton Companies, LLC, 300 S.E. 2nd Street, Fort Lauderdale, FL 33301, Attention: Proxy Group. Copies of the Fund’s proxy voting records are also made available online at franklintempleton.com and posted on the U.S. Securities and Exchange Commission’s website at sec.gov and reflect the most recent 12-month period ended June 30.
Quarterly Statement of Investments
The Fund files a complete statement of investments with the U.S. Securities and Exchange Commission for the first and third quarters for each fiscal year on Form N-Q. Shareholders may view the filed Form N-Q by visiting the Commission’s website at sec.gov. The filed form may also be viewed and copied at the Commission’s Public Reference Room in Wash-ington, DC. Information regarding the operations of the Public Reference Room may be obtained by calling (800) SEC-0330.
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Semiannual Report and Shareholder Letter
Franklin Mutual European Fund
Investment Manager
Franklin Mutual Advisers, LLC.
Distributor
Franklin Templeton Distributors, Inc.
(800) DIAL BEN® / 342-5236
franklintempleton.com
Shareholder Services
(800) 632-2301 - (Class A, C, R & R6)
(800) 448-FUND - (Class Z)
Authorized for distribution only when accompanied or preceded by a summary prospectus and/or prospectus. Investors should carefully consider a fund’s investment goals, risks, charges and expenses before investing. A prospectus contains this and other information; please read it carefully before investing.
To help ensure we provide you with quality service, all calls to and from our service areas are monitored and/or recorded.
© 2016 Franklin Templeton Investments. All rights reserved. | 478 S 08/16 |
Semiannual Report
and Shareholder Letter
June 30, 2016
Franklin Mutual Financial Services Fund
A SERIES OF FRANKLIN MUTUAL SERIES FUNDS
Sign up for electronic delivery at franklintempleton.com/edelivery
Contents | |
Semiannual Report | |
Franklin Mutual Financial Services Fund | 3 |
Performance Summary | 9 |
Your Fund’s Expenses | 12 |
Financial Highlights and Statement of Investments | 13 |
Financial Statements | 22 |
Notes to Financial Statements | 26 |
Shareholder Information | 38 |
Visit franklintempleton.com for fund updates, to access your account, or to find helpful financial planning tools.
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Semiannual Report
Franklin Mutual Financial Services Fund
This semiannual report for Franklin Mutual Financial Services Fund covers the period ended June 30, 2016.
Your Fund’s Goals and Main Investments
The Fund seeks capital appreciation, which may occasionally be short term, with income as a secondary goal, by investing at least 80% of its net assets in securities of financial services companies. It focuses mainly on what the investment manager believes are undervalued mid- and large cap equity securities and, to a lesser extent, the securities of distressed companies and merger arbitrage securities. The Fund may invest in foreign securities without limit.
Performance Overview
The Fund’s Class Z shares had a cumulative total return of -7.49% for the six months under review. In comparison, the Fund’s new narrow benchmark, the MSCI World Financials Index, which captures large and midcap representation across 23 developed markets countries, had a -7.79% total return, while its new broad equity benchmark (and old narrow equity benchmark), the Standard & Poor’s 500 (S&P 500®) Financials Index, which tracks financials stocks in the S&P 500 Index, had a -3.05% total return.1 For the same period, the Fund’s old broad equity benchmark, the S&P 500 Index, which is a broad measure of U.S. stock performance, posted a +3.84% total return.1 As the investment manager believes the composition of the MSCI World Financials Index more accurately reflects the Fund’s holdings, it has replaced the S&P 500 Financials Index as the Fund’s narrow equity benchmark. For similar reasons, the Fund’s investment manager has replaced the S&P 500 Index with the S&P 500 Financials Index as its broad equity benchmark. You can find more of the Fund’s performance data in the Performance Summary beginning on page 9.
Performance data represent past performance, which does not guarantee future results. Investment return and principal value will fluctuate, and you may have a gain or loss when you sell your shares. Current performance may differ from figures shown. For most recent month-end performance, go to franklintempleton.com or call (800) 342-5236.
*Figures are stated as a percentage of total and may not equal 100% or may be negative due to rounding, use of any derivatives, unsettled trades or other factors.
1. Source: Morningstar.
The indexes are unmanaged and include reinvestment of any income or distributions. They do not reflect any fees, expenses or sales charges. One cannot invest directly in an index, and an index is not representative of the Fund’s portfolio.
See www.franklintempletondatasources.com for additional data provider information.
The dollar value, number of shares or principal amount, and names of all portfolio holdings are listed in the Fund’s Statement of Investments (SOI). The SOI begins on page 17.
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Economic and Market Overview
The global economy expanded during the six months under review. An improvement in commodity prices including a rally in crude oil prices, accommodative monetary policy from various global central banks, finalization of the new debt deal for Greece and encouraging Chinese trade data toward period-end boosted market sentiment. However, global equity market volatility increased after the U.S. Federal Reserve’s (Fed’s) June decision to keep its federal funds target range unchanged, while providing a cautious stance on further interest rate hikes. In addition, global economic concerns and the U.K.’s historic referendum to leave the European Union (EU), also known as the “Brexit,” contributed to volatile global stock markets.
Oil prices fell at the beginning of the review period, largely due to a strong global supply, but recovered in the period’s second half amid oilfield outages and continued demand growth. Meanwhile, commodity prices increased for most of the review period as oversupply for a host of commodities shrank and the market appeared to be on the path of rebalanc-ing after hitting a glut-induced bottom earlier in the year. Gold prices continued to rise following the Brexit referendum as some investors turned to safe haven investing. The U.S. dollar generally depreciated against most currencies during the period, which increased returns of many foreign assets in U.S. dollar terms. In this environment, global developed market stocks overall, as measured by the MSCI World Index, rose slightly during the period.
The U.S. economy grew moderately, as measured by gross domestic product (GDP) in 2016’s first and second quarters, driven by consumer spending and exports. A decline in private inventory investment and nonresidential fixed investment contributed to the moderation. The Fed maintained its target interest rate during the review period after raising it for the first time in nine years at its December 2015 meeting. The Fed kept its target rate unchanged in its June meeting mainly due to a substantial slowdown in job additions toward period-end. The Fed expects economic conditions to evolve in a manner that could warrant only gradual increases in the federal funds rate.
In Europe, slower U.K. economic growth continued in 2016’s first quarter as output slowed in construction, production and agriculture. Immediate effects of the Brexit materialized as U.K. stocks significantly declined and the pound sterling hit a three-decade low amid intensified selling. Credit rating agencies Standard & Poor’s and Fitch also downgraded the U.K.’s credit rating. In the eurozone, despite investors’ concerns about banking sector weakness, low corporate earnings and post-Brexit political repercussions, some regions benefited due to rising consumer spending resulting from a cheaper euro, low inflation and signs of sustained economic growth. The eurozone’s annual inflation rate remained in negative territory for most of the review period; however, it rose marginally above zero in June.
Japan’s economy posted mixed results, contracting in 2015’s fourth quarter stemming from declining private and household consumption. However, the economy expanded during 2016’s first quarter as private consumption increased and business investment decreased less than anticipated. The Bank of Japan (BOJ) took several actions during the review period. In January, to boost lending and support inflation, the BOJ introduced a negative interest rate on excess reserves held at the central bank by financial institutions. In April, the BOJ further reduced its GDP and inflation forecasts for fiscal year 2016, and decided against additional quantitative easing measures. However, after the U.K.’s vote in June to leave the EU, the BOJ hinted at carrying out flexible open market operations to stabilize its financial markets.
In emerging markets, economic growth generally moderated during the review period. Brazil’s economy witnessed its longest recession since the 1930s amid political and economic turmoil, while Russia’s economy continued to contract. The Bank of Russia reduced its key interest rate in an attempt to revive its economy. China’s economic growth slowed marginally in 2016’s first quarter compared to the previous quarter, but remained largely in line with the government’s target. The People’s Bank of China cut its cash reserve requirement ratio for the country’s banks and effectively devalued the renminbi against the U.S. dollar to the lowest level in more than five years. Overall, emerging market stocks, as measured by the MSCI Emerging Markets Index, rose for the six-month period under review.
Investment Strategy
We strive to provide investors with superior risk-adjusted returns over time through our distinctive, value investment style, which includes investments in undervalued common stocks, distressed debt and merger arbitrage. Rigorous fundamental analysis drives our investment process. We attempt to determine each investment’s intrinsic value as well as the price at which we would be willing to commit shareholder funds. While valuation remains our key consideration, we utilize numerous fundamental factors such as return on equity, financial leverage and long-term earnings power. We also consider factors such as management quality and competitive position. As always, our approach to investing is as much about assessing risk and containing losses as it is about achieving profits.
In addition, it is our practice to hedge the Fund’s currency exposure when we deem it advantageous for our shareholders.
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*Figures are stated as a percentage of total and may not equal 100% or may be negative due to rounding, use of any derivatives, unsettled trades or other factors.
What is return on equity?
Return on equity is an amount, expressed as a percentage, earned on a company’s common stock investment for a given period. Return on equity tells common shareholders how effectually their money is being employed. Comparing percentages for current and prior periods also reveals trends, and comparison with industry composites reveals how well a company is holding its own against its competitors.
What is meant by “hedge”?
To hedge an investment is to take a position intended to offset potential losses/gains that may be incurred by a companion financial instrument.
Manager’s Discussion
Economic and political uncertainty influenced markets during the six months under review. The year 2016 began with severe economic uncertainty. Brent oil prices plunged below US$30 per barrel as fears of a global recession spread. Global equity markets dropped from the start of the year, continuing a downward move from mid-2015 highs, before bottoming in mid-February. Commodity and equity prices rose over the following four months, before a late June surprise: the result of the Brexit vote, signaling the beginning of the end of the U.K.’s 43-year membership in the EU. Uncertainty about the future status of the U.K. as well as implications for the EU and the global economy weighed on markets at the end of the period.
The momentous decision by U.K. voters on June 23 to leave the EU has introduced significant economic, financial and political uncertainty to the region. We believe it is probable that the U.K. will face a heightened risk of an economic slowdown, as businesses will likely put investment decisions on hold while waiting for clarity as to what the new reality may look like. The negative impact on the rest of the EU will likely be less severe, although economic growth in the region was already running at a modest pace before the vote, and we do not believe the region will be immune.
We anticipate prices in European financial markets will reflect increasing political and economic risk. The prospects of continuing low or even lower interest rates, as well as uncertainty as to the future of London as Europe’s main financial center will likely weigh on financial stocks. Potentially slower economic growth and the regional trade implications of the Brexit will also weigh on domestically oriented cyclical stocks, and we had reduced but not eliminated the Fund’s exposure to U.K. banks. U.K. banks that generate most of their earnings abroad should benefit from the precipitous fall of the British pound that followed the Brexit vote. In this respect, the Fund’s exposure is limited to a number of these global banks, namely Standard Chartered, HSBC Holdings, and Barclays, although HSBC Holdings and Barclays, in particular, have U.K. businesses as well.
Although the Brexit vote is clearly a negative surprise, we do not believe it will usher in a new global financial crisis similar to the one experienced eight years ago. While markets reacted brutally to the U.K.’s decision to leave the EU, we have not seen any systemic shock like the one that followed the fall of Lehman Brothers in 2008. We also believe that, eventually, the U.K. and the EU will come to an acceptable agreement concerning trade relations.
In Asia, disruptions in the Chinese markets due to technical factors at the beginning of the year were proven to be unrelated to fundamental factors as we surmised having recently returned from the region. However, structural adjustments continue in China with excess capacity being withdrawn from a number of “old economy” sectors such as steel, coal, glass and cement, and reverberations from these adjustments will be felt throughout the economy, driving credit losses at the banks to which we currently have no exposure. On the other hand, we expect insurers will benefit from higher risk premium on credit instruments they buy to cover liabilities.
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Japan is suffering from the impact of its negative interest rate policy (NIRP), which has even further reduced consumption. Demographics in Japan are such that a very large portion of its population is retired or close to retirement. With no return on savings due to NIRP and pension funds that are increasingly underfunded, they have no choice but to save even more. Therefore, quantitative easing (QE) is having the opposite impact from what was intended. The positive news is that share prices are coming off the euphoric valuations driven by QE and the resulting depreciation of the yen as that has also retraced some of its move.
The U.S. seems to be experiencing a relatively calm economic environment. However, we believe that U.S. equities are being impacted by volatility emanating from other regions and asset classes but transmitted by the changing structure of the equity market—namely the proliferation of exchange traded funds. These external factors have also impacted the timing of the U.S. Fed’s move to normalize interest rates. While negative for the U.S. financials sector, which had priced in some element of rate normalization, we increased our exposure to the sector over the period because we found the fundamentals relatively more compelling.
Turning to Fund performance, top contributors to performance included condominium developer Takara Leben and insurers Chubb Limited and Allstate.
Takara Leben is a midsized condominium developer in Japan that is also rapidly expanding its solar farm capacity. In April, Takara Leben announced that it would be the first to list shares of its solar power assets on a newly formed infrastructure market. The financial vehicle holding the solar power assets will be similar to a real estate investment trust. In May, the company announced positive earnings results and a new share buy-back program.
Chubb Limited is a U.S.-based property and casualty insurance company. ACE Limited completed its acquisition of Chubb Corporation in January 2016, renaming the newly combined insurance company Chubb Limited. In May, Chubb Limited reported quarterly earnings that exceeded the consensus estimate despite a headwind from unfavorable foreign currency exchange. Management also increased its cost saving target by US$100 million, expecting savings of US$750 million by 2018.
Shares of U.S.-based property and life insurer Allstate were positively impacted by better-than expected quarterly results reported in February and May. Results for both quarters were aided by improved underwriting, premium increases and a reduction in expenses, which more than offset weaker net investment income driven in large part by the ongoing low interest rate environment. The company also announced a US$1.5 billion share buyback program in May.
Top 10 Equity Holdings | ||
6/30/16 | ||
Company | % of Total | |
Sector/Industry, Country | Net Assets | |
American International Group Inc. | 3.7 | % |
Insurance, U.S. | ||
CIT Group Inc. | 3.5 | % |
Banks, U.S. | ||
XL Group PLC | 3.4 | % |
Insurance, Ireland | ||
Takara Leben Co. Ltd. | 3.4 | % |
Real Estate Management & Development, Japan | ||
NN Group NV | 3.0 | % |
Insurance, Netherlands | ||
Capital One Financial Corp. | 2.9 | % |
Consumer Finance, U.S. | ||
SunTrust Banks Inc. | 2.9 | % |
Banks, U.S. | ||
Wells Fargo & Co. | 2.5 | % |
Banks, U.S. | ||
CNO Financial Group Inc. | 2.4 | % |
Insurance, U.S. | ||
Citizens Financial Group Inc. | 2.4 | % |
Banks, U.S. |
During the period under review, Fund investments that detracted from performance included insurers NN Group and Ageas and consumer and business financing company CIT Group.
NN Group is a Netherlands-based insurer spun out of ING Groep in 2014. Shares of NN Group followed the broad-based decline of European financial stocks in late June following the U.K.’s vote to leave the EU. In our view, the outcome had negative implications for the insurance sector by increasing economic uncertainty, adding immediate downward pressure on global interest rates and increasing the possibility that the U.S. Fed will further delay its next interest rate hike. Shares of NN Group also declined in January and early February as Europe’s financial sector was hurt by the potentially detrimental effect of the European Central Bank’s negative interest rate policy.
Shares of Belgium-based insurer Ageas followed the broad based decline of European financial stocks in late June following the Brexit referendum result. In our view, the outcome had negative implications for the insurance industry by increasing economic uncertainty, adding immediate downward pressure on global interest rates and increasing the possibility that the U.S. Fed will further delay its next interest rate hike. Ageas also declined in January and early February as Europe’s financials sector was hurt by the potentially detrimental effect of the ECB’s negative interest rate policy. On an encouraging note,
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the company announced solid quarterly results in mid-February and May, as well as raising its dividend in February.
CIT Group is a U.S.-based commercial financing and leasing company that primarily serves small and midsized businesses in a variety of industries. Shares of CIT Group followed the broad-based decline of global financial stocks in late June following the U.K. referendum result in favor of leaving the EU. Investors were also unsure about how, if at all, the Brexit may impact CIT’s attempt to sell or spin-off its aircraft leasing business. The stock dropped sharply in January and early February as the financials sector was negatively impacted by ongoing concerns about the strength of U.S. economic expansion, scaled back investor expectations regarding rate hikes by the U.S. Fed and concerns about exposure to the energy sector. At a March strategic update conference call, investors were disappointed by the minimal amount of new information regarding the divestiture of CIT’s aircraft leasing business and downbeat remarks regarding its energy financing portfolio.
We are closely following the market repercussions from Brexit and maintain, for the time being, a cautious approach as there is still little clarity on how this fluid situation will evolve. However, we are ready to take advantage of market dislocations to buy companies at a discount to intrinsic value, particularly those with a catalyst which may help generate returns that are idiosyncratic to the daily vagaries of global markets.
During the period, the Fund held currency forwards and futures to hedge a significant portion of the currency risk of the portfolio’s non-U.S. dollar investments. The currency forwards had a minor positive impact on the Fund’s performance, while currency futures had a negligible impact.
What is a currency forward?
A currency forward is an agreement between the Fund and a counterparty to buy or sell a foreign currency in exchange for another currency at a specific exchange rate on a future date.
What is a future?
A future is an agreement between the Fund and a counterparty made through a U.S. or foreign futures exchange to buy or sell an underlying instrument or asset at a specific price on a future date.
CFA® is a trademark owned by CFA Institute.
Thank you for your continued participation in Franklin Mutual Financial Services Fund. We look forward to continuing to serve your investment needs.
The foregoing information reflects our analysis, opinions and portfolio holdings as of June 30, 2016, the end of the reporting period. The way we implement our main investment strategies and the resulting portfolio holdings may change depending on factors such as market and economic conditions. These opinions may not be relied upon as investment advice or an offer for a particular security. The information is not a complete analysis of every aspect of any market, country, industry, security or the Fund. Statements of fact are from sources considered reliable, but the investment manager makes no representation or warranty as to their completeness or accuracy. Although historical performance is no guarantee of future results, these insights may help you understand our investment management philosophy.
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Semiannual Report 7
FRANKLIN MUTUAL FINANCIAL SERVICES FUND
Andrew Sleeman has been portfolio manager for Franklin Mutual Financial Services Fund since 2009. He has also been a co-portfolio manager for Franklin Mutual International Fund since 2009. Mr. Sleeman joined Franklin Templeton Investments in 2007. Previously, he was with Fox-Pitt, Kelton, a financials specialist firm, where he focused on international financial equities. Prior to that, he worked in international equities at BNP Paribas.
Mr. Sleeman also worked in Australia in the fixed income division of JP Morgan Investment Management.
Andrew Dinnhaupt has been assistant portfolio manager for Franklin Mutual Financial Services Fund since December 2013 and has been an analyst for Franklin Mutual Advisers since 2011, specializing in the global insurance industry. Previously, Mr. Dinnhaupt was a portfolio manager and senior analyst covering the global financial services sector for RBC Capital Markets. Prior to RBC, Mr. Dinnhaupt worked at several hedge funds where he was responsible for analyzing and managing portfolios in the financial services sector. Before that, he worked at Mitchell Hutchins Asset Management where he covered the financial services industry.
Richard Cetlin has been assistant portfolio manager for Franklin Mutual Financial Services Fund since 2010 with primary coverage of European banks. Prior to joining Franklin Templeton Investments in 2010, Mr. Cetlin was a consultant for Asian Century Quest, a hedge fund focused on the Asia-Pacific region. In this role, he focused on the analysis of banking, insurance and real estate stocks in China and banking stocks in Hong Kong and Korea. Prior to that, Mr. Cetlin worked for 14 years at AllianceBernstein where he was a senior vice president and senior analyst for U.S. banking and specialty finance.
8 Semiannual Report
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FRANKLIN MUTUAL FINANCIAL SERVICES FUND
Performance Summary as of June 30, 2016
Your dividend income will vary depending on dividends or interest paid by securities in the Fund’s portfolio, adjusted for operating expenses of each class. Capital gain distributions are net profits realized from the sale of portfolio securities. The performance table does not reflect any taxes that a shareholder would pay on Fund dividends, capital gain distributions, if any, or any realized gains on the sale of Fund shares. Total return reflects reinvestment of the Fund’s dividends and capital gain distributions, if any, and any unrealized gains or losses.
Net Asset Value | ||||||
Share Class (Symbol) | 6/30/16 | 12/31/15 | Change | |||
Z (TEFAX) | $ | 18.16 | $ | 19.63 | -$ | 1.47 |
A (TFSIX) | $ | 18.19 | $ | 19.69 | -$ | 1.50 |
C (TMFSX) | $ | 18.05 | $ | 19.61 | -$ | 1.56 |
R6 (FMFVX) | $ | 18.29 | $ | 19.76 | -$ | 1.47 |
franklintempleton.com
Semiannual Report 9
FRANKLIN MUTUAL FINANCIAL SERVICES FUND
PERFORMANCE SUMMARY
Performance as of 6/30/161
Cumulative total return excludes sales charges. Average annual total return and value of $10,000 investment include maximum sales charges. Class Z/R6: no sales charges; Class A: 5.75% maximum initial sales charge; Class C: 1% contingent deferred sales charge in first year only.
Cumulative | Average Annual | Value of $10,000 | Total Annual Operating Expenses5 | |||||||
Share Class | Total Return2 | Total Return3 | Investment4 | (with waiver) | (without waiver) | |||||
Z | 1.13 | % | 1.13 | % | ||||||
6-Month | -7.49 | % | -7.49 | % | $ | 9,251 | ||||
1-Year | -6.86 | % | -6.86 | % | $ | 9,314 | ||||
5-Year | +46.89 | % | +7.99 | % | $ | 14,689 | ||||
10-Year | +22.73 | % | +2.07 | % | $ | 12,273 | ||||
A | 1.38 | % | 1.38 | % | ||||||
6-Month | -7.62 | % | -12.92 | % | $ | 8,708 | ||||
1-Year | -7.08 | % | -12.42 | % | $ | 8,758 | ||||
5-Year | +44.74 | % | +6.41 | % | $ | 13,646 | ||||
10-Year | +19.17 | % | +1.17 | % | $ | 11,231 | ||||
C | 2.13 | % | 2.13 | % | ||||||
6-Month | -7.96 | % | -8.96 | % | $ | 9,104 | ||||
1-Year | -7.80 | % | -8.71 | % | $ | 9,129 | ||||
5-Year | +39.75 | % | +6.92 | % | $ | 13,975 | ||||
10-Year | +11.06 | % | +1.05 | % | $ | 11,106 | ||||
R6 | 0.96 | % | 1.16 | % | ||||||
6-Month | -7.44 | % | -7.44 | % | $ | 9,256 | ||||
1-Year | -6.73 | % | -6.73 | % | $ | 9,327 | ||||
3-Year | +26.91 | % | +8.27 | % | $ | 12,691 | ||||
Since Inception (5/1/13) | +28.36 | % | +8.21 | % | $ | 12,836 |
Performance data represent past performance, which does not guarantee future results. Investment return and principal value will fluctuate, and you may have a gain or loss when you sell your shares. Current performance may differ from figures shown. For most recent month-end performance, go to franklintempleton.com or call (800) 342-5236.
See page 11 for Performance Summary footnotes.
10 Semiannual Report
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FRANKLIN MUTUAL FINANCIAL SERVICES FUND
PERFORMANCE SUMMARY
All investments involve risks, including possible loss of principal. Value securities may not increase in price as anticipated or may decline further in value. Special risks are associated with foreign investing, including currency fluctuations, economic instability and political developments. Investing in a single-sector fund involves special risks, including greater sensitivity to economic, political or regulatory developments impacting the sector. Smaller company stocks have exhibited greater price volatility than larger company stocks, particularly over the short term. The Fund’s investments in companies engaged in mergers, reorganizations or liquidations also involve special risks as pending deals may not be completed on time or on favorable terms. The Fund may invest in lower rated bonds, which entail higher credit risk. The Fund is actively managed but there is no guarantee that the manager’s investment decisions will produce the desired results. The Fund’s prospectus also includes a description of the main investment risks.
Class Z: | Shares are available to certain eligible investors as described in the prospectus. |
Class C: | These shares have higher annual fees and expenses than Class A shares. |
Class R6: | Shares are available to certain eligible investors as described in the prospectus. |
1. The Fund has a fee waiver associated with any investment in a Franklin Templeton money fund and/or other Franklin Templeton fund, as applicable, contractually guaranteed through at least the Fund’s current fiscal year-end. The transfer agent has contractually agreed to cap transfer agency fees for Class R6 shares so that transfer agency fees for that class do not exceed 0.01% until at least 4/30/17. Fund investment results reflect the fee waiver and fee cap, to the extent applicable; without these reductions, the results would have been lower.
2. Cumulative total return represents the change in value of an investment over the periods indicated.
3. Average annual total return represents the average annual change in value of an investment over the periods indicated. Return for less than one year, if any, has not been annualized.
4. These figures represent the value of a hypothetical $10,000 investment in the Fund over the periods indicated.
5. Figures are as stated in the Fund’s current prospectus and may differ from the expense ratios disclosed in the Financials Highlights in this report. In periods of market volatility, assets may decline significantly, causing total annual Fund operating expenses to become higher than the figures shown.
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Semiannual Report 11
FRANKLIN MUTUAL FINANCIAL SERVICES FUND
Your Fund’s Expenses
As a Fund shareholder, you can incur two types of costs:
- Transaction costs, including sales charges (loads) on Fund purchases; and
- Ongoing Fund costs, including management fees, distribution and service (12b-1) fees, and other Fund expenses. All mutual funds have ongoing costs, sometimes referred to as operating expenses.
The following table shows ongoing costs of investing in the Fund and can help you understand these costs and compare them with those of other mutual funds. The table assumes a $1,000 investment held for the six months indicated.
Actual Fund Expenses
The first line (Actual) for each share class listed in the table provides actual account values and expenses. The “Ending Account Value” is derived from the Fund’s actual return, which includes the effect of Fund expenses.
You can estimate the expenses you paid during the period by following these steps. Of course, your account value and expenses will differ from those in this illustration:
1. Divide your account value by $1,000.
If an account had an $8,600 value, then $8,600 ÷ $1,000 = 8.6.
2. Multiply the result by the number under the heading “Expenses Paid During Period.”
If Expenses Paid During Period were $7.50, then 8.6 × $7.50 = $64.50.
In this illustration, the estimated expenses paid this period are $64.50.
Hypothetical Example for Comparison with Other Funds
Information in the second line (Hypothetical) for each class in the table can help you compare ongoing costs of investing in the Fund with those of other mutual funds. This information may not be used to estimate the actual ending account balance or expenses you paid during the period. The hypothetical “Ending Account Value” is based on the actual expense ratio for each class and an assumed 5% annual rate of return before expenses, which does not represent the Fund’s actual return. The figure under the heading “Expenses Paid During Period” shows the hypothetical expenses your account would have incurred under this scenario. You can compare this figure with the 5% hypothetical examples that appear in shareholder reports of other funds.
Please note that expenses shown in the table are meant to highlight ongoing costs and do not reflect any transaction costs, such as sales charges. Therefore, the second line for each class is useful in comparing ongoing costs only, and will not help you compare total costs of owning different funds. In addition, if transaction costs were included, your total costs would have been higher. Please refer to the Fund prospectus for additional information on operating expenses.
Beginning Account | Ending Account | Expenses Paid During | ||||
Share Class | Value 1/1/16 | Value 6/30/16 | Period* 1/1/16–6/30/16 | |||
Z | ||||||
Actual | $ | 1,000 | $ | 925.10 | $ | 5.31 |
Hypothetical (5% return before expenses) | $ | 1,000 | $ | 1,019.34 | $ | 5.57 |
A | ||||||
Actual | $ | 1,000 | $ | 923.80 | $ | 6.51 |
Hypothetical (5% return before expenses) | $ | 1,000 | $ | 1,018.10 | $ | 6.82 |
C | ||||||
Actual | $ | 1,000 | $ | 920.40 | $ | 10.07 |
Hypothetical (5% return before expenses) | $ | 1,000 | $ | 1,014.37 | $ | 10.57 |
R6 | ||||||
Actual | $ | 1,000 | $ | 925.60 | $ | 4.55 |
Hypothetical (5% return before expenses) | $ | 1,000 | $ | 1,020.14 | $ | 4.77 |
*Expenses are calculated using the most recent six-month expense ratio, net of expense waivers, annualized for each class (Z: 1.11%; A: 1.36%; C: 2.11%; and R6: 0.95%), multiplied by the average account value over the period, multiplied by 182/366 to reflect the one-half year period.
12 Semiannual Report
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FRANKLIN MUTUAL FINANCIAL SERVICES FUND | ||||||||||||||||||
Financial Highlights | ||||||||||||||||||
Six Months Ended | Year Ended December 31, | |||||||||||||||||
June 30, 2016 | ||||||||||||||||||
(unaudited) | 2015 | 2014 | 2013 | 2012 | 2011 | |||||||||||||
Class Z | ||||||||||||||||||
Per share operating performance | ||||||||||||||||||
(for a share outstanding throughout the period) | ||||||||||||||||||
Net asset value, beginning of period | $ | 19.63 | $ | 18.40 | $ | 16.90 | $ | 13.59 | $ | 11.53 | $ | 13.01 | ||||||
Income from investment operationsa: | ||||||||||||||||||
Net investment incomeb | 0.21 | 0.30 | c | 0.25 | 0.24 | 0.20 | 0.28 | |||||||||||
Net realized and unrealized gains (losses) | (1.68 | ) | 1.23 | 1.62 | 3.24 | 2.09 | (1.48 | ) | ||||||||||
Total from investment operations | (1.47 | ) | 1.53 | 1.87 | 3.48 | 2.29 | (1.20 | ) | ||||||||||
Less distributions from net investment income | — | (0.30 | ) | (0.37 | ) | (0.17 | ) | (0.23 | ) | (0.28 | ) | |||||||
Net asset value, end of period | $ | 18.16 | $ | 19.63 | $ | 18.40 | $ | 16.90 | $ | 13.59 | $ | 11.53 | ||||||
Total returnd | (7.49 | )% | 8.34 | % | 11.07 | % | 25.67 | % | 19.98 | % | (9.26 | )% | ||||||
Ratios to average net assetse | ||||||||||||||||||
Expenses | 1.11 | %f,g | 1.13 | %f | 1.14 | %f | 1.16 | %f | 1.24 | % | 1.24 | % | ||||||
Net investment income | 2.35 | % | 1.53 | %c | 1.44 | % | 1.51 | % | 1.56 | % | 2.22 | % | ||||||
Supplemental data | ||||||||||||||||||
Net assets, end of period (000’s) | $ | 133,089 | $ | 178,157 | $ | 112,156 | $ | 105,279 | $ | 86,519 | $ | 80,105 | ||||||
Portfolio turnover rate | 10.01 | % | 25.43 | % | 33.69 | % | 25.73 | % | 12.65 | % | 23.58 | % |
aThe amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases
of the Fund’s shares in relation to income earned and/or fluctuating fair value of the investments of the Fund.
bBased on average daily shares outstanding.
cNet investment income per share includes approximately $0.14 per share related to income received in the form of special dividends in connection with certain Fund holdings.
Excluding this amount, the ratio of net investment income to average net assets would have been 0.81%.
dTotal return is not annualized for periods less than one year.
eRatios are annualized for periods less than one year.
fBenefit of expense reduction rounds to less than 0.01%.
gBenefit of waiver and payments by affiliates rounds to less than 0.01%.
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The accompanying notes are an integral part of these financial statements. | Semiannual Report 13
FRANKLIN MUTUAL FINANCIAL SERVICES FUND
FINANCIAL H IGHLIGHTS
Six Months Ended | Year Ended December 31, | |||||||||||||||||
June 30, 2016 | ||||||||||||||||||
(unaudited) | 2015 | 2014 | 2013 | 2012 | 2011 | |||||||||||||
Class A | ||||||||||||||||||
Per share operating performance | ||||||||||||||||||
(for a share outstanding throughout the period) | ||||||||||||||||||
Net asset value, beginning of period | $ | 19.69 | $ | 18.46 | $ | 16.96 | $ | 13.64 | $ | 11.57 | $ | 13.05 | ||||||
Income from investment operationsa: | ||||||||||||||||||
Net investment incomeb | 0.19 | 0.25 | c | 0.20 | 0.19 | 0.16 | 0.25 | |||||||||||
Net realized and unrealized gains (losses) | (1.69 | ) | 1.23 | 1.61 | 3.26 | 2.10 | (1.49 | ) | ||||||||||
Total from investment operations | (1.50 | ) | 1.48 | 1.81 | 3.45 | 2.26 | (1.24 | ) | ||||||||||
Less distributions from net investment income | — | (0.25 | ) | (0.31 | ) | (0.13 | ) | (0.19 | ) | (0.24 | ) | |||||||
Net asset value, end of period | $ | 18.19 | $ | 19.69 | $ | 18.46 | $ | 16.96 | $ | 13.64 | $ | 11.57 | ||||||
Total returnd | (7.62 | )% | 8.05 | % | 10.71 | % | 25.32 | % | 19.55 | % | (9.49 | )% | ||||||
Ratios to average net assetse | ||||||||||||||||||
Expenses | 1.36 | %f,g | 1.41 | %f | 1.44 | %f | 1.46 | %f | 1.54 | % | 1.54 | % | ||||||
Net investment income | 2.10 | % | 1.25 | %c | 1.14 | % | 1.21 | % | 1.26 | % | 1.92 | % | ||||||
Supplemental data | ||||||||||||||||||
Net assets, end of period (000’s) | $ | 293,574 | $ | 360,278 | $ | 255,242 | $ | 240,529 | $ | 184,681 | $ | 173,167 | ||||||
Portfolio turnover rate | 10.01 | % | 25.43 | % | 33.69 | % | 25.73 | % | 12.65 | % | 23.58 | % |
aThe amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases
of the Fund’s shares in relation to income earned and/or fluctuating fair value of the investments of the Fund.
bBased on average daily shares outstanding.
cNet investment income per share includes approximately $0.14 per share related to income received in the form of special dividends in connection with certain Fund holdings.
Excluding this amount, the ratio of net investment income to average net assets would have been 0.53%.
dTotal return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year.
eRatios are annualized for periods less than one year.
fBenefit of expense reduction rounds to less than 0.01%.
gBenefit of waiver and payments by affiliates rounds to less than 0.01%.
14 Semiannual Report | The accompanying notes are an integral part of these financial statements.
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FRANKLIN MUTUAL FINANCIAL SERVICES FUND
FINANCIAL H IGHLIGHTS
Six Months Ended | Year Ended December 31, | |||||||||||||||||
June 30, 2016 | ||||||||||||||||||
(unaudited) | 2015 | 2014 | 2013 | 2012 | 2011 | |||||||||||||
Class C | ||||||||||||||||||
Per share operating performance | ||||||||||||||||||
(for a share outstanding throughout the period) | ||||||||||||||||||
Net asset value, beginning of period | $ | 19.61 | $ | 18.41 | $ | 16.92 | $ | 13.61 | $ | 11.55 | $ | 13.01 | ||||||
Income from investment operationsa: | ||||||||||||||||||
Net investment incomeb | 0.12 | 0.10 | c | 0.08 | 0.08 | 0.07 | 0.16 | |||||||||||
Net realized and unrealized gains (losses) | (1.68 | ) | 1.24 | 1.60 | �� | 3.25 | 2.08 | (1.48 | ) | |||||||||
Total from investment operations | (1.56 | ) | 1.34 | 1.68 | 3.33 | 2.15 | (1.32 | ) | ||||||||||
Less distributions from net investment income | — | (0.14 | ) | (0.19 | ) | (0.02 | ) | (0.09 | ) | (0.14 | ) | |||||||
Net asset value, end of period | $ | 18.05 | $ | 19.61 | $ | 18.41 | $ | 16.92 | $ | 13.61 | $ | 11.55 | ||||||
Total returnd | (7.96 | )% | 7.30 | % | 9.93 | % | 24.50 | % | 18.67 | % | (10.13 | )% | ||||||
Ratios to average net assetse | ||||||||||||||||||
Expenses | 2.11 | %f,g | 2.13 | %f | 2.14 | %f | 2.16 | %f | 2.24 | % | 2.24 | % | ||||||
Net investment income | 1.35 | % | 0.53 | %c | 0.44 | % | 0.51 | % | 0.56 | % | 1.22 | % | ||||||
Supplemental data | ||||||||||||||||||
Net assets, end of period (000’s) | $ | 112,630 | $ | 132,975 | $ | 89,341 | $ | 86,370 | $ | 69,046 | $ | 68,324 | ||||||
Portfolio turnover rate | 10.01 | % | 25.43 | % | 33.69 | % | 25.73 | % | 12.65 | % | 23.58 | % |
aThe amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases
of the Fund’s shares in relation to income earned and/or fluctuating fair value of the investments of the Fund.
bBased on average daily shares outstanding.
cNet investment income per share includes approximately $0.14 per share related to income received in the form of special dividends in connection with certain Fund holdings.
Excluding this amount, the ratio of net investment income to average net assets would have been (0.19)%.
dTotal return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year.
eRatios are annualized for periods less than one year.
fBenefit of expense reduction rounds to less than 0.01%.
gBenefit of waiver and payments by affiliates rounds to less than 0.01%.
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The accompanying notes are an integral part of these financial statements. | Semiannual Report 15
FRANKLIN MUTUAL FINANCIAL SERVICES FUND
FINANCIAL H IGHLIGHTS
Six Months Ended | Year Ended December 31, | |||||||||||
June 30, 2016 | ||||||||||||
(unaudited) | 2015 | 2014 | 2013 | a | ||||||||
Class R6 | ||||||||||||
Per share operating performance | ||||||||||||
(for a share outstanding throughout the period) | ||||||||||||
Net asset value, beginning of period | $ | 19.76 | $ | 18.52 | $ | 16.88 | $ | 14.89 | ||||
Income from investment operationsb: | ||||||||||||
Net investment incomec | 0.23 | 0.07 | d | 0.25 | 0.13 | |||||||
Net realized and unrealized gains (losses) | (1.70 | ) | 1.49 | 1.66 | 2.07 | |||||||
Total from investment operations | (1.47 | ) | 1.56 | 1.91 | 2.20 | |||||||
Less distributions from net investment income | — | (0.32 | ) | (0.27 | ) | (0.21 | ) | |||||
Net asset value, end of period | $ | 18.29 | $ | 19.76 | $ | 18.52 | $ | 16.88 | ||||
Total returne | (7.44 | )% | 8.55 | % | 11.23 | % | 14.86 | % | ||||
Ratios to average net assetsf | ||||||||||||
Expenses before waiver, payments by affiliates and expense reduction | 0.96 | % | 1.16 | % | 2.61 | % | 2.18 | % | ||||
Expenses net of waiver, payments by affiliates and expense reductiong | 0.95 | % | 0.96 | % | 0.97 | % | 0.97 | % | ||||
Net investment income | 2.51 | % | 1.70 | %d | 1.61 | % | 1.70 | % | ||||
Supplemental data | ||||||||||||
Net assets, end of period (000’s) | $ | 1,650 | $ | 1,421 | $ | 12 | $ | 6 | ||||
Portfolio turnover rate | 10.01 | % | 25.43 | % | 33.69 | % | 25.73 | % |
aFor the period May 1, 2013 (effective date) to December 31, 2013.
bThe amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases
of the Fund’s shares in relation to income earned and/or fluctuating fair value of the investments of the Fund.
cBased on average daily shares outstanding.
dNet investment income per share includes approximately $0.14 per share related to income received in the form of special dividends in connection with certain Fund holdings.
Excluding this amount, the ratio of net investment income to average net assets would have been 0.98%.
eTotal return is not annualized for periods less than one year.
fRatios are annualized for periods less than one year.
gBenefit of expense reduction rounds to less than 0.01%.
16 Semiannual Report | The accompanying notes are an integral part of these financial statements.
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FRANKLIN MUTUAL FINANCIAL SERVICES FUND
Statement of Investments, June 30, 2016 (unaudited) | ||||
Country | Shares/Units | Value | ||
Common Stocks and Other Equity Interests 90.1% | ||||
Banks 30.1% | ||||
a,b AB&T Financial Corp | United States | 226,100 | $ | 79,135 |
Barclays PLC | United Kingdom | 2,855,165 | 5,276,609 | |
BB&T Corp | United States | 291,320 | 10,373,905 | |
BNP Paribas SA | France | 71,270 | 3,144,864 | |
Capital Bank Financial Corp., A | United States | 42,649 | 1,228,291 | |
c Capital Bank Financial Corp., B, 144A, non-voting | United States | 153,021 | 4,407,005 | |
CIT Group Inc | United States | 594,800 | 18,980,068 | |
Citigroup Inc | United States | 123,869 | 5,250,807 | |
Citizens Financial Group Inc | United States | 643,086 | 12,848,858 | |
Columbia Banking System Inc | United States | 138,253 | 3,879,379 | |
a FCB Financial Holdings Inc., A | United States | 356,409 | 12,117,906 | |
Guaranty Bancorp | United States | 266,761 | 4,454,909 | |
HSBC Holdings PLC | United Kingdom | 1,057,690 | 6,570,699 | |
JPMorgan Chase & Co | United States | 156,190 | 9,705,647 | |
KB Financial Group Inc | South Korea | 107,348 | 3,035,849 | |
PNC Financial Services Group Inc | United States | 94,970 | 7,729,608 | |
Southern National Bancorp of Virginia Inc | United States | 547,560 | 6,652,854 | |
Standard Chartered PLC | United Kingdom | 1,287,230 | 9,690,752 | |
State Bank Financial Corp | United States | 416,160 | 8,468,856 | |
SunTrust Banks Inc | United States | 375,460 | 15,423,897 | |
Wells Fargo & Co | United States | 284,820 | 13,480,531 | |
162,800,429 | ||||
Capital Markets 2.9% | ||||
a China International Capital Corp. Ltd., H | China | 4,425,001 | 6,718,676 | |
Credit Suisse Group AG | Switzerland | 307,290 | 3,245,733 | |
UBS Group AG | Switzerland | 441,330 | 5,683,350 | |
15,647,759 | ||||
Consumer Finance 5.4% | ||||
Capital One Financial Corp | United States | 248,230 | 15,765,087 | |
c Hoist Finance AB, 144A | Sweden | 608,928 | 5,363,641 | |
Sun Hung Kai & Co. Ltd | Hong Kong | 14,145,704 | 8,277,619 | |
29,406,347 | ||||
Diversified Financial Services 4.6% | ||||
First Pacific Co. Ltd | Hong Kong | 7,786,902 | 5,610,500 | |
Oslo Bors VPS Holding ASA | Norway | 911,000 | 9,242,747 | |
Voya Financial Inc | United States | 399,670 | 9,895,829 | |
24,749,076 | ||||
Household Durables 1.1% | ||||
a Cairn Homes PLC | Ireland | 2,388,116 | 2,544,662 | |
a,c Cairn Homes PLC, 144A | Ireland | 2,988,749 | 3,184,667 | |
5,729,329 | ||||
Insurance 39.9% | ||||
Ageas | Belgium | 256,999 | 8,838,658 | |
a Alleghany Corp | United States | 18,637 | 10,242,522 | |
The Allstate Corp | United States | 102,216 | 7,150,009 | |
American International Group Inc | United States | 375,458 | 19,857,974 | |
Argo Group International Holdings Ltd | United States | 218,285 | 11,328,997 | |
a ASR Nederland NV | Netherlands | 410,210 | 8,855,830 | |
China Pacific Insurance Group Co. Ltd., H | China | 2,979,740 | 10,024,066 |
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Semiannual Report 17
FRANKLIN MUTUAL FINANCIAL SERVICES FUND
STATEMENT OF INVESTMENTS (UNAUDITED)
Country | Shares/Units | Value | |||
Common Stocks and Other Equity Interests (continued) | |||||
Insurance (continued) | |||||
Chubb Ltd | United States | 95,570 | $ | 12,491,955 | |
CNO Financial Group Inc | United States | 755,060 | 13,183,348 | ||
Direct Line Insurance Group PLC | United Kingdom | 2,164,854 | 9,953,053 | ||
a Enstar Group Ltd | United States | 51,919 | 8,410,359 | ||
Korean Reinsurance Co | South Korea | 622,180 | 6,584,829 | ||
Lancashire Holdings Ltd | United Kingdom | 633,269 | 4,956,633 | ||
Maiden Holdings Ltd | United States | 413,070 | 5,055,977 | ||
MetLife Inc | United States | 272,020 | 10,834,557 | ||
NN Group NV | Netherlands | 580,348 | 15,971,879 | ||
RSA Insurance Group PLC | United Kingdom | 1,851,271 | 12,330,081 | ||
State National Cos. Inc | United States | 373,757 | 3,935,661 | ||
c State National Cos. Inc.144A | United States | 350,000 | 3,685,500 | ||
a Storebrand ASA | Norway | 30,079 | 112,757 | ||
UNIQA Insurance Group AG | Austria | 564,365 | 3,366,364 | ||
White Mountains Insurance Group Ltd | United States | 12,068 | 10,161,256 | ||
XL Group PLC | Ireland | 554,492 | 18,470,128 | ||
215,802,393 | |||||
Real Estate Investment Trusts (REITs) 1.7% | |||||
Hibernia REIT PLC | Ireland | 6,309,142 | 9,348,781 | ||
Real Estate Management & Development 3.4% | |||||
a Dolphin Capital Investors Ltd | Greece | 3,979,650 | 364,819 | ||
Takara Leben Co. Ltd | Japan | 2,419,600 | 18,250,965 | ||
18,615,784 | |||||
Thrifts & Mortgage Finance 1.0% | |||||
Genworth Mortgage Insurance Australia Ltd | Australia | 2,696,920 | 5,531,990 | ||
Total Common Stocks and Other Equity Interests | |||||
(Cost $487,858,090) | 487,631,888 | ||||
Convertible Preferred Stocks (Cost $122,400) 0.1% | |||||
Banks 0.1% | |||||
d Columbia Banking System Inc., 5.168%, cvt. pfd., B | United States | 1,224 | 400,330 | ||
Preferred Stocks 1.2% | |||||
Diversified Financial Services 1.2% | |||||
a,e Hightower Holding LLC, pfd., A | United States | 3,000,000 | 3,669,300 | ||
a,e Hightower Holding LLC, pfd., A, Series 2 | United States | 968,000 | 2,594,434 | ||
Total Preferred Stocks (Cost $4,782,324) | 6,263,734 | ||||
Companies in Liquidation 0.0%† | |||||
a,e FIM Coinvestor Holdings I, LLC | United States | 4,357,178 | — | ||
a,f Lehman Brothers Holdings Inc., Bankruptcy Claim | United States | 7,766,103 | 242,691 | ||
Total Companies in Liquidation (Cost $532,682) | 242,691 | ||||
Notional | |||||
Counterparty | Amount* | ||||
Options Purchased 0.0%† | |||||
Puts - Over-the-Counter | |||||
Currency Options 0.0%† | |||||
CNY/USD, August Strike Price 7.387 CNY, Expires 8/03/16 | FBCO | 36,004,705 | CNY | 15 | |
CNY/USD, August Strike Price 7.398 CNY, Expires 8/03/16 | HSBC | 51,809,089 | CNY | 14 | |
CNY/USD, August Strike Price 7.43 CNY, Expires 8/03/16 | FBCO | 18,108,374 | CNY | 3 | |
CNY/USD, August Strike Price 7.44 CNY, Expires 8/03/16 | HSBC | 29,012,392 | CNY | 4 |
18 Semiannual Report
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FRANKLIN MUTUAL FINANCIAL SERVICES FUND
STATEMENT OF INVESTMENTS (UNAUDITED)
Notional | ||||||
Counterparty | Amount* | Value | ||||
Options Purchased (continued) | ||||||
Puts - Over-the-Counter (continued) | ||||||
Currency Options (continued) | ||||||
CNY/USD, August Strike Price 7.51 CNY, Expires 8/03/16 | FBCO | 91,516,943 | CNY | $ | 12 | |
CNY/USD, December Strike Price 7.255 CNY, Expires 12/14/16 | HSBC | 49,282,490 | CNY | 31,220 | ||
CNY/USD, December Strike Price 7.27 CNY, Expires 12/15/16 | HSBC | 60,072,010 | CNY | 37,018 | ||
CNY/USD, December Strike Price 7.27 CNY, Expires 12/15/16 | MSCS | 30,257,013 | CNY | 18,645 | ||
Total Options Purchased (Cost $422,922) | 86,931 | |||||
Total Investments before Short Term Investments | ||||||
(Cost $493,718,418) | 494,625,574 | |||||
Principal | ||||||
Country | Amount | |||||
Short Term Investments 7.2% | ||||||
U.S. Government and Agency Securities 7.2% | ||||||
FHLB, 7/01/16 | United States | $ | 3,500,000 | 3,500,000 | ||
g U.S. Treasury Bill, 7/07/16 - 12/08/16 | United States | 35,500,000 | 35,476,009 | |||
Total U.S. Government and Agency Securities | ||||||
(Cost $38,961,813) | 38,976,009 | |||||
Total Investments (Cost $532,680,231) 98.6% | 533,601,583 | |||||
Other Assets, less Liabilities 1.4% | 7,340,854 | |||||
Net Assets 100.0% | $ | 540,942,437 |
*The notional amount is stated in U.S. dollars unless otherwise indicated.
†Rounds to less than 0.1% of net assets.
aNon-income producing.
bSee Note 10 regarding holdings of 5% voting securities.
cSecurity was purchased pursuant to Rule 144A under the Securities Act of 1933 and may be sold in transactions exempt from registration only to qualified institutional buyers
or in a public offering registered under the Securities Act of 1933. These securities have been deemed liquid under guidelines approved by the Trust’s Board of Trustees. At
June 30, 2016, the aggregate value of these securities was $16,640,813, representing 3.1% of net assets.
dVariable rate security. The rate shown represents the yield at period end.
eSee Note 8 regarding restricted securities.
fBankruptcy claims represent the right to receive distributions, if any, during the liquidation of the underlying pool of assets. Shares represent amount of allowed
unsecured claims.
gThe security is traded on a discount basis with no stated coupon rate.
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Semiannual Report 19
FRANKLIN MUTUAL FINANCIAL SERVICES FUND
STATEMENT OF INVESTMENTS (UNAUDITED)
At June 30, 2016, the Fund had the following futures contracts outstanding. See Note 1(c). | |||||||||||||
Futures Contracts | |||||||||||||
Number of | Notional Expiration | Unrealized | Unrealized | ||||||||||
Description | Type Contracts | Value | Date | Appreciation | Depreciation | ||||||||
Currency Contracts | |||||||||||||
CHF/USD | Short | 2 | $ | 256,600 | 9/19/16 | $ | 630 | $ | — | ||||
EUR/USD | Short | 119 | 16,522,406 | 9/19/16 | 461,429 | — | |||||||
GBP/USD | Short | 149 | 12,337,200 | 9/19/16 | 1,172,441 | — | |||||||
Total Futures Contracts | $ | 1,634,500 | $ | — | |||||||||
Net unrealized appreciation (depreciation) | $ | 1,634,500 | |||||||||||
At June 30, 2016, the Fund had the following forward exchange contracts outstanding. See Note 1(c). | |||||||||||||
Forward Exchange Contracts | |||||||||||||
Contract | Settlement | Unrealized | Unrealized | ||||||||||
Currency | Counterpartya | Type | Quantity | Amount | Date | Appreciation | Depreciation | ||||||
OTC Forward Exchange Contracts | |||||||||||||
Euro | BANT | Buy | 381,284 | $ | 419,204 | 7/06/16 | $ | 4,097 | $ | — | |||
Euro | BANT | Sell | 2,905,977 | 3,176,412 | 7/06/16 | 2,591 | (52,391 | ) | |||||
Euro | BONY | Buy | 650,180 | 719,250 | 7/06/16 | 2,819 | (240 | ) | |||||
Euro | FBCO | Buy | 3,025,164 | 3,349,639 | 7/06/16 | 8,894 | — | ||||||
Euro | FBCO | Sell | 117,782 | 132,620 | 7/06/16 | 1,859 | — | ||||||
Euro | HSBC | Buy | 365,575 | 402,359 | 7/06/16 | 3,502 | — | ||||||
Euro | HSBC | Sell | 2,774,023 | 3,027,264 | 7/06/16 | — | (52,453 | ) | |||||
Euro | SSBT | Buy | 752,576 | 829,657 | 7/06/16 | 5,852 | — | ||||||
British Pound | BANT | Buy | 961,181 | 1,363,194 | 7/21/16 | 597 | (81,916 | ) | |||||
British Pound | BANT | Sell | 2,972,873 | 4,217,381 | 7/21/16 | 252,618 | — | ||||||
British Pound | FBCO | Sell | 189,706 | 270,959 | 7/21/16 | 17,958 | — | ||||||
British Pound | HSBC | Buy | 574,723 | 793,568 | 7/21/16 | 2,636 | (29,727 | ) | |||||
British Pound | HSBC | Sell | 2,971,998 | 4,216,509 | 7/21/16 | 252,914 | — | ||||||
British Pound | SSBT | Buy | 651,861 | 918,250 | 7/21/16 | — | (48,898 | ) | |||||
Euro | BANT | Sell | 5,320,848 | 5,835,943 | 7/21/16 | 3,309 | (77,876 | ) | |||||
Euro | BONY | Sell | 234,863 | 258,185 | 7/21/16 | 576 | (3,282 | ) | |||||
Euro | FBCO | Buy | 300,000 | 330,695 | 7/21/16 | 2,552 | — | ||||||
Euro | HSBC | Buy | 40,018 | 45,377 | 7/21/16 | — | (924 | ) | |||||
Euro | HSBC | Sell | 929,779 | 1,032,960 | 7/21/16 | 5,502 | (5,359 | ) | |||||
Euro | SSBT | Buy | 305,482 | 345,931 | 7/21/16 | — | (6,595 | ) | |||||
Euro | SSBT | Sell | 751,251 | 835,625 | 7/21/16 | 5,842 | (4,723 | ) | |||||
Norwegian Krone | HSBC | Buy | 1,457,000 | 169,848 | 7/25/16 | 4,312 | — | ||||||
Norwegian Krone | HSBC | Sell | 78,156,185 | 9,382,603 | 7/25/16 | 40,633 | (318 | ) | |||||
Australian Dollar | HSBC | Buy | 4,923,939 | 3,616,927 | 7/29/16 | 53,727 | (1,934 | ) | |||||
Australian Dollar | HSBC | Sell | 12,192,172 | 9,187,186 | 7/29/16 | 114,982 | (11,919 | ) | |||||
South Korean Won | BANT | Buy | 164,983,082 | 141,158 | 8/12/16 | 2,443 | (554 | ) | |||||
South Korean Won | BANT | Sell | 2,486,391,632 | 2,058,869 | 8/12/16 | — | (96,923 | ) | |||||
South Korean Won | FBCO | Buy | 340,117,800 | 288,529 | 8/12/16 | 6,366 | — | ||||||
South Korean Won | FBCO | Sell | 319,531,692 | 279,400 | 8/12/16 | 2,972 | (617 | ) | |||||
South Korean Won | HSBC | Buy | 252,048,600 | 215,118 | 8/12/16 | 3,418 | — | ||||||
South Korean Won | HSBC | Sell | 2,588,489,454 | 2,141,223 | 8/12/16 | — | (103,091 | ) | |||||
Swiss Franc | BONY | Buy | 404,000 | 419,909 | 8/12/16 | — | (4,894 | ) | |||||
Swiss Franc | BONY | Sell | 189,600 | 195,446 | 8/12/16 | 1,915 | (1,238 | ) | |||||
Swiss Franc | HSBC | Buy | 311,740 | 319,684 | 8/12/16 | 555 | — | ||||||
Swiss Franc | HSBC | Sell | 3,008,457 | 3,100,607 | 8/12/16 | 10,127 | — | ||||||
Swiss Franc | SSBT | Buy | 186,105 | 191,309 | 8/12/16 | 118 | (249 | ) | |||||
Swiss Franc | SSBT | Sell | 50,000 | 50,537 | 8/12/16 | — | (826 | ) | |||||
British Pound | BANT | Sell | 4,794,887 | 6,858,900 | 8/19/16 | 462,416 | — | ||||||
British Pound | HSBC | Sell | 400,976 | 565,886 | 8/19/16 | 30,976 | — | ||||||
Swedish Krona | SSBT | Sell | 44,750,000 | 5,241,274 | 8/29/16 | — | (63,979 | ) |
20 Semiannual Report
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FRANKLIN MUTUAL FINANCIAL SERVICES FUND
STATEMENT OF INVESTMENTS (UNAUDITED)
Forward Exchange Contracts (continued) | |||||||||||
Contract | Settlement | Unrealized | Unrealized | ||||||||
Currency | Counterpartya | Type | Quantity | Amount | Date | Appreciation | Depreciation | ||||
OTC Forward Exchange Contracts (continued) | |||||||||||
Euro | HSBC | Sell | 2,088,085 | $ | 2,380,114 | 10/03/16 | $ | 54,047 | $ | — | |
Euro | SSBT | Sell | 2,088,085 | 2,379,498 | 10/03/16 | 53,431 | — | ||||
Euro | BANT | Sell | 2,896,823 | 3,284,581 | 10/18/16 | 55,661 | — | ||||
Euro | SSBT | Sell | 2,953,481 | 3,346,418 | 10/18/16 | 54,344 | — | ||||
British Pound | SSBT | Sell | 4,668,716 | 6,715,901 | 10/24/16 | 482,737 | — | ||||
Japanese Yen | BONY | Sell | 43,044,000 | 398,478 | 10/24/16 | — | (20,134 | ) | |||
Japanese Yen | HSBC | Buy | 188,498,799 | 1,779,357 | 10/24/16 | 53,832 | — | ||||
Japanese Yen | HSBC | Sell | 1,992,626,764 | 18,405,477 | 10/24/16 | 7,326 | (980,554 | ) | |||
Euro | BANT | Sell | 2,317,779 | 2,683,988 | 11/04/16 | 98,732 | — | ||||
Euro | HSBC | Sell | 2,466,551 | 2,857,379 | 11/04/16 | 106,182 | — | ||||
South Korean Won | BANT | Sell | 2,376,089,046 | 2,058,913 | 11/14/16 | — | (46 | ) | |||
South Korean Won | FBCO | Sell | 2,121,232,651 | 1,840,789 | 11/14/16 | 2,671 | — | ||||
South Korean Won | HSBC | Sell | 1,955,555,807 | 1,716,190 | 11/14/16 | 21,637 | — | ||||
Euro | BANT | Sell | 2,374,249 | 2,693,126 | 11/18/16 | 43,394 | — | ||||
Euro | BONY | Sell | 4,463,592 | 5,075,390 | 11/18/16 | 93,889 | — | ||||
Euro | HSBC | Sell | 3,855,287 | 4,390,998 | 11/18/16 | 88,384 | — | ||||
Euro | SSBT | Sell | 1,689,044 | 1,899,028 | 11/18/16 | 14,005 | — | ||||
British Pound | BANT | Sell | 243,739 | 325,474 | 11/23/16 | 529 | (599 | ) | |||
British Pound | BONY | Sell | 4,202,854 | 6,140,889 | 11/23/16 | 527,451 | — | ||||
British Pound | FBCO | Sell | 22,177 | 29,992 | 11/23/16 | 371 | — | ||||
British Pound | HSBC | Sell | 3,869,066 | 5,600,081 | 11/23/16 | 433,611 | (1,150 | ) | |||
British Pound | SSBT | Sell | 889,559 | 1,243,163 | 11/23/16 | 56,422 | (1,376 | ) | |||
Total Forward Exchange Contracts | $ | 3,557,734 | $ | (1,654,785 | ) | ||||||
Net unrealized appreciation (depreciation) | $ | 1,902,949 | |||||||||
aMay be comprised of multiple contracts with the same counterparty, currency and settlement date. | |||||||||||
See Abbreviations on page 37. |
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The accompanying notes are an integral part of these financial statements. | Semiannual Report 21
FRANKLIN MUTUAL FINANCIAL SERVICES FUND
Financial Statements | |||
Statement of Assets and Liabilities | |||
June 30, 2016 (unaudited) | |||
Assets: | |||
Investments in securities: | |||
Cost - Unaffiliated issuers | $ | 530,453,146 | |
Cost - Non-controlled affiliates (Note 10) | 2,227,085 | ||
Total cost of investments | $ | 532,680,231 | |
Value - Unaffiliated issuers | $ | 533,522,448 | |
Value - Non-controlled affiliates (Note 10) | 79,135 | ||
Total value of investments | 533,601,583 | ||
Cash | 168,907 | ||
Restricted Cash (Note 1d) | 920,000 | ||
Foreign currency, at value (cost $2,612,372) | 2,615,424 | ||
Receivables: | |||
Investment securities sold | 1,380,223 | ||
Capital shares sold | 746,968 | ||
Dividends and interest | 993,318 | ||
European Union tax reclaims | 920,095 | ||
Due from brokers | 1,027,125 | ||
Variation margin | 216,294 | ||
Unrealized appreciation on OTC forward exchange contracts | 3,557,734 | ||
Other assets | 98,340 | ||
Total assets | 546,246,011 | ||
Liabilities: | |||
Payables: | |||
Capital shares redeemed | 1,782,927 | ||
Management fees | 406,041 | ||
Distribution fees | 324,773 | ||
Transfer agent fees | 98,089 | ||
Trustees’ fees and expenses | 22,554 | ||
Due to brokers | 920,000 | ||
Unrealized depreciation on OTC forward exchange contracts | 1,654,785 | ||
Accrued expenses and other liabilities | 94,405 | ||
Total liabilities | 5,303,574 | ||
Net assets, at value | $ | 540,942,437 | |
Net assets consist of: | |||
Paid-in capital | $ | 661,366,701 | |
Undistributed net investment income | 5,109,231 | ||
Net unrealized appreciation (depreciation) | 4,445,510 | ||
Accumulated net realized gain (loss) | (129,979,005 | ) | |
Net assets, at value | $ | 540,942,437 |
22 Semiannual Report | The accompanying notes are an integral part of these financial statements.
franklintempleton.com
FRANKLIN MUTUAL FINANCIAL SERVICES FUND
FINANCIAL STATEMENTS
Statement of Assets and Liabilities (continued) | ||
June 30, 2016 (unaudited) | ||
Class Z: | ||
Net assets, at value | $ | 133,088,757 |
Shares outstanding | 7,329,245 | |
Net asset value and maximum offering price per share | $ | 18.16 |
Class A: | ||
Net assets, at value | $ | 293,573,539 |
Shares outstanding | 16,140,039 | |
Net asset value per sharea | $ | 18.19 |
Maximum offering price per share (net asset value per share ÷ 94.25%) | $ | 19.30 |
Class C: | ||
Net assets, at value | $ | 112,630,477 |
Shares outstanding | 6,241,026 | |
Net asset value and maximum offering price per sharea | $ | 18.05 |
Class R6: | ||
Net assets, at value | $ | 1,649,664 |
Shares outstanding | 90,195 | |
Net asset value and maximum offering price per share | $ | 18.29 |
aRedemption price is equal to net asset value less contingent deferred sales charges, if applicable. |
franklintempleton.com
The accompanying notes are an integral part of these financial statements. | Semiannual Report 23
FRANKLIN MUTUAL FINANCIAL SERVICES FUND
FINANCIAL STATEMENTS
Statement of Operations | |||
for the six months ended June 30, 2016 (unaudited) | |||
Investment income: | |||
Dividends (net of foreign taxes of $697,617) | $ | 9,858,113 | |
Interest | 80,518 | ||
Income from securities loaned (net of fees and rebates) | 102,487 | ||
Total investment income | 10,041,118 | ||
Expenses: | |||
Management fees (Note 3a) | 2,537,848 | ||
Distribution fees: (Note 3c) | |||
Class A | 387,432 | ||
Class C | 592,395 | ||
Transfer agent fees: (Note 3e) | |||
Class Z | 130,102 | ||
Class A | 269,376 | ||
Class C | 102,932 | ||
Class R6 | 172 | ||
Custodian fees (Note 4) | 19,507 | ||
Reports to shareholders | 39,298 | ||
Registration and filing fees | 42,066 | ||
Professional fees | 70,814 | ||
Trustees’ fees and expenses | 8,060 | ||
Other | 11,455 | ||
Total expenses | 4,211,457 | ||
Expense reductions (Note 4) | (761 | ) | |
Expenses waived/paid by affiliates (Notes 3f and 3g) | (654 | ) | |
Net expenses | 4,210,042 | ||
Net investment income | 5,831,076 | ||
Realized and unrealized gains (losses): | |||
Net realized gain (loss) from: | |||
Investments | (3,434,140 | ) | |
Foreign currency transactions | 709,406 | ||
Futures contracts | (115,696 | ) | |
Net realized gain (loss) | (2,840,430 | ) | |
Net change in unrealized appreciation (depreciation) on: | |||
Investments | (56,587,560 | ) | |
Translation of other assets and liabilities denominated in foreign currencies | (1,065,278 | ) | |
Futures contracts | 1,275,172 | ||
Net change in unrealized appreciation (depreciation) | (56,377,666 | ) | |
Net realized and unrealized gain (loss) | (59,218,096 | ) | |
Net increase (decrease) in net assets resulting from operations | $ | (53,387,020 | ) |
24 Semiannual Report | The accompanying notes are an integral part of these financial statements.
franklintempleton.com
FRANKLIN MUTUAL FINANCIAL SERVICES FUND
FINANCIAL STATEMENTS
Statements of Changes in Net Assets | ||||||
Six Months Ended | ||||||
June 30, 2016 | Year Ended | |||||
(unaudited) | December 31, 2015 | |||||
Increase (decrease) in net assets: | ||||||
Operations: | ||||||
Net investment income | $ | 5,831,076 | $ | 6,413,297 | ||
Net realized gain (loss) | (2,840,430 | ) | 30,317,431 | |||
Net change in unrealized appreciation (depreciation) | (56,377,666 | ) | (2,679,732 | ) | ||
Net increase (decrease) in net assets resulting from operations | (53,387,020 | ) | 34,050,996 | |||
Distributions to shareholders from: | ||||||
Net investment income: | ||||||
Class Z | — | (2,528,422 | ) | |||
Class A | — | (4,347,602 | ) | |||
Class C | — | (866,630 | ) | |||
Class R6 | — | (18,925 | ) | |||
Total distributions to shareholders | — | (7,761,579 | ) | |||
Capital share transactions: (Note 2) | ||||||
Class Z | (30,886,452 | ) | 59,444,061 | |||
Class A | (38,239,935 | ) | 90,685,735 | |||
Class C | (9,727,504 | ) | 38,200,826 | |||
Class R6 | 352,447 | 1,458,822 | ||||
Total capital share transactions | (78,501,444 | ) | 189,789,444 | |||
Net increase (decrease) in net assets | (131,888,464 | ) | 216,078,861 | |||
Net assets: | ||||||
Beginning of period | 672,830,901 | 456,752,040 | ||||
End of period | $ | 540,942,437 | $ | 672,830,901 | ||
Undistributed net investment income (distributions in excess of net investment income) | ||||||
included in net assets: | ||||||
End of period | $ | 5,109,231 | $ | (721,845 | ) |
franklintempleton.com
The accompanying notes are an integral part of these financial statements. | Semiannual Report 25
FRANKLIN MUTUAL FINANCIAL SERVICES FUND
Notes to Financial Statements (unaudited)
1. Organization and Significant Accounting Policies
Franklin Mutual Series Funds (Trust) is registered under the Investment Company Act of 1940 (1940 Act) as an open-end management investment company, consisting of seven separate funds and applies the specialized accounting and reporting guidance in U.S. Generally Accepted Accounting Principles (U.S. GAAP). Franklin Mutual Financial Services Fund (Fund) is included in this report. The financial statements of the remaining funds in the Trust are presented separately. The Fund offers four classes of shares: Class Z, Class A, Class C and Class R6. Each class of shares differs by its initial sales load, contingent deferred sales charges, voting rights on matters affecting a single class, its exchange privilege and fees primarily due to differing arrangements for distribution and transfer agent fees.
The following summarizes the Fund’s significant accounting policies.
a. Financial Instrument Valuation
The Fund’s investments in financial instruments are carried at fair value daily. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date. The Fund calculates the net asset value per share as of 4 p.m. Eastern time each day the New York Stock Exchange (NYSE) is open for trading. Under compliance policies and procedures approved by the Trust’s Board of Trustees (the Board), the Fund’s administrator has responsibility for oversight of valuation, including leading the cross-functional Valuation Committee (VC). The VC provides administration and oversight of the Fund’s valuation policies and procedures, which are approved annually by the Board. Among other things, these procedures allow the Fund to utilize independent pricing services, quotations from securities and financial instrument dealers, and other market sources to determine fair value.
Equity securities and derivative financial instruments (derivatives) listed on an exchange or on the NASDAQ National Market System are valued at the last quoted sale price or the official closing price of the day, respectively. Foreign equity securities are valued as of the close of trading on the foreign stock exchange on which the security is primarily traded or as of 4 p.m. Eastern time whichever is earlier. The value is then converted into its U.S. dollar equivalent at the foreign exchange rate in effect at 4 p.m. Eastern time on the day that the value of the security is determined. Over-the-counter (OTC) securities are valued within the range of the most recent quoted bid and ask prices. Securities that trade in multiple markets or on multiple exchanges are valued according to the broadest and most representative market. Certain equity securities are valued based upon fundamental characteristics or relationships to similar securities.
Debt securities generally trade in the OTC market rather than on a securities exchange. The Fund’s pricing services use multiple valuation techniques to determine fair value. In instances where sufficient market activity exists, the pricing services may utilize a market-based approach through which quotes from market makers are used to determine fair value. In instances where sufficient market activity may not exist or is limited, the pricing services also utilize proprietary valuation models which may consider market characteristics such as benchmark yield curves, credit spreads, estimated default rates, anticipated market interest rate volatility, coupon rates, anticipated timing of principal repayments, underlying collateral, and other unique security features in order to estimate the relevant cash flows, which are then discounted to calculate the fair value. Securities denominated in a foreign currency are converted into their U.S. dollar equivalent at the foreign exchange rate in effect at 4 p.m. Eastern time on the date that the values of the foreign debt securities are determined.
Certain derivatives trade in the OTC market. The Fund’s pricing services use various techniques including industry standard option pricing models and proprietary discounted cash flow models to determine the fair value of those instruments. The Fund’s net benefit or obligation under the derivative contract, as measured by the fair value of the contract, is included in net assets.
The Fund has procedures to determine the fair value of financial instruments for which market prices are not reliable or readily available. Under these procedures, the VC convenes on a regular basis to review such financial instruments and considers a number of factors, including significant unobservable valuation inputs, when arriving at fair value. The VC primarily employs a market-based approach which may use related or comparable assets or liabilities, recent transactions, market multiples, book values, and other relevant information for the investment to determine the fair value of the investment. An income-based valuation approach may also be used in which the anticipated future cash flows of the investment are discounted to calculate fair value. Discounts may also be applied due to the nature or
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duration of any restrictions on the disposition of the investments. Due to the inherent uncertainty of valuations of such investments, the fair values may differ significantly from the values that would have been used had an active market existed. The VC employs various methods for calibrating these valuation approaches including a regular review of key inputs and assumptions, transactional back-testing or disposition analysis, and reviews of any related market activity.
Trading in securities on foreign securities stock exchanges and OTC markets may be completed before 4 p.m. Eastern time. In addition, trading in certain foreign markets may not take place on every NYSE business day. Occasionally, events occur between the time at which trading in a foreign security is completed and the close of the NYSE that might call into question the reliability of the value of a portfolio security held by the Fund. As a result, differences may arise between the value of the Fund’s portfolio securities as determined at the foreign market close and the latest indications of value at the close of the NYSE. In order to minimize the potential for these differences, the VC monitors price movements following the close of trading in foreign stock markets through a series of country specific market proxies (such as baskets of American Depositary Receipts, futures contracts and exchange traded funds). These price movements are measured against established trigger thresholds for each specific market proxy to assist in determining if an event has occurred that may call into question the reliability of the values of the foreign securities held by the Fund. If such an event occurs, the securities may be valued using fair value procedures, which may include the use of independent pricing services.
When the last day of the reporting period is a non-business day, certain foreign markets may be open on those days that the NYSE is closed, which could result in differences between the value of the Fund’s portfolio securities on the last business day and the last calendar day of the reporting period. Any significant security valuation changes due to an open foreign market are adjusted and reflected by the Fund for financial reporting purposes.
b. Foreign Currency Translation
Portfolio securities and other assets and liabilities denominated in foreign currencies are translated into U.S. dollars based on the exchange rate of such currencies against U.S. dollars on the date of valuation. The Fund may enter into foreign currency exchange contracts to facilitate transactions denominated in a foreign currency. Purchases and sales of securities, income and
expense items denominated in foreign currencies are translated into U.S. dollars at the exchange rate in effect on the transaction date. Portfolio securities and assets and liabilities denominated in foreign currencies contain risks that those currencies will decline in value relative to the U.S. dollar. Occasionally, events may impact the availability or reliability of foreign exchange rates used to convert the U.S. dollar equivalent value. If such an event occurs, the foreign exchange rate will be valued at fair value using procedures established and approved by the Board.
The Fund does not separately report the effect of changes in foreign exchange rates from changes in market prices on securities held. Such changes are included in net realized and unrealized gain or loss from investments in the Statement of Operations.
Realized foreign exchange gains or losses arise from sales of foreign currencies, currency gains or losses realized between the trade and settlement dates on securities transactions and the difference between the recorded amounts of dividends, interest, and foreign withholding taxes and the U.S. dollar equivalent of the amounts actually received or paid. Net unrealized foreign exchange gains and losses arise from changes in foreign exchange rates on foreign denominated assets and liabilities other than investments in securities held at the end of the reporting period.
c. Derivative Financial Instruments
The Fund invested in derivatives in order to manage risk or gain exposure to various other investments or markets. Derivatives are financial contracts based on an underlying or notional amount, require no initial investment or an initial net investment that is smaller than would normally be required to have a similar response to changes in market factors, and require or permit net settlement. Derivatives contain various risks including the potential inability of the counterparty to fulfill their obligations under the terms of the contract, the potential for an illiquid secondary market, and/or the potential for market movements which expose the Fund to gains or losses in excess of the amounts shown in the Statement of Assets and Liabilities. Realized gain and loss and unrealized appreciation and depreciation on these contracts for the period are included in the Statement of Operations.
Derivative counterparty credit risk is managed through a formal evaluation of the creditworthiness of all potential counter-parties. The Fund attempts to reduce its exposure to counterparty credit risk on OTC derivatives, whenever possible,
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1. Organization and Significant Accounting Policies (continued)
c. Derivative Financial Instruments (continued)
by entering into International Swaps and Derivatives Association (ISDA) master agreements with certain counterparties. These agreements contain various provisions, including but not limited to collateral requirements, events of default, or early termination. Termination events applicable to the counterparty include certain deteriorations in the credit quality of the counterparty. Termination events applicable to the Fund include failure of the Fund to maintain certain net asset levels and/or limit the decline in net assets over various periods of time. In the event of default or early termination, the ISDA master agreement gives the non-defaulting party the right to net and close-out all transactions traded, whether or not arising under the ISDA agreement, to one net amount payable by one counterparty to the other. However, absent an event of default or early termination, OTC derivative assets and liabilities are presented gross and not offset in the Statement of Assets and Liabilities. Early termination by the counterparty may result in an immediate payment by the Fund of any net liability owed to that counterparty under the ISDA agreement. At June 30, 2016, the Fund had no OTC derivatives in a net liability position for such contracts.
Collateral requirements differ by type of derivative. Collateral or initial margin requirements are set by the broker or exchange clearing house for exchange traded and centrally cleared derivatives. Initial margin deposited is held at the exchange and can be in the form of cash and/or securities. For OTC derivatives traded under an ISDA master agreement, posting of collateral is required by either the Fund or the applicable coun-terparty if the total net exposure of all OTC derivatives with the applicable counterparty exceeds the minimum transfer amount, which typically ranges from $100,000 to $250,000, and can vary depending on the counterparty and the type of the agreement. Generally, collateral is determined at the close of Fund business each day and any additional collateral required due to changes in derivative values may be delivered by the Fund or the counterparty within a few business days. Collateral pledged and/or received by the Fund for OTC derivatives, if any, is held in segregated accounts with the Fund’s custodian/counterparty broker and can be in the form of cash and/or securities. Unrestricted cash may be invested according to the Fund’s investment objectives. To the extent that the amounts due to the Fund from its counterparties are not subject to collateralization or are not fully collateralized, the Fund bears the risk of loss from counterparty non-performance.
At June 30, 2016, the Fund received $1,813,199 in United Kingdom Treasury Bonds and U.S. Treasury Bills, Bonds and Notes as collateral for derivatives.
The Fund entered into exchange traded futures contracts primarily to manage exposure to certain foreign currencies. A futures contract is an agreement between the Fund and a counterparty to buy or sell an asset for a specified price on a future date. Required initial margins are pledged by the Fund, and the daily change in fair value is accounted for as a variation margin payable or receivable in the Statement of Assets and Liabilities.
The Fund entered into OTC forward exchange contracts primarily to manage exposure to certain foreign currencies. A forward exchange contract is an agreement between the Fund and a counterparty to buy or sell a foreign currency at a specific exchange rate on a future date.
The Fund purchased or wrote OTC option contracts primarily to manage exposure to foreign exchange rate risk. An option is a contract entitling the holder to purchase or sell a specific amount of shares or units of an asset or notional amount of a swap (swaption), at a specified price. When an option is purchased or written, an amount equal to the premium paid or received is recorded as an asset or liability, respectively. Upon exercise of an option, the acquisition cost or sales proceeds of the underlying investment is adjusted by any premium received or paid. Upon expiration of an option, any premium received or paid is recorded as a realized gain or loss. Upon closing an option other than through expiration or exercise, the difference between the premium received or paid and the cost to close the position is recorded as a realized gain or loss.
See Note 9 regarding other derivative information.
d. Restricted Cash
At June 30, 2016, the Fund held restricted cash in connection with investments in certain derivative securities. Restricted cash is held in a segregated account with the Fund’s custodian/ counterparty broker and is reflected in the Statement of Assets and Liabilities.
The Fund participates in an agency based securities lending program to earn additional income. The Fund receives cash collateral against the loaned securities in an amount equal to at
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least 102% of the fair value of the loaned securities. Collateral is maintained over the life of the loan in an amount not less than 100% of the fair value of loaned securities, as determined at the close of Fund business each day; any additional collateral required due to changes in security values is delivered to the Fund on the next business day. The collateral is deposited into a joint cash account with other funds and is used to invest in a money market fund managed by Franklin Advisers, Inc., an affiliate of the Fund, and/or a joint repurchase agreement. The Fund may receive income from the investment of cash collateral, in addition to lending fees and rebates paid by the borrower. Income from securities loaned, net of fees paid to the securities lending agent and/or third-party vendor, is reported separately in the Statement of Operations. The Fund bears the market risk with respect to the collateral investment, securities loaned, and the risk that the agent may default on its obligations to the Fund. If the borrower defaults on its obligation to return the securities loaned, the Fund has the right to repurchase the securities in the open market using the collateral received. The securities lending agent has agreed to indemnify the Fund in the event of default by a third party borrower. At June 30, 2016, the Fund had no securities on loan.
f. Income and Deferred Taxes
It is the Fund’s policy to qualify as a regulated investment company under the Internal Revenue Code. The Fund intends to distribute to shareholders substantially all of its taxable income and net realized gains to relieve it from federal income and excise taxes. As a result, no provision for U.S. federal income taxes is required.
The Fund may be subject to foreign taxation related to income received, capital gains on the sale of securities and certain foreign currency transactions in the foreign jurisdictions in which it invests. Foreign taxes, if any, are recorded based on the tax regulations and rates that exist in the foreign markets in which the Fund invests. When a capital gain tax is determined to apply, the Fund records an estimated deferred tax liability in an amount that would be payable if the securities were disposed of on the valuation date. As a result of several court cases, in certain countries across the European Union, the Fund filed additional tax reclaims for previously withheld taxes on dividends earned in those countries (EU reclaims). These additional filings are subject to various administrative proceedings by the local jurisdictions’ tax authorities within the European Union, as well as a number of related judicial proceedings. Income recognized, if any, for EU reclaims is reflected as other income in the Statement of Operations and any related receivable, if any, is reflected as European Union tax reclaims in the Statement of Assets and Liabilities. When uncertainty exists as to the ultimate resolution of these proceedings, the likelihood of receipt of these EU reclaims, and the potential timing of payment, no amounts are reflected in the financial statements.
The Fund may recognize an income tax liability related to its uncertain tax positions under U.S. GAAP when the uncertain tax position has a less than 50% probability that it will be sustained upon examination by the tax authorities based on its technical merits. As of June 30, 2016, the Fund has determined that no tax liability is required in its financial statements related to uncertain tax positions for any open tax years (or expected to be taken in future tax years). Open tax years are those that remain subject to examination and are based on each tax jurisdiction’s statute of limitation.
g. Security Transactions, Investment Income, Expenses and Distributions
Security transactions are accounted for on trade date. Realized gains and losses on security transactions are determined on a specific identification basis. Interest income and estimated expenses are accrued daily. Amortization of premium and accretion of discount on debt securities are included in interest income. Dividend income is recorded on the ex-dividend date except for certain dividends from foreign securities where the dividend rate is not available. In such cases, the dividend is recorded as soon as the information is received by the Fund. Distributions to shareholders are recorded on the ex-dividend date and are determined according to income tax regulations (tax basis). Distributable earnings determined on a tax basis may differ from earnings recorded in accordance with U.S. GAAP. These differences may be permanent or temporary. Permanent differences are reclassified among capital accounts to reflect their tax character. These reclassifications have no impact on net assets or the results of operations. Temporary differences are not reclassified, as they may reverse in subsequent periods.
Common expenses incurred by the Trust are allocated among the funds based on the ratio of net assets of each fund to the combined net assets of the Trust. Fund specific expenses are charged directly to the fund that incurred the expense.
Realized and unrealized gains and losses and net investment income, not including class specific expenses, are allocated daily to each class of shares based upon the relative proportion of net
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1. Organization and Significant Accounting Policies (continued)
g. Security Transactions, Investment Income, Expenses and Distributions (continued)
assets of each class. Differences in per share distributions, by class, are generally due to differences in class specific expenses.
h. Accounting Estimates
The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the amounts of income
and expenses during the reporting period. Actual results could differ from those estimates.
i. Guarantees and Indemnifications
Under the Trust’s organizational documents, its officers and trustees are indemnified by the Trust against certain liabilities arising out of the performance of their duties to the Trust. Additionally, in the normal course of business, the Trust, on behalf of the Fund, enters into contracts with service providers that contain general indemnification clauses. The Trust’s maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Trust that have not yet occurred. Currently, the Trust expects the risk of loss to be remote.
2. Shares of Beneficial Interest
At June 30, 2016, there were an unlimited number of shares authorized (without par value). Transactions in the Fund’s shares were as follows:
Six Months Ended | Year Ended | ||||||||||
June 30, 2016 | December 31, 2015 | ||||||||||
Shares | Amount | Shares | Amount | ||||||||
Class Z Shares: | |||||||||||
Shares sold | 860,344 | $ | 15,629,656 | 4,075,813 | $ | 80,768,459 | |||||
Shares issued in reinvestment of distributions | — | — | 120,121 | 2,312,900 | |||||||
Shares redeemed | (2,604,831 | ) | (46,516,108 | ) | (1,219,045 | ) | (23,637,298 | ) | |||
Net increase (decrease) | (1,744,487 | ) | $ | (30,886,452 | ) | 2,976,889 | $ | 59,444,061 | |||
Class A Shares: | |||||||||||
Shares sold | 2,304,663 | $ | 42,302,464 | 9,859,370 | $ | 194,934,822 | |||||
Shares issued in reinvestment of distributions | — | — | 218,808 | 4,214,727 | |||||||
Shares redeemed | (4,460,179 | ) | (80,542,399 | ) | (5,609,806 | ) | (108,463,814 | ) | |||
Net increase (decrease) | (2,155,516 | ) | $ | (38,239,935 | ) | 4,468,372 | $ | 90,685,735 | |||
Class C Shares: | |||||||||||
Shares sold | 458,023 | $ | 8,309,108 | 2,695,436 | $ | 52,859,589 | |||||
Shares issued in reinvestment of distributions | — | — | 43,382 | 824,724 | |||||||
Shares redeemed | (997,698 | ) | (18,036,612 | ) | (810,404 | ) | (15,483,487 | ) | |||
Net increase (decrease) | (539,675 | ) | $ | (9,727,504 | ) | 1,928,414 | $ | 38,200,826 | |||
Class R6 Shares: | |||||||||||
Shares sold | 30,073 | $ | 563,460 | 70,704 | $ | 1,447,899 | |||||
Shares issued in reinvestment of distributions | — | — | 964 | 18,816 | |||||||
Shares redeemed | (11,805 | ) | (211,013 | ) | (412 | ) | (7,893 | ) | |||
Net increase (decrease) | 18,268 | $ | 352,447 | 71,256 | $ | 1,458,822 |
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3. Transactions with Affiliates
Franklin Resources, Inc. is the holding company for various subsidiaries that together are referred to as Franklin Templeton Investments. Certain officers and trustees of the Fund are also officers and/or directors of the following subsidiaries:
Subsidiary | Affiliation |
Franklin Mutual Advisers, LLC (Franklin Mutual) | Investment manager |
Franklin Templeton Services, LLC (FT Services) | Administrative manager |
Franklin Templeton Distributors, Inc. (Distributors) | Principal underwriter |
Franklin Templeton Investor Services, LLC (Investor Services) | Transfer agent |
a. Management Fees
The Fund pays an investment management fee to Franklin Mutual based on the average daily net assets of the Fund as follows:
Annualized Fee Rate | Net Assets | |
0.875 | % | Up to and including $ 1 billion |
0.845 | % | Over $ 1 billion, up to and including $ 2 billion |
0.825 | % | Over $ 2 billion, up to and including $ 5 billion |
0.805 | % | In excess of $ 5 billion |
For the period ended June 30, 2016, the annualized effective investment management fee rate was 0.875% of the Fund’s average daily net assets.
b. Administrative Fees
Under an agreement with Franklin Mutual, FT Services provides administrative services to the Fund. The fee is paid by Franklin Mutual based on the Fund’s average daily net assets, and is not an additional expense of the Fund.
c. Distribution Fees
The Board has adopted distribution plans for each share class, with the exception of Class Z and Class R6 shares, pursuant to Rule 12b-1 under the 1940 Act. Under the Fund’s Class A reimbursement distribution plan, the Fund reimburses Distributors for costs incurred in connection with the servicing, sale and distribution of the Fund’s shares up to the maximum annual plan rate. Under the Class A reimbursement distribution plan, costs exceeding the maximum for the current plan year cannot be reimbursed in subsequent periods. In addition, under the Fund’s Class C compensation distribution plan, the Fund pays Distributors for costs incurred in connection with the servicing, sale and distribution of the Fund’s shares up to the maximum annual plan rate. The plan year, for purposes of monitoring compliance with the maximum annual plan rates, is February 1 through January 31 for each fund.
The maximum annual plan rates, based on the average daily net assets, for each class, are as follows:
Class A | 0.35 | % |
Class C | 1.00 | % |
The Board has set the current rate at 0.25% per year for Class A shares until further notice and approval by the Board.
d. Sales Charges/Underwriting Agreements
Front-end sales charges and contingent deferred sales charges (CDSC) do not represent expenses of the Fund. These charges are deducted from the proceeds of sales of Fund shares prior to investment or from redemption proceeds prior to remittance, as applicable. Distributors has advised the Fund of the following commission transactions related to the sales and redemptions of the Fund’s shares for the period:
Sales charges retained net of commissions paid to unaffiliated broker/dealers | $ | 49,764 |
CDSC retained | $ | 10,722 |
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e. Transfer Agent Fees
Each class of shares, except for Class R6, pays transfer agent fees to Investor Services for its performance of shareholder servicing obligations and reimburses Investor Services for out of pocket expenses incurred, including shareholder servicing fees paid to third parties. These fees are allocated daily based upon their relative proportion of such classes’ aggregate net assets. Class R6 pays Investor Services transfer agent fees specific to that class.
For the period ended June 30, 2016, the Fund paid transfer agent fees of $502,582, of which $250,576 was retained by Investor Services.
f. Investments in Affiliated Management Investment Companies
The Fund invests in one or more affiliated management investment companies for purposes other than exercising a controlling influence over the management or policies. Management fees paid by the Fund are waived on assets invested in the affiliated management investment companies, as noted in the Statement of Operations, in an amount not to exceed the management and administrative fees paid directly or indirectly by each affiliate.
Number | % of Affiliated | ||||||||
of Shares | Number of | Fund Shares | |||||||
Held at | Shares Held | Value | Realized | Outstanding | |||||
Beginning | Gross | Gross | at End | at End | Investment | Gain | Held at End | ||
of Period | Additions | Reductions | of Period | of Period | Income | (Loss) | of Period | ||
Non-Controlled Affiliates | |||||||||
Institutional Fiduciary Trust | |||||||||
Money Market Portfolio | — | 18,784,000 | (18,784,000 | ) | — | $— | $— | $— | —% |
g. Waiver and Expense Reimbursements
Investor Services has contractually agreed in advance to waive or limit its fees so that the Class R6 transfer agent fees do not exceed 0.01% until April 30, 2017.
4. Expense Offset Arrangement
The Fund has entered into an arrangement with its custodian whereby credits realized as a result of uninvested cash balances are used to reduce a portion of the Fund’s custodian expenses. During the period ended June 30, 2016, the custodian fees were reduced as noted in the Statement of Operations.
5. Independent Trustees’ Retirement Plan
On January 1, 1993, the Trust adopted an Independent Trustees’ Retirement Plan (Plan). The Plan is an unfunded defined benefit plan that provides benefit payments to Trustees whose length of service and retirement age meets the eligibility requirements of the Plan. Benefits under the Plan are based on years of service and fees paid to each trustee at the time of retirement. Effective in December 1996, the Plan was closed to new participants.
During the period ended June 30, 2016, the Fund’s projected benefit obligation and benefit payments under the Plan were as follows:
aProjected benefit obligation at June 30, 2016 | $ | 24,859 | |
bIncrease in projected benefit obligation | $ | 916 | |
Benefit payments made to retired trustees | $ | (303 | ) |
aThe projected benefit obligation is included in trustees’ fees and expenses in the Statement of Assets and Liabilities.
bThe increase in projected benefit obligation is included in trustees’ fees and expenses in the Statement of Operations.
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6. Income Taxes
For tax purposes, capital losses may be carried over to offset future capital gains. Capital loss carryforwards with no expiration, if any, must be fully utilized before those losses with expiration dates.
At December 31, 2015, capital loss carryforwards were as follows: | ||
Capital loss carryforwards expiring in: | ||
2016 | $ | 20,044,095 |
2017 | 73,527,713 | |
2018 | 31,091,133 | |
$ | 124,662,941 |
At June 30, 2016, the cost of investments and net unrealized appreciation (depreciation) for income tax purposes were as follows:
Cost of investments | $ | 534,621,602 | |
Unrealized appreciation | $ | 71,174,014 | |
Unrealized depreciation | (72,194,033 | ) | |
Net unrealized appreciation (depreciation) | $ | (1,020,019 | ) |
Differences between income and/or capital gains as determined on a book basis and a tax basis are primarily due to differing treatments of foreign currency transactions and passive foreign investment company shares.
7. Investment Transactions
Purchases and sales of investments (excluding short term securities) for the period ended June 30, 2016, aggregated $54,036,614 and $82,645,498, respectively.
8. Restricted Securities
The Fund invests in securities that are restricted under the Securities Act of 1933 (1933 Act) or which are subject to legal, contractual, or other agreed upon restrictions on resale. Restricted securities are often purchased in private placement transactions, and cannot be sold without prior registration unless the sale is pursuant to an exemption under the 1933 Act. Disposal of these securities may require greater effort and expense, and prompt sale at an acceptable price may be difficult. The Fund may have registration rights for restricted securities. The issuer generally incurs all registration costs.
At June 30, 2016, the Fund held investments in restricted securities, excluding certain securities exempt from registration under the 1933 Act deemed to be liquid, as follows:
Shares/ | Acquisition | |||||
Units | Issuer | Dates | Cost | Value | ||
4,357,178 | FIM Coinvestor Holdings I, LLC | 11/20/06 - 6/02/09 | $ | — | $ | — |
3,000,000 | Hightower Holding LLC, pfd., A | 3/31/08 - 1/05/10 | 2,362,324 | 3,669,300 | ||
968,000 | Hightower Holding LLC, pfd., A, Series 2 | 6/10/10 - 5/10/12 | 2,420,000 | 2,594,434 | ||
Total Restricted Securities (Value is 1.2% of Net Assets) | $ | 4,782,324 | $ | 6,263,734 |
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NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
9. Other Derivative Information
At June 30, 2016, the Fund’s investments in derivative contracts are reflected in the Statement of Assets and Liabilities as follows:
Asset Derivatives | Liability Derivatives | ||||||
Derivative Contracts | |||||||
Not Accounted for as | Statement of Assets and | Statement of Assets and | |||||
Hedging Instruments | Liabilities Location | Fair Value | Liabilities Location | Fair Value | |||
Foreign exchange contracts | Investments in securities, at | $ | 86,931 | a | |||
value | |||||||
Variation margin | 1,634,500 | b | |||||
Unrealized appreciation on | 3,557,734 | Unrealized depreciation on | $ | 1,654,785 | |||
OTC forward exchange | OTC forward exchange | ||||||
contracts | contracts | ||||||
Totals | $ | 5,279,165 | $ | 1,654,785 |
aPurchased option contracts are included in investments in securities, at value in the Statement of Assets and Liabilities.
bThis amount reflects the cumulative appreciation (depreciation) of futures contracts as reported in the Statement of Investments. Only the variation margin receivable/payable
at period end is separately reported within the Statement of Assets and Liabilities. Prior variation margin movements were recorded to cash upon receipt or payment.
For the period ended June 30, 2016, the effect of derivative contracts in the Fund’s Statement of Operations was as follows:
Net Change in | ||||||||
Unrealized | ||||||||
Derivative Contracts | Net Realized | Appreciation | ||||||
Not Accounted for as | Statement of | Gain (Loss) | Statement of | (Depreciation) | ||||
Hedging Instruments | Operations Locations | for the Period | Operations Locations | for the Period | ||||
Net realized gain (loss) from: | Net change in unrealized | |||||||
appreciation (depreciation) on: | ||||||||
Foreign exchange contracts | Investments | $ | (335,991 | )a | ||||
Foreign currency transactions | $ | 607,183 | b | Translation of other assets | (1,071,957 | )b | ||
and liabilities denominated | ||||||||
in foreign currencies | ||||||||
Futures contracts | (115,696 | ) | Futures contracts | 1,275,172 | ||||
Totals | $ | 491,487 | $ | (132,776 | ) |
aPurchased option contracts are included in net change in unrealized appreciation (depreciation) on investments in the Statement of Operations.
bForward exchange contracts are included in net realized gain (loss) from foreign currency transactions and net change in unrealized appreciation (depreciation) on translation
of other assets and liabilities denominated in foreign currencies in the Statement of Operations.
For the period ended June 30, 2016, the average month end fair value of derivatives represented 1.1% of average month end net
assets. The average month end number of open derivative contracts for the period was 191.
See Note 1(c) regarding derivative financial instruments.
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NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
10. Holdings of 5% Voting Securities of Portfolio Companies
The 1940 Act defines “affiliated companies” to include investments in portfolio companies in which a fund owns 5% or more of the outstanding voting securities. Investments in “affiliated companies” for the Fund for the period ended June 30, 2016, were as shown below.
Number | ||||||||
of Shares | Number of | |||||||
Held at | Shares Held | Value | Realized | |||||
Beginning | Gross | Gross | at End | at End | Investment | Gain | ||
Name of Issuer | of Period | Additions | Reductions | of Period | of Period | Income | (Loss) | |
Non-Controlled Affiliates | ||||||||
AB&T Financial Corp. | ||||||||
(Value is —%a of Net Assets) | 226,100 | — | — | 226,100 | $ | 79,135 | $ — | $ — |
aRounds to less than 0.1% of net assets. |
11. Credit Facility
The Fund, together with other U.S. registered and foreign investment funds (collectively, Borrowers), managed by Franklin Templeton Investments, are borrowers in a joint syndicated senior unsecured credit facility totaling $2 billion (Global Credit Facility) which matures on February 10, 2017. This Global Credit Facility provides a source of funds to the Borrowers for temporary and emergency purposes, including the ability to meet future unanticipated or unusually large redemption requests.
Under the terms of the Global Credit Facility, the Fund shall, in addition to interest charged on any borrowings made by the Fund and other costs incurred by the Fund, pay its share of fees and expenses incurred in connection with the implementation and maintenance of the Global Credit Facility, based upon its relative share of the aggregate net assets of all of the Borrowers, including an annual commitment fee of 0.07% based upon the unused portion of the Global Credit Facility. Effective February 12, 2016, the annual commitment fee is 0.15%. These fees are reflected in other expenses in the Statement of Operations. During the period ended June 30, 2016, the Fund did not use the Global Credit Facility.
12. Fair Value Measurements
The Fund follows a fair value hierarchy that distinguishes between market data obtained from independent sources (observable inputs) and the Fund’s own market assumptions (unobservable inputs). These inputs are used in determining the value of the Fund’s financial instruments and are summarized in the following fair value hierarchy:
- Level 1 – quoted prices in active markets for identical financial instruments
- Level 2 – other significant observable inputs (including quoted prices for similar financial instruments, interest rates, prepay- ment speed, credit risk, etc.)
- Level 3 – significant unobservable inputs (including the Fund’s own assumptions in determining the fair value of financial instruments)
The input levels are not necessarily an indication of the risk or liquidity associated with financial instruments at that level.
For movements between the levels within the fair value hierarchy, the Fund has adopted a policy of recognizing the transfers as of the date of the underlying event which caused the movement.
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FRANKLIN MUTUAL FINANCIAL SERVICES FUND
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
12. Fair Value Measurements (continued)
A summary of inputs used as of June 30, 2016, in valuing the Fund’s assets and liabilities carried at fair value, is as follows:
Level 1 | Level 2 | Level 3 | Total | |||||
Assets: | ||||||||
Investments in Securities: | ||||||||
Equity Investments:a | ||||||||
Banks | $ | 158,314,289 | $ | 4,886,470 | $ | — | $ | 163,200,759 |
Diversified Financial Services | 24,749,076 | — | 6,263,734 | 31,012,810 | ||||
All Other Equity Investmentsb | 300,082,383 | — | — | 300,082,383 | ||||
Companies in Liquidation | — | 242,691 | —c | 242,691 | ||||
Options Purchased | — | 86,931 | — | 86,931 | ||||
Short Term Investments | 35,476,009 | 3,500,000 | — | 38,976,009 | ||||
Total Investments in Securities | $ | 518,621,757 | $ | 8,716,092 | $ | 6,263,734 | $ | 533,601,583 |
Other Financial Instruments | ||||||||
Futures Contracts | $ | 1,634,500 | $ | — | $ | — | $ | 1,634,500 |
Forward Exchange Contracts | — | 3,557,734 | — | 3,557,734 | ||||
Total Other Financial Instruments | $ | 1,634,500 | $ | 3,557,734 | $ | — | $ | 5,192,234 |
Liabilities: | ||||||||
Other Financial Instruments | ||||||||
Forward Exchange Contracts | $ | — | $ | 1,654,785 | $ | — | $ | 1,654,785 |
aIncludes common, convertible preferred and preferred stocks as well as other equity investments.
bFor detailed categories, see the accompanying Statement of Investments.
cIncludes securities determined to have no value at June 30, 2016.
A reconciliation of assets in which Level 3 inputs are used in determining fair value is presented when there are significant Level 3 financial instruments at the end of the period. At June 30, 2016, the reconciliation of assets is as follows:
Net Change in | ||||||||||
Unrealized | ||||||||||
Appreciation | ||||||||||
Transfers | Net | Net | (Depreciation) | |||||||
Balance at | Into | Realized | Unrealized | Balance | on Assets | |||||
Beginning | Purchases | (Out of) | Cost Basis | Gain | Appreciation | at End | Held at | |||
of Period | (Sales) | Level 3 | Adjustments | (Loss) | (Depreciation) | of Period | Period End | |||
Assets: | ||||||||||
Investments in Securities: | ||||||||||
Equity Investments:a | ||||||||||
Diversified Financial Services | $ | 5,601,410 | $ — | $ — | $ — | $ — | $662,324 | $6,263,734 | $662,324 | |
aIncludes preferred stocks. |
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NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
Significant unobservable valuation inputs developed by the VC for material Level 3 financial instruments and impact to fair value as a result of changes in unobservable valuation inputs as of June 30, 2016, are as follows:
Fair | Impact to | ||||||
Value at | Fair Value | ||||||
End of | Amount/ | if Input | |||||
Description | Period | Valuation Technique | Unobservable Inputs | Range | Increasesa | ||
Assets: | |||||||
Investments in Securities: | |||||||
Equity Investments:b | |||||||
Diversified Financial Services | $ | 6,263,734 | Discounted Cash Flow Model | Cost of equity | 17 | % | Decreasec |
Revenue growth rate | 6.2% - 24.3% | Increasec | |||||
Adjusted EBITDA margin | 12.5% - 21.5% | Increasec |
aRepresents the directional change in the fair value of the Level 3 financial instruments that would result from a significant and reasonable increase in the corresponding input.
A significant and reasonable decrease in the input would have the opposite effect. Significant impacts, if any, to fair value and/or net assets have been indicated.
bIncludes preferred stocks.
cRepresents a significant impact to fair value and net assets.
Abbreviations List
EBITDA Earnings before interest, taxes, depreciation and amortization
13. Subsequent Events
The Fund has evaluated subsequent events through the issuance of the financial statements and determined that no events have occurred that require disclosure.
ABBREVIATIONS | ||||
Counterparty | Currency | Selected Portfolio | ||
BANT | Bank of America N.A. | CHF | Swiss Franc | FHLB Federal Home Loan Bank |
BONY | Bank of New York Mellon | CNY | Chinese Yuan | |
FBCO | Credit Suisse International | EUR | Euro | |
HSBC | HSBC Bank PLC | GBP | British Pound | |
MSCS | Morgan Stanley Capital Services LLC | USD | United States Dollar | |
SSBT | State Street Bank and Trust Co., N.A. |
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FRANKLIN MUTUAL FINANCIAL SERVICES FUND
Shareholder Information
Board Review of Investment Management Agreement
The Board of Trustees (Board), including the independent trustees, at a Board meeting held on May 16, 2016, unanimously approved the renewal of the Fund’s investment management agreement. Prior to a meeting of all of the trustees for the purpose of considering such approval, the independent trustees participated in two other meetings held in connection with the renewal process (those trustees unable to attend in person were present by telephonic conference means). Throughout the process, the independent trustees received assistance and advice from and met separately with independent counsel. The independent trustees met with and interviewed officers of the investment manager (including portfolio managers), the transfer agent and shareholder services group and the distributor. In approving the renewal of the investment management agreement for the Fund, the Board, including the independent trustees, determined that the investment management fee structure was fair and reasonable and that continuance of the agreement was in the best interests of the Fund and its shareholders.
In reaching their decision on the investment management agreement, the trustees took into account information furnished throughout the year at regular Board meetings, as well as information specifically requested and furnished for the renewal process, which culminated in the meetings referred to above for the specific purpose of considering such agreement. Information furnished throughout the year included, among others, reports on the Fund’s investment performance, expenses, portfolio composition, portfolio brokerage execution, client commission arrangements, derivatives, securities lending, asset segregation, portfolio turnover, Rule 12b-1 plans, distribution, shareholder servicing, legal and compliance matters, pricing of securities and sales and redemptions, and marketing support payments made to financial intermediaries, as well as a third-party survey of transfer agent fees charged funds within the Franklin Templeton Investments (FTI) complex in comparison with those charged other fund complexes deemed comparable. Also, related financial statements and other information about the scope and quality of services provided by the investment manager and its affiliates and enhancements to such services over the past year were provided. In addition, the trustees received periodic reports throughout the year and during the renewal process relating to compliance with the Fund’s investment policies and restrictions. During the renewal process, the independent trustees considered the investment manager’s methods of operation within the Franklin Templeton group and its activities on behalf of other clients.
The information obtained by the trustees during the renewal process also included a special report prepared by Broadridge Financial Solutions, Inc. (Broadridge), an independent third-party analyst that utilizes data from Lipper, Inc. (“Lipper”), an independent third-party analyst, comparing the Fund’s investment performance and expenses with those of other mutual funds deemed comparable to the Fund as selected by Lipper (Broadridge Section 15(c) Report). The trustees reviewed the Broadridge Section 15(c) Report and its usefulness in the approval process with respect to matters such as comparative fees, expenses, expense ratios, performance and volatility. They concluded that the report continues to be a reliable resource in the performance of their duties.
In addition, the trustees received a Profitability Study (Profitability Study) prepared by management discussing the profitability to FTI from its overall U.S. Fund operations, as well as on an individual fund-by-fund basis. Over the past year, the Board and counsel to the independent trustees continued to receive reports on management’s handling of recent regulatory inquiries and pending legal actions against the investment manager and its affiliates. The independent trustees were satisfied with the actions taken to date by management in response to such regulatory and legal matters.
Particular attention was given to management’s diligent risk management program, including continual monitoring and management of counterparty credit risk and attention given to derivatives and other complex instruments that are held and expected to be held by the Fund and how such instruments are used to carry out the Fund’s investment goals. The Board also took into account, among other things, management’s efforts in establishing a global credit facility for the benefit of the Fund and other accounts managed by FTI to provide a source of cash for temporary and emergency purposes or to meet unusual redemption requests as well as the strong financial position of the investment manager’s parent company and its commitment to the mutual fund business. In addition, the Board received updates from management on the Securities and Exchange Commission’s (SEC) progress in implementing the rule-making requirements established by the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), which was enacted July 21, 2010, and the investment manager’s compliance with rules and regulations already promulgated by the SEC under such act. The Board also noted that they received an annual report on all marketing support payments made by FTI to financial intermediaries, as well as a memorandum relating to third-party servicing arrangements in response to a Guidance Update from the SEC relating to mutual fund distribution and sub accounting fees.
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SHAREHOLDER INFORMATION
In addition to the above and other matters considered by the trustees throughout the course of the year, the following discussion relates to certain primary factors relevant to the Board’s decision. This discussion of the information and factors considered by the Board (as well as the discussion above) is not intended to be exhaustive, but rather summarizes certain factors considered by the Board. In view of the wide variety of factors considered, the Board did not, unless otherwise noted, find it practicable to quantify or otherwise assign relative weights to the foregoing factors. In addition, individual trustees may have assigned different weights to various factors.
NATURE, EXTENT AND QUALITY OF SERVICES. The trustees reviewed the nature, extent and quality of the services provided by the investment manager. In this regard, they reviewed the Fund’s investment approach and concluded that, in their view, it continues to differentiate the Fund from typical core investment products in the mutual fund field. The trustees cited the investment manager’s ability to implement the Fund’s disciplined value investment approach and its long-term relationship with the Fund as reasons that shareholders choose to invest, and remain invested, in the Fund. The trustees reviewed the Fund’s portfolio management team, including its performance, staffing, skills and compensation program. With respect to portfolio manager compensation, management assured the trustees that the Fund’s long-term performance is a significant component of incentive-based compensation and noted that a portion of a portfolio manager’s incentive-based compensation is paid in shares of predesignated funds from the portfolio manager’s fund management area. The trustees noted that the portfolio manager compensation program aligned the interests of the portfolio managers with that of Fund shareholders. The trustees discussed with management various other products, portfolios and entities that are advised by the investment manager and the allocation of assets and expenses among and within them, as well as their relative fees and reasons for differences with respect thereto and any potential conflicts. During regular Board meetings and the aforementioned meetings of the independent trustees, the trustees received reports and presentations on the investment manager’s best execution trading policies. The trustees considered periodic reports provided to them showing that the investment manager complied with the investment policies and restrictions of the Fund as well as other reports periodically furnished to the Board covering matters such as the compliance of portfolio managers and other management personnel with the code of ethics covering the investment management personnel, the adherence to fair value pricing procedures established by the Board and the accuracy of net asset value calculations. The Board noted the extent of the benefits provided to Fund share-holders from being part of the Franklin Templeton group, including the right to exchange investments between funds (same class) without a sales charge, the ability to reinvest Fund dividends into other funds and the right to combine holdings of other funds to obtain reduced sales charges. The trustees considered the investment manager’s significant efforts in developing and implementing compliance procedures established in accordance with SEC and other requirements.
The trustees also reviewed the nature, extent and quality of the Fund’s other service agreements to determine that, on an overall basis, Fund shareholders were well served. In this connection, the Board also took into account transfer agent and shareholder services provided to Fund shareholders by an affiliate of the investment manager, noting continuing expenditures by management to increase and improve the scope of such services and favorable periodic reports on shareholder services conducted by independent third parties. While such considerations directly affected the trustees’ decision in renewing the Fund’s transfer agent and shareholder services agreement, the Board also considered these commitments as incidental benefits to Fund shareholders deriving from the investment management relationship.
Based on their review, the trustees were satisfied with the nature and quality of the overall services provided by the investment manager and its affiliates to the Fund and its shareholders and were confident in the abilities of the management team to continue the disciplined value investment approach of the Fund and to provide quality services to the Fund and its shareholders.
INVESTMENT PERFORMANCE. The trustees reviewed and placed significant emphasis on the investment performance of the Fund over the one-, three-, five- and 10-year periods ended December 31, 2015. They considered the history of successful performance of the Fund relative to various benchmarks. As part of their review, they inquired of management regarding benchmarks, style drift and restrictions on permitted investments. Consideration was also given to performance in the context of available levels of cash during the periods. The trustees had meetings during the year, including the meetings referred to above held in connection with the approval process, with the Fund’s portfolio managers to discuss performance and the management of the Fund. In addition, particular attention in assessing performance was given to the Broadridge Section 15(c) Report. That report showed the investment performance of the Fund (Class A shares) in comparison to other funds determined comparable by Lipper.
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Semiannual Report 39
FRANKLIN MUTUAL FINANCIAL SERVICES FUND
SHAREHOLDER INFORMATION
The comparable funds to the Fund, as chosen by Lipper, included all retail and institutional global financial services funds. The Fund had total returns in the best performing quin-tile for the one-year period ended December 31, 2015, and had annualized total returns for the three- and five-year periods in the best performing quintile. The trustees noted that the Fund’s total return on an annualized basis for the 10-year period ended December 31, 2015, was in the second-lowest performing quin-tile. Reference was made to prior discussions with management regarding the reasons for the relative underperformance for the 10-year period ended December 31, 2015. While noting such discussions and given the recent improvement in relative performance, the Board was satisfied with such comparative performance.
The trustees also compared Fund performance to other industry benchmarks, including measures of risk-adjusted performance of a fund, as part of their evaluation of investment performance. The trustees concluded that the Fund had continued to perform well in comparison to its various benchmarks and in the context of the Fund’s objectives.
COMPARATIVE EXPENSES AND MANAGEMENT PROFITABILITY. The trustees considered the cost of the services provided and to be provided and the profits realized by the investment manager and its affiliates from their respective relationships with the Fund. As part of the approval process, they explored with management the trends in expense ratios over the past three fiscal years and the reasons for any increases in the Fund’s expense ratios (or components thereof). In considering the appropriateness of the management fee and other expenses charged to the Fund, the Board took into account various factors including investment performance and matters relating to Fund operations, including, but not limited to, the quality and experience of its portfolio managers and research staff. Consideration was also given to a comparative analysis in the Broadridge Section 15(c) Report of the investment management fee and total expense ratio of the Fund in comparison with those of a group of other funds selected by Lipper as its appropriate Lipper expense group. Lipper expense data is based upon information taken from the Fund’s most recent annual report, which reflects historical asset levels that may be quite different from those currently existing, particularly in a period of market volatility. While recognizing such inherent limitation and the fact that expense ratios generally increase as assets decline and decrease as assets grow, the Board believed the independent analysis conducted by Lipper to be an appropriate measure of comparative expenses.
In reviewing comparative costs, emphasis was given to the Fund’s contractual management fee in comparison with the contractual management fee that would have been charged by other funds within its Lipper expense group assuming they were similar in size to the Fund, as well as the actual total expenses of the Fund in comparison with those of its Lipper expense group. The Lipper contractual management fee analysis includes administrative charges as being part of the management fee, and total expenses, for comparative consistency, are shown by Lipper for Fund Class A shares.
The Fund’s contractual management fee rate was in the second-most expensive quintile of its Lipper expense group and its total expenses were in the second-most expensive quintile of such group. The Board noted that the Fund’s total expenses were within 5.6 basis points of its expense group median. The Board found such comparative fees and expenses to be acceptable in view of factors relating to the Fund’s operations, such as the quality and experience of its portfolio managers.
The trustees also reviewed the Profitability Study addressing profitability of Franklin Resources, Inc., from its overall U.S. fund business, as well as profitability to the Fund’s investment manager and its affiliates, from providing investment management and other services to the Fund during the 12-month period ended September 30, 2015, the most recent fiscal year-end of Franklin Resources, Inc. The trustees reviewed the basis on which such reports are prepared and the cost allocation methodology utilized in the Profitability Study, it being recognized that allocation methodologies may each be reasonable while producing different results. In this respect, the Board noted that the reasonableness of the cost allocation methodologies was reviewed by independent accountants on an every other year basis.
The independent trustees met with management to discuss the Profitability Study. This included, among other things, a comparison of investment management income with investment management expenses of the Fund; comparison of underwriting revenues and expenses; the relative relationship of investment management and underwriting expenses; shareholder servicing profitability; economies of scale; and the relative contribution of the Fund to the profitability of the investment manager and its parent. In discussing the Profitability Study with the Board, the investment manager stated its belief that the costs incurred in establishing the infrastructure necessary to operate the type of mutual fund operations conducted by it and its affiliates may not be fully reflected in the expenses allocated to the Fund in determining its profitability.
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SHAREHOLDER INFORMATION
The Board also took into account management’s expenditures in improving shareholder services provided to the Fund, as well as the need to meet additional regulatory and compliance requirements resulting from the Sarbanes-Oxley Act, the Dodd-Frank Act and recent SEC and other regulatory requirements. The trustees also considered the extent to which the investment manager may derive ancillary benefits from Fund operations, including those derived from economies of scale, discussed below, the allocation of Fund brokerage and the use of commission dollars to pay for research and other similar services.
Based upon their consideration of all these factors, the trustees determined that the level of profits realized by the investment manager and its affiliates in providing services to the Fund was not excessive in view of the nature, quality and extent of services provided.
ECONOMIES OF SCALE. The trustees considered economies of scale realized by the investment manager and its affiliates as the Fund grows larger and the extent to which they are shared with Fund shareholders, as for example, in the level of the investment management fee charged, in the quality and efficiency of services rendered and in increased capital commitments benefiting the Fund directly or indirectly. While recognizing that any precise determination is inherently subjective, the trustees noted that, based upon the Profitability Study, as some funds increase in size, at some point economies of scale may result in the investment manager realizing a larger profit margin on investment management services provided to such a fund. The trustees also noted that benefits of economies of scale will be shared with Fund shareholders due to the decline in the effective investment management fee rate as breakpoints are achieved by the Fund.
The trustees noted that breakpoints had been instituted as part of the Fund’s investment management fee in 2004. The trustees
assessed the breakpoints and believed they were, and continue to be, appropriate and they agreed to continue to monitor the appropriateness of the breakpoints. The trustees also considered the effects an increase in assets under management would have on the investment management fee and expense ratio of the Fund. To the extent further economies of scale may be realized by the investment manager and its affiliates, the Board believed the investment management and administrative fees provide a sharing of benefits with the Fund and its shareholders.
Proxy Voting Policies and Procedures
The Fund’s investment manager has established Proxy Voting Policies and Procedures (Policies) that the Fund uses to determine how to vote proxies relating to portfolio securities. Shareholders may view the Fund’s complete Policies online at franklintempleton.com. Alternatively, shareholders may request copies of the Policies free of charge by calling the Proxy Group collect at (954) 527-7678 or by sending a written request to: Franklin Templeton Companies, LLC, 300 S.E. 2nd Street, Fort Lauderdale, FL 33301, Attention: Proxy Group. Copies of the Fund’s proxy voting records are also made available online at franklintempleton.com and posted on the U.S. Securities and Exchange Commission’s website at sec.gov and reflect the most recent 12-month period ended June 30.
Quarterly Statement of Investments
The Fund files a complete statement of investments with the U.S. Securities and Exchange Commission for the first and third quarters for each fiscal year on Form N-Q. Shareholders may view the filed Form N-Q by visiting the Commission’s website at sec.gov. The filed form may also be viewed and copied at the Commission’s Public Reference Room in Washington, DC. Information regarding the operations of the Public Reference Room may be obtained by calling (800) SEC-0330.
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Semiannual Report and Shareholder Letter
Franklin Mutual Financial Services Fund
Investment Manager
Franklin Mutual Advisers, LLC
Distributor
Franklin Templeton Distributors, Inc.
(800) DIAL BEN® / 342-5236
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Shareholder Services
(800) 632-2301 - (Class A, C & R6)
(800) 448-FUND - (Class Z)
Authorized for distribution only when accompanied or preceded by a summary prospectus and/or prospectus. Investors should carefully consider a fund’s investment goals, risks, charges and expenses before investing. A prospectus contains this and other information; please read it carefully before investing.
To help ensure we provide you with quality service, all calls to and from our service areas are monitored and/or recorded.
© 2016 Franklin Templeton Investments. All rights reserved. | 479 S 08/16 |
Semiannual Report
and Shareholder Letter
June 30, 2016
Franklin Mutual Global Discovery Fund
A SERIES OF FRANKLIN MUTUAL SERIES FUNDS
Sign up for electronic delivery at franklintempleton.com/edelivery
Contents | |
Semiannual Report | |
Franklin Mutual Global Discovery Fund | 3 |
Performance Summary | 9 |
Your Fund’s Expenses | 12 |
Financial Highlights and Statement of Investments | 14 |
Financial Statements | 27 |
Notes to Financial Statements | 31 |
Shareholder Information | 43 |
Visit franklintempleton.com for fund updates, to access your account, or to find helpful financial planning tools.
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Semiannual Report
Franklin Mutual Global Discovery Fund
This semiannual report for Franklin Mutual Global Discovery Fund covers the period ended June 30, 2016.
Your Fund’s Goal and Main Investments
The Fund seeks capital appreciation. Its strategy is focused mainly on what the investment manager believes are undervalued mid-and large-cap equity securities, with a significant portion of its assets in foreign securities and, to a lesser extent, in the securities of distressed companies and merger arbitrage securities. The Fund may invest up to 100% of its assets in foreign securities.
Performance Overview
The Fund’s Class Z shares posted a +0.31% cumulative total return for the six months ended June 30, 2016. In comparison, the Fund’s new sole benchmark and former secondary benchmark, the MSCI World Index, which tracks stock performance in global developed markets, posted a +1.02% total return, while its old primary benchmark, the Standard & Poor’s 500 Index (S&P 500®), which is a broad measure of U.S. stock performance, generated a +3.84% total return.1 As the investment manager believes the composition of the MSCI World Index more accurately reflects the Fund’s holdings, it has replaced the S&P 500 as the Fund’s benchmark. You can find more of Fund’s performance data in the Performance Summary beginning on page 9.
Performance data represent past performance, which does not guarantee future results. Investment return and principal value will fluctuate, and you may have a gain or loss when you sell your shares. Current performance may differ from figures shown. For most recent month-end performance, go to franklintempleton.com or call (800) 342-5236.
Economic and Market Overview
The global economy expanded during the six months under review. An improvement in commodity prices including a rally in crude oil prices, accommodative monetary policy from various global central banks, finalization of the new debt deal for Greece and encouraging Chinese trade data toward period-end boosted market sentiment. However, global equity market
*Figures are stated as a percentage of total and may not equal 100% or may be negative due to rounding, use of any derivatives, unsettled trades or other factors.
1. Source: Morningstar.
The indexes are unmanaged and include reinvestment of any income or distributions. They do not reflect any fees, expenses or sales charges. One cannot invest directly in an index, and an index is not representative of the Fund’s portfolio.
The dollar value, number of shares or principal amount, and names of all portfolio holdings are listed in the Fund’s Statement of Investments (SOI). The SOI begins on page 19.
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FRANKLIN MUTUAL GLOBAL DISCOVERY FUND
volatility increased after the U.S. Federal Reserve’s (Fed’s) June decision to keep its federal funds target range unchanged, while providing a cautious stance on further interest rate hikes. In addition, global economic concerns and the U.K.’s historic referendum to leave the European Union (EU), also known as the “Brexit,” contributed to volatile global stock markets.
Oil prices fell at the beginning of the review period, largely due to a strong global supply, but recovered in the period’s second half amid oilfield outages and continued demand growth. Meanwhile, commodity prices increased for most of the review period as oversupply for a host of commodities shrank and the market appeared to be on the path of rebalancing after hitting a glut-induced bottom earlier in the year. Gold prices continued to rise following the Brexit referendum as some investors turned to safe haven investing. The U.S. dollar generally depreciated against most currencies during the period, which increased returns of many foreign assets in U.S. dollar terms. In this environment, global developed market stocks overall, as measured by the MSCI World Index, rose slightly during the period.
The U.S. economy grew moderately, as measured by gross domestic product (GDP) in 2016’s first and second quarters, driven by consumer spending and exports. A decline in private inventory investment and non-residential fixed investment contributed to the moderation. The Fed maintained its target interest rate during the review period after raising it for the first time in nine years at its December 2015 meeting. The Fed kept its target rate unchanged in its June meeting mainly due to a substantial slowdown in job additions toward period-end. The Fed expects economic conditions to evolve in a manner that could warrant only gradual increases in the federal funds rate.
In Europe, slower U.K. economic growth continued in 2016’s first quarter as output slowed in construction, production and agriculture. Immediate effects of the Brexit materialized as U.K. stocks significantly declined and the pound sterling hit a three-decade low amid intensified selling. Credit rating agencies Standard & Poor’s and Fitch also downgraded the U.K.’s credit rating. In the eurozone, despite investors’ concerns about banking sector weakness, low corporate earnings and post-Brexit political repercussions, some regions benefited due to rising consumer spending resulting from a cheaper euro, low inflation and signs of sustained economic growth. The eurozone’s annual inflation rate remained in negative territory for most of the review period; however, it rose marginally above zero in June.
Japan’s economy posted mixed results, contracting in 2015’s fourth quarter stemming from declining private and household consumption. However, the economy expanded during 2016’s first quarter as private consumption increased and business
Top 10 Sectors/Industries | ||
Based on Equity Securities as of 6/30/16 | ||
% of Total | ||
Net Assets | ||
Banks | 11.3 | % |
Insurance | 9.4 | % |
Pharmaceuticals | 7.7 | % |
Oil, Gas & Consumable Fuels | 6.3 | % |
Media | 5.8 | % |
Software | 5.8 | % |
Tobacco | 5.4 | % |
Health Care Equipment & Supplies | 4.3 | % |
Food & Staples Retailing | 4.0 | % |
Technology Hardware, Storage & Peripherals | 3.5 | % |
investment decreased less than anticipated. The Bank of Japan (BOJ) took several actions during the review period. In January, to boost lending and support inflation, the BOJ introduced a negative interest rate on excess reserves held at the central bank by financial institutions. In April, the BOJ further reduced its GDP and inflation forecasts for fiscal year 2016, and decided against additional quantitative easing measures. However, after the U.K.’s vote in June to leave the EU, the BOJ hinted at carrying out flexible open market operations to stabilize its financial markets.
In emerging markets, economic growth generally moderated during the review period. Brazil’s economy witnessed its longest recession since the 1930s amid political and economic turmoil, while Russia’s economy continued to contract. The Bank of Russia reduced its key interest rate in an attempt to revive its economy. China’s economic growth slowed marginally in 2016’s first quarter compared to the previous quarter, but remained largely in line with the government’s target. The People’s Bank of China cut its cash reserve requirement ratio for the country’s banks and effectively devalued the renminbi against the U.S. dollar to the lowest level in more than five years. Overall, emerging market stocks, as measured by the MSCI Emerging Markets Index, rose for the six-month period under review.
Investment Strategy
At Franklin Mutual Series, we are committed to our distinctive value approach to investing, which we believe can generate above-average risk-adjusted returns over time for our shareholders. Our major investment strategy is investing in undervalued stocks. When selecting undervalued equities, we are attracted to what we believe are fundamentally strong companies with healthy balance sheets, high-quality assets,
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substantial free cash flow and shareholder-oriented management teams and whose stocks are trading at discounts to our assessment of the companies’ intrinsic or business value. We also look for asset rich companies whose shares may be trading at depressed levels due to concerns over short-term earnings disappointments, litigation, management strategy or other perceived negatives. This strict value approach is not only intended to improve the likelihood of upside potential, but it is also intended to reduce the risk of substantial declines. While the vast majority of our undervalued equity investments are made in publicly traded companies globally, we may invest occasionally in privately held companies as well.
We complement this more traditional investment strategy with two others. One is distressed investing, a highly specialized field that has proven quite profitable during certain periods over the years. Distressed investing is complex and can take many forms. The most common distressed investment the Fund undertakes is the purchase of financially troubled or bankrupt companies’ debt at a substantial discount to face value. After the financially distressed company is reorganized, often in bankruptcy court, the old debt is typically replaced with new securities issued by the financially stronger company.
The other piece of our investment strategy is participating in arbitrage situations, another highly specialized field. When companies announce proposed mergers or takeovers, commonly referred to as “deals,” the target company may trade at a discount to the bid it ultimately accepts. One form of arbitrage involves purchasing the target company’s stock when it is trading below the value we believe it would receive in a deal. In keeping with our commitment to a relatively conservative investment approach, we typically focus our arbitrage efforts on announced deals, and avoid rumored deals or other situations we consider relatively risky.
In addition, it is our practice to hedge the Fund’s currency exposure when we deem it advantageous for our shareholders.
What is meant by “hedge”?
To hedge an investment is to take a position intended to offset potential losses/gains that may be incurred by a companion financial instrument.
Manager’s Discussion
Economic and political uncertainty influenced markets during the six months under review. The year 2016 began with severe economic uncertainty. Brent oil prices plunged below US$30 per barrel as fears of a global recession spread. Global equity markets
dropped from the start of the year, continuing a downward move from mid-2015 highs, before bottoming in mid-February. Commodity and equity prices rose over the following four months, before a late June surprise: the result of the Brexit vote, signaling the beginning of the end of the U.K.’s 43-year membership in the EU. Uncertainty about the future status of the U.K. as well as implications for the EU and the global economy weighed on markets at the end of the period.
Equity prices are typically forward looking, reflecting investors’ beliefs about how various factors and events will play out in the future. Global equity prices at period-end were down from mid-2015 highs, reflecting increased uncertainty among investors regarding the consequences of Brexit in addition to long-standing concerns about China, commodity prices, interest rates and geopolitical events.
Following the momentous decision by U.K. voters on June 23 to leave the EU, we believe it is probable that the U.K. will face a heightened risk of an economic slowdown, as businesses will likely put investment decisions on hold while waiting for greater clarity. The negative impact on the rest of the EU will likely be less severe, although economic growth in the region was already running at a modest pace before the vote, and we do not believe the region will be immune. Among the region’s equity markets, we believe that financial and domestically oriented cyclical stocks were being perceived by some investors as more vulnerable. Those stocks that were viewed as defensive, as well as stocks with what we consider attractive dividend yields, will likely remain in favor among many investors, in our view, causing them to trade at even higher valuation multiples. Within the U.K., large multinational companies that generate most of their earnings abroad should benefit from the precipitous fall of the British pound that followed the Brexit vote. In this respect, the Fund’s exposure to U.K. equities was predominantly through a number of these global companies. Also, the Fund has only a modest exposure to European financials, particularly in banks.
Although the Brexit vote is clearly a negative surprise, we do not believe it will usher in a new global financial crisis similar to the one experienced eight years ago. While markets reacted brutally to the U.K.’s decision to leave the EU, we have not seen any systemic shock like the one that followed the fall of Lehman Brothers in 2008. We also believe that, eventually, the U.K. and the EU will come to an acceptable agreement concerning trade relations.
Three of the Fund’s top 10 positions at period-end were in health care.2 Merck, Medtronic and Switzerland-based Novartis are global companies that meet important customer needs with
2. The health care sector comprises health care equipment and supplies, and pharmaceuticals in the SOI.
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products protected by intellectual property. This focus on innovation that improves the lives of customers gives us confidence in the sustainability of their businesses. In addition, we feel that each has strong financial characteristics, including the ability to invest in research and development and acquisitions, while also providing material returns to shareholders, and trading at valuations that are attractive from our perspective as value investors.
The Fund also featured three information technology (IT) firms among its larger positions: Microsoft, Symantec and Samsung Electronics.3 Microsoft features a strong global business based on innovation and meeting customer needs, including its fast-growing cloud business, while also returning excess capital to shareholders through dividends and share buybacks. Symantec also competes through innovation in providing security software to individuals and enterprises. Following a restructuring of its activities, the company is now focused on the fast-growing market for web-related security, while also returning capital to shareholders. South Korea-based Samsung Electronics, another meaningful position of the Fund in this sector, competes in more capital intensive commodity markets such as memory semiconductors and smartphones. In these areas, we believe that Samsung has advantages of scale and expertise relative to many of its competitors. In our view, these firms, like the health care firms mentioned previously, share these positive attributes as well as valuations that we, as value investors, find compelling.
Merger and acquisition (M&A) activity continued to be strong in the first half of 2016, helping to support valuations. Although deal volumes remained near historical highs, regulators globally continued to be more aggressive in their scrutiny of potentially negative effects of high industry concentration. We were disappointed to see regulators successfully sue to block the merger of Office Depot and Staples. Less surprising was the collapse of Halliburton’s attempt to acquire Baker Hughes (a Fund holding) on antitrust grounds, or the largest failure, Pfizer’s withdrawn attempt to acquire Allergan in the face of the U.S. Treasury Department’s new rules on tax inversions. We continue to be active in this space and work to ensure the potential rewards are big enough to outweigh the clear risks that exist in the current environment.
Turning to Fund performance, top contributors included British American Tobacco, integrated oil and gas company Royal Dutch Shell and medical technology company Stryker.
Shares of U.K.-based British American Tobacco rose as many equity market investors showed a preference for defensive
stocks (perceived to be less sensitive to economic conditions and/or having an attractive dividend yield, such as consumer staples) amid tepid global economic conditions, the low interest-rate environment and the late June U.K. referendum result in favor of leaving the EU. In our view, British American Tobacco remains an attractive position given the current management team, its portfolio of brands and track record of returning capital to shareholders.
Improved crude oil prices during the period helped many energy sector stocks, including U.K.-based Royal Dutch Shell. In January, company shareholders approved the acquisition of BG Group and both companies released quarterly results indicating strong cash flow and results in their natural gas operations. In June, investors reacted favorably to Royal Dutch Shell’s strategy update, which included an upward revision to synergies related to the BG Group acquisition, including a lower cost base, a limit on capital spending, and an implicit lower oil-price breakeven point. The company also reiterated its intention to dispose of US$30 billion in assets through 2018, maintain its dividend, eliminate the scrip dividend, and buy back US$25 billion of shares over time. Shares of Royal Dutch Shell did not follow the broad equity market decline after the Brexit referendum result in June. The company is a U.S. dollar-based business that reports and declares its dividends in U.S. dollars, with some level of British pound-based costs, resulting in a more what we consider an attractive valuation in its local market, given the decline of the pound.
U.S.-based medical technology company Stryker announced solid quarterly results in January and May that reflected strong organic growth, market share gains in many of its business segments and operating margin leverage that drove earnings growth. Along with the earnings results in May, Stryker raised its sales and earnings guidance for 2016. Beyond earnings, Stryker announced two strategic acquisitions in February. In our view, the deals were priced at full valuation but involved good-quality assets that offer Stryker the potential to enhance the value of existing assets and drive further value for Stryker shareholders.
During the period under review, Fund investments that detracted from performance included insurer NN Group, bank holding company Barclays and network technology provider Nokia.
NN Group is a Netherlands-based insurer spun out of ING Groep in 2014. Shares of NN Group followed the broad-based decline of European financial stocks in late June following the U.K.’s vote to leave the EU. In our view, the outcome had negative implications for the insurance sector by increasing
3. The IT sector comprises communications equipment; Internet software and services; IT services; semiconductors and semiconductor equipment; software; and technology hardware, storage and peripherals in the SOI.
See www.franklintempletondatasources.com for additional data provider information.
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economic uncertainty, adding immediate downward pressure on global interest rates and increasing the possibility that the U.S. Fed will further delay its next interest rate hike. Shares of NN Group also declined in January and early February as Europe’s financial sector was hurt by the potentially detrimental effect of the European Central Bank’s negative interest rate policy.
Shares of U.K.-based bank Barclays dropped sharply in late June after the Brexit vote. Investors feared the decision could lead to an increase in bad loans and reduced investment banking revenues if the U.K. economy slips into recession. Barclays’ stock had already significantly declined in January and early February as Europe’s financial sector was hindered by the detrimental effects of low interest rates, ongoing concerns about the health of the global economy, and challenging conditions in capital markets. In addition, the bank’s share price was negatively impacted by a disappointing strategic update in early March that included limited downsizing of the investment banking unit and a dividend cut to fund an accelerated rundown of its non-core activities.
Nokia is a Finland-based global communications and information technology company. Nokia’s stock price retreated in early February after the International Court of Arbitration issued a binding ruling prescribing below-estimated royalty rates that South Korea-based Samsung is to pay to Nokia; the decision negatively impacted the high-margin cash flows Nokia is expected to receive. In February, Nokia also announced its first set of quarterly results following the January 14 close of its Alcatel-Lucent acquisition. Investors reacted negatively to management’s cautious comments regarding demand for new mobile networks in China and the absence of formal guidance. In May, the company announced weaker-than-expected 2016 margin guidance for its networks business due to a slowdown in spending by telecommunications customers. Although management has taken a conservative view on margins this year, we believe a more consolidated industry may allow for greater pricing power and that cost synergies from the merger may eventually be revised higher.
During the period, the Fund held currency forwards and futures to hedge a significant portion of the currency risk of the portfolio’s
Top 10 Equity Holdings | ||
6/30/16 | ||
Company | % of Total | |
Sector/Industry, Country | Net Assets | |
Microsoft Corp. | 2.4 | % |
Software, U.S. | ||
Merck & Co. Inc. | 2.4 | % |
Pharmaceuticals, U.S. | ||
Medtronic PLC | 2.1 | % |
Health Care Equipment & Supplies, U.S. | ||
Royal Dutch Shell PLC | 2.0 | % |
Oil, Gas & Consumable Fuels, U.K. | ||
Novartis AG | 1.8 | % |
Pharmaceuticals, Switzerland | ||
Chubb Ltd. | 1.7 | % |
Insurance, U.S. | ||
British American Tobacco PLC | 1.7 | % |
Tobacco, U.K. | ||
Eli Lilly & Co. | 1.6 | % |
Pharmaceuticals, U.S. | ||
Wells Fargo & Co. | 1.5 | % |
Banks, U.S. | ||
Stryker Corp. | 1.5 | % |
Health Care Equipment & Supplies, U.S. |
non-U.S. dollar investments. The currency forwards had a positive impact on the Fund’s performance, while currency futures had a negligible impact.
What is a currency forward?
A currency forward is an agreement between the Fund and a counterparty to buy or sell a foreign currency in exchange for another currency at a specific exchange rate on a future date.
What is a future?
A future is an agreement between the Fund and a counterparty made through a U.S. or foreign futures exchange to buy or sell an underlying instrument or asset at a specific price on a future date.
As fellow shareholders, we found recent relative performance disappointing. We remain committed to our disciplined, value investment approach as we seek to generate attractive, long-term, risk-adjusted returns for shareholders.
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Thank you for your continued participation in Franklin Mutual Global Discovery Fund. We look forward to continuing to serve your investment needs.
The foregoing information reflects our analysis, opinions and portfolio holdings as of June 30, 2016, the end of the reporting period. The way we implement our main investment strategies and the resulting portfolio holdings may change depending on factors such as market and economic conditions. These opinions may not be relied upon as investment advice or an offer for a particular security. The information is not a complete analysis of every aspect of any market, country, industry, security or the Fund. Statements of fact are from sources considered reliable, but the investment manager makes no representation or warranty as to their completeness or accuracy. Although historical performance is no guarantee of future results, these insights may help you understand our investment management philosophy.
CFA® is a trademark owned by CFA Institute.
Peter A. Langerman has been portfolio manager for Franklin Mutual Global Discovery Fund since 2009. He has been portfolio manager for Franklin Mutual Shares Fund since 2005. He joined Franklin Templeton Investments in 1996, serving in various capacities, including President and Chief Executive Officer of Franklin Mutual Advisers and member of the management team of the Funds, including Franklin Mutual Global Discovery Fund. From 2002 to 2005, he served as director of New Jersey’s Division of Investment, overseeing employee pension funds. Between 1986 and 1996, Mr. Langerman was employed at Heine Securities Corporation, the Fund’s former manager.
Philippe Brugere-Trelat has been portfolio manager for Franklin Mutual Global Discovery Fund since 2009. He has been lead portfolio manager for Franklin Mutual European Fund since 2005 and co-portfolio manager for Franklin Mutual International Fund since 2009. He has been a member of the management team of the Franklin Mutual Series Funds since 2004, when he rejoined Franklin Templeton Investments. Previously, he was president and portfolio manager of Eurovest. Between 1984 and 1994, Mr. Brugere-Trelat was employed at Heine Securities Corporation, the Fund’s former manager.
Timothy Rankin rejoined the Franklin Mutual Series investment group in 2010 and currently serves as co-portfolio manager for Franklin Mutual Global Discovery Fund, and as a research analyst, is responsible for the analysis of the global energy and chemical industries. Mr. Rankin had previously worked at Franklin Mutual Series from 1997 through 2004. Mr. Rankin has over 20 years of experience in the investment management industry, including over 10 years with Franklin Mutual Series as a research analyst and portfolio manager. Most recently, he was managing director of Blue Harbour Group, LLC, a private investment firm focused on small-and mid-cap North American companies. Prior to his original employment with Franklin Mutual Series, Mr. Rankin was an equity analyst at Glickenhaus & Co.
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Performance Summary as of June 30, 2016
Your dividend income will vary depending on dividends or interest paid by securities in the Fund’s portfolio, adjusted for operating expenses of each class. Capital gain distributions are net profits realized from the sale of portfolio securities. The performance table does not reflect any taxes that a shareholder would pay on Fund dividends, capital gain distributions, if any, or any realized gains on the sale of Fund shares. Total return reflects reinvestment of the Fund’s dividends and capital gain distributions, if any, and any unrealized gains or losses.
Net Asset Value | ||||||
Share Class (Symbol) | 6/30/16 | 12/31/15 | Change | |||
Z (MDISX) | $ | 29.44 | $ | 29.35 | +$ | 0.09 |
A (TEDIX) | $ | 28.90 | $ | 28.86 | +$ | 0.04 |
C (TEDSX) | $ | 28.50 | $ | 28.55 | -$ | 0.05 |
R (TEDRX) | $ | 28.52 | $ | 28.51 | +$ | 0.01 |
R6 (FMDRX) | $ | 29.46 | $ | 29.35 | +$ | 0.11 |
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PERFORMANCE SUMMARY
Performance as of 6/30/161
Cumulative total return excludes sales charges. Average annual total return and value of $10,000 investment include maximum sales charges. Class Z/R/R6: no sales charges; Class A: 5.75% maximum initial sales charge; Class C: 1% contingent deferred sales charge in first year only.
Cumulative | Average Annual | Value of $10,000 | Total Annual | |||||
Share Class | Total Return2 | Total Return3 | Investment4 | Operating Expenses5 | ||||
Z | 0.99 | % | ||||||
6-Month | +0.31 | % | +0.31 | % | $ | 10,031 | ||
1-Year | -5.73 | % | -5.73 | % | $ | 9,427 | ||
5-Year | +34.88 | % | +6.17 | % | $ | 13,488 | ||
10-Year | +78.59 | % | +5.97 | % | $ | 17,859 | ||
A | 1.24 | % | ||||||
6-Month | +0.14 | % | -5.61 | % | $ | 9,439 | ||
1-Year | -5.95 | % | -11.35 | % | $ | 8,865 | ||
5-Year | +32.92 | % | +4.61 | % | $ | 12,528 | ||
10-Year | +73.41 | % | +5.03 | % | $ | 16,342 | ||
C | 1.99 | % | ||||||
6-Month | -0.18 | % | -1.18 | % | $ | 9,882 | ||
1-Year | -6.65 | % | -7.51 | % | $ | 9,249 | ||
5-Year | +28.28 | % | +5.11 | % | $ | 12,828 | ||
10-Year | +61.61 | % | +4.92 | % | $ | 16,161 | ||
R | 1.49 | % | ||||||
6-Month | +0.04 | % | +0.04 | % | $ | 10,004 | ||
1-Year | -6.19 | % | -6.19 | % | $ | 9,381 | ||
5-Year | +31.50 | % | +5.63 | % | $ | 13,150 | ||
10-Year | +69.83 | % | +5.44 | % | $ | 16,983 | ||
R6 | 0.84 | % | ||||||
6-Month | +0.37 | % | +0.37 | % | $ | 10,037 | ||
1-Year | -5.56 | % | -5.56 | % | $ | 9,444 | ||
3-Year | +16.72 | % | +5.29 | % | $ | 11,672 | ||
Since Inception (5/1/13) | +17.50 | % | +5.23 | % | $ | 11,750 |
Performance data represent past performance, which does not guarantee future results. Investment return and principal value will fluctuate, and you may have a gain or loss when you sell your shares. Current performance may differ from figures shown. For most recent month-end performance, go to franklintempleton.com or call (800) 342-5236.
See page 11 for Performance Summary footnotes.
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PERFORMANCE SUMMARY
All investments involve risks, including possible loss of principal. Value securities may not increase in price as anticipated or may decline further in value. Special risks are associated with foreign investing, including currency fluctuations, economic instability and political developments. Smaller company stocks have exhibited greater price volatility than larger company stocks, particularly over the short term. The Fund’s investments in companies engaged in mergers, reorganizations or liquidations also involve special risks as pending deals may not be completed on time or on favorable terms. The Fund may invest in lower rated bonds, which entail higher credit risk. The Fund is actively managed but there is no guarantee that the manager’s investment decisions will produce the desired results. The Fund’s prospectus also includes a description of the main investment risks.
Class Z: Class C: Class R: Class R6: | Shares are available to certain eligible investors as described in the prospectus. These shares have higher annual fees and expenses than Class A shares. Shares are available to certain eligible investors as described in the prospectus. These shares have higher annual fees and expenses than Class A shares. Shares are available to certain eligible investors as described in the prospectus. |
1. The Fund has a fee waiver associated with any investment in a Franklin Templeton money fund and/or Franklin Templeton fund, as applicable, contractually guaranteed through at least the Fund’s current fiscal year-end. Fund investment results reflect the fee waiver, to the extent applicable; without this reduction, the results would have been lower.
2. Cumulative total return represents the change in value of an investment over the periods indicated.
3. Average annual total return represents the average annual change in value of an investment over the periods indicated. Return for less than one year, if any, has not been annualized.
4. These figures represent the value of a hypothetical $10,000 investment in the Fund over the periods indicated.
5. Figures are as stated in the Fund’s current prospectus and may differ from the expense ratios disclosed in the Financial Highlights in this report. In periods of market volatility, assets may decline significantly, causing total annual Fund operating expenses to become higher than the figures shown.
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Your Fund’s Expenses
As a Fund shareholder, you can incur two types of costs:
- Transaction costs, including sales charges (loads) on Fund purchases; and
- Ongoing Fund costs, including management fees, distribu- tion and service (12b-1) fees, and other Fund expenses. All mutual funds have ongoing costs, sometimes referred to as operating expenses.
The following table shows ongoing costs of investing in the Fund and can help you understand these costs and compare them with those of other mutual funds. The table assumes a $1,000 investment held for the six months indicated.
Actual Fund Expenses
The first line (Actual) for each share class listed in the table provides actual account values and expenses. The “Ending Account Value” is derived from the Fund’s actual return, which includes the effect of Fund expenses.
You can estimate the expenses you paid during the period by following these steps. Of course, your account value and expenses will differ from those in this illustration:
1. Divide your account value by $1,000.
If an account had an $8,600 value, then $8,600 ÷ $1,000 = 8.6.
2. Multiply the result by the number under the heading “Expenses Paid During Period.”
If Expenses Paid During Period were $7.50, then 8.6 × $7.50 = $64.50.
In this illustration, the estimated expenses paid this period are $64.50.
Hypothetical Example for Comparison with Other Funds
Information in the second line (Hypothetical) for each class in the table can help you compare ongoing costs of investing in the Fund with those of other mutual funds. This information may not be used to estimate the actual ending account balance or expenses you paid during the period. The hypothetical “Ending Account Value” is based on the Fund’s actual expense ratio for each class and an assumed 5% annual rate of return before expenses, which does not represent the Fund’s actual return. The figure under the heading “Expenses Paid During Period” shows the hypothetical expenses your account would have incurred under this scenario. You can compare this figure with the 5% hypothetical examples that appear in shareholder reports of other funds.
Please note that expenses shown in the table are meant to highlight ongoing costs and do not reflect any transaction costs, such as sales charges. Therefore, the second line for each class is useful in comparing ongoing costs only, and will not help you compare total costs of owning different funds. In addition, if transaction costs were included, your total costs would have been higher. Please refer to the Fund prospectus for additional information on operating expenses.
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F R A N K L I N M U T U A L G L O B A L | D I S C O V E R Y F U N D | |
Y O U R | F U N D ’ S E X P E N S E S |
Beginning Account | Ending Account | Expenses Paid During | ||||
Share Class | Value 1/1/16 | Value 6/30/16 | Period* 1/1/16–6/30/16 | |||
Z | ||||||
Actual | $ | 1,000 | $ | 1,003.10 | $ | 4.93 |
Hypothetical (5% return before expenses) | $ | 1,000 | $ | 1,019.94 | $ | 4.97 |
A | ||||||
Actual | $ | 1,000 | $ | 1,001.40 | $ | 6.17 |
Hypothetical (5% return before expenses) | $ | 1,000 | $ | 1,018.70 | $ | 6.22 |
C | ||||||
Actual | $ | 1,000 | $ | 998.20 | $ | 9.89 |
Hypothetical (5% return before expenses) | $ | 1,000 | $ | 1,014.97 | $ | 9.97 |
R | ||||||
Actual | $ | 1,000 | $ | 1,000.40 | $ | 7.41 |
Hypothetical (5% return before expenses) | $ | 1,000 | $ | 1,017.45 | $ | 7.47 |
R6 | ||||||
Actual | $ | 1,000 | $ | 1,003.70 | $ | 4.13 |
Hypothetical (5% return before expenses) | $ | 1,000 | $ | 1,020.74 | $ | 4.17 |
*Expenses are calculated using the most recent six-month expense ratio, net of expense waivers, annualized for each class (Z: 0.99%; A: 1.24%; C: 1.99%; R: 1.49%; and R6: 0.83%), multiplied by the average account value over the period, multiplied by 182/366 to reflect the one-half year period.
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Financial Highlights | ||||||||||||||||||
Six Months Ended | Year Ended December 31, | |||||||||||||||||
June 30, 2016 | ||||||||||||||||||
(unaudited) | 2015 | 2014 | 2013 | 2012 | 2011 | |||||||||||||
Class Z | ||||||||||||||||||
Per share operating performance | ||||||||||||||||||
(for a share outstanding throughout the | ||||||||||||||||||
period) | ||||||||||||||||||
Net asset value, beginning of period | $ | 29.35 | $ | 33.32 | $ | 33.73 | $ | 28.65 | $ | 27.47 | $ | 29.54 | ||||||
Income from investment operationsa: | ||||||||||||||||||
Net investment incomeb | 0.47 | c | 0.53 | 0.82 | d | 0.55 | 0.56 | 0.61 | ||||||||||
Net realized and unrealized gains | ||||||||||||||||||
(losses) | (0.38 | ) | (1.71 | ) | 0.97 | 6.74 | 3.21 | (1.46 | ) | |||||||||
Total from investment operations | 0.09 | (1.18 | ) | 1.79 | 7.29 | 3.77 | (0.85 | ) | ||||||||||
Less distributions from: | ||||||||||||||||||
Net investment income | — | (0.55 | ) | (0.82 | ) | (0.57 | ) | (0.57 | ) | (0.55 | ) | |||||||
Net realized gains | — | (2.24 | ) | (1.38 | ) | (1.64 | ) | (2.02 | ) | (0.67 | ) | |||||||
Total distributions | — | (2.79 | ) | (2.20 | ) | (2.21 | ) | (2.59 | ) | (1.22 | ) | |||||||
Net asset value, end of period | $ | 29.44 | $ | 29.35 | $ | 33.32 | $ | 33.73 | $ | 28.65 | $ | 27.47 | ||||||
Total returne | 0.31 | % | (3.36 | )% | 5.33 | % | 25.64 | % | 13.64 | % | (2.68 | )% | ||||||
Ratios to average net assetsf | ||||||||||||||||||
Expensesg | 0.99 | %h,i | 0.99 | %h,i | 0.99 | %h | 0.98 | %h | 1.02 | % | 1.01 | % | ||||||
Expenses incurred in connection with | ||||||||||||||||||
securities sold short | —%j | 0.02 | % | 0.03 | % | —%j | —%j | —%j | ||||||||||
Net investment income | 3.36 | %c | 1.56 | % | 2.38 | %d | 1.68 | % | 1.89 | % | 2.11 | % | ||||||
Supplemental data | ||||||||||||||||||
Net assets, end of period (000’s) | $ | 7,346,634 | $ | 9,132,752 | $ | 10,375,518 | $ | 9,529,245 | $ | 7,417,041 | $ | 7,159,033 | ||||||
Portfolio turnover rate | 8.68 | % | 21.79 | % | 23.66 | % | 23.57 | % | 24.65 | % | 33.60 | % |
aThe amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases
of the Fund’s shares in relation to income earned and/or fluctuating fair value of the investments of the Fund.
bBased on average daily shares outstanding.
cNet investment income per share includes approximately $0.08 per share related to income received in the form of special dividends in connection with certain Fund holdings.
Excluding this amount, the ratio of net investment income to average net assets would have been 2.80%.
dNet investment income per share includes approximately $0.34 per share related to income received in the form of special dividends in connection with certain Fund holdings.
Excluding this amount, the ratio of net investment income to average net assets would have been 1.40%.
eTotal return is not annualized for periods less than one year.
fRatios are annualized for periods less than one year.
gIncludes dividend and/or interest expense on securities sold short and security borrowing fees, if any. See below for the ratios of such expenses to average net assets for the
periods presented. See Note 1(f).
hBenefit of expense reduction rounds to less than 0.01%.
iBenefit of waiver and payments by affiliates rounds to less than 0.01%.
jRounds to less than 0.01%.
14 Semiannual Report | The accompanying notes are an integral part of these financial statements.
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FINANCIAL H IGHLIGHTS
Six Months Ended | Year Ended December 31, | |||||||||||||||||
June 30, 2016 | ||||||||||||||||||
(unaudited) | 2015 | 2014 | 2013 | 2012 | 2011 | |||||||||||||
Class A | ||||||||||||||||||
Per share operating performance | ||||||||||||||||||
(for a share outstanding throughout the | ||||||||||||||||||
period) | ||||||||||||||||||
Net asset value, beginning of period | $ | 28.86 | $ | 32.81 | $ | 33.24 | $ | 28.27 | $ | 27.14 | $ | 29.19 | ||||||
Income from investment operationsa: | ||||||||||||||||||
Net investment incomeb | 0.44 | c | 0.42 | 0.71 | d | 0.44 | 0.46 | 0.52 | ||||||||||
Net realized and unrealized gains | ||||||||||||||||||
(losses) | (0.40 | ) | (1.67 | ) | 0.96 | 6.65 | 3.17 | (1.44 | ) | |||||||||
Total from investment operations | 0.04 | (1.25 | ) | 1.67 | 7.09 | 3.63 | (0.92 | ) | ||||||||||
Less distributions from: | ||||||||||||||||||
Net investment income | — | (0.46 | ) | (0.72 | ) | (0.48 | ) | (0.48 | ) | (0.46 | ) | |||||||
Net realized gains | — | (2.24 | ) | (1.38 | ) | (1.64 | ) | (2.02 | ) | (0.67 | ) | |||||||
Total distributions | — | (2.70 | ) | (2.10 | ) | (2.12 | ) | (2.50 | ) | (1.13 | ) | |||||||
Net asset value, end of period | $ | 28.90 | $ | 28.86 | $ | 32.81 | $ | 33.24 | $ | 28.27 | $ | 27.14 | ||||||
Total returne | 0.14 | % | (3.63 | )% | 5.01 | % | 25.26 | % | 13.34 | % | (2.99 | )% | ||||||
Ratios to average net assetsf | ||||||||||||||||||
Expensesg | 1.24 | %h,i | 1.27 | %h,i | 1.29 | %h | 1.28 | %h | 1.32 | % | 1.31 | % | ||||||
Expenses incurred in connection with | ||||||||||||||||||
securities sold short | —%j | 0.02 | % | 0.03 | % | —%j | —%j | —%j | ||||||||||
Net investment income | 3.11 | %c | 1.28 | % | 2.08 | %d | 1.38 | % | 1.59 | % | 1.81 | % | ||||||
Supplemental data | ||||||||||||||||||
Net assets, end of period (000’s) | $ | 10,603,491 | $ | 11,274,721 | $ | 11,573,196 | $ | 10,785,375 | $ | 7,977,279 | $ | 7,617,500 | ||||||
Portfolio turnover rate | 8.68 | % | 21.79 | % | 23.66 | % | 23.57 | % | 24.65 | % | 33.60 | % |
aThe amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases
of the Fund’s shares in relation to income earned and/or fluctuating fair value of the investments of the Fund.
bBased on average daily shares outstanding.
cNet investment income per share includes approximately $0.08 per share related to income received in the form of special dividends in connection with certain Fund holdings.
Excluding this amount, the ratio of net investment income to average net assets would have been 2.55%.
dNet investment income per share includes approximately $0.34 per share related to income received in the form of special dividends in connection with certain Fund holdings.
Excluding this amount, the ratio of net investment income to average net assets would have been 1.10%.
eTotal return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year.
fRatios are annualized for periods less than one year.
gIncludes dividend and/or interest expense on securities sold short and security borrowing fees, if any. See below for the ratios of such expenses to average net assets for the
periods presented. See Note 1(f).
hBenefit of expense reduction rounds to less than 0.01%.
iBenefit of waiver and payments by affiliates rounds to less than 0.01%.
jRounds to less than 0.01%.
franklintempleton.com
The accompanying notes are an integral part of these financial statements. | Semiannual Report 15
FRANKLIN MUTUAL GLOBAL DISCOVERY FUND
FINANCIAL H IGHLIGHTS
Six Months Ended | Year Ended December 31, | |||||||||||||||||
June 30, 2016 | ||||||||||||||||||
(unaudited) | 2015 | 2014 | 2013 | 2012 | 2011 | |||||||||||||
Class C | ||||||||||||||||||
Per share operating performance | ||||||||||||||||||
(for a share outstanding throughout the | ||||||||||||||||||
period) | ||||||||||||||||||
Net asset value, beginning of period | $ | 28.55 | $ | 32.49 | $ | 32.94 | $ | 28.05 | $ | 26.95 | $ | 28.97 | ||||||
Income from investment operationsa: | ||||||||||||||||||
Net investment incomeb | 0.33 | c | 0.18 | 0.47 | d | 0.22 | 0.25 | 0.32 | ||||||||||
Net realized and unrealized gains | ||||||||||||||||||
(losses) | (0.38 | ) | (1.64 | ) | 0.95 | 6.58 | 3.14 | (1.42 | ) | |||||||||
Total from investment operations | (0.05 | ) | (1.46 | ) | 1.42 | 6.80 | 3.39 | (1.10 | ) | |||||||||
Less distributions from: | ||||||||||||||||||
Net investment income | — | (0.24 | ) | (0.49 | ) | (0.27 | ) | (0.27 | ) | (0.25 | ) | |||||||
Net realized gains | — | (2.24 | ) | (1.38 | ) | (1.64 | ) | (2.02 | ) | (0.67 | ) | |||||||
Total distributions | — | (2.48 | ) | (1.87 | ) | (1.91 | ) | (2.29 | ) | (0.92 | ) | |||||||
Net asset value, end of period | $ | 28.50 | $ | 28.55 | $ | 32.49 | $ | 32.94 | $ | 28.05 | $ | 26.95 | ||||||
Total returne | (0.18 | )% | (4.33 | )% | 4.28 | % | 24.39 | % | 12.53 | % | (3.64 | )% | ||||||
Ratios to average net assetsf | ||||||||||||||||||
Expensesg | 1.99 | %h,i | 1.99 | %h,i | 1.99 | %h | 1.98 | %h | 2.02 | % | 2.01 | % | ||||||
Expenses incurred in connection with | ||||||||||||||||||
securities sold short | —%j | 0.02 | % | 0.03 | % | —%j | —%j | —%j | ||||||||||
Net investment income | 2.36 | %c | 0.56 | % | 1.38 | %d | 0.68 | % | 0.89 | % | 1.11 | % | ||||||
Supplemental data | ||||||||||||||||||
Net assets, end of period (000’s) | $ | 2,766,090 | $ | 2,983,216 | $ | 3,077,691 | $ | 2,894,908 | $ | 2,222,484 | $ | 2,268,995 | ||||||
Portfolio turnover rate | 8.68 | % | 21.79 | % | 23.66 | % | 23.57 | % | 24.65 | % | 33.60 | % |
aThe amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases
of the Fund’s shares in relation to income earned and/or fluctuating fair value of the investments of the Fund.
bBased on average daily shares outstanding.
cNet investment income per share includes approximately $0.08 per share related to income received in the form of special dividends in connection with certain Fund holdings.
Excluding this amount, the ratio of net investment income to average net assets would have been 1.80%.
dNet investment income per share includes approximately $0.34 per share related to income received in the form of special dividends in connection with certain Fund holdings.
Excluding this amount, the ratio of net investment income to average net assets would have been 0.40%.
eTotal return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year.
fRatios are annualized for periods less than one year.
gIncludes dividend and/or interest expense on securities sold short and security borrowing fees, if any. See below for the ratios of such expenses to average net assets for the
periods presented. See Note 1(f).
hBenefit of expense reduction rounds to less than 0.01%.
iBenefit of waiver and payments by affiliates rounds to less than 0.01%.
jRounds to less than 0.01%.
16 Semiannual Report | The accompanying notes are an integral part of these financial statements.
franklintempleton.com
FRANKLIN MUTUAL GLOBAL DISCOVERY FUND
FINANCIAL H IGHLIGHTS
Six Months Ended | Year Ended December 31, | |||||||||||||||||
June 30, 2016 | ||||||||||||||||||
(unaudited) | 2015 | 2014 | 2013 | 2012 | 2011 | |||||||||||||
Class R | ||||||||||||||||||
Per share operating performance | ||||||||||||||||||
(for a share outstanding throughout the period) | ||||||||||||||||||
Net asset value, beginning of period | $ | 28.51 | $ | 32.43 | $ | 32.88 | $ | 27.98 | $ | 26.89 | $ | 28.93 | ||||||
Income from investment operationsa: | ||||||||||||||||||
Net investment incomeb | 0.40 | c | 0.35 | 0.65 | d | 0.37 | 0.39 | 0.46 | ||||||||||
Net realized and unrealized gains (losses) | (0.39 | ) | (1.64 | ) | 0.93 | 6.58 | 3.14 | (1.42 | ) | |||||||||
Total from investment operations | 0.01 | (1.29 | ) | 1.58 | 6.95 | 3.53 | (0.96 | ) | ||||||||||
Less distributions from: | ||||||||||||||||||
Net investment income | — | (0.39 | ) | (0.65 | ) | (0.41 | ) | (0.42 | ) | (0.41 | ) | |||||||
Net realized gains | — | (2.24 | ) | (1.38 | ) | (1.64 | ) | (2.02 | ) | (0.67 | ) | |||||||
Total distributions | — | (2.63 | ) | (2.03 | ) | (2.05 | ) | (2.44 | ) | (1.08 | ) | |||||||
Net asset value, end of period | $ | 28.52 | $ | 28.51 | $ | 32.43 | $ | 32.88 | $ | 27.98 | $ | 26.89 | ||||||
Total returne | 0.04 | % | (3.82 | )% | 4.77 | % | 25.02 | % | 13.09 | % | (3.17 | )% | ||||||
Ratios to average net assetsf | ||||||||||||||||||
Expensesg | 1.49 | %h,i | 1.49 | %h,i | 1.49 | %h | 1.48 | %h | 1.52 | % | 1.51 | % | ||||||
Expenses incurred in connection with securities sold | ||||||||||||||||||
short | —%j | 0.02 | % | 0.03 | % | —%j | —%j | —%j | ||||||||||
Net investment income | 2.86 | %c | 1.06 | % | 1.88 | %d | 1.18 | % | 1.39 | % | 1.61 | % | ||||||
Supplemental data | ||||||||||||||||||
Net assets, end of period (000’s) | $ | 437,029 | $ | 468,425 | $ | 528,439 | $ | 539,613 | $ | 458,142 | $ | 434,893 | ||||||
Portfolio turnover rate | 8.68 | % | 21.79 | % | 23.66 | % | 23.57 | % | 24.65 | % | 33.60 | % |
aThe amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases
of the Fund’s shares in relation to income earned and/or fluctuating fair value of the investments of the Fund.
bBased on average daily shares outstanding.
cNet investment income per share includes approximately $0.08 per share related to income received in the form of special dividends in connection with certain Fund holdings.
Excluding this amount, the ratio of net investment income to average net assets would have been 2.30%.
dNet investment income per share includes approximately $0.34 per share related to income received in the form of special dividends in connection with certain Fund holdings.
Excluding this amount, the ratio of net investment income to average net assets would have been 0.90%.
eTotal return is not annualized for periods less than one year.
fRatios are annualized for periods less than one year.
gIncludes dividend and/or interest expense on securities sold short and security borrowing fees, if any. See below for the ratios of such expenses to average net assets for the
periods presented. See Note 1(f).
hBenefit of expense reduction rounds to less than 0.01%.
iBenefit of waiver and payments by affiliates rounds to less than 0.01%.
jRounds to less than 0.01%.
franklintempleton.com
The accompanying notes are an integral part of these financial statements. | Semiannual Report 17
FRANKLIN MUTUAL GLOBAL DISCOVERY FUND
FINANCIAL H IGHLIGHTS
Six Months Ended | Year Ended December 31, | |||||||||||
June 30, 2016 | ||||||||||||
(unaudited) | 2015 | 2014 | 2013 | a | ||||||||
Class R6 | ||||||||||||
Per share operating performance | ||||||||||||
(for a share outstanding throughout the period) | ||||||||||||
Net asset value, beginning of period | $ | 29.35 | $ | 33.33 | $ | 33.73 | $ | 31.42 | ||||
Income from investment operationsb: | ||||||||||||
Net investment incomec | 0.50 | d | 0.55 | 0.85 | e | 0.40 | ||||||
Net realized and unrealized gains (losses) | (0.39 | ) | (1.69 | ) | 1.00 | 4.17 | ||||||
Total from investment operations | 0.11 | (1.14 | ) | 1.85 | 4.57 | |||||||
Less distributions from: | ||||||||||||
Net investment income | — | (0.60 | ) | (0.87 | ) | (0.62 | ) | |||||
Net realized gains | — | (2.24 | ) | (1.38 | ) | (1.64 | ) | |||||
Total distributions | — | (2.84 | ) | (2.25 | ) | (2.26 | ) | |||||
Net asset value, end of period | $ | 29.46 | $ | 29.35 | $ | 33.33 | $ | 33.73 | ||||
Total returnf | 0.37 | % | (3.23 | )% | 5.46 | % | 14.71 | % | ||||
Ratios to average net assetsg | ||||||||||||
Expensesh,i | 0.83 | %j | 0.84 | %j | 0.85 | % | 0.84 | % | ||||
Expenses incurred in connection with securities sold short | —%k | 0.02 | % | 0.03 | % | —%k | ||||||
Net investment income | 3.52 | %d | 1.71 | % | 2.52 | %e | 1.83 | % | ||||
Supplemental data | ||||||||||||
Net assets, end of period (000’s) | $ | 423,681 | $ | 229,765 | $ | 137,922 | $ | 10,535 | ||||
Portfolio turnover rate | 8.68 | % | 21.79 | % | 23.66 | % | 23.57 | % |
aFor the period May 1, 2013 (effective date) to December 31, 2013.
bThe amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases
of the Fund’s shares in relation to income earned and/or fluctuating fair value of the investments of the Fund.
cBased on average daily shares outstanding.
dNet investment income per share includes approximately $0.08 per share related to income received in the form of special dividends in connection with certain Fund holdings.
Excluding this amount, the ratio of net investment income to average net assets would have been 2.96%.
eNet investment income per share includes approximately $0.34 per share related to income received in the form of special dividends in connection with certain Fund holdings.
Excluding this amount, the ratio of net investment income to average net assets would have been 1.54%.
fTotal return is not annualized for periods less than one year.
gRatios are annualized for periods less than one year.
hIncludes dividend and/or interest expense on securities sold short and security borrowing fees, if any. See below for the ratios of such expenses to average net assets for the
periods presented. See Note 1(f).
iBenefit of expense reduction rounds to less than 0.01%.
jBenefit of waiver and payments by affiliates rounds to less than 0.01%.
kRounds to less than 0.01%.
18 Semiannual Report | The accompanying notes are an integral part of these financial statements.
franklintempleton.com
FRANKLIN MUTUAL GLOBAL DISCOVERY FUND
Statement of Investments, June 30, 2016 (unaudited) | ||||
Country | Shares/Units | Value | ||
Common Stocks and Other Equity Interests 88.9% | ||||
Aerospace & Defense 0.6% | ||||
B/E Aerospace Inc | United States | 2,022,442 | $ | 93,391,271 |
a KLX Inc | United States | 1,011,221 | 31,347,852 | |
124,739,123 | ||||
Auto Components 0.6% | ||||
Cie Generale des Etablissements Michelin, B | France | 1,269,287 | 120,047,690 | |
a,b International Automotive Components Group Brazil LLC | Brazil | 3,819,425 | 62,879 | |
a,b,c,d International Automotive Components Group North America LLC | United States | 35,491,081 | 15,657,458 | |
135,768,027 | ||||
Automobiles 1.1% | ||||
General Motors Co | United States | 5,945,392 | 168,254,594 | |
Hyundai Motor Co | South Korea | 661,459 | 77,751,873 | |
246,006,467 | ||||
Banks 11.3% | ||||
Barclays PLC | United Kingdom | 60,743,193 | 112,259,033 | |
BNP Paribas SA | France | 3,690,983 | 162,868,543 | |
Capital Bank Financial Corp., A | United States | 866,477 | 24,954,538 | |
e Capital Bank Financial Corp., B, 144A, non-voting | United States | 2,980,444 | 85,836,787 | |
CIT Group Inc | United States | 4,841,447 | 154,490,574 | |
Citigroup Inc | United States | 5,490,140 | 232,727,035 | |
Citizens Financial Group Inc | United States | 10,206,899 | 203,933,842 | |
a Commerzbank AG | Germany | 8,316,042 | 53,757,795 | |
HSBC Holdings PLC | United Kingdom | 21,384,574 | 132,847,616 | |
JPMorgan Chase & Co | United States | 4,590,489 | 285,252,987 | |
KB Financial Group Inc | South Korea | 2,731,042 | 77,235,083 | |
PNC Financial Services Group Inc | United States | 2,700,744 | 219,813,554 | |
Societe Generale SA | France | 3,827,410 | 119,842,671 | |
Standard Chartered PLC | United Kingdom | 12,656,750 | 95,284,778 | |
SunTrust Banks Inc | United States | 4,005,415 | 164,542,448 | |
Wells Fargo & Co | United States | 6,774,534 | 320,638,694 | |
2,446,285,978 | ||||
Beverages 1.1% | ||||
PepsiCo Inc | United States | 2,145,742 | 227,319,908 | |
Chemicals 0.3% | ||||
a,f,g Dow Corning Corp., Contingent Distribution | United States | 11,430,153 | — | |
Syngenta AG | Switzerland | 157,078 | 60,201,700 | |
60,201,700 | ||||
Communications Equipment 2.4% | ||||
Cisco Systems Inc | United States | 7,416,030 | 212,765,901 | |
Nokia Corp., ADR | Finland | 25,474,246 | 144,948,460 | |
Nokia OYJ, A | Finland | 28,555,604 | 161,804,466 | |
519,518,827 | ||||
Construction Materials 0.7% | ||||
a LafargeHolcim Ltd., B | Switzerland | 3,691,245 | 153,307,112 | |
Consumer Finance 0.4% | ||||
a Ally Financial Inc | United States | 4,641,368 | 79,228,152 | |
Containers & Packaging 0.7% | ||||
International Paper Co | United States | 3,351,698 | 142,044,961 |
franklintempleton.com
Semiannual Report 19
FRANKLIN MUTUAL GLOBAL DISCOVERY FUND
STATEMENT OF INVESTMENTS (UNAUDITED)
Country | Shares/Units | Value | ||
Common Stocks and Other Equity Interests (continued) | ||||
Diversified Financial Services 0.4% | ||||
Voya Financial Inc | United States | 3,426,353 | $ | 84,836,500 |
Diversified Telecommunication Services 2.9% | ||||
China Telecom Corp. Ltd., H | China | 448,060,220 | 199,819,342 | |
Deutsche Telekom AG | Germany | 8,629,475 | 146,356,204 | |
a,f,g Global Crossing Holdings Ltd., Contingent Distribution | United States | 45,658,716 | — | |
Koninklijke KPN NV | Netherlands | 79,524,264 | 287,312,195 | |
633,487,741 | ||||
Electric Utilities 1.1% | ||||
Enel SpA | Italy | 54,669,574 | 241,508,360 | |
Energy Equipment & Services 1.1% | ||||
Baker Hughes Inc | United States | 5,382,143 | 242,896,114 | |
Food & Staples Retailing 4.0% | ||||
CVS Health Corp | United States | 1,765,125 | 168,993,068 | |
Empire Co. Ltd., A | Canada | 7,893,638 | 117,356,850 | |
Metro AG | Germany | 7,384,718 | 225,162,459 | |
a Rite Aid Corp | United States | 13,959,587 | 104,557,307 | |
Walgreens Boots Alliance Inc | United States | 2,833,972 | 235,984,848 | |
852,054,532 | ||||
Health Care Equipment & Supplies 4.9% | ||||
Medtronic PLC | United States | 5,286,204 | 458,683,921 | |
St. Jude Medical Inc | United States | 3,633,160 | 283,386,480 | |
Stryker Corp | United States | 2,622,672 | 314,274,786 | |
1,056,345,187 | ||||
Hotels, Restaurants & Leisure 1.4% | ||||
Accor SA | France | 5,775,634 | 222,385,964 | |
Sands China Ltd | Hong Kong | 21,300,300 | 71,106,699 | |
293,492,663 | ||||
Independent Power & Renewable Electricity Producers 0.4% | ||||
NRG Energy Inc | United States | 6,228,341 | 93,362,832 | |
Industrial Conglomerates 2.1% | ||||
Jardine Strategic Holdings Ltd | Hong Kong | 5,511,361 | 166,332,875 | |
Koninklijke Philips NV | Netherlands | 11,117,357 | 276,347,809 | |
442,680,684 | ||||
Insurance 9.4% | ||||
a Alleghany Corp | United States | 76,761 | 42,186,310 | |
The Allstate Corp | United States | 2,713,383 | 189,801,141 | |
American International Group Inc | United States | 5,102,618 | 269,877,466 | |
China Pacific Insurance Group Co. Ltd., H | China | 44,491,587 | 149,672,991 | |
Chubb Ltd | United States | 2,853,031 | 372,919,682 | |
MetLife Inc | United States | 3,841,066 | 152,989,659 | |
NN Group NV | Netherlands | 11,287,329 | 310,640,949 | |
RSA Insurance Group PLC | United Kingdom | 17,857,312 | 118,935,645 | |
White Mountains Insurance Group Ltd | United States | 163,310 | 137,507,020 | |
XL Group PLC | Ireland | 8,454,755 | 281,627,889 | |
2,026,158,752 | ||||
Internet Software & Services 0.4% | ||||
a LinkedIn Corp., A | United States | 459,725 | 87,002,956 |
20 Semiannual Report
franklintempleton.com
FRANKLIN MUTUAL GLOBAL DISCOVERY FUND
STATEMENT OF INVESTMENTS (UNAUDITED)
Country | Shares/Units | Value | ||
Common Stocks and Other Equity Interests (continued) | ||||
IT Services 0.6% | ||||
Xerox Corp | United States | 13,125,527 | $ | 124,561,251 |
Machinery 1.5% | ||||
Caterpillar Inc | United States | 3,147,600 | 238,619,556 | |
CNH Industrial NV | United Kingdom | 5,804,196 | 41,746,540 | |
CNH Industrial NV, special voting | United Kingdom | 7,338,645 | 52,783,027 | |
333,149,123 | ||||
Marine 0.9% | ||||
A.P. Moeller-Maersk AS, B | Denmark | 141,774 | 184,183,904 | |
Media 5.8% | ||||
CBS Corp., B | United States | 4,610,979 | 251,021,697 | |
a Charter Communications Inc., A | United States | 840,665 | 192,209,646 | |
a DISH Network Corp., A | United States | 3,041,368 | 159,367,683 | |
a Liberty Global PLC LiLAC, C | United Kingdom | 363,751 | 11,818,282 | |
a Liberty Global PLC, C | United Kingdom | 2,915,402 | 83,526,267 | |
Relx PLC | United Kingdom | 16,305,620 | 299,168,734 | |
Time Warner Inc | United States | 2,055,136 | 151,134,701 | |
Twenty-First Century Fox Inc., B | United States | 4,159,700 | 113,351,825 | |
1,261,598,835 | ||||
Metals & Mining 0.9% | ||||
Freeport-McMoRan Inc., B | United States | 6,099,862 | 67,952,463 | |
ThyssenKrupp AG | Germany | 6,240,872 | 124,756,274 | |
192,708,737 | ||||
Multiline Retail 0.6% | ||||
Macy’s Inc | United States | 3,802,597 | 127,805,285 | |
Oil, Gas & Consumable Fuels 6.3% | ||||
Anadarko Petroleum Corp | United States | 958,056 | 51,016,482 | |
Apache Corp | United States | 1,786,470 | 99,452,785 | |
BP PLC | United Kingdom | 30,087,550 | 175,780,256 | |
China Shenhua Energy Co. Ltd., H | China | 63,379,200 | 116,490,715 | |
CONSOL Energy Inc | United States | 6,429,499 | 103,450,639 | |
Kinder Morgan Inc | United States | 10,003,978 | 187,274,468 | |
Marathon Oil Corp | United States | 12,928,845 | 194,061,963 | |
Royal Dutch Shell PLC, A (EUR Traded) | United Kingdom | 9,226,904 | 252,655,385 | |
Royal Dutch Shell PLC, A (GBP Traded) | United Kingdom | 6,164,658 | 168,303,579 | |
a,b,c Warrior Met Coal LLC, A | United States | 60,966 | 6,146,373 | |
a,b,c Warrior Met Coal LLC, B | United States | 142,575 | 14,373,898 | |
1,369,006,543 | ||||
Paper & Forest Products 0.0%† | ||||
a Verso Corp | United States | 1,100,202 | 22,004 | |
Pharmaceuticals 7.7% | ||||
Eli Lilly & Co | United States | 4,482,919 | 353,029,871 | |
GlaxoSmithKline PLC | United Kingdom | 10,945,979 | 234,182,686 | |
Merck & Co. Inc | United States | 8,840,438 | 509,297,633 | |
Novartis AG, ADR | Switzerland | 4,827,162 | 398,289,137 | |
Teva Pharmaceutical Industries Ltd., ADR | Israel | 3,429,742 | 172,275,941 | |
1,667,075,268 |
franklintempleton.com
Semiannual Report 21
FRANKLIN MUTUAL GLOBAL DISCOVERY FUND
STATEMENT OF INVESTMENTS (UNAUDITED)
Country | Shares/Units | Value | ||
Common Stocks and Other Equity Interests (continued) | ||||
Semiconductors & Semiconductor Equipment 0.4% | ||||
SK Hynix Inc | South Korea | 3,356,242 | $ | 94,333,710 |
Software 5.8% | ||||
a Check Point Software Technologies Ltd | Israel | 3,392,843 | 270,341,730 | |
Microsoft Corp | United States | 10,162,391 | 520,009,547 | |
Open Text Corp | Canada | 2,858,954 | 169,135,719 | |
Symantec Corp | United States | 14,661,159 | 301,140,206 | |
1,260,627,202 | ||||
Specialty Retail 0.9% | ||||
Kingfisher PLC | United Kingdom | 42,834,793 | 184,198,820 | |
Technology Hardware, Storage & Peripherals 3.5% | ||||
EMC Corp | United States | 9,920,610 | 269,542,974 | |
Hewlett Packard Enterprise Co | United States | 6,436,730 | 117,599,057 | |
HP Inc | United States | 6,082,710 | 76,338,010 | |
Lenovo Group Ltd | China | 41,391,101 | 24,914,312 | |
Samsung Electronics Co. Ltd | South Korea | 217,030 | 268,289,250 | |
756,683,603 | ||||
Tobacco 5.4% | ||||
Altria Group Inc | United States | 3,611,267 | 249,032,972 | |
British American Tobacco PLC | United Kingdom | 5,563,572 | 359,276,353 | |
Imperial Brands PLC | United Kingdom | 4,213,802 | 227,753,340 | |
Philip Morris International Inc | United States | 925,621 | 94,154,168 | |
Reynolds American Inc | United States | 4,519,785 | 243,752,005 | |
1,173,968,838 | ||||
Wireless Telecommunication Services 1.3% | ||||
Vodafone Group PLC | United Kingdom | 89,319,132 | 271,126,895 | |
Total Common Stocks and Other Equity Interests | ||||
(Cost $17,264,292,996) | 19,189,296,594 | |||
Preferred Stocks 1.1% | ||||
Automobiles 1.1% | ||||
h Volkswagen AG, 0.157% pfd | Germany | 1,896,164 | 227,933,291 | |
Diversified Financial Services 0.0%† | ||||
a,b Hightower Holding LLC, pfd., A, Series 2 | United States | 3,048,000 | 8,169,250 | |
Total Preferred Stocks (Cost $398,807,079) | 236,102,541 | |||
Principal | ||||
Amount* | ||||
Corporate Bonds, Notes and Senior Floating Rate | ||||
Interests 3.7% | ||||
Avaya Inc., | ||||
e senior note, 144A, 10.50%, 3/01/21 | United States | 98,429,000 | 22,146,525 | |
e senior secured note, 144A, 7.00%, 4/01/19 | United States | 51,741,000 | 37,124,167 | |
i,j Term B-3 Loan, 5.134%, 10/26/17 | United States | 51,898,103 | 40,298,877 | |
i,j Term B-6 Loan, 6.50%, 3/30/18 | United States | 34,017,476 | 25,162,319 | |
i,j Term B-7 Loan, 6.25%, 5/29/20 | United States | 37,624,226 | 26,744,541 | |
i,j Belk Inc., Closing Date Term Loan, 5.75%, 12/12/22 | United States | 69,524,753 | 55,619,802 |
22 Semiannual Report
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FRANKLIN MUTUAL GLOBAL DISCOVERY FUND
STATEMENT OF INVESTMENTS (UNAUDITED)
Principal | |||||
Country | Amount* | Value | |||
Corporate Bonds, Notes and Senior Floating Rate | |||||
Interests (continued) | |||||
iHeartCommunications Inc., | |||||
senior secured note, first lien, 9.00%, 12/15/19 | United States | 95,618,000 | $ | 73,028,247 | |
i,j Tranche D Term Loan, 7.21%, 1/30/19 | United States | 117,978,997 | 86,714,563 | ||
i,j Tranche E Term Loan, 7.96%, 7/30/19 | United States | 37,921,652 | 27,896,115 | ||
e Valeant Pharmaceuticals International, | |||||
senior bond, 144A, 6.75%, 8/15/21 | United States | 17,307,000 | 14,840,753 | ||
senior bond, 144A, 7.25%, 7/15/22 | United States | 8,530,000 | 7,358,831 | ||
senior note, 144A, 8.625%, 10/15/20 | United States | 106,148,000 | 91,818,020 | ||
i,j,k Veritas Software Corp., | |||||
Term Loan B1, 6.625%, 6/15/23 | United States | 709,223 | EUR | 671,745 | |
Term Loan B1, 6.625%, 1/27/23 | United States | 67,745,413 | 59,277,236 | ||
Term Loan B2, 8.625%, 1/27/23 | United States | 65,389,594 | 56,153,314 | ||
e Veritas U.S. Inc./Veritas Bermuda Ltd., senior note, 144A, 10.50%, | |||||
2/01/24 | United States | 84,935,000 | 72,619,425 | ||
e Western Digital Corp., senior note, 144A, 10.50%, 4/01/24 | United States | 82,406,000 | 88,380,435 | ||
Total Corporate Bonds, Notes and Senior Floating Rate | |||||
Interests (Cost $927,215,130) | 785,854,915 | ||||
Corporate Notes and Senior Floating Rate Interests in | |||||
Reorganization 1.0% | |||||
b,l Broadband Ventures III LLC, secured promissory note, 5.00%, 2/01/12 | United States | 8,893 | — | ||
i,j,l Caesars Entertainment Operating Co. Inc., 1.50%, 3/01/17, | |||||
Term B-5-B Loans | United States | 13,307,605 | 13,130,175 | ||
Term B-6-B Loans | United States | 63,441,299 | 63,599,902 | ||
Term B-7 Loans | United States | 46,344,115 | 46,846,161 | ||
l Samson Investment Co., senior note, 9.75%, 2/15/20 | United States | 87,456,000 | 1,967,760 | ||
i,j,l Texas Competitive Electric Holdings Co. LLC, Term Loans, 4.943%, | |||||
10/10/17 | United States | 142,325,613 | 47,738,430 | ||
e,l Texas Competitive Electric Holdings Co. LLC/Texas Competitive Electric | |||||
Holdings Finance Inc., senior secured note, first lien, 144A, 4.934%, | |||||
10/01/20 | United States | 118,132,000 | 40,460,210 | ||
e,l,m Walter Energy Inc., second lien, 144A, PIK, 11.50%, 4/01/20 | United States | 27,033,380 | 9,462 | ||
Total Corporate Notes and Senior Floating Rate Interests | |||||
in Reorganization (Cost $395,273,766) | 213,752,100 | ||||
Shares | |||||
Companies in Liquidation 0.1% | |||||
a Adelphia Recovery Trust | United States | 45,477,593 | 95,503 | ||
a,f Adelphia Recovery Trust, Arahova Contingent Value Vehicle, Contingent | |||||
Distribution | United States | 5,538,790 | 55,388 | ||
a,f,g Century Communications Corp., Contingent Distribution | United States | 15,282,000 | — | ||
a,b FIM Coinvestor Holdings I, LLC | United States | 30,279,560 | — | ||
a,n Lehman Brothers Holdings Inc., Bankruptcy Claim | United States | 587,363,521 | 18,355,110 | ||
a,f,g NewPage Corp., Litigation Trust, Contingent Distribution | United States | 145,817,000 | — | ||
a,f,g Tribune Media Litigation Trust, Contingent Distribution | United States | 1,285,973 | — | ||
Total Companies in Liquidation (Cost $41,476,119) | 18,506,001 | ||||
Principal | |||||
Amount* | |||||
Municipal Bonds (Cost $85,611,961) 0.3% | |||||
Puerto Rico Commonwealth GO, Refunding, Series A, 8.00%, 7/01/35 | United States | 98,292,000 | 65,732,775 |
franklintempleton.com
Semiannual Report 23
FRANKLIN MUTUAL GLOBAL DISCOVERY FUND
STATEMENT OF INVESTMENTS (UNAUDITED)
Notional | ||||||||
Counterparty | Amount* | Value | ||||||
Options Purchased 0.0%† | ||||||||
Puts - Over-the-Counter | ||||||||
Currency Options 0.0%† | ||||||||
CNY/USD, August Strike Price 7.387 CNY, Expires 8/03/16 | FBCO | 532,612,564 | CNY | $ | 216 | |||
CNY/USD, August Strike Price 7.398 CNY, Expires 8/03/16 | HSBC | 1,107,538,978 | CNY | 299 | ||||
CNY/USD, August Strike Price 7.43 CNY, Expires 8/03/16 | FBCO | 267,874,592 | CNY | 36 | ||||
CNY/USD, August Strike Price 7.44 CNY, Expires 8/03/16 | HSBC | 429,176,199 | CNY | 58 | ||||
CNY/USD, August Strike Price 7.51 CNY, Expires 8/03/16 | FBCO | 1,353,793,687 | CNY | 180 | ||||
CNY/USD, December Strike Price 7.255 CNY, Expires 12/14/16 | HSBC | 890,688,370 | CNY | 564,246 | ||||
CNY/USD, December Strike Price 7.27 CNY, Expires 12/15/16 | MSCS | 601,247,902 | CNY | 370,508 | ||||
CNY/USD, December Strike Price 7.27 CNY, Expires 12/15/16 | HSBC | 1,223,199,310 | CNY | 753,774 | ||||
Total Options Purchased (Cost $7,089,499) | 1,689,317 | |||||||
Total Investments before Short Term Investments | ||||||||
(Cost $19,119,766,550) | 20,510,934,243 | |||||||
Principal | ||||||||
Country | Amount* | |||||||
Short Term Investments 4.1% | ||||||||
U.S. Government and Agency Securities 4.1% | ||||||||
FHLB, 7/01/16 | United States | 72,400,000 | 72,400,000 | |||||
o,p U.S. Treasury Bill, 7/07/16 - 12/08/16 | United States | 824,300,000 | 823,878,098 | |||||
Total U.S. Government and Agency Securities | ||||||||
(Cost $895,956,992) | 896,278,098 | |||||||
Total Investments (Cost $20,015,723,542) 99.2% | 21,407,212,341 | |||||||
Securities Sold Short (0.6)% | (124,367,288 | ) | ||||||
Other Assets, less Liabilities 1.4% | 294,079,439 | |||||||
Net Assets 100.0% | $ | 21,576,924,492 | ||||||
Shares | ||||||||
q Securities Sold Short (Proceeds $121,997,463) (0.6)% | ||||||||
Common Stocks (0.6)% | ||||||||
Health Care Equipment & Supplies (0.6)% | ||||||||
Abbott Laboratories | United States | 3,163,757 | $ | (124,367,288 | ) |
†Rounds to less than 0.1% of net assets.
*The principal/notional amount is stated in U.S. dollars unless otherwise indicated.
aNon-income producing.
bSee Note 10 regarding restricted securities.
cAt June 30, 2016, pursuant to the Fund’s policies and the requirements of applicable securities law, the Fund is restricted from trading these securities at period end.
dSee Note 12 regarding holdings of 5% voting securities.
eSecurity was purchased pursuant to Rule 144A under the Securities Act of 1933 and may be sold in transactions exempt from registration only to qualified institutional buyers
or in a public offering registered under the Securities Act of 1933. These securities have been deemed liquid under guidelines approved by the Trust’s Board of Trustees. At
June 30, 2016, the aggregate value of these securities was $460,594,615, representing 2.1% of net assets.
fContingent distributions represent the right to receive additional distributions, if any, during the reorganization of the underlying company. Shares represent total underlying
principal of debt securities.
gSecurity has been deemed illiquid because it may not be able to be sold within seven days.
hVariable rate security. Interest rate shown represents the yield at period end.
iThe coupon rate shown represents the rate at period end.
jSee Note 1(h) regarding senior floating rate interests.
kSecurity purchased on a delayed delivery basis. See Note 1(c).
lSee Note 8 regarding credit risk and defaulted securities.
24 Semiannual Report
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FRANKLIN MUTUAL GLOBAL DISCOVERY FUND
STATEMENT OF INVESTMENTS (UNAUDITED)
mIncome may be received in additional securities and/or cash.
nBankruptcy claims represent the right to receive distributions, if any, during the liquidation of the underlying pool of assets. Shares represent amount of allowed unsecured
claims.
oThe security is traded on a discount basis with no stated coupon rate.
pA portion or all of the security has been segregated as collateral for securities sold short. At June 30, 2016, the aggregate value of these securities and/or cash pledged
amounted to $184,196,350, representing 0.9% of net assets.
qSee Note 1(f) regarding securities sold short.
At June 30, 2016, the Fund had the following futures contracts outstanding. See Note 1(d). | ||||||||||||
Futures Contracts | ||||||||||||
Number of | Notional Expiration | Unrealized | Unrealized | |||||||||
Description | Type Contracts | Value | Date | Appreciation | Depreciation | |||||||
Currency Contracts | ||||||||||||
EUR/USD | Short | 8,928 | $ | 1,239,597,000 | 9/19/16 | $ | 34,627,242 | $ | — | |||
GBP/USD | Short | 7,333 | 607,172,400 | 9/19/16 | 57,736,799 | — | ||||||
Total Futures Contracts | $ | 92,364,041 | $ | — | ||||||||
Net unrealized appreciation (depreciation) | $ | 92,364,041 | ||||||||||
At June 30, 2016, the Fund had the following forward exchange contracts outstanding. See Note 1(d). | ||||||||||||
Forward Exchange Contracts | ||||||||||||
Contract | Settlement | Unrealized | Unrealized | |||||||||
Currency | Counterpartya | Type | Quantity | Amount | Date | Appreciation | Depreciation | |||||
OTC Forward Exchange Contracts | ||||||||||||
Euro | BANT | Buy | 51,521,900 | $ | 57,313,782 | 7/06/16 | $ | 236,409 | $ | (350,642 | ) | |
Euro | BANT | Sell | 103,778,105 | 113,575,664 | 7/06/16 | 163,908 | (1,802,566 | ) | ||||
Euro | BONY | Buy | 50,704,620 | 56,514,302 | 7/06/16 | 162,646 | (384,742 | ) | ||||
Euro | FBCO | Buy | 56,144,380 | 62,550,774 | 7/06/16 | 207,030 | (426,383 | ) | ||||
Euro | FBCO | Sell | 39,257,619 | 44,453,332 | 7/06/16 | 869,573 | — | |||||
Euro | HSBC | Buy | 53,359,825 | 59,419,070 | 7/06/16 | 202,072 | (381,132 | ) | ||||
Euro | HSBC | Sell | 138,162,887 | 152,533,292 | 7/06/16 | 949,734 | (1,804,706 | ) | ||||
Euro | SSBT | Buy | 62,285,632 | 69,393,727 | 7/06/16 | 232,134 | (476,431 | ) | ||||
Canadian Dollar | HSBC | Buy | 4,208,738 | 3,247,180 | 7/19/16 | 14,906 | (4,542 | ) | ||||
Canadian Dollar | HSBC | Sell | 4,445,861 | 3,396,606 | 7/19/16 | — | (44,470 | ) | ||||
Canadian Dollar | SSBT | Buy | 18,291,231 | 14,117,701 | 7/19/16 | 66,884 | (27,258 | ) | ||||
Canadian Dollar | SSBT | Sell | 169,673,942 | 132,459,975 | 7/19/16 | 1,133,130 | — | |||||
British Pound | BANT | Buy | 39,258,988 | 55,672,259 | 7/21/16 | — | (3,314,639 | ) | ||||
British Pound | BANT | Sell | 112,453,111 | 159,531,023 | 7/21/16 | 9,558,300 | — | |||||
British Pound | FBCO | Sell | 7,610,324 | 10,869,902 | 7/21/16 | 720,418 | — | |||||
British Pound | HSBC | Sell | 113,035,682 | 160,382,358 | 7/21/16 | 9,632,691 | — | |||||
British Pound | SSBT | Buy | 10,283,742 | 14,469,328 | 7/21/16 | — | (754,449 | ) | ||||
Euro | BANT | Buy | 1,180,939 | 1,333,983 | 7/21/16 | — | (22,171 | ) | ||||
Euro | BANT | Sell | 99,048,737 | 109,636,965 | 7/21/16 | 428,354 | (816,821 | ) | ||||
Euro | BONY | Buy | 3,229,175 | 3,664,178 | 7/21/16 | — | (77,141 | ) | ||||
Euro | BONY | Sell | 34,808,321 | 38,267,137 | 7/21/16 | 83,735 | (482,418 | ) | ||||
Euro | FBCO | Buy | 14,820,633 | 16,337,006 | 7/21/16 | 126,067 | — | |||||
Euro | FBCO | Sell | 9,574,191 | 10,837,867 | 7/21/16 | 202,653 | — | |||||
Euro | HSBC | Buy | 4,428,020 | 5,020,989 | 7/21/16 | — | (102,251 | ) | ||||
Euro | HSBC | Sell | 73,288,842 | 81,082,021 | 7/21/16 | 189,702 | (518,478 | ) | ||||
Euro | SSBT | Buy | 3,630,228 | 4,098,513 | 7/21/16 | — | (65,979 | ) | ||||
Euro | SSBT | Sell | 69,275,924 | 76,805,989 | 7/21/16 | 406,753 | (553,926 | ) | ||||
South Korean Won | BANT | Buy | 9,825,575,250 | 8,457,497 | 8/12/16 | 83,382 | (21,748 | ) | ||||
South Korean Won | BANT | Sell | 61,965,161,757 | 51,335,502 | 8/12/16 | 6,395 | (2,396,942 | ) | ||||
South Korean Won | FBCO | Sell | 149,945,083,221 | 128,579,508 | 8/12/16 | 1,086,560 | (2,514,891 | ) | ||||
South Korean Won | HSBC | Buy | 19,326,859,442 | 16,486,541 | 8/12/16 | 290,841 | (20,293 | ) | ||||
South Korean Won | HSBC | Sell | 130,504,703,597 | 107,791,955 | 8/12/16 | 20,145 | (5,380,513 | ) | ||||
British Pound | BANT | Sell | 198,842,349 | 284,841,444 | 8/19/16 | 19,581,426 | — | |||||
British Pound | HSBC | Sell | 14,071,195 | 19,828,909 | 8/19/16 | 1,057,629 | — | |||||
Euro | BANT | Sell | 5,093,102 | 5,805,347 | 10/03/16 | 131,775 | — |
franklintempleton.com
Semiannual Report 25
FRANKLIN MUTUAL GLOBAL DISCOVERY FUNDS
STATEMENT OF INVESTMENTS (UNAUDITED)
Forward Exchange Contracts (continued) | |||||||||||
Contract | Settlement | Unrealized | Unrealized | ||||||||
Currency | Counterpartya | Type | Quantity | Amount | Date | Appreciation | Depreciation | ||||
OTC Forward Exchange Contracts (continued) | |||||||||||
Euro | HSBC | Sell | 143,063,189 | $ | 163,072,463 | 10/03/16 | $ | 3,704,122 | $ | — | |
Euro | SSBT | Sell | 154,503,755 | 176,139,097 | 10/03/16 | 4,026,289 | — | ||||
Euro | BANT | Sell | 176,729,763 | 200,388,999 | 10/18/16 | 3,398,608 | — | ||||
Euro | HSBC | Sell | 3,571,429 | 4,074,972 | 10/18/16 | 94,108 | — | ||||
Euro | SSBT | Sell | 190,957,471 | 216,366,634 | 10/18/16 | 3,517,444 | — | ||||
British Pound | SSBT | Sell | 217,271,806 | 312,543,320 | 10/24/16 | 22,465,503 | — | ||||
Euro | BANT | Sell | 232,129,226 | 268,805,644 | 11/04/16 | 9,888,156 | — | ||||
Euro | HSBC | Sell | 235,223,545 | 272,503,970 | 11/04/16 | 10,135,072 | — | ||||
South Korean Won | BANT | Sell | 68,280,538,392 | 59,146,494 | 11/14/16 | — | (20,830 | ) | |||
South Korean Won | FBCO | Sell | 61,892,543,138 | 53,698,997 | 11/14/16 | 69,851 | (2,772 | ) | |||
South Korean Won | HSBC | Buy | 3,324,926,050 | 2,834,066 | 11/14/16 | 47,092 | — | ||||
South Korean Won | HSBC | Sell | 144,625,592,047 | 126,733,029 | 11/14/16 | 1,433,700 | (23,486 | ) | |||
Euro | BANT | Sell | 7,360,188 | 8,303,762 | 11/18/16 | 89,576 | — | ||||
Euro | BONY | Sell | 101,818,152 | 115,800,411 | 11/18/16 | 2,168,355 | — | ||||
Euro | HSBC | Sell | 100,590,914 | 114,449,887 | 11/18/16 | 2,187,465 | — | ||||
Euro | SSBT | Sell | 26,117,460 | 29,496,178 | 11/18/16 | 348,324 | — | ||||
British Pound | BANT | Sell | 9,661,779 | 12,951,920 | 11/23/16 | 61,064 | (13,659 | ) | |||
British Pound | BONY | Sell | 117,629,227 | 171,407,601 | 11/23/16 | 14,299,055 | — | ||||
British Pound | FBCO | Sell | 2,558,223 | 3,459,677 | 11/23/16 | 42,850 | — | ||||
British Pound | HSBC | Sell | 90,729,958 | 130,608,437 | 11/23/16 | 9,453,456 | (26,227 | ) | |||
British Pound | SSBT | Sell | 18,420,335 | 24,897,075 | 11/23/16 | 325,778 | (31,363 | ) | |||
Total Forward Exchange Contracts | $ | 135,601,120 | $ | (22,863,869 | ) | ||||||
Net unrealized appreciation (depreciation) | $ | 112,737,251 | |||||||||
aMay be comprised of multiple contracts with the same counterparty, currency and settlement date. | |||||||||||
See Abbreviations on page 42. |
26 Semiannual Report | The accompanying notes are an integral part of these financial statements.
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FRANKLIN MUTUAL GLOBAL DISCOVERY FUND
Financial Statements | ||
Statement of Assets and Liabilities | ||
June 30, 2016 (unaudited) | ||
Assets: | ||
Investments in securities: | ||
Cost - Unaffiliated issuers | $ | 19,986,628,171 |
Cost - Non-controlled affiliates (Note 12) | 29,095,371 | |
Total cost of investments | $ | 20,015,723,542 |
Value - Unaffiliated issuers | $ | 21,391,554,883 |
Value - Non-controlled affiliates (Note 12) | 15,657,458 | |
Total value of investments | 21,407,212,341 | |
Cash | 5,744,113 | |
Restricted Cash (Note 1e) | 34,050,000 | |
Foreign currency, at value (cost $69,908,829) | 69,597,812 | |
Receivables: | ||
Investment securities sold | 94,206,256 | |
Capital shares sold | 18,183,017 | |
Dividends and interest | 115,618,709 | |
European Union tax reclaims | 2,874,553 | |
Due from brokers | 186,125,099 | |
Variation margin | 11,836,750 | |
Unrealized appreciation on OTC forward exchange contracts | 135,601,120 | |
Other assets | 566,901 | |
Total assets | 22,081,616,671 | |
Liabilities: | ||
Payables: | ||
Investment securities purchased | 239,137,270 | |
Capital shares redeemed | 49,866,525 | |
Management fees | 14,549,036 | |
Distribution fees | 9,495,521 | |
Transfer agent fees | 5,731,599 | |
Trustees’ fees and expenses | 807,766 | |
Securities sold short, at value (proceeds $121,997,463) | 124,367,288 | |
Due to brokers | 36,730,000 | |
Unrealized depreciation on OTC forward exchange contracts | 22,863,869 | |
Accrued expenses and other liabilities | 1,143,305 | |
Total liabilities | 504,692,179 | |
Net assets, at value | $ | 21,576,924,492 |
Net assets consist of: | ||
Paid-in capital | $ | 19,204,714,242 |
Undistributed net investment income | 325,497,142 | |
Net unrealized appreciation (depreciation) | 1,591,767,445 | |
Accumulated net realized gain (loss) | 454,945,663 | |
Net assets, at value | $ | 21,576,924,492 |
franklintempleton.com
The accompanying notes are an integral part of these financial statements. | Semiannual Report 27
FRANKLIN MUTUAL GLOBAL DISCOVERY FUND
FINANCIAL STATEMENTS
Statement of Assets and Liabilities (continued) | ||
June 30, 2016 (unaudited) | ||
Class Z: | ||
Net assets, at value | $ | 7,346,633,885 |
Shares outstanding | 249,587,135 | |
Net asset value and maximum offering price per share | $ | 29.44 |
Class A: | ||
Net assets, at value | $ | 10,603,491,162 |
Shares outstanding | 366,860,657 | |
Net asset value per sharea | $ | 28.90 |
Maximum offering price per share (net asset value per share ÷ 94.25%) | $ | 30.66 |
Class C: | ||
Net assets, at value | $ | 2,766,090,010 |
Shares outstanding | 97,071,765 | |
Net asset value and maximum offering price per sharea | $ | 28.50 |
Class R: | ||
Net assets, at value | $ | 437,028,760 |
Shares outstanding | 15,323,929 | |
Net asset value and maximum offering price per share | $ | 28.52 |
Class R6: | ||
Net assets, at value | $ | 423,680,675 |
Shares outstanding | 14,382,463 | |
Net asset value and maximum offering price per share | $ | 29.46 |
aRedemption price is equal to net asset value less contingent deferred sales charges, if applicable. |
28 Semiannual Report | The accompanying notes are an integral part of these financial statements.
franklintempleton.com
FRANKLIN MUTUAL GLOBAL DISCOVERY FUND
FINANCIAL STATEMENTS
Statement of Operations | |||
for the six months ended June 30, 2016 (unaudited) | |||
Investment income: | |||
Dividends (net of foreign taxes of $22,703,488) | $ | 436,361,833 | |
Interest | 48,801,099 | ||
Income from securities loaned (net of fees and rebates) | 3,220,164 | ||
Total investment income | 488,383,096 | ||
Expenses: | |||
Management fees (Note 3a) | 90,644,617 | ||
Distribution fees: (Note 3c) | |||
Class A | 13,239,884 | ||
Class C | 13,910,266 | ||
Class R | 1,089,650 | ||
Transfer agent fees: (Note 3e) | |||
Class Z | 6,597,336 | ||
Class A | 8,331,091 | ||
Class C | 2,188,042 | ||
Class R | 342,781 | ||
Class R6 | 382 | ||
Custodian fees (Note 4) | 631,149 | ||
Reports to shareholders | 974,296 | ||
Registration and filing fees | 291,682 | ||
Professional fees | 180,491 | ||
Trustees’ fees and expenses | 396,817 | ||
Dividends and/or interest on securities sold short | 266,979 | ||
Other | 310,926 | ||
Total expenses | 139,396,389 | ||
Expense reductions (Note 4) | (17,735 | ) | |
Expenses waived/paid by affiliates (Note 3f) | (31,739 | ) | |
Net expenses | 139,346,915 | ||
Net investment income | 349,036,181 | ||
Realized and unrealized gains (losses): | |||
Net realized gain (loss) from: | |||
Investments | 258,142,042 | ||
Foreign currency transactions | 82,164,572 | ||
Futures contracts | (23,507,746 | ) | |
Securities sold short | (4,436,365 | ) | |
Net realized gain (loss) | 312,362,503 | ||
Net change in unrealized appreciation (depreciation) on: | |||
Investments | (709,964,608 | ) | |
Translation of other assets and liabilities denominated in foreign currencies | (28,010,240 | ) | |
Futures contracts | 74,308,829 | ||
Net change in unrealized appreciation (depreciation) | (663,466,019 | ) | |
Net realized and unrealized gain (loss) | (351,103,516 | ) | |
Net increase (decrease) in net assets resulting from operations | $ | (2,067,335 | ) |
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The accompanying notes are an integral part of these financial statements. | Semiannual Report 29
Statements of Changes in Net Assets | ||||||
Six Months Ended | ||||||
June 30, 2016 | Year Ended | |||||
(unaudited) | December 31, 2015 | |||||
Increase (decrease) in net assets: | ||||||
Operations: | ||||||
Net investment income | $ | 349,036,181 | $ | 339,164,398 | ||
Net realized gain (loss) | 312,362,503 | 1,935,425,923 | ||||
Net change in unrealized appreciation (depreciation) | (663,466,019 | ) | (3,210,851,013 | ) | ||
Net increase (decrease) in net assets resulting from operations | (2,067,335 | ) | (936,260,692 | ) | ||
Distributions to shareholders from: | ||||||
Net investment income: | ||||||
Class Z | — | (160,624,336 | ) | |||
Class A | — | (169,856,805 | ) | |||
Class C | — | (23,086,411 | ) | |||
Class R | — | (5,977,705 | ) | |||
Class R6 | — | (4,336,706 | ) | |||
Net realized gains: | ||||||
Class Z | — | (652,957,508 | ) | |||
Class A | — | (819,776,810 | ) | |||
Class C | — | (219,714,563 | ) | |||
Class R | — | (34,654,955 | ) | |||
Class R6 | — | (15,790,541 | ) | |||
Total distributions to shareholders | — | (2,106,776,340 | ) | |||
Capital share transactions: (Note 2) | ||||||
Class Z | (1,790,952,302 | ) | (117,039,628 | ) | ||
Class A | (670,740,898 | ) | 1,145,571,804 | |||
Class C | (204,953,667 | ) | 290,521,090 | |||
Class R | (30,779,429 | ) | (535,429 | ) | ||
Class R6 | 187,539,489 | 120,632,129 | ||||
Total capital share transactions | (2,509,886,807 | ) | 1,439,149,966 | |||
Net increase (decrease) in net assets | (2,511,954,142 | ) | (1,603,887,066 | ) | ||
Net assets: | ||||||
Beginning of period | 24,088,878,634 | 25,692,765,700 | ||||
End of period | $ | 21,576,924,492 | $ | 24,088,878,634 | ||
Undistributed net investment income (distributions in excess of net investment income) | ||||||
included in net assets: | ||||||
End of period | $ | 325,497,142 | $ | (23,539,039 | ) |
30 Semiannual Report | The accompanying notes are an integral part of these financial statements.
franklintempleton.com
FRANKLIN MUTUAL GLOBAL DISCOVERY FUND
FINANCIAL STATEMENTS
FRANKLIN MUTUAL GLOBAL DISCOVERY FUND
Notes to Financial Statements (unaudited)
1. Organization and Significant Accounting Policies
Franklin Mutual Series Funds (Trust) is registered under the Investment Company Act of 1940 (1940 Act) as an open-end management investment company, consisting of seven separate funds and applies the specialized accounting and reporting guidance in U.S. Generally Accepted Accounting Principles (U.S. GAAP). Franklin Mutual Global Discovery Fund (Fund) is included in this report. The financial statements of the remaining funds in the Trust are presented separately. The Fund offers five classes of shares: Class Z, Class A, Class C, Class R and Class R6. Each class of shares differs by its initial sales load, contingent deferred sales charges, voting rights on matters affecting a single class, its exchange privilege and fees primarily due to differing arrangements for distribution and transfer agent fees.
The following summarizes the Fund’s significant accounting policies.
a. Financial Instrument Valuation
The Fund’s investments in financial instruments are carried at fair value daily. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date. The Fund calculates the net asset value per share as of 4 p.m. Eastern time each day the New York Stock Exchange (NYSE) is open for trading. Under compliance policies and procedures approved by the Trust’s Board of Trustees (the Board), the Fund’s administrator has responsibility for oversight of valuation, including leading the cross-functional Valuation Committee (VC). The VC provides administration and oversight of the Fund’s valuation policies and procedures, which are approved annually by the Board. Among other things, these procedures allow the Fund to utilize independent pricing services, quotations from securities and financial instrument dealers, and other market sources to determine fair value.
Equity securities and derivative financial instruments (derivatives) listed on an exchange or on the NASDAQ National Market System are valued at the last quoted sale price or the official closing price of the day, respectively. Foreign equity securities are valued as of the close of trading on the foreign stock exchange on which the security is primarily traded or as of 4 p.m. Eastern time whichever is earlier. The value is then converted into its U.S. dollar equivalent at the foreign exchange rate in effect at 4 p.m. Eastern time on the day that the value of the security is determined. Over-the-counter (OTC) securities are valued within the range of the most recent quoted bid and ask prices. Securities that trade in multiple markets or on multiple exchanges are valued according to the broadest and most representative market. Certain equity securities are valued based upon fundamental characteristics or relationships to similar securities.
Debt securities generally trade in the OTC market rather than on a securities exchange. The Fund’s pricing services use multiple valuation techniques to determine fair value. In instances where sufficient market activity exists, the pricing services may utilize a market-based approach through which quotes from market makers are used to determine fair value. In instances where sufficient market activity may not exist or is limited, the pricing services also utilize proprietary valuation models which may consider market characteristics such as benchmark yield curves, credit spreads, estimated default rates, anticipated market interest rate volatility, coupon rates, anticipated timing of principal repayments, underlying collateral, and other unique security features in order to estimate the relevant cash flows, which are then discounted to calculate the fair value. Securities denominated in a foreign currency are converted into their U.S. dollar equivalent at the foreign exchange rate in effect at 4 p.m. Eastern time on the date that the values of the foreign debt securities are determined.
Certain derivatives trade in the OTC market. The Fund’s pricing services use various techniques including industry standard option pricing models and proprietary discounted cash flow models to determine the fair value of those instruments. The Fund’s net benefit or obligation under the derivative contract, as measured by the fair value of the contract, is included in net assets.
The Fund has procedures to determine the fair value of financial instruments for which market prices are not reliable or readily available. Under these procedures, the VC convenes on a regular basis to review such financial instruments and considers a number of factors, including significant unobservable valuation inputs, when arriving at fair value. The VC primarily employs a market-based approach which may use related or comparable assets or liabilities, recent transactions, market multiples, book values, and other relevant information for the investment to determine the fair value of the investment. An income-based valuation approach may also be used in which the anticipated
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Semiannual Report 31
FRANKLIN MUTUAL GLOBAL DISCOVERY FUND
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
1. Organization and Significant Accounting Policies (continued)
a. Financial Instrument Valuation (continued)
future cash flows of the investment are discounted to calculate fair value. Discounts may also be applied due to the nature or duration of any restrictions on the disposition of the investments. Due to the inherent uncertainty of valuations of such investments, the fair values may differ significantly from the values that would have been used had an active market existed. The VC employs various methods for calibrating these valuation approaches including a regular review of key inputs and assumptions, transactional back-testing or disposition analysis, and reviews of any related market activity.
Trading in securities on foreign securities stock exchanges and OTC markets may be completed before 4 p.m. Eastern time. In addition, trading in certain foreign markets may not take place on every NYSE business day. Occasionally, events occur between the time at which trading in a foreign security is completed and the close of the NYSE that might call into question the reliability of the value of a portfolio security held by the Fund. As a result, differences may arise between the value of the Fund’s portfolio securities as determined at the foreign market close and the latest indications of value at the close of the NYSE. In order to minimize the potential for these differences, the VC monitors price movements following the close of trading in foreign stock markets through a series of country specific market proxies (such as baskets of American Depositary Receipts, futures contracts and exchange traded funds). These price movements are measured against established trigger thresholds for each specific market proxy to assist in determining if an event has occurred that may call into question the reliability of the values of the foreign securities held by the Fund. If such an event occurs, the securities may be valued using fair value procedures, which may include the use of independent pricing services.
When the last day of the reporting period is a non-business day, certain foreign markets may be open on those days that the NYSE is closed, which could result in differences between the value of the Fund’s portfolio securities on the last business day and the last calendar day of the reporting period. Any significant security valuation changes due to an open foreign market are adjusted and reflected by the Fund for financial reporting purposes.
b. Foreign Currency Translation
Portfolio securities and other assets and liabilities denominated in foreign currencies are translated into U.S. dollars based on the exchange rate of such currencies against U.S. dollars on the date of valuation. The Fund may enter into foreign currency exchange contracts to facilitate transactions denominated in a foreign currency. Purchases and sales of securities, income and expense items denominated in foreign currencies are translated into U.S. dollars at the exchange rate in effect on the transaction date. Portfolio securities and assets and liabilities denominated in foreign currencies contain risks that those currencies will decline in value relative to the U.S. dollar. Occasionally, events may impact the availability or reliability of foreign exchange rates used to convert the U.S. dollar equivalent value. If such an event occurs, the foreign exchange rate will be valued at fair value using procedures established and approved by the Board.
The Fund does not separately report the effect of changes in foreign exchange rates from changes in market prices on securities held. Such changes are included in net realized and unrealized gain or loss from investments in the Statement of Operations.
Realized foreign exchange gains or losses arise from sales of foreign currencies, currency gains or losses realized between the trade and settlement dates on securities transactions and the difference between the recorded amounts of dividends, interest, and foreign withholding taxes and the U.S. dollar equivalent of the amounts actually received or paid. Net unrealized foreign exchange gains and losses arise from changes in foreign exchange rates on foreign denominated assets and liabilities other than investments in securities held at the end of the reporting period.
c. Securities Purchased on a Delayed Delivery Basis
The Fund purchases securities on a delayed delivery basis, with payment and delivery scheduled for a future date. These transactions are subject to market fluctuations and are subject to the risk that the value at delivery may be more or less than the trade date purchase price. Although the Fund will generally purchase these securities with the intention of holding the securities, it may sell the securities before the settlement date. Sufficient assets have been segregated for these securities.
d. Derivative Financial Instruments
The Fund invested in derivatives in order to manage risk or gain exposure to various other investments or markets. Derivatives are financial contracts based on an underlying or notional amount, require no initial investment or an initial net
32 Semiannual Report
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FRANKLIN MUTUAL GLOBAL DISCOVERY FUND
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
investment that is smaller than would normally be required to have a similar response to changes in market factors, and require or permit net settlement. Derivatives contain various risks including the potential inability of the counterparty to fulfill their obligations under the terms of the contract, the potential for an illiquid secondary market, and/or the potential for market movements which expose the Fund to gains or losses in excess of the amounts shown in the Statement of Assets and Liabilities. Realized gain and loss and unrealized appreciation and depreciation on these contracts for the period are included in the Statement of Operations.
Derivative counterparty credit risk is managed through a formal evaluation of the creditworthiness of all potential counter-parties. The Fund attempts to reduce its exposure to counterparty credit risk on OTC derivatives, whenever possible, by entering into International Swaps and Derivatives Association (ISDA) master agreements with certain counterparties. These agreements contain various provisions, including but not limited to collateral requirements, events of default, or early termination. Termination events applicable to the counterparty include certain deteriorations in the credit quality of the counterparty. Termination events applicable to the Fund include failure of the Fund to maintain certain net asset levels and/or limit the decline in net assets over various periods of time. In the event of default or early termination, the ISDA master agreement gives the non-defaulting party the right to net and close-out all transactions traded, whether or not arising under the ISDA agreement, to one net amount payable by one counterparty to the other. However, absent an event of default or early termination, OTC derivative assets and liabilities are presented gross and not offset in the Statement of Assets and Liabilities. Early termination by the counterparty may result in an immediate payment by the Fund of any net liability owed to that counterparty under the ISDA agreement. At June 30, 2016 the Fund had no OTC derivatives in a net liability position for such contracts.
Collateral requirements differ by type of derivative. Collateral or initial margin requirements are set by the broker or exchange clearing house for exchange traded and centrally cleared derivatives. Initial margin deposited is held at the exchange and can be in the form of cash and/or securities. For OTC derivatives traded under an ISDA master agreement, posting of collateral is required by either the Fund or the applicable coun-terparty if the total net exposure of all OTC derivatives with the applicable counterparty exceeds the minimum transfer amount, which typically ranges from $100,000 to $250,000, and can
vary depending on the counterparty and the type of the agreement. Generally, collateral is determined at the close of Fund business each day and any additional collateral required due to changes in derivative values may be delivered by the Fund or the counterparty within a few business days. Collateral pledged and/or received by the Fund for OTC derivatives, if any, is held in segregated accounts with the Fund’s custodian/counterparty broker and can be in the form of cash and/or securities. Unrestricted cash may be invested according to the Fund’s investment objectives. To the extent that the amounts due to the Fund from its counterparties are not subject to collateralization or are not fully collateralized, the Fund bears the risk of loss from counterparty non-performance.
At June 30, 2016, the Fund received $79,606,286 in United Kingdom Treasury Bonds and U.S. Treasury Bills and Notes as collateral for derivatives.
The Fund entered into exchange traded futures contracts primarily to manage exposure to certain foreign currencies. A futures contract is an agreement between the Fund and a counterparty to buy or sell an asset for a specified price on a future date. Required initial margins are pledged by the Fund, and the daily change in fair value is accounted for as a variation margin payable or receivable in the Statement of Assets and Liabilities.
The Fund entered into OTC forward exchange contracts primarily to manage exposure to certain foreign currencies. A forward exchange contract is an agreement between the Fund and a counterparty to buy or sell a foreign currency at a specific exchange rate on a future date.
The Fund purchased or wrote OTC option contracts primarily to manage exposure to foreign exchange rate risk. An option is a contract entitling the holder to purchase or sell a specific amount of shares or units of an asset or notional amount of a swap (swaption), at a specified price. When an option is purchased or written, an amount equal to the premium paid or received is recorded as an asset or liability, respectively. Upon exercise of an option, the acquisition cost or sales proceeds of the underlying investment is adjusted by any premium received or paid. Upon expiration of an option, any premium received or paid is recorded as a realized gain or loss. Upon closing an option other than through expiration or exercise, the difference between the premium received or paid and the cost to close the position is recorded as a realized gain or loss.
See Note 11 regarding other derivative information.
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Semiannual Report 33
FRANKLIN MUTUAL GLOBAL DISCOVERY FUND
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
1. Organization and Significant Accounting Policies (continued)
e. Restricted Cash
At June 30, 2016, the Fund held restricted cash in connection with investments in certain derivative securities. Restricted cash is held in a segregated account with the Fund’s custodian/ counterparty broker and is reflected in the Statement of Assets and Liabilities.
f. Securities Sold Short
The Fund is engaged in selling securities short, which obligates the Fund to replace a borrowed security with the same security at current fair value. The Fund incurs a loss if the price of the security increases between the date of the short sale and the date on which the Fund replaces the borrowed security. The Fund realizes a gain if the price of the security declines between those dates. Gains are limited to the price at which the Fund sold the security short, while losses are potentially unlimited in size.
The Fund is required to establish a margin account with the broker lending the security sold short. While the short sale is outstanding, the broker retains the proceeds of the short sale to the extent necessary to meet margin requirements until the short position is closed out. A deposit must also be maintained with the Fund’s custodian/counterparty broker consisting of cash and/or securities having a value equal to a specified percentage of the value of the securities sold short. The Fund is obligated to pay fees for borrowing the securities sold short and is required to pay the counterparty any dividends and/or interest due on securities sold short. Such dividends and/or interest and any security borrowing fees are recorded as an expense to the Fund.
g. Securities Lending
The Fund participates in an agency based securities lending program to earn additional income. The Fund receives cash collateral against the loaned securities in an amount equal to at least 102% of the fair value of the loaned securities. Collateral is maintained over the life of the loan in an amount not less than 100% of the fair value of loaned securities, as determined at the close of Fund business each day; any additional collateral required due to changes in security values is delivered to the Fund on the next business day. The collateral is deposited into a joint cash account with other funds and is used to invest in a money market fund managed by Franklin Advisers, Inc., an affiliate of the Fund, and/or a joint repurchase agreement. The
Fund may receive income from the investment of cash collateral, in addition to lending fees and rebates paid by the borrower. Income from securities loaned, net of fees paid to the securities lending agent and/or third-party vendor, is reported separately in the Statement of Operations. The Fund bears the market risk with respect to the collateral investment, securities loaned, and the risk that the agent may default on its obligations to the Fund. If the borrower defaults on its obligation to return the securities loaned, the Fund has the right to repurchase the securities in the open market using the collateral received. The securities lending agent has agreed to indemnify the Fund in the event of default by a third party borrower. At June 30, 2016, the Fund had no securities on loan.
h. Senior Floating Rate Interests
The Fund invests in senior secured corporate loans that pay interest at rates which are periodically reset by reference to a base lending rate plus a spread. These base lending rates are generally the prime rate offered by a designated U.S. bank or the London InterBank Offered Rate (LIBOR). Senior secured corporate loans often require prepayment of principal from excess cash flows or at the discretion of the borrower. As a result, actual maturity may be substantially less than the stated maturity. Senior secured corporate loans in which the Fund invests are generally readily marketable, but may be subject to certain restrictions on resale.
i. Income and Deferred Taxes
It is the Fund’s policy to qualify as a regulated investment company under the Internal Revenue Code. The Fund intends to distribute to shareholders substantially all of its taxable income and net realized gains to relieve it from federal income and excise taxes. As a result, no provision for U.S. federal income taxes is required.
The Fund may be subject to foreign taxation related to income received, capital gains on the sale of securities and certain foreign currency transactions in the foreign jurisdictions in which it invests. Foreign taxes, if any, are recorded based on the tax regulations and rates that exist in the foreign markets in which the Fund invests. When a capital gain tax is determined to apply, the Fund records an estimated deferred tax liability in an amount that would be payable if the securities were disposed of on the valuation date. As a result of several court cases, in certain countries across the European Union, the Fund filed additional tax reclaims for previously withheld taxes on dividends earned in those countries (EU reclaims). These additional
34 Semiannual Report
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FRANKLIN MUTUAL GLOBAL DISCOVERY FUND
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
filings are subject to various administrative proceedings by the local jurisdictions’ tax authorities within the European Union, as well as a number of related judicial proceedings. Income recognized, if any, for EU reclaims is reflected as other income in the Statement of Operations and any related receivable, if any, is reflected as European Union tax reclaims in the Statement of Assets and Liabilities. When uncertainty exists as to the ultimate resolution of these proceedings, the likelihood of receipt of these EU reclaims, and the potential timing of payment, no amounts are reflected in the financial statements.
The Fund may recognize an income tax liability related to its uncertain tax positions under U.S. GAAP when the uncertain tax position has a less than 50% probability that it will be sustained upon examination by the tax authorities based on its technical merits. As of June 30, 2016, the Fund has determined that no tax liability is required in its financial statements related to uncertain tax positions for any open tax years (or expected to be taken in future tax years). Open tax years are those that remain subject to examination and are based on each tax jurisdiction’s statute of limitation.
j. Security Transactions, Investment Income, Expenses and Distributions
Security transactions are accounted for on trade date. Realized gains and losses on security transactions are determined on a specific identification basis. Interest income and estimated expenses are accrued daily. Amortization of premium and accretion of discount on debt securities are included in interest income. Dividend income and dividends declared on securities sold short are recorded on the ex-dividend date except for certain dividends from foreign securities where the dividend rate is not available. In such cases, the dividend is recorded as soon as the information is received by the Fund. Distributions to shareholders are recorded on the ex-dividend date and are determined according to income tax regulations (tax basis). Distributable earnings determined on a tax basis may differ from earnings recorded in accordance with U.S. GAAP. These differences may be permanent or temporary. Permanent differences are reclassified among capital accounts to reflect their tax character. These reclassifications have no impact on net assets or the results of operations. Temporary differences are not reclassified, as they may reverse in subsequent periods.
Common expenses incurred by the Trust are allocated among the funds based on the ratio of net assets of each fund to the combined net assets of the Trust. Fund specific expenses are charged directly to the fund that incurred the expense.
Realized and unrealized gains and losses and net investment income, not including class specific expenses, are allocated daily to each class of shares based upon the relative proportion of net assets of each class. Differences in per share distributions, by class, are generally due to differences in class specific expenses.
k. Accounting Estimates
The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the amounts of income and expenses during the reporting period. Actual results could differ from those estimates.
l. Guarantees and Indemnifications
Under the Trust’s organizational documents, its officers and trustees are indemnified by the Trust against certain liabilities arising out of the performance of their duties to the Trust. Additionally, in the normal course of business, the Trust, on behalf of the Fund, enters into contracts with service providers that contain general indemnification clauses. The Trust’s maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Trust that have not yet occurred. Currently, the Trust expects the risk of loss to be remote.
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Semiannual Report 35
FRANKLIN MUTUAL GLOBAL DISCOVERY FUND
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
2. Shares of Beneficial Interest
At June 30, 2016, there were an unlimited number of shares authorized (without par value). Transactions in the Fund’s shares were as follows:
Six Months Ended | Year Ended | |||||||||||
June 30, 2016 | December 31, 2015 | |||||||||||
Shares | Amount | Shares | Amount | |||||||||
Class Z Shares: | ||||||||||||
Shares sold | 20,279,150 | $ | 575,438,807 | 42,382,438 | $ | 1,417,518,812 | ||||||
Shares issued in reinvestment of distributions | — | — | 26,156,041 | 761,748,485 | ||||||||
Shares redeemed | (81,857,238 | ) | (2,366,391,109 | ) | (68,764,363 | ) | (2,296,306,925 | ) | ||||
Net increase (decrease) | (61,578,088 | ) | $ | (1,790,952,302 | ) | (225,884 | ) | $ | (117,039,628 | ) | ||
Class A Shares: | ||||||||||||
Shares sold | 20,956,217 | $ | 584,030,134 | 67,815,155 | $ | 2,242,627,379 | ||||||
Shares issued in reinvestment of distributions | — | — | 33,918,312 | 971,252,561 | ||||||||
Shares redeemed | (44,822,304 | ) | (1,254,771,032 | ) | (63,780,164 | ) | (2,068,308,136 | ) | ||||
Net increase (decrease) | (23,866,087 | ) | $ | (670,740,898 | ) | 37,953,303 | $ | 1,145,571,804 | ||||
Class C Shares: | ||||||||||||
Shares sold | 4,005,245 | $ | 110,085,535 | 17,196,586 | $ | 560,093,583 | ||||||
Shares issued in reinvestment of distributions | — | — | 7,951,692 | 225,458,453 | ||||||||
Shares redeemed | (11,406,597 | ) | (315,039,202 | ) | (15,414,887 | ) | (495,030,946 | ) | ||||
Net increase (decrease) | (7,401,352 | ) | $ | (204,953,667 | ) | 9,733,391 | $ | 290,521,090 | ||||
Class R Shares: | ||||||||||||
Shares sold | 1,142,175 | $ | 31,598,752 | 2,599,812 | $ | 84,252,120 | ||||||
Shares issued in reinvestment of distributions | — | — | 1,403,754 | 39,729,502 | ||||||||
Shares redeemed | (2,249,834 | ) | (62,378,181 | ) | (3,865,140 | ) | (124,517,051 | ) | ||||
Net increase (decrease) | (1,107,659 | ) | $ | (30,779,429 | ) | 138,426 | $ | (535,429 | ) | |||
Class R6 Shares: | ||||||||||||
Shares sold | 8,027,665 | $ | 229,486,521 | 5,836,313 | $ | 192,133,049 | ||||||
Shares issued in reinvestment of distributions | — | — | 365,321 | 10,603,629 | ||||||||
Shares redeemed | (1,473,145 | ) | (41,947,032 | ) | (2,512,137 | ) | (82,104,549 | ) | ||||
Net increase (decrease) | 6,554,520 | $ | 187,539,489 | 3,689,497 | $ | 120,632,129 |
3. Transactions with Affiliates
Franklin Resources, Inc. is the holding company for various subsidiaries that together are referred to as Franklin Templeton Investments. Certain officers and trustees of the Fund are also officers and/or directors of the following subsidiaries:
Subsidiary | Affiliation |
Franklin Mutual Advisers, LLC (Franklin Mutual) | Investment manager |
Franklin Templeton Services, LLC (FT Services) | Administrative manager |
Franklin Templeton Distributors, Inc. (Distributors) | Principal underwriter |
Franklin Templeton Investor Services, LLC (Investor Services) | Transfer agent |
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FRANKLIN MUTUAL GLOBAL DISCOVERY FUND
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
a. Management Fees
The Fund pays an investment management fee to Franklin Mutual based on the average daily net assets of the Fund as follows:
Annualized Fee Rate | Net Assets | |
0.875 | % | Up to and including $4 billion |
0.845 | % | Over $4 billion, up to and including $7 billion |
0.825 | % | Over $7 billion, up to and including $10 billion |
0.805 | % | Over $10 billion, up to and including $13 billion |
0.785 | % | Over $13 billion, up to and including $16 billion |
0.765 | % | Over $16 billion, up to and including $19 billion |
0.745 | % | Over $19 billion, up to and including $22 billion |
0.725 | % | Over $22 billion, up to and including $25 billion |
0.705 | % | Over $25 billion, up to and including $28 billion |
0.685 | % | In excess of $28 billion |
For the period ended June 30, 2016, the annualized effective investment management fee rate was 0.808% of the Fund’s average daily net assets.
b. Administrative Fees
Under an agreement with Franklin Mutual, FT Services provides administrative services to the Fund. The fee is paid by Franklin Mutual based on the Fund’s average daily net assets, and is not an additional expense of the Fund.
c. Distribution Fees
The Board has adopted distribution plans for each share class, with the exception of Class Z and Class R6 shares, pursuant to Rule 12b-1 under the 1940 Act. Under the Fund’s Class A reimbursement distribution plan, the Fund reimburses Distributors for costs incurred in connection with the servicing, sale and distribution of the Fund’s shares up to the maximum annual plan rate. Under the Class A reimbursement distribution plan, costs exceeding the maximum for the current plan year cannot be reimbursed in subsequent periods. In addition, under the Fund’s Class C and R compensation distribution plans, the Fund pays Distributors for costs incurred in connection with the servicing, sale and distribution of the Fund’s shares up to the maximum annual plan rate for each class. The plan year, for purposes of monitoring compliance with the maximum annual plan rates, is February 1 through January 31 for each fund.
The maximum annual plan rates, based on the average daily net assets, for each class, are as follows:
Class A | 0.35 | % |
Class C | 1.00 | % |
Class R | 0.50 | % |
The Board has set the current rate at 0.25% per year for Class A shares until further notice and approval by the Board.
d. Sales Charges/Underwriting Agreements
Front-end sales charges and contingent deferred sales charges (CDSC) do not represent expenses of the Fund. These charges are deducted from the proceeds of sales of Fund shares prior to investment or from redemption proceeds prior to remittance, as applicable. Distributors has advised the Fund of the following commission transactions related to the sales and redemptions of the Fund’s shares for the period:
Sales charges retained net of commissions paid to unaffiliated | ||
broker/dealers | $ | 1,632,679 |
CDSC retained | $ | 143,427 |
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FRANKLIN MUTUAL GLOBAL DISCOVERY FUND
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
3. Transactions with Affiliates (continued)
e. Transfer Agent Fees
Each class of shares, except for Class R6, pays transfer agent fees to Investor Services for its performance of shareholder servicing obligations and reimburses Investor Services for out of pocket expenses incurred, including shareholder servicing fees paid to third parties. These fees are allocated daily based upon their relative proportion of such classes’ aggregate net assets. Class R6 pays Investor Services transfer agent fees specific to that class.
For the period ended June 30, 2016, the Fund paid transfer agent fees of $17,459,632, of which $6,293,783 was retained by Investor Services.
f. Investments in Affiliated Management Investment Companies
The Fund invests in one or more affiliated management investment companies for purposes other than exercising a controlling influence over the management or policies. Management fees paid by the Fund are waived on assets invested in the affiliated management investment companies, as noted in the Statement of Operations, in an amount not to exceed the management and administrative fees paid directly or indirectly by each affiliate.
Number | % of Affiliated | ||||||||
of Shares | Number of | Fund Shares | |||||||
Held at | Shares Held | Value | Realized | Outstanding | |||||
Beginning | Gross | Gross | at End | at End | Investment | Gain | Held at End | ||
of Period | Additions | Reductions | of Period | of Period | Income | (Loss) | of Period | ||
Non-Controlled | |||||||||
Affiliates | |||||||||
Institutional Fiduciary | |||||||||
Trust Money Market | |||||||||
Portfolio | — | 1,068,309,000 | (1,068,309,000 | ) | — | $ — | $ — | $ — | —% |
g. Waiver and Expense Reimbursements
Investor Services has contractually agreed in advance to waive or limit its fees so that the Class R6 transfer agent fees do not exceed 0.01% until April 30, 2017. There were no Class R6 transfer agent fees waived during the period ended June 30, 2016.
4. Expense Offset Arrangement
The Fund has entered into an arrangement with its custodian whereby credits realized as a result of uninvested cash balances are used to reduce a portion of the Fund’s custodian expenses. During the period ended June 30, 2016, the custodian fees were reduced as noted in the Statement of Operations.
5. Independent Trustees’ Retirement Plan
On January 1, 1993, the Trust adopted an Independent Trustees’ Retirement Plan (Plan). The Plan is an unfunded defined benefit plan that provides benefit payments to Trustees whose length of service and retirement age meets the eligibility requirements of the Plan. Benefits under the Plan are based on years of service and fees paid to each trustee at the time of retirement. Effective in December 1996, the Plan was closed to new participants.
During the period ended June 30, 2016, the Fund’s projected benefit obligation and benefit payments under the Plan were as follows:
aProjected benefit obligation at June 30, 2016 | $ | 818,881 | |
bIncrease in projected benefit obligation | $ | 38,037 | |
Benefit payments made to retired trustees | $ | (11,667 | ) |
aThe projected benefit obligation is included in trustees’ fees and expenses in the Statement of Assets and Liabilities.
bThe increase in projected benefit obligation is included in trustees’ fees and expenses in the Statement of Operations.
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NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
6. Income Taxes
At June 30, 2016, the cost of investments and net unrealized appreciation (depreciation) for income tax purposes were as follows:
Cost of investments | $ | 20,040,146,649 | |
Unrealized appreciation | $ | 4,038,230,300 | |
Unrealized depreciation | (2,671,164,608 | ) | |
Net unrealized appreciation (depreciation) | $ | 1,367,065,692 |
Differences between income and/or capital gains as determined on a book basis and a tax basis are primarily due to differing treatment of foreign currency transactions.
7. Investment Transactions
Purchases and sales of investments (excluding short term securities and securities sold short) for the period ended June 30, 2016, aggregated $1,887,019,521 and $4,142,990,958, respectively.
8. Credit Risk and Defaulted Securities
The Fund may purchase the pre-default or defaulted debt of distressed companies. Distressed companies are financially troubled and could be or are already involved in financial restructuring or bankruptcy. Risks associated with purchasing these securities include the possibility that the bankruptcy or other restructuring process takes longer than expected, or that distributions in restructuring are less than anticipated, either or both of which may result in unfavorable consequences to the Fund. If it becomes probable that the income on debt securities, including those of distressed companies, will not be collected, the Fund discontinues accruing income and recognizes an adjustment for uncollectible interest.
At June 30, 2016, the aggregate long value of distressed company securities for which interest recognition has been discontinued was $213,752,100, representing 1.0% of the Fund’s net assets. For information as to specific securities, see the accompanying Statement of Investments.
9. Concentration of Risk
Investing in foreign securities may include certain risks and considerations not typically associated with investing in U.S. securities, such as fluctuating currency values and changing local and regional economic, political and social conditions, which may result in greater market volatility. In addition, certain foreign securities may not be as liquid as U.S. securities.
10. Restricted Securities
The Fund invests in securities that are restricted under the Securities Act of 1933 (1933 Act) or which are subject to legal, contractual, or other agreed upon restrictions on resale. Restricted securities are often purchased in private placement transactions, and cannot be sold without prior registration unless the sale is pursuant to an exemption under the 1933 Act. Disposal of these securities may require greater effort and expense, and prompt sale at an acceptable price may be difficult. The Fund may have registration rights for restricted securities. The issuer generally incurs all registration costs.
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NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
10. Restricted Securities (continued)
At June 30, 2016, the Fund held investments in restricted securities, excluding certain securities exempt from registration under the 1933 Act deemed to be liquid, as follows:
Principal | ||||||
Amount/ | ||||||
Shares/ | Acquisition | |||||
Units | Issuer | Dates | Cost | Value | ||
8,893 | Broadband Ventures III LLC, secured promissory note, 5.00%, 2/01/12 | 7/01/10 - 11/30/12 | $ | 8,893 | $ | — |
30,279,560 | FIM Coinvestor Holdings I, LLC | 11/20/06 - 6/02/09 | — | — | ||
3,048,000 | Hightower Holding LLC, pfd., A, Series 2 | 6/10/10 - 5/10/12 | 7,620,000 | 8,169,250 | ||
3,819,425 | International Automotive Components Group Brazil LLC | 4/13/06 - 12/26/08 | 2,536,498 | 62,879 | ||
35,491,081 | International Automotive Components Group North America LLC | 1/12/06 - 3/18/13 | 29,095,371 | 15,657,458 | ||
60,966 | Warrior Met Coal LLC, A | 9/19/14 - 12/04/14 | 80,068,471 | 6,146,373 | ||
142,575 | Warrior Met Coal LLC, B | 3/31/16 - 6/23/16 | 11,406,033 | 14,373,898 | ||
Total Restricted Securities (Value is 0.2% of Net Assets) | $ | 130,735,266 | $ | 44,409,858 |
11. Other Derivative Information
At June 30, 2016, the Fund’s investments in derivative contracts are reflected in the Statement of Assets and Liabilities as follows:
Asset Derivatives | Liability Derivatives | ||||||
Derivative Contracts | |||||||
Not Accounted for as | Statement of Assets and | Statement of Assets and | |||||
Hedging Instruments | Liabilities Location | Fair Value | Liabilities Location | Fair Value | |||
Foreign exchange contracts | Investments in securities, at | $ | 1,689,317 | a | |||
value | |||||||
Variation margin | 92,364,041 | b | |||||
Unrealized appreciation on | 135,601,120 | Unrealized depreciation on | $ | 22,863,869 | |||
OTC forward exchange | OTC forward exchange | ||||||
contracts | contracts | ||||||
Totals | $ | 229,654,478 | $ | 22,863,869 |
a Purchase option contracts are included in investments in securities, at value in the Statement of Assets and Liabilities.
b This amount reflects the cumulative appreciation (depreciation) of futures contracts as reported in the Statement of Investments. Only the variation margin receivable/payable
at period end is separately reported within the Statement of Assets and Liabilities. Prior variation margin movements were recorded to cash upon receipt or payment.
For the period ended June 30, 2016, the effect of derivative contracts in the Fund’s Statement of Operations was as follows:
Net Change in | ||||||||
Unrealized | ||||||||
Derivative Contracts | Net Realized | Appreciation | ||||||
Not Accounted for as | Statement of | Gain (Loss) | Statement of | (Depreciation) | ||||
Hedging Instruments | Operations Locations | for the Period | Operations Locations | for the Period | ||||
Net realized gain (loss) from: | Net change in unrealized | |||||||
appreciation (depreciation) | ||||||||
on: | ||||||||
Foreign exchange contracts | Investments | $ | (5,400,182 | )a | ||||
Foreign currency transactions | $ | 85,068,798 | b | Translation of other assets and | (25,984,124 | )b | ||
liabilities denominated in | ||||||||
foreign currencies | ||||||||
Futures contracts | (23,507,746 | ) | Futures contracts | 74,308,829 | ||||
Totals | $ | 61,561,052 | $ | 42,924,523 |
a Purchased option contracts are included in net change in unrealized appreciation (depreciation) on investments in the Statement of Operations.
b Forward exchange contracts are included in net realized gain (loss) from foreign currency transactions and net change in unrealized appreciation (depreciation) on translation
of other assets and liabilities denominated in foreign currencies in the Statement of Operations.
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NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
For the period ended June 30, 2016, the average month end fair value of derivatives represented 1.0% of average month end net assets. The average month end number of open derivative contracts for the period was 176.
See Note 1(d) regarding derivative financial instruments.
12. Holdings of 5% Voting Securities of Portfolio Companies
The 1940 Act defines “affiliated companies” to include investments in portfolio companies in which a fund owns 5% or more of the outstanding voting securities. Investments in “affiliated companies” for the Fund for the period ended June 30, 2016, were as shown below.
Number | ||||||||
of Shares | Number of | |||||||
Held at | Shares Held | Value | Realized | |||||
Beginning | Gross | Gross | at End | at End | Investment | Gain | ||
Name of Issuer | of Period | Additions | Reductions | of Period | of Period | Income | (Loss) | |
Non-Controlled Affiliates | ||||||||
International Automotive Components Group | ||||||||
North America LLC (Value is 0.1% of Net | ||||||||
Assets) | 35,491,081 | — | — | 35,491,081 | $ | 15,657,458 | $ — | $ — |
13. Credit Facility
The Fund, together with other U.S. registered and foreign investment funds (collectively, Borrowers), managed by Franklin Temple-ton Investments, are borrowers in a joint syndicated senior unsecured credit facility totaling $2 billion (Global Credit Facility) which matures on February 10, 2017. This Global Credit Facility provides a source of funds to the Borrowers for temporary and emergency purposes, including the ability to meet future unanticipated or unusually large redemption requests.
Under the terms of the Global Credit Facility, the Fund shall, in addition to interest charged on any borrowings made by the Fund and other costs incurred by the Fund, pay its share of fees and expenses incurred in connection with the implementation and maintenance of the Global Credit Facility, based upon its relative share of the aggregate net assets of all of the Borrowers, including an annual commitment fee of 0.07% based upon the unused portion of the Global Credit Facility. Effective February 12, 2016, the annual commitment fee is 0.15%. These fees are reflected in other expenses in the Statement of Operations. During the period ended June 30, 2016, the Fund did not use the Global Credit Facility.
14. Fair Value Measurements
The Fund follows a fair value hierarchy that distinguishes between market data obtained from independent sources (observable inputs) and the Fund’s own market assumptions (unobservable inputs). These inputs are used in determining the value of the Fund’s financial instruments and are summarized in the following fair value hierarchy:
- Level 1 – quoted prices in active markets for identical financial instruments
- Level 2 – other significant observable inputs (including quoted prices for similar financial instruments, interest rates, prepayment speed, credit risk, etc.)
- Level 3 – significant unobservable inputs (including the Fund’s own assumptions in determining the fair value of financial instruments)
The input levels are not necessarily an indication of the risk or liquidity associated with financial instruments at that level.
For movements between the levels within the fair value hierarchy, the Fund has adopted a policy of recognizing the transfers as of the date of the underlying event which caused the movement.
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NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
14. Fair Value Measurements (continued)
A summary of inputs used as of June 30, 2016, in valuing the Fund’s assets and liabilities carried at fair value, is as follows:
Level 1 | Level 2 | Level 3 | Total | |||||
Assets: | ||||||||
Investments in Securities: | ||||||||
Equity Investments:a | ||||||||
Auto Components | $ | 120,047,690 | $ | — | $ | 15,720,337 | $ | 135,768,027 |
Banks | 2,360,449,191 | 85,836,787 | — | 2,446,285,978 | ||||
Diversified Financial Services | 84,836,500 | — | 8,169,250 | 93,005,750 | ||||
Machinery | 280,366,096 | 52,783,027 | — | 333,149,123 | ||||
Oil, Gas & Consumable Fuels | 1,348,486,272 | — | 20,520,271 | 1,369,006,543 | ||||
All Other Equity Investmentsb | 15,048,183,714 | — | —c | 15,048,183,714 | ||||
Corporate Bonds, Notes and Senior Floating Rate | ||||||||
Interests | — | 785,854,915 | — | 785,854,915 | ||||
Corporate Notes and Senior Floating Rate Interests in | ||||||||
Reorganization | — | 213,752,100 | —c | 213,752,100 | ||||
Companies in Liquidation | 95,503 | 18,410,498 | —c | 18,506,001 | ||||
Municipal Bonds | — | 65,732,775 | — | 65,732,775 | ||||
Options Purchased | — | 1,689,317 | — | 1,689,317 | ||||
Short Term Investments | 823,878,098 | 72,400,000 | — | 896,278,098 | ||||
Total Investments in Securities | $ | 20,066,343,064 | $ | 1,296,459,419 | $ | 44,409,858 | $ | 21,407,212,341 |
Other Financial Instruments | ||||||||
Futures Contracts | $ | 92,364,041 | $ | — | $ | — | $ | 92,364,041 |
Forward Exchange Contracts | — | 135,601,120 | — | 135,601,120 | ||||
Total Other Financial Instruments | $ | 92,364,041 | $ | 135,601,120 | $ | — | $ | 227,965,161 |
Liabilities: | ||||||||
Other Financial Instruments | ||||||||
Securities Sold Short | $ | 124,367,288 | $ | — | $ | — | $ | 124,367,288 |
Forward Exchange Contracts | — | 22,863,869 | — | 22,863,869 | ||||
Total Other Financial Instruments | $ | 124,367,288 | $ | 22,863,869 | $ | — | $ | 147,231,157 |
aIncludes common and preferred stocks as well as other equity investments.
bFor detailed categories, see the accompanying Statement of Investments.
cIncludes securities determined to have no value at June 30, 2016.
A reconciliation of assets in which Level 3 inputs are used in determining fair value is presented when there are significant Level 3 financial instruments at the end of the period.
15. Subsequent Events
The Fund has evaluated subsequent events through the issuance of the financial statements and determined that no events have occurred that require disclosure.
Abbreviations | |||||
Counterparty | Currency | Selected Portfolio | |||
BANT | Bank of America N.A. | CAD | Canadian Dollar | ADR | American Depositary Receipt |
BONY | Bank of New York Mellon | CNY | Chinese Yuan | FHLB | Federal Home Loan Bank |
FBCO | Credit Suisse International | EUR | Euro | GO | General Obligation |
HSBC | HSBC Bank PLC | GBP | British Pound | PIK | Payment-In-Kind |
MSCS | Morgan Stanley Capital Services LLC | USD | United States Dollar | ||
SSBT | State Street Bank and Trust Co., N.A. |
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Shareholder Information
Board Review of Investment Management Agreement
The Board of Trustees (Board), including the independent trustees, at a Board meeting held on May 16, 2016, unanimously approved the renewal of the Fund’s investment management agreement. Prior to a meeting of all of the trustees for the purpose of considering such approval, the independent trustees participated in two other meetings held in connection with the renewal process (those trustees unable to attend in person were present by telephonic conference means). Throughout the process, the independent trustees received assistance and advice from and met separately with independent counsel. The independent trustees met with and interviewed officers of the investment manager (including portfolio managers), the transfer agent and shareholder services group and the distributor. In approving the renewal of the investment management agreement for the Fund, the Board, including the independent trustees, determined that the investment management fee structure was fair and reasonable and that continuance of the agreement was in the best interests of the Fund and its shareholders.
In reaching their decision on the investment management agreement, the trustees took into account information furnished throughout the year at regular Board meetings, as well as information specifically requested and furnished for the renewal process, which culminated in the meetings referred to above for the specific purpose of considering such agreement. Information furnished throughout the year included, among others, reports on the Fund’s investment performance, expenses, portfolio composition, portfolio brokerage execution, client commission arrangements, derivatives, securities lending, asset segregation, portfolio turnover, Rule 12b-1 plans, distribution, shareholder servicing, legal and compliance matters, pricing of securities and sales and redemptions, and marketing support payments made to financial intermediaries, as well as a third-party survey of transfer agent fees charged funds within the Franklin Templeton Investments (FTI) complex in comparison with those charged other fund complexes deemed comparable. Also, related financial statements and other information about the scope and quality of services provided by the investment manager and its affiliates and enhancements to such services over the past year were provided. In addition, the trustees received periodic reports throughout the year and during the renewal process relating to compliance with the Fund’s investment policies and restrictions. During the renewal process, the independent trustees considered the investment manager’s methods of operation within the Franklin Templeton group and its activities on behalf of other clients.
The information obtained by the trustees during the renewal process also included a special report prepared by Broadridge Financial Solutions, Inc. (Broadridge), an independent third-party analyst that utilizes data from Lipper, Inc. (“Lipper”), an independent third-party analyst,, comparing the Fund’s investment performance and expenses with those of other mutual funds deemed comparable to the Fund as selected by Lipper (Broadridge Section 15(c) Report). The trustees reviewed the Broadridge Section 15(c) Report and its usefulness in the approval process with respect to matters such as comparative fees, expenses, expense ratios, performance and volatility. They concluded that the report continues to be a reliable resource in the performance of their duties.
In addition, the trustees received a Profitability Study (Profitability Study) prepared by management discussing the profitability to FTI from its overall U.S. Fund operations, as well as on an individual fund-by-fund basis. Over the past year, the Board and counsel to the independent trustees continued to receive reports on management’s handling of recent regulatory inquiries and pending legal actions against the investment manager and its affiliates. The independent trustees were satisfied with the actions taken to date by management in response to such regulatory and legal matters.
Particular attention was given to management’s diligent risk management program, including continual monitoring and management of counterparty credit risk and attention given to derivatives and other complex instruments that are held and expected to be held by the Fund and how such instruments are used to carry out the Fund’s investment goals. The Board also took into account, among other things, management’s efforts in establishing a global credit facility for the benefit of the Fund and other accounts managed by FTI to provide a source of cash for temporary and emergency purposes or to meet unusual redemption requests as well as the strong financial position of the investment manager’s parent company and its commitment to the mutual fund business. In addition, the Board received updates from management on the Securities and Exchange Commission’s (SEC) progress in implementing the rule-making requirements established by the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), which was enacted July 21, 2010, and the investment manager’s compliance with rules and regulations already promulgated by the SEC under such act. The Board also noted that they received an annual report on all marketing support payments made by FTI to financial intermediaries, as well as a memorandum relating to third-party servicing arrangements in response to a Guidance Update from the SEC relating to mutual fund distribution and sub accounting fees.
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SHAREHOLDER INFORMATION
In addition to the above and other matters considered by the trustees throughout the course of the year, the following discussion relates to certain primary factors relevant to the Board’s decision. This discussion of the information and factors considered by the Board (as well as the discussion above) is not intended to be exhaustive, but rather summarizes certain factors considered by the Board. In view of the wide variety of factors considered, the Board did not, unless otherwise noted, find it practicable to quantify or otherwise assign relative weights to the foregoing factors. In addition, individual trustees may have assigned different weights to various factors.
NATURE, EXTENT AND QUALITY OF SERVICES. The trustees reviewed the nature, extent and quality of the services provided by the investment manager. In this regard, they reviewed the Fund’s investment approach and concluded that, in their view, it continues to differentiate the Fund from typical core investment products in the mutual fund field. The trustees cited the investment manager’s ability to implement the Fund’s disciplined value investment approach and its long-term relationship with the Fund as reasons that shareholders choose to invest, and remain invested, in the Fund. The trustees reviewed the Fund’s portfolio management team, including its performance, staffing, skills and compensation program. With respect to portfolio manager compensation, management assured the trustees that the Fund’s long-term performance is a significant component of incentive-based compensation and noted that a portion of a portfolio manager’s incentive-based compensation is paid in shares of predesignated funds from the portfolio manager’s fund management area. The trustees noted that the portfolio manager compensation program aligned the interests of the portfolio managers with that of Fund shareholders. The trustees discussed with management various other products, portfolios and entities that are advised by the investment manager and the allocation of assets and expenses among and within them, as well as their relative fees and reasons for differences with respect thereto and any potential conflicts. During regular Board meetings and the aforementioned meetings of the independent trustees, the trustees received reports and presentations on the investment manager’s best execution trading policies. The trustees considered periodic reports provided to them showing that the investment manager complied with the investment policies and restrictions of the Fund as well as other reports periodically furnished to the Board covering matters such as the compliance of portfolio managers and other management personnel with the code of ethics covering the investment management personnel, the adherence to fair value pricing procedures established by the Board and the accuracy of net asset value calculations. The
Board noted the extent of the benefits provided to Fund shareholders from being part of the Franklin Templeton group, including the right to exchange investments between funds (same class) without a sales charge, the ability to reinvest Fund dividends into other funds and the right to combine holdings of other funds to obtain reduced sales charges. The trustees considered the investment manager’s significant efforts in developing and implementing compliance procedures established in accordance with SEC and other requirements.
The trustees also reviewed the nature, extent and quality of the Fund’s other service agreements to determine that, on an overall basis, Fund shareholders were well served. In this connection, the Board also took into account transfer agent and shareholder services provided to Fund shareholders by an affiliate of the investment manager, noting continuing expenditures by management to increase and improve the scope of such services and favorable periodic reports on shareholder services conducted by independent third parties. While such considerations directly affected the trustees’ decision in renewing the Fund’s transfer agent and shareholder services agreement, the Board also considered these commitments as incidental benefits to Fund shareholders deriving from the investment management relationship.
Based on their review, the trustees were satisfied with the nature and quality of the overall services provided by the investment manager and its affiliates to the Fund and its shareholders and were confident in the abilities of the management team to continue the disciplined value investment approach of the Fund and to provide quality services to the Fund and its shareholders.
INVESTMENT PERFORMANCE. The trustees reviewed and placed significant emphasis on the investment performance of the Fund over the one-, three-, five- and 10-year periods ended December 31, 2015. They considered the history of successful performance of the Fund relative to various benchmarks. As part of their review, they inquired of management regarding benchmarks, style drift and restrictions on permitted investments. Consideration was also given to performance in the context of available levels of cash during the periods. The trustees had meetings during the year, including the meetings referred to above held in connection with the approval process, with the Fund’s portfolio managers to discuss performance and the management of the Fund. In addition, particular attention in assessing performance was given to the Broadridge Section 15(c) Report. That report
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SHAREHOLDER INFORMATION
showed the investment performance of the Fund (Class A shares) in comparison to other funds determined comparable by Lipper.
The comparable funds to the Fund, as chosen by Lipper, included all retail and institutional global multi-cap value funds. The Fund had total returns in the middle performing quintile for the one- year period ended December 31, 2015, and had annualized total returns for the three- and five-year periods in the second-best performing quintile. The trustees noted that the Fund’s total return on an annualized basis for the 10-year period ended December 31, 2015, was in the best performing quintile as shown in the Broadrdige Section 15(c) Report. The trustees also compared Fund performance to other industry benchmarks, including measures of risk-adjusted performance of a fund, as part of their evaluation of investment performance. The trustees concluded that the Fund had continued to perform well in comparison to its various benchmarks and in the context of the Fund’s objectives.
COMPARATIVE EXPENSES AND MANAGEMENT PROFITABILITY. The trustees considered the cost of the services provided and to be provided and the profits realized by the investment manager and its affiliates from their respective relationships with the Fund. As part of the approval process, they explored with management the trends in expense ratios over the past three fiscal years and the reasons for any increases in the Fund’s expense ratios (or components thereof). In considering the appropriateness of the management fee and other expenses charged to the Fund, the Board took into account various factors including investment performance and matters relating to Fund operations, including, but not limited to, the quality and experience of its portfolio managers and research staff. Consideration was also given to a comparative analysis in the Broadridge Section 15(c) Report of the investment management fee and total expense ratio of the Fund in comparison with those of a group of other funds selected by Lipper as its appropriate Lipper expense group. Lipper expense data is based upon information taken from the Fund’s most recent annual report, which reflects historical asset levels that may be quite different from those currently existing, particularly in a period of market volatility. While recognizing such inherent limitation and the fact that expense ratios generally increase as assets decline and decrease as assets grow, the Board believed the independent analysis conducted by Lipper to be an appropriate measure of comparative expenses.
In reviewing comparative costs, emphasis was given to the Fund’s contractual management fee in comparison with the contractual management fee that would have been charged by other funds within its Lipper expense group assuming they were similar in size to the Fund, as well as the actual total expenses of the Fund in comparison with those of its Lipper expense group. The Lipper contractual management fee analysis includes administrative charges as being part of the management fee, and total expenses, for comparative consistency, are shown by Lipper for Fund Class A shares.
The Fund’s contractual management fee rate was in the second-most expensive quintile of its Lipper expense group and its total expenses were in the least-expensive quintile of such group. The Board noted that the Fund’s contractual management fee rate was within 1.3 basis points of its expense group median. The Board found such comparative fees and expenses to be acceptable in view of factors relating to the Fund’s operations, such as the quality and experience of its portfolio managers.
The trustees also reviewed the Profitability Study addressing profitability of Franklin Resources, Inc., from its overall U.S. fund business, as well as profitability to the Fund’s investment manager and its affiliates, from providing investment management and other services to the Fund during the 12-month period ended September 30, 2015, the most recent fiscal year-end of Franklin Resources, Inc. The trustees reviewed the basis on which such reports are prepared and the cost allocation methodology utilized in the Profitability Study, it being recognized that allocation methodologies may each be reasonable while producing different results. In this respect, the Board noted that the reasonableness of the cost allocation methodologies was reviewed by independent accountants on an every other year basis.
The independent trustees met with management to discuss the Profitability Study. This included, among other things, a comparison of investment management income with investment management expenses of the Fund; comparison of underwriting revenues and expenses; the relative relationship of investment management and underwriting expenses; shareholder servicing profitability; economies of scale; and the relative contribution of the Fund to the profitability of the investment manager and its parent. In discussing the Profitability Study with the Board, the investment manager stated its belief that the costs incurred in establishing the infrastructure necessary to operate the type of mutual fund operations conducted by it and its affiliates may not be fully reflected in the expenses allocated to the Fund in determining its profitability.
The Board also took into account management’s expenditures in improving shareholder services provided to the Fund, as well
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FRANKLIN MUTUAL GLOBAL DISCOVERY FUND
SHAREHOLDER INFORMATION
as the need to meet additional regulatory and compliance requirements resulting from the Sarbanes-Oxley Act, the Dodd-Frank Act and recent SEC and other regulatory requirements. The trustees also considered the extent to which the investment manager may derive ancillary benefits from Fund operations, including those derived from economies of scale, discussed below, the allocation of Fund brokerage and the use of commission dollars to pay for research and other similar services.
Based upon their consideration of all these factors, the trustees determined that the level of profits realized by the investment manager and its affiliates in providing services to the Fund was not excessive in view of the nature, quality and extent of services provided.
ECONOMIES OF SCALE. The trustees considered economies of scale realized by the investment manager and its affiliates as the Fund grows larger and the extent to which they are shared with Fund shareholders, as for example, in the level of the investment management fee charged, in the quality and efficiency of services rendered and in increased capital commitments benefiting the Fund directly or indirectly. While recognizing that any precise determination is inherently subjective, the trustees noted that, based upon the Profitability Study, as some funds increase in size, at some point economies of scale may result in the investment manager realizing a larger profit margin on investment management services provided to such a fund. The trustees also noted that benefits of economies of scale will be shared with Fund shareholders due to the decline in the effective investment management fee rate as breakpoints are achieved by the Fund.
The trustees noted that breakpoints had been instituted as part of the Fund’s investment management fee in 2004, with additional breakpoints being added as deemed appropriate by the Board. The trustees assessed the savings to shareholders resulting from such breakpoints and believed they were, and continue to be, appropriate and they agreed to continue to monitor the appropriateness of the breakpoints. The trustees also considered the effects an increase in assets under management would have on the investment management fee and expense ratio of the Fund. To the extent further economies of scale may be realized by the investment manager and its affiliates, the Board believed the investment management and administrative fees provide a sharing of benefits with the Fund and its shareholders.
Proxy Voting Policies and Procedures
The Fund’s investment manager has established Proxy Voting Policies and Procedures (Policies) that the Fund uses to determine how to vote proxies relating to portfolio securities. Shareholders may view the Fund’s complete Policies online at franklintempleton.com. Alternatively, shareholders may request copies of the Policies free of charge by calling the Proxy Group collect at (954) 527-7678 or by sending a written request to: Franklin Templeton Companies, LLC, 300 S.E. 2nd Street, Fort Lauderdale, FL 33301, Attention: Proxy Group. Copies of the Fund’s proxy voting records are also made available online at franklintempleton.com and posted on the U.S. Securities and Exchange Commission’s website at sec.gov and reflect the most recent 12-month period ended June 30.
Quarterly Statement of Investments
The Fund files a complete statement of investments with the U.S. Securities and Exchange Commission for the first and third quarters for each fiscal year on Form N-Q. Shareholders may view the filed Form N-Q by visiting the Commission’s website at sec.gov. The filed form may also be viewed and copied at the Commission’s Public Reference Room in Wash-ington, DC. Information regarding the operations of the Public Reference Room may be obtained by calling (800) SEC-0330.
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Semiannual Report and Shareholder Letter
Franklin Mutual Global Discovery Fund
Investment Manager
Franklin Mutual Advisers, LLC.
Distributor
Franklin Templeton Distributors, Inc.
(800) DIAL BEN® / 342-5236
franklintempleton.com
Shareholder Services
(800) 632-2301 - (Class A, C, R & R6)
(800) 448-FUND - (Class Z)
Authorized for distribution only when accompanied or preceded by a summary prospectus and/or prospectus. Investors should carefully consider a fund’s investment goals, risks, charges and expenses before investing. A prospectus contains this and other information; please read it carefully before investing.
To help ensure we provide you with quality service, all calls to and from our service areas are monitored and/or recorded.
© 2016 Franklin Templeton Investments. All rights reserved. | 477 S 08/16 |
Contents | |
Semiannual Report | |
Franklin Mutual International Fund | 3 |
Performance Summary | 9 |
Your Fund’s Expenses | 12 |
Financial Highlights and Statement of Investments | 14 |
Financial Statements | 25 |
Notes to Financial Statements | 29 |
Shareholder Information | 41 |
Visit franklintempleton.com for fund updates, to access your account, or to find helpful financial planning tools.
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Franklin Mutual International Fund
This semiannual report for Franklin Mutual International Fund covers the period ended June 30, 2016.
Your Fund’s Goals and Main Investments
The Fund seeks capital appreciation, which may occasionally be short term, with income as a secondary goal, by investing, under normal market conditions, at least 80% of its assets in securities of companies located outside the U.S. Its strategy is focused mainly on what the investment manager believes are undervalued mid- and large cap equity securities and, to a lesser extent, the securities of distressed companies and merger arbi-trage securities.
Performance Overview
The Fund’s Class Z shares had a -6.35% cumulative total return for the six months ended June 30, 2016. In comparison, the Fund’s new benchmark, the MSCI All Country World Index (ACWI) ex U.S. Net Return (Local Currency), which is a free float-adjusted,1 market capitalization-weighted index designed to measure equity market performance in global developed and emerging markets, had a -4.14% total return, while its old equity benchmark, the MSCI Europe, Australasia, Far East (EAFE) Index Net Return (Local Currency), which measures equity performance in global developed markets outside the U.S. and Canada, had a -7.21% total return.2 As the investment manager believes the composition of the MSCI ACWI ex U.S. Net Return (Local Currency) more accurately reflects the Fund’s holdings, it has replaced the MSCI EAFE Index Net Return Local as the Fund’s benchmark. Also for comparison, the Fund’s new secondary benchmark, the MSCI ACWI ex U.S. Net Return (U.S. dollar) had a -0.67% total return.2 You can find more of the Fund’s performance data in the Performance Summary beginning on page 9.
Performance data represent past performance, which does not guarantee future results. Investment return and principal value will fluctuate, and you may have a gain or loss when you sell your shares. Current performance may differ from figures shown. For most recent month-end performance, go to franklintempleton.com or call (800) 342-5236.
*Figures are stated as a percentage of total and may not equal 100% or may be negative due to rounding, use of any derivatives, unsettled trades or other factors.
Economic and Market Overview
The global economy expanded during the six months under review. An improvement in commodity prices including a
1. A “free float-adjusted” index means that companies with larger proportions of their shares being actively traded, rather than being held by company insiders, governments or
cross held by other companies, receive higher weightings within the index.
2. Source: Morningstar.
The indexes are unmanaged and include reinvestment of any income or distributions. They do not reflect any fees, expenses or sales charges. One cannot invest directly in an
index, and an index is not representative of the Fund’s portfolio.
The dollar value, number of shares or principal amount, and names of all portfolio holdings are listed in the Fund’s Statement of Investments (SOI). The SOI
begins on page 19.
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rally in crude oil prices, accommodative monetary policy from various global central banks, finalization of the new debt deal for Greece and encouraging Chinese trade data toward period-end boosted market sentiment. However, global equity market volatility increased after the U.S. Federal Reserve’s (Fed’s) June decision to keep its federal funds target range unchanged, while providing a cautious stance on further interest rate hikes. In addition, global economic concerns and the U.K.’s historic referendum to leave the European Union (EU), also known as the “Brexit,” contributed to volatile global stock markets.
Oil prices fell at the beginning of the review period, largely due to a strong global supply, but recovered in the period’s second half amid oilfield outages and continued demand growth. Meanwhile, commodity prices increased for most of the review period as oversupply for a host of commodities shrank and the market appeared to be on the path of rebalancing after hitting a glut-induced bottom earlier in the year. Gold prices continued to rise following the Brexit referendum as some investors turned to safe haven investing. The U.S. dollar generally depreciated against most currencies during the period, which increased returns of many foreign assets in U.S. dollar terms. In this environment, global developed market stocks overall, as measured by the MSCI World Index, rose slightly during the period.
The U.S. economy grew moderately, as measured by gross domestic product (GDP) in 2016’s first and second quarters, driven by consumer spending and exports. A decline in private inventory investment and non-residential fixed investment contributed to the moderation. The Fed maintained its target interest rate during the review period after raising it for the first time in nine years at its December 2015 meeting. The Fed kept its target rate unchanged in its June meeting mainly due to a substantial slowdown in job additions toward period-end. The Fed expects economic conditions to evolve in a manner that could warrant only gradual increases in the federal funds rate.
In Europe, slower U.K. economic growth continued in 2016’s first quarter as output slowed in construction, production and agriculture. Immediate effects of the Brexit materialized as U.K. stocks significantly declined and the pound sterling hit a three-decade low amid intensified selling. Credit rating agencies Standard & Poor’s and Fitch also downgraded the U.K.’s credit rating. In the eurozone, despite investors’ concerns about banking sector weakness, low corporate earnings and post-Brexit political repercussions, some regions benefited due to rising consumer spending resulting from a cheaper euro, low inflation and signs of sustained economic growth. The euro-zone’s annual inflation rate remained in negative territory for most of the review period; however, it rose marginally above zero in June.
Japan’s economy posted mixed results, contracting in 2015’s fourth quarter stemming from declining private and household consumption. However, the economy expanded during 2016’s first quarter as private consumption increased and business investment decreased less than anticipated. The Bank of Japan (BOJ) took several actions during the review period. In January, to boost lending and support inflation, the BOJ introduced a negative interest rate on excess reserves held at the central bank by financial institutions. In April, the BOJ further reduced its GDP and inflation forecasts for fiscal year 2016, and decided against additional quantitative easing measures. However, after the U.K.’s vote in June to leave the EU, the BOJ hinted at carrying out flexible open market operations to stabilize its financial markets.
In emerging markets, economic growth generally moderated during the review period. Brazil’s economy witnessed its longest recession since the 1930s amid political and economic turmoil, while Russia’s economy continued to contract. The Bank of Russia reduced its key interest rate in an attempt to revive its economy. China’s economic growth slowed marginally in 2016’s first quarter compared to the previous quarter, but remained largely in line with the government’s target. The People’s Bank of China cut its cash reserve requirement ratio for the country’s banks and effectively devalued the renminbi against the U.S. dollar to the lowest level in more than five years. Overall, emerging market stocks, as measured by the MSCI Emerging Markets Index, rose for the six-month period under review.
Investment Strategy
At Franklin Mutual Series, we are committed to our distinctive value approach to investing, which we believe can generate above-average risk-adjusted returns over time for our shareholders. Our major investment strategy is investing in undervalued stocks in Asia and Europe. We have the ability to invest in emerging markets, although this is unlikely to be a significant focus of our strategy. When selecting undervalued equities, we are attracted to what we believe are fundamentally strong companies with healthy balance sheets, high-quality assets, substantial free cash flow and shareholder-oriented management teams and whose stocks are trading at discounts to our assessment of the companies’ intrinsic or business value. We also look for asset-rich companies whose shares may be trading at depressed levels due to concerns over short-term earnings disappointments, litigation, management strategy or other perceived negatives. This strict value approach is not only intended to improve the likelihood of upside potential, but it is also intended to reduce the risk of substantial declines. While the vast majority of our undervalued equity investments are
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made in publicly traded companies internationally, we may invest occasionally in privately held companies as well.
We complement this more traditional investment strategy with two others. One is distressed investing, a highly specialized field that has proven quite profitable during certain periods over the years. Distressed investing is complex and can take many forms. The most common distressed investment the Fund undertakes is the purchase of financially troubled or bankrupt companies’ debt at a substantial discount to face value. After the financially distressed company is reorganized, the old debt is typically replaced with new securities issued by the financially stronger company.
The other piece of our investment strategy is participating in arbitrage situations, another highly specialized field. When companies announce proposed mergers or takeovers, commonly referred to as “deals,” the target company may trade at a discount to the bid it ultimately accepts. One form of arbitrage involves purchasing the target company’s stock when it is trading below the value we believe it would receive in a deal. In keeping with our commitment to a relatively conservative investment approach, we typically focus our arbitrage efforts on announced deals, and avoid rumored deals or other situations we consider relatively risky.
In addition, it is our practice to hedge the Fund’s currency exposure when we deem it advantageous for our shareholders.
What is meant by “hedge”?
To hedge an investment is to take a position intended to offset potential losses/gains that may be incurred by a companion financial instrument.
Manager’s Discussion
European equity markets experienced a turbulent first half of 2016. Stocks in Europe started the new year lower due to renewed concern regarding China’s economy and a further deterioration in crude oil prices. Markets recovered by the middle of February, aided by an improvement in oil prices, and continued to rise as investors reacted positively to additional stimulus measures announced by the European Central Bank (ECB) in early March. Overall, eurozone economic data indicated a continuing modest recovery fueled mostly by consumer spending and increased household lending. Manufacturing-related data during the period were generally soft.
Top 10 Sectors/Industries | ||
Based on Equity Securities as of 6/30/16 | ||
% of Total | ||
Net Assets | ||
Insurance | 12.9 | % |
Pharmaceuticals | 7.5 | % |
Diversified Telecommunication Services | 5.3 | % |
Specialty Retail | 5.3 | % |
Auto Components | 5.1 | % |
Banks | 4.4 | % |
Oil, Gas & Consumable Fuels | 4.3 | % |
Chemicals | 3.5 | % |
Hotels, Restaurants & Leisure | 3.2 | % |
Air Freight & Logistics | 3.1 | % |
The momentous decision by U.K. voters on June 23 to leave the EU has introduced significant economic, financial and political uncertainty to the region. We believe it is probable that the U.K. will face a heightened risk of an economic slowdown, as businesses will likely put investment decisions on hold while waiting clarity as to what the new reality may look like. The negative impact on the rest of the EU will likely be less severe, although economic growth in the region was already running at a modest pace before the vote, and we do not believe the region will be immune.
We anticipate prices in European financial markets will reflect increasing political and economic risk. The prospects of continuing low or even lower interest rates, as well as uncertainty as to the future of London as Europe’s main financial center will likely weigh on financial stocks. Potentially slower economic growth and the regional trade implications of the Brexit will also weigh on domestically oriented cyclical stocks. With this in mind, we have notably reduced the Fund’s exposure to the financials sector, primarily by reducing our exposure to banks.3 Areas of the equity markets that were viewed as defensive, as well as stocks with what we consider attractive dividend yields, will likely remain in favor among many investors, in our view, causing them to trade at even higher valuation multiples. As it stands, consumer staples already trade significantly above historical valuations. Within the U.K., large multinational companies that generate most of their earnings abroad should benefit from the precipitous fall of the British pound that followed the Brexit vote. In this respect, the Fund’s exposure to U.K. equities was predominantly through a number of these global companies.
3. The financials sector comprises banks, capital markets, consumer finance, diversified financial services, insurance, real estate investment trusts, real estate management and development, and thrifts and mortgage finance in the SOI.
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Although the Brexit vote is clearly a negative surprise, we do not believe it will usher in a new global financial crisis similar to the one experienced eight years ago. Although markets reacted brutally to the U.K.’s decision to leave the EU, we have not seen any systemic shock like the one that followed the fall of Lehman Brothers in 2008. We also believe that, eventually, the U.K. and the EU will come to an acceptable agreement concerning trade relations.
In Asia, disruptions in the Chinese markets due to technical factors at the beginning of the year were proven to be unrelated to fundamental factors as we surmised having recently returned from the region. However, structural adjustments continue in China with excess capacity being withdrawn from a number of “old economy” sectors such as steel, coal, glass, and cement. We believe that we are well positioned to benefit from these changes, with exposure to low-cost producers that will be the winners from these changes, in our view. At the same time, reverberations from these adjustments will be felt throughout the economy, from credit losses at the banks to unpaid claims to suppliers.
Japan is suffering from the impact of its negative interest rate policy (NIRP) which has even further reduced consumption. Demographics in Japan are such that a very large portion of its population is retired or close to retirement. With no return on savings due to NIRP and pension funds that are increasingly underfunded, they have no choice but to save even more. Therefore, quantitative easing (QE) is having the opposite impact from what was intended. The positive news is that share prices are coming off the euphoric valuations driven by QE and the resulting depreciation of the yen as that has also retraced some of its move. This gives us some companies to start looking at again in Japan.
Turning to Fund performance, top contributors to performance included glass manufacturer Xinyi Glass Holdings, condominium developer Takara Leben, and integrated oil and gas company Royal Dutch Shell.
Xinyi Glass Holdings is a major diversified glass manufacturer in China. Xinyi’s positive stock performance was primarily driven by its float glass division. Float glass is used mainly in the housing industry which is experiencing strong demand in China. In addition, the supply of float glass has declined due to government restrictions and the exit of loss-making companies. The improved industry supply-demand environment led to improved margins and profits in Xinyi’s float glass division.
Takara Leben is a midsized condominium developer in Japan that is also rapidly expanding its solar farm capacity. In April, Takara Leben announced that it would be the first to list shares of its solar power assets on a newly formed infrastructure market. The financial vehicle holding the solar power assets will be similar to a real estate investment trust. In May, the company announced positive earnings results and a new share buy-back program.
Improved crude oil prices during the period helped many energy sector stocks, including U.K.-based Royal Dutch Shell. In January, company shareholders approved the acquisition of BG Group and both companies released quarterly results indicating strong cash flow and results in their natural gas operations. In June, investors reacted favorably to Royal Dutch Shell’s strategy update, which included an upward revision to synergies related to the BG Group acquisition, including a lower cost base, a limit on capital spending, and an implicit lower oil-price breakeven point. The company also reiterated its intention to dispose of US$30 billion in assets through 2018, maintain its dividend, eliminate the scrip dividend, and buy back US$25 billion of shares over time. Shares of Royal Dutch Shell did not follow the broad equity market decline after the Brexit referendum result in June. The company is a U.S. dollar-based business that reports and declares its dividends in U.S. dollars, with some level of British pound-based costs, resulting in a more what we consider an attractive valuation in its local market, given the decline of the pound.
During the period under review, Fund investments that detracted from performance included auto rental company CAR,4 insurance and financial services firm Assicurazioni Generali4 and insurer NN Group.
CAR is the largest company in the emerging Chinese auto rental industry and is also the largest supplier of vehicles to mobile app-based chauffeured car service company UCAR. The stock price of CAR declined due to increased competition within the car rental and chauffeured car service markets, as well as relaxed government rules on ride-sharing, which has impacted UCAR.
Similar to many other major European financial companies, shares of the Italy-based Assicurazioni Generali declined sharply in late June following the U.K. referendum to leave the EU. Italian financials were among the hardest hit as investors became concerned that the decision by U.K. voters may have negative implications for Italy, especially considering that the eurosceptic Five Star Movement political party fared well in the June local elections.
4. Not held at period-end.
See www.franklintempletondatasources.com for additional data provider information.
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Assicurazioni Generali’s share price also declined in January and early February. The financial sector in Europe was hindered by the potentially detrimental effect of the ECB’s negative interest rate policy, ongoing concerns about global economic health, and challenging capital market conditions. In addition, investors reacted negatively to the January announcement that chief executive officer (CEO) Mario Greco was leaving Assicurazioni Generali to take the CEO position at Zurich Insurance Group.
NN Group is a Netherlands-based insurer spun out of ING Groep in 2014. Shares of NN Group followed the broad-based decline of European financial stocks in late June following the U.K.’s vote to leave the EU. In our view, the outcome had negative implications for the insurance sector by increasing economic uncertainty, adding immediate downward pressure on global interest rates and increasing the possibility that the U.S. Fed will further delay its next interest rate hike. Shares of NN Group also declined in January and early February as Europe’s financial sector was hurt by the potentially detrimental effect of the European Central Bank’s negative interest rate policy.
During the period, the Fund held currency forwards and futures to hedge a significant portion of the currency risk of the portfolio’s non-U.S. dollar investments. The currency forwards had a minor positive impact on the Fund’s performance, while currency futures had a negligible impact.
What is a currency forward?
A currency forward is an agreement between the Fund and a counterparty to buy or sell a foreign currency in exchange for another currency at a specific exchange rate on a future date.
What is a future?
A futures is an agreement between the Fund and a counterparty made through a U.S. or foreign futures exchange to buy or sell an underlying instrument or asset at a specific price on a future date.
We are closely following the market repercussions from Brexit and maintain, for the time being, a cautious approach as there is still little clarity on how this fluid situation will evolve. However, we are ready to take advantage of market dislocations to buy companies at a discount to intrinsic value, particularly those with a catalyst which will help generate returns that are idiosyncratic to the daily vagaries of global markets.
Top 10 Equity Holdings | ||
6/30/16 | ||
Company | % of Total | |
Sector/Industry, Country | Net Assets | |
Takara Leben Co. Ltd. | 3.0 | % |
Real Estate Management & Development, Japan | ||
Novartis AG | 2.7 | % |
Pharmaceuticals, Switzerland | ||
Arkema SA | 2.4 | % |
Chemicals, France | ||
Enel SpA | 2.3 | % |
Electric Utilities, Italy | ||
Deutsche Telekom AG | 2.3 | % |
Diversified Telecommunication Services, Germany | ||
Volkswagen AG | 2.2 | % |
Automobiles, Germany | ||
Xinyi Glass Holdings Ltd. | 2.2 | % |
Auto Components, Hong Kong | ||
Koninklijke Philips NV | 2.2 | % |
Industrial Conglomerates, Netherlands | ||
Vodafone Group PLC | 2.2 | % |
Wireless Telecommunication Services, U.K. | ||
Samsung Electronics Co. Ltd. | 2.2 | % |
Technology Hardware, Storage & Peripherals, | ||
South Korea |
As fellow shareholders, we found recent relative performance disappointing. We remain committed to our disciplined, value investment approach as we seek to generate attractive, long-term, risk-adjusted returns for shareholders. Thank you for your continued participation in Franklin Mutual International Fund. We look forward to continuing to serve your investment needs.
CFA® is a trademark owned by CFA Institute.
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The foregoing information reflects our analysis, opinions and portfolio holdings as of June 30, 2016, the end of the reporting period. The way we implement our main investment strategies and the resulting portfolio holdings may change depending on factors such as market and economic conditions. These opinions may not be relied upon as investment advice or an offer for a particular security. The information is not a complete analysis of every aspect of any market, country, industry, security or the Fund. Statements of fact are from sources considered reliable, but the investment manager makes no representation or warranty as to their completeness or accuracy. Although historical performance is no guarantee of future results, these insights may help you understand our investment management philosophy.
Philippe Brugere-Trelat has been a co-portfolio manager for Franklin Mutual International Fund since 2009.
Mr. Brugere-Trelat has also served as lead portfolio manager for Franklin Mutual European Fund since 2005 and as portfolio manager for Franklin Mutual Global Discovery Fund since 2009. He has been a member of the management team of the Franklin Mutual Series Funds since 2004, when he rejoined Franklin Templeton Investments. Previously, he was president and portfolio manager of Eurovest. Between 1984 and 1994, Mr. Brugere-Trelat was employed at Heine Securities Corporation, the Fund’s former manager.
Andrew Sleeman has been a co-portfolio manager for Franklin Mutual International Fund since 2009. He has also served as lead portfolio manager for Franklin Mutual Financial Services Fund since 2009. Mr. Sleeman joined Franklin Templeton Investments in 2007. Previously, he was with Fox-Pitt, Kelton, a financials specialist firm, where he focused on international financial equities. Prior to that, he worked in international equities at BNP Paribas. Mr. Sleeman also worked in Australia in the fixed income division of JP Morgan Investment Management.
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Performance Summary as of June 30, 2016
Your dividend income will vary depending on dividends or interest paid by securities in the Fund’s portfolio, adjusted for operating expenses of each class. Capital gain distributions are net profits realized from the sale of portfolio securities. The performance table does not reflect any taxes that a shareholder would pay on Fund dividends, capital gain distributions, if any, or any realized gains on the sale of Fund shares. Total return reflects reinvestment of the Fund’s dividends and capital gain distributions, if any, and any unrealized gains or losses.
Net Asset Value | ||||||
Share Class (Symbol) | 6/30/16 | 12/31/15 | Change | |||
Z (FMIZX) | $ | 13.27 | $ | 14.17 | -$ | 0.90 |
A (FMIAX) | $ | 13.20 | $ | 14.10 | -$ | 0.90 |
C (FCMIX) | $ | 12.98 | $ | 13.92 | -$ | 0.94 |
R (FRMIX) | $ | 13.13 | $ | 14.05 | -$ | 0.92 |
R6 (FIMFX) | $ | 13.29 | $ | 14.17 | -$ | 0.88 |
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PERFORMANCE SUMMARY
Performance as of 6/30/161
Cumulative total return excludes sales charges. Average annual total return and value of $10,000 investment include maximum sales charges. Class Z/R/R6: no sales charges; Class A: 5.75% maximum initial sales charge; Class C: 1% contingent deferred sales charge in first year only.
Value of | ||||||||||
Cumulative | Average Annual | $ | 10,000 | Total Annual Operating Expenses5 | ||||||
Share Class | Total Return2 | Total Return3 | Investment4 | (with waiver) | (without waiver) | |||||
Z | 1.17 | % | 1.24 | % | ||||||
6-Month | -6.35 | % | -6.35 | % | $ | 9,365 | ||||
1-Year | -11.31 | % | -11.31 | % | $ | 8,869 | ||||
5-Year | +10.38 | % | +2.00 | % | $ | 11,038 | ||||
Since Inception (5/1/09) | +68.90 | % | +7.59 | % | $ | 16,890 | ||||
A | 1.42 | % | 1.49 | % | ||||||
6-Month | -6.38 | % | -11.76 | % | $ | 8,824 | ||||
1-Year | -11.56 | % | -16.66 | % | $ | 8,334 | ||||
5-Year | +8.81 | % | +0.50 | % | $ | 10,255 | ||||
Since Inception (5/1/09) | +65.37 | % | +6.39 | % | $ | 15,586 | ||||
C | 2.17 | % | 2.24 | % | ||||||
6-Month | -6.75 | % | -7.75 | % | $ | 9,225 | ||||
1-Year | -12.26 | % | -13.12 | % | $ | 8,688 | ||||
5-Year | +4.96 | % | +0.97 | % | $ | 10,496 | ||||
Since Inception (5/1/09) | +57.04 | % | +6.50 | % | $ | 15,704 | ||||
R | 1.67 | % | 1.74 | % | ||||||
6-Month | -6.55 | % | -6.55 | % | $ | 9,345 | ||||
1-Year | -11.76 | % | -11.76 | % | $ | 8,824 | ||||
5-Year | +7.52 | % | +1.46 | % | $ | 10,752 | ||||
Since Inception (5/1/09) | +62.76 | % | +7.04 | % | $ | 16,276 | ||||
R6 | 0.99 | % | 1.06 | % | ||||||
6-Month | -6.21 | % | -6.21 | % | $ | 9,379 | ||||
1-Year | -11.17 | % | -11.17 | % | $ | 8,883 | ||||
3-Year | +8.19 | % | +2.66 | % | $ | 10,819 | ||||
Since Inception (5/1/13) | +5.69 | % | +1.76 | % | $ | 10,569 |
Performance data represent past performance, which does not guarantee future results. Investment return and principal value will fluctuate, and you may have a gain or loss when you sell your shares. Current performance may differ from figures shown. For most recent month-end performance, go to franklintempleton.com or call (800) 342-5236.
See page 11 for Performance Summary footnotes.
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PERFORMANCE SUMMARY
All investments involve risks, including possible loss of principal. Value securities may not increase in price as anticipated or may decline further in value. Special risks are associated with foreign investing, including currency fluctuations, economic instability and political developments; investments in emerging markets involve heightened risks related to the same factors. Because the Fund invests its assets primarily in companies in a specific region, it is subject to greater risks of adverse developments in that region and/or surrounding regions than a fund that is more broadly diversified geographically. Political, social or economic disruptions in the region, even in countries in which the fund is not invested, may adversely affect the value of securities held by the Fund. Smaller company stocks have exhibited greater price volatility than larger company stocks, particularly over the short term. The Fund’s investments in companies engaged in mergers, reorganizations or liquidations also involve special risks as pending deals may not be completed on time or on favorable terms. The Fund may invest in lower rated bonds, which entail higher credit risk. The Fund is actively managed but there is no guarantee that the manager’s investment decisions will produce the desired results. The Fund’s prospectus also includes a description of the main investment risks.
Class Z: | Shares are available to certain eligible investors as described in the prospectus. |
Class C: | These shares have higher annual fees and expenses than Class A shares. |
Class R: | Shares are available to certain eligible investors as described in the prospectus. These shares have higher annual fees and expenses than Class A shares. |
Class R6: | Shares are available to certain eligible investors as described in the prospectus. |
1. The Fund has an expense reduction contractually guaranteed through at least 4/30/17 and a fee waiver associated with any investment in a Franklin Templeton money fund
and/or other Franklin Templeton fund, as applicable, contractually guaranteed through at least the Fund’s current fiscal year-end. Investment results reflect the expense reduc-
tion and fee waiver, to the extent applicable; without these reductions, the results would have been lower.
2. Cumulative total return represents the change in value of an investment over the periods indicated.
3. Average annual total return represents the average annual change in value of an investment over the periods indicated. Return for less than one year, if any, has not been
annualized.
4. These figures represent the value of a hypothetical $10,000 investment in the Fund over the periods indicated.
5. Figures are as stated in the Fund’s current prospectus and may differ from the expense ratios disclosed in the Financial Highlights in this report. In periods of market vola-
tility, assets may decline significantly, causing total annual Fund operating expenses to become higher than the figures shown.
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Your Fund’s Expenses
As a Fund shareholder, you can incur two types of costs:
- Transaction costs, including sales charges (loads) on Fund purchases; and
- Ongoing Fund costs, including management fees, distribution and service (12b-1) fees, and other Fund expenses. All mutual funds have ongoing costs, sometimes referred to as operating expenses.
The following table shows ongoing costs of investing in the Fund and can help you understand these costs and compare them with those of other mutual funds. The table assumes a $1,000 investment held for the six months indicated.
Actual Fund Expenses
The first line (Actual) for each share class listed in the table provides actual account values and expenses. The “Ending Account Value” is derived from the Fund’s actual return, which includes the effect of Fund expenses.
You can estimate the expenses you paid during the period by following these steps. Of course, your account value and expenses will differ from those in this illustration:
1. Divide your account value by $1,000.
If an account had an $8,600 value, then $8,600 ÷ $1,000 = 8.6.
2. Multiply the result by the number under the heading “Expenses Paid During Period.”
If Expenses Paid During Period were $7.50, then 8.6 × $7.50 = $64.50.
In this illustration, the estimated expenses paid this period are $64.50.
Hypothetical Example for Comparison with Other Funds
Information in the second line (Hypothetical) for each class in the table can help you compare ongoing costs of investing in the Fund with those of other mutual funds. This information may not be used to estimate the actual ending account balance or expenses you paid during the period. The hypothetical “Ending Account Value” is based on the actual expense ratio for each class and an assumed 5% annual rate of return before expenses, which does not represent the Fund’s actual return. The figure under the heading “Expenses Paid During Period” shows the hypothetical expenses your account would have incurred under this scenario. You can compare this figure with the 5% hypothetical examples that appear in shareholder reports of other funds.
Please note that expenses shown in the table are meant to highlight ongoing costs and do not reflect any transaction costs, such as sales charges. Therefore, the second line for each class is useful in comparing ongoing costs only, and will not help you compare total costs of owning different funds. In addition, if transaction costs were included, your total costs would have been higher. Please refer to the Fund prospectus for additional information on operating expenses.
12 Semiannual Report
franklintempleton.com
FRANKLIN MUTUAL INTERNATIONAL FUND
YOUR FUND’S EXPENSES
Beginning Account | Ending Account | Expenses Paid During | ||||
Share Class | Value 1/1/16 | Value 6/30/16 | Period* 1/1/16–6/30/16 | |||
Z | ||||||
Actual | $ | 1,000 | $ | 936.50 | $ | 5.63 |
Hypothetical (5% return before expenses) | $ | 1,000 | $ | 1,019.05 | $ | 5.87 |
A | ||||||
Actual | $ | 1,000 | $ | 936.20 | $ | 6.84 |
Hypothetical (5% return before expenses) | $ | 1,000 | $ | 1,017.80 | $ | 7.12 |
C | ||||||
Actual | $ | 1,000 | $ | 932.50 | $ | 10.43 |
Hypothetical (5% return before expenses) | $ | 1,000 | $ | 1,014.07 | $ | 10.87 |
R | ||||||
Actual | $ | 1,000 | $ | 934.50 | $ | 8.03 |
Hypothetical (5% return before expenses) | $ | 1,000 | $ | 1,016.56 | $ | 8.37 |
R6 | ||||||
Actual | $ | 1,000 | $ | 937.90 | $ | 4.87 |
Hypothetical (5% return before expenses) | $ | 1,000 | $ | 1,019.84 | $ | 5.07 |
*Expenses are calculated using the most recent six-month expense ratio, net of expense waivers, annualized for each class (Z: 1.17%; A:
1.42%; C: 2.17%; R: 1.67% and R6: 1.01%, multiplied by the average account value over the period, multiplied by 182/366 to reflect the one-
half year period.
franklintempleton.com
Semiannual Report 13
FRANKLIN MUTUAL INTERNATIONAL FUND
Financial Highlights | ||||||||||||||||||
Six Months Ended | Year Ended December 31, | |||||||||||||||||
June 30, 2016 | ||||||||||||||||||
(unaudited) | 2015 | 2014 | 2013 | 2012 | 2011 | |||||||||||||
Class Z | ||||||||||||||||||
Per share operating performance | ||||||||||||||||||
(for a share outstanding throughout the period) | ||||||||||||||||||
Net asset value, beginning of period | $ | 14.17 | $ | 14.59 | $ | 15.90 | $ | 13.58 | $ | 11.83 | $ | 13.81 | ||||||
Income from investment operationsa: | ||||||||||||||||||
Net investment incomeb | 0.23 | 0.18 | c | 0.30 | d | 0.24 | 0.24 | 0.28 | ||||||||||
Net realized and unrealized gains (losses) | (1.13 | ) | (0.17 | ) | (0.57 | ) | 2.42 | 1.68 | (1.81 | ) | ||||||||
Total from investment operations | (0.90 | ) | 0.01 | (0.27 | ) | 2.66 | 1.92 | (1.53 | ) | |||||||||
Less distributions from: | ||||||||||||||||||
Net investment income | — | (0.16 | ) | (0.43 | ) | (0.24 | ) | (0.15 | ) | (0.30 | ) | |||||||
Net realized gains | — | (0.27 | ) | (0.61 | ) | (0.10 | ) | (0.02 | ) | (0.15 | ) | |||||||
Total distributions | — | (0.43 | ) | (1.04 | ) | (0.34 | ) | (0.17 | ) | (0.45 | ) | |||||||
Net asset value, end of period | $ | 13.27 | $ | 14.17 | $ | 14.59 | $ | 15.90 | $ | 13.58 | $ | 11.83 | ||||||
Total returne | (6.35 | )% | 0.15 | % | (1.63 | )% | 19.71 | % | 16.30 | % | (11.08 | )% | ||||||
Ratios to average net assetsf | ||||||||||||||||||
Expenses before waiver, payments by affiliates and | ||||||||||||||||||
expense reductiong | 1.20 | % | 1.24 | % | 1.39 | % | 1.49 | % | 1.75 | % | 1.80 | % | ||||||
Expenses net of waiver, payments by affiliates and | ||||||||||||||||||
expense reductiong | 1.17 | %h | 1.15 | %h | 1.16 | %h | 1.17 | %h | 1.17 | % | 1.17 | % | ||||||
Expenses incurred in connection with securities sold | ||||||||||||||||||
short | —% | —% | —%i | —% | —% | —% | ||||||||||||
Net investment income | 3.62 | %j | 1.26 | %c | 1.78 | %d | 1.64 | % | 1.70 | % | 2.12 | % | ||||||
Supplemental data | ||||||||||||||||||
Net assets, end of period (000’s) | $ | 36,600 | $ | 49,963 | $ | 19,940 | $ | 14,732 | $ | 10,354 | $ | 6,977 | ||||||
Portfolio turnover rate | 11.60 | % | 28.64 | % | 54.78 | % | 41.47 | % | 27.97 | % | 41.26 | % |
aThe amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases
of the Fund’s shares in relation to income earned and/or fluctuating fair value of the investments of the Fund.
bBased on average daily shares outstanding.
cNet investment income per share includes approximately $0.08 per share related to income received in the form of a special dividend in connection with certain Fund holdings.
Excluding this amount, the ratio of net investment income to average net assets would have been 0.71%.
dNet investment income per share includes approximately $0.08 per share related to income received in the form of a special dividend in connection with certain Fund
holdings. Excluding this amount, the ratio of net investment income to average net assets would have been 1.27%.
eTotal return is not annualized for periods less than one year.
fRatios are annualized for periods less than one year.
gIncludes dividend and/or interest expense on securities sold short and security borrowing fees, if any. See below for the ratios of such expenses to average net assets for the
periods presented. See Note 1(d).
hBenefit of expense reduction rounds to less than 0.01%.
iRounds to less than 0.01%.
jThe net investment income ratio is annualized and may not be indicative of operating results for a full year.
14 Semiannual Report | The accompanying notes are an integral part of these financial statements.
franklintempleton.com
FRANKLIN MUTUAL INTERNATIONAL FUND
FINANCIAL H IGHLIGHTS
Six Months Ended | Year Ended December 31, | |||||||||||||||||
June 30, 2016 | ||||||||||||||||||
(unaudited) | 2015 | 2014 | 2013 | 2012 | 2011 | |||||||||||||
Class A | ||||||||||||||||||
Per share operating performance | ||||||||||||||||||
(for a share outstanding throughout the period) | ||||||||||||||||||
Net asset value, beginning of period | $ | 14.10 | $ | 14.54 | $ | 15.84 | $ | 13.54 | $ | 11.81 | $ | 13.78 | ||||||
Income from investment operationsa: | ||||||||||||||||||
Net investment incomeb | 0.22 | 0.15 | c | 0.26 | d | 0.20 | 0.18 | 0.24 | ||||||||||
Net realized and unrealized gains (losses) | (1.12 | ) | (0.19 | ) | (0.57 | ) | 2.41 | 1.70 | (1.80 | ) | ||||||||
Total from investment operations | (0.90 | ) | (0.04 | ) | (0.31 | ) | 2.61 | 1.88 | (1.56 | ) | ||||||||
Less distributions from: | ||||||||||||||||||
Net investment income | — | (0.13 | ) | (0.38 | ) | (0.21 | ) | (0.13 | ) | (0.26 | ) | |||||||
Net realized gains | — | (0.27 | ) | (0.61 | ) | (0.10 | ) | (0.02 | ) | (0.15 | ) | |||||||
Total distributions | — | (0.40 | ) | (0.99 | ) | (0.31 | ) | (0.15 | ) | (0.41 | ) | |||||||
Net asset value, end of period | $ | 13.20 | $ | 14.10 | $ | 14.54 | $ | 15.84 | $ | 13.54 | $ | 11.81 | ||||||
Total returne | (6.38 | )% | (0.20 | )% | (1.89 | )% | 19.34 | % | 16.01 | % | (11.39 | )% | ||||||
Ratios to average net assetsf | ||||||||||||||||||
Expenses before waiver, payments by affiliates and | ||||||||||||||||||
expense reductiong | 1.45 | % | 1.52 | % | 1.69 | % | 1.79 | % | 2.05 | % | 2.11 | % | ||||||
Expenses net of waiver, payments by affiliates and | ||||||||||||||||||
expense reductiong | 1.42 | %h | 1.43 | %h | 1.46 | %h | 1.47 | %h | 1.47 | % | 1.48 | % | ||||||
Expenses incurred in connection with securities sold | ||||||||||||||||||
short | —% | —% | —%i | —% | —% | —% | ||||||||||||
Net investment income | 3.37 | %j | 0.98 | %c | 1.48 | %d | 1.34 | % | 1.40 | % | 1.81 | % | ||||||
Supplemental data | ||||||||||||||||||
Net assets, end of period (000’s) | $ | 84,075 | $ | 110,591 | $ | 39,810 | $ | 35,319 | $ | 18,221 | $ | 9,212 | ||||||
Portfolio turnover rate | 11.60 | % | 28.64 | % | 54.78 | % | 41.47 | % | 27.97 | % | 41.26 | % |
aThe amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases
of the Fund’s shares in relation to income earned and/or fluctuating fair value of the investments of the Fund.
bBased on average daily shares outstanding.
cNet investment income per share includes approximately $0.08 per share related to income received in the form of special dividends in connection with certain Fund holdings.
Excluding this amount, the ratio of net investment income to average net assets would have been 0.43%.
dNet investment income per share includes approximately $0.08 per share related to income received in the form of a special dividend in connection with certain Fund
holdings. Excluding this amount, the ratio of net investment income to average net assets would have been 0.97%.
eTotal return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year.
fRatios are annualized for periods less than one year.
gIncludes dividend and/or interest expense on securities sold short and security borrowing fees, if any. See below for the ratios of such expenses to average net assets for the
periods presented. See Note 1(d).
hBenefit of expense reduction rounds to less than 0.01%.
iRounds to less than 0.01%.
jThe net investment income ratio is annualized and may not be indicative of operating results for a full year.
franklintempleton.com
The accompanying notes are an integral part of these financial statements. | Semiannual Report 15
FRANKLIN MUTUAL INTERNATIONAL FUND
FINANCIAL H IGHLIGHTS
Six Months Ended | Year Ended December 31, | |||||||||||||||||
June 30, 2016 | ||||||||||||||||||
(unaudited) | 2015 | 2014 | 2013 | 2012 | 2011 | |||||||||||||
Class C | ||||||||||||||||||
Per share operating performance | ||||||||||||||||||
(for a share outstanding throughout the period) | ||||||||||||||||||
Net asset value, beginning of period | $ | 13.92 | $ | 14.38 | $ | 15.68 | $ | 13.41 | $ | 11.74 | $ | 13.71 | ||||||
Income from investment operationsa: | ||||||||||||||||||
Net investment incomeb | 0.17 | 0.04 | c | 0.15 | d | 0.10 | 0.05 | 0.14 | ||||||||||
Net realized and unrealized gains (losses) | (1.11 | ) | (0.18 | ) | (0.56 | ) | 2.38 | 1.72 | (1.78 | ) | ||||||||
Total from investment operations | (0.94 | ) | (0.14 | ) | (0.41 | ) | 2.48 | 1.77 | (1.64 | ) | ||||||||
Less distributions from: | ||||||||||||||||||
Net investment income | — | (0.05 | ) | (0.28 | ) | (0.11 | ) | (0.08 | ) | (0.18 | ) | |||||||
Net realized gains | — | (0.27 | ) | (0.61 | ) | (0.10 | ) | (0.02 | ) | (0.15 | ) | |||||||
Total distributions | — | (0.32 | ) | (0.89 | ) | (0.21 | ) | (0.10 | ) | (0.33 | ) | |||||||
Net asset value, end of period | $ | 12.98 | $ | 13.92 | $ | 14.38 | $ | 15.68 | $ | 13.41 | $ | 11.74 | ||||||
Total returne | (6.75 | )% | (0.93 | )% | (2.58 | )% | 18.54 | % | 15.14 | % | (11.98 | )% | ||||||
Ratios to average net assetsf | ||||||||||||||||||
Expenses before waiver, payments by affiliates and | ||||||||||||||||||
expense reductiong | 2.20 | % | 2.24 | % | 2.39 | % | 2.49 | % | 2.75 | % | 2.80 | % | ||||||
Expenses net of waiver, payments by affiliates and | ||||||||||||||||||
expense reductiong | 2.17 | %h | 2.15 | %h | 2.16 | %h | 2.17 | %h | 2.17 | % | 2.17 | % | ||||||
Expenses incurred in connection with securities sold | ||||||||||||||||||
short | —% | —% | —%i | —% | —% | —% | ||||||||||||
Net investment income | 2.62 | %j | 0.26 | %c | 0.78 | %d | 0.64 | % | 0.70 | % | 1.12 | % | ||||||
Supplemental data | ||||||||||||||||||
Net assets, end of period (000’s) | $ | 27,304 | $ | 34,611 | $ | 14,794 | $ | 14,198 | $ | 10,503 | $ | 2,667 | ||||||
Portfolio turnover rate | 11.60 | % | 28.64 | % | 54.78 | % | 41.47 | % | 27.97 | % | 41.26 | % |
aThe amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases
of the Fund’s shares in relation to income earned and/or fluctuating fair value of the investments of the Fund.
bBased on average daily shares outstanding.
cNet investment income per share includes approximately $0.08 per share related to income received in the form of special dividends in connection with certain Fund holdings.
Excluding this amount, the ratio of net investment income to average net assets would have been (0.29%).
dNet investment income per share includes approximately $0.08 per share related to income received in the form of a special dividend in connection with certain Fund
holdings. Excluding this amount, the ratio of net investment income to average net assets would have been 0.27%.
eTotal return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year.
fRatios are annualized for periods less than one year.
gIncludes dividend and/or interest expense on securities sold short and security borrowing fees, if any. See below for the ratios of such expenses to average net assets for the
periods presented. See Note 1(d).
hBenefit of expense reduction rounds to less than 0.01%.
iRounds to less than 0.01%.
jThe net investment income ratio is annualized and may not be indicative of operating results for a full year.
16 Semiannual Report | The accompanying notes are an integral part of these financial statements.
franklintempleton.com
FRANKLIN MUTUAL INTERNATIONAL FUND
FINANCIAL H IGHLIGHTS
Six Months Ended | Year Ended December 31, | |||||||||||||||||
June 30, 2016 | ||||||||||||||||||
(unaudited) | 2015 | 2014 | 2013 | 2012 | 2011 | |||||||||||||
Class R | ||||||||||||||||||
Per share operating performance | ||||||||||||||||||
(for a share outstanding throughout the period) | ||||||||||||||||||
Net asset value, beginning of period | $ | 14.05 | $ | 14.51 | $ | 15.83 | $ | 13.54 | $ | 11.82 | $ | 13.78 | ||||||
Income from investment operationsa: | ||||||||||||||||||
Net investment incomeb | 0.21 | 0.04 | c | 0.18 | d | 0.15 | 0.11 | 0.21 | ||||||||||
Net realized and unrealized gains (losses) | (1.13 | ) | (0.10 | ) | (0.52 | ) | 2.43 | 1.73 | (1.79 | ) | ||||||||
Total from investment operations | (0.92 | ) | (0.06 | ) | (0.34 | ) | 2.58 | 1.84 | (1.58 | ) | ||||||||
Less distributions from: | ||||||||||||||||||
Net investment income | — | (0.13 | ) | (0.37 | ) | (0.19 | ) | (0.10 | ) | (0.23 | ) | |||||||
Net realized gains | — | (0.27 | ) | (0.61 | ) | (0.10 | ) | (0.02 | ) | (0.15 | ) | |||||||
Total distributions | — | (0.40 | ) | (0.98 | ) | (0.29 | ) | (0.12 | ) | (0.38 | ) | |||||||
Net asset value, end of period | $ | 13.13 | $ | 14.05 | $ | 14.51 | $ | 15.83 | $ | 13.54 | $ | 11.82 | ||||||
Total returne | (6.55 | )% | (0.38 | )% | (2.13 | )% | 19.13 | % | 15.70 | % | (11.53 | )% | ||||||
Ratios to average net assetsf | ||||||||||||||||||
Expenses before waiver, payments by affiliates and | ||||||||||||||||||
expense reductiong | 1.70 | % | 1.74 | % | 1.89 | % | 1.99 | % | 2.25 | % | 2.30 | % | ||||||
Expenses net of waiver, payments by affiliates and | ||||||||||||||||||
expense reductiong | 1.67 | %h | 1.65 | %h | 1.66 | %h | 1.67 | %h | 1.67 | % | 1.67 | % | ||||||
Expenses incurred in connection with securities sold | ||||||||||||||||||
short | —% | —% | —%i | —% | —% | —% | ||||||||||||
Net investment income | 3.12 | %j | 0.76 | %c | 1.28 | %d | 1.14 | % | 1.20 | % | 1.62 | % | ||||||
Supplemental data | ||||||||||||||||||
Net assets, end of period (000’s) | $ | 600 | $ | 662 | $ | 112 | $ | 90 | $ | 42 | $ | 12 | ||||||
Portfolio turnover rate | 11.60 | % | 28.64 | % | 54.78 | % | 41.47 | % | 27.97 | % | 41.26 | % |
aThe amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases
of the Fund’s shares in relation to income earned and/or fluctuating fair value of the investments of the Fund.
bBased on average daily shares outstanding.
cNet investment income per share includes approximately $0.08 per share related to income received in the form of special dividends in connection with certain Fund holdings.
Excluding this amount, the ratio of net investment income to average net assets would have been 0.21%.
dNet investment income per share includes approximately $0.08 per share related to income received in the form of a special dividend in connection with certain Fund
holdings. Excluding this amount, the ratio of net investment income to average net assets would have been 0.77%.
eTotal return is not annualized for periods less than one year.
fRatios are annualized for periods less than one year.
gIncludes dividend and/or interest expense on securities sold short and security borrowing fees, if any. See below for the ratios of such expenses to average net assets for the
periods presented. See Note 1(d).
hBenefit of expense reduction rounds to less than 0.01%.
iRounds to less than 0.01%.
jThe net investment income ratio is annualized and may not be indicative of operating results for a full year.
franklintempleton.com
The accompanying notes are an integral part of these financial statements. | Semiannual Report 17
FRANKLIN MUTUAL INTERNATIONAL FUND
FINANCIAL H IGHLIGHTS
Six Months Ended | Year Ended December 31, | |||||||||||
June 30, 2016 | ||||||||||||
(unaudited) | 2015 | 2014 | 2013 | a | ||||||||
Class R6 | ||||||||||||
Per share operating performance | ||||||||||||
(for a share outstanding throughout the period) | ||||||||||||
Net asset value, beginning of period | $ | 14.17 | $ | 14.59 | $ | 15.87 | $ | 14.26 | ||||
Income from investment operationsb: | ||||||||||||
Net investment incomec | 0.25 | 0.22 | d | —e,f | 0.15 | |||||||
Net realized and unrealized gains (losses) | (1.13 | ) | (0.20 | ) | (0.22 | ) | 1.83 | |||||
Total from investment operations | (0.88 | ) | 0.02 | (0.22 | ) | 1.98 | ||||||
Less distributions from: | ||||||||||||
Net investment income | — | (0.17 | ) | (0.45 | ) | (0.27 | ) | |||||
Net realized gains | — | (0.27 | ) | (0.61 | ) | (0.10 | ) | |||||
Total distributions | — | (0.44 | ) | (1.06 | ) | (0.37 | ) | |||||
Net asset value, end of period | $ | 13.29 | $ | 14.17 | $ | 14.59 | $ | 15.87 | ||||
Total returng | (6.21 | )% | 0.23 | % | (1.46 | )% | 14.09 | % | ||||
Ratios to average net assetsh | ||||||||||||
Expenses before waiver, payments by affiliates and expense reductioni | 1.03 | % | 1.06 | % | 1.24 | % | 2.89 | % | ||||
Expenses net of waiver, payments by affiliates and expense reductioni,j | 1.01 | % | 1.02 | % | 1.00 | % | 1.00 | % | ||||
Expenses incurred in connection with securities sold short | —% | —% | —%k | —% | ||||||||
Net investment income | 3.78 | %l | 1.39 | %d | 1.94 | %e | 1.81 | % | ||||
Supplemental data | ||||||||||||
Net assets, end of period (000’s) | $ | 15,402 | $ | 23,793 | $ | 19,398 | $ | 6 | ||||
Portfolio turnover rate | 11.60 | % | 28.64 | % | 54.78 | % | 41.47 | % |
aFor the period May 1, 2013 (commencement of operations) to December 31, 2013.
bThe amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases
of the Fund’s shares in relation to income earned and/or fluctuating fair value of the investments of the Fund.
cBased on average daily shares outstanding.
dNet investment income per share includes approximately $0.08 per share related to income received in the form of special dividends in connection with certain Fund holdings.
Excluding this amount, the ratio of net investment income to average net assets would have been 0.84%.
eNet investment income per share includes approximately $0.08 per share related to income received in the form of a special dividend in connection with certain Fund
holdings. Excluding this amount, the ratio of net investment income to average net assets would have been 1.42%.
fAmount rounds to less than $0.01 per share.
gTotal return is not annualized for periods less than one year.
hRatios are annualized for periods less than one year.
iIncludes dividend and/or interest expense on securities sold short and security borrowing fees, if any. See below for the ratios of such expenses to average net assets for the
periods presented. See Note 1(d).
jBenefit of expense reduction rounds to less than 0.01%.
kRounds to less than 0.01%.
lThe net investment income ratio is annualized and may not be indicative of operating results for a full year.
18 Semiannual Report | The accompanying notes are an integral part of these financial statements.
franklintempleton.com
FRANKLIN MUTUAL INTERNATIONAL FUND
Statement of Investments, June 30, 2016 (unaudited) | ||||
Country | Shares | Value | ||
Common Stocks 91.7% | ||||
Air Freight & Logistics 3.1% | ||||
Deutsche Post AG | Germany | 91,971 | $ | 2,569,944 |
Sinotrans Ltd., H | China | 5,681,000 | 2,511,562 | |
5,081,506 | ||||
Auto Components 4.0% | ||||
Cie Generale des Etablissements Michelin, B | France | 30,760 | 2,909,245 | |
a,b Xinyi Automobile Glass Hong Kong Enterprises Ltd., Reg S | Hong Kong | 617,750 | 55,736 | |
Xinyi Glass Holdings Ltd | Hong Kong | 4,942,000 | 3,630,803 | |
6,595,784 | ||||
Banks 4.4% | ||||
Barclays PLC | United Kingdom | 690,867 | 1,276,786 | |
BNP Paribas SA | France | 32,930 | 1,453,071 | |
HSBC Holdings PLC | United Kingdom | 269,900 | 1,676,703 | |
Standard Chartered PLC | United Kingdom | 377,586 | 2,842,609 | |
7,249,169 | ||||
Capital Markets 1.8% | ||||
a China International Capital Corp. Ltd., H | China | 1,424,999 | 2,163,640 | |
UBS Group AG | Switzerland | 65,110 | 838,472 | |
3,002,112 | ||||
Chemicals 3.5% | ||||
Arkema SA | France | 51,245 | 3,928,659 | |
Lanxess AG | Germany | 39,685 | 1,730,220 | |
5,658,879 | ||||
Communications Equipment 2.0% | ||||
Nokia Corp., ADR | Finland | 227,640 | 1,295,272 | |
Nokia OYJ, A | Finland | 356,803 | 2,021,751 | |
3,317,023 | ||||
Construction & Engineering 1.4% | ||||
a Balfour Beatty PLC | United Kingdom | 470,034 | 1,347,498 | |
FLSmidth & Co. A/S | Denmark | 28,340 | 1,006,192 | |
2,353,690 | ||||
Construction Materials 1.4% | ||||
a LafargeHolcim Ltd., B | Switzerland | 53,550 | 2,224,072 | |
Consumer Finance 2.1% | ||||
c Hoist Finance AB, 144A | Sweden | 192,581 | 1,696,318 | |
Sun Hung Kai & Co. Ltd | Hong Kong | 2,877,748 | 1,683,967 | |
3,380,285 | ||||
Diversified Financial Services 1.8% | ||||
Metro Pacific Investments Corp | Philippines | 20,375,200 | 3,015,055 | |
Diversified Telecommunication Services 5.3% | ||||
China Telecom Corp. Ltd., H | China | 5,447,468 | 2,429,382 | |
Deutsche Telekom AG | Germany | 222,361 | 3,771,251 | |
Hellenic Telecommunications Organization SA | Greece | 252,478 | 2,261,520 | |
a Telecom Italia SpA | Italy | 341,192 | 278,349 | |
8,740,502 |
franklintempleton.com
Semiannual Report 19
FRANKLIN MUTUAL INTERNATIONAL FUND
STATEMENT OF INVESTMENTS (UNAUDITED)
Country | Shares | Value | ||
Common Stocks (continued) | ||||
Electric Utilities 2.3% | ||||
Enel SpA | Italy | 856,234 | $ | 3,782,500 |
Food & Staples Retailing 2.1% | ||||
Metro AG | Germany | 113,276 | 3,453,822 | |
Hotels, Restaurants & Leisure 3.2% | ||||
Accor SA | France | 87,590 | 3,372,580 | |
Sands China Ltd | Hong Kong | 546,000 | 1,822,709 | |
5,195,289 | ||||
Household Durables 1.1% | ||||
a Cairn Homes PLC | Ireland | 693,523 | 738,985 | |
a,c Cairn Homes PLC, 144A | Ireland | 1,011,251 | 1,077,540 | |
1,816,525 | ||||
Industrial Conglomerates 2.2% | ||||
Koninklijke Philips NV | Netherlands | 144,669 | 3,596,085 | |
Insurance 12.9% | ||||
Ageas | Belgium | 51,414 | 1,768,220 | |
a ASR Nederland NV | Netherlands | 125,840 | 2,716,700 | |
China Pacific Insurance Group Co. Ltd., H | China | 541,245 | 1,820,788 | |
Direct Line Insurance Group PLC | United Kingdom | 337,459 | 1,551,489 | |
Korean Reinsurance Co | South Korea | 138,863 | 1,469,654 | |
Lancashire Holdings Ltd | United Kingdom | 181,386 | 1,419,719 | |
NN Group NV | Netherlands | 118,722 | 3,267,373 | |
RSA Insurance Group PLC | United Kingdom | 389,405 | 2,593,567 | |
a Storebrand ASA | Norway | 7,991 | 29,956 | |
UNIQA Insurance Group AG | Austria | 180,837 | 1,078,669 | |
XL Group PLC | Ireland | 102,729 | 3,421,903 | |
�� | 21,138,038 | |||
Internet Software & Services 1.1% | ||||
a Baidu Inc., ADR | China | 11,031 | 1,821,770 | |
Machinery 0.2% | ||||
CNH Industrial NV | United Kingdom | 30,305 | 217,968 | |
CNH Industrial NV, special voting | United Kingdom | 16,517 | 118,798 | |
336,766 | ||||
Marine 1.0% | ||||
A.P. Moeller-Maersk AS, B | Denmark | 1,239 | 1,609,631 | |
Media 2.5% | ||||
Clear Media Ltd | Hong Kong | 2,283,000 | 1,989,197 | |
a Liberty Global PLC LiLAC, C | United Kingdom | 7,864 | 255,487 | |
a Liberty Global PLC, C | United Kingdom | 63,025 | 1,805,666 | |
4,050,350 | ||||
Metals & Mining 0.7% | ||||
ThyssenKrupp AG | Germany | 58,392 | 1,167,268 | |
Multiline Retail 1.8% | ||||
Hyundai Department Store Co. Ltd | South Korea | 26,541 | 2,970,131 | |
Oil, Gas & Consumable Fuels 4.3% | ||||
BP PLC | United Kingdom | 368,488 | 2,152,814 |
20 Semiannual Report
franklintempleton.com
FRANKLIN MUTUAL INTERNATIONAL FUND
STATEMENT OF INVESTMENTS (UNAUDITED)
Country | Shares | Value | |||
Common Stocks (continued) | |||||
Oil, Gas & Consumable Fuels (continued) | |||||
China Shenhua Energy Co. Ltd., H | China | 906,941 | $ | 1,666,954 | |
Royal Dutch Shell PLC, A (EUR Traded) | United Kingdom | 34,447 | 943,244 | ||
Royal Dutch Shell PLC, A (GBP Traded) | United Kingdom | 85,525 | 2,334,949 | ||
7,097,961 | |||||
Pharmaceuticals 7.5% | |||||
GlaxoSmithKline PLC | United Kingdom | 160,200 | 3,427,383 | ||
Novartis AG | Switzerland | 54,449 | 4,470,943 | ||
Sanofi | France | 29,672 | 2,467,448 | ||
Teva Pharmaceutical Industries Ltd., ADR | Israel | 37,950 | 1,906,229 | ||
12,272,003 | |||||
Real Estate Investment Trusts (REITs) 1.6% | |||||
Hibernia REIT PLC | Ireland | 1,741,347 | 2,580,299 | ||
Real Estate Management & Development 3.0% | |||||
Takara Leben Co. Ltd | Japan | 654,400 | 4,936,118 | ||
Semiconductors & Semiconductor Equipment 1.8% | |||||
SK Hynix Inc | South Korea | 106,205 | 2,985,098 | ||
Specialty Retail 5.3% | |||||
China ZhengTong Auto Services Holdings Ltd | China | 4,761,387 | 1,749,055 | ||
a Dufry AG | Switzerland | 21,104 | 2,514,492 | ||
Hornbach Holding AG & Co. KGaA | Germany | 31,290 | 2,118,550 | ||
Kingfisher PLC | United Kingdom | 547,572 | 2,354,677 | ||
8,736,774 | |||||
Technology Hardware, Storage & Peripherals 2.2% | |||||
Samsung Electronics Co. Ltd | South Korea | 2,866 | 3,542,906 | ||
Thrifts & Mortgage Finance 1.1% | |||||
Genworth Mortgage Insurance Australia Ltd | Australia | 837,730 | 1,718,373 | ||
Trading Companies & Distributors 0.8% | |||||
Rexel SA | France | 110,630 | 1,389,411 | ||
Wireless Telecommunication Services 2.2% | |||||
Vodafone Group PLC | United Kingdom | 1,173,530 | 3,562,233 | ||
Total Common Stocks (Cost $163,565,519) | 150,377,428 | ||||
Preferred Stocks 3.3% | |||||
Auto Components 1.1% | |||||
d Schaeffler AG, 4.224%, pfd | Germany | 137,281 | 1,805,644 | ||
Automobiles 2.2% | |||||
d Volkswagen AG, 0.157%, pfd | Germany | 30,491 | 3,665,250 | ||
Total Preferred Stocks (Cost $7,191,857) | 5,470,894 | ||||
Notional | |||||
Counterparty | Amount* | ||||
Options Purchased 0.1% | |||||
Puts - Over-the-Counter | |||||
Currency Options 0.1% | |||||
CNY/USD, August Strike Price 7.387 CNY, Expires 8/03/16 | FBCO | 30,913,803 | CNY | 13 | |
CNY/USD, August Strike Price 7.398 CNY, Expires 8/03/16 | HSBC | 51,060,323 | CNY | 14 | |
CNY/USD, August Strike Price 7.43 CNY, Expires 8/03/16 | FBCO | 15,547,929 | CNY | 2 |
franklintempleton.com
Semiannual Report 21
FRANKLIN MUTUAL INTERNATIONAL FUND
STATEMENT OF INVESTMENTS (UNAUDITED)
Notional | |||||
Counterparty | Amount* | Value | |||
Options Purchased (continued) | |||||
Puts - Over-the-Counter (continued) | |||||
Currency Options (continued) | |||||
CNY/USD, August Strike Price 7.44 CNY, Expires 8/03/16 | HSBC | 24,910,162 | CNY | $ 3 | |
CNY/USD, August Strike Price 7.51 CNY, Expires 8/03/16 | FBCO | 78,579,375 | CNY | 10 | |
CNY/USD, December Strike Price 7.255 CNY, Expires 12/14/16 | HSBC | 46,393,549 | CNY | 29,390 | |
CNY/USD, December Strike Price 7.27 CNY, Expires 12/15/16 | HSBC | 55,579,150 | CNY | 34,250 | |
CNY/USD, December Strike Price 7.27 CNY, Expires 12/15/16 | MSCS | 29,950,219 | CNY | 18,456 | |
Total Options Purchased (Cost $378,993) | 82,138 | ||||
Total Investments before Short Term Investments | |||||
(Cost $171,136,369) | 155,930,460 | ||||
Principal | |||||
Country | Amount | ||||
Short Term Investments 1.6% | |||||
U.S. Government and Agency Securities 1.6% | |||||
FHLB, 7/01/16 | United States | $ | 1,000,000 | 1,000,000 | |
e,f U.S. Treasury Bill, 9/29/16 - 12/01/16 | United States | 1,591,000 | 1,589,384 | ||
Total U.S. Government and Agency Securities | |||||
(Cost $2,588,599) | 2,589,384 | ||||
Total Investments (Cost $173,724,968) 96.7% | 158,519,844 | ||||
Other Assets, less Liabilities 3.3% | 5,461,592 | ||||
Net Assets 100.0% | $ 163,981,436 |
*The notional amount is stated in U.S. dollars unless otherwise indicated.
aNon-income producing.
bSecurity was purchased pursuant to Regulation S under the Securities Act of 1933, which exempts from registration securities offered and sold outside of the United States.
Such a security cannot be sold in the United States without either an effective registration statement filed pursuant to the Securities Act of 1933, or pursuant to an exemption
from registration. This security has been deemed liquid under guidelines approved by the Trust’s Board of Trustees. At June 30, 2016, the value of this security was $55,736,
representing less than 0.1% of net assets.
cSecurity was purchased pursuant to Rule 144A under the Securities Act of 1933 and may be sold in transactions exempt from registration only to qualified institutional buyers
or in a public offering registered under the Securities Act of 1933. These securities have been deemed liquid under guidelines approved by the Trust’s Board of Trustees. At
June 30, 2016, the aggregate value of these securities was $2,773,858, representing 1.7% of net assets.
dVariable rate security. The rate shown represents the yield at period end.
eThe security is traded on a discount basis with no stated coupon rate.
fA portion or all of the security has been segregated as collateral for open forward contracts. At June 30, 2016, the value of this security and/or cash pledged amounted to
$118,901, representing 0.1% of net assets.
22 Semiannual Report
franklintempleton.com
FRANKLIN MUTUAL INTERNATIONAL FUND
STATEMENT OF INVESTMENTS (UNAUDITED)
At June 30, 2016, the Fund had the following futures contracts outstanding. See Note 1(c). | ||||||||||||
Futures Contracts | ||||||||||||
Number of | Notional Expiration | Unrealized | Unrealized | |||||||||
Description | Type Contracts | Value | Date | Appreciation | Depreciation | |||||||
Currency Contracts | ||||||||||||
CHF/USD | Short | 1 | $ | 128,300 | 9/19/16 | $ | 315 | $ | — | |||
EUR/USD | Short | 119 | 16,522,406 | 9/19/16 | 465,817 | — | ||||||
GBP/USD | Short | 44 | 3,643,200 | 9/19/16 | 335,620 | — | ||||||
Total Futures Contracts | $ | 801,752 | $ | — | ||||||||
Net unrealized appreciation (depreciation) | $ | 801,752 | ||||||||||
At June 30, 2016, the Fund had the following forward exchange contracts outstanding. See Note 1(c). | ||||||||||||
Forward Exchange Contracts | ||||||||||||
Contract | Settlement | Unrealized | Unrealized | |||||||||
Currency | Counterpartya Type | Quantity | Amount | Date | Appreciation | Depreciation | ||||||
OTC Forward Exchange Contracts | ||||||||||||
Euro | BANT | Buy | 2,557,925 | $ | 2,881,045 | 7/06/16 | $ | 4,569 | $ | (45,809 | ) | |
Euro | BANT | Sell | 8,699,844 | 9,518,322 | 7/06/16 | 3,567 | (143,801 | ) | ||||
Euro | BONY | Buy | 524,470 | 581,422 | 7/06/16 | 3,143 | (2,299 | ) | ||||
Euro | BONY | Sell | 205,346 | 229,453 | 7/06/16 | 1,479 | — | |||||
Euro | FBCO | Buy | 562,032 | 621,661 | 7/06/16 | 4,001 | (1,695 | ) | ||||
Euro | FBCO | Sell | 821,118 | 926,071 | 7/06/16 | 14,467 | — | |||||
Euro | HSBC | Buy | 577,995 | 639,168 | 7/06/16 | 3,905 | (1,384 | ) | ||||
Euro | HSBC | Sell | 7,461,132 | 8,144,969 | 7/06/16 | 1,372 | (139,743 | ) | ||||
Euro | SSBT | Buy | 637,289 | 705,316 | 7/06/16 | 4,486 | (2,285 | ) | ||||
Euro | SSBT | Sell | 180,643 | 203,952 | 7/06/16 | 3,402 | — | |||||
Euro | BANT | Sell | 15,176,603 | 16,657,830 | 7/21/16 | 9,871 | (210,532 | ) | ||||
Euro | BONY | Sell | 941,608 | 1,037,622 | 7/21/16 | 1,013 | (9,350 | ) | ||||
Euro | FBCO | Buy | 407,794 | 449,517 | 7/21/16 | 3,469 | — | |||||
Euro | FBCO | Sell | 531,998 | 604,559 | 7/21/16 | 13,604 | — | |||||
Euro | HSBC | Sell | 2,165,562 | 2,414,106 | 7/21/16 | 20,217 | (11,664 | ) | ||||
Euro | SSBT | Sell | 2,039,146 | 2,280,245 | 7/21/16 | 26,399 | (11,280 | ) | ||||
Norwegian Krone | HSBC | Buy | 17,658 | 2,058 | 7/25/16 | 52 | — | |||||
Norwegian Krone | HSBC | Sell | 263,251 | 31,597 | 7/25/16 | 134 | (4 | ) | ||||
Australian Dollar | HSBC | Buy | 1,529,509 | 1,123,514 | 7/29/16 | 16,691 | (601 | ) | ||||
Australian Dollar | HSBC | Sell | 3,787,191 | 2,853,767 | 7/29/16 | 35,716 | (3,703 | ) | ||||
South Korean Won | BANT | Buy | 367,926,617 | 315,253 | 8/12/16 | 3,829 | (76 | ) | ||||
South Korean Won | BANT | Sell | 1,396,753,677 | 1,152,976 | 8/12/16 | — | (58,060 | ) | ||||
South Korean Won | FBCO | Buy | 69,205,750 | 58,699 | 8/12/16 | 1,305 | — | |||||
South Korean Won | FBCO | Sell | 1,529,676,625 | 1,317,463 | 8/12/16 | 12,039 | (20,861 | ) | ||||
South Korean Won | HSBC | Buy | 2,102,984,542 | 1,803,933 | 8/12/16 | 19,431 | — | |||||
South Korean Won | HSBC | Sell | 5,473,919,046 | 4,518,215 | 8/12/16 | — | (227,872 | ) | ||||
Swiss Franc | BONY | Buy | 58,985 | 61,298 | 8/12/16 | — | (705 | ) | ||||
Swiss Franc | BONY | Sell | 28,300 | 29,152 | 8/12/16 | 274 | (194 | ) | ||||
Swiss Franc | HSBC | Buy | 43,400 | 44,506 | 8/12/16 | 77 | — | |||||
Swiss Franc | HSBC | Sell | 263,518 | 271,590 | 8/12/16 | 887 | — | |||||
Swiss Franc | SSBT | Buy | 80,100 | 82,079 | 8/12/16 | 213 | (8 | ) | ||||
Swiss Franc | SSBT | Sell | 9,000 | 9,097 | 8/12/16 | — | (149 | ) | ||||
Swedish Krona | SSBT | Sell | 14,150,000 | 1,657,297 | 8/29/16 | — | (20,230 | ) | ||||
Philippine Peso | BONY | Sell | 139,175,000 | 2,936,031 | 8/30/16 | 346 | (10,547 | ) | ||||
Japanese Yen | BONY | Sell | 11,641,000 | 107,766 | 10/24/16 | — | (5,445 | ) | ||||
Japanese Yen | HSBC | Buy | 50,979,201 | 481,224 | 10/24/16 | 14,559 | — | |||||
Japanese Yen | HSBC | Sell | 538,920,236 | 4,977,893 | 10/24/16 | 1,981 | (265,198 | ) | ||||
Euro | BANT | Sell | 2,405,709 | 2,785,811 | 11/04/16 | 102,478 | — | |||||
Euro | HSBC | Sell | 2,509,727 | 2,907,435 | 11/04/16 | 108,079 | — | |||||
South Korean Won | BANT | Sell | 1,736,173,605 | 1,503,946 | 11/14/16 | — | (505 | ) | ||||
South Korean Won | FBCO | Sell | 1,417,410,477 | 1,230,017 | 11/14/16 | 1,785 | — |
franklintempleton.com
Semiannual Report 23
FRANKLIN MUTUAL INTERNATIONAL FUND
STATEMENT OF INVESTMENTS (UNAUDITED)
Forward Exchange Contracts (continued) | |||||||||||
Contract | Settlement | Unrealized | Unrealized | ||||||||
Currency | Counterpartya Type | Quantity | Amount | Date | Appreciation | Depreciation | |||||
OTC Forward Exchange Contracts (continued) | |||||||||||
South Korean Won | HSBC | Buy | 82,507,300 | $ | 70,327 | 11/14/16 | $ | 1,169 | $ | — | |
South Korean Won | HSBC | Sell | 3,946,311,729 | 3,461,155 | 11/14/16 | 42,021 | (475 | ) | |||
Euro | BANT | Sell | 35,593 | 39,950 | 11/18/16 | 227 | — | ||||
Euro | BONY | Sell | 2,310,054 | 2,626,864 | 11/18/16 | 48,776 | — | ||||
Euro | HSBC | Sell | 2,110,565 | 2,404,844 | 11/18/16 | 49,392 | — | ||||
Euro | SSBT | Sell | 71,186 | 79,866 | 11/18/16 | 420 | — | ||||
British Pound | BANT | Buy | 372,370 | 523,512 | 11/23/16 | 696 | (26,861 | ) | |||
British Pound | BANT | Sell | 137,979 | 184,563 | 11/23/16 | 371 | (97 | ) | |||
British Pound | BONY | Sell | 7,118,671 | 10,410,238 | 11/23/16 | 902,363 | — | ||||
British Pound | HSBC | Buy | 479,111 | 652,343 | 11/23/16 | 3,635 | (16,065 | ) | |||
British Pound | HSBC | Sell | 4,936,197 | 7,205,954 | 11/23/16 | 613,233 | (186 | ) | |||
British Pound | SSBT | Buy | 309,943 | 442,334 | 11/23/16 | — | (28,366 | ) | |||
British Pound | SSBT | Sell | 227,050 | 324,505 | 11/23/16 | 21,475 | (223 | ) | |||
Total Forward Exchange Contracts | $ | 2,122,618 | $ | (1,266,273 | ) | ||||||
Net unrealized appreciation (depreciation) | $ | 856,345 | |||||||||
aMay be comprised of multiple contracts with the same counterparty, currency and settlement date. | |||||||||||
See Abbreviations on page 40. |
24 Semiannual Report | The accompanying notes are an integral part of these financial statements.
franklintempleton.com
FRANKLIN MUTUAL INTERNATIONAL FUND
Financial Statements | |||
Statement of Assets and Liabilities | |||
June 30, 2016 (unaudited) | |||
Assets: | |||
Investments in securities: | |||
Cost | $ | 173,724,968 | |
Value | $ | 158,519,844 | |
Cash | 42,804 | ||
Foreign currency, at value (cost $899,309) | 899,331 | ||
Receivables: | |||
Investment securities sold | 2,927,849 | ||
Capital shares sold | 342,484 | ||
Dividends and interest | 964,119 | ||
Due from brokers | 611,453 | ||
Variation margin | 95,756 | ||
Unrealized appreciation on OTC forward exchange contracts | 2,122,618 | ||
Other assets | 92 | ||
Total assets | 166,526,350 | ||
Liabilities: | |||
Payables: | |||
Investment securities purchased | 389,756 | ||
Capital shares redeemed | 634,886 | ||
Management fees | 118,515 | ||
Distribution fees | 84,808 | ||
Transfer agent fees | 21,568 | ||
Trustees’ fees and expenses | 568 | ||
Unrealized depreciation on OTC forward exchange contracts | 1,266,273 | ||
Accrued expenses and other liabilities | 28,540 | ||
Total liabilities | 2,544,914 | ||
Net assets, at value | $ | 163,981,436 | |
Net assets consist of: | |||
Paid-in capital | $ | 187,919,501 | |
Undistributed net investment income | 2,631,341 | ||
Net unrealized appreciation (depreciation) | (13,566,442 | ) | |
Accumulated net realized gain (loss) | (13,002,964 | ) | |
Net assets, at value | $ | 163,981,436 |
franklintempleton.com
The accompanying notes are an integral part of these financial statements. | Semiannual Report 25
FRANKLIN MUTUAL INTERNATIONAL FUND
FINANCIAL STATEMENTS
Statement of Assets and Liabilities (continued) | ||
June 30, 2016 (unaudited) | ||
Class Z: | ||
Net assets, at value | $ | 36,600,185 |
Shares outstanding | 2,757,405 | |
Net asset value and maximum offering price per share | $ | 13.27 |
Class A: | ||
Net assets, at value | $ | 84,074,908 |
Shares outstanding | 6,370,701 | |
Net asset value per sharea | $ | 13.20 |
Maximum offering price per share (net asset value per share ÷ 94.25%) | $ | 14.01 |
Class C: | ||
Net assets, at value | $ | 27,303,575 |
Shares outstanding | 2,103,108 | |
Net asset value and maximum offering price per sharea | $ | 12.98 |
Class R: | ||
Net assets, at value | $ | 600,483 |
Shares outstanding | 45,732 | |
Net asset value and maximum offering price per share | $ | 13.13 |
Class R6: | ||
Net assets, at value | $ | 15,402,285 |
Shares outstanding | 1,159,364 | |
Net asset value and maximum offering price per share | $ | 13.29 |
aRedemption price is equal to net asset value less contingent deferred sales charges, if applicable. |
26 Semiannual Report | The accompanying notes are an integral part of these financial statements.
franklintempleton.com
FRANKLIN MUTUAL INTERNATIONAL FUND
FINANCIAL STATEMENTS
Statement of Operations | |||
for the six months ended June 30, 2016 (unaudited) | |||
Investment income: | |||
Dividends (net of foreign taxes of $413,039) | $ | 4,279,917 | |
Interest | 12,607 | ||
Income from securities loaned (net of fees and rebates) | 86,638 | ||
Total investment income | 4,379,162 | ||
Expenses: | |||
Management fees (Note 3a) | 801,403 | ||
Distribution fees: (Note 3c) | |||
Class A | 112,933 | ||
Class C | 145,032 | ||
Class R | 1,544 | ||
Transfer agent fees: (Note 3e) | |||
Class Z | 33,327 | ||
Class A | 74,337 | ||
Class C | 23,859 | ||
Class R | 508 | ||
Class R6 | 119 | ||
Custodian fees (Note 4) | 13,951 | ||
Reports to shareholders | 18,536 | ||
Registration and filing fees | 47,621 | ||
Professional fees | 45,297 | ||
Trustees’ fees and expenses | 2,336 | ||
Other | 13,383 | ||
Total expenses | 1,334,186 | ||
Expense reductions (Note 4) | (877 | ) | |
Expenses waived/paid by affiliates (Note 3f and 3g) | (22,104 | ) | |
Net expenses | 1,311,205 | ||
Net investment income | 3,067,957 | ||
Realized and unrealized gains (losses): | |||
Net realized gain (loss) from: | |||
Investments | (11,659,519 | ) | |
Foreign currency transactions | 280,939 | ||
Futures contracts | (504,581 | ) | |
Net realized gain (loss) | (11,883,161 | ) | |
Net change in unrealized appreciation (depreciation) on: | |||
Investments | (5,763,805 | ) | |
Translation of other assets and liabilities denominated in foreign currencies | (728,491 | ) | |
Futures contracts | 675,375 | ||
Net change in unrealized appreciation (depreciation) | (5,816,921 | ) | |
Net realized and unrealized gain (loss) | (17,700,082 | ) | |
Net increase (decrease) in net assets resulting from operations | $ | (14,632,125 | ) |
franklintempleton.com
The accompanying notes are an integral part of these financial statements. | Semiannual Report 27
FRANKLIN MUTUAL INTERNATIONAL FUND
FINANCIAL STATEMENTS
Statements of Changes in Net Assets | ||||||
Six Months Ended | ||||||
June 30, 2016 | Year Ended | |||||
(unaudited) | December 31, 2015 | |||||
Increase (decrease) in net assets: | ||||||
Operations: | ||||||
Net investment income | $ | 3,067,957 | $ | 1,517,970 | ||
Net realized gain (loss) | (11,883,161 | ) | 3,668,778 | |||
Net change in unrealized appreciation (depreciation) | (5,816,921 | ) | (12,050,083 | ) | ||
Net increase (decrease) in net assets resulting from operations | (14,632,125 | ) | (6,863,335 | ) | ||
Distributions to shareholders from: | ||||||
Net investment income: | ||||||
Class Z | — | (540,800 | ) | |||
Class A | — | (983,407 | ) | |||
Class C | — | (115,267 | ) | |||
Class R | — | (5,824 | ) | |||
Class R6 | — | (291,543 | ) | |||
Net realized gains: | ||||||
Class Z | — | (662,068 | ) | |||
Class A | — | (1,747,632 | ) | |||
Class C | — | (600,597 | ) | |||
Class R | — | (10,302 | ) | |||
Class R6 | — | (429,291 | ) | |||
Total distributions to shareholders | — | (5,386,731 | ) | |||
Capital share transactions: (Note 2) | ||||||
Class Z | (10,012,025 | ) | 31,733,987 | |||
Class A | (19,198,118 | ) | 78,126,822 | |||
Class C | (4,923,385 | ) | 22,165,666 | |||
Class R | (19,278 | ) | 563,842 | |||
Class R6 | (6,852,383 | ) | 5,224,973 | |||
Total capital share transactions | (41,005,189 | ) | 137,815,290 | |||
Net increase (decrease) in net assets | (55,637,314 | ) | 125,565,224 | |||
Net assets: | ||||||
Beginning of period | 219,618,750 | 94,053,526 | ||||
End of period | $ | 163,981,436 | $ | 219,618,750 | ||
Undistributed net investment income (distributions in excess of net investment income) | ||||||
included in net assets: | ||||||
End of period | $ | 2,631,341 | $ | (436,616 | ) |
28 Semiannual Report | The accompanying notes are an integral part of these financial statements.
franklintempleton.com
FRANKLIN MUTUAL INTERNATIONAL FUND
Notes to Financial Statements (unaudited)
1. Organization and Significant Accounting Policies
Franklin Mutual Series Funds (Trust) is registered under the Investment Company Act of 1940 (1940 Act) as an open-end management investment company, consisting of seven separate funds and applies the specialized accounting and reporting guidance in U.S. Generally Accepted Accounting Principles (U.S. GAAP). Franklin Mutual International Fund (Fund) is included in this report. The financial statements of the remaining funds in the Trust are presented separately. The Fund offers five classes of shares: Class Z, Class A, Class C, Class R and Class R6. Each class of shares differs by its initial sales load, contingent deferred sales charges, voting rights on matters affecting a single class, its exchange privilege and fees primarily due to differing arrangements for distribution and transfer agent fees.
The following summarizes the Fund’s significant accounting policies.
a. Financial Instrument Valuation
The Fund’s investments in financial instruments are carried at fair value daily. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date. The Fund calculates the net asset value per share as of 4 p.m. Eastern time each day the New York Stock Exchange (NYSE) is open for trading. Under compliance policies and procedures approved by the Trust’s Board of Trustees (the Board), the Fund’s administrator has responsibility for oversight of valuation, including leading the cross-functional Valuation Committee (VC). The VC provides administration and oversight of the Fund’s valuation policies and procedures, which are approved annually by the Board. Among other things, these procedures allow the Fund to utilize independent pricing services, quotations from securities and financial instrument dealers, and other market sources to determine fair value.
Equity securities and derivative financial instruments (derivatives) listed on an exchange or on the NASDAQ National Market System are valued at the last quoted sale price or the official closing price of the day, respectively. Foreign equity securities are valued as of the close of trading on the foreign stock exchange on which the security is primarily traded or as of 4 p.m. Eastern time whichever is earlier. The value is then converted into its U.S. dollar equivalent at the foreign exchange rate in effect at 4 p.m. Eastern time on the day that the value of the security is determined. Over-the-counter (OTC) securities are valued within the range of the most recent quoted bid and ask prices. Securities that trade in multiple markets or on multiple exchanges are valued according to the broadest and most representative market. Certain equity securities are valued based upon fundamental characteristics or relationships to similar securities.
Debt securities generally trade in the OTC market rather than on a securities exchange. The Fund’s pricing services use multiple valuation techniques to determine fair value. In instances where sufficient market activity exists, the pricing services may utilize a market-based approach through which quotes from market makers are used to determine fair value. In instances where sufficient market activity may not exist or is limited, the pricing services also utilize proprietary valuation models which may consider market characteristics such as benchmark yield curves, credit spreads, estimated default rates, anticipated market interest rate volatility, coupon rates, anticipated timing of principal repayments, underlying collateral, and other unique security features in order to estimate the relevant cash flows, which are then discounted to calculate the fair value. Securities denominated in a foreign currency are converted into their U.S. dollar equivalent at the foreign exchange rate in effect at 4 p.m. Eastern time on the date that the values of the foreign debt securities are determined.
Certain derivatives trade in the OTC market. The Fund’s pricing services use various techniques including industry standard option pricing models and proprietary discounted cash flow models to determine the fair value of those instruments. The Fund’s net benefit or obligation under the derivative contract, as measured by the fair value of the contract, is included in net assets.
The Fund has procedures to determine the fair value of financial instruments for which market prices are not reliable or readily available. Under these procedures, the VC convenes on a regular basis to review such financial instruments and considers a number of factors, including significant unobservable valuation inputs, when arriving at fair value. The VC primarily employs a market-based approach which may use related or comparable assets or liabilities, recent transactions, market multiples, book values, and other relevant information for the investment to determine the fair value of the investment. An income-based valuation approach may also be used in which the anticipated future cash flows of the investment are discounted to calculate fair value. Discounts may also be applied due to the nature or
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FRANKLIN MUTUAL INTERNATIONAL FUND
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
1. Organization and Significant Accounting
Policies (continued)
a. Financial Instrument Valuation (continued)
duration of any restrictions on the disposition of the investments. Due to the inherent uncertainty of valuations of such investments, the fair values may differ significantly from the values that would have been used had an active market existed. The VC employs various methods for calibrating these valuation approaches including a regular review of key inputs and assumptions, transactional back-testing or disposition analysis, and reviews of any related market activity.
Trading in securities on foreign securities stock exchanges and OTC markets may be completed before 4 p.m. Eastern time. In addition, trading in certain foreign markets may not take place on every NYSE business day. Occasionally, events occur between the time at which trading in a foreign security is completed and the close of the NYSE that might call into question the reliability of the value of a portfolio security held by the Fund. As a result, differences may arise between the value of the Fund’s portfolio securities as determined at the foreign market close and the latest indications of value at the close of the NYSE. In order to minimize the potential for these differences, the VC monitors price movements following the close of trading in foreign stock markets through a series of country specific market proxies (such as baskets of American Depositary Receipts, futures contracts and exchange traded funds). These price movements are measured against established trigger thresholds for each specific market proxy to assist in determining if an event has occurred that may call into question the reliability of the values of the foreign securities held by the Fund. If such an event occurs, the securities may be valued using fair value procedures, which may include the use of independent pricing services.
When the last day of the reporting period is a non-business day, certain foreign markets may be open on those days that the NYSE is closed, which could result in differences between the value of the Fund’s portfolio securities on the last business day and the last calendar day of the reporting period. Any significant security valuation changes due to an open foreign market are adjusted and reflected by the Fund for financial reporting purposes.
b. Foreign Currency Translation
Portfolio securities and other assets and liabilities denominated in foreign currencies are translated into U.S. dollars based on the exchange rate of such currencies against U.S. dollars on the date of valuation. The Fund may enter into foreign currency exchange contracts to facilitate transactions denominated in a foreign currency. Purchases and sales of securities, income and expense items denominated in foreign currencies are translated into U.S. dollars at the exchange rate in effect on the transaction date. Portfolio securities and assets and liabilities denominated in foreign currencies contain risks that those currencies will decline in value relative to the U.S. dollar. Occasionally, events may impact the availability or reliability of foreign exchange rates used to convert the U.S. dollar equivalent value. If such an event occurs, the foreign exchange rate will be valued at fair value using procedures established and approved by the Board.
The Fund does not separately report the effect of changes in foreign exchange rates from changes in market prices on securities held. Such changes are included in net realized and unrealized gain or loss from investments in the Statement of Operations.
Realized foreign exchange gains or losses arise from sales of foreign currencies, currency gains or losses realized between the trade and settlement dates on securities transactions and the difference between the recorded amounts of dividends, interest, and foreign withholding taxes and the U.S. dollar equivalent of the amounts actually received or paid. Net unrealized foreign exchange gains and losses arise from changes in foreign exchange rates on foreign denominated assets and liabilities other than investments in securities held at the end of the reporting period.
c. Derivative Financial Instruments
The Fund invested in derivatives in order to manage risk or gain exposure to various other investments or markets. Derivatives are financial contracts based on an underlying or notional amount, require no initial investment or an initial net investment that is smaller than would normally be required to have a similar response to changes in market factors, and require or permit net settlement. Derivatives contain various risks including the potential inability of the counterparty to fulfill their obligations under the terms of the contract, the potential for an illiquid secondary market, and/or the potential for market movements which expose the Fund to gains or losses in excess of the amounts shown in the Statement of Assets and Liabilities. Realized gain and loss and unrealized appreciation and depreciation on these contracts for the period are included in the Statement of Operations.
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Derivative counterparty credit risk is managed through a formal evaluation of the creditworthiness of all potential counterparties. The Fund attempts to reduce its exposure to counterparty credit risk on OTC derivatives, whenever possible, by entering into International Swaps and Derivatives Association (ISDA) master agreements with certain counterparties. These agreements contain various provisions, including but not limited to collateral requirements, events of default, or early termination. Termination events applicable to the counterparty include certain deteriorations in the credit quality of the counterparty. Termination events applicable to the Fund include failure of the Fund to maintain certain net asset levels and/or limit the decline in net assets over various periods of time. In the event of default or early termination, the ISDA master agreement gives the non-defaulting party the right to net and close-out all transactions traded, whether or not arising under the ISDA agreement, to one net amount payable by one counterparty to the other. However, absent an event of default or early termination, OTC derivative assets and liabilities are presented gross and not offset in the Statement of Assets and Liabilities. Early termination by the counterparty may result in an immediate payment by the Fund of any net liability owed to that counterparty under the ISDA agreement.
Collateral requirements differ by type of derivative. Collateral or initial margin requirements are set by the broker or exchange clearing house for exchange traded and centrally cleared derivatives. Initial margin deposited is held at the exchange and can be in the form of cash and/or securities. For OTC derivatives traded under an ISDA master agreement, posting of collateral is required by either the Fund or the applicable coun-terparty if the total net exposure of all OTC derivatives with the applicable counterparty exceeds the minimum transfer amount, which typically ranges from $100,000 to $250,000, and can vary depending on the counterparty and the type of the agreement. Generally, collateral is determined at the close of Fund business each day and any additional collateral required due to changes in derivative values may be delivered by the Fund or the counterparty within a few business days. Collateral pledged and/or received by the Fund for OTC derivatives, if any, is held in segregated accounts with the Fund’s custodian/counterparty broker and can be in the form of cash and/or securities. Unrestricted cash may be invested according to the Fund’s investment objectives. To the extent that the amounts due to the Fund from its counterparties are not subject to collateralization or are not fully collateralized, the Fund bears the risk of loss from counterparty non-performance.
The Fund entered into exchange traded futures contracts primarily to manage exposure to certain foreign currencies. A futures contract is an agreement between the Fund and a counterparty to buy or sell an asset for a specified price on a future date. Required initial margins are pledged by the Fund, and the daily change in fair value is accounted for as a variation margin payable or receivable in the Statement of Assets and Liabilities.
The Fund entered into OTC forward exchange contracts primarily to manage exposure to certain foreign currencies. A forward exchange contract is an agreement between the Fund and a counterparty to buy or sell a foreign currency at a specific exchange rate on a future date.
The Fund purchased or wrote OTC option contracts primarily to manage exposure to foreign exchange rate risk. An option is a contract entitling the holder to purchase or sell a specific amount of shares or units of an asset or notional amount of a swap (swaption), at a specified price. When an option is purchased or written, an amount equal to the premium paid or received is recorded as an asset or liability, respectively. Upon exercise of an option, the acquisition cost or sales proceeds of the underlying investment is adjusted by any premium received or paid. Upon expiration of an option, any premium received or paid is recorded as a realized gain or loss. Upon closing an option other than through expiration or exercise, the difference between the premium received or paid and the cost to close the position is recorded as a realized gain or loss.
See Note 9 regarding other derivative information.
d. Securities Sold Short
The Fund is engaged in selling securities short, which obligates the Fund to replace a borrowed security with the same security at current fair value. The Fund incurs a loss if the price of the security increases between the date of the short sale and the date on which the Fund replaces the borrowed security. The Fund realizes a gain if the price of the security declines between those dates. Gains are limited to the price at which the Fund sold the security short, while losses are potentially unlimited in size.
The Fund is required to establish a margin account with the broker lending the security sold short. While the short sale is outstanding, the broker retains the proceeds of the short sale to the extent necessary to meet margin requirements until the short position is closed out. A deposit must also be maintained with the Fund’s custodian/counterparty broker consisting of cash and/or securities having a value equal to a specified percentage
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FRANKLIN MUTUAL INTERNATIONAL FUND
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
1. Organization and Significant Accounting
Policies (continued)
d. Securities Sold Short (continued)
of the value of the securities sold short. The Fund is obligated to pay fees for borrowing the securities sold short and is required to pay the counterparty any dividends and/or interest due on securities sold short. Such dividends and/or interest and any security borrowing fees are recorded as an expense to the Fund. At June 30, 2016, the Fund had no securities sold short.
e. Securities Lending
The Fund participates in an agency based securities lending program to earn additional income. The Fund receives cash collateral against the loaned securities in an amount equal to at least 102% of the fair value of the loaned securities. Collateral is maintained over the life of the loan in an amount not less than 100% of the fair value of loaned securities, as determined at the close of Fund business each day; any additional collateral required due to changes in security values is delivered to the Fund on the next business day. The collateral is deposited into a joint cash account with other funds and is used to invest in a money market fund managed by Franklin Advisers, Inc., an affiliate of the Fund, and/or a joint repurchase agreement. The Fund may receive income from the investment of cash collateral, in addition to lending fees and rebates paid by the borrower. Income from securities loaned, net of fees paid to the securities lending agent and/or third-party vendor, is reported separately in the Statement of Operations. The Fund bears the market risk with respect to the collateral investment, securities loaned, and the risk that the agent may default on its obligations to the Fund. If the borrower defaults on its obligation to return the securities loaned, the Fund has the right to repurchase the securities in the open market using the collateral received. The securities lending agent has agreed to indemnify the Fund in the event of default by a third party borrower. At June 30, 2016, the Fund had no securities on loan.
f. Income and Deferred Taxes
It is the Fund’s policy to qualify as a regulated investment company under the Internal Revenue Code. The Fund intends to distribute to shareholders substantially all of its taxable income and net realized gains to relieve it from federal income and excise taxes. As a result, no provision for U.S. federal income taxes is required.
The Fund may be subject to foreign taxation related to income received, capital gains on the sale of securities and certain foreign currency transactions in the foreign jurisdictions in which it invests. Foreign taxes, if any, are recorded based on the tax regulations and rates that exist in the foreign markets in which the Fund invests. When a capital gain tax is determined to apply, the Fund records an estimated deferred tax liability in an amount that would be payable if the securities were disposed of on the valuation date.
The Fund may recognize an income tax liability related to its uncertain tax positions under U.S. GAAP when the uncertain tax position has a less than 50% probability that it will be sustained upon examination by the tax authorities based on its technical merits. As of June 30, 2016, the Fund has determined that no tax liability is required in its financial statements related to uncertain tax positions for any open tax years (or expected to be taken in future tax years). Open tax years are those that remain subject to examination and are based on each tax jurisdiction’s statute of limitation.
g. Security Transactions, Investment Income, Expenses and Distributions
Security transactions are accounted for on trade date. Realized gains and losses on security transactions are determined on a specific identification basis. Interest income and estimated expenses are accrued daily. Amortization of premium and accretion of discount on debt securities are included in interest income. Dividend income is recorded on the ex-dividend date except for certain dividends from foreign securities where the dividend rate is not available. In such cases, the dividend is recorded as soon as the information is received by the Fund. Distributions to shareholders are recorded on the ex-dividend date and are determined according to income tax regulations (tax basis). Distributable earnings determined on a tax basis may differ from earnings recorded in accordance with U.S. GAAP. These differences may be permanent or temporary. Permanent differences are reclassified among capital accounts to reflect their tax character. These reclassifications have no impact on net assets or the results of operations. Temporary differences are not reclassified, as they may reverse in subsequent periods.
Common expenses incurred by the Trust are allocated among the funds based on the ratio of net assets of each fund to the combined net assets of the Trust. Fund specific expenses are charged directly to the fund that incurred the expense.
Realized and unrealized gains and losses and net investment income, not including class specific expenses, are allocated
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NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
daily to each class of shares based upon the relative proportion of net assets of each class. Differences in per share distributions, by class, are generally due to differences in class specific expenses.
h. Accounting Estimates
The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the amounts of income and expenses during the reporting period. Actual results could differ from those estimates.
i. Guarantees and Indemnifications
Under the Trust’s organizational documents, its officers and trustees are indemnified by the Trust against certain liabilities arising out of the performance of their duties to the Trust. Additionally, in the normal course of business, the Trust, on behalf of the Fund, enters into contracts with service providers that contain general indemnification clauses. The Trust’s maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Trust that have not yet occurred. Currently, the Trust expects the risk of loss to be remote.
2. Shares of Beneficial Interest
At June 30, 2016, there were an unlimited number of shares authorized (without par value). Transactions in the Fund’s shares were as follows:
Six Months Ended | Year Ended | ||||||||||
June 30, 2016 | December 31, 2015 | ||||||||||
Shares | Amount | Shares | Amount | ||||||||
Class Z Shares: | |||||||||||
Shares sold | 553,996 | $ | 7,258,746 | 2,413,536 | $ | 35,531,201 | |||||
Shares issued in reinvestment of distributions | — | — | 84,406 | 1,172,521 | |||||||
Shares redeemed | (1,323,589 | ) | (17,270,771 | ) | (337,358 | ) | (4,969,735 | ) | |||
Net increase (decrease) | (769,593 | ) | $ | (10,012,025 | ) | 2,160,584 | $ | 31,733,987 | |||
Class A Shares: | |||||||||||
Shares sold | 988,193 | $ | 12,847,955 | 7,288,961 | $ | 110,020,725 | |||||
Shares issued in reinvestment of distributions | — | — | 192,281 | 2,654,730 | |||||||
Shares redeemed | (2,459,514 | ) | (32,046,073 | ) | (2,377,293 | ) | (34,548,633 | ) | |||
Net increase (decrease) | (1,471,321 | ) | $ | (19,198,118 | ) | 5,103,949 | $ | 78,126,822 | |||
Class C Shares: | |||||||||||
Shares sold | 204,084 | $ | 2,648,699 | 2,030,613 | $ | 30,447,005 | |||||
Shares issued in reinvestment of distributions | — | — | 52,555 | 713,543 | |||||||
Shares redeemed | (586,643 | ) | (7,572,084 | ) | (626,348 | ) | (8,994,882 | ) | |||
Net increase (decrease) | (382,559 | ) | $ | (4,923,385 | ) | 1,456,820 | $ | 22,165,666 | |||
Class R Shares: | |||||||||||
Shares sold | 14,489 | $ | 188,216 | 39,482 | $ | 566,560 | |||||
Shares issued in reinvestment of distributions | — | — | 1,172 | 16,126 | |||||||
Shares redeemed | (15,862 | ) | (207,494 | ) | (1,269 | ) | (18,844 | ) | |||
Net increase (decrease) | (1,373 | ) | $ | (19,278 | ) | 39,385 | $ | 563,842 | |||
Class R6 Shares: | |||||||||||
Shares sold | 213,912 | $ | 2,809,375 | 401,874 | $ | 6,037,202 | |||||
Shares issued in reinvestment of distributions | — | — | 51,921 | 720,834 | |||||||
Shares redeemed | (733,778 | ) | (9,661,758 | ) | (104,241 | ) | (1,533,063 | ) | |||
Net increase (decrease) | (519,866 | ) | $ | (6,852,383 | ) | 349,554 | $ | 5,224,973 |
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FRANKLIN MUTUAL INTERNATIONAL FUND
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
3. Transactions with Affiliates
Franklin Resources, Inc. is the holding company for various subsidiaries that together are referred to as Franklin Templeton Investments. Certain officers and trustees of the Fund are also officers and/or directors of the following subsidiaries:
Subsidiary | Affiliation |
Franklin Mutual Advisers, LLC (Franklin Mutual) | Investment manager |
Franklin Templeton Services, LLC (FT Services) | Administrative manager |
Franklin Templeton Distributors, Inc. (Distributors) | Principal underwriter |
Franklin Templeton Investor Services, LLC (Investor Services) | Transfer agent |
a. Management Fees
The Fund pays an investment management fee to Franklin Mutual of 0.875% per year of the average daily net assets of the Fund.
b. Administrative Fees
Under an agreement with Franklin Mutual, FT Services provides administrative services to the Fund. The fee is paid by Franklin Mutual based on the Fund’s average daily net assets, and is not an additional expense of the Fund.
c. Distribution Fees
The Board has adopted distribution plans for each share class, with the exception of Class Z and Class R6 shares, pursuant to Rule 12b-1 under the 1940 Act. Under the Fund’s Class A reimbursement distribution plan, the Fund reimburses Distributors for costs incurred in connection with the servicing, sale and distribution of the Fund’s shares up to the maximum annual plan rate. Under the Class A reimbursement distribution plan, costs exceeding the maximum for the current plan year cannot be reimbursed in subsequent periods. In addition, under the Fund’s Class C and R compensation distribution plans, the Fund pays Distributors for costs incurred in connection with the servicing, sale and distribution of the Fund’s shares up to the maximum annual plan rate for each class. The plan year, for purposes of monitoring compliance with the maximum annual plan rates, is February 1 through January 31 for each fund.
The maximum annual plan rates, based on the average daily net assets, for each class, are as follows:
Class A | 0.35 | % |
Class C | 1.00 | % |
Class R | 0.50 | % |
The Board has set the current rate at 0.25% per year for Class A shares until further notice and approval by the Board.
d. Sales Charges/Underwriting Agreements
Front-end sales charges and contingent deferred sales charges (CDSC) do not represent expenses of the Fund. These charges are deducted from the proceeds of sales of Fund shares prior to investment or from redemption proceeds prior to remittance, as applicable. Distributors has advised the Fund of the following commission transactions related to the sales and redemptions of the Fund’s shares for the period:
Sales charges retained net of commissions paid to unaffiliated broker/dealers | $ | 10,355 |
CDSC retained | $ | 3,079 |
e. Transfer Agent Fees
Each class of shares, except for Class R6, pays transfer agent fees to Investor Services for its performance of shareholder servicing obligations and reimburses Investor Services for out of pocket expenses incurred, including shareholder servicing fees paid to third parties. These fees are allocated daily based upon their relative proportion of such classes’ aggregate net assets. Class R6 pays Investor Services transfer agent fees specific to that class.
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For the period ended June 30, 2016, the Fund paid transfer agent fees of $132,150, of which $72,086 was retained by Investor Services.
f. Investments in Affiliated Management Investment Companies
The Fund invests in one or more affiliated management investment companies for purposes other than exercising a controlling influence over the management or policies. Management fees paid by the Fund are waived on assets invested in the affiliated management investment companies, as noted in the Statement of Operations, in an amount not to exceed the management and administrative fees paid directly or indirectly by each affiliate.
% of | |||||||||
Number | Affiliated | ||||||||
of Shares | Number of | Fund Shares | |||||||
Held at | Shares Held | Value | Realized | Outstanding | |||||
Beginning | Gross | Gross | at End | at End | Investment | Gain | Held at End | ||
of Period | Additions | Reductions | of Period | of Period | Income | (Loss) | of Period | ||
Non-Controlled Affiliates | |||||||||
Institutional Fiduciary Trust | |||||||||
Money Market Portfolio | — | 11,626,000 | (11,626,000 | ) | — | $ — | $ — | $ — | —% |
g. Waiver and Expense Reimbursements
Franklin Mutual and Investor Services have contractually agreed in advance to waive or limit their respective fees and to assume as their own expense certain expenses otherwise payable by the Fund so that the expenses (excluding distribution fees, acquired fund fees and expenses) for each class of the Fund do not exceed 1.17% and Class R6 does not exceed 0.99% based on the average net assets of each class (other than certain non-routine expenses or costs, including those relating to litigation, indemnification, reorganizations, and liquidations) until April 30, 2017. Prior to May 1, 2016, expenses for Class R6 were limited to 1.02%.
h. Other Affiliated Transactions
At June 30, 2016, one or more of the funds in Franklin Fund Allocator Series owned 8.64% of the Fund’s outstanding shares.
4. Expense Offset Arrangement
The Fund has entered into an arrangement with its custodian whereby credits realized as a result of uninvested cash balances are used to reduce a portion of the Fund’s custodian expenses. During the period ended June 30, 2016, the custodian fees were reduced as noted in the Statement of Operations.
5. Independent Trustees’ Retirement Plan
On January 1, 1993, the Trust adopted an Independent Trustees’ Retirement Plan (Plan). The Plan is an unfunded defined benefit plan that provides benefit payments to Trustees whose length of service and retirement age meets the eligibility requirements of the Plan. Benefits under the Plan are based on years of service and fees paid to each trustee at the time of retirement. Effective in December 1996, the Plan was closed to new participants.
During the period ended June 30, 2016, the Fund’s projected benefit obligation and benefit payments under the Plan were as follows:
aProjected benefit obligation at June 30, 2016 | $ | 568 | |
bIncrease in projected benefit obligation | $ | 268 | |
Benefit payments made to retired trustees | $ | (96 | ) |
aThe projected benefit obligation is included in trustees’ fees and expenses in the Statement of Assets and Liabilities.
bThe increase in projected benefit obligation is included in trustees’ fees and expenses in the Statement of Operations.
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FRANKLIN MUTUAL INTERNATIONAL FUND
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
6. Income Taxes
At June 30, 2016, the cost of investments and net unrealized appreciation (depreciation) for income tax purposes were as follows:
Cost of investments | $ | 174,503,343 | |
Unrealized appreciation | $ | 5,575,053 | |
Unrealized depreciation | (21,558,552 | ) | |
Net unrealized appreciation (depreciation) | $ | (15,983,499 | ) |
Differences between income and/or capital gains as determined on a book basis and a tax basis are primarily due to differing treatment of foreign currency transactions.
7. Investment Transactions
Purchases and sales of investments (excluding short term securities) for the period ended June 30, 2016, aggregated $20,517,178 and $48,039,749, respectively.
8. Concentration of Risk
Investing in foreign securities may include certain risks and considerations not typically associated with investing in U.S. securities, such as fluctuating currency values and changing local and regional economic, political and social conditions, which may result in greater market volatility. In addition, certain foreign securities may not be as liquid as U.S. securities.
9. Other Derivative Information
At June 30, 2016, the Fund’s investments in derivative contracts are reflected in the Statement of Assets and Liabilities as follows:
Asset Derivatives | Liability Derivatives | ||||||
Derivative Contracts | |||||||
Not Accounted for as | Statement of Assets and | Statement of Assets and | |||||
Hedging Instruments | Liabilities Location | Fair Value | Liabilities Location | Fair Value | |||
Foreign exchange contracts | Investments in securities, at | $ | 82,138 | a | |||
value | |||||||
Variation margin | 801,752 | b | |||||
Unrealized appreciation on | 2,122,618 | Unrealized depreciation on | $ | 1,266,273 | |||
OTC forward exchange | OTC forward exchange | ||||||
contracts | contracts | ||||||
Totals | $ | 3,006,508 | $ | 1,266,273 |
aPurchased option contracts are included in investments in securities, at value in the Statement of Assets and Liabilities.
bThis amount reflects the cumulative appreciation (depreciation) of futures contracts as reported in the Statement of Investments. Only the variation margin receivable/payable
at period end is separately reported within the Statement of Assets and Liabilities. Prior variation margin movements were recorded to cash upon receipt or payment.
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NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
For the period ended June 30, 2016, the effect of derivative contracts in the Fund’s Statement of Operations was as follows:
Net Change in | ||||||||
Unrealized | ||||||||
Derivative Contracts | Net Realized | Appreciation | ||||||
Not Accounted for as | Statement of | Gain (Loss) | Statement of | (Depreciation) | ||||
Hedging Instruments | Operations Locations | for the Period | Operations Locations | for the Period | ||||
Net realized gain (loss) from: | Net change in unrealized | |||||||
appreciation (depreciation) on: | ||||||||
Foreign exchange contracts | Investments | $ | (296,855 | )a | ||||
Foreign currency | $ | 315,372 | b | Translation of other assets | (717,271 | )b | ||
transactions | and liabilities denominated | |||||||
in foreign currencies | ||||||||
Futures contracts | (504,581 | ) | Futures contracts | 675,375 | ||||
Totals | $ | (189,209 | ) | $ | (338,751 | ) |
aPurchased option contracts are included in net change in unrealized appreciation (depreciation) on investments in the Statement of Operations.
bForward exchange contracts are included in net realized gain (loss) from foreign currency transactions and net change in unrealized appreciation (depreciation) on translation of other assets and liabilities denominated in foreign currencies in the Statement of Operations.
For the period ended June 30, 2016, the average month end fair value of derivatives represented 2.1% of average month end net assets. The average month end number of open derivative contracts for the period was 240.
At June 30, 2016, the Fund’s OTC derivative assets and liabilities are as follows:
Gross and Net Amounts | ||||
of Assets and Liabilities | ||||
Presented in the | ||||
Statement of | ||||
Assets and Liabilities | ||||
Assetsa | Liabilitiesa | |||
Derivatives | ||||
Forward Exchange Contracts | $ | 2,122,618 | $ | 1,266,273 |
Options Purchased | 82,138 | — | ||
Total | $ | 2,204,756 | $ | 1,266,273 |
aAbsent an event of default or early termination, OTC derivative assets and liabilities are presented gross and not offset in the Statement of Assets and Liabilities.
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NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
9. Other Derivative Information (continued)
At June 30, 2016, the Fund’s OTC derivative assets, which may be offset against the Fund’s OTC derivative liabilities and collateral received from the counterparty, are as follows:
Amounts Not Offset in the | ||||||||||||||
Statement of Assets and Liabilities | ||||||||||||||
Gross and Net | ||||||||||||||
Amounts of Assets | Financial | |||||||||||||
Presented in the | Financial | Instruments | Cash | |||||||||||
Statement of | Instruments | Collateral | Collateral | Net Amount (Not | ||||||||||
Assets and Liabilities | Available for Offset | Receiveda,b | Received | less than zero) | ||||||||||
Counterparty | ||||||||||||||
BANT | $ | 125,608 | $ | (125,608 | ) | $ | — | $ | — | $ | — | |||
BONY | 957,394 | (28,540 | ) | (928,854 | ) | — | — | |||||||
FBCO | 50,695 | (22,556 | ) | — | — | 28,139 | ||||||||
HSBC | 996,208 | (666,895 | ) | (329,313 | ) | — | — | |||||||
MSCS | 18,456 | — | — | — | 18,456 | |||||||||
SSBT | 56,395 | (56,395 | ) | — | — | — | ||||||||
Total | $ | 2,204,756 | $ | (899,994 | ) | $ | (1,258,167 | ) | $ | — | $ | 46,595 | ||
aAt June 30, 2016, the Fund received United Kingdom Treasury Bonds and U.S. Treasury Bills and Notes as collateral for derivatives. | ||||||||||||||
bIn some instances, the collateral amounts disclosed in the table above were adjusted due to the requirement to limit collateral amounts to avoid the effect of over- | ||||||||||||||
collateralization. Actual collateral received and/or pledged may be more than the amounts disclosed herein. |
At June 30, 2016, the Fund’s OTC derivative liabilities, which may be offset against the Fund’s OTC derivative assets and collateral pledged to the counterparty, are as follows:
Amounts Not Offset in the | ||||||||||||
Statement of Assets and Liabilities | ||||||||||||
Gross and Net | ||||||||||||
Amounts of Liabilities | Financial | |||||||||||
Presented in the | Financial | Instruments | Cash | |||||||||
Statement of | Instruments | Collateral | Collateral | Net Amount (Not | ||||||||
Assets and Liabilities | Available for Offset | Pledgeda | Pledged | less than zero) | ||||||||
Counterparty | ||||||||||||
BANT | $ | 485,741 | $ | (125,608 | ) | $ | (118,901 | ) | $ | — | $ | 241,232 |
BONY | 28,540 | (28,540 | ) | — | — | — | ||||||
FBCO | 22,556 | (22,556 | ) | — | — | — | ||||||
HSBC | 666,895 | (666,895 | ) | — | — | — | ||||||
MSCS | — | — | — | — | — | |||||||
SSBT | 62,541 | (56,395 | ) | — | — | 6,146 | ||||||
Total | $ | 1,266,273 | $ | (899,994 | ) | $ | (118,901 | ) | $ | — | $ | 247,378 |
aSee the accompanying Statement of Investments for securities pledged as collateral for derivatives.
See Note 1(c) regarding derivative financial instruments.
See Abbreviations on page 40.
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NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
10. Credit Facility
The Fund, together with other U.S. registered and foreign investment funds (collectively, Borrowers), managed by Franklin Templeton Investments, are borrowers in a joint syndicated senior unsecured credit facility totaling $2 billion (Global Credit Facility) which matures on February 10, 2017. This Global Credit Facility provides a source of funds to the Borrowers for temporary and emergency purposes, including the ability to meet future unanticipated or unusually large redemption requests.
Under the terms of the Global Credit Facility, the Fund shall, in addition to interest charged on any borrowings made by the Fund and other costs incurred by the Fund, pay its share of fees and expenses incurred in connection with the implementation and maintenance of the Global Credit Facility, based upon its relative share of the aggregate net assets of all of the Borrowers, including an annual commitment fee of 0.07% based upon the unused portion of the Global Credit Facility. Effective February 12, 2016, the annual commitment fee is 0.15%. These fees are reflected in other expenses in the Statement of Operations. During the period ended June 30, 2016, the Fund did not use the Global Credit Facility.
11. Fair Value Measurements
The Fund follows a fair value hierarchy that distinguishes between market data obtained from independent sources (observable inputs) and the Fund’s own market assumptions (unobservable inputs). These inputs are used in determining the value of the Fund’s financial instruments and are summarized in the following fair value hierarchy:
- Level 1 – quoted prices in active markets for identical financial instruments
- Level 2 – other significant observable inputs (including quoted prices for similar financial instruments, interest rates, prepay- ment speed, credit risk, etc.)
- Level 3 – significant unobservable inputs (including the Fund’s own assumptions in determining the fair value of financial instruments)
The input levels are not necessarily an indication of the risk or liquidity associated with financial instruments at that level.
For movements between the levels within the fair value hierarchy, the Fund has adopted a policy of recognizing the transfers as of the date of the underlying event which caused the movement.
A summary of inputs used as of June 30, 2016, in valuing the Fund’s assets and liabilities carried at fair value, is as follows:
Level 1 | Level 2 | Level 3 | Total | |||||
Assets: | ||||||||
Investments in Securities: | ||||||||
Equity Investments:a | ||||||||
Machinery | $ | 217,968 | $ | 118,798 | $ | — | $ | 336,766 |
All Other Equity Investmentsb | 155,511,556 | — | — | 155,511,556 | ||||
Options Purchased | — | 82,138 | — | 82,138 | ||||
Short Term Investments | 1,589,384 | 1,000,000 | — | 2,589,384 | ||||
Total Investments in Securities | $ | 157,318,908 | $ | 1,200,936 | $ | — | $ | 158,519,844 |
Other Financial Instruments | ||||||||
Futures Contracts | $ | 801,752 | $ | — | $ | — | $ | 801,752 |
Forward Exchange Contracts | — | 2,122,618 | — | 2,122,618 | ||||
Total Other Financial Instruments | $ | 801,752 | $ | 2,122,618 | $ | — | $ | 2,924,370 |
Liabilities: | ||||||||
Other Financial Instruments | ||||||||
Forward Exchange Contracts | $ | — | $ | 1,266,273 | $ | — | $ | 1,266,273 |
aIncludes common and preferred stocks. | ||||||||
bFor detailed categories, see the accompanying Statement of Investments. |
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NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
11. Fair Value Measurements (continued)
A reconciliation of assets in which Level 3 inputs are used in determining fair value is presented when there are significant Level 3 financial instruments at the end of the period.
12. Subsequent Events
The Fund has evaluated subsequent events through the issuance of the financial statements and determined that no events have occurred that require disclosure.
Abbreviations | |||||
Counterparty | Currency | Selected Portfolio | |||
BANT | Bank of America N.A. | CHF | Swiss Franc | ADR | American Depositary Receipt |
BONY | Bank of New York Mellon | CNY | Chinese Yuan | FHLB | Federal Home Loan Bank |
FBCO | Credit Suisse International | EUR | Euro | ||
HSBC | HSBC Bank PLC | GBP | British Pound | ||
MSCS | Morgan Stanley Capital Services LLC | USD | United States Dollar | ||
SSBT | State Street Bank and Trust Co., N.A. |
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Shareholder Information
Board Review of Investment Management Agreement
The Board of Trustees (Board), including the independent trustees, at a Board meeting held on May 16, 2016, unanimously approved the renewal of the Fund’s investment management agreement. Prior to a meeting of all of the trustees for the purpose of considering such approval, the independent trustees participated in two other meetings held in connection with the renewal process (those trustees unable to attend in person were present by telephonic conference means). Throughout the process, the independent trustees received assistance and advice from and met separately with independent counsel. The independent trustees met with and interviewed officers of the investment manager (including portfolio managers), the transfer agent and shareholder services group and the distributor. In approving the renewal of the investment management agreement for the Fund, the Board, including the independent trustees, determined that the investment management fee structure was fair and reasonable and that continuance of the agreement was in the best interests of the Fund and its shareholders.
In reaching their decision on the investment management agreement, the trustees took into account information furnished throughout the year at regular Board meetings, as well as information specifically requested and furnished for the renewal process, which culminated in the meetings referred to above for the specific purpose of considering such agreement. Information furnished throughout the year included, among others, reports on the Fund’s investment performance, expenses, portfolio composition, portfolio brokerage execution, client commission arrangements, derivatives, securities lending, asset segregation, portfolio turnover, Rule 12b-1 plans, distribution, shareholder servicing, legal and compliance matters, pricing of securities and sales and redemptions, and marketing support payments made to financial intermediaries, as well as a third-party survey of transfer agent fees charged funds within the Franklin Templeton Investments (FTI) complex in comparison with those charged other fund complexes deemed comparable. Also, related financial statements and other information about the scope and quality of services provided by the investment manager and its affiliates and enhancements to such services over the past year were provided. In addition, the trustees received periodic reports throughout the year and during the renewal process relating to compliance with the Fund’s investment policies and restrictions. During the renewal process, the independent trustees considered the investment manager’s methods of operation within the Franklin Templeton group and its activities on behalf of other clients.
The information obtained by the trustees during the renewal process also included a special report prepared by Broadridge Financial Solutions, Inc. (Broadridge), an independent third-party analyst that utilizes data from Lipper, Inc. (“Lipper”), an independent third-party analyst,, comparing the Fund’s investment performance and expenses with those of other mutual funds deemed comparable to the Fund as selected by Lipper (Broadridge Section 15(c) Report). The trustees reviewed the Broadridge Section 15(c) Report and its usefulness in the approval process with respect to matters such as comparative fees, expenses, expense ratios, performance and volatility. They concluded that the report continues to be a reliable resource in the performance of their duties.
In addition, the trustees received a Profitability Study (Profitability Study) prepared by management discussing the profitability to FTI from its overall U.S. Fund operations, as well as on an individual fund-by-fund basis. Over the past year, the Board and counsel to the independent trustees continued to receive reports on management’s handling of recent regulatory inquiries and pending legal actions against the investment manager and its affiliates. The independent trustees were satisfied with the actions taken to date by management in response to such regulatory and legal matters.
Particular attention was given to management’s diligent risk management program, including continual monitoring and management of counterparty credit risk and attention given to derivatives and other complex instruments that are held and expected to be held by the Fund and how such instruments are used to carry out the Fund’s investment goals. The Board also took into account, among other things, management’s efforts in establishing a global credit facility for the benefit of the Fund and other accounts managed by FTI to provide a source of cash for temporary and emergency purposes or to meet unusual redemption requests as well as the strong financial position of the investment manager’s parent company and its commitment to the mutual fund business. In addition, the Board received updates from management on the Securities and Exchange Commission’s (SEC) progress in implementing the rule-making requirements established by the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), which was enacted July 21, 2010, and the investment manager’s compliance with rules and regulations already promulgated by the SEC under such act. The Board also noted that they received an annual report on all marketing support payments made by FTI to financial intermediaries, as well as a memorandum relating to third-party servicing arrangements in response to a Guidance Update from the SEC relating to mutual fund distribution and sub accounting fees.
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SHAREHOLDER INFORMATION
In addition to the above and other matters considered by the trustees throughout the course of the year, the following discussion relates to certain primary factors relevant to the Board’s decision. This discussion of the information and factors considered by the Board (as well as the discussion above) is not intended to be exhaustive, but rather summarizes certain factors considered by the Board. In view of the wide variety of factors considered, the Board did not, unless otherwise noted, find it practicable to quantify or otherwise assign relative weights to the foregoing factors. In addition, individual trustees may have assigned different weights to various factors.
NATURE, EXTENT AND QUALITY OF SERVICES. The trustees reviewed the nature, extent and quality of the services provided by the investment manager. In this regard, they reviewed the Fund’s investment approach and concluded that, in their view, it continues to differentiate the Fund from typical core investment products in the mutual fund field. The trustees cited the investment manager’s ability to implement the Fund’s disciplined value investment approach and its long-term relationship with the Fund as reasons that shareholders choose to invest, and remain invested, in the Fund. The trustees reviewed the Fund’s portfolio management team, including its performance, staffing, skills and compensation program. With respect to portfolio manager compensation, management assured the trustees that the Fund’s long-term performance is a significant component of incentive-based compensation and noted that a portion of a portfolio manager’s incentive-based compensation is paid in shares of predesignated funds from the portfolio manager’s fund management area. The trustees noted that the portfolio manager compensation program aligned the interests of the portfolio managers with that of Fund shareholders. The trustees discussed with management various other products, portfolios and entities that are advised by the investment manager and the allocation of assets and expenses among and within them, as well as their relative fees and reasons for differences with respect thereto and any potential conflicts. During regular Board meetings and the aforementioned meetings of the independent trustees, the trustees received reports and presentations on the investment manager’s best execution trading policies. The trustees considered periodic reports provided to them showing that the investment manager complied with the investment policies and restrictions of the Fund as well as other reports periodically furnished to the Board covering matters such as the compliance of portfolio managers and other management personnel with the code of ethics covering the investment management personnel, the adherence to fair value pricing procedures established by the Board and the accuracy of net asset value calculations. The Board noted the extent of the benefits provided to Fund shareholders from being part of the Franklin Templeton group, including the right to exchange investments between funds (same class) without a sales charge, the ability to reinvest Fund dividends into other funds and the right to combine holdings of other funds to obtain reduced sales charges. The trustees considered the investment manager’s significant efforts in developing and implementing compliance procedures established in accordance with SEC and other requirements.
The trustees also reviewed the nature, extent and quality of the Fund’s other service agreements to determine that, on an overall basis, Fund shareholders were well served. In this connection, the Board also took into account transfer agent and shareholder services provided to Fund shareholders by an affiliate of the investment manager, noting continuing expenditures by management to increase and improve the scope of such services and favorable periodic reports on shareholder services conducted by independent third parties. While such considerations directly affected the trustees’ decision in renewing the Fund’s transfer agent and shareholder services agreement, the Board also considered these commitments as incidental benefits to Fund shareholders deriving from the investment management relationship.
Based on their review, the trustees were satisfied with the nature and quality of the overall services provided by the investment manager and its affiliates to the Fund and its shareholders and were confident in the abilities of the management team to continue the disciplined value investment approach of the Fund and to provide quality services to the Fund and its shareholders.
INVESTMENT PERFORMANCE. As the Fund commenced operations on May 31, 2009, the trustees reviewed the investment performance of the Fund for the one-, three- and five-year periods ended December 31, 2015. They considered the history of successful performance of the Fund relative to various benchmarks. As part of their review, they inquired of management regarding benchmarks, style drift and restrictions on permitted investments. Consideration was also given to performance in the context of available levels of cash during the periods. The trustees had meetings during the year, including the meetings referred to above held in connection with the approval process, with the Fund’s portfolio managers to discuss performance and the management of the Fund. In addition, particular attention in assessing performance was given to the Broadridge Section 15(c) Report. That report showed the investment performance of the Fund (Class A shares) in comparison to other funds determined comparable by Lipper.
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SHAREHOLDER INFORMATION
The comparable funds to the Fund, as chosen by Lipper, included all retail and institutional international multi-cap value funds. The Fund had total returns in the second-best performing quintile for the one-year period ended December 31, 2015, and had annualized total returns for the three- and five-year periods also in the second-best and best performing quintiles, respectively. The Board was satisfied with such comparative performance.
The trustees also compared Fund performance to other industry benchmarks, including measures of risk-adjusted performance of a fund, as part of their evaluation of investment performance. The trustees concluded that the Fund had continued to perform well in comparison to its various benchmarks and in the context of the Fund’s objectives.
COMPARATIVE EXPENSES AND MANAGEMENT PROFITABILITY. The trustees considered the cost of the services provided and to be provided and the losses incurred by the investment manager and its affiliates from their respective relationships with the Fund. In considering the appropriateness of the management fee and other expenses charged to the Fund, the Board took into account various factors including investment performance and matters relating to Fund operations, including, but not limited to, the quality and experience of its portfolio managers and research staff. As part of this discussion, the Board took into account the extension for an additional year of the fee waiver and expense limitation arrangement. Consideration was also given to a comparative analysis in the Broadridge Section 15(c) Report of the investment management fee and total expense ratio of the Fund in comparison with those of a group of other funds selected by Lipper as its appropriate Lipper expense group. Lipper expense data is based upon information taken from the Fund’s most recent annual report, which reflects historical asset levels that may be quite different from those currently existing, particularly in a period of market volatility. While recognizing such inherent limitation and the fact that expense ratios generally increase as assets decline and decrease as assets grow, the Board believed the independent analysis conducted by Lipper to be an appropriate measure of comparative expenses.
In reviewing comparative costs, emphasis was given to the Fund’s contractual management fee in comparison with the contractual management fee that would have been charged by other funds within its Lipper expense group assuming they were similar in size to the Fund, as well as the actual total expenses of the Fund in comparison with those of its Lipper expense group. The Lipper contractual management fee analysis includes administrative charges as being part of the management fee, and total expenses, for comparative consistency, are shown by Lipper for Fund Class A shares.
The Fund’s contractual management fee rate was in the second-least expensive quintile of its Lipper expense group and its total expenses were in the second-most expensive quintile of such group. The Board noted that the Fund’s total expenses were within 3.3 basis points of its expense group median. The Board found such comparative fees and expenses to be acceptable in view of factors relating to the Fund’s operations, such as the quality and experience of its portfolio managers.
The trustees also reviewed the Profitability Study addressing profitability of Franklin Resources, Inc., from its overall U.S. fund business, as well as profitability to the Fund’s investment manager and its affiliates, from providing investment management and other services to the Fund during the 12-month period ended September 30, 2015, the most recent fiscal year-end of Franklin Resources, Inc. The trustees reviewed the basis on which such reports are prepared and the cost allocation methodology utilized in the Profitability Study, it being recognized that allocation methodologies may each be reasonable while producing different results. In this respect, the Board noted that the reasonableness of the cost allocation methodologies was reviewed by independent accountants on an every other year basis.
The independent trustees met with management to discuss the Profitability Study. This included, among other things, a comparison of investment management income with investment management expenses of the Fund; comparison of underwriting revenues and expenses; the relative relationship of investment management and underwriting expenses; shareholder servicing profitability; economies of scale; and the relative contribution of the Fund to the profitability of the investment manager and its parent. In discussing the Profitability Study with the Board, the investment manager stated its belief that the costs incurred in establishing the infrastructure necessary to operate the type of mutual fund operations conducted by it and its affiliates may not be fully reflected in the expenses allocated to the Fund in determining its profitability.
The Board also took into account management’s expenditures in improving shareholder services provided to the Fund, as well as the need to meet additional regulatory and compliance requirements resulting from the Sarbanes-Oxley Act, the Dodd-Frank Act and recent SEC and other regulatory requirements. The trustees also considered the extent to which the investment manager may derive ancillary benefits from Fund operations,
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SHAREHOLDER INFORMATION
including those derived from economies of scale, discussed below, the allocation of Fund brokerage and the use of commission dollars to pay for research and other similar services.
Based upon their consideration of all these factors, the trustees determined that the level of profits realized by the investment manager and its affiliates in providing services to the Fund was not excessive in view of the nature, quality and extent of services provided.
ECONOMIES OF SCALE. The trustees considered economies of scale realized by the investment manager and its affiliates as the Fund grows larger and the extent to which they are shared with Fund shareholders, as for example, in the level of the investment management fee charged, in the quality and efficiency of services rendered and in increased capital commitments benefiting the Fund directly or indirectly. The Board also considered the fee waiver and expense limitation arrangement in effect, and the amount of Fund expenses that were absorbed since inception of the Fund by the investment manager through such waiver and arrangement. The Board concluded that economies of scale were deemed not to be a significant factor at that time in light of, among other matters, the fee waiver and expense limitation arrangement in effect and the limited size of assets under management.
Proxy Voting Policies and Procedures
The Fund’s investment manager has established Proxy Voting Policies and Procedures (Policies) that the Fund uses to determine how to vote proxies relating to portfolio securities. Shareholders may view the Fund’s complete Policies online at franklintempleton.com. Alternatively, shareholders may request copies of the Policies free of charge by calling the Proxy Group collect at (954) 527-7678 or by sending a written request to: Franklin Templeton Companies, LLC, 300 S.E. 2nd Street, Fort Lauderdale, FL 33301, Attention: Proxy Group. Copies of the Fund’s proxy voting records are also made available online at franklintempleton.com and posted on the U.S. Securities and Exchange Commission’s website at sec.gov and reflect the most recent 12-month period ended June 30.
Quarterly Statement of Investments
The Fund files a complete statement of investments with the U.S. Securities and Exchange Commission for the first and third quarters for each fiscal year on Form N-Q. Shareholders may view the filed Form N-Q by visiting the Commission’s website at sec.gov. The filed form may also be viewed and copied at the Commission’s Public Reference Room in Wash-ington, DC. Information regarding the operations of the Public Reference Room may be obtained by calling (800) SEC-0330.
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Contents | |
Semiannual Report | |
Franklin Mutual Quest Fund | 3 |
Performance Summary | 9 |
Your Fund’s Expenses | 12 |
Financial Highlights and Statement of Investments | 14 |
Financial Statements | 26 |
Notes to Financial Statements | 30 |
Shareholder Information | 45 |
Visit franklintempleton.com for fund updates, to access your account, or to find helpful financial planning tools.
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Semiannual Report
Franklin Mutual Quest Fund
This semiannual report for Franklin Mutual Quest Fund covers the period ended June 30, 2016.
Your Fund’s Goals and Main Investments
The Fund seeks capital appreciation, which may occasionally be short term, with income as a secondary goal. Its strategy is focused mainly on what the investment manager believes are undervalued mid- to large-cap equity securities with a significant portion of its assets in foreign securities and, to a lesser extent, in the securities of distressed companies and merger arbitrage securities. The Fund may invest up to 100% of its assets in foreign securities.
Performance Overview
The Fund’s Class Z shares delivered a +5.94% cumulative total return for the six months ended June 30, 2016. In comparison, the Fund’s new benchmark, the MSCI World Index, which tracks stock performance in global developed markets, posted a +1.02% total return, while its old equity benchmark, the Standard & Poor’s 500 Index (S&P 500®), which is a broad measure of U.S. stock performance, generated a +3.84% total return.1 As the investment manager believes the composition of the MSCI World Index more accurately reflects the Fund’s holdings, it has replaced the S&P 500 as the Fund’s benchmark. Also for comparison, the Fund’s new secondary benchmark, the Barclays U.S. Corporate High Yield Index, which measures the U.S. corporate market of non-investment grade, fixed-rate corporate bonds, defined as the middle or lower ratings of Moody’s, Fitch and Standard & Poor’s (Ba1/BB+/BB+), posted a +9.06% total return.1 You can find more of the Fund’s performance data in the Performance Summary beginning on page 9.
Performance data represent past performance, which does not guarantee future results. Investment return and principal value will fluctuate, and you may have a gain or loss when you sell your shares. Current performance may differ from figures shown. For most recent month-end performance, go to franklintempleton.com or call (800) 342-5236.
Economic and Market Overview
The global economy expanded during the six months under review. An improvement in commodity prices including a rally in crude oil prices, accommodative monetary policy from various global central banks, finalization of the new debt deal for Greece and encouraging Chinese trade data toward period-end boosted market sentiment. However, global equity market volatility increased after the U.S. Federal Reserve’s (Fed’s)
*Figures are stated as a percentage of total and may not equal 100% or may be
negative due to rounding, use of any derivatives, unsettled trades or other factors.
1. Source: Morningstar.
The indexes are unmanaged and include reinvestment of any income or distributions. They do not reflect any fees, expenses or sales charges. One cannot invest directly in an
index, and an index is not representative of the Fund’s portfolio.
The dollar value, number of shares or principal amount, and names of all portfolio holdings are listed in the Fund’s Statement of Investments (SOI). The SOI
begins on page 19.
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June decision to keep its federal funds target range unchanged, while providing a cautious stance on further interest rate hikes. In addition, global economic concerns and the U.K.’s historic referendum to leave the European Union (EU), also known as the “Brexit,” contributed to volatile global stock markets.
Oil prices fell at the beginning of the review period, largely due to a strong global supply, but recovered in the period’s second half amid oilfield outages and continued demand growth. Meanwhile, commodity prices increased for most of the review period as oversupply for a host of commodities shrank and the market appeared to be on the path of rebalancing after hitting a glut-induced bottom earlier in the year. Gold prices continued to rise following the Brexit referendum as some investors turned to safe haven investing. The U.S. dollar generally depreciated against most currencies during the period, which increased returns of many foreign assets in U.S. dollar terms. In this environment, global developed market stocks overall, as measured by the MSCI World Index, rose slightly during the period.
The U.S. economy grew moderately, as measured by gross domestic product (GDP) in 2016’s first and second quarters, driven by consumer spending and exports. A decline in private inventory investment and non-residential fixed investment contributed to the moderation. The Fed maintained its target interest rate during the review period after raising it for the first time in nine years at its December 2015 meeting. The Fed kept its target rate unchanged in its June meeting mainly due to a substantial slowdown in job additions toward period-end. The Fed expects economic conditions to evolve in a manner that could warrant only gradual increases in the federal funds rate.
In Europe, slower U.K. economic growth continued in 2016’s first quarter as output slowed in construction, production and agriculture. Immediate effects of the Brexit materialized as U.K. stocks significantly declined and the pound sterling hit a three-decade low amid intensified selling. Credit rating agencies Standard & Poor’s and Fitch also downgraded the U.K.’s credit rating. In the eurozone, despite investors’ concerns about banking sector weakness, low corporate earnings and post-Brexit political repercussions, some regions benefited due to rising consumer spending resulting from a cheaper euro, low inflation and signs of sustained economic growth. The eurozone’s annual inflation rate remained in negative territory for most of the review period; however, it rose marginally above zero in June.
Japan’s economy posted mixed results, contracting in 2015’s fourth quarter stemming from declining private and household consumption. However, the economy expanded during 2016’s first quarter as private consumption increased and business
Top 10 Sectors/Industries | ||
Based on Equity Securities as of 6/30/16 | ||
% of Total | ||
Net Assets | ||
Insurance | 6.8 | % |
Pharmaceuticals | 6.1 | % |
Banks | 5.9 | % |
Oil, Gas & Consumable Fuels | 5.4 | % |
Media | 3.4 | % |
Real Estate Investment Trusts (REITs) | 3.1 | % |
Tobacco | 2.6 | % |
Independent Power & Renewable Electricity Producers | 2.5 | % |
Communications Equipment | 2.1 | % |
Technology Hardware, Storage & Peripherals | 1.9 | % |
investment decreased less than anticipated. The Bank of Japan (BOJ) took several actions during the review period. In January, to boost lending and support inflation, the BOJ introduced a negative interest rate on excess reserves held at the central bank by financial institutions. In April, the BOJ further reduced its GDP and inflation forecasts for fiscal year 2016, and decided against additional quantitative easing measures. However, after the U.K.’s vote in June to leave the EU, the BOJ hinted at carrying out flexible open market operations to stabilize its financial markets.
In emerging markets, economic growth generally moderated during the review period. Brazil’s economy witnessed its longest recession since the 1930s amid political and economic turmoil, while Russia’s economy continued to contract. The Bank of Russia reduced its key interest rate in an attempt to revive its economy. China’s economic growth slowed marginally in 2016’s first quarter compared to the previous quarter, but remained largely in line with the government’s target. The People’s Bank of China cut its cash reserve requirement ratio for the country’s banks and effectively devalued the renminbi against the U.S. dollar to the lowest level in more than five years. Overall, emerging market stocks, as measured by the MSCI Emerging Markets Index, rose for the six-month period under review.
Investment Strategy
At Franklin Mutual Series, we are committed to our distinctive value approach to investing, which we believe can generate above-average risk-adjusted returns over time for our shareholders. Our major investment strategy is investing in undervalued stocks. When selecting undervalued equities, we are attracted to what we believe are fundamentally strong companies with healthy balance sheets, high-quality assets, substantial free cash flow and shareholder-oriented management
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teams and whose stocks are trading at discounts to our assessment of the companies’ intrinsic or business value. We also look for asset-rich companies whose shares may be trading at depressed levels due to concerns over short-term earnings disappointments, litigation, management strategy or other perceived negatives. This strict value approach is not only intended to improve the likelihood of upside potential, but it is also intended to reduce the risk of substantial declines. While the vast majority of our undervalued equity investments are made in publicly traded companies globally, we may invest occasionally in privately held companies as well.
We complement this more traditional investment strategy with two others. One is distressed investing, a highly specialized field that has proven quite profitable during certain periods over the years. Distressed investing is complex and can take many forms. The most common distressed investment the Fund undertakes is the purchase of financially troubled or bankrupt companies’ debt at a substantial discount to face value. After the financially distressed company is reorganized, often in bankruptcy court, the old debt is typically replaced with new securities issued by the financially stronger company.
The other piece of our investment strategy is participating in arbitrage situations, another highly specialized field. When companies announce proposed mergers or takeovers, commonly referred to as “deals,” the target company may trade at a discount to the bid it ultimately accepts. One form of arbitrage involves purchasing the target company’s stock when it is trading below the value we believe it would receive in a deal. In keeping with our commitment to a relatively conservative investment approach, we typically focus our arbitrage efforts on announced deals, and avoid rumored deals or other situations we consider relatively risky.
In addition, it is our practice to hedge the Fund’s currency exposure when we deem it advantageous for our shareholders.
What is meant by “hedge”?
To hedge an investment is to take a position intended to offset potential losses/gains that may be incurred by a companion financial instrument.
Manager’s Discussion
Economic and political uncertainty influenced markets during the six months under review. The year 2016 began with severe economic uncertainty. Brent oil prices plunged below US$30 per barrel as fears of a global recession spread. Global equity markets dropped from the start of the year, continuing a downward move from mid-2015 highs, before bottoming in mid-February. Commodity and equity prices rose over the following four months, before a late June surprise: the result of the Brexit vote, signaling the beginning of the end of the U.K.’s 43-year membership in the EU. Uncertainty about the future status of the U.K. as well as implications for the EU and the global economy weighed on markets at the end of the period.
Equity prices are typically forward looking, reflecting investors’ beliefs about how various factors and events will play out in the future. Global equity prices at period-end were down from mid-2015 highs, reflecting increased uncertainty among global investors regarding the future of the U.K. and the EU, in addition to long-standing concerns about China, commodity prices, interest rates and geopolitical events. In contrast, prices for fixed income investments incorporate these considerations and typically factor in the likelihood of recouping the original face value of bonds, in addition to the reliability of receiving the stream of interest payments through maturity.
Following the momentous decision by U.K. voters on June 23 to leave the EU, we believe it is probable that the U.K. will face a heightened risk of an economic slowdown, as businesses will likely put investment decisions on hold while waiting for greater clarity. The negative impact on the rest of the EU will likely be less severe, although economic growth in the region was already running at a modest pace before the vote, and we do not believe the region will be immune. Among the region’s equity markets, we believe that financial and domestically oriented cyclical stocks were being perceived by some investors as more vulnerable. Those stocks that were viewed as defensive, as well as stocks with what we consider attractive dividend yields, will likely remain in favor among many investors, in our view, causing them to trade at even higher valuation multiples. Within the U.K., large multinational companies that generate most of their earnings abroad should benefit from the precipitous fall of the British pound that followed the Brexit vote. In this respect, the Fund’s exposure to U.K. equities was predominantly through a number of these global companies. Also, the Fund has only a modest exposure to European financials, and mostly in banks.2
Although the Brexit vote is clearly a negative surprise, we do not believe it will usher in a new global financial crisis similar to the one experienced eight years ago. While markets reacted brutally to the U.K.’s decision to leave the EU, we have not seen any systemic shock like the one that followed the fall of Lehman Brothers in 2008. We also believe that, eventually, the
2. The financials sector comprises banks, consumer finance, diversified financial services, insurance and real estate investment trusts in the SOI.
See www.franklintempletondatasources.com for additional data provider information.
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U.K. and the EU will come to an acceptable agreement concerning trade relations.
The Fund invests across the capital structure and issuer life-cycles; we believe a cross-asset approach with a focus on corporate actions tends to have less correlation to overall market movements. The types of events that provide opportunities include balance sheet or operational restructurings, mergers and acquisitions (M&A), the sale of non-core assets, refinanc-ing and other company-specific events. Many of the Fund’s larger positions at period-end were in these types of situations, including Eastman Kodak, New Media Investment Group, and Sorenson Communications. Eastman Kodak, a U.S.-based digital commercial imaging company, is an example of further balance sheet restructuring. Eastman is rationalizing its product portfolio and has expressed its intention to use any proceeds from asset monetization to retire first-lien debt, which benefits its other debt securities and its equity. New Media Investment Group owns and operates local media assets. M&A consolidation continues to be a theme in the media industry and the company has continued to acquire other companies. In addition, New Media Investment Group has committed to return a substantial portion of its free cash flow generation in the form of a regular stock dividend. Sorenson Communications offers videophones, applications and video relay services to the hearing impaired. The company is retiring company debt to reduce its financial leverage and improve cash flow generation, benefiting its stockholders. The Fund owns secured debt, holding company pay-in-kind debt and equity interests in Sorenson Communications.
We believe balancing exposure across debt and equity securities of the same issuer or company helps mitigate risk. We also try to create balanced risk-return characteristics through diverse sources: principal appreciation, current yield (dividend and interest payments) and related fees or premiums. In other equity-focused situations, we seek to utilize our analysis of any debt securities in the capital structure to assess additional risks and opportunities that a potentially limited, equity-only assessment may fail to uncover or appreciate.
M&A activity continued to be strong in the first half of 2016, driven partly by lower cost financing across the globe, helping to support valuations. Although deal volumes remained near historical highs, regulators globally continued to be more aggressive in their scrutiny of potentially negative effects of high industry concentration. We were disappointed to see regulators successfully sue to block the merger of Office Depot and Staples. Less surprising was the collapse of Halliburton’s attempt to acquire Baker Hughes on antitrust grounds, or the largest failure, Pfizer’s withdrawn attempt to acquire Allergan in the face of the U.S. Treasury Department’s new rules on tax inversions. The Fund has had limited exposure in this area as the potential rewards have not been big enough to outweigh the clear risks that exist in the current environment. We have preferred to instead focus on select event-driven credit situations that benefit but do not depend on potential M&A activity, limiting downside potential.
Credit spreads widened dramatically across industries and countries early in the period and subsequently narrowed. This was particularly apparent in subinvestment-grade credit, which created additional challenges for sectors, including energy, metals and mining that were already experiencing distress. The precipitous decline in commodity prices globally over the past two year resulted in heightened bankruptcy activity. Dislocations in debt capital markets created some unique opportunities, in our view, especially in stressed and event-driven credit situations where we feel that the yield reached attractive levels and that cheap enterprise valuation protected the downside. By the end of the period, credit spreads had tightened materially from their intra-period highs. Although the current environment seems less attractive to us than a few months ago, volatility remained at heightened levels. The increase in global risk premiums may result in certain issuers finding it difficult to access capital, whether debt or equity, necessary to service significant borrowings and commitments.
Turning to Fund performance, top contributors to performance included communications technology company Sorenson Communications, power generation company NRG Energy and metals and mining company Freeport McMoRan.
The Fund’s debt and equity investments in Sorenson Communications appreciated early in the period as improvements in the company’s fundamentals, financial leverage and cash flow generation, largely due to retirement of company debt, continued to meet or exceed investor expectations, benefiting stockholders.
NRG Energy is a U.S.-based integrated wholesale power generation and retail electricity company that includes solar and renewable energy businesses. Shares of NRG followed the rally in natural gas prices that began in early March. NRG’s wholesale power operation sells electricity at market rates that move in line with fuel costs. In early May, investors responded favorably to the company’s announcement that it intends to simplify operations and reduce financial leverage.
The Fund’s debt holdings in Freeport McMoRan moved in line with the general improvement of commodity prices through April, particularly for copper. In February, our position also benefited from positive events that were part of our investment
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thesis. Indonesia’s Energy and Mineral Resources Ministry granted Freeport a new six-month copper export permit. The permit ended a stoppage in the company’s Indonesia copper mining activities related to a dispute between Freeport and Indonesia’s government regarding payment for a new metal smelter. Later in the month, Freeport announced an agreement to sell its partial interest in an Arizona copper mine to Sumitomo Metal Mining for US$1 billion. In May, Freeport announced the sale of its stake in an African copper operation to China Molybdenum for US$2.7 billion. These transactions support Freeport’s efforts to sell US$5–$10 billion in assets and use the proceeds to reduce debt. The prices paid for the assets implied a copper price of $2.75–$3.00 per pound—compared to $2.15 per pound at period-end—which indicates an industry view of medium- to long-term prices.
During the period under review, Fund investments that detracted from performance included customer engagement solutions provider Affinion Group, consumer and business financing company CIT Group and insurer Ageas.
Affinion Group is a global provider of comprehensive marketing services and loyalty programs to many companies around the world. Purchased by private equity in 2005, Affinion began addressing its overleveraged capital structure in earnest in late 2015. A debt-for-equity exchange of its holding company obligations was completed in November 2015. The Fund’s investment in the company’s debt securities declined during the period as investors focused on the balance of the loans and senior notes outstanding which mature over the next two years.
CIT Group is a U.S.-based commercial financing and leasing company that primarily serves small and midsized businesses in a variety of industries. Shares of CIT Group followed the broad-based decline of global financial stocks in late June following the U.K. referendum result in favor of leaving the EU. Investors were also unsure about how, if at all, the Brexit may impact CIT’s attempt to sell or spin-off its aircraft leasing business. The stock dropped sharply in January and early February as the financials sector was negatively impacted by ongoing concerns about the strength of U.S. economic expansion, scaled back investor expectations regarding rate hikes by the U.S. Fed and concerns about exposure to the energy sector. At a March strategic update conference call, investors were disappointed by the minimal amount of new information regarding the divestiture of CIT’s aircraft leasing business and downbeat remarks regarding its energy financing portfolio.
Shares of Belgium-based insurer Ageas followed the broad based decline of European financial stocks in late June following the Brexit referendum result. In our view, the outcome had negative implications for the insurance industry by increasing economic uncertainty, adding immediate downward pressure on global interest rates and increasing the possibility that the U.S. Fed will further delay its next interest rate hike. Ageas also declined in January and early February as Europe’s financials sector was hurt by the potentially detrimental effect of the ECB’s negative interest rate policy. On an encouraging note, the company announced solid quarterly results in mid-February and May, as well as raising its dividend in February.
During the period, the Fund held currency forwards and futures to hedge a significant portion of the currency risk of the portfolio’s non-U.S. dollar investments. The currency forwards had a positive impact on the Fund’s performance, while currency futures had a negligible impact.
Top 10 Equity Holdings | ||
6/30/16 | ||
Company | % of Total | |
Sector/Industry, Country | Net Assets | |
Forest City Realty Trust Inc. | 2.6 | % |
Real Estate Investment Trusts (REITs), U.S. | ||
NRG Energy Inc. | 2.5 | % |
Independent Power & Renewable Electricity | ||
Producers, U.S. | ||
Royal Dutch Shell PLC | 2.1 | % |
Oil, Gas & Consumable Fuels, U.K. | ||
Sorenson Communications Inc. | 2.1 | % |
Communications Equipment, U.S. | ||
White Mountains Insurance Group Ltd. | 2.0 | % |
Insurance, U.S. | ||
GlaxoSmithKline PLC | 1.9 | % |
Pharmaceuticals, U.K. | ||
BP PLC | 1.8 | % |
Oil, Gas & Consumable Fuels, U.K. | ||
Teva Pharmaceutical Industries Ltd. | 1.7 | % |
Pharmaceuticals, Israel | ||
Vodafone Group PLC | 1.7 | % |
Wireless Telecommunication Services, U.K. | ||
New Media Investment Group Inc. | 1.6 | % |
Media, U.S. |
What is a currency forward?
A currency forward is an agreement between the Fund and a counterparty to buy or sell a foreign currency in exchange for another currency at a specific exchange rate on a future date.
What is a future?
A future is an agreement between the Fund and a counterparty made through a U.S. or foreign futures exchange to buy or sell an underlying instrument or asset at a specific price on a future date.
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Thank you for your continued participation in Franklin Mutual Quest Fund. We look forward to continuing to serve your investment needs.
The foregoing information reflects our analysis, opinions and portfolio holdings as of June 30, 2016, the end of the reporting period. The way we implement our main investment strategies and the resulting portfolio holdings may change depending on factors such as market and economic conditions. These opinions may not be relied upon as investment advice or an offer for a particular security. The information is not a complete analysis of every aspect of any market, country, industry, security or the Fund. Statements of fact are from sources considered reliable, but the investment manager makes no representation or warranty as to their completeness or accuracy. Although historical performance is no guarantee of future results, these insights may help you understand our investment management philosophy.
CFA® is a trademark owned by CFA Institute.
Shawn M. Tumulty has been a portfolio manager for Franklin Mutual Quest Fund since 2003 and a co-portfolio manager since 2010. He joined Franklin Templeton Investments in 2000. Prior to joining Franklin Templeton Investments, Mr. Tumulty was an analyst and portfolio manager at Hamilton Partners Limited.
Keith Luh is a portfolio manager and head of cross asset investing for Franklin Mutual Series. He has been a co-portfolio manager for Franklin Mutual Quest Fund since 2010, with a value and event-driven focus across equity and fixed income investments, globally. Prior to joining Frank-lin Mutual Series in 2005, Mr. Luh was a senior analyst in global investment research at Putnam Investments, where he also helped manage a best-ideas research fund. Previously, he worked in the investment banking group at Volpe Brown Whelan and Co., LLC, and the derivative products trading group at BNP. Mr. Luh is also Adjunct Professor in Finance and Economics at the Graduate School of Business, Columbia University and the Gabelli School of Business, Fordham University. He began his career in the financial services industry in 1996.
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Performance Summary as of June 30, 2016
Your dividend income will vary depending on dividends or interest paid by securities in the Fund’s portfolio, adjusted for operating expenses of each class. Capital gain distributions are net profits realized from the sale of portfolio securities. The performance table does not reflect any taxes that a shareholder would pay on Fund dividends, capital gain distributions, if any, or any realized gains on the sale of Fund shares. Total return reflects reinvestment of the Fund’s dividends and capital gain distributions, if any, and any unrealized gains or losses.
Net Asset Value | |||||
Share Class (Symbol) | 6/30/16 | 12/31/15 | Change | ||
Z (MQIFX) | $ | 15.33 | $ | 14.47 | +$0.86 |
A (TEQIX) | $ | 15.13 | $ | 14.29 | +$0.84 |
C (TEMQX) | $ | 14.84 | $ | 14.08 | +$0.76 |
R (FMQSX) | $ | 14.94 | $ | 14.14 | +$0.80 |
R6 (FMQRX) | $ | 15.32 | $ | 14.45 | +$0.87 |
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PERFORMANCE SUMMARY
Performance as of 6/30/161
Cumulative total return excludes sales charges. Average annual total return and value of $10,000 investment include maximum sales charges. Class Z/R/R6: no sales charges; Class A: 5.75% maximum initial sales charge; Class C: 1% contingent deferred sales charge in first year only.
Cumulative | Average Annual | Value of $10,000 | Total Annual | |||||
Share Class | Total Return2 | Total Return3 | Investment4 | Operating Expenses5 | ||||
Z | 0.82 | % | ||||||
6-Month | +5.94 | % | +5.94 | % | $ | 10,594 | ||
1-Year | -0.91 | % | -0.91 | % | $ | 9,909 | ||
5-Year | +37.40 | % | +6.56 | % | $ | 13,740 | ||
10-Year | +74.48 | % | +5.72 | % | $ | 17,448 | ||
A | 1.07 | % | ||||||
6-Month | +5.88 | % | -0.20 | % | $ | 9,980 | ||
1-Year | -1.11 | % | -6.83 | % | $ | 9,317 | ||
5-Year | +35.50 | % | +5.01 | % | $ | 12,771 | ||
10-Year | +69.34 | % | +4.79 | % | $ | 15,962 | ||
C | 1.82 | % | ||||||
6-Month | +5.40 | % | +4.40 | % | $ | 10,440 | ||
1-Year | -1.88 | % | -2.82 | % | $ | 9,718 | ||
5-Year | +30.70 | % | +5.50 | % | $ | 13,070 | ||
10-Year | +57.83 | % | +4.67 | % | $ | 15,783 | ||
R | 1.32 | % | ||||||
6-Month | +5.66 | % | +5.66 | % | $ | 10,566 | ||
1-Year | -1.40 | % | -1.40 | % | $ | 9,860 | ||
5-Year | +34.02 | % | +6.03 | % | $ | 13,402 | ||
Since Inception (5/1/09) | +82.71 | % | +8.78 | % | $ | 18,271 | ||
R6 | 0.74 | % | ||||||
6-Month | +6.02 | % | +6.02 | % | $ | 10,602 | ||
1-Year | -0.83 | % | -0.83 | % | $ | 9,917 | ||
3-Year | +16.81 | % | +5.31 | % | $ | 11,681 | ||
Since Inception (5/1/13) | +19.06 | % | +5.67 | % | $ | 11,906 |
Performance data represent past performance, which does not guarantee future results. Investment return and principal value will fluctuate, and you may have a gain or loss when you sell your shares. Current performance may differ from figures shown. For most recent month-end performance, go to franklintempleton.com or call (800) 342-5236.
See page 11 for Performance Summary footnotes.
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PERFORMANCE SUMMARY
All investments involve risks, including possible loss of principal. Value securities may not increase in price as anticipated or may decline further in value. Special risks are associated with foreign investing, including currency fluctuations, economic instability and political developments. Smaller company stocks have exhibited greater price volatility than larger company stocks, particularly over the short term. The Fund’s investments in companies engaged in mergers, reorganizations or liquidations also involve special risks as pending deals may not be completed on time or on favorable terms. The Fund may invest in lower rated bonds, which entail higher credit risk. The Fund is actively managed but there is no guarantee that the manager’s investment decisions will produce the desired results. The Fund’s prospectus also includes a description of the main investment risks.
Class Z: | Shares are available to certain eligible investors as described in the prospectus. |
Class C: | These shares have higher annual fees and expenses than Class A shares. |
Class R: | Shares are available to certain eligible investors as described in the prospectus. These shares have higher annual fees and expenses than Class A shares. |
Class R6: | Shares are available to certain eligible investors as described in the prospectus. |
1. The Fund has a fee waiver associated with any investment in a Franklin Templeton money fund and/or other Franklin Templeton fund, as applicable, contractually guaran-
teed through at least the Fund’s current fiscal year-end. Fund investment results reflect the fee waiver, to the extent applicable; without this reduction, the results would have
been lower.
2. Cumulative total return represents the change in value of an investment over the periods indicated.
3. Average annual total return represents the average annual change in value of an investment over the periods indicated. Return for less than one year, if any, has not
been annualized.
4. These figures represent the value of a hypothetical $10,000 investment in the Fund over the periods indicated.
5. Figures are as stated in the Fund’s current prospectus and may differ from the expense ratios disclosed in the Financial Highlights in this report. In periods of market vola-
tility, assets may decline significantly, causing total annual Fund operating expenses to become higher than the figures shown.
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Your Fund’s Expenses
As a Fund shareholder, you can incur two types of costs:
- Transaction costs, including sales charges (loads) on Fund purchases; and
- Ongoing Fund costs, including management fees, distribution and service (12b-1) fees, and other Fund expenses. All mutual funds have ongoing costs, sometimes referred to as operating expenses.
The following table shows ongoing costs of investing in the Fund and can help you understand these costs and compare them with those of other mutual funds. The table assumes a $1,000 investment held for the six months indicated.
Actual Fund Expenses
The first line (Actual) for each share class listed in the table provides actual account values and expenses. The “Ending Account Value” is derived from the Fund’s actual return, which includes the effect of Fund expenses.
You can estimate the expenses you paid during the period by following these steps. Of course, your account value and expenses will differ from those in this illustration:
1. Divide your account value by $1,000.
If an account had an $8,600 value, then $8,600 ÷ $1,000 = 8.6.
2. Multiply the result by the number under the heading “Expenses Paid During Period.”
If Expenses Paid During Period were $7.50, then 8.6 × $7.50 = $64.50.
In this illustration, the estimated expenses paid this period are $64.50.
Hypothetical Example for Comparison with Other Funds
Information in the second line (Hypothetical) for each class in the table can help you compare ongoing costs of investing in the Fund with those of other mutual funds. This information may not be used to estimate the actual ending account balance or expenses you paid during the period. The hypothetical “Ending Account Value” is based on the actual expense ratio for each class and an assumed 5% annual rate of return before expenses, which does not represent the Fund’s actual return. The figure under the heading “Expenses Paid During Period” shows the hypothetical expenses your account would have incurred under this scenario. You can compare this figure with the 5% hypothetical examples that appear in shareholder reports of other funds.
Please note that expenses shown in the table are meant to highlight ongoing costs and do not reflect any transaction costs, such as sales charges. Therefore, the second line for each class is useful in comparing ongoing costs only, and will not help you compare total costs of owning different funds. In addition, if transaction costs were included, your total costs would have been higher. Please refer to the Fund prospectus for additional information on operating expenses.
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YOUR FUND’S EXPENSES
Beginning Account | Ending Account | Expenses Paid During | ||||
Share Class | Value 1/1/16 | Value 6/30/16 | Period* 1/1/16–6/30/16 | |||
Z | ||||||
Actual | $ | 1,000 | $ | 1,059.40 | $ | 4.05 |
Hypothetical (5% return before expenses) | $ | 1,000 | $ | 1,020.93 | $ | 3.97 |
A | ||||||
Actual | $ | 1,000 | $ | 1,058.80 | $ | 5.32 |
Hypothetical (5% return before expenses) | $ | 1,000 | $ | 1,019.69 | $ | 5.22 |
C | ||||||
Actual | $ | 1,000 | $ | 1,054.00 | $ | 9.14 |
Hypothetical (5% return before expenses) | $ | 1,000 | $ | 1,015.96 | $ | 8.97 |
R | ||||||
Actual | $ | 1,000 | $ | 1,056.60 | $ | 6.60 |
Hypothetical (5% return before expenses) | $ | 1,000 | $ | 1,018.45 | $ | 6.47 |
R6 | ||||||
Actual | $ | 1,000 | $ | 1,060.20 | $ | 3.59 |
Hypothetical (5% return before expenses) | $ | 1,000 | $ | 1,021.38 | $ | 3.52 |
*Expenses are calculated using the most recent six-month expense ratio, net of expense waivers, annualized for each class (Z: 0.79%;
A: 1.04%; C: 1.79%; R: 1.29%; and R6: 0.70%), multiplied by the average account value over the period, multiplied by 182/366 to reflect the
one-half year period.
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Financial Highlights | ||||||||||||||||||
Six Months Ended | Year Ended December 31, | |||||||||||||||||
June 30, 2016 | ||||||||||||||||||
(unaudited) | 2015 | 2014 | 2013 | 2012 | 2011 | |||||||||||||
Class Z | ||||||||||||||||||
Per share operating performance | ||||||||||||||||||
(for a share outstanding throughout the period) | ||||||||||||||||||
Net asset value, beginning of period | $ | 14.47 | $ | 16.21 | $ | 18.18 | $ | 16.55 | $ | 16.24 | $ | 17.70 | ||||||
Income from investment operationsa: | ||||||||||||||||||
Net investment incomeb | 0.50 | 0.54 | 0.78 | c | 0.54 | 0.43 | 0.51 | |||||||||||
Net realized and unrealized gains (losses) | 0.36 | (1.45 | ) | (0.16 | ) | 3.68 | 1.61 | (0.88 | ) | |||||||||
Total from investment operations | 0.86 | (0.91 | ) | 0.62 | 4.22 | 2.04 | (0.37 | ) | ||||||||||
Less distributions from: | ||||||||||||||||||
Net investment income | — | (0.68 | ) | (0.85 | ) | (0.56 | ) | (0.43 | ) | (0.52 | ) | |||||||
Net realized gains | — | (0.15 | ) | (1.74 | ) | (2.03 | ) | (1.30 | ) | (0.57 | ) | |||||||
Total distributions | — | (0.83 | ) | (2.59 | ) | (2.59 | ) | (1.73 | ) | (1.09 | ) | |||||||
Net asset value, end of period | $ | 15.33 | $ | 14.47 | $ | 16.21 | $ | 18.18 | $ | 16.55 | $ | 16.24 | ||||||
Total returnd | 5.94 | % | (5.55 | )% | 3.44 | % | 25.97 | % | 12.57 | % | (1.83 | )% | ||||||
Ratios to average net assetse | ||||||||||||||||||
Expensesf | 0.79 | %g,h | 0.82 | %g,h | 0.81 | %g | 0.84 | %g | 0.90 | % | 0.86 | % | ||||||
Expenses incurred in connection with securities sold | ||||||||||||||||||
short | —%i | 0.03 | % | 0.04 | % | 0.07 | % | 0.11 | % | 0.06 | % | |||||||
Net investment income | 6.85 | %j | 3.35 | % | 4.18 | %c | 2.93 | % | 2.48 | % | 2.90 | % | ||||||
Supplemental data | ||||||||||||||||||
Net assets, end of period (000’s) | $ | 3,577,696 | $ 3,434,727 | $4,116,651 | $ | 4,270,828 | $ | 3,582,856 | $ | 3,413,759 | ||||||||
Portfolio turnover rate | 26.82 | % | 30.51 | % | 65.77 | % | 63.41 | % | 65.21 | % | 107.25 | % |
aThe amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases
of the Fund’s shares in relation to income earned and/or fluctuating fair value of the investments of the Fund.
bBased on average daily shares outstanding.
cNet investment income per share includes approximately $0.27 per share related to income received in the form of special dividends in connection with certain Fund holdings.
Excluding these amounts, the ratio of net investment income to average net assets would have been 2.73%.
dTotal return is not annualized for periods less than one year.
eRatios are annualized for periods less than one year.
fIncludes dividend and/or interest expense on securities sold short and security borrowing fees, if any. See below for the ratios of such expenses to average net assets for the
periods presented. See Note 1(f).
gBenefit of expense reduction rounds to less than 0.01%.
hBenefit of waiver and payments by affiliates rounds to less than 0.01%.
iRounds to less than 0.01%.
jThe net investment income ratio is annualized and may not be indicative of operating results for a full year.
14 Semiannual Report | The accompanying notes are an integral part of these financial statements.
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FINANCIAL H IGHLIGHTS
Six Months Ended | Year Ended December 31, | |||||||||||||||||
June 30, 2016 | ||||||||||||||||||
(unaudited) | 2015 | 2014 | 2013 | 2012 | 2011 | |||||||||||||
Class A | ||||||||||||||||||
Per share operating performance | ||||||||||||||||||
(for a share outstanding throughout the period) | ||||||||||||||||||
Net asset value, beginning of period | $ | 14.29 | $ | 16.02 | $ | 18.00 | $ | 16.41 | $ | 16.12 | $ | 17.57 | ||||||
Income from investment operationsa: | ||||||||||||||||||
Net investment incomeb | 0.47 | 0.49 | 0.71 | c | 0.48 | 0.37 | 0.45 | |||||||||||
Net realized and unrealized gains (losses) | 0.37 | (1.43 | ) | (0.15 | ) | 3.65 | 1.60 | (0.86 | ) | |||||||||
Total from investment operations | 0.84 | (0.94 | ) | 0.56 | 4.13 | 1.97 | (0.41 | ) | ||||||||||
Less distributions from: | ||||||||||||||||||
Net investment income | — | (0.64 | ) | (0.80 | ) | (0.51 | ) | (0.38 | ) | (0.47 | ) | |||||||
Net realized gains | — | (0.15 | ) | (1.74 | ) | (2.03 | ) | (1.30 | ) | (0.57 | ) | |||||||
Total distributions | — | (0.79 | ) | (2.54 | ) | (2.54 | ) | (1.68 | ) | (1.04 | ) | |||||||
Net asset value, end of period | $ | 15.13 | $ | 14.29 | $ | 16.02 | $ | 18.00 | $ | 16.41 | $ | 16.12 | ||||||
Total returnd | 5.88 | % | (5.85 | )% | 3.11 | % | 25.61 | % | 12.21 | % | (2.10 | )% | ||||||
Ratios to average net assetse | ||||||||||||||||||
Expensesf | 1.04 | %g,h | 1.10 | %g,h | 1.11 | %g | 1.14 | %g | 1.20 | % | 1.16 | % | ||||||
Expenses incurred in connection with securities sold | ||||||||||||||||||
short | —%i | 0.03 | % | 0.04 | % | 0.07 | % | 0.11 | % | 0.06 | % | |||||||
Net investment income | 6.60 | %j | 3.07 | % | 3.88 | %c | 2.63 | % | 2.18 | % | 2.60 | % | ||||||
Supplemental data | ||||||||||||||||||
Net assets, end of period (000’s) | $ | 1,198,578 | $1,203,508 | $1,394,138 | $ | 1,371,789 | $ | 1,101,808 | $ | 1,093,539 | ||||||||
Portfolio turnover rate | 26.82 | % | 30.51 | % | 65.77 | % | 63.41 | % | 65.21 | % | 107.25 | % |
aThe amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases
of the Fund’s shares in relation to income earned and/or fluctuating fair value of the investments of the Fund.
bBased on average daily shares outstanding.
cNet investment income per share includes approximately $0.27 per share related to income received in the form of special dividends in connection with certain Fund holdings.
Excluding these amounts, the ratio of net investment income to average net assets would have been 2.43%.
dTotal return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year.
eRatios are annualized for periods less than one year.
fIncludes dividend and/or interest expense on securities sold short and security borrowing fees, if any. See below for the ratios of such expenses to average net assets for the
periods presented. See Note 1(f).
gBenefit of expense reduction rounds to less than 0.01%.
hBenefit of waiver and payments by affiliates rounds to less than 0.01%.
iRounds to less than 0.01%.
jThe net investment income ratio is annualized and may not be indicative of operating results for a full year.
franklintempleton.com
The accompanying notes are an integral part of these financial statements. | Semiannual Report 15
FRANKLIN MUTUAL QUEST FUND
FINANCIAL H IGHLIGHTS
Six Months Ended | Year Ended December 31, | |||||||||||||||||
June 30, 2016 | ||||||||||||||||||
(unaudited) | 2015 | 2014 | 2013 | 2012 | 2011 | |||||||||||||
Class C | ||||||||||||||||||
Per share operating performance | ||||||||||||||||||
(for a share outstanding throughout the period) | ||||||||||||||||||
Net asset value, beginning of period | $ | 14.08 | $ | 15.78 | $ | 17.76 | $ | 16.24 | $ | 15.96 | $ | 17.39 | ||||||
Income from investment operationsa: | ||||||||||||||||||
Net investment incomeb | 0.41 | 0.36 | 0.57 | c | 0.35 | 0.25 | 0.33 | |||||||||||
Net realized and unrealized gains (losses) | 0.35 | (1.39 | ) | (0.14 | ) | 3.59 | 1.59 | (0.85 | ) | |||||||||
Total from investment operations | 0.76 | (1.03 | ) | 0.43 | 3.94 | 1.84 | (0.52 | ) | ||||||||||
Less distributions from: | ||||||||||||||||||
Net investment income | — | (0.52 | ) | (0.67 | ) | (0.39 | ) | (0.26 | ) | (0.34 | ) | |||||||
Net realized gains | — | (0.15 | ) | (1.74 | ) | (2.03 | ) | (1.30 | ) | (0.57 | ) | |||||||
Total distributions | — | (0.67 | ) | (2.41 | ) | (2.42 | ) | (1.56 | ) | (0.91 | ) | |||||||
Net asset value, end of period | $ | 14.84 | $ | 14.08 | $ | 15.78 | $ | 17.76 | $ | 16.24 | $ | 15.96 | ||||||
Total returnd | 5.40 | % | (6.49 | )% | 2.42 | % | 24.74 | % | 11.42 | % | (2.82 | )% | ||||||
Ratios to average net assetse | ||||||||||||||||||
Expensesf | 1.79 | %g,h | 1.82 | %g,h | 1.81 | %g | 1.84 | %g | 1.90 | % | 1.86 | % | ||||||
Expenses incurred in connection with securities | ||||||||||||||||||
sold short | —%i | 0.03 | % | 0.04 | % | 0.07 | % | 0.11 | % | 0.06 | % | |||||||
Net investment income | 5.85 | %j | 2.35 | % | 3.18 | %c | 1.93 | % | 1.48 | % | 1.90 | % | ||||||
Supplemental data | ||||||||||||||||||
Net assets, end of period (000’s) | $ | 334,257 | $ | 337,974 | $ | 397,963 | $ | 406,304 | $ | 333,908 | $ | 338,983 | ||||||
Portfolio turnover rate | 26.82 | % | 30.51 | % | 65.77 | % | 63.41 | % | 65.21 | % | 107.25 | % |
aThe amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases
of the Fund’s shares in relation to income earned and/or fluctuating fair value of the investments of the Fund.
bBased on average daily shares outstanding.
cNet investment income per share includes approximately $0.27 per share related to income received in the form of special dividends in connection with certain Fund holdings.
Excluding these amounts, the ratio of net investment income to average net assets would have been 1.73%.
dTotal return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year.
eRatios are annualized for periods less than one year.
fIncludes dividend and/or interest expense on securities sold short and security borrowing fees, if any. See below for the ratios of such expenses to average net assets for the
periods presented. See Note 1(f).
gBenefit of expense reduction rounds to less than 0.01%.
hBenefit of waiver and payments by affiliates rounds to less than 0.01%.
iRounds to less than 0.01%.
jThe net investment income ratio is annualized and may not be indicative of operating results for a full year.
16 Semiannual Report | The accompanying notes are an integral part of these financial statements.
franklintempleton.com
FRANKLIN MUTUAL QUEST FUND
FINANCIAL H IGHLIGHTS
Six Months Ended | Year Ended December 31, | |||||||||||||||||
June 30, 2016 | ||||||||||||||||||
(unaudited) | 2015 | 2014 | 2013 | 2012 | 2011 | |||||||||||||
Class R | ||||||||||||||||||
Per share operating performance | ||||||||||||||||||
(for a share outstanding throughout the period) | ||||||||||||||||||
Net asset value, beginning of period | $ | 14.14 | $ | 15.87 | $ | 17.84 | $ | 16.33 | $ | 16.05 | $ | 17.50 | ||||||
Income from investment operationsa: | ||||||||||||||||||
Net investment incomeb | 0.44 | 0.44 | 0.65 | c | 0.50 | 0.33 | 0.41 | |||||||||||
Net realized and unrealized gains (losses) | 0.36 | (1.40 | ) | (0.13 | ) | 3.56 | 1.60 | (0.85 | ) | |||||||||
Total from investment operations | 0.80 | (0.96 | ) | 0.52 | 4.06 | 1.93 | (0.44 | ) | ||||||||||
Less distributions from: | ||||||||||||||||||
Net investment income | — | (0.62 | ) | (0.75 | ) | (0.52 | ) | (0.35 | ) | (0.44 | ) | |||||||
Net realized gains | — | (0.15 | ) | (1.74 | ) | (2.03 | ) | (1.30 | ) | (0.57 | ) | |||||||
Total distributions | — | (0.77 | ) | (2.49 | ) | (2.55 | ) | (1.65 | ) | (1.01 | ) | |||||||
Net asset value, end of period | $ | 14.94 | $ | 14.14 | $ | 15.87 | $ | 17.84 | $ | 16.33 | $ | 16.05 | ||||||
Total returnd | 5.66 | % | (6.03 | )% | 2.94 | % | 25.34 | % | 11.99 | % | (2.31 | )% | ||||||
Ratios to average net assetse | ||||||||||||||||||
Expensesf | 1.29 | %g,h | 1.32 | %g,h | 1.31 | %g | 1.34 | %g | 1.40 | % | 1.36 | % | ||||||
Expenses incurred in connection with securities sold | ||||||||||||||||||
short | —%i | 0.03 | % | 0.04 | % | 0.07 | % | 0.11 | % | 0.06 | % | |||||||
Net investment income | 6.35 | %j | 2.85 | % | 3.68 | %c | 2.43 | % | 1.98 | % | 2.40 | % | ||||||
Supplemental data | ||||||||||||||||||
Net assets, end of period (000’s) | $ | 867 | $ | 898 | $ | 675 | $ | 853 | $ | 212 | $ | 193 | ||||||
Portfolio turnover rate | 26.82 | % | 30.51 | % | 65.77 | % | 63.41 | % | 65.21 | % | 107.25 | % |
aThe amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases
of the Fund’s shares in relation to income earned and/or fluctuating fair value of the investments of the Fund.
bBased on average daily shares outstanding.
cNet investment income per share includes approximately $0.27 per share related to income received in the form of special dividends in connection with certain Fund holdings.
Excluding these amounts, the ratio of net investment income to average net assets would have been 2.23%.
dTotal return is not annualized for periods less than one year.
eRatios are annualized for periods less than one year.
fIncludes dividend and/or interest expense on securities sold short and security borrowing fees, if any. See below for the ratios of such expenses to average net assets for the
periods presented. See Note 1(f).
gBenefit of expense reduction rounds to less than 0.01%.
hBenefit of waiver and payments by affiliates rounds to less than 0.01%.
iRounds to less than 0.01%.
jThe net investment income ratio is annualized and may not be indicative of operating results for a full year.
franklintempleton.com
The accompanying notes are an integral part of these financial statements. | Semiannual Report 17
FRANKLIN MUTUAL QUEST FUND
FINANCIAL H IGHLIGHTS
Six Months Ended | Year Ended December 31, | |||||||||||
June 30, 2016 | ||||||||||||
(unaudited) | 2015 | 2014 | 2013 | a | ||||||||
Class R6 | ||||||||||||
Per share operating performance | ||||||||||||
(for a share outstanding throughout the period) | ||||||||||||
Net asset value, beginning of period | $ | 14.45 | $ | 16.19 | $ | 18.19 | $ | 18.16 | ||||
Income from investment operationsb: | ||||||||||||
Net investment incomec | 0.50 | 0.55 | 0.51 | d | 0.36 | |||||||
Net realized and unrealized gains (losses) | 0.37 | (1.44 | ) | 0.10 | 2.28 | |||||||
Total from investment operations | 0.87 | (0.89 | ) | 0.61 | 2.64 | |||||||
Less distributions from: | ||||||||||||
Net investment income | — | (0.70 | ) | (0.87 | ) | (0.58 | ) | |||||
Net realized gains | — | (0.15 | ) | (1.74 | ) | (2.03 | ) | |||||
Total distributions | — | (0.85 | ) | (2.61 | ) | (2.61 | ) | |||||
Net asset value, end of period | $ | 15.32 | $ | 14.45 | $ | 16.19 | $ | 18.19 | ||||
Total returne | 6.02 | % | (5.54 | )% | 3.53 | % | 14.83 | % | ||||
Ratios to average net assetsf | ||||||||||||
Expenses before waiver, payments by affiliates and expense reductiong | 0.70 | % | 0.74 | % | 0.74 | % | 2.00 | % | ||||
Expenses net of waiver, payments by affiliates and expense reductiong,h | 0.70 | %i | 0.74 | %i | 0.74 | % | 0.77 | % | ||||
Expenses incurred in connection with securities sold short | —%j | 0.03 | % | 0.04 | % | 0.07 | % | |||||
Net investment income | 6.94 | %k | 3.43 | % | 4.25 | %d | 3.00 | % | ||||
Supplemental data | ||||||||||||
Net assets, end of period (000’s) | $ | 44,481 | $ | 41,408 | $ | 44,340 | $ | 5 | ||||
Portfolio turnover rate | 26.82 | % | 30.51 | % | 65.77 | % | 63.41 | % |
aFor the period May 1, 2013 (effective date) to December 31, 2013.
bThe amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases
of the Fund’s shares in relation to income earned and/or fluctuating fair value of the investments of the Fund.
cBased on average daily shares outstanding.
dNet investment income per share includes approximately $0.27 per share related to income received in the form of special dividends in connection with certain Fund holdings.
Excluding these amounts, the ratio of net investment income to average net assets would have been 2.80%.
eTotal return is not annualized for periods less than one year.
fRatios are annualized for periods less than one year.
gIncludes dividend and/or interest expense on securities sold short and security borrowing fees, if any. See below for the ratios of such expenses to average net assets for the
periods presented. See Note 1(f).
hBenefit of expense reduction rounds to less than 0.01%.
iBenefit of waiver and payments by affiliates rounds to less than 0.01%.
jRounds to less than 0.01%.
kThe net investment income ratio is annualized and may not be indicative of operating results for a full year.
18 Semiannual Report | The accompanying notes are an integral part of these financial statements.
franklintempleton.com
FRANKLIN MUTUAL QUEST FUND
Statement of Investments, June 30, 2016 (unaudited) | ||||
Country | Shares/Units/Warrants | Value | ||
Common Stocks and Other Equity Interests 48.2% | ||||
Auto Components 0.2% | ||||
a,b International Automotive Components Group Brazil LLC | Brazil | 2,548,299 | $ | 41,953 |
a,b,c International Automotive Components Group North America LLC | United States | 19,924,658 | 8,790,082 | |
8,832,035 | ||||
Automobiles 0.2% | ||||
General Motors Co | United States | 212,763 | 6,021,193 | |
a General Motors Co., wts., 7/10/19 | United States | 232,162 | 2,423,771 | |
8,444,964 | ||||
Banks 5.9% | ||||
Barclays PLC | United Kingdom | 3,550,000 | 6,560,728 | |
BB&T Corp | United States | 1,218,847 | 43,403,142 | |
BNP Paribas SA | France | 161,470 | 7,125,035 | |
CIT Group Inc | United States | 2,269,088 | 72,406,598 | |
Citizens Financial Group Inc | United States | 1,861,290 | 37,188,574 | |
Guaranty Bancorp | United States | 347,127 | 5,797,021 | |
HSBC Holdings PLC | United Kingdom | 1,075,000 | 6,678,234 | |
PNC Financial Services Group Inc | United States | 163,600 | 13,315,404 | |
Societe Generale SA | France | 207,500 | 6,497,175 | |
SunTrust Banks Inc | United States | 1,238,117 | 50,861,846 | |
Wells Fargo & Co | United States | 947,444 | 44,842,525 | |
294,676,282 | ||||
Chemicals 0.2% | ||||
a,d Advanced Emissions Solutions Inc | United States | 1,724,209 | 12,371,200 | |
a,e,f Dow Corning Corp., Contingent Distribution | United States | 12,089,194 | — | |
Tronox Ltd., A | United States | 20,435 | 90,118 | |
12,461,318 | ||||
Communications Equipment 2.1% | ||||
a,b,c Sorenson Communications Inc., Membership Interests | United States | 224,279 | 102,753,377 | |
Consumer Finance 1.6% | ||||
a Ally Financial Inc | United States | 4,699,414 | 80,218,997 | |
Diversified Financial Services 0.7% | ||||
Voya Financial Inc | United States | 1,445,820 | 35,798,503 | |
Diversified Telecommunication Services 1.5% | ||||
a,e,f Global Crossing Holdings Ltd., Contingent Distribution | United States | 49,411,586 | — | |
Koninklijke KPN NV | Netherlands | 20,312,770 | 73,387,747 | |
73,387,747 | ||||
Energy Equipment & Services 0.0%† | ||||
a,f DeepOcean Group Holding BV | Netherlands | 91,357 | 228,393 | |
Health Care Equipment & Supplies 0.9% | ||||
Medtronic PLC | United States | 522,033 | 45,296,803 | |
Hotels, Restaurants & Leisure 0.2% | ||||
a Pinnacle Entertainment Inc | United States | 982,551 | 10,886,665 | |
Independent Power & Renewable Electricity | ||||
Producers 2.5% | ||||
NRG Energy Inc | United States | 8,524,843 | 127,787,397 | |
Insurance 6.8% | ||||
Ageas | Belgium | 1,051,948 | 36,178,385 | |
The Allstate Corp | United States | 873,039 | 61,060,714 | |
American International Group Inc | United States | 479,906 | 25,382,228 |
franklintempleton.com
Semiannual Report 19
FRANKLIN MUTUAL QUEST FUND
STATEMENT OF INVESTMENTS (UNAUDITED)
Country | Shares/Units/Warrants | Value | ||
Common Stocks and Other Equity Interests (continued) | ||||
Insurance (continued) | ||||
a ASR Nederland NV | Netherlands | 2,207,970 | $ | 47,666,820 |
Direct Line Insurance Group PLC | United Kingdom | 84,729 | 389,547 | |
RSA Insurance Group PLC | United Kingdom | 10,576,596 | 70,443,652 | |
UNIQA Insurance Group AG | Austria | 55,868 | 333,246 | |
White Mountains Insurance Group Ltd | United States | 120,239 | 101,241,238 | |
342,695,830 | ||||
Internet & Catalog Retail 0.1% | ||||
a Bluestem Group Inc | United States | 4,150,000 | 5,395,000 | |
Internet Software & Services 1.0% | ||||
a Baidu Inc., ADR | China | 295,562 | 48,812,064 | |
Machinery 0.0%† | ||||
a Vossloh AG | Germany | 1,910 | 117,787 | |
Marine 0.0%† | ||||
a,b Eagle Bulk Shipping Inc | United States | 870,767 | 343,648 | |
Media 3.4% | ||||
CBS Corp., B | United States | 1,296,060 | 70,557,506 | |
a Charter Communications Inc., A | United States | 45,350 | 10,368,824 | |
a,d Lee Enterprises Inc./IA | United States | 4,824,268 | 9,214,352 | |
a,b,d Lee Enterprises Inc., wts., 12/31/22 | United States | 1,110,000 | 815,194 | |
d New Media Investment Group Inc | United States | 4,441,772 | 80,262,820 | |
171,218,696 | ||||
Multiline Retail 0.7% | ||||
Macy’s Inc | United States | 997,740 | 33,534,041 | |
Oil, Gas & Consumable Fuels 5.4% | ||||
BP PLC | United Kingdom | 15,042,717 | 87,883,947 | |
China Shenhua Energy Co. Ltd., H | China | 17,827,995 | 32,767,783 | |
Kinder Morgan Inc | United States | 2,285,990 | 42,793,733 | |
Royal Dutch Shell PLC, A (EUR Traded) | United Kingdom | 3,801,481 | 104,093,924 | |
a,b,c Warrior Met Coal LLC, A | United States | 14,690 | 1,480,993 | |
a,b,c Warrior Met Coal LLC, B | United States | 34,356 | 3,463,648 | |
272,484,028 | ||||
Pharmaceuticals 5.4% | ||||
GlaxoSmithKline PLC | United Kingdom | 4,545,080 | 97,239,273 | |
Merck & Co. Inc | United States | 1,102,890 | 63,537,493 | |
Novartis AG, ADR | Switzerland | 747,376 | 61,665,994 | |
Teva Pharmaceutical Industries Ltd., ADR | Israel | 972,498 | 48,848,575 | |
271,291,335 | ||||
Real Estate Investment Trusts (REITs) 3.1% | ||||
Forest City Realty Trust Inc., A | United States | 5,831,830 | 130,108,127 | |
Gaming and Leisure Properties Inc | United States | 771,760 | 26,610,285 | |
156,718,412 | ||||
Software 0.8% | ||||
Symantec Corp | United States | 1,924,037 | 39,519,720 | |
Technology Hardware, Storage & Peripherals 1.2% | ||||
a,d Eastman Kodak Co | United States | 3,577,698 | 57,529,384 | |
a,d Eastman Kodak Co., wts., 9/03/18 | United States | 48,582 | 200,643 |
20 Semiannual Report
franklintempleton.com
FRANKLIN MUTUAL QUEST FUND
STATEMENT OF INVESTMENTS (UNAUDITED)
Country | Shares/Units/Warrants | Value | ||
Common Stocks and Other Equity Interests (continued) | ||||
Technology Hardware, Storage & Peripherals (continued) | ||||
a,d Eastman Kodak Co., wts., 9/03/18 | United States | 48,582 | $ | 170,523 |
57,900,550 | ||||
Tobacco 2.6% | ||||
Altria Group Inc | United States | 313,920 | 21,647,923 | |
British American Tobacco PLC | United Kingdom | 802,998 | 51,854,851 | |
Imperial Brands PLC | United Kingdom | 1,077,438 | 58,234,844 | |
131,737,618 | ||||
Wireless Telecommunication Services 1.7% | ||||
Vodafone Group PLC | United Kingdom | 28,050,937 | 85,148,202 | |
Total Common Stocks and Other Equity Interests | ||||
(Cost $2,208,174,644) | 2,417,689,412 | |||
Convertible Preferred Stocks | ||||
(Cost $37,119,722) 0.7% | ||||
Pharmaceuticals 0.7% | ||||
g Teva Pharmaceutical Industries Ltd., 4.42%, cvt. pfd | Israel | 44,000 | 36,388,000 | |
Preferred Stocks 0.9% | ||||
Automobiles 0.2% | ||||
g Volkswagen AG, 0.157%, pfd | Germany | 74,300 | 8,931,424 | |
Technology Hardware, Storage & Peripherals 0.7% | ||||
g Samsung Electronics Co. Ltd., 1.775%, pfd | South Korea | 35,845 | 36,785,949 | |
Total Preferred Stocks (Cost $41,630,644) | 45,717,373 | |||
Principal | ||||
Amount* | ||||
Corporate Bonds, Notes and Senior Floating | ||||
Rate Interests 30.9% | ||||
d,h,i Advanced Emissions Solutions Inc., Term Loan, | ||||
15.00%, 7/08/16 | United States | 8,866,667 | 8,750,868 | |
Advanced Micro Devices Inc., | ||||
senior bond, 7.00%, 7/01/24 | United States | 89,431,000 | 76,016,350 | |
senior note, 7.50%, 8/15/22 | United States | 13,000,000 | 11,635,000 | |
Affinion Group Inc., | ||||
h,i Second Lien Term Loan, 8.50%, 10/31/18 | United States | 124,500,000 | 88,550,625 | |
senior note, 7.875%, 12/15/18 | United States | 50,000,000 | 24,125,000 | |
h,i Tranche B Term Loans, 6.75%, 4/30/18 | United States | 26,794,544 | 24,237,889 | |
Avaya Inc., | ||||
j senior note, 144A, 10.50%, 3/01/21 | United States | 302,902,380 | 68,153,035 | |
j senior secured note, 144A, 7.00%, 4/01/19 | United States | 14,003,000 | 10,047,153 | |
h,i Term B-3 Loan, 5.134%, 10/26/17 | United States | 14,008,235 | 10,877,394 | |
h,i Term B-6 Loan, 6.50%, 3/30/18 | United States | 8,080,130 | 5,976,775 | |
h,i Term B-7 Loan, 6.25%, 5/29/20 | United States | 8,255,352 | 5,868,177 | |
h,i Belk Inc., | ||||
Closing Date Term Loan, 5.75%, 12/12/22 | United States | 14,887,688 | 11,910,150 | |
second lien Term Loan, 10.50%, 12/12/22 | United States | 25,000,000 | 21,409,250 | |
h,i Bluestem Brands Inc., Initial Term Loan, 8.50%, 11/09/20 | United States | 74,943,547 | 65,388,244 | |
h,i Eagle Bulk Shipping Inc., Second Lien Loan, 15.00%, 1/14/20 | United States | 6,994,997 | 6,973,103 | |
d,h,i Eastman Kodak Co., | ||||
Second Lien Term Loan, 10.75%, 9/03/20 | United States | 92,085,701 | 85,179,273 | |
Term Loan, 7.25%, 9/03/19 | United States | 38,492,739 | 37,530,420 | |
Freeport-McMoRan Inc., senior bond, 5.45%, 3/15/43 | United States | 12,900,000 | 10,416,750 |
franklintempleton.com
Semiannual Report 21
FRANKLIN MUTUAL QUEST FUND
STATEMENT OF INVESTMENTS (UNAUDITED)
Principal | ||||
Country | Amount* | Value | ||
Corporate Bonds, Notes and Senior Floating Rate | ||||
Interests (continued) | ||||
GenOn Americas Generation LLC, senior bond, | ||||
8.50%,10/01/21 | United States | 28,630,000 | $ | 22,814,531 |
9.125%,5/01/31 | United States | 90,639,000 | 70,245,225 | |
iHeartCommunications Inc., | ||||
senior secured note, first lien, 9.00%, 12/15/19 | United States | 37,367,000 | 28,539,046 | |
h,i Tranche D Term Loan, 7.21%, 1/30/19 | United States | 46,662,631 | 34,297,034 | |
h,i Tranche E Term Loan, 7.96%, 7/30/19 | United States | 14,995,598 | 11,031,137 | |
d Lee Enterprises Inc., | ||||
h,i Second Lien Term Loan, 12.00%, 12/15/22 | United States | 68,120,324 | 71,270,889 | |
j senior secured note, first lien, 144A, 9.50%, 3/15/22 | United States | 99,050,000 | 98,059,500 | |
h,i Moxie Patriot LLC, Construction B-1 Term Loan, 6.75%, 12/21/20 | United States | 22,500,000 | 21,825,000 | |
d,h,i New Media Holdings II LLC, Fourth Amendment Replacement Term Loan, | ||||
7.25%, 6/04/20 | United States | 112,707,637 | 112,244,409 | |
Sabine Pass LNG LP, | ||||
first lien, 6.50%, 11/01/20 | United States | 25,266,000 | 26,418,761 | |
senior secured note, first lien, 7.50%, 11/30/16 | United States | 10,000,000 | 10,196,250 | |
c Sorenson Communications Inc., | ||||
h,i Initial Term Loan, 8.00%, 4/30/20 | United States | 142,814,070 | 140,901,790 | |
j,k secured note, second lien, 144A, PIK, 9.00%, 10/31/20 | United States | 96,671,937 | 86,521,384 | |
c,j,k Sorenson Holdings LLC/Finance Corp., senior note, 144A, PIK, 13.00%, | ||||
10/31/21 | United States | 56,682,637 | 53,281,679 | |
Sprint Capital Corp., senior note, 6.90%, 5/01/19 | United States | 22,000,000 | 21,120,000 | |
j Sunshine Oilsands Ltd., secured note, 144A, 10.00%, 8/01/17 | Canada | 18,000,000 | 9,945,000 | |
h,i Toys R Us-Delaware Inc., | ||||
FILO Loans, 8.25%, 10/24/19 | United States | 9,228,000 | 8,964,079 | |
Term B-4 Loan, 9.75%, 4/24/20 | United States | 74,366,912 | 64,575,244 | |
j Valeant Pharmaceuticals International, | ||||
senior bond, 144A, 6.75%, 8/15/21 | United States | 3,680,000 | 3,155,600 | |
senior bond, 144A, 7.25%, 7/15/22 | United States | 1,809,000 | 1,560,624 | |
senior note, 144A, 6.375%, 10/15/20 | United States | 22,513,000 | 19,473,745 | |
h,i, l Veritas Software Corp., | ||||
Term Loan B1, 6.625%, 6/15/23 | United States | 160,598 | EUR | 152,111 |
Term Loan B1, 6.625%, 1/27/23 | United States | 15,439,288 | 13,509,377 | |
Term Loan B2, 8.625%, 1/27/23 | United States | 14,908,218 | 12,802,432 | |
j Veritas U.S. Inc./Veritas Bermuda Ltd., senior note, 144A, 10.50%, 2/01/24 | United States | 18,402,000 | 15,733,710 | |
j Western Digital Corp., senior note, 144A, 10.50%, 4/01/24 | United States | 17,435,000 | 18,699,038 | |
Total Corporate Bonds, Notes and Senior Floating Rate | ||||
Interests (Cost $1,687,783,829) | 1,550,383,051 | |||
Corporate Bonds, Notes and Senior Floating Rate | ||||
Interests in Reorganization 2.8% | ||||
b,m Broadband Ventures III LLC, secured promissory note, 5.00%, 2/01/12 | United States | 9,272 | — | |
h,i,m Caesars Entertainment Operating Co. Inc., 1.50%, 3/01/17, | ||||
Term B-5-B Loans | United States | 7,325,894 | 7,228,218 | |
Term B-6-B Loans | United States | 34,925,138 | 35,012,450 | |
Term B-7 Loans | United States | 13,731,000 | 13,879,748 | |
m Nortel Networks Corp., cvt., senior note, | ||||
1.75%,4/15/12 | Canada | 18,224,000 | 15,877,660 | |
2.125%,4/15/14 | Canada | 12,968,000 | 11,283,781 | |
m Northern Telecom Ltd., 6.875%, 9/01/23 | Canada | 20,912,000 | 7,423,760 | |
m Samson Investment Co., senior note, 9.75%, 2/15/20 | United States | 19,689,000 | 443,003 | |
h,i,m Texas Competitive Electric Holdings Co. LLC, Term Loans, 4.943%, 10/10/17 | United States | 104,175,133 | 34,942,111 |
22 Semiannual Report
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FRANKLIN MUTUAL QUEST FUND
STATEMENT OF INVESTMENTS (UNAUDITED)
Principal | |||||
Country | Amount* | Value | |||
Corporate Bonds, Notes and Senior Floating Rate Interests | |||||
in Reorganization (continued) | |||||
j,m Texas Competitive Electric Holdings Co. LLC/Texas Competitive Electric | |||||
Holdings Finance Inc., senior secured note, first lien, 144A, | |||||
4.934%, 10/01/20 | United States | 40,665,000 | $ | 13,927,762 | |
j,k,m Walter Energy Inc., second lien, 144A, PIK, 11.50%, 4/01/20 | United States | 6,473,550 | 2,266 | ||
Total Corporate Bonds, Notes and Senior Floating Rate | |||||
Interests in Reorganization (Cost $236,077,387) | 140,020,759 | ||||
Shares | |||||
Companies in Liquidation 0.4% | |||||
a Adelphia Recovery Trust | United States | 49,534,842 | 104,023 | ||
a,e Adelphia Recovery Trust, Arahova Contingent Value Vehicle, Contingent | |||||
Distribution | United States | 5,918,407 | 59,184 | ||
a,b,c CB FIM Coinvestors LLC | United States | 1,439,821 | — | ||
a,e,f Century Communications Corp., Contingent Distribution | United States | 16,323,000 | — | ||
a EME Reorganization Trust | United States | 368,387,370 | 1,584,066 | ||
a,b FIM Coinvestor Holdings I, LLC | United States | 17,934,688 | — | ||
a,e,f KGen Power Liquidating Trust, Contingent Distribution | United States | 5,519,104 | 2,502,814 | ||
a,n Lehman Brothers Holdings Inc., Bankruptcy Claim | United States | 459,471,220 | 14,358,476 | ||
a,e,f NewPage Corp., Litigation Trust, Contingent Distribution | United States | 723,000 | — | ||
a,e,f Tribune Media Litigation Trust, Contingent Distribution | United States | 1,517,306 | — | ||
a,e,f Tropicana Litigation Trust, Contingent Distribution | United States | 12,892,000 | — | ||
Total Companies in Liquidation (Cost $33,244,297) | 18,608,563 | ||||
Principal | |||||
Amount* | |||||
Municipal Bonds (Cost $55,121,799) 1.0% | |||||
Puerto Rico Commonwealth GO, Refunding, Series A, 8.00%, 7/01/35 | United States | 74,239,000 | 49,647,331 | ||
Notional | |||||
Counterparty | Amount* | ||||
Options Purchased 0.0%† | |||||
Puts - Over-the-Counter | |||||
Currency Options 0.0%† | |||||
CNY/USD, August Strike Price 7.387 CNY, Expires 8/03/16 | FBCO | 66,555,903 | CNY | 27 | |
CNY/USD, August Strike Price 7.398 CNY, Expires 8/03/16 | HSBC | 97,796,108 | CNY | 26 | |
CNY/USD, August Strike Price 7.43 CNY, Expires 8/03/16 | FBCO | 33,473,926 | CNY | 5 | |
CNY/USD, August Strike Price 7.44 CNY, Expires 8/03/16 | HSBC | 53,630,370 | CNY | 7 | |
CNY/USD, August Strike Price 7.51 CNY, Expires 8/03/16 | FBCO | 169,170,590 | CNY | 23 | |
Total Options Purchased (Cost $641,592) | 88 | ||||
Total Investments before Short Term Investments | |||||
(Cost $4,299,793,914) | 4,258,454,577 | ||||
Principal | |||||
Country | Amount * | ||||
Short Term Investments 13.9% | |||||
U.S. Government and Agency Securities 13.9% | |||||
FHLB, 7/01/16 | United States | 25,000,000 | 25,000,000 | ||
o U.S. Treasury Bill, | |||||
9/01/16 | United States | 80,000,000 | 79,967,520 | ||
9/08/16 | United States | 80,000,000 | 79,970,080 | ||
11/17/16 | United States | 76,000,000 | 75,927,648 |
franklintempleton.com
Semiannual Report 23
FRANKLIN MUTUAL QUEST FUND
STATEMENT OF INVESTMENTS (UNAUDITED)
Principal | ||||
Country | Amount* | Value | ||
Short Term Investments (continued) | ||||
U.S. Government and Agency Securities (continued) | ||||
o U.S. Treasury Bill (continued), | ||||
11/25/16 | United States | 60,000,000 | $ | 59,937,720 |
7/07/16 - 12/08/16 | United States | 371,600,000 | 371,346,378 | |
Total U.S. Government and Agency Securities | ||||
(Cost $691,835,485) | 692,149,346 | |||
Total Investments (Cost $4,991,629,399) 98.8% | 4,950,603,923 | |||
Other Assets, less Liabilities 1.2% | 62,305,224 | |||
Net Assets 100.0% | $ | 5,012,909,147 |
*The principal/notional amount is stated in U.S. dollars unless otherwise indicated.
†Rounds to less than 0.1% of net assets.
aNon-income producing.
bSee Note 9 regarding restricted securities.
cAt June 30, 2016, pursuant to the Fund’s policies and the requirements of applicable securities law, the Fund is restricted from trading these securities at period end.
dSee Note 11 regarding holdings of 5% voting securities.
eContingent distributions represent the right to receive additional distributions, if any, during the reorganization of the underlying company. Shares represent total underlying
principal of debt securities.
fSecurity has been deemed illiquid because it may not be able to be sold within seven days. At June 30, 2016, the aggregate value of these securities was $2,731,207, repre-
senting 0.1% of net assets.
gVariable rate security. The rate shown represents the yield at period end.
hSee Note 1(h) regarding senior floating rate interests.
iThe coupon rate shown represents the rate at period end.
jSecurity was purchased pursuant to Rule 144A under the Securities Act of 1933 and may be sold in transactions exempt from registration only to qualified institutional buyers
or in a public offering registered under the Securities Act of 1933. These securities have been deemed liquid under guidelines approved by the Trust’s Board of Trustees. At
June 30, 2016, the aggregate value of these securities was $398,560,496, representing 8.0% of net assets.
kIncome may be received in additional securities and/or cash.
lSecurity purchased on a delayed delivery basis. See Note 1(c).
mSee Note 8 regarding credit risk and defaulted securities.
nBankruptcy claims represent the right to receive distributions, if any, during the liquidation of the underlying pool of assets. Shares represent amount of allowed unsecured
claims.
oThe security is traded on a discount basis with no stated coupon rate.
24 Semiannual Report
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FRANKLIN MUTUAL QUEST FUND
STATEMENT OF INVESTMENTS (UNAUDITED)
At June 30, 2016, the Fund had the following futures contracts outstanding. See Note 1(d). | ||||||||||||
Futures Contracts | ||||||||||||
Number of | Notional Expiration | Unrealized | Unrealized | |||||||||
Description | Type | Contracts | Value | Date | Appreciation | Depreciation | ||||||
Currency Contracts | ||||||||||||
EUR/USD | Short | 814 | $ | 113,018,813 | 9/19/16 | $ | 3,184,089 | $ | — | |||
GBP/USD | Short | 1,611 | 133,390,800 | 9/19/16 | 12,687,496 | — | ||||||
Total Futures Contracts | $ | 15,871,585 | $ | — | ||||||||
Net unrealized appreciation (depreciation) | $ | 15,871,585 | ||||||||||
At June 30, 2016, the Fund had the following forward exchange contracts outstanding. See Note 1(d). | ||||||||||||
Forward Exchange Contracts | ||||||||||||
Contract | Settlement | Unrealized | Unrealized | |||||||||
Currency | Counterpartya Type | Quantity | Amount | Date | Appreciation | Depreciation | ||||||
OTC Forward Exchange Contracts | ||||||||||||
Euro | BANT | Sell | 258,926 | $ | 282,569 | 7/06/16 | $ | — | $ | (4,889 | ) | |
Euro | FBCO | Sell | 303,622 | 341,664 | 7/06/16 | 4,583 | — | |||||
Euro | HSBC | Sell | 258,891 | 282,525 | 7/06/16 | — | (4,895 | ) | ||||
British Pound | BANT | Buy | 6,910,303 | 9,823,935 | 7/21/16 | — | (608,032 | ) | ||||
British Pound | BANT | Sell | 4,057,517 | 5,764,567 | 7/21/16 | 353,273 | — | |||||
British Pound | FBCO | Sell | 974,313 | 1,391,621 | 7/21/16 | 92,232 | — | |||||
British Pound | HSBC | Sell | 3,269,730 | 4,636,117 | 7/21/16 | 275,453 | — | |||||
British Pound | SSBT | Buy | 770,298 | 1,083,817 | 7/21/16 | — | (56,512 | ) | ||||
Euro | BANT | Sell | 373,018 | 420,840 | 7/21/16 | 6,750 | (266 | ) | ||||
Euro | HSBC | Sell | 894,543 | 1,005,036 | 7/21/16 | 11,690 | (332 | ) | ||||
Euro | SSBT | Sell | 1,819,774 | 2,037,231 | 7/21/16 | 15,788 | — | |||||
South Korean Won | BANT | Buy | 2,006,337,782 | 1,733,608 | 8/12/16 | 12,474 | (6,514 | ) | ||||
South Korean Won | BANT | Sell | 1,540,201,985 | 1,312,881 | 8/12/16 | 1,657 | (24,187 | ) | ||||
South Korean Won | FBCO | Buy | 23,591,796,315 | 19,104,053 | 8/12/16 | 1,350,892 | — | |||||
South Korean Won | FBCO | Sell | 23,672,952,417 | 19,550,858 | 8/12/16 | — | (974,453 | ) | ||||
South Korean Won | HSBC | Buy | 29,411,082,996 | 24,592,669 | 8/12/16 | 911,152 | (3,343 | ) | ||||
South Korean Won | HSBC | Sell | 46,149,553,341 | 38,058,138 | 8/12/16 | 1,913 | (1,957,116 | ) | ||||
British Pound | BANT | Sell | 759,690 | 1,086,948 | 8/19/16 | 73,505 | — | |||||
British Pound | HSBC | Sell | 2,740,811 | 3,929,021 | 8/19/16 | 272,720 | — | |||||
British Pound | SSBT | Sell | 7,541,172 | 10,847,900 | 10/24/16 | 779,743 | — | |||||
Euro | BANT | Sell | 2,387,546 | 2,764,778 | 11/04/16 | 101,704 | — | |||||
Euro | HSBC | Sell | 2,387,546 | 2,765,972 | 11/04/16 | 102,898 | — | |||||
South Korean Won | BANT | Sell | 377,985,525 | 326,328 | 11/14/16 | — | (1,209 | ) | ||||
South Korean Won | FBCO | Sell | 659,426,974 | 571,130 | 11/14/16 | — | (285 | ) | ||||
South Korean Won | HSBC | Sell | 24,165,639,151 | 21,176,092 | 11/14/16 | 246,186 | (10,413 | ) | ||||
Euro | BANT | Sell | 31,121,569 | 34,995,381 | 11/18/16 | 366,044 | (103,251 | ) | ||||
Euro | BONY | Sell | 15,593,724 | 17,454,566 | 11/18/16 | 83,111 | (31,601 | ) | ||||
Euro | HSBC | Sell | 2,848,600 | 3,208,727 | 11/18/16 | 29,638 | (33 | ) | ||||
Euro | SSBT | Sell | 12,398,956 | 13,748,146 | 11/18/16 | 19,397 | (108,851 | ) | ||||
British Pound | BANT | Sell | 14,953,751 | 20,391,473 | 11/23/16 | 422,651 | (3,783 | ) | ||||
British Pound | BONY | Sell | 25,812,576 | 37,700,508 | 11/23/16 | 3,224,584 | — | |||||
British Pound | FBCO | Sell | 198,329 | 268,215 | 11/23/16 | 3,322 | — | |||||
British Pound | HSBC | Sell | 21,216,454 | 30,625,358 | 11/23/16 | 2,295,394 | (7,262 | ) | ||||
British Pound | SSBT | Sell | 22,514,119 | 30,013,719 | 11/23/16 | 182,241 | (238,943 | ) | ||||
Total Forward Exchange Contracts | $ | 11,240,995 | $ | (4,146,170 | ) | |||||||
Net unrealized appreciation (depreciation) | $ | 7,094,825 | ||||||||||
aMay be comprised of multiple contracts with the same counterparty, currency and settlement date. | ||||||||||||
See Abbreviations on page 44. |
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The accompanying notes are an integral part of these financial statements. | Semiannual Report 25
Financial Statements | |||
Statement of Assets and Liabilities | |||
June 30, 2016 (unaudited) | |||
Assets: | |||
Investments in securities: | |||
Cost - Unaffiliated issuers | $ | 4,386,628,305 | |
Cost - Non-controlled affiliates (Note 11) | 605,001,094 | ||
Total cost of investments | $ | 4,991,629,399 | |
Value - Unaffiliated issuers | $ | 4,377,004,448 | |
Value - Non-controlled affiliates (Note 11) | 573,599,475 | ||
Total value of investments | 4,950,603,923 | ||
Cash | 14,302,130 | ||
Restricted Cash (Note 1e) | 650,000 | ||
Foreign currency, at value (cost $4,033,722) | 4,005,263 | ||
Receivables: | |||
Investment securities sold | 23,072,850 | ||
Capital shares sold | 2,269,608 | ||
Dividends and interest | 35,649,768 | ||
European Union tax reclaims | 711,736 | ||
Due from brokers | 9,124,342 | ||
Variation margin | 2,162,988 | ||
Unrealized appreciation on OTC forward exchange contracts | 11,240,995 | ||
Other assets | 2,440 | ||
Total assets | 5,053,796,043 | ||
Liabilities: | |||
Payables: | |||
Investment securities purchased | 25,946,897 | ||
Capital shares redeemed | 4,739,276 | ||
Management fees | 2,756,165 | ||
Distribution fees | 1,062,568 | ||
Transfer agent fees | 622,453 | ||
Trustees’ fees and expenses | 257,738 | ||
Due to brokers | 1,020,000 | ||
Unrealized depreciation on OTC forward exchange contracts | 4,146,170 | ||
Accrued expenses and other liabilities | 335,629 | ||
Total liabilities | 40,886,896 | ||
Net assets, at value | $ | 5,012,909,147 | |
Net assets consist of: | |||
Paid-in capital | $ | 5,098,521,609 | |
Undistributed net investment income | 131,683,929 | ||
Net unrealized appreciation (depreciation) | (18,600,546 | ) | |
Accumulated net realized gain (loss) | (198,695,845 | ) | |
Net assets, at value | $ | 5,012,909,147 |
26 Semiannual Report | The accompanying notes are an integral part of these financial statements.
franklintempleton.com
FRANKLIN MUTUAL QUEST FUND
FRANKLIN MUTUAL QUEST FUND
FINANCIAL STATEMENTS
Statement of Assets and Liabilities (continued) | ||
June 30, 2016 (unaudited) | ||
Class Z: | ||
Net assets, at value | $ | 3,434,726,692 |
Shares outstanding | 224,077,273 | |
Net asset value and maximum offering price per share | $ | 15.33 |
Class A: | ||
Net assets, at value | $ | 1,198,578,067 |
Shares outstanding | 79,243,947 | |
Net asset value per sharea | $ | 15.13 |
Maximum offering price per share (net asset value per share ÷ 94.25%) | $ | 16.05 |
Class C: | ||
Net assets, at value | $ | 334,256,578 |
Shares outstanding | 22,522,619 | |
Net asset value and maximum offering price per sharea | $ | 14.84 |
Class R: | ||
Net assets, at value | $ | 867,204 |
Shares outstanding | 58,045 | |
Net asset value and maximum offering price per share | $ | 14.94 |
Class R6: | ||
Net assets, at value | $ | 44,480,606 |
Shares outstanding | 2,903,410 | |
Net asset value and maximum offering price per share | $ | 15.32 |
aRedemption price is equal to net asset value less contingent deferred sales charges, if applicable. |
franklintempleton.com
The accompanying notes are an integral part of these financial statements. | Semiannual Report 27
FRANKLIN MUTUAL QUEST FUND
FINANCIAL STATEMENTS
Statement of Operations | |||
for the six months ended June 30, 2016 (unaudited) | |||
Investment income: | |||
Dividends: | |||
Unaffiliated issuers | $ | 75,946,515 | |
Non-controlled affiliates (Note 11) | 2,931,570 | ||
Interest: | |||
Unaffiliated issuers | 91,217,678 | ||
Non-controlled affiliates (Note 11) | 14,958,622 | ||
Income from securities loaned (net of fees and rebates) | 67,817 | ||
Total investment income | 185,122,202 | ||
Expenses: | |||
Management fees (Note 3a) | 16,334,783 | ||
Distribution fees: (Note 3c) | |||
Class A | 1,451,117 | ||
Class C | 1,631,255 | ||
Class R | 2,251 | ||
Transfer agent fees: (Note 3e) | |||
Class Z | 1,493,918 | ||
Class A | 525,101 | ||
Class C | 147,245 | ||
Class R | 406 | ||
Class R6 | 117 | ||
Custodian fees (Note 4) | 99,715 | ||
Reports to shareholders | 143,934 | ||
Registration and filing fees | 82,624 | ||
Professional fees | 154,707 | ||
Trustees’ fees and expenses | 86,844 | ||
Dividends and/or interest on securities sold short | 96,648 | ||
Other | 61,022 | ||
Total expenses | 22,311,687 | ||
Expense reductions (Note 4) | (5,651 | ) | |
Expenses waived/paid by affiliates (Note 3f) | (2,693 | ) | |
Net expenses | 22,303,343 | ||
Net investment income | 162,818,859 | ||
Realized and unrealized gains (losses): | |||
Net realized gain (loss) from: | |||
Investments: | |||
Unaffiliated issuers | (27,728 | ) | |
Non-controlled affiliates (Note 11) | (4,461,623 | ) | |
Written options | 836,162 | ||
Foreign currency transactions | 27,023,142 | ||
Futures contracts | 901,761 | ||
Securities sold short | (291,919 | ) | |
Net realized gain (loss) | 23,979,795 | ||
Net change in unrealized appreciation (depreciation) on: | |||
Investments | 79,263,910 | ||
Translation of other assets and liabilities denominated in foreign currencies | (8,774,388 | ) | |
Written options | (27,458 | ) | |
Futures contracts | 11,943,239 | ||
Net change in unrealized appreciation (depreciation) | 82,405,303 | ||
Net realized and unrealized gain (loss) | 106,385,098 | ||
Net increase (decrease) in net assets resulting from operations | $ | 269,203,957 |
28 Semiannual Report | The accompanying notes are an integral part of these financial statements.
franklintempleton.com
FRANKLIN MUTUAL QUEST FUND
FINANCIAL STATEMENTS
Statements of Changes in Net Assets | ||||||
Six Months Ended | ||||||
June 30, 2016 | Year Ended | |||||
(unaudited) | December 31, 2015 | |||||
Increase (decrease) in net assets: | ||||||
Operations: | ||||||
Net investment income | $ | 162,818,859 | $ | 184,227,613 | ||
Net realized gain (loss) | 23,979,795 | 10,961,303 | ||||
Net change in unrealized appreciation (depreciation) | 82,405,303 | (514,843,848 | ) | |||
Net increase (decrease) in net assets resulting from operations | 269,203,957 | (319,654,932 | ) | |||
Distributions to shareholders from: | ||||||
Net investment income: | ||||||
Class Z | — | (163,207,971 | ) | |||
Class A | — | (51,862,885 | ) | |||
Class C | — | (12,107,464 | ) | |||
Class R | — | (37,204 | ) | |||
Class R6 | — | (1,902,104 | ) | |||
Net realized gains: | ||||||
Class Z | — | (36,346,618 | ) | |||
Class A | — | (12,624,545 | ) | |||
Class C | — | (3,609,519 | ) | |||
Class R | — | (8,573 | ) | |||
Class R6 | — | (400,346 | ) | |||
Total distributions to shareholders | — | (282,107,229 | ) | |||
Capital share transactions: (Note 2) | ||||||
Class Z | (326,614,534 | ) | (123,816,554 | ) | ||
Class A | (70,735,015 | ) | (48,647,999 | ) | ||
Class C | (20,928,533 | ) | (20,106,509 | ) | ||
Class R | (82,676 | ) | 330,459 | |||
Class R6 | 582,549 | 1,720,060 | ||||
Total capital share transactions | (417,778,209 | ) | (190,520,543 | ) | ||
Net increase (decrease) in net assets | (148,574,252 | ) | (792,282,704 | ) | ||
Net assets: | ||||||
Beginning of period | 5,161,483,399 | 5,953,766,103 | ||||
End of period | $ | 5,012,909,147 | $ | 5,161,483,399 | ||
Undistributed net investment income (distributions in excess of net investment income) included | ||||||
in net assets: | ||||||
End of period | $ | 131,683,929 | $ | (31,134,930 | ) |
franklintempleton.com
The accompanying notes are an integral part of these financial statements. | Semiannual Report 29
FRANKLIN MUTUAL QUEST FUND
Notes to Financial Statements (unaudited)
1. Organization and Significant Accounting Policies
Franklin Mutual Series Funds (Trust) is registered under the Investment Company Act of 1940 (1940 Act) as an open-end management investment company, consisting of seven separate funds and applies the specialized accounting and reporting guidance in U.S. Generally Accepted Accounting Principles (U.S. GAAP). Franklin Mutual Quest Fund (Fund) is included in this report. The financial statements of the remaining funds in the Trust are presented separately. The Fund offers five classes of shares: Class Z, Class A, Class C, Class R and Class R6. Each class of shares differs by its initial sales load, contingent deferred sales charges, voting rights on matters affecting a single class, its exchange privilege and fees primarily due to differing arrangements for distribution and transfer agent fees.
The following summarizes the Fund’s significant accounting policies.
a. Financial Instrument Valuation
The Fund’s investments in financial instruments are carried at fair value daily. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date. The Fund calculates the net asset value per share as of 4 p.m. Eastern time each day the New York Stock Exchange (NYSE) is open for trading. Under compliance policies and procedures approved by the Trust’s Board of Trustees (the Board), the Fund’s administrator has responsibility for oversight of valuation, including leading the cross-functional Valuation Committee (VC). The VC provides administration and oversight of the Fund’s valuation policies and procedures, which are approved annually by the Board. Among other things, these procedures allow the Fund to utilize independent pricing services, quotations from securities and financial instrument dealers, and other market sources to determine fair value.
Equity securities and derivative financial instruments (derivatives) listed on an exchange or on the NASDAQ National Market System are valued at the last quoted sale price or the official closing price of the day, respectively. Foreign equity securities are valued as of the close of trading on the foreign stock exchange on which the security is primarily traded or as of 4 p.m. Eastern time whichever is earlier. The value is then converted into its U.S. dollar equivalent at the foreign exchange rate in effect at 4 p.m. Eastern time on the day that the value of the security is determined. Over-the-counter (OTC) securities are valued within the range of the most recent quoted bid and ask prices. Securities that trade in multiple markets or on multiple exchanges are valued according to the broadest and most representative market. Certain equity securities are valued based upon fundamental characteristics or relationships to similar securities.
Debt securities generally trade in the OTC market rather than on a securities exchange. The Fund’s pricing services use multiple valuation techniques to determine fair value. In instances where sufficient market activity exists, the pricing services may utilize a market-based approach through which quotes from market makers are used to determine fair value. In instances where sufficient market activity may not exist or is limited, the pricing services also utilize proprietary valuation models which may consider market characteristics such as benchmark yield curves, credit spreads, estimated default rates, anticipated market interest rate volatility, coupon rates, anticipated timing of principal repayments, underlying collateral, and other unique security features in order to estimate the relevant cash flows, which are then discounted to calculate the fair value. Securities denominated in a foreign currency are converted into their U.S. dollar equivalent at the foreign exchange rate in effect at 4 p.m. Eastern time on the date that the values of the foreign debt securities are determined.
Certain derivatives trade in the OTC market. The Fund’s pricing services use various techniques including industry standard option pricing models and proprietary discounted cash flow models to determine the fair value of those instruments. The Fund’s net benefit or obligation under the derivative contract, as measured by the fair value of the contract, is included in net assets.
The Fund has procedures to determine the fair value of financial instruments for which market prices are not reliable or readily available. Under these procedures, the VC convenes on a regular basis to review such financial instruments and considers a number of factors, including significant unobservable valuation inputs, when arriving at fair value. The VC primarily employs a market-based approach which may use related or comparable assets or liabilities, recent transactions, market multiples, book values, and other relevant information for the investment to determine the fair value of the investment. An income-based valuation approach may also be used in which the anticipated future cash flows of the investment are discounted to calculate fair value. Discounts may also be applied due to the nature or duration of any restrictions on the disposition of the investments. Due to the inherent uncertainty of valuations of such
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investments, the fair values may differ significantly from the values that would have been used had an active market existed. The VC employs various methods for calibrating these valuation approaches including a regular review of key inputs and assumptions, transactional back-testing or disposition analysis, and reviews of any related market activity.
Trading in securities on foreign securities stock exchanges and OTC markets may be completed before 4 p.m. Eastern time. In addition, trading in certain foreign markets may not take place on every NYSE business day. Occasionally, events occur between the time at which trading in a foreign security is completed and the close of the NYSE that might call into question the reliability of the value of a portfolio security held by the Fund. As a result, differences may arise between the value of the Fund’s portfolio securities as determined at the foreign market close and the latest indications of value at the close of the NYSE. In order to minimize the potential for these differences, the VC monitors price movements following the close of trading in foreign stock markets through a series of country specific market proxies (such as baskets of American Depositary Receipts, futures contracts and exchange traded funds). These price movements are measured against established trigger thresholds for each specific market proxy to assist in determining if an event has occurred that may call into question the reliability of the values of the foreign securities held by the Fund. If such an event occurs, the securities may be valued using fair value procedures, which may include the use of independent pricing services.
When the last day of the reporting period is a non-business day, certain foreign markets may be open on those days that the NYSE is closed, which could result in differences between the value of the Fund’s portfolio securities on the last business day and the last calendar day of the reporting period. Any significant security valuation changes due to an open foreign market are adjusted and reflected by the Fund for financial reporting purposes.
b. Foreign Currency Translation
Portfolio securities and other assets and liabilities denominated in foreign currencies are translated into U.S. dollars based on the exchange rate of such currencies against U.S. dollars on the date of valuation. The Fund may enter into foreign currency exchange contracts to facilitate transactions denominated in a foreign currency. Purchases and sales of securities, income and expense items denominated in foreign currencies are translated into U.S. dollars at the exchange rate in effect on the transaction date. Portfolio securities and assets and liabilities denominated in foreign currencies contain risks that those currencies will decline in value relative to the U.S. dollar. Occasionally, events may impact the availability or reliability of foreign exchange rates used to convert the U.S. dollar equivalent value. If such an event occurs, the foreign exchange rate will be valued at fair value using procedures established and approved by the Board.
The Fund does not separately report the effect of changes in foreign exchange rates from changes in market prices on securities held. Such changes are included in net realized and unrealized gain or loss from investments in the Statement of Operations.
Realized foreign exchange gains or losses arise from sales of foreign currencies, currency gains or losses realized between the trade and settlement dates on securities transactions and the difference between the recorded amounts of dividends, interest, and foreign withholding taxes and the U.S. dollar equivalent of the amounts actually received or paid. Net unrealized foreign exchange gains and losses arise from changes in foreign exchange rates on foreign denominated assets and liabilities other than investments in securities held at the end of the reporting period.
c. Securities Purchased on a Delayed Delivery Basis
The Fund purchases securities on a delayed delivery basis, with payment and delivery scheduled for a future date. These transactions are subject to market fluctuations and are subject to the risk that the value at delivery may be more or less than the trade date purchase price. Although the Fund will generally purchase these securities with the intention of holding the securities, it may sell the securities before the settlement date. Sufficient assets have been segregated for these securities.
d. Derivative Financial Instruments
The Fund invested in derivatives in order to manage risk or gain exposure to various other investments or markets. Derivatives are financial contracts based on an underlying or notional amount, require no initial investment or an initial net investment that is smaller than would normally be required to have a similar response to changes in market factors, and require or permit net settlement. Derivatives contain various risks including the potential inability of the counterparty to fulfill their obligations under the terms of the contract, the potential for an illiquid secondary market, and/or the potential for market
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1. Organization and Significant Accounting
Policies (continued)
d. Derivative Financial Instruments (continued)
movements which expose the Fund to gains or losses in excess of the amounts shown in the Statement of Assets and Liabilities. Realized gain and loss and unrealized appreciation and depreciation on these contracts for the period are included in the Statement of Operations.
Derivative counterparty credit risk is managed through a formal evaluation of the creditworthiness of all potential counter-parties. The Fund attempts to reduce its exposure to counterparty credit risk on OTC derivatives, whenever possible, by entering into International Swaps and Derivatives Association (ISDA) master agreements with certain counterparties. These agreements contain various provisions, including but not limited to collateral requirements, events of default, or early termination. Termination events applicable to the counterparty include certain deteriorations in the credit quality of the counterparty. Termination events applicable to the Fund include failure of the Fund to maintain certain net asset levels and/or limit the decline in net assets over various periods of time. In the event of default or early termination, the ISDA master agreement gives the non-defaulting party the right to net and close-out all transactions traded, whether or not arising under the ISDA agreement, to one net amount payable by one counterparty to the other. However, absent an event of default or early termination, OTC derivative assets and liabilities are presented gross and not offset in the Statement of Assets and Liabilities. Early termination by the counterparty may result in an immediate payment by the Fund of any net liability owed to that counterparty under the ISDA agreement. At June 30, 2016, the Fund had no OTC derivatives in a net liability position for such contracts.
Collateral requirements differ by type of derivative. Collateral or initial margin requirements are set by the broker or exchange clearing house for exchange traded and centrally cleared derivatives. Initial margin deposited is held at the exchange and can be in the form of cash and/or securities. For OTC derivatives traded under an ISDA master agreement, posting of collateral is required by either the Fund or the applicable coun-terparty if the total net exposure of all OTC derivatives with the applicable counterparty exceeds the minimum transfer amount, which typically ranges from $100,000 to $250,000, and can vary depending on the counterparty and the type of the agreement. Generally, collateral is determined at the close of Fund business each day and any additional collateral required due to changes in derivative values may be delivered by the Fund or the counterparty within a few business days. Collateral pledged and/or received by the Fund for OTC derivatives, if any, is held in segregated accounts with the Fund’s custodian/ counterparty broker and can be in the form of cash and/or securities. Unrestricted cash may be invested according to the Fund’s investment objectives. To the extent that the amounts due to the Fund from its counterparties are not subject to collateralization or are not fully collateralized, the Fund bears the risk of loss from counterparty non-performance.
At June 30, 2016, the Fund received $5,897,536 in United Kingdom Treasury Bonds and U.S. Treasury Bonds and Notes as collateral for derivatives.
The Fund entered into exchange traded futures contracts primarily to manage exposure to certain foreign currencies. A futures contract is an agreement between the Fund and a counterparty to buy or sell an asset for a specified price on a future date. Required initial margins are pledged by the Fund, and the daily change in fair value is accounted for as a variation margin payable or receivable in the Statement of Assets and Liabilities.
The Fund entered into OTC forward exchange contracts primarily to manage exposure to certain foreign currencies. A forward exchange contract is an agreement between the Fund and a counterparty to buy or sell a foreign currency at a specific exchange rate on a future date.
The Fund purchased or wrote exchange traded and/or OTC option contracts primarily to manage exposure to equity price and foreign exchange rate risk. An option is a contract entitling the holder to purchase or sell a specific amount of shares or units of an asset or notional amount of a swap (swaption), at a specified price. When an option is purchased or written, an amount equal to the premium paid or received is recorded as an asset or liability, respectively. Upon exercise of an option, the acquisition cost or sales proceeds of the underlying investment is adjusted by any premium received or paid. Upon expiration of an option, any premium received or paid is recorded as a realized gain or loss. Upon closing an option other than through expiration or exercise, the difference between the premium received or paid and the cost to close the position is recorded as a realized gain or loss.
See Notes 7 and 10 regarding investment transactions and other derivative information, respectively.
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e. Restricted Cash
At June 30, 2016, the Fund held restricted cash in connection with investments in certain derivative securities. Restricted cash is held in a segregated account with the Fund’s custodian/ counterparty broker and is reflected in the Statement of Assets and Liabilities.
f. Securities Sold Short
The Fund is engaged in selling securities short, which obligates the Fund to replace a borrowed security with the same security at current fair value. The Fund incurs a loss if the price of the security increases between the date of the short sale and the date on which the Fund replaces the borrowed security. The Fund realizes a gain if the price of the security declines between those dates. Gains are limited to the price at which the Fund sold the security short, while losses are potentially unlimited in size.
The Fund is required to establish a margin account with the broker lending the security sold short. While the short sale is outstanding, the broker retains the proceeds of the short sale to the extent necessary to meet margin requirements until the short position is closed out. A deposit must also be maintained with the Fund’s custodian/counterparty broker consisting of cash and/or securities having a value equal to a specified percentage of the value of the securities sold short. The Fund is obligated to pay fees for borrowing the securities sold short and is required to pay the counterparty any dividends and/or interest due on securities sold short. Such dividends and/or interest and any security borrowing fees are recorded as an expense to the Fund. At June 30, 2016, the Fund had no securities sold short.
g. Securities Lending
The Fund participates in an agency based securities lending program to earn additional income. The Fund receives cash collateral against the loaned securities in an amount equal to at least 102% of the fair value of the loaned securities. Collateral is maintained over the life of the loan in an amount not less than 100% of the fair value of loaned securities, as determined at the close of Fund business each day; any additional collateral required due to changes in security values is delivered to the Fund on the next business day. The collateral is deposited into a joint cash account with other funds and is used to invest in a money market fund managed by Franklin Advisers, Inc., an affiliate of the Fund, and/or a joint repurchase agreement. The Fund may receive income from the investment of cash collateral, in addition to lending fees and rebates paid by the borrower. Income from securities loaned, net of fees paid to the securities lending agent and/or third-party vendor, is reported separately in the Statement of Operations. The Fund bears the market risk with respect to the collateral investment, securities loaned, and the risk that the agent may default on its obligations to the Fund. If the borrower defaults on its obligation to return the securities loaned, the Fund has the right to repurchase the securities in the open market using the collateral received. The securities lending agent has agreed to indemnify the Fund in the event of default by a third party borrower. At June 30, 2016, the Fund had no securities on loan.
h. Senior Floating Rate Interests
The Fund invests in senior secured corporate loans that pay interest at rates which are periodically reset by reference to a base lending rate plus a spread. These base lending rates are generally the prime rate offered by a designated U.S. bank or the London InterBank Offered Rate (LIBOR). Senior secured corporate loans often require prepayment of principal from excess cash flows or at the discretion of the borrower. As a result, actual maturity may be substantially less than the stated maturity. Senior secured corporate loans in which the Fund invests are generally readily marketable, but may be subject to certain restrictions on resale.
i. Income and Deferred Taxes
It is the Fund’s policy to qualify as a regulated investment company under the Internal Revenue Code. The Fund intends to distribute to shareholders substantially all of its taxable income and net realized gains to relieve it from federal income and excise taxes. As a result, no provision for U.S. federal income taxes is required.
The Fund may be subject to foreign taxation related to income received, capital gains on the sale of securities and certain foreign currency transactions in the foreign jurisdictions in which it invests. Foreign taxes, if any, are recorded based on the tax regulations and rates that exist in the foreign markets in which the Fund invests. When a capital gain tax is determined to apply, the Fund records an estimated deferred tax liability in an amount that would be payable if the securities were disposed of on the valuation date. As a result of several court cases, in certain countries across the European Union, the Fund filed additional tax reclaims for previously withheld taxes on dividends earned in those countries (EU reclaims). These additional filings are subject to various administrative proceedings by the local jurisdictions’ tax authorities within the European
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1. Organization and Significant Accounting
Policies (continued)
i. Income and Deferred Taxes (continued)
Union, as well as a number of related judicial proceedings. Income recognized, if any, for EU reclaims is reflected as other income in the Statement of Operations and any related receivable, if any, is reflected as European Union tax reclaims in the Statement of Assets and Liabilities. When uncertainty exists as to the ultimate resolution of these proceedings, the likelihood of receipt of these EU reclaims, and the potential timing of payment, no amounts are reflected in the financial statements.
The Fund may recognize an income tax liability related to its uncertain tax positions under U.S. GAAP when the uncertain tax position has a less than 50% probability that it will be sustained upon examination by the tax authorities based on its technical merits. As of June 30, 2016, the Fund has determined that no tax liability is required in its financial statements related to uncertain tax positions for any open tax years (or expected to be taken in future tax years). Open tax years are those that remain subject to examination and are based on each tax jurisdiction’s statute of limitation.
j. Security Transactions, Investment Income, Expenses and Distributions
Security transactions are accounted for on trade date. Realized gains and losses on security transactions are determined on a specific identification basis. Interest income and estimated expenses are accrued daily. Amortization of premium and accretion of discount on debt securities are included in interest income. Dividend income, and dividends declared on securities sold short are recorded on the ex-dividend date except for certain dividends from foreign securities where the dividend rate is not available. In such cases, the dividend is recorded as soon as the information is received by the Fund. Distributions to shareholders are recorded on the ex-dividend date and are determined according to income tax regulations (tax basis). Distributable earnings determined on a tax basis may differ from earnings recorded in accordance with U.S. GAAP. These differences may be permanent or temporary. Permanent differences are reclassified among capital accounts to reflect their tax character. These reclassifications have no impact on net assets or the results of operations. Temporary differences are not reclassified, as they may reverse in subsequent periods.
Common expenses incurred by the Trust are allocated among the funds based on the ratio of net assets of each fund to the combined net assets of the Trust. Fund specific expenses are charged directly to the fund that incurred the expense.
Realized and unrealized gains and losses and net investment income, not including class specific expenses, are allocated daily to each class of shares based upon the relative proportion of net assets of each class. Differences in per share distributions, by class, are generally due to differences in class specific expenses.
k. Accounting Estimates
The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the amounts of income and expenses during the reporting period. Actual results could differ from those estimates.
l. Guarantees and Indemnifications
Under the Trust’s organizational documents, its officers and trustees are indemnified by the Trust against certain liabilities arising out of the performance of their duties to the Trust. Additionally, in the normal course of business, the Trust, on behalf of the Fund, enters into contracts with service providers that contain general indemnification clauses. The Trust’s maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Trust that have not yet occurred. Currently, the Trust expects the risk of loss to be remote.
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2. Shares of Beneficial Interest
At June 30, 2016, there were an unlimited number of shares authorized (without par value). Transactions in the Fund’s shares were as follows:
Six Months Ended | Year Ended | ||||||||||
June 30, 2016 | December 31, 2015 | ||||||||||
Shares | Amount | Shares | Amount | ||||||||
Class Z Shares: | |||||||||||
Shares sold | 7,562,116 | $ | 109,654,971 | 12,954,163 | $ | 207,655,082 | |||||
Shares issued on reorganization | — | — | 1,132,300 | 17,641,382 | |||||||
Shares issued in reinvestment of distributions | — | — | 13,178,701 | 190,234,563 | |||||||
Shares redeemed | (30,780,055 | ) | (436,269,505 | ) | (33,954,727 | ) | (539,347,581 | ) | |||
Net increase (decrease) | (23,217,939 | ) | $ | (326,614,534 | ) | (6,689,563 | ) | $ | (123,816,554 | ) | |
Class A Shares: | |||||||||||
Shares sold | 4,584,943 | $ | 65,794,908 | 12,578,900 | $ | 198,023,725 | |||||
Shares issued on reorganization | — | — | 1,141,127 | 17,539,264 | |||||||
Shares issued in reinvestment of distributions | — | — | 4,438,917 | 63,336,516 | |||||||
Shares redeemed | (9,544,403 | ) | (136,529,923 | ) | (20,988,500 | ) | (327,547,504 | ) | |||
Net increase (decrease) | (4,959,460 | ) | $ | (70,735,015 | ) | (2,829,556 | ) | $ | (48,647,999 | ) | |
Class C Shares: | |||||||||||
Shares sold | 831,984 | $ | 11,730,616 | 2,190,012 | $ | 33,809,518 | |||||
Shares issued on reorganization | — | — | 448,682 | 6,761,645 | |||||||
Shares issued in reinvestment of distributions | — | — | 1,074,843 | 15,125,085 | |||||||
Shares redeemed | (2,318,236 | ) | (32,659,149 | ) | (4,927,958 | ) | (75,802,757 | ) | |||
Net increase (decrease) | (1,486,252 | ) | $ | (20,928,533 | ) | (1,214,421 | ) | $ | (20,106,509 | ) | |
Class R Shares: | |||||||||||
Shares sold | 8,222 | $ | 115,499 | 25,822 | $ | 411,526 | |||||
Shares issued in reinvestment of distributions | — | — | 3,246 | 45,776 | |||||||
Shares redeemed | (13,703 | ) | (198,175 | ) | (8,054 | ) | (126,843 | ) | |||
Net increase (decrease) | (5,481 | ) | $ | (82,676 | ) | 21,014 | $ | 330,459 | |||
Class R6 Shares: | |||||||||||
Shares sold | 238,153 | $ | 3,473,677 | 601,340 | $ | 9,629,497 | |||||
Shares issued in reinvestment of distributions | — | — | 159,785 | 2,302,450 | |||||||
Shares redeemed | (199,773 | ) | (2,891,128 | ) | (634,102 | ) | (10,211,887 | ) | |||
Net increase (decrease) | 38,380 | $ | 582,549 | 127,023 | $ | 1,720,060 |
3. Transactions with Affiliates
Franklin Resources, Inc. is the holding company for various subsidiaries that together are referred to as Franklin Templeton Investments. Certain officers and trustees of the Fund are also officers and/or directors of the following subsidiaries:
Subsidiary | Affiliation |
Franklin Mutual Advisers, LLC (Franklin Mutual) | Investment manager |
Franklin Templeton Services, LLC (FT Services) | Administrative manager |
Franklin Templeton Distributors, Inc. (Distributors) | Principal underwriter |
Franklin Templeton Investor Services, LLC (Investor Services) | Transfer agent |
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3. Transactions with Affiliates (continued)
a. Management Fees
The Fund pays an investment management fee to Franklin Mutual based on the average daily net assets of the Fund as follows:
Annualized Fee Rate | Net Assets | |
0.675 | % | Up to and including $5 billion |
0.645 | % | Over $5 billion, up to and including $7 billion |
0.625 | % | Over $7 billion, up to and including $10 billion |
0.615 | % | In excess of $10 billion |
For the period ended June 30, 2016, the annualized effective investment management fee rate was 0.675% of the Fund’s average daily net assets.
b. Administrative Fees
Under an agreement with Franklin Mutual, FT Services provides administrative services to the Fund. The fee is paid by Franklin Mutual based on the Fund’s average daily net assets, and is not an additional expense of the Fund.
c. Distribution Fees
The Board has adopted distribution plans for each share class, with the exception of Class Z and Class R6 shares, pursuant to Rule 12b-1 under the 1940 Act. Under the Fund’s Class A reimbursement distribution plan, the Fund reimburses Distributors for costs incurred in connection with the servicing, sale and distribution of the Fund’s shares up to the maximum annual plan rate. Under the Class A reimbursement distribution plan, costs exceeding the maximum for the current plan year cannot be reimbursed in subsequent periods. In addition, under the Fund’s Class C and R compensation distribution plans, the Fund pays Distributors for costs incurred in connection with the servicing, sale and distribution of the Fund’s shares up to the maximum annual plan rate for each class. The plan year, for purposes of monitoring compliance with the maximum annual plan rates, is February 1 through January 31 for each fund.
The maximum annual plan rates, based on the average daily net assets, for each class, are as follows:
Class A | 0.35 | % |
Class C | 1.00 | % |
Class R | 0.50 | % |
The Board has set the current rate at 0.25% per year for Class A shares until further notice and approval by the Board.
d. Sales Charges/Underwriting Agreements
Front-end sales charges and contingent deferred sales charges (CDSC) do not represent expenses of the Fund. These charges are deducted from the proceeds of sales of Fund shares prior to investment or from redemption proceeds prior to remittance, as applicable. Distributors has advised the Fund of the following commission transactions related to the sales and redemptions of the Fund’s shares for the period:
Sales charges retained net of commissions paid to unaffiliated broker/dealers | $ | 145,605 |
CDSC retained | $ | 10,985 |
e. Transfer Agent Fees
Each class of shares, except for Class R6, pays transfer agent fees to Investor Services for its performance of shareholder servicing obligations and reimburses Investor Services for out of pocket expenses incurred, including shareholder servicing fees paid to third parties. These fees are allocated daily based upon their relative proportion of such classes’ aggregate net assets. Class R6 pays Investor Services transfer agent fees specific to that class.
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For the period ended June 30, 2016, the Fund paid transfer agent fees of $2,166,787 of which $1,113,918 was retained by Investor Services.
f. Investments in Affiliated Management Investment Companies
The Fund invests in one or more affiliated management investment companies for purposes other than exercising a controlling influence over the management or policies. Management fees paid by the Fund are waived on assets invested in the affiliated management investment companies, as noted in the Statement of Operations, in an amount not to exceed the management and administrative fees paid directly or indirectly by each affiliate.
Number | % of Affiliated | ||||||||
of Shares | Number of | Fund Shares | |||||||
Held at | Shares Held | Value | Realized | Outstanding | |||||
Beginning | Gross | Gross | at End | at End | Investment | Gain | Held at End | ||
of Period | Additions | Reductions | of Period | of Period | Income | (Loss) | of Period | ||
Non-Controlled Affiliates | |||||||||
Institutional Fiduciary Trust | |||||||||
Money Market Portfolio | — | 4,116,000 | (4,116,000 | ) | — | $— | $— | $— | —% |
g. Waiver and Expense Reimbursements
Investor Services has contractually agreed in advance to waive or limit its fees so that the Class R6 transfer agent fees do not exceed 0.01% until April 30, 2017. There were no Class R6 transfer agent fees waived during the period ended June 30, 2016.
4. Expense Offset Arrangement
The Fund has entered into an arrangement with its custodian whereby credits realized as a result of uninvested cash balances are used to reduce a portion of the Fund’s custodian expenses. During the period ended June 30, 2016, the custodian fees were reduced as noted in the Statement of Operations.
5. Independent Trustees’ Retirement Plan
On January 1, 1993, the Trust adopted an Independent Trustees’ Retirement Plan (Plan). The Plan is an unfunded defined benefit plan that provides benefit payments to Trustees whose length of service and retirement age meets the eligibility requirements of the Plan. Benefits under the Plan are based on years of service and fees paid to each trustee at the time of retirement. Effective in December 1996, the Plan was closed to new participants.
During the period ended June 30, 2016, the Fund’s projected benefit obligation and benefit payments under the Plan were as follows:
aProjected benefit obligation at June 30, 2016 | $ | 258,191 | |
bIncrease in projected benefit obligation | $ | 8,184 | |
Benefit payments made to retired trustees | $ | (2,481 | ) |
aThe projected benefit obligation is included in trustees’ fees and expenses in the Statement of Assets and Liabilities.
bThe increase in projected benefit obligation is included in trustees’ fees and expenses in the Statement of Operations.
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NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
6. Income Taxes
For tax purposes, capital losses may be carried over to offset future capital gains. Capital loss carryforwards with no expiration, if any, must be fully utilized before those losses with expiration dates.
At December 31, 2015, capital loss carryforwards were as follows: | |||
Capital loss carryforwards subject to expiration: | |||
2016 | $ | 44,141,197 | |
2017 | 73,758,943 | ||
2018 | 18,751,585 | ||
Capital loss carryforwards not subject to expiration: | |||
Short term | 5,699,192 | ||
Long term | 53,864,143 | ||
Total capital loss carryforwards | $ | 196,215,060 | a |
aIncludes $140,892,142 from the merged Franklin Mutual Recovery Fund, which may be carried over to offset future capital gains, subject to certain limitations.
At June 30, 2016, the cost of investments and net unrealized appreciation (depreciation) for income tax purposes were as follows:
Cost of investments | $ | 5,032,416,934 | |
Unrealized appreciation | $ | 472,047,283 | |
Unrealized depreciation | (553,860,294 | ) | |
Net unrealized appreciation (depreciation) | $ | (81,813,011 | ) |
Differences between income and/or capital gains as determined on a book basis and a tax basis are primarily due to differing treatments of foreign currency transactions, bond discounts and premiums, tax straddles and wash sales.
7. Investment Transactions
Purchases and sales of investments (excluding short term securities and securities sold short) for the period ended June 30, 2016, aggregated $1,132,051,597 and $1,685,183,713 respectively.
Transactions in options written during the period ended June 30, 2016, were as follows: | |||||
Number of | |||||
Contracts | Premiums | ||||
Options outstanding at December 31, 2015 | 1,000 | $ | 29,458 | ||
Options written | 7,500 | 2,249,666 | |||
Options expired | (1,000 | ) | (29,458 | ) | |
Options exercised | — | — | |||
Options closed | (7,500 | ) | (2,249,666 | ) | |
Options outstanding at June 30, 2016 | — | $ | — | ||
See Notes 1(d) and 10 regarding derivative financial instruments and other derivative information, respectively. |
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8. Credit Risk and Defaulted Securities
The Fund may purchase the pre-default or defaulted debt of distressed companies. Distressed companies are financially troubled and could be or are already involved in financial restructuring or bankruptcy. Risks associated with purchasing these securities include the possibility that the bankruptcy or other restructuring process takes longer than expected, or that distributions in restructuring are less than anticipated, either or both of which may result in unfavorable consequences to the Fund. If it becomes probable that the income on debt securities, including those of distressed companies, will not be collected, the Fund discontinues accruing income and recognizes an adjustment for uncollectible interest.
At June 30, 2016, the aggregate long value of distressed company securities for which interest recognition has been discontinued was $140,020,759, representing 2.8% of the Fund’s net assets. For information as to specific securities, see the accompanying Statement of Investments.
9. Restricted Securities
The Fund invests in securities that are restricted under the Securities Act of 1933 (1933 Act) or which are subject to legal, contractual, or other agreed upon restrictions on resale. Restricted securities are often purchased in private placement transactions, and cannot be sold without prior registration unless the sale is pursuant to an exemption under the 1933 Act. Disposal of these securities may require greater effort and expense, and prompt sale at an acceptable price may be difficult. The Fund may have registration rights for restricted securities. The issuer generally incurs all registration costs.
At June 30, 2016, the Fund held investments in restricted securities, excluding certain securities exempt from registration under the 1933 Act deemed to be liquid, as follows:
Principal | ||||||
Amount/ | ||||||
Shares/ | ||||||
Units/ | Acquisition | |||||
Warrants | Issuer | Dates | Cost | Value | ||
9,272 | Broadband Ventures III LLC, secured promissory note, 5.00%, 2/01/12 | 7/01/10 - 11/30/12 | $ | 9,272 | $ | — |
1,439,821 | CB FIM Coinvestors LLC | 1/15/09 - 6/02/09 | — | — | ||
870,767 | aEagle Bulk Shipping Inc | 3/30/16 | — | 343,648 | ||
17,934,688 | FIM Coinvestor Holdings I, LLC | 11/20/06 - 6/02/09 | — | — | ||
2,548,299 | International Automotive Components Group Brazil LLC | 4/13/06 - 12/26/08 | 1,692,334 | 41,953 | ||
19,924,658 | International Automotive Components Group North America LLC | 1/02/06 - 3/18/13 | 16,305,945 | 8,790,082 | ||
1,110,000 | bLee Enterprises Inc., wts., 12/31/22 | 3/31/14 | 1,490,026 | 815,194 | ||
224,279 | cSorenson Communications Inc., Membership Interests | 4/30/14 | — | 102,753,377 | ||
14,690 | Warrior Met Coal LLC, A | 9/19/14 - 12/04/14 | 19,293,267 | 1,480,993 | ||
34,356 | Warrior Met Coal LLC, B | 3/31/16 - 6/23/16 | 2,748,507 | 3,463,648 | ||
Total Restricted Securities (Value is 2.3% of Net Assets) | $ | 41,539,351 | $ | 117,688,895 |
aThe Fund also invests in unrestricted securities or other investments in the issuer, valued at $6,973,103 as of June 30, 2016.
bThe Fund also invests in unrestricted securities or other investments in the issuer, valued at $178,544,741 as of June 30, 2016.
cThe Fund also invests in unrestricted securities or other investments in the issuer, valued at $280,704,853 as of June 30, 2016.
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FRANKLIN MUTUAL QUEST FUND
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
10. Other Derivative Information
At June 30, 2016, the Fund’s investments in derivative contracts are reflected in the Statement of Assets and Liabilities as follows:
Asset Derivatives | Liability Derivatives | ||||||
Derivative Contracts Not | |||||||
Accounted for as Hedging | Statement of Assets and | Statement of Assets and | |||||
Instruments | Liabilities Location | Fair Value | Liabilities Location | Fair Value | |||
Foreign exchange contracts | Investments in securities, at | $ | 88 | a | |||
value | |||||||
Variation margin | 15,871,585 | b | |||||
Unrealized appreciation on | 11,240,995 | Unrealized depreciation on | $ | 4,146,170 | |||
OTC forward exchange | OTC forward exchange | ||||||
contracts | contracts | ||||||
Totals | $ | 27,112,668 | $ | 4,146,170 |
aPurchased option contracts are included in investments in securities, at value in the Statement of Assets and Liabilities.
bThis amount reflects the cumulative appreciation (depreciation) of futures contracts as reported in the Statement of Investments. Only the variation margin receivable/payable
at period end is separately reported within the Statement of Assets and Liabilities. Prior variation margin movements were recorded to cash upon receipt or payment.
For the period ended June 30, 2016, the effect of derivative contracts in the Fund’s Statement of Operations was as follows:
Net Change in | ||||||||
Unrealized | ||||||||
Derivative Contracts | Net Realized | Appreciation | ||||||
Not Accounted for as | Statement of Operations | Gain (Loss) | Statement of | (Depreciation) | ||||
Hedging Instruments | Locations | for the Period | Operations Locations | for the Period | ||||
Net realized gain (loss) from: | Net change in unrealized | |||||||
appreciation (depreciation) on: | ||||||||
Foreign exchange contracts | Investments | $ | (641,504 | )a | ||||
Foreign currency transactions | $ | 24,402,412 | b | Translation of other assets and | (8,426,413 | )b | ||
liabilities denominated in | ||||||||
foreign currencies | ||||||||
Futures contracts | 901,761 | Futures contracts | 11,943,239 | |||||
Equity contracts | Investments | 162,463 | a | |||||
Written options | 836,162 | Written options | (27,458 | ) | ||||
Totals | $ | 26,302,798 | $ | 2,847,864 |
aPurchased option contracts are included in net realized gain (loss) from investments and net change in unrealized appreciation (depreciation) on investments in the Statement
of Operations.
bForward exchange contracts are included in net realized gain (loss) from foreign currency transactions and net change in unrealized appreciation (depreciation) on translation
of other assets and liabilities denominated in foreign currencies in the Statement of Operations.
For the period ended June 30, 2016, the average month end fair value of derivatives represented 0.6% of average month end net
assets. The average month end number of open derivative contracts for the period was 105.
See Notes 1(d) and 7 regarding derivative financial instruments and investment transactions, respectively.
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NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
11. Holdings of 5% Voting Securities of Portfolio Companies
The 1940 Act defines “affiliated companies” to include investments in portfolio companies in which a fund owns 5% or more of the outstanding voting securities. Investments in “affiliated companies” for the Fund for the period ended June 30, 2016, were as shown below.
Number of | Number of | |||||||||
Shares/Warrants/ | Shares/Warrants/ | |||||||||
Principal Amount | Principal Amount | Value at | ||||||||
Held at Beginning | Gross | Gross | Held at End of | End of | Investment | Realized | ||||
Name of Issuer | of Period | Additions | Reductions | of Period | Period | Income | Gain(loss) | |||
Non-Controlled Affiliates | ||||||||||
Advanced Emissions Solutions | ||||||||||
Inc | 1,724,209 | — | — | 1,724,209 | $ | 12,371,200 | $ | — | $ | — |
Advanced Emissions Solutions | ||||||||||
Inc., Term Loan, 15.00%, | ||||||||||
7/08/16 | 12,366,667 | — | (3,500,000) | 8,866,667 | 8,750,868 | 287,408 | 60,835 | |||
Eastman Kodak Co | 3,728,145 | — | (150,447) | 3,577,698 | 57,529,384 | — | (2,083,009) | |||
Eastman Kodak Co., Second | ||||||||||
Lien Term Loan, 10.75%, | ||||||||||
9/03/20 | 51,000,000 | 41,085,701 | — | 92,085,701 | 85,179,273 | 3,189,498 | — | |||
Eastman Kodak Co., Term | ||||||||||
Loan, 7.25%, 9/03/19 | 52,047,405 | 4,143,750 | (17,698,416) | 38,492,739 | 37,530,420 | 921,909 | (2,458,262) | |||
Eastman Kodak Co., wts., | ||||||||||
9/03/18 | 48,582 | — | — | 48,582 | 200,643 | — | — | |||
Eastman Kodak Co., wts., | ||||||||||
9/03/18 | 48,582 | — | — | 48,582 | 170,523 | — | — | |||
Lee Enterprises Inc./IA | 4,824,268 | — | — | 4,824,268 | 9,214,352 | — | — | |||
Lee Enterprises Inc., Second | ||||||||||
Lien Term Loan, 12.00%, | ||||||||||
12/15/22 | 25,448,045 | 42,902,864 | (230,585) | 68,120,324 | 71,270,889 | 2,232,430 | 10,512 | |||
Lee Enterprises Inc., senior | ||||||||||
secured note, first lien, 144A, | ||||||||||
9.50%, 3/15/22 | 99,050,000 | — | — | 99,050,000 | 98,059,500 | 4,678,737 | — | |||
Lee Enterprises Inc., wts., | ||||||||||
12/31/22 | 1,110,000 | — | — | 1,110,000 | 815,194 | — | — | |||
New Media Investment Group | ||||||||||
Inc | 4,441,772 | — | — | 4,441,772 | 80,262,820 | 2,931,570 | — | |||
New Media Holdings II LLC, | ||||||||||
Fourth Amendment | ||||||||||
Replacement Term Loan, | ||||||||||
7.25%, 6/04/20 | 113,279,762 | — | (572,125) | 112,707,637 | 112,244,409 | 3,648,640 | 8,301 | |||
Total Affiliated Securities (Value is 11.4% of Net Assets) | $ | 573,599,475 | $ | 17,890,192 | $ | (4,461,623) |
12. Credit Facility
The Fund, together with other U.S. registered and foreign investment funds (collectively, Borrowers), managed by Franklin Temple-ton Investments, are borrowers in a joint syndicated senior unsecured credit facility totaling $2 billion (Global Credit Facility) which matures on February 10, 2017. This Global Credit Facility provides a source of funds to the Borrowers for temporary and emergency purposes, including the ability to meet future unanticipated or unusually large redemption requests.
Under the terms of the Global Credit Facility, the Fund shall, in addition to interest charged on any borrowings made by the Fund and other costs incurred by the Fund, pay its share of fees and expenses incurred in connection with the implementation and maintenance of the Global Credit Facility, based upon its relative share of the aggregate net assets of all of the Borrowers, including an annual commitment fee of 0.07% based upon the unused portion of the Global Credit Facility. Effective February 12, 2016, the annual commitment fee is 0.15%. These fees are reflected in other expenses in the Statement of Operations. During the period ended June 30, 2016, the Fund did not use the Global Credit Facility.
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NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
13. Fair Value Measurements
The Fund follows a fair value hierarchy that distinguishes between market data obtained from independent sources (observable inputs) and the Fund’s own market assumptions (unobservable inputs). These inputs are used in determining the value of the Fund’s financial instruments and are summarized in the following fair value hierarchy:
- Level 1 – quoted prices in active markets for identical financial instruments
- Level 2 – other significant observable inputs (including quoted prices for similar financial instruments, interest rates, prepay- ment speed, credit risk, etc.)
- Level 3 – significant unobservable inputs (including the Fund’s own assumptions in determining the fair value of financial instruments)
The input levels are not necessarily an indication of the risk or liquidity associated with financial instruments at that level.
For movements between the levels within the fair value hierarchy, the Fund has adopted a policy of recognizing the transfers as of the date of the underlying event which caused the movement.
A summary of inputs used as of June 30, 2016, in valuing the Fund’s assets and liabilities carried at fair value, is as follows:
Level 1 | Level 2 | Level 3 | Total | |||||||
Assets: | ||||||||||
Investments in Securities: | ||||||||||
Equity Investments:a | ||||||||||
Auto Components | $ | — | $ | — | $ | 8,832,035 | $ | 8,832,035 | ||
Communications Equipment | — | — | 102,753,377 | 102,753,377 | ||||||
Energy Equipment & Services | — | — | 228,393 | 228,393 | ||||||
Marine | — | — | 343,648 | 343,648 | ||||||
Media | 170,403,502 | — | 815,194 | 171,218,696 | ||||||
Oil, Gas & Consumable Fuels | 267,539,387 | — | 4,944,641 | 272,484,028 | ||||||
All Other Equity Investmentsb | 1,943,934,608 | — | — c | 1,943,934,608 | ||||||
Corporate Bonds, Notes and Senior Floating Rate | ||||||||||
Interests | — | 1,550,383,051 | — | 1,550,383,051 | ||||||
Corporate Bonds, Notes and Senior Floating Rate | ||||||||||
Interests in Reorganization | — | 140,020,759 | — c | 140,020,759 | ||||||
Companies in Liquidation | 1,688,089 | 14,417,660 | 2,502,814 | c | 18,608,563 | |||||
Municipal Bonds | — | 49,647,331 | — | 49,647,331 | ||||||
Options Purchased | — | 88 | — | 88 | ||||||
Short Term Investments | 667,149,346 | 25,000,000 | — | 692,149,346 | ||||||
Total Investments in Securities | $ | 3,050,714,932 | $ | 1,779,468,889 | $ | 120,420,102 | $ | 4,950,603,923 | ||
Other Financial Instruments | ||||||||||
Futures Contracts | $ | 15,871,585 | $ | — | $ | — | $ | 15,871,585 | ||
Forward Exchange Contracts | — | 11,240,995 | — | 11,240,995 | ||||||
Total Other Financial Instruments | $ | 15,871,585 | $ | 11,240,995 | $ | — | $ | 27,112,580 | ||
Liabilities: | ||||||||||
Other Financial Instruments | ||||||||||
Forward Exchange Contracts | $ | — | $ | 4,146,170 | $ | — | $ | 4,146,170 | ||
aIncludes common, convertible preferred and preferred stocks as well as other equity investments. | ||||||||||
bFor detailed categories, see the accompanying Statement of Investments. | ||||||||||
cIncludes securities determined to have no value at June 30, 2016. |
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NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
A reconciliation of assets in which Level 3 inputs are used in determining fair value is presented when there are significant Level 3 financial instruments at the end of the period. At June 30, 2016, the reconciliation of assets is as follows:
Net Change in | |||||||||||||||||||||||
Unrealized | |||||||||||||||||||||||
Appreciation | |||||||||||||||||||||||
Net | Net | (Depreciation) | |||||||||||||||||||||
Balance at | Transfers | Transfers | Realized | Unrealized | Balance | on Assets | |||||||||||||||||
Beginning of | Into | Out of | Cost Basis | Gain | Appreciation | at End | Held at Period | ||||||||||||||||
Period | Purchases | Sales | Level 3a | Level 3b | Adjustments | (Loss) | ( (Depreciation) | of Period | End | ||||||||||||||
Assets: | |||||||||||||||||||||||
Investments in Securities: | |||||||||||||||||||||||
Equity Investments:c | |||||||||||||||||||||||
Auto Components | $ | 10,782,830 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | (1,950,795 | ) $ | 8,832,035 | $ | (1,950,795 | ) | ||
Communications | |||||||||||||||||||||||
Equipment | 47,098,569 | — | — | — | — | — | — | 55,654,808 | 102,753,377 | 55,654,808 | |||||||||||||
Energy Equipment & | |||||||||||||||||||||||
Services | 548,142 | — | — | — | — | — | — | (319,749 | ) | 228,393 | (319,749 | ) | |||||||||||
Marine | — | — | — | 282,129 | — | — | — | 61,519 | 343,648 | 61,519 | |||||||||||||
Media | — | — | — | 815,194 | — | — | — | — | 815,194 | — | |||||||||||||
Oil, Gas & | |||||||||||||||||||||||
Consumable | |||||||||||||||||||||||
Fuels | — | 2,748,507 | — | 1,763,897 | — | — | — | 432,237 | 4,944,641 | 432,237 | |||||||||||||
Corporate Bonds, | |||||||||||||||||||||||
Notes and Senior | |||||||||||||||||||||||
Floating Rate | |||||||||||||||||||||||
Interests in | |||||||||||||||||||||||
Reorganization | 16,582 | d | — | — | — | (2,266 | ) | — | — | (14,316 | ) | —d | — | ||||||||||
Companies in | |||||||||||||||||||||||
Liquidation | 2,154,962 | d | — | — | — | — | — | — | 347,852 | 2,502,814 | d | 347,852 | |||||||||||
Total Investments in | |||||||||||||||||||||||
Securities | $ | 60,601,085 | $ | 2,748,507 | $ | — | $ | 2,861,220 | $ | (2,266 | ) | $ | — | $ | — | $ | 54,211,556 | $120,420,102 | $ | 54,225,872 |
aThe investments were transferred into Level 3 as a result of their value being determined using a significant unobservable input. May include amounts related to a corporate action.
bThe investments were transferred out of Level 3 as a result of the removal of a significant unobservable valuation input.
cIncludes common and preferred stocks as well as other equity investments.
dIncludes securities determined to have no value.
Significant unobservable valuation inputs developed by the VC for material Level 3 financial instruments and impact to fair value
as a result of changes in unobservable valuation inputs as of June 30, 2016, are as follows:
Impact to | |||||||
Fair Value | |||||||
Fair Value at End | if Input | ||||||
Description | of Period | Valuation Technique | Unobservable Inputs | Amount | Increasesa | ||
Assets: | |||||||
Investments in Securities: | |||||||
Equity Investments: | |||||||
Auto Components | $ | 8,790,082 | Market comparables | Discount for lack of marketability | 10 | % | Decreaseb |
EV / EBITDA multiple | 3.2 | x | Increaseb | ||||
All Other Investmentsc | 111,630,020 | ||||||
Total | $ | 120,420,102 |
aRepresents the directional change in the fair value of the Level 3 financial instruments that would result from a significant and reasonable increase in the corresponding input.
A significant and reasonable decrease in the input would have the opposite effect. Significant impacts, if any, to fair value and/or net assets have been indicated.
bRepresents a significant impact to fair value but not net assets.
cIncludes financial instruments with values derived using prior transaction prices or third party pricing information without adjustment for which such inputs are unobservable.
May also include fair value of immaterial financial instruments developed using various valuation techniques and unobservable inputs.
Abbreviations List
EBITDA - Earnings before interest, taxes, depreciation and amortization
EV - Enterprise value
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FRANKLIN MUTUAL QUEST FUND
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
14. Subsequent Events
The Fund has evaluated subsequent events through the issuance of the financial statements and determined that no events have occurred that require disclosure.
ABBREVIATIONS | |||||
Counterparty | Currency | Selected Portfolio | |||
BANT | Bank of America N.A. | CNY | Chinese Yuan | ADR | American Depositary Receipt |
BONY | Bank of New York Mellon | EUR | Euro | FHLB | Federal Home Loan Bank |
FBCO | Credit Suisse International | GBP | British Pound | GO | General Obligation |
HSBC | HSBC Bank PLC | USD | United States Dollar | PIK | Payment-In-Kind |
SSBT | State Street Bank and Trust Co., N.A. |
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Shareholder Information
Board Review of Investment Management Agreement
The Board of Trustees (Board), including the independent trustees, at a Board meeting held on May 16, 2016, unanimously approved the renewal of the Fund’s investment management agreement. Prior to a meeting of all of the trustees for the purpose of considering such approval, the independent trustees participated in two other meetings held in connection with the renewal process (those trustees unable to attend in person were present by telephonic conference means). Throughout the process, the independent trustees received assistance and advice from and met separately with independent counsel. The independent trustees met with and interviewed officers of the investment manager (including portfolio managers), the transfer agent and shareholder services group and the distributor. In approving the renewal of the investment management agreement for the Fund, the Board, including the independent trustees, determined that the investment management fee structure was fair and reasonable and that continuance of the agreement was in the best interests of the Fund and its shareholders.
In reaching their decision on the investment management agreement, the trustees took into account information furnished throughout the year at regular Board meetings, as well as information specifically requested and furnished for the renewal process, which culminated in the meetings referred to above for the specific purpose of considering such agreement. Information furnished throughout the year included, among others, reports on the Fund’s investment performance, expenses, portfolio composition, portfolio brokerage execution, client commission arrangements, derivatives, securities lending, asset segregation, portfolio turnover, Rule 12b-1 plans, distribution, shareholder servicing, legal and compliance matters, pricing of securities and sales and redemptions, and marketing support payments made to financial intermediaries, as well as a third-party survey of transfer agent fees charged funds within the Franklin Templeton Investments (FTI) complex in comparison with those charged other fund complexes deemed comparable. Also, related financial statements and other information about the scope and quality of services provided by the investment manager and its affiliates and enhancements to such services over the past year were provided. In addition, the trustees received periodic reports throughout the year and during the renewal process relating to compliance with the Fund’s investment policies and restrictions. During the renewal process, the independent trustees considered the investment manager’s methods of operation within the Franklin Templeton group and its activities on behalf of other clients.
The information obtained by the trustees during the renewal process also included a special report prepared by Broadridge Financial Solutions, Inc. (Broadridge), an independent third-party analyst that utilizes data from Lipper, Inc. (“Lipper”), an independent third-party analyst,, comparing the Fund’s investment performance and expenses with those of other mutual funds deemed comparable to the Fund as selected by Lipper (Broadridge Section 15(c) Report). The trustees reviewed the Broadridge Section 15(c) Report and its usefulness in the approval process with respect to matters such as comparative fees, expenses, expense ratios, performance and volatility. They concluded that the report continues to be a reliable resource in the performance of their duties.
In addition, the trustees received a Profitability Study (Profitability Study) prepared by management discussing the profitability to FTI from its overall U.S. Fund operations, as well as on an individual fund-by-fund basis. Over the past year, the Board and counsel to the independent trustees continued to receive reports on management’s handling of recent regulatory inquiries and pending legal actions against the investment manager and its affiliates. The independent trustees were satisfied with the actions taken to date by management in response to such regulatory and legal matters.
Particular attention was given to management’s diligent risk management program, including continual monitoring and management of counterparty credit risk and attention given to derivatives and other complex instruments that are held and expected to be held by the Fund and how such instruments are used to carry out the Fund’s investment goals. The Board also took into account, among other things, management’s efforts in establishing a global credit facility for the benefit of the Fund and other accounts managed by FTI to provide a source of cash for temporary and emergency purposes or to meet unusual redemption requests as well as the strong financial position of the investment manager’s parent company and its commitment to the mutual fund business. In addition, the Board received updates from management on the Securities and Exchange Commission’s (SEC) progress in implementing the rule-making requirements established by the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), which was enacted July 21, 2010, and the investment manager’s compliance with rules and regulations already promulgated by the SEC under such act. The Board also noted that they received an annual report on all marketing support payments made by FTI to financial intermediaries, as well as a memorandum relating to third-party servicing arrangements in response to a Guidance Update from the SEC relating to mutual fund distribution and sub accounting fees.
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SHAREHOLDER INFORMATION
In addition to the above and other matters considered by the trustees throughout the course of the year, the following discussion relates to certain primary factors relevant to the Board’s decision. This discussion of the information and factors considered by the Board (as well as the discussion above) is not intended to be exhaustive, but rather summarizes certain factors considered by the Board. In view of the wide variety of factors considered, the Board did not, unless otherwise noted, find it practicable to quantify or otherwise assign relative weights to the foregoing factors. In addition, individual trustees may have assigned different weights to various factors.
NATURE, EXTENT AND QUALITY OF SERVICES. The trustees reviewed the nature, extent and quality of the services provided by the investment manager. In this regard, they reviewed the Fund’s investment approach and concluded that, in their view, it continues to differentiate the Fund from typical core investment products in the mutual fund field. The trustees cited the investment manager’s ability to implement the Fund’s disciplined value investment approach and its long-term relationship with the Fund as reasons that shareholders choose to invest, and remain invested, in the Fund. The trustees reviewed the Fund’s portfolio management team, including its performance, staffing, skills and compensation program. With respect to portfolio manager compensation, management assured the trustees that the Fund’s long-term performance is a significant component of incentive-based compensation and noted that a portion of a portfolio manager’s incentive-based compensation is paid in shares of predesignated funds from the portfolio manager’s fund management area. The trustees noted that the portfolio manager compensation program aligned the interests of the portfolio managers with that of Fund shareholders. The trustees discussed with management various other products, portfolios and entities that are advised by the investment manager and the allocation of assets and expenses among and within them, as well as their relative fees and reasons for differences with respect thereto and any potential conflicts. During regular Board meetings and the aforementioned meetings of the independent trustees, the trustees received reports and presentations on the investment manager’s best execution trading policies. The trustees considered periodic reports provided to them showing that the investment manager complied with the investment policies and restrictions of the Fund as well as other reports periodically furnished to the Board covering matters such as the compliance of portfolio managers and other management personnel with the code of ethics covering the investment management personnel, the adherence to fair value pricing procedures established by the Board and the accuracy of net asset value calculations. The Board noted the extent of the benefits provided to Fund shareholders from being part of the Franklin Templeton group, including the right to exchange investments between funds (same class) without a sales charge, the ability to reinvest Fund dividends into other funds and the right to combine holdings of other funds to obtain reduced sales charges. The trustees considered the investment manager’s significant efforts in developing and implementing compliance procedures established in accordance with SEC and other requirements.
The trustees also reviewed the nature, extent and quality of the Fund’s other service agreements to determine that, on an overall basis, Fund shareholders were well served. In this connection, the Board also took into account transfer agent and shareholder services provided to Fund shareholders by an affiliate of the investment manager, noting continuing expenditures by management to increase and improve the scope of such services and favorable periodic reports on shareholder services conducted by independent third parties. While such considerations directly affected the trustees’ decision in renewing the Fund’s transfer agent and shareholder services agreement, the Board also considered these commitments as incidental benefits to Fund shareholders deriving from the investment management relationship.
Based on their review, the trustees were satisfied with the nature and quality of the overall services provided by the investment manager and its affiliates to the Fund and its shareholders and were confident in the abilities of the management team to continue the disciplined value investment approach of the Fund and to provide quality services to the Fund and its shareholders.
INVESTMENT PERFORMANCE. The trustees reviewed and placed significant emphasis on the investment performance of the Fund over the one-, three-, five- and 10-year periods ended December 31, 2015. They considered the history of successful performance of the Fund relative to various benchmarks. As part of their review, they inquired of management regarding benchmarks, style drift and restrictions on permitted investments. Consideration was also given to performance in the context of available levels of cash during the periods. The trustees had meetings during the year, including the meetings referred to above held in connection with the approval process, with the Fund’s portfolio managers to discuss performance and the management of the Fund. In addition, particular attention in assessing performance was given to the Broadridge Section 15(c) Report. That report showed the investment performance of the Fund (Class A shares) in comparison to other funds determined comparable by Lipper.
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SHAREHOLDER INFORMATION
The comparable funds to the Fund, as chosen by Lipper, included all retail and institutional global multi-cap value funds. The Fund had total returns in the middle performing quintile for the one-year period ended December 31, 2015, and had annualized total returns for the three- and five-year periods also in the second-best performing quintile. The trustees noted that the Fund’s total return on an annualized basis for the 10-year period ended December 31, 2015, was in the best performing quintile. The Board was satisfied with such comparative performance.
The trustees also compared Fund performance to other industry benchmarks, including measures of risk-adjusted performance of a fund, as part of their evaluation of investment performance. The trustees concluded that the Fund had continued to perform well in comparison to its various benchmarks and in the context of the Fund’s objectives.
COMPARATIVE EXPENSES AND MANAGEMENT PROFITABILITY. The trustees considered the cost of the services provided and to be provided and the profits realized by the investment manager and its affiliates from their respective relationships with the Fund. As part of the approval process, they explored with management the trends in expense ratios over the past three fiscal years and the reasons for any increases in the Fund’s expense ratios (or components thereof). In considering the appropriateness of the management fee and other expenses charged to the Fund, the Board took into account various factors including investment performance and matters relating to Fund operations, including, but not limited to, the quality and experience of its portfolio managers and research staff. Consideration was also given to a comparative analysis in the Broadridge Section 15(c) Report of the investment management fee and total expense ratio of the Fund in comparison with those of a group of other funds selected by Lipper as its appropriate Lipper expense group. Lipper expense data is based upon information taken from the Fund’s most recent annual report, which reflects historical asset levels that may be quite different from those currently existing, particularly in a period of market volatility. While recognizing such inherent limitation and the fact that expense ratios generally increase as assets decline and decrease as assets grow, the Board believed the independent analysis conducted by Lipper to be an appropriate measure of comparative expenses.
In reviewing comparative costs, emphasis was given to the Fund’s contractual management fee in comparison with the contractual management fee that would have been charged by other funds within its Lipper expense group assuming they were similar in size to the Fund, as well as the actual total expenses of the Fund in comparison with those of its Lipper expense group. The Lipper contractual management fee analysis includes administrative charges as being part of the management fee, and total expenses, for comparative consistency, are shown by Lipper for Fund Class A shares.
The Fund’s contractual management fee rate was in the second-least expensive quintile of its Lipper expense group and its total expenses were in the least expensive quintile of such group. The Board was satisfied with such comparative fees and expenses.
The trustees also reviewed the Profitability Study addressing profitability of Franklin Resources, Inc., from its overall U.S. fund business, as well as profitability to the Fund’s investment manager and its affiliates, from providing investment management and other services to the Fund during the 12-month period ended September 30, 2015, the most recent fiscal year-end of Franklin Resources, Inc. The trustees reviewed the basis on which such reports are prepared and the cost allocation methodology utilized in the Profitability Study, it being recognized that allocation methodologies may each be reasonable while producing different results. In this respect, the Board noted that the reasonableness of the cost allocation methodologies was reviewed by independent accountants on an every other year basis.
The independent trustees met with management to discuss the Profitability Study. This included, among other things, a comparison of investment management income with investment management expenses of the Fund; comparison of underwriting revenues and expenses; the relative relationship of investment management and underwriting expenses; shareholder servicing profitability; economies of scale; and the relative contribution of the Fund to the profitability of the investment manager and its parent. In discussing the Profitability Study with the Board, the investment manager stated its belief that the costs incurred in establishing the infrastructure necessary to operate the type of mutual fund operations conducted by it and its affiliates may not be fully reflected in the expenses allocated to the Fund in determining its profitability.
The Board also took into account management’s expenditures in improving shareholder services provided to the Fund, as well as the need to meet additional regulatory and compliance requirements resulting from the Sarbanes-Oxley Act, the Dodd-Frank Act and recent SEC and other regulatory requirements. The trustees also considered the extent to which the investment manager may derive ancillary benefits from Fund operations, including those derived from economies of scale, discussed
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SHAREHOLDER INFORMATION
below, the allocation of Fund brokerage and the use of commission dollars to pay for research and other similar services.
Based upon their consideration of all these factors, the trustees determined that the level of profits realized by the investment manager and its affiliates in providing services to the Fund was not excessive in view of the nature, quality and extent of services provided.
ECONOMIES OF SCALE. The trustees considered economies of scale realized by the investment manager and its affiliates as the Fund grows larger and the extent to which they are shared with Fund shareholders, as for example, in the level of the investment management fee charged, in the quality and efficiency of services rendered and in increased capital commitments benefiting the Fund directly or indirectly. While recognizing that any precise determination is inherently subjective, the trustees noted that, based upon the Profitability Study, as some funds increase in size, at some point economies of scale may result in the investment manager realizing a larger profit margin on investment management services provided to such a fund. The trustees also noted that benefits of economies of scale will be shared with Fund shareholders due to the decline in the effective investment management fee rate as breakpoints are achieved by the Fund.
The trustees noted that breakpoints had been instituted as part of the Fund’s investment management fee in 2004. The trustees assessed the savings to shareholders resulting from such breakpoints and believed they were, and continue to be, appropriate and they agreed to continue to monitor the appropriateness of the breakpoints. The trustees also considered the effects an increase in assets under management would have on the investment management fee and expense ratio of the Fund. To the extent further economies of scale may be realized by the investment manager and its affiliates, the Board believed the investment management and administrative fees provide a sharing of benefits with the Fund and its shareholders.
Proxy Voting Policies and Procedures
The Fund’s investment manager has established Proxy Voting Policies and Procedures (Policies) that the Fund uses to determine how to vote proxies relating to portfolio securities. Shareholders may view the Fund’s complete Policies online at franklintempleton.com. Alternatively, shareholders may request copies of the Policies free of charge by calling the Proxy Group collect at (954) 527-7678 or by sending a written request to: Franklin Templeton Companies, LLC, 300 S.E. 2nd Street, Fort Lauderdale, FL 33301, Attention: Proxy Group. Copies of the Fund’s proxy voting records are also made available online at franklintempleton.com and posted on the U.S. Securities and Exchange Commission’s website at sec.gov and reflect the most recent 12-month period ended June 30.
Quarterly Statement of Investments
The Fund files a complete statement of investments with the U.S. Securities and Exchange Commission for the first and third quarters for each fiscal year on Form N-Q. Shareholders may view the filed Form N-Q by visiting the Commission’s website at sec.gov. The filed form may also be viewed and copied at the Commission’s Public Reference Room in Wash-ington, DC. Information regarding the operations of the Public Reference Room may be obtained by calling (800) SEC-0330.
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Contents | |
Semiannual Report | |
Franklin Mutual Shares Fund | 3 |
Performance Summary | 9 |
Your Fund’s Expenses | 12 |
Financial Highlights and Statement of Investments | 14 |
Financial Statements | 27 |
Notes to Financial Statements | 31 |
Shareholder Information | 44 |
Visit franklintempleton.com for fund updates, to access your account, or to find helpful financial planning tools.
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Franklin Mutual Shares Fund
We are pleased to bring you Franklin Mutual Shares Fund’s semiannual report for the period ended June 30, 2016.
Your Fund’s Goals and Main Investments
The Fund seeks capital appreciation, which may occasionally be short term, with income as a secondary goal. Its strategy is focused mainly on what the investment manager believes are undervalued mid- and large cap equity securities, which may include foreign securities and, to a lesser extent, the securities of distressed companies and merger arbitrage securities. The Fund may invest up to 35% of its assets in foreign securities.
Performance Overview
The Fund’s Class Z shares delivered a +4.23% cumulative total return for the six months ended June 30, 2016. In comparison, the Fund’s benchmark, the Standard & Poor’s 500 Index (S&P 500®), which is a broad measure of U.S. stock performance, posted a +3.84% total return.1 You can find more of the Fund’s performance data in the Performance Summary beginning on page 9.
Performance data represent past performance, which does not guarantee future results. Investment return and principal value will fluctuate, and you may have a gain or loss when you sell your shares. Current performance may differ from figures shown. For most recent month-end performance, go to franklintempleton.com or call (800) 342-5236.
Economic and Market Overview
The global economy expanded during the six months under review. An improvement in commodity prices including a rally in crude oil prices, accommodative monetary policy from various global central banks, finalization of the new debt deal for Greece and encouraging Chinese trade data toward period-end boosted market sentiment. However, global equity market volatility increased after the U.S. Federal Reserve’s (Fed’s) June decision to keep its federal funds target range unchanged, while providing a cautious stance on further interest rate hikes. In addition, global economic concerns and the U.K.’s historic referendum to leave the European Union (EU), also known as the “Brexit,” contributed to volatile global stock markets.
Oil prices fell at the beginning of the review period, largely due to a strong global supply, but recovered in the period’s second half amid oilfield outages and continued demand growth. Meanwhile, commodity prices increased for most of the review period as oversupply for a host of commodities shrank and the market appeared to be on the path of rebalancing after hitting a glut-induced bottom earlier in the year. Gold prices continued to rise following the Brexit referendum as some investors turned to safe haven investing. The U.S. dollar generally depreciated against most currencies during the period, which increased returns of many foreign assets in U.S. dollar terms. In
*Figures are stated as a percentage of total and may not equal 100% or may be
negative due to rounding, use of any derivatives, unsettled trades or other factors.
1. Source: Morningstar.
The index is unmanaged and includes reinvestment of any income or distributions. It does not reflect any fees, expenses or sales charges. One cannot invest directly in an
index, and an index is not representative of the Fund’s portfolio.
The dollar value, number of shares or principal amount, and names of all portfolio holdings are listed in the Fund’s Statement of Investments (SOI). The SOI
begins on page 19.
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this environment, global developed market stocks overall, as measured by the MSCI World Index, rose slightly during the period.
The U.S. economy grew moderately, as measured by gross domestic product (GDP) in 2016’s first and second quarters, driven by consumer spending and exports. A decline in private inventory investment and non-residential fixed investment contributed to the moderation. The Fed maintained its target interest rate during the review period after raising it for the first time in nine years at its December 2015 meeting. The Fed kept its target rate unchanged in its June meeting mainly due to a substantial slowdown in job additions toward period-end. The Fed expects economic conditions to evolve in a manner that could warrant only gradual increases in the federal funds rate.
In Europe, slower U.K. economic growth continued in 2016’s first quarter as output slowed in construction, production and agriculture. Immediate effects of the Brexit materialized as U.K. stocks significantly declined and the pound sterling hit a three-decade low amid intensified selling. Credit rating agencies Standard & Poor’s and Fitch also downgraded the U.K.’s credit rating. In the eurozone, despite investors’ concerns about banking sector weakness, low corporate earnings and post-Brexit political repercussions, some regions benefited due to rising consumer spending resulting from a cheaper euro, low inflation and signs of sustained economic growth. The euro-zone’s annual inflation rate remained in negative territory for most of the review period; however, it rose marginally above zero in June.
Japan’s economy posted mixed results, contracting in 2015’s fourth quarter stemming from declining private and household consumption. However, the economy expanded during 2016’s first quarter as private consumption increased and business investment decreased less than anticipated. The Bank of Japan (BOJ) took several actions during the review period. In January, to boost lending and support inflation, the BOJ introduced a negative interest rate on excess reserves held at the central bank by financial institutions. In April, the BOJ further reduced its GDP and inflation forecasts for fiscal year 2016, and decided against additional quantitative easing measures. However, after the U.K.’s vote in June to leave the EU, the BOJ hinted at carrying out flexible open market operations to stabilize its financial markets.
In emerging markets, economic growth generally moderated during the review period. Brazil’s economy witnessed its longest recession since the 1930s amid political and economic turmoil, while Russia’s economy continued to contract. The Bank of Russia reduced its key interest rate in an attempt to revive its economy. China’s economic growth slowed marginally in 2016’s first quarter compared to the previous quarter, but remained largely in line with the government’s target. The People’s Bank of China cut its cash reserve requirement ratio for the country’s banks and effectively devalued the renminbi against the U.S. dollar to the lowest level in more than five years. Overall, emerging market stocks, as measured by the MSCI Emerging Markets Index, rose for the six-month period under review.
Investment Strategy
At Franklin Mutual Series, we are committed to our distinctive value approach to investing, which we believe can generate above-average risk-adjusted returns over time for our shareholders. Our major investment strategy is investing in undervalued stocks. When selecting undervalued equities, we are attracted to what we believe are fundamentally strong companies with healthy balance sheets, high-quality assets, substantial free cash flow and shareholder-oriented management teams and whose stocks are trading at discounts to our assessment of the companies’ intrinsic or business value. We also look for asset-rich companies whose shares may be trading at depressed levels due to concerns over short-term earnings disappointments, litigation, management strategy or other perceived negatives. This strict value approach is not only intended to improve the likelihood of upside potential, but it is also intended to reduce the risk of substantial declines. While the vast majority of our undervalued equity investments are made in publicly traded companies globally, we may invest occasionally in privately held companies as well.
We complement this more traditional investment strategy with two others. One is distressed investing, a highly specialized field that has proven quite profitable during certain periods over the years. Distressed investing is complex and can take many forms. The most common distressed investment the Fund undertakes is the purchase of financially troubled or bankrupt companies’ debt at a substantial discount to face value. After the financially distressed company is reorganized, often in bankruptcy court, the old debt is typically replaced with new securities issued by the financially stronger company.
The other piece of our investment strategy is participating in arbitrage situations, another highly specialized field. When companies announce proposed mergers or takeovers, commonly referred to as “deals,” the target company may trade at a discount to the bid it ultimately accepts. One form of arbitrage involves purchasing the target company’s stock when it is trading below the value we believe it would receive in a deal. In keeping with our commitment to a relatively conservative investment approach, we typically focus our arbitrage efforts on announced deals, and avoid rumored deals or other situations we consider relatively risky.
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In addition, it is our practice to hedge the Fund’s currency exposure when we deem it advantageous for our shareholders.
What is meant by “hedge”?
To hedge an investment is to take a position intended to offset potential losses/gains that may be incurred by a companion financial instrument.
Top 10 Sectors/Industries | ||
Based on Equity Securities as of 6/30/16 | ||
% of Total | ||
Net Assets | ||
Insurance | 10.6 | % |
Banks | 8.9 | % |
Pharmaceuticals | 7.9 | % |
Oil, Gas & Consumable Fuels | 6.6 | % |
Media | 6.3 | % |
Tobacco | 6.2 | % |
Software | 6.2 | % |
Health Care Equipment & Supplies | 5.4 | % |
Food & Staples Retailing | 3.8 | % |
Technology Hardware, Storage & Peripherals | 3.4 | % |
Manager’s Discussion
Economic and political uncertainty influenced markets during the six months under review. The year 2016 began with severe economic uncertainty. Brent oil prices plunged below US$30 per barrel as fears of a global recession spread. Global equity markets dropped from the start of the year, continuing a downward move from mid-2015 highs, before bottoming in mid-February. Commodity and equity prices rose over the following four months, before a late June surprise: the result of the Brexit vote, signaling the beginning of the end of the U.K.’s 43-year membership in the EU. Uncertainty about the future status of the U.K. as well as implications for the EU and the global economy weighed on markets at the end of the period.
Equity prices are typically forward looking, reflecting investors’ beliefs about how various factors and events will play out in the future. Global equity prices at period-end were down from mid-2015 highs, reflecting increased uncertainty among investors regarding the consequences of Brexit in addition to long-standing concerns about China, commodity prices, interest rates and geopolitical events.
Following the momentous decision by U.K. voters on June 23 to leave the EU, we believe it is probable that the U.K. will face a heightened risk of an economic slowdown, as businesses will likely put investment decisions on hold while waiting for greater clarity. The negative impact on the rest of the EU will likely be less severe, although economic growth in the region was already running at a modest pace before the vote, and we do not believe the region will be immune. Among the region’s equity markets, we believe that financial and domestically oriented cyclical stocks were being perceived by some investors as more vulnerable. Those stocks that were viewed as defensive, as well as stocks with what we consider attractive dividend yields, will likely remain in favor among many investors, in our view, causing them to trade at even higher valuation multiples. Within the U.K., large multinational companies that generate most of their earnings abroad should benefit from the precipitous fall of the British pound that followed the Brexit vote. In this respect, the Fund’s exposure to U.K. equities was predominantly through a number of these global companies. Also, the Fund has only a modest exposure to European financials, particularly in banks.
Although the Brexit vote is clearly a negative surprise, we do not believe it will usher in a new global financial crisis similar to the one experienced eight years ago. While markets reacted brutally to the U.K.’s decision to leave the EU, we have not seen any systemic shock like the one that followed the fall of Lehman Brothers in 2008. We also believe that, eventually, the U.K. and the EU will come to an acceptable agreement concerning trade relations.
Three of the Fund’s larger positions at period-end were in health care.2 Merck, Medtronic and Switzerland-based Novartis are global companies that meet important customer needs with products protected by intellectual property. This focus on innovation that improves the lives of customers gives us confidence in the sustainability of their businesses. In addition, we feel that each has strong financial characteristics, including the ability to invest in research and development and acquisitions, while also providing material returns to shareholders, and trading at valuations that are attractive from our perspective as value investors.
The Fund also featured three information technology (IT) firms among its larger positions: Microsoft, Symantec and Samsung Electronics.3 Microsoft features a strong global business based on innovation and meeting customer needs, including its fast-growing cloud business, while also returning excess capital to shareholders through dividends and share buybacks. Symantec also competes through innovation in providing security software to individuals and enterprises. Following a restructuring of its activities, the company is now focused on the fast-growing
2. The health care sector comprises health care equipment and supplies, health care providers and services, and pharmaceuticals in the SOI.
3. The IT sector comprises communications equipment; Internet software and services; software; IT services; and technology hardware, storage and peripherals in the SOI.
See www.franklintempletondatasources.com for additional data provider information.
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market for web-related security, while also returning capital to shareholders. South Korea-based Samsung Electronics, another meaningful position of the Fund in this sector, competes in more capital intensive commodity markets such as memory semiconductors and smartphones. In these areas, we believe that Samsung has advantages of scale and expertise relative to many of its competitors. In our view, these firms, like the health care firms mentioned previously, share these positive attributes as well as valuations that we, as value investors, find compelling.
Merger and acquisition (M&A) activity continued to be strong in the first half of 2016, helping to support valuations. Although deal volumes remained near historical highs, regulators globally continued to be more aggressive in their scrutiny of potentially negative effects of high industry concentration. We were disappointed to see regulators successfully sue to block the merger of Office Depot and Staples. Less surprising was the collapse of Halli-burton’s attempt to acquire Baker Hughes (a Fund holding) on antitrust grounds, or the largest failure, Pfizer’s withdrawn attempt to acquire Allergan in the face of the U.S. Treasury Department’s new rules on tax inversions. We continue to be active in this space and work to ensure the potential rewards are big enough to outweigh the clear risks that exist in the current environment.
Credit spreads widened dramatically across industries and countries early in the period and subsequently narrowed. This was particularly apparent in subinvestment-grade credit, which created additional challenges for sectors, including energy, metals and mining that were already experiencing distress. The precipitous decline in commodity prices globally over the past two years resulted in heightened bankruptcy activity. Dislocations in debt capital markets created some unique opportunities, in our view, especially in stressed and event-driven credit situations where we feel that the yield reached attractive levels and that cheap enterprise valuation protected the downside. By the end of the period, credit spreads had tightened materially from their intra-period highs. Although the current environment seems less attractive to us than a few months ago, volatility remained at heightened levels. In our experience, we believe that patience will be rewarded and the increase in global risk premiums will result in more opportunities.
Turning to Fund performance, top contributors included British American Tobacco, medical technology company Stryker and White Mountains Insurance Group.
Shares of U.K.-based British American Tobacco rose as many equity market investors showed a preference for defensive stocks (perceived to be less sensitive to economic conditions and/or having an attractive dividend yield, such as consumer staples) amid tepid global economic conditions, the low interest-rate environment and the late June U.K. referendum result in favor of leaving the EU. In our view, British American Tobacco remains an attractive position given the current management team, its portfolio of brands and track record of returning capital to shareholders.
U.S.-based medical technology company Stryker announced solid quarterly results in January and May that reflected strong organic growth, market share gains in many of its business segments and operating margin leverage that drove earnings growth. Along with the earnings results in May, Stryker raised its sales and earnings guidance for 2016. Beyond earnings, Stryker announced two strategic acquisitions in February. In our view, the deals were priced at full valuation but involved good-quality assets that offer Stryker the potential to enhance the value of existing assets and drive further value for Stryker shareholders.
White Mountains Insurance Group is a U.S.-based company that invests capital primarily in companies associated with the insurance and reinsurance industry. The insurer’s stock price rallied in February due in part to solid quarterly results and the authorization of a significant stock buyback program near the end of February.
During the period under review, Fund investments that detracted from performance included pharmaceutical services provider Teva Pharmaceutical Industries, global insurer American International Group (AIG) and bank holding company Barclays.
Shares of Israel-based Teva Pharmaceutical Industries followed the broad-based retreat in global financial markets in January and early February. The stock slid further in March after the company announced a delay in the closing of its acquisition of Allergan’s generics unit. Teva has been working to obtain approval from the U.S. Federal Trade Commission, including multiple asset sales agreements in June, in an effort to close the deal in July 2016. In our view, a delay of three to four months will postpone the potential realization of synergies but not have a meaningful impact on the expected medium-term value of the deal. Heightened concerns around generic price deflation were also a significant drag on the stock price despite Teva’s management stating that the company did not experience the sharp price declines affecting some competitors.
Shares of U.S.-based insurer AIG declined as investors were frustrated by the January announcement of a US$3.6 billion reserve shortfall and uncertainty regarding the company’s ability to hit its financial targets. Management is under pressure from activist investors, most notably Carl Icahn, to show rapid improvement or spin off non-core assets to simplify the company. The stock also participated in the global equity market
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Top 10 Equity Holdings | ||
6/30/16 | ||
Company | % of Total | |
Sector/Industry, Country | Net Assets | |
Medtronic PLC | 3.3 | % |
Health Care Equipment & Supplies, U.S. | ||
Microsoft Corp. | 3.3 | % |
Software, U.S. | ||
Merck & Co. Inc. | 3.2 | % |
Pharmaceuticals, U.S. | ||
White Mountains Insurance Group Ltd. | 2.6 | % |
Insurance, U.S. | ||
Eli Lilly & Co. | 2.1 | % |
Pharmaceuticals, U.S. | ||
Royal Dutch Shell PLC | 1.9 | % |
Oil, Gas & Consumable Fuels, U.K. | ||
British American Tobacco PLC | 1.9 | % |
Tobacco, U.K. | ||
PNC Financial Services Group Inc. | 1.9 | % |
Banks, U.S. | ||
American International Group Inc. | 1.8 | % |
Insurance, U.S. | ||
Symantec Corp. | 1.7 | % |
Software, U.S. |
sell-off in late June as investors reacted negatively to the U.K. referendum result in favor of leaving the EU.
Shares of U.K.-based bank Barclays dropped sharply in late June after the U.K. Brexit vote. Investors feared the decision could lead to an increase in bad loans and reduced investment banking revenues if the U.K. economy slips into recession. Barclays’ stock had already significantly declined in January and early February as Europe’s financial sector was hindered by the detrimental effects of low interest rates, ongoing concerns about the health of the global economy, and challenging conditions in capital markets. In addition, the bank’s share price was negatively impacted by a disappointing strategic update in early March that included limited downsizing of the investment banking unit and a dividend cut to fund an accelerated rundown of its non-core activities.
During the period, the Fund held currency forwards and futures to hedge a significant portion of the currency risk of the portfolio’s non-U.S. dollar investments. The currency forwards had a positive impact on the Fund’s performance, while currency futures had a negligible impact.
What is a currency forward?
A currency forward is an agreement between the Fund and a counterparty to buy or sell a foreign currency in exchange for another currency at a specific exchange rate on a future date.
What is a future?
A future is an agreement between the Fund and a counter-party made through a U.S. or foreign futures exchange to buy or sell an underlying instrument or asset at a specific price on a future date.
Thank you for your continued participation in Franklin Mutual Shares Fund. We look forward to continuing to serve your investment needs.
The foregoing information reflects our analysis, opinions and portfolio holdings as of June 30, 2016, the end of the reporting period. The way we implement our main investment strategies and the resulting portfolio holdings may change depending on factors such as market and economic conditions. These opinions may not be relied upon as investment advice or an offer for a particular security. The information is not a complete analysis of every aspect of any market, country, industry, security or the Fund. Statements of fact are from sources considered reliable, but the investment manager makes no representation or warranty as to their completeness or accuracy. Although historical performance is no guarantee of future results, these insights may help you understand our investment management philosophy.
CFA® is a trademark owned by CFA Institute.
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Peter A. Langerman has been portfolio manager for Franklin Mutual Shares Fund since 2005. He has been portfolio manager of Franklin Mutual Global Discovery Fund since 2009. He joined Franklin Templeton Investments in 1996, serving in various capacities, including President and Chief Executive Officer of Franklin Mutual Advisers and member of the management team of the Funds, including Franklin Mutual Shares Fund. From 2002 to 2005, he served as director of New Jersey’s Division of Investment, overseeing employee pension funds. Between 1986 and 1996, Mr. Langerman was employed at Heine Securities Corporation, the Fund’s former manager.
F. David Segal has been portfolio manager for Franklin Mutual Shares Fund since 2005. He joined Franklin Templeton Investments in 2002. Previously, he was an analyst in the Structured Finance Group of MetLife from 1999 to 2002.
Debbie A. Turner has been assistant portfolio manager for Franklin Mutual Shares Fund since 2001. She joined Franklin Templeton Investments in 1996. Between 1993 and 1996, Ms. Turner was employed at Heine Securities Corporation, the Fund’s former manager.
CFA® is a trademark owned by CFA Institute.
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Performance Summary as of June 30, 2016
Your dividend income will vary depending on dividends or interest paid by securities in the Fund’s portfolio, adjusted for operating expenses of each class. Capital gain distributions are net profits realized from the sale of portfolio securities. The performance table does not reflect any taxes that a shareholder would pay on Fund dividends, capital gain distributions, if any, or any realized gains on the sale of Fund shares. Total return reflects reinvestment of the Fund’s dividends and capital gain distributions, if any, and any unrealized gains or losses.
Net Asset Value | |||||
Share Class (Symbol) | 6/30/16 | 12/31/15 | Change | ||
Z (MUTHX) | $ | 27.10 | $ | 26.00 | +$1.10 |
A (TESIX) | $ | 26.84 | $ | 25.78 | +$1.06 |
C (TEMTX) | $ | 26.49 | $ | 25.54 | +$0.95 |
R (TESRX) | $ | 26.68 | $ | 25.66 | +$1.02 |
R6 (FMSHX) | $ | 27.11 | $ | 25.98 | +$1.13 |
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PERFORMANCE SUMMARY
Performance as of 6/30/161
Cumulative total return excludes sales charges. Average annual total return and value of $10,000 investment include maximum sales charges. Class Z/R/R6: no sales charges; Class A: 5.75% maximum initial sales charge; Class C: 1% contingent deferred sales charge in first year only.
Value of | ||||||||
Cumulative | Average Annual | $ | 10,000 | Total Annual | ||||
Share Class | Total Return2 | Total Return3 | Investment4 | Operating Expenses5 | ||||
Z | 0.81 | % | ||||||
6-Month | +4.23 | % | +4.23 | % | $ | 10,423 | ||
1-Year | -2.06 | % | -2.06 | % | $ | 9,794 | ||
5-Year | +48.32 | % | +8.20 | % | $ | 14,832 | ||
10-Year | +61.64 | % | +4.92 | % | $ | 16,164 | ||
A | 1.06 | % | ||||||
6-Month | +4.11 | % | -1.86 | % | $ | 9,814 | ||
1-Year | -2.32 | % | -7.95 | % | $ | 9,205 | ||
5-Year | +46.16 | % | +6.61 | % | $ | 13,775 | ||
10-Year | +56.88 | % | +3.99 | % | $ | 14,785 | ||
C | 1.81 | % | ||||||
6-Month | +3.72 | % | +2.72 | % | $ | 10,272 | ||
1-Year | -3.05 | % | -3.95 | % | $ | 9,605 | ||
5-Year | +41.07 | % | +7.12 | % | $ | 14,107 | ||
10-Year | +46.30 | % | +3.88 | % | $ | 14,630 | ||
R | 1.31 | % | ||||||
6-Month | +3.98 | % | +3.98 | % | $ | 10,398 | ||
1-Year | -2.56 | % | -2.56 | % | $ | 9,744 | ||
5-Year | +44.62 | % | +7.66 | % | $ | 14,462 | ||
10-Year | +53.80 | % | +4.40 | % | $ | 15,380 | ||
R6 | 0.69 | % | ||||||
6-Month | +4.35 | % | +4.35 | % | $ | 10,435 | ||
1-Year | -1.92 | % | -1.92 | % | $ | 9,808 | ||
3-Year | +23.34 | % | +7.24 | % | $ | 12,334 | ||
Since Inception (5/1/13) | +25.22 | % | +7.37 | % | $ | 12,522 |
Performance data represent past performance, which does not guarantee future results. Investment return and principal value will fluctuate, and you may have a gain or loss when you sell your shares. Current performance may differ from figures shown. For most recent month-end performance, go to franklintempleton.com or call (800) 342-5236.
See page 11 for Performance Summary footnotes.
10 Semiannual Report
franklintempleton.com
FRANKLIN MUTUAL SHARES FUND
PERFORMANCE SUMMARY
All investments involve risks, including possible loss of principal. Value securities may not increase in price as anticipated or may decline further in value. Special risks are associated with foreign investing, including currency fluctuations, economic instability and political developments. The Fund’s investments in companies engaged in mergers, reorganizations or liquidations also involve special risks as pending deals may not be completed on time or on favorable terms. The Fund may invest in lower rated bonds, which entail higher credit risk. The Fund is actively managed but there is no guarantee that the manager’s investment decisions will produce the desired results. The Fund’s prospectus also includes a description of the main investment risks.
Class Z: | Shares are available to certain eligible investors as described in the prospectus. |
Class C: | These shares have higher annual fees and expenses than Class A shares. |
Class R: | Shares are available to certain eligible investors as described in the prospectus. These shares have higher annual fees and expenses than Class A shares. |
Class R6: | Shares are available to certain eligible investors as described in the prospectus. |
1. The Fund has a fee waiver associated with any investment in a Franklin Templeton money fund and/or Franklin Templeton fund, as applicable, contractually guaranteed
through at least the Fund’s current fiscal year-end. Fund investment results reflect the fee waiver, to the extent applicable; without this reduction, the results would have
been lower.
2. Cumulative total return represents the change in value of an investment over the periods indicated.
3. Average annual total return represents the average annual change in value of an investment over the periods indicated. Return for less than one year, if any, has not
been annualized.
4. These figures represent the value of a hypothetical $10,000 investment in the Fund over the periods indicated.
5. Figures are as stated in the Fund’s current prospectus and may differ from the expense ratios disclosed in the Financial Highlights in this report. In periods of market vola-
tility, assets may decline significantly, causing total annual Fund operating expenses to become higher than the figures shown.
franklintempleton.com
Semiannual Report 11
FRANKLIN MUTUAL SHARES FUND
Your Fund’s Expenses
As a Fund shareholder, you can incur two types of costs:
- Transaction costs, including sales charges (loads) on Fund purchases; and
- Ongoing Fund costs, including management fees, distribution and service (12b-1) fees, and other Fund expenses. All mutual funds have ongoing costs, sometimes referred to as operat- ing expenses.
The following table shows ongoing costs of investing in the Fund and can help you understand these costs and compare them with those of other mutual funds. The table assumes a $1,000 investment held for the six months indicated.
Actual Fund Expenses
The first line (Actual) for each share class listed in the table provides actual account values and expenses. The “Ending Account Value” is derived from the Fund’s actual return, which includes the effect of Fund expenses.
You can estimate the expenses you paid during the period by following these steps. Of course, your account value and expenses will differ from those in this illustration:
1. Divide your account value by $1,000.
If an account had an $8,600 value, then $8,600 ÷ $1,000 = 8.6.
2. Multiply the result by the number under the heading “Expenses Paid During Period.”
If Expenses Paid During Period were $7.50, then 8.6 × $7.50 = $64.50.
In this illustration, the estimated expenses paid this period are $64.50.
Hypothetical Example for Comparison with Other Funds
Information in the second line (Hypothetical) for each class in the table can help you compare ongoing costs of investing in the Fund with those of other mutual funds. This information may not be used to estimate the actual ending account balance or expenses you paid during the period. The hypothetical “Ending Account Value” is based on the actual expense ratio for each class and an assumed 5% annual rate of return before expenses, which does not represent the Fund’s actual return. The figure under the heading “Expenses Paid During Period” shows the hypothetical expenses your account would have incurred under this scenario. You can compare this figure with the 5% hypothetical examples that appear in shareholder reports of other funds.
Please note that expenses shown in the table are meant to highlight ongoing costs and do not reflect any transaction costs, such as sales charges. Therefore, the second line for each class is useful in comparing ongoing costs only, and will not help you compare total costs of owning different funds. In addition, if transaction costs were included, your total costs would have been higher. Please refer to the Fund prospectus for additional information on operating expenses.
12 Semiannual Report
franklintempleton.com
FRANKLIN MUTUAL SHARES FUND
Beginning Account | Ending Account | Expenses Paid During | ||||
Share Class | Value 1/1/16 | Value 6/30/16 | Period* 1/1/16–6/30/16 | |||
Z | ||||||
Actual | $ | 1,000 | $ | 1,042.30 | $ | 4.06 |
Hypothetical (5% return before expenses) | $ | 1,000 | $ | 1,020.89 | $ | 4.02 |
A | ||||||
Actual | $ | 1,000 | $ | 1,041.10 | $ | 5.33 |
Hypothetical (5% return before expenses) | $ | 1,000 | $ | 1,019.64 | $ | 5.27 |
C | ||||||
Actual | $ | 1,000 | $ | 1,037.20 | $ | 9.12 |
Hypothetical (5% return before expenses) | $ | 1,000 | $ | 1,015.91 | $ | 9.02 |
R | ||||||
Actual | $ | 1,000 | $ | 1,039.80 | $ | 6.59 |
Hypothetical (5% return before expenses) | $ | 1,000 | $ | 1,018.40 | $ | 6.52 |
R6 | ||||||
Actual | $ | 1,000 | $ | 1,043.50 | $ | 3.40 |
Hypothetical (5% return before expenses) | $ | 1,000 | $ | 1,021.53 | $ | 3.37 |
*Expenses are calculated using the most recent six-month expense ratio, net of expense waivers, annualized for each class (Z: 0.80%; A:
1.05%; C: 1.80%; R: 1.30%; and R6: 0.67%), multiplied by the average account value over the period, multiplied by 182/366 to reflect the one-
half year period.
franklintempleton.com
Semiannual Report 13
FRANKLIN MUTUAL SHARES FUND
Financial Highlights | ||||||||||||||||||
Six Months Ended | Year Ended December 31, | |||||||||||||||||
June 30, 2016 | ||||||||||||||||||
(unaudited) | 2015 | 2014 | 2013 | 2012 | 2011 | |||||||||||||
Class Z | ||||||||||||||||||
Per share operating performance | ||||||||||||||||||
(for a share outstanding throughout the period) | ||||||||||||||||||
Net asset value, beginning of period | $ | 26.00 | $ | 29.52 | $ | 28.34 | $ | 22.48 | $ | 19.96 | $ | 20.80 | ||||||
Income from investment operationsa: | ||||||||||||||||||
Net investment incomeb | 0.39 | c | 0.54 | 0.78 | d | 0.47 | 0.39 | 0.47 | e | |||||||||
Net realized and unrealized gains (losses) | 0.71 | (1.71 | ) | 1.38 | 5.83 | 2.62 | (0.80 | ) | ||||||||||
Total from investment operations | 1.10 | (1.17 | ) | 2.16 | 6.30 | 3.01 | (0.33 | ) | ||||||||||
Less distributions from: | ||||||||||||||||||
Net investment income | — | (0.59 | ) | (0.98 | ) | (0.44 | ) | (0.49 | ) | (0.51 | ) | |||||||
Net realized gains | — | (1.76 | ) | — | — | — | — | |||||||||||
Total distributions | — | (2.35 | ) | (0.98 | ) | (0.44 | ) | (0.49 | ) | (0.51 | ) | |||||||
Net asset value, end of period | $ | 27.10 | $ | 26.00 | $ | 29.52 | $ | 28.34 | $ | 22.48 | $ | 19.96 | ||||||
Total returnf | 4.23 | % | (3.81 | )% | 7.60 | % | 28.10 | % | 15.14 | % | (1.50 | )% | ||||||
Ratios to average net assetsg | ||||||||||||||||||
Expensesh | 0.80 | %i,j | 0.81 | %i,j | 0.80 | %i | 0.79 | %i | 0.82 | % | 0.86 | % | ||||||
Expenses incurred in connection with securities | ||||||||||||||||||
sold short | —%k | 0.02 | % | 0.03 | % | —%k | —%k | —%k | ||||||||||
Net investment income | 3.05 | %c | 1.82 | % | 2.67 | %d | 1.85 | % | 1.82 | % | 2.24 | %e | ||||||
Supplemental data | ||||||||||||||||||
Net assets, end of period (000’s) | $ | 7,118,673 | $ | 6,770,056 | $ | 7,363,765 | $ | 7,025,908 | $ | 7,575,308 | $ | 7,540,502 | ||||||
Portfolio turnover rate | 9.91 | % | 19.99 | % | 19.24 | % | 24.29 | % | 21.57 | % | 29.44 | % |
aThe amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases
of the Fund’s shares in relation to income earned and/or fluctuating fair value of the investments of the Fund.
bBased on average daily shares outstanding.
cNet investment income per share includes approximately $0.08 per share related to income received in the form of special dividends in connection with certain Fund holdings.
Excluding this amount, the ratio of net investment income to average net assets would have been 2.45%.
dNet investment income per share includes approximately $0.29 per share related to income received in the form of a special dividend in connection with certain Fund hold-
ings. Excluding this amount, the ratio of net investment income to average net assets would have been 1.66%.
eNet investment income per share includes approximately $0.08 per share related to an adjustment for uncollectible interest in connection with certain Fund holdings. Exclud-
ing this amount, the ratio of net investment income to average net assets would have been 1.87%.
fTotal return is not annualized for periods less than one year.
gRatios are annualized for periods less than one year.
hIncludes dividend and/or interest expense on securities sold short and security borrowing fees, if any. See below for the ratios of such expenses to average net assets for the
periods presented. See Note 1(f).
iBenefit of expense reduction rounds to less than 0.01%.
jBenefit of waiver and payments by affiliates rounds to less than 0.01%.
kRounds to less than 0.01%.
14 Semiannual Report | The accompanying notes are an integral part of these financial statements.
franklintempleton.com
FRANKLIN MUTUAL SHARES FUND
FINANCIAL H IGHLIGHTS
Six Months Ended | Year Ended December 31, | |||||||||||||||||
June 30, 2016 | ||||||||||||||||||
(unaudited) | 2015 | 2014 | 2013 | 2012 | 2011 | |||||||||||||
Class A | ||||||||||||||||||
Per share operating performance | ||||||||||||||||||
(for a share outstanding throughout the period) | ||||||||||||||||||
Net asset value, beginning of period | $ | 25.78 | $ | 29.29 | $ | 28.12 | $ | 22.32 | $ | 19.81 | $ | 20.64 | ||||||
Income from investment operationsa: | ||||||||||||||||||
Net investment incomeb | 0.35 | c | 0.45 | 0.69 | d | 0.40 | 0.33 | 0.40 | e | |||||||||
Net realized and unrealized gains (losses) | 0.71 | (1.69 | ) | 1.37 | 5.76 | 2.60 | (0.79 | ) | ||||||||||
Total from investment operations | 1.06 | (1.24 | ) | 2.06 | 6.16 | 2.93 | (0.39 | ) | ||||||||||
Less distributions from: | ||||||||||||||||||
Net investment income | — | (0.51 | ) | (0.89 | ) | (0.36 | ) | (0.42 | ) | (0.44 | ) | |||||||
Net realized gains | — | (1.76 | ) | — | — | — | — | |||||||||||
Total distributions | — | (2.27 | ) | (0.89 | ) | (0.36 | ) | (0.42 | ) | (0.44 | ) | |||||||
Net asset value, end of period | $ | 26.84 | $ | 25.78 | $ | 29.29 | $ | 28.12 | $ | 22.32 | $ | 19.81 | ||||||
Total returnf | 4.11 | % | (4.10 | )% | 7.30 | % | 27.74 | % | 14.75 | % | (1.79 | )% | ||||||
Ratios to average net assetsg | ||||||||||||||||||
Expensesh | 1.05 | %i,j | 1.09 | %i,j | 1.10 | %i | 1.09 | %i | 1.12 | % | 1.16 | % | ||||||
Expenses incurred in connection with securities | ||||||||||||||||||
sold short | —%k | 0.02 | % | 0.03 | % | —%k | —%k | —%k | ||||||||||
Net investment income | 2.80 | %c | 1.54 | % | 2.37 | %d | 1.55 | % | 1.52 | % | 1.94 | %e | ||||||
Supplemental data | ||||||||||||||||||
Net assets, end of period (000’s) | $ | 4,734,354 | $ | 4,819,868 | $ | 5,392,130 | $ | 5,477,733 | $ | 4,633,895 | $ | 4,681,967 | ||||||
Portfolio turnover rate | 9.91 | % | 19.99 | % | 19.24 | % | 24.29 | % | 21.57 | % | 29.44 | % |
aThe amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases
of the Fund’s shares in relation to income earned and/or fluctuating fair value of the investments of the Fund.
bBased on average daily shares outstanding.
cNet investment income per share includes approximately $0.08 per share related to income received in the form of special dividends in connection with certain Fund holdings.
Excluding this amount, the ratio of net investment income to average net assets would have been 2.20%.
dNet investment income per share includes approximately $0.29 per share related to income received in the form of a special dividend in connection with certain Fund hold-
ings. Excluding this amount, the ratio of net investment income to average net assets would have been 1.36%.
eNet investment income per share includes approximately $0.08 per share related to an adjustment for uncollectible interest in connection with certain Fund holdings. Exclud-
ing this amount, the ratio of net investment income to average net assets would have been 1.57%.
fTotal return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year.
gRatios are annualized for periods less than one year.
hIncludes dividend and/or interest expense on securities sold short and security borrowing fees, if any. See below for the ratios of such expenses to average net assets for the
periods presented. See Note 1(f).
iBenefit of expense reduction rounds to less than 0.01%.
jBenefit of waiver and payments by affiliates rounds to less than 0.01%.
kRounds to less than 0.01%.
franklintempleton.com
The accompanying notes are an integral part of these financial statements. | Semiannual Report 15
FRANKLIN MUTUAL SHARES FUND
FINANCIAL H IGHLIGHTS
Six Months Ended | Year Ended December 31, | |||||||||||||||||
June 30, 2016 | ||||||||||||||||||
(unaudited) | 2015 | 2014 | 2013 | 2012 | 2011 | |||||||||||||
Class C | ||||||||||||||||||
Per share operating performance | ||||||||||||||||||
(for a share outstanding throughout the period) | ||||||||||||||||||
Net asset value, beginning of period | $ | 25.54 | $ | 29.02 | $ | 27.88 | $ | 22.13 | $ | 19.65 | $ | 20.46 | ||||||
Income from investment operationsa: | ||||||||||||||||||
Net investment incomeb | 0.26 | c | 0.24 | 0.48 | d | 0.22 | 0.17 | 0.25 | e | |||||||||
Net realized and unrealized gains (losses) | 0.69 | (1.67 | ) | 1.34 | 5.71 | 2.57 | (0.77 | ) | ||||||||||
Total from investment operations | 0.95 | (1.43 | ) | 1.82 | 5.93 | 2.74 | (0.52 | ) | ||||||||||
Less distributions from: | ||||||||||||||||||
Net investment income | — | (0.29 | ) | (0.68 | ) | (0.18 | ) | (0.26 | ) | (0.29 | ) | |||||||
Net realized gains | — | (1.76 | ) | — | — | — | — | |||||||||||
Total distributions | — | (2.05 | ) | (0.68 | ) | (0.18 | ) | (0.26 | ) | (0.29 | ) | |||||||
Net asset value, end of period | $ | 26.49 | $ | 25.54 | $ | 29.02 | $ | 27.88 | $ | 22.13 | $ | 19.65 | ||||||
Total returnf | 3.72 | % | (4.79 | )% | 6.56 | % | 26.82 | % | 13.97 | % | (2.44 | )% | ||||||
Ratios to average net assetsg | ||||||||||||||||||
Expensesh | 1.80 | %i,j | 1.81 | %i,j | 1.80 | %i | 1.79 | %i | 1.82 | % | 1.86 | % | ||||||
Expenses incurred in connection with securities | ||||||||||||||||||
sold short | —%k | 0.02 | % | 0.03 | % | —%k | —%k | —%k | ||||||||||
Net investment income | 2.05 | %c | 0.82 | % | 1.67 | %d | 0.85 | % | 0.82 | % | 1.24 | %e | ||||||
Supplemental data | ||||||||||||||||||
Net assets, end of period (000’s) | $ | 1,074,995 | $ | 1,101,302 | $ | 1,240,845 | $ | 1,236,603 | $ | 1,043,695 | $ | 1,065,446 | ||||||
Portfolio turnover rate | 9.91 | % | 19.99 | % | 19.24 | % | 24.29 | % | 21.57 | % | 29.44 | % |
aThe amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases
of the Fund’s shares in relation to income earned and/or fluctuating fair value of the investments of the Fund.
bBased on average daily shares outstanding.
cNet investment income per share includes approximately $0.08 per share related to income received in the form of special dividends in connection with certain Fund holdings.
Excluding this amount, the ratio of net investment income to average net assets would have been 1.45%.
dNet investment income per share includes approximately $0.29 per share related to income received in the form of a special dividend in connection with certain Fund hold-
ings. Excluding this amount, the ratio of net investment income to average net assets would have been 0.66%.
eNet investment income per share includes approximately $0.08 per share related to an adjustment for uncollectible interest in connection with certain Fund holdings. Exclud-
ing this amount, the ratio of net investment income to average net assets would have been 0.87%.
fTotal return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year.
gRatios are annualized for periods less than one year.
hIncludes dividend and/or interest expense on securities sold short and security borrowing fees, if any. See below for the ratios of such expenses to average net assets for the
periods presented. See Note 1(f).
iBenefit of expense reduction rounds to less than 0.01%.
jBenefit of waiver and payments by affiliates rounds to less than 0.01%.
kRounds to less than 0.01%.
16 Semiannual Report | The accompanying notes are an integral part of these financial statements.
franklintempleton.com
FRANKLIN MUTUAL SHARES FUND
FINANCIAL H IGHLIGHTS
Six Months Ended | Year Ended December 31, | |||||||||||||||||
June 30, 2016 | ||||||||||||||||||
(unaudited) | 2015 | 2014 | 2013 | 2012 | 2011 | |||||||||||||
Class R | ||||||||||||||||||
Per share operating performance | ||||||||||||||||||
(for a share outstanding throughout the period) | ||||||||||||||||||
Net asset value, beginning of period | $ | 25.66 | $ | 29.14 | $ | 27.98 | $ | 22.20 | $ | 19.70 | $ | 20.52 | ||||||
Income from investment operationsa: | ||||||||||||||||||
Net investment incomeb | 0.32 | c | 0.38 | 0.64 | d | 0.34 | 0.28 | 0.36 | e | |||||||||
Net realized and unrealized gains (losses) | 0.70 | (1.67 | ) | 1.34 | 5.73 | 2.59 | (0.78 | ) | ||||||||||
Total from investment operations | 1.02 | (1.29 | ) | 1.98 | 6.07 | 2.87 | (0.42 | ) | ||||||||||
Less distributions from: | ||||||||||||||||||
Net investment income | — | (0.43 | ) | (0.82 | ) | (0.29 | ) | (0.37 | ) | (0.40 | ) | |||||||
Net realized gains | — | (1.76 | ) | — | — | — | — | |||||||||||
Total distributions | — | (2.19 | ) | (0.82 | ) | (0.29 | ) | (0.37 | ) | (0.40 | ) | |||||||
Net asset value, end of period | $ | 26.68 | $ | 25.66 | $ | 29.14 | $ | 27.98 | $ | 22.20 | $ | 19.70 | ||||||
Total returnf | 3.98 | % | (4.32 | )% | 7.10 | % | 27.47 | % | 14.52 | % | (1.94 | )% | ||||||
Ratios to average net assetsg | ||||||||||||||||||
Expensesh | 1.30 | %i,j | 1.31 | %i,j | 1.30 | %i | 1.29 | %i | 1.32 | % | 1.36 | % | ||||||
Expenses incurred in connection with securities sold | ||||||||||||||||||
short | —%k | 0.02 | % | 0.03 | % | —%k | —%k | —%k | ||||||||||
Net investment income | 2.55 | %c | 1.32 | % | 2.17 | %d | 1.35 | % | 1.32 | % | 1.74 | %e | ||||||
Supplemental data | ||||||||||||||||||
Net assets, end of period (000’s) | $ | 127,886 | $ | 134,050 | $ | 172,938 | $ | 192,658 | $ | 191,304 | $ | 218,757 | ||||||
Portfolio turnover rate | 9.91 | % | 19.99 | % | 19.24 | % | 24.29 | % | 21.57 | % | 29.44 | % |
aThe amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases
of the Fund’s shares in relation to income earned and/or fluctuating fair value of the investments of the Fund.
bBased on average daily shares outstanding.
cNet investment income per share includes approximately $0.08 per share related to income received in the form of special dividends in connection with certain Fund holdings.
Excluding this amount, the ratio of net investment income to average net assets would have been 1.95%.
dNet investment income per share includes approximately $0.29 per share related to income received in the form of a special dividend in connection with certain Fund hold-
ings. Excluding this amount, the ratio of net investment income to average net assets would have been 1.16%.
eNet investment income per share includes approximately $0.08 per share related to an adjustment for uncollectible interest in connection with certain Fund holdings. Exclud-
ing this amount, the ratio of net investment income to average net assets would have been 1.37%.
fTotal return is not annualized for periods less than one year.
gRatios are annualized for periods less than one year.
hIncludes dividend and/or interest expense on securities sold short and security borrowing fees, if any. See below for the ratios of such expenses to average net assets for the
periods presented. See Note 1(f).
iBenefit of expense reduction rounds to less than 0.01%.
jBenefit of waiver and payments by affiliates rounds to less than 0.01%.
kRounds to less than 0.01%.
franklintempleton.com
The accompanying notes are an integral part of these financial statements. | Semiannual Report 17
FRANKLIN MUTUAL SHARES FUND
FINANCIAL H IGHLIGHTS
Six Months Ended | Year Ended December 31, | |||||||||||
June 30, 2016 | ||||||||||||
(unaudited) | 2015 | 2014 | 2013 | a | ||||||||
Class R6 | ||||||||||||
Per share operating performance | ||||||||||||
(for a share outstanding throughout the period) | ||||||||||||
Net asset value, beginning of period | $ | 25.98 | $ | 29.51 | $ | 28.33 | $ | 24.91 | ||||
Income from investment operationsb: | ||||||||||||
Net investment incomec | 0.41 | d | 0.57 | 0.82 | e | 0.38 | ||||||
Net realized and unrealized gains (losses) | 0.72 | (1.71 | ) | 1.37 | 3.51 | |||||||
Total from investment operations | 1.13 | (1.14 | ) | 2.19 | 3.89 | |||||||
Less distributions from: | ||||||||||||
Net investment income | — | (0.63 | ) | (1.01 | ) | (0.47 | ) | |||||
Net realized gains | — | (1.76 | ) | — | — | |||||||
Total distributions | — | (2.39 | ) | (1.01 | ) | (0.47 | ) | |||||
Net asset value, end of period | $ | 27.11 | $ | 25.98 | $ | 29.51 | $ | 28.33 | ||||
Total returnf | 4.35 | % | (3.71 | )% | 7.72 | % | 15.70 | % | ||||
Ratios to average net assetsg | ||||||||||||
Expensesh,i | 0.67 | %j | 0.69 | %j | 0.69 | % | 0.67 | % | ||||
Expenses incurred in connection with securities sold short | —%k | 0.02 | % | 0.03 | % | —%k | ||||||
Net investment income | 3.18 | %d | 1.94 | % | 2.78 | %e | 1.97 | % | ||||
Supplemental data | ||||||||||||
Net assets, end of period (000’s) | $ | 1,868,137 | $ | 1,923,466 | $ | 2,249,991 | $ | 2,221,889 | ||||
Portfolio turnover rate | 9.91 | % | 19.99 | % | 19.24 | % | 24.29 | % |
aFor the period May 1, 2013 (effective date) to December 31, 2013.
bThe amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases
of the Fund’s shares in relation to income earned and/or fluctuating fair value of the investments of the Fund.
cBased on average daily shares outstanding.
dNet investment income per share includes approximately $0.08 per share related to income received in the form of special dividends in connection with certain Fund holdings.
Excluding this amount, the ratio of net investment income to average net assets would have been 2.58%.
eNet investment income per share includes approximately $0.29 per share related to income received in the form of a special dividend in connection with certain Fund hold-
ings. Excluding this amount, the ratio of net investment income to average net assets would have been 1.77%.
fTotal return is not annualized for periods less than one year.
gRatios are annualized for periods less than one year.
hIncludes dividend and/or interest expense on securities sold short and security borrowing fees, if any. See below for the ratios of such expenses to average net assets for the
periods presented. See Note 1(f).
iBenefit of expense reduction rounds to less than 0.01%.
jBenefit of waiver and payments by affiliates rounds to less than 0.01%.
kRounds to less than 0.01%.
18 Semiannual Report | The accompanying notes are an integral part of these financial statements.
franklintempleton.com
FRANKLIN MUTUAL SHARES FUND
Statement of Investments, June 30, 2016 (unaudited) | ||||
Country | Shares/Units | Value | ||
Common Stocks and Other Equity Interests 86.8% | ||||
Aerospace & Defense 1.1% | ||||
B/E Aerospace Inc | United States | 1,412,070 | $ | 65,202,332 |
Huntington Ingalls Industries Inc | United States | 454,152 | 76,311,161 | |
a KLX Inc | United States | 706,035 | 21,887,085 | |
163,400,578 | ||||
Auto Components 0.2% | ||||
a,b,c International Automotive Components Group Brazil LLC | Brazil | 7,234,813 | 119,107 | |
a,b,c,d International Automotive Components Group North America LLC | United States | 63,079,866 | 27,828,692 | |
27,947,799 | ||||
Automobiles 1.2% | ||||
General Motors Co | United States | 6,183,080 | 174,981,164 | |
Banks 8.9% | ||||
Barclays PLC | United Kingdom | 38,190,870 | 70,580,257 | |
CIT Group Inc | United States | 3,544,866 | 113,116,674 | |
Citigroup Inc | United States | 3,362,406 | 142,532,390 | |
Citizens Financial Group Inc | United States | 6,757,671 | 135,018,267 | |
Columbia Banking System Inc | United States | 854,350 | 23,973,061 | |
a FCB Financial Holdings Inc., A | United States | 1,647,570 | 56,017,380 | |
c Guaranty Bancorp | United States | 1,146,366 | 19,144,312 | |
JPMorgan Chase & Co | United States | 3,550,940 | 220,655,412 | |
PNC Financial Services Group Inc | United States | 3,438,533 | 279,862,201 | |
State Bank Financial Corp | United States | 1,467,000 | 29,853,450 | |
SunTrust Banks Inc | United States | 2,963,080 | 121,723,326 | |
Wells Fargo & Co | United States | 2,531,930 | 119,836,247 | |
1,332,312,977 | ||||
Beverages 1.2% | ||||
PepsiCo Inc | United States | 1,640,769 | 173,823,068 | |
Chemicals 0.3% | ||||
a,e,f Dow Corning Corp., Contingent Distribution | United States | 12,630,547 | — | |
FMC Corp | United States | 945,859 | 43,802,730 | |
43,802,730 | ||||
Communications Equipment 2.5% | ||||
Cisco Systems Inc | United States | 8,126,460 | 233,148,137 | |
Nokia Corp., ADR | Finland | 10,897,776 | 62,008,346 | |
Nokia OYJ, A | Finland | 13,670,039 | 77,458,469 | |
372,614,952 | ||||
Construction Materials 0.5% | ||||
a LafargeHolcim Ltd., B | Switzerland | 1,946,175 | 80,829,766 | |
Consumer Finance 0.4% | ||||
a Ally Financial Inc | United States | 3,254,500 | 55,554,315 | |
Containers & Packaging 1.8% | ||||
International Paper Co | United States | 4,045,267 | 171,438,416 | |
WestRock Co | United States | 2,648,821 | 102,959,672 | |
274,398,088 | ||||
Diversified Financial Services 0.6% | ||||
Voya Financial Inc | United States | 3,413,030 | 84,506,623 |
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Semiannual Report 19
FRANKLIN MUTUAL SHARES FUND
STATEMENT OF INVESTMENTS (UNAUDITED)
Country | Shares/Units | Value | ||
Common Stocks and Other Equity Interests (continued) | ||||
Diversified Telecommunication Services 0.7% | ||||
a,e,f Global Crossing Holdings Ltd., Contingent Distribution | United States | 105,649,309 | $ | — |
Koninklijke KPN NV | Netherlands | 30,410,640 | 109,870,212 | |
109,870,212 | ||||
Electrical Equipment 0.1% | ||||
a Sensata Technologies Holding NV | United States | 290,494 | 10,135,336 | |
Energy Equipment & Services 1.1% | ||||
Baker Hughes Inc | United States | 3,663,252 | 165,322,563 | |
Food & Staples Retailing 3.8% | ||||
CVS Health Corp | United States | 1,528,221 | 146,311,878 | |
The Kroger Co | United States | 4,624,996 | 170,153,603 | |
a Rite Aid Corp | United States | 8,729,840 | 65,386,502 | |
Walgreens Boots Alliance Inc | United States | 2,283,129 | 190,116,152 | |
571,968,135 | ||||
Health Care Equipment & Supplies 5.9% | ||||
Medtronic PLC | United States | 5,682,814 | 493,097,771 | |
St. Jude Medical Inc | United States | 2,303,440 | 179,668,320 | |
Stryker Corp | United States | 1,767,092 | 211,750,634 | |
884,516,725 | ||||
Health Care Providers & Services 0.4% | ||||
Cigna Corp | United States | 492,860 | 63,081,151 | |
Household Products 0.2% | ||||
Energizer Holdings Inc | United States | 635,933 | 32,744,190 | |
Independent Power & Renewable Electricity Producers 0.4% | ||||
NRG Energy Inc | United States | 4,399,652 | 65,950,783 | |
Insurance 10.6% | ||||
a Alleghany Corp | United States | 377,389 | 207,405,447 | |
The Allstate Corp | United States | 2,106,477 | 147,351,394 | |
American International Group Inc | United States | 5,079,039 | 268,630,373 | |
Chubb Ltd | United States | 1,732,376 | 226,438,867 | |
MetLife Inc | United States | 3,551,930 | 141,473,372 | |
c White Mountains Insurance Group Ltd | United States | 458,519 | 386,072,998 | |
XL Group PLC | Ireland | 6,076,710 | 202,415,210 | |
1,579,787,661 | ||||
Internet Software & Services 0.4% | ||||
a LinkedIn Corp., A | United States | 317,378 | 60,063,786 | |
IT Services 0.8% | ||||
Xerox Corp | United States | 13,032,713 | 123,680,446 | |
Machinery 1.9% | ||||
Caterpillar Inc | United States | 2,219,257 | 168,241,873 | |
CNH Industrial NV | United Kingdom | 4,351,332 | 31,296,850 | |
CNH Industrial NV, special voting | United Kingdom | 5,296,616 | 38,095,783 | |
c Federal Signal Corp | United States | 3,360,800 | 43,287,104 | |
280,921,610 | ||||
Marine 0.8% | ||||
A.P. Moeller-Maersk AS, B | Denmark | 95,664 | 124,280,679 |
20 Semiannual Report
franklintempleton.com
FRANKLIN MUTUAL SHARES FUND
STATEMENT OF INVESTMENTS (UNAUDITED)
Country | Shares/Units | Value | ||
Common Stocks and Other Equity Interests (continued) | ||||
Media 6.3% | ||||
CBS Corp., B | United States | 3,336,259 | $ | 181,625,940 |
a Charter Communications Inc., A | United States | 865,529 | 197,894,550 | |
a DISH Network Corp., A | United States | 2,076,987 | 108,834,119 | |
Relx PLC | United Kingdom | 9,892,030 | 181,494,852 | |
Time Warner Inc | United States | 1,428,918 | 105,082,630 | |
Twenty-First Century Fox Inc., B | United States | 5,787,646 | 157,713,353 | |
932,645,444 | ||||
Metals & Mining 1.0% | ||||
Freeport-McMoRan Inc., B | United States | 5,933,533 | 66,099,557 | |
ThyssenKrupp AG | Germany | 3,973,743 | 79,435,914 | |
145,535,471 | ||||
Multiline Retail 0.5% | ||||
Macy’s Inc | United States | 2,389,270 | 80,303,365 | |
Oil, Gas & Consumable Fuels 6.6% | ||||
Anadarko Petroleum Corp | United States | 654,473 | 34,850,687 | |
Apache Corp | United States | 1,332,734 | 74,193,302 | |
BP PLC | United Kingdom | 15,851,497 | 92,609,076 | |
CONSOL Energy Inc | United States | 4,672,924 | 75,187,347 | |
Kinder Morgan Inc | United States | 9,361,520 | 175,247,654 | |
Marathon Oil Corp | United States | 11,077,437 | 166,272,329 | |
Royal Dutch Shell PLC, A (EUR Traded) | United Kingdom | 6,685,312 | 183,060,329 | |
Royal Dutch Shell PLC, A (GBP Traded) | United Kingdom | 3,716,893 | 101,476,253 | |
a,b,d Warrior Met Coal LLC, A | United States | 39,407 | 3,972,872 | |
a,b,d Warrior Met Coal LLC, B | United States | 92,157 | 9,290,937 | |
The Williams Cos. Inc | United States | 3,008,243 | 65,068,296 | |
981,229,082 | ||||
Personal Products 0.4% | ||||
a Edgewell Personal Care Co | United States | 635,933 | 53,679,105 | |
Pharmaceuticals 7.9% | ||||
Eli Lilly & Co | United States | 3,904,091 | 307,447,166 | |
Merck & Co. Inc | United States | 8,275,160 | 476,731,968 | |
Novartis AG, ADR | Switzerland | 3,016,830 | 248,918,643 | |
Teva Pharmaceutical Industries Ltd., ADR | Israel | 3,007,416 | 151,062,506 | |
1,184,160,283 | ||||
Real Estate Investment Trusts (REITs) 0.9% | ||||
c Alexander’s Inc | United States | 326,675 | 133,685,210 | |
Real Estate Management & Development 0.1% | ||||
a Forestar Group Inc | United States | 886,386 | 10,539,130 | |
Software 6.2% | ||||
CA Inc | United States | 5,509,612 | 180,880,562 | |
Microsoft Corp | United States | 9,580,700 | 490,244,419 | |
Symantec Corp | United States | 12,274,551 | 252,119,277 | |
923,244,258 | ||||
Specialty Retail 0.3% | ||||
a Office Depot Inc | United States | 12,286,390 | 40,667,951 |
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Semiannual Report 21
FRANKLIN MUTUAL SHARES FUND
STATEMENT OF INVESTMENTS (UNAUDITED)
Country | Shares/Units | Value | |||
Common Stocks and Other Equity Interests (continued) | |||||
Technology Hardware, Storage & Peripherals 3.4% | |||||
EMC Corp | United States | 6,467,600 | $ | 175,724,692 | |
Hewlett Packard Enterprise Co | United States | 5,001,424 | 91,376,017 | ||
HP Inc | United States | 5,001,424 | 62,767,871 | ||
Samsung Electronics Co. Ltd | South Korea | 147,228 | 182,001,058 | ||
511,869,638 | |||||
Tobacco 6.2% | |||||
Altria Group Inc | United States | 2,903,030 | 200,192,949 | ||
British American Tobacco PLC | United Kingdom | 4,377,848 | 282,706,374 | ||
Imperial Brands PLC | United Kingdom | 3,810,199 | 205,938,852 | ||
Philip Morris International Inc | United States | 636,649 | 64,759,936 | ||
Reynolds American Inc | United States | 3,147,696 | 169,755,245 | ||
923,353,356 | |||||
Wireless Telecommunication Services 1.2% | |||||
Vodafone Group PLC | United Kingdom | 58,574,055 | 177,800,672 | ||
Total Common Stocks and Other Equity Interests | |||||
(Cost $10,389,857,891) | 12,955,208,302 | ||||
Convertible Preferred Stocks (Cost $755,800) 0.0%† | |||||
Banks 0.0%† | |||||
g Columbia Banking System Inc., 5.168%, cvt. pfd., B | United States | 7,558 | 2,471,975 | ||
Principal | |||||
Amount * | |||||
Corporate Bonds, Notes and Senior Floating Rate | |||||
Interests 4.1% | |||||
Avaya Inc., | |||||
h senior note, 144A, 10.50%, 3/01/21 | United States | 67,859,000 | 15,268,275 | ||
h senior secured note, 144A, 7.00%, 4/01/19 | United States | 37,416,000 | 26,845,980 | ||
i,j Term B-3 Loan, 5.134%, 10/26/17 | United States | 37,242,834 | 28,919,060 | ||
i,j Term B-6 Loan, 6.50%, 3/30/18 | United States | 22,002,294 | 16,274,833 | ||
i,j Term B-7 Loan, 6.25%, 5/29/20 | United States | 23,045,807 | 16,381,720 | ||
i,j Belk Inc., Closing Date Term Loan, 5.75%, 12/12/22 | United States | 42,661,080 | 34,128,864 | ||
iHeartCommunications Inc., | |||||
senior secured note, first lien, 9.00%, 12/15/19 | United States | 74,295,000 | 56,742,806 | ||
i,j Tranche D Term Loan, 7.21%, 1/30/19 | United States | 94,620,527 | 69,546,087 | ||
i,j Tranche E Term Loan, 7.96%, 7/30/19 | United States | 30,412,812 | 22,372,425 | ||
i,j Toys R Us-Delaware Inc., | |||||
FILO Loans, 8.25%, 10/24/19 | United States | 8,171,000 | 7,937,309 | ||
Term B-4 Loan, 9.75%, 4/24/20 | United States | 78,185,303 | 67,890,878 | ||
h Valeant Pharmaceuticals International, | |||||
senior bond, 144A, 6.75%, 8/15/21 | United States | 10,842,000 | 9,297,015 | ||
senior bond, 144A, 7.25%, 7/15/22 | United States | 5,337,000 | 4,604,230 | ||
senior note, 144A, 6.375%, 10/15/20 | United States | 66,425,000 | 57,457,625 | ||
i,j,k Veritas Software Corp., | |||||
Term Loan B1, 6.625%, 6/15/23 | United States | 470,820 | EUR | 445,940 | |
Term Loan B1, 6.625%, 1/27/23 | United States | 45,180,968 | 39,533,347 | ||
Term Loan B2, 8.625%, 1/27/23 | United States | 43,619,400 | 37,458,159 |
22 Semiannual Report
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FRANKLIN MUTUAL SHARES FUND
STATEMENT OF INVESTMENTS (UNAUDITED)
Principal | ||||
Country | Amount * | Value | ||
Corporate Bonds, Notes and Senior Floating Rate | ||||
Interests (continued) | ||||
h Veritas U.S. Inc./Veritas Bermuda Ltd., senior note, 144A, 10.50%, 2/01/24 | United States | 53,953,000 | $ | 46,129,815 |
h Western Digital Corp., senior note, 144A, 10.50%, 4/01/24 | United States | 51,569,000 | 55,307,753 | |
Total Corporate Bonds, Notes and Senior Floating Rate | ||||
Interests (Cost $721,570,593) | 612,542,121 | |||
Corporate Notes and Senior Floating Rate Interests in | ||||
Reorganization 1.3% | ||||
b,l Broadband Ventures III LLC, secured promissory note, 5.00%, 2/01/12 | United States | 19,594 | — | |
i,j,l Caesars Entertainment Operating Co. Inc., 1.50%, 3/01/17, | ||||
Term B-5-B Loans | United States | 9,541,623 | 9,414,405 | |
Term B-6-B Loans | United States | 45,490,495 | 45,604,221 | |
Term B-7 Loans | United States | 30,701,720 | 31,034,312 | |
l Samson Investment Co., senior note, 9.75%, 2/15/20 | United States | 55,052,000 | 1,238,670 | |
i,j,l Texas Competitive Electric Holdings Co. LLC, Term Loans, 4.943%, 10/10/17 | United States | 194,177,556 | 65,130,453 | |
h,l Texas Competitive Electric Holdings Co. LLC/Texas Competitive Electric | ||||
Holdings Finance Inc., senior secured note, first lien, 144A, 4.934%, 10/01/20 | United States | 98,672,000 | 33,795,160 | |
h,l,m Walter Energy Inc., second lien, 144A, PIK, 11.50%, 4/01/20 | United States | 17,468,800 | 6,114 | |
Total Corporate Notes and Senior Floating Rate Interests in | ||||
Reorganization (Cost $371,117,599) | 186,223,335 | |||
Shares | ||||
Companies in Liquidation 0.1% | ||||
a Adelphia Recovery Trust | United States | 99,967,609 | 209,932 | |
a,e Adelphia Recovery Trust, Arahova Contingent Value Vehicle, Contingent | ||||
Distribution | United States | 12,005,115 | 120,051 | |
a,b,c,d CB FIM Coinvestors LLC | United States | 43,105,703 | — | |
a,e,f Century Communications Corp., Contingent Distribution | United States | 33,138,000 | — | |
a,b FIM Coinvestor Holdings I, LLC | United States | 53,924,666 | — | |
a,n Lehman Brothers Holdings Inc., Bankruptcy Claim | United States | 420,480,670 | 13,140,021 | |
a,e,f Tribune Media Litigation Trust, Contingent Distribution | United States | 995,739 | — | |
a,e,f Tropicana Litigation Trust, Contingent Distribution | United States | 76,355,000 | — | |
Total Companies in Liquidation (Cost $37,035,312) | 13,470,004 | |||
Principal | ||||
Amount * | ||||
Municipal Bonds (Cost $56,143,000) 0.3% | ||||
Puerto Rico Commonwealth GO, Refunding, Series A, 8.00%, 7/01/35 | United States | 64,157,000 | 42,904,994 | |
Total Investments before Short Term Investments | ||||
(Cost $11,576,480,195) | 13,812,820,731 | |||
Short Term Investments 7.5% | ||||
U.S. Government and Agency Securities 7.5% | ||||
FHLB, 7/01/16 | United States | 153,800,000 | 153,800,000 | |
o U.S. Treasury Bill, | ||||
7/07/16 | United States | 185,900,000 | 185,897,769 | |
p7/14/16 - 12/08/16 | United States | 784,000,000 | 783,463,111 | |
Total U.S. Government and Agency Securities | ||||
(Cost $1,122,832,953) | 1,123,160,880 |
franklintempleton.com
Semiannual Report 23
FRANKLIN MUTUAL SHARES FUND
STATEMENT OF INVESTMENTS (UNAUDITED)
Country | Shares | Value | |||
Total Investments (Cost $12,699,313,148) 100.1% | $ | 14,935,981,611 | |||
Securities Sold Short (0.5)% | (78,849,335 | ) | |||
Other Assets, less Liabilities 0.4% | 66,913,109 | ||||
Net Assets 100.0% | $ | 14,924,045,385 | |||
q Securities Sold Short (Proceeds $77,333,215) (0.5)% | |||||
Common Stocks (0.5)% | |||||
Health Care Equipment & Supplies (0.5)% | |||||
Abbott Laboratories | United States | 2,005,834 | $ | (78,849,335 | ) |
†Rounds to less than 0.1% of net assets.
*The principal amount is stated in U.S. dollars unless otherwise indicated.
aNon-income producing.
bSee Note 9 regarding restricted securities.
cSee Note 11 regarding holdings of 5% voting securities.
dAt June 30, 2016, pursuant to the Fund’s policies and the requirements of applicable securities law, the Fund is restricted from trading these securities at period end.
eContingent distributions represent the right to receive additional distributions, if any, during the reorganization of the underlying company. Shares represent total underlying
principal of debt securities.
fSecurity has been deemed illiquid because it may not be able to be sold within seven days.
gVariable rate security. The rate shown represents the yield at period end.
hSecurity was purchased pursuant to Rule 144A under the Securities Act of 1933 and may be sold in transactions exempt from registration only to qualified institutional buyers
or in a public offering registered under the Securities Act of 1933. These securities have been deemed liquid under guidelines approved by the Trust’s Board of Trustees. At
June 30, 2016, the aggregate value of these securities was $248,711,967, representing 1.7% of net assets.
iSee Note 1(h) regarding senior floating rate interests.
jThe coupon rate shown represents the rate at period end.
kSecurity purchased on a delayed delivery basis. See Note 1(c).
lSee Note 8 regarding credit risk and defaulted securities.
mIncome may be received in additional securities and/or cash.
nBankruptcy Claim represent the right to receive distributions, if any, during the liquidation of the underlying pool of assets. Shares represent the amount of allowed unsecured
claims.
oThe security is traded on a discount basis with no stated coupon rate.
pA portion or all of the security has been segregated as collateral for securities sold short. At June 30, 2016, the aggregate value of these securities and/or cash pledged
amounted to $116,933,513, representing 0.8% of net assets.
qSee Note 1(f) regarding securities sold short.
24 Semiannual Report
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FRANKLIN MUTUAL SHARES FUND
STATEMENT OF INVESTMENTS (UNAUDITED)
At June 30, 2016, the Fund had the following futures contracts outstanding. See Note 1(d). | ||||||||||||
Futures Contracts | ||||||||||||
Number of | Notional Expiration | Unrealized | Unrealized | |||||||||
Description | Type | Contracts | Value | Date | Appreciation | Depreciation | ||||||
Currency Contracts | ||||||||||||
EUR/USD | Short 1,618 | $ | 224,649,188 | 9/19/16 | $ | 6,281,234 | $ | — | ||||
GBP/USD | Short 3,923 | 324,824,400 | 9/19/16 | 30,911,572 | — | |||||||
Total Futures Contracts | $ | 37,192,806 | $ | — | ||||||||
Net unrealized appreciation (depreciation) | $ | 37,192,806 | ||||||||||
At June 30, 2016, the Fund had the following forward exchange contracts outstanding. See Note 1(d). | ||||||||||||
Forward Exchange Contracts | ||||||||||||
Contract | Settlement | Unrealized | Unrealized | |||||||||
Currency | Counterpartya Type | Quantity | Amount | Date | Appreciation | Depreciation | ||||||
OTC Forward Exchange Contracts | ||||||||||||
Euro | BANT | Buy | 7,725,960 | $ | 8,580,659 | 7/06/16 | $ | 25,140 | $ | (28,448 | ) | |
Euro | BANT | Sell | 15,671,974 | 17,154,502 | 7/06/16 | 26,262 | (270,766 | ) | ||||
Euro | BONY | Buy | 3,390,510 | 3,803,290 | 7/06/16 | — | (39,150 | ) | ||||
Euro | FBCO | Buy | 10,127,364 | 11,298,040 | 7/06/16 | 34,936 | (89,589 | ) | ||||
Euro | FBCO | Sell | 2,257,684 | 2,574,214 | 7/06/16 | 67,736 | — | |||||
Euro | HSBC | Buy | 5,658,440 | 6,272,036 | 7/06/16 | 34,099 | (24,142 | ) | ||||
Euro | HSBC | Sell | 16,578,494 | 18,181,576 | 7/06/16 | 47,240 | (271,087 | ) | ||||
Euro | SSBT | Buy | 7,474,044 | 8,305,117 | 7/06/16 | 39,172 | (46,614 | ) | ||||
Euro | SSBT | Sell | 2,292,617 | 2,589,016 | 7/06/16 | 43,755 | — | |||||
British Pound | BANT | Buy | 11,822,266 | 16,804,460 | 7/21/16 | — | (1,037,734 | ) | ||||
British Pound | BANT | Sell | 48,969,072 | 69,500,309 | 7/21/16 | 4,192,867 | — | |||||
British Pound | FBCO | Sell | 4,307,974 | 6,153,122 | 7/21/16 | 407,807 | — | |||||
British Pound | DBFX | Sell | 1,925,013 | 2,770,671 | 7/21/16 | 203,384 | — | |||||
British Pound | HSBC | Buy | 8,020,585 | 11,330,040 | 7/21/16 | — | (633,413 | ) | ||||
British Pound | HSBC | Sell | 42,349,359 | 60,085,937 | 7/21/16 | 3,606,853 | — | |||||
British Pound | SSBT | Buy | 5,259,940 | 7,418,361 | 7/21/16 | — | (403,459 | ) | ||||
Euro | BANT | Buy | 889,970 | 979,755 | 7/21/16 | 8,843 | — | |||||
Euro | BANT | Sell | 13,046,423 | 14,412,234 | 7/21/16 | 33,344 | (113,353 | ) | ||||
Euro | BONY | Buy | 2,718,578 | 2,992,429 | 7/21/16 | 27,425 | — | |||||
Euro | BONY | Sell | 3,904,503 | 4,313,926 | 7/21/16 | 15,228 | (38,507 | ) | ||||
Euro | DBFX | Sell | 816,000 | 893,959 | 7/21/16 | — | (12,471 | ) | ||||
Euro | HSBC | Buy | 2,900,000 | 3,259,224 | 7/21/16 | — | (37,843 | ) | ||||
Euro | HSBC | Sell | 13,478,567 | 14,935,410 | 7/21/16 | 40,725 | (77,593 | ) | ||||
Euro | SSBT | Sell | 15,926,668 | 17,768,229 | 7/21/16 | 148,744 | (72,195 | ) | ||||
South Korean Won | BANT | Sell | 26,245,640,362 | 21,960,881 | 8/12/16 | — | (795,044 | ) | ||||
South Korean Won | FBCO | Buy | 3,135,126,131 | 2,723,355 | 8/12/16 | — | (5,087 | ) | ||||
South Korean Won | FBCO | Sell | 32,194,074,189 | 27,643,692 | 8/12/16 | 224,527 | (494,268 | ) | ||||
South Korean Won | HSBC | Buy | 4,269,612,000 | 3,734,137 | 8/12/16 | — | (32,228 | ) | ||||
South Korean Won | HSBC | Sell | 62,794,034,943 | 52,009,151 | 8/12/16 | 6,294 | (2,441,854 | ) | ||||
British Pound | BANT | Sell | 54,734,322 | 78,201,906 | 8/19/16 | 5,185,130 | — | |||||
British Pound | HSBC | Sell | 19,472,880 | 27,619,777 | 8/19/16 | 1,642,531 | — | |||||
Euro | BANT | Sell | 3,285,377 | 3,744,821 | 10/03/16 | 85,004 | — | |||||
Euro | HSBC | Sell | 33,499,149 | 38,184,928 | 10/03/16 | 867,825 | — | |||||
Euro | SSBT | Sell | 33,600,298 | 38,304,466 | 10/03/16 | 874,686 | — | |||||
Euro | BANT | Sell | 29,594,072 | 33,543,697 | 10/18/16 | 556,906 | — | |||||
Euro | SSBT | Sell | 33,401,385 | 37,845,172 | 10/18/16 | 614,590 | — | |||||
British Pound | SSBT | Sell | 105,608,314 | 151,916,503 | 10/24/16 | 10,919,704 | — | |||||
Euro | BANT | Sell | 14,884,001 | 17,235,674 | 11/04/16 | 634,023 | — | |||||
Euro | HSBC | Sell | 14,884,002 | 17,243,116 | 11/04/16 | 641,465 | — | |||||
South Korean Won | BANT | Sell | 16,574,001,668 | 14,353,583 | 11/14/16 | — | (8,333 | ) | ||||
South Korean Won | FBCO | Sell | 14,607,658,812 | 12,672,921 | 11/14/16 | 15,797 | (891 | ) | ||||
South Korean Won | HSBC | Sell | 60,593,230,157 | 53,107,584 | 11/14/16 | 610,864 | (9,300 | ) |
franklintempleton.com
Semiannual Report 25
FRANKLIN MUTUAL SHARES FUND
STATEMENT OF INVESTMENTS (UNAUDITED)
Forward Exchange Contracts (continued) | |||||||||||
Contract | Settlement | Unrealized | Unrealized | ||||||||
Currency | Counterpartya Type | Quantity | Amount | Date | Appreciation | Depreciation | |||||
OTC Forward Exchange Contracts (continued) | |||||||||||
Euro | BANT | Sell | 12,414,708 | $ | 13,999,889 | 11/18/16 | $ | 144,709 | $ | — | |
Euro | BONY | Sell | 12,118,339 | 13,742,987 | 11/18/16 | 219,538 | (974 | ) | |||
Euro | HSBC | Sell | 18,984,497 | 21,452,170 | 11/18/16 | 265,080 | (167 | ) | |||
Euro | SSBT | Sell | 7,074,614 | 7,979,290 | 11/18/16 | 84,048 | (235 | ) | |||
British Pound | BANT | Sell | 4,513,723 | 6,051,309 | 11/23/16 | 28,944 | (6,276 | ) | |||
British Pound | BONY | Sell | 76,393,968 | 110,980,846 | 11/23/16 | 8,947,146 | — | ||||
British Pound | FBCO | Sell | 1,212,569 | 1,639,848 | 11/23/16 | 20,310 | — | ||||
British Pound | HSBC | Sell | 67,867,599 | 97,445,695 | 11/23/16 | 6,812,079 | (12,051 | ) | |||
British Pound | SSBT | Sell | 16,829,457 | 23,240,144 | 11/23/16 | 776,711 | (14,411 | ) | |||
Total Forward Exchange Contracts | $ | 49,181,471 | $ | (7,017,483 | ) | ||||||
Net unrealized appreciation (depreciation) | $ | 42,163,988 | |||||||||
aMay be comprised of multiple contracts with the same counterparty, currency and settlement date. | |||||||||||
See Abbreviations on page 43. |
26 Semiannual Report | The accompanying notes are an integral part of these financial statements.
franklintempleton.com
FRANKLIN MUTUAL SHARES FUND
Financial Statements | ||
Statement of Assets and Liabilities | ||
June 30, 2016 (unaudited) | ||
Assets: | ||
Investments in securities: | ||
Cost - Unaffiliated issuers | $ | 12,475,594,206 |
Cost - Non-controlled affiliates (Note 11) | 223,718,942 | |
Total cost of investments | $ | 12,699,313,148 |
Value - Unaffiliated issuers | $ | 14,325,844,188 |
Value - Non-controlled affiliates (Note 11) | 610,137,423 | |
Total value of investments | 14,935,981,611 | |
Cash | 4,689,288 | |
Restricted Cash (Note 1e) | 13,490,000 | |
Foreign currency, at value (cost $6,585,252) | 6,544,124 | |
Receivables: | ||
Investment securities sold | 53,579,317 | |
Capital shares sold | 6,904,822 | |
Dividends and interest | 54,184,975 | |
European Union tax reclaims | 3,866,790 | |
Due from brokers | 99,611,919 | |
Variation margin | 5,128,313 | |
Unrealized appreciation on OTC forward exchange contracts | 49,181,471 | |
Other assets | 6,970 | |
Total assets | 15,233,169,600 | |
Liabilities: | ||
Payables: | ||
Investment securities purchased | 171,885,366 | |
Capital shares redeemed | 21,566,516 | |
Management fees | 7,809,137 | |
Distribution fees | 3,910,346 | |
Transfer agent fees | 2,433,490 | |
Trustees’ fees and expenses | 757,913 | |
Securities sold short, at value (proceeds $77,333,215) | 78,849,335 | |
Due to brokers | 14,490,000 | |
Unrealized depreciation on OTC forward exchange contracts | 7,017,483 | |
Accrued expenses and other liabilities | 404,629 | |
Total liabilities | 309,124,215 | |
Net assets, at value | $ | 14,924,045,385 |
Net assets consist of: | ||
Paid-in capital | $ | 11,889,530,655 |
Undistributed net investment income | 185,566,306 | |
Net unrealized appreciation (depreciation) | 2,313,475,146 | |
Accumulated net realized gain (loss) | 535,473,278 | |
Net assets, at value | $ | 14,924,045,385 |
franklintempleton.com
The accompanying notes are an integral part of these financial statements. | Semiannual Report 27
FRANKLIN MUTUAL SHARES FUND
FINANCIAL STATEMENTS
Statement of Assets and Liabilities (continued)
June 30, 2016 (unaudited)
Class Z: | ||
Net assets, at value | $ | 7,118,673,180 |
Shares outstanding | 262,659,913 | |
Net asset value and maximum offering price per share | $ | 27.10 |
Class A: | ||
Net assets, at value | $ | 4,734,354,215 |
Shares outstanding | 176,385,592 | |
Net asset value per sharea | $ | 26.84 |
Maximum offering price per share (net asset value per share ÷ 94.25%) | $ | 28.48 |
Class C: | ||
Net assets, at value | $ | 1,074,994,835 |
Shares outstanding | 40,576,336 | |
Net asset value and maximum offering price per sharea | $ | 26.49 |
Class R: | ||
Net assets, at value | $ | 127,885,853 |
Shares outstanding | 4,792,715 | |
Net asset value and maximum offering price per share | $ | 26.68 |
Class R6: | ||
Net assets, at value | $ | 1,868,137,302 |
Shares outstanding | 68,919,114 | |
Net asset value and maximum offering price per share | $ | 27.11 |
aRedemption price is equal to net asset value less contingent deferred sales charges, if applicable. |
28 Semiannual Report | The accompanying notes are an integral part of these financial statements.
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FRANKLIN MUTUAL SHARES FUND
FINANCIAL STATEMENTS
Statement of Operations | |||||
for the six months ended June 30, 2016 (unaudited) | |||||
Investment income: | |||||
Dividends: | |||||
Unaffiliated issuers | $ | 228,111,880 | |||
Non-controlled affiliates (Note 11) | 4,002,922 | ||||
Interest | 41,411,948 | ||||
Income from securities loaned (net of fees and rebates) | 238,586 | ||||
Total investment income | 273,765,336 | ||||
Expenses: | |||||
Management fees (Note 3a) | 46,157,049 | ||||
Distribution fees: (Note 3c) | |||||
Class A | 5,793,617 | ||||
Class C | 5,276,081 | ||||
Class R | 318,025 | ||||
Transfer agent fees: (Note 3e) | |||||
Class Z | 4,303,566 | ||||
Class A | 3,005,316 | ||||
Class C | 684,196 | ||||
Class R | 82,469 | ||||
Class R6 | 141 | ||||
Custodian fees (Note 4) | 175,238 | ||||
Reports to shareholders | 423,053 | ||||
Registration and filing fees | 128,287 | ||||
Professional fees | 135,917 | ||||
Trustees’ fees and expenses | 244,857 | ||||
Dividends and/or interest on securities sold short | 236,816 | ||||
Other | 138,147 | ||||
Total expenses | 67,102,775 | ||||
Expense reductions (Note 4) | (6,951 | ) | |||
Expenses waived/paid by affiliates (Note 3f) | (6,289 | ) | |||
Net expenses | 67,089,535 | ||||
Net investment income | 206,675,801 | ||||
Realized and unrealized gains (losses): | |||||
Net realized gain (loss) from: | |||||
Investments: | |||||
Unaffiliated issuers | 219,298,544 | ||||
Non-controlled affiliates (Note 11) | 102,198,306 | ||||
Foreign currency transactions | 35,138,089 | ||||
Futures contracts | 5,286,547 | ||||
Securities sold short | (2,782,365 | ) | |||
Net realized gain (loss) | 359,139,121 | ||||
Net change in unrealized appreciation (depreciation) on: | |||||
Investments | (13,016,818 | ) | |||
Translation of other assets and liabilities denominated in foreign currencies | 6,346,538 | ||||
Futures contracts | 27,691,585 | ||||
Net change in unrealized appreciation (depreciation) | 21,021,305 | ||||
Net realized and unrealized gain (loss) | 380,160,426 | ||||
Net increase (decrease) in net assets resulting from operations | $ | 586,836,227 | |||
franklintempleton.com | The accompanying notes are an integral part of these financial statements. | | Semiannual Report | 29 |
FRANKLIN MUTUAL SHARES FUND
FINANCIAL STATEMENTS
Statements of Changes in Net Assets | ||||||
Six Months | ||||||
Ended June 30, 2016 | Year Ended | |||||
(unaudited) | December 31, 2015 | |||||
Increase (decrease) in net assets: | ||||||
Operations: | ||||||
Net investment income | $ | 206,675,801 | $ | 266,380,152 | ||
Net realized gain (loss) | 359,139,121 | 1,102,537,685 | ||||
Net change in unrealized appreciation (depreciation) | 21,021,305 | (1,980,421,559 | ) | |||
Net increase (decrease) in net assets resulting from operations | 586,836,227 | (611,503,722 | ) | |||
Distributions to shareholders from: | ||||||
Net investment income: | ||||||
Class Z | – | (143,955,672 | ) | |||
Class A | – | (88,556,211 | ) | |||
Class C | – | (11,852,920 | ) | |||
Class R | – | (2,112,252 | ) | |||
Class R6 | – | (43,006,986 | ) | |||
Net realized gains: | ||||||
Class Z | – | (428,103,004 | ) | |||
Class A | – | (307,474,440 | ) | |||
Class C | – | (71,195,451 | ) | |||
Class R | – | (8,639,243 | ) | |||
Class R6 | – | (120,486,342 | ) | |||
Total distributions to shareholders | – | (1,225,382,521 | ) | |||
Capital share transactions: (Note 2) | ||||||
Class Z | 65,919,847 | 251,525,140 | ||||
Class A | (270,474,821 | ) | 30,013,668 | |||
Class C | (64,112,734 | ) | (637,580 | ) | ||
Class R | (11,060,327 | ) | (22,173,401 | ) | ||
Class R6 | (131,805,099 | ) | (92,769,124 | ) | ||
Total capital share transactions | (411,533,134 | ) | 165,958,703 | |||
Net increase (decrease) in net assets | 175,303,093 | (1,670,927,540 | ) | |||
Net assets: | ||||||
Beginning of period | 14,748,742,292 | 16,419,669,832 | ||||
End of period | $ | 14,924,045,385 | $ | 14,748,742,292 | ||
Undistributed net investment income (distributions in excess of net investment income) | ||||||
included in net assets: | ||||||
End of period | $ | 185,566,306 | $ | (21,109,495 | ) |
30 Semiannual Report | The accompanying notes are an integral part of these financial statements.
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FRANKLIN MUTUAL SHARES FUND
Notes to Financial Statements (unaudited)
1. Organization and Significant Accounting Policies
Franklin Mutual Series Funds (Trust) is registered under the Investment Company Act of 1940 (1940 Act) as an open-end management investment company, consisting of seven separate funds and applies the specialized accounting and reporting guidance in U.S. Generally Accepted Accounting Principles (U.S. GAAP). Franklin Mutual Shares Fund (Fund) is included in this report. The financial statements of the remaining funds in the Trust are presented separately. The Fund offers five classes of shares: Class Z, Class A, Class C, Class R and Class R6. Each class of shares differs by its initial sales load, contingent deferred sales charges, voting rights on matters affecting a single class, its exchange privilege and fees primarily due to differing arrangements for distribution and transfer agent fees.
The following summarizes the Fund’s significant accounting policies.
a. Financial Instrument Valuation
The Fund’s investments in financial instruments are carried at fair value daily. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date. The Fund calculates the net asset value per share as of 4 p.m. Eastern time each day the New York Stock Exchange (NYSE) is open for trading. Under compliance policies and procedures approved by the Trust’s Board of Trustees (the Board), the Fund’s administrator has responsibility for oversight of valuation, including leading the cross-functional Valuation Committee (VC). The VC provides administration and oversight of the Fund’s valuation policies and procedures, which are approved annually by the Board. Among other things, these procedures allow the Fund to utilize independent pricing services, quotations from securities and financial instrument dealers, and other market sources to determine fair value.
Equity securities and derivative financial instruments (derivatives) listed on an exchange or on the NASDAQ National Market System are valued at the last quoted sale price or the official closing price of the day, respectively. Foreign equity securities are valued as of the close of trading on the foreign stock exchange on which the security is primarily traded or as of 4 p.m. Eastern time whichever is earlier. The value is then converted into its U.S. dollar equivalent at the foreign exchange rate in effect at 4 p.m. Eastern time on the day that the value of the security is determined. Over-the-counter (OTC) securities are valued within the range of the most recent quoted bid and ask prices. Securities that trade in multiple markets or on multiple exchanges are valued according to the broadest and most representative market. Certain equity securities are valued based upon fundamental characteristics or relationships to similar securities.
Debt securities generally trade in the OTC market rather than on a securities exchange. The Fund’s pricing services use multiple valuation techniques to determine fair value. In instances where sufficient market activity exists, the pricing services may utilize a market-based approach through which quotes from market makers are used to determine fair value. In instances where sufficient market activity may not exist or is limited, the pricing services also utilize proprietary valuation models which may consider market characteristics such as benchmark yield curves, credit spreads, estimated default rates, anticipated market interest rate volatility, coupon rates, anticipated timing of principal repayments, underlying collateral, and other unique security features in order to estimate the relevant cash flows, which are then discounted to calculate the fair value. Securities denominated in a foreign currency are converted into their U.S. dollar equivalent at the foreign exchange rate in effect at 4 p.m. Eastern time on the date that the values of the foreign debt securities are determined.
Certain derivatives trade in the OTC market. The Fund’s pricing services use various techniques including industry standard option pricing models and proprietary discounted cash flow models to determine the fair value of those instruments. The Fund’s net benefit or obligation under the derivative contract, as measured by the fair value of the contract, is included in net assets.
The Fund has procedures to determine the fair value of financial instruments for which market prices are not reliable or readily available. Under these procedures, the VC convenes on a regular basis to review such financial instruments and considers a number of factors, including significant unobservable valuation inputs, when arriving at fair value. The VC primarily employs a market-based approach which may use related or comparable assets or liabilities, recent transactions, market multiples, book values, and other relevant information for the investment to determine the fair value of the investment. An income-based valuation approach may also be used in which the anticipated future cash flows of the investment are discounted to calculate fair value. Discounts may also be applied due to the nature or duration of any restrictions on the disposition of the
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Semiannual Report 31
FRANKLIN MUTUAL SHARES FUND
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
1. Organization and Significant Accounting
Policies (continued)
a. Financial Instrument Valuation (continued)
investments. Due to the inherent uncertainty of valuations of such investments, the fair values may differ significantly from the values that would have been used had an active market existed. The VC employs various methods for calibrating these valuation approaches including a regular review of key inputs and assumptions, transactional back-testing or disposition analysis, and reviews of any related market activity.
Trading in securities on foreign securities stock exchanges and OTC markets may be completed before 4 p.m. Eastern time. In addition, trading in certain foreign markets may not take place on every NYSE business day. Occasionally, events occur between the time at which trading in a foreign security is completed and the close of the NYSE that might call into question the reliability of the value of a portfolio security held by the Fund. As a result, differences may arise between the value of the Fund’s portfolio securities as determined at the foreign market close and the latest indications of value at the close of the NYSE. In order to minimize the potential for these differences, the VC monitors price movements following the close of trading in foreign stock markets through a series of country specific market proxies (such as baskets of American Depositary Receipts, futures contracts and exchange traded funds). These price movements are measured against established trigger thresholds for each specific market proxy to assist in determining if an event has occurred that may call into question the reliability of the values of the foreign securities held by the Fund. If such an event occurs, the securities may be valued using fair value procedures, which may include the use of independent pricing services.
When the last day of the reporting period is a non-business day, certain foreign markets may be open on those days that the NYSE is closed, which could result in differences between the value of the Fund’s portfolio securities on the last business day and the last calendar day of the reporting period. Any significant security valuation changes due to an open foreign market are adjusted and reflected by the Fund for financial reporting purposes.
b. Foreign Currency Translation
Portfolio securities and other assets and liabilities denominated in foreign currencies are translated into U.S. dollars based on the exchange rate of such currencies against U.S. dollars on the date of valuation. The Fund may enter into foreign currency exchange contracts to facilitate transactions denominated in a foreign currency. Purchases and sales of securities, income and expense items denominated in foreign currencies are translated into U.S. dollars at the exchange rate in effect on the transaction date. Portfolio securities and assets and liabilities denominated in foreign currencies contain risks that those currencies will decline in value relative to the U.S. dollar. Occasionally, events may impact the availability or reliability of foreign exchange rates used to convert the U.S. dollar equivalent value. If such an event occurs, the foreign exchange rate will be valued at fair value using procedures established and approved by the Board.
The Fund does not separately report the effect of changes in foreign exchange rates from changes in market prices on securities held. Such changes are included in net realized and unrealized gain or loss from investments in the Statement of Operations.
Realized foreign exchange gains or losses arise from sales of foreign currencies, currency gains or losses realized between the trade and settlement dates on securities transactions and the difference between the recorded amounts of dividends, interest, and foreign withholding taxes and the U.S. dollar equivalent of the amounts actually received or paid. Net unrealized foreign exchange gains and losses arise from changes in foreign exchange rates on foreign denominated assets and liabilities other than investments in securities held at the end of the reporting period.
c. Securities Purchased on a Delayed Delivery Basis
The Fund purchases securities on a delayed delivery basis, with payment and delivery scheduled for a future date. These transactions are subject to market fluctuations and are subject to the risk that the value at delivery may be more or less than the trade date purchase price. Although the Fund will generally purchase these securities with the intention of holding the securities, it may sell the securities before the settlement date. Sufficient assets have been segregated for these securities.
d. Derivative Financial Instruments
The Fund invested in derivatives in order to manage risk or gain exposure to various other investments or markets. Derivatives are financial contracts based on an underlying or notional amount, require no initial investment or an initial net investment that is smaller than would normally be required to have a
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NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
similar response to changes in market factors, and require or permit net settlement. Derivatives contain various risks including the potential inability of the counterparty to fulfill their obligations under the terms of the contract, the potential for an illiquid secondary market, and/or the potential for market movements which expose the Fund to gains or losses in excess of the amounts shown in the Statement of Assets and Liabilities. Realized gain and loss and unrealized appreciation and depreciation on these contracts for the period are included in the Statement of Operations.
Derivative counterparty credit risk is managed through a formal evaluation of the creditworthiness of all potential counterparties. The Fund attempts to reduce its exposure to counterparty credit risk on OTC derivatives, whenever possible, by entering into International Swaps and Derivatives Association (ISDA) master agreements with certain counterparties. These agreements contain various provisions, including but not limited to collateral requirements, events of default, or early termination. Termination events applicable to the counterparty include certain deteriorations in the credit quality of the counterparty. Termination events applicable to the Fund include failure of the Fund to maintain certain net asset levels and/or limit the decline in net assets over various periods of time. In the event of default or early termination, the ISDA master agreement gives the non-defaulting party the right to net and close-out all transactions traded, whether or not arising under the ISDA agreement, to one net amount payable by one counterparty to the other. However, absent an event of default or early termination, OTC derivative assets and liabilities are presented gross and not offset in the Statement of Assets and Liabilities. Early termination by the counterparty may result in an immediate payment by the Fund of any net liability owed to that counterparty under the ISDA agreement. At June 30, 2016, the Fund had no OTC derivatives in a net liability position for such contracts.
Collateral requirements differ by type of derivative. Collateral or initial margin requirements are set by the broker or exchange clearing house for exchange traded and centrally cleared derivatives. Initial margin deposited is held at the exchange and can be in the form of cash and/or securities. For OTC derivatives traded under an ISDA master agreement, posting of collateral is required by either the Fund or the applicable coun-terparty if the total net exposure of all OTC derivatives with the applicable counterparty exceeds the minimum transfer amount, which typically ranges from $100,000 to $250,000, and can vary depending on the counterparty and the type of the agreement. Generally, collateral is determined at the close of Fund business each day and any additional collateral required due to changes in derivative values may be delivered by the Fund or the counterparty within a few business days. Collateral pledged and/or received by the Fund for OTC derivatives, if any, is held in segregated accounts with the Fund’s custodian/ counterparty broker and can be in the form of cash and/or securities. Unrestricted cash may be invested according to the Fund’s investment objectives. To the extent that the amounts due to the Fund from its counterparties are not subject to collateralization or are not fully collateralized, the Fund bears the risk of loss from counterparty non-performance.
At June 30, 2016, the Fund received $27,062,647 in United Kingdom Treasury Bonds and U.S. Treasury Bills and Notes as collateral for derivatives.
The Fund entered into exchange traded futures contracts primarily to manage exposure to certain foreign currencies. A futures contract is an agreement between the Fund and a counterparty to buy or sell an asset for a specified price on a future date. Required initial margins are pledged by the Fund, and the daily change in fair value is accounted for as a variation margin payable or receivable in the Statement of Assets and Liabilities.
The Fund entered into OTC forward exchange contracts primarily to manage exposure to certain foreign currencies. A forward exchange contract is an agreement between the Fund and a counterparty to buy or sell a foreign currency at a specific exchange rate on a future date.
See Note 10 regarding other derivative information.
e. Restricted Cash
At June 30, 2016, the Fund held restricted cash in connection with investments in certain derivative securities. Restricted cash is held in a segregated account with the Fund’s custodian/ counterparty broker and is reflected in the Statement of Assets and Liabilities.
f. Securities Sold Short
The Fund is engaged in selling securities short, which obligates the Fund to replace a borrowed security with the same security at current fair value. The Fund incurs a loss if the price of the security increases between the date of the short sale and the date on which the Fund replaces the borrowed security. The Fund realizes a gain if the price of the security declines between those
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Semiannual Report 33
FRANKLIN MUTUAL SHARES FUND
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
1. Organization and Significant Accounting Policies (continued)
f. Securities Sold Short (continued)
dates. Gains are limited to the price at which the Fund sold the security short, while losses are potentially unlimited in size.
The Fund is required to establish a margin account with the broker lending the security sold short. While the short sale is outstanding, the broker retains the proceeds of the short sale to the extent necessary to meet margin requirements until the short position is closed out. A deposit must also be maintained with the Fund’s custodian/counterparty broker consisting of cash and/or securities having a value equal to a specified percentage of the value of the securities sold short. The Fund is obligated to pay fees for borrowing the securities sold short and is required to pay the counterparty any dividends and/or interest due on securities sold short. Such dividends and/or interest and any security borrowing fees are recorded as an expense to the Fund.
g. Securities Lending
The Fund participates in an agency based securities lending program to earn additional income. The Fund receives cash collateral against the loaned securities in an amount equal to at least 102% of the fair value of the loaned securities. Collateral is maintained over the life of the loan in an amount not less than 100% of the fair value of loaned securities, as determined at the close of Fund business each day; any additional collateral required due to changes in security values is delivered to the Fund on the next business day. The collateral is deposited into a joint cash account with other funds and is used to invest in a money market fund managed by Franklin Advisers, Inc., an affiliate of the Fund, and/or a joint repurchase agreement. The Fund may receive income from the investment of cash collateral, in addition to lending fees and rebates paid by the borrower. Income from securities loaned, net of fees paid to the securities lending agent and/or third-party vendor, is reported separately in the Statement of Operations. The Fund bears the market risk with respect to the collateral investment, securities loaned, and the risk that the agent may default on its obligations to the Fund. If the borrower defaults on its obligation to return the securities loaned, the Fund has the right to repurchase the securities in the open market using the collateral received. The securities lending agent has agreed to indemnify the Fund in the event of default by a third party borrower. At June 30, 2016, the Fund had no securities on loan.
h. Senior Floating Rate Interests
The Fund invests in senior secured corporate loans that pay interest at rates which are periodically reset by reference to a base lending rate plus a spread. These base lending rates are generally the prime rate offered by a designated U.S. bank or the London InterBank Offered Rate (LIBOR). Senior secured corporate loans often require prepayment of principal from excess cash flows or at the discretion of the borrower. As a result, actual maturity may be substantially less than the stated maturity. Senior secured corporate loans in which the Fund invests are generally readily marketable, but may be subject to certain restrictions on resale.
i. Income and Deferred Taxes
It is the Fund’s policy to qualify as a regulated investment company under the Internal Revenue Code. The Fund intends to distribute to shareholders substantially all of its taxable income and net realized gains to relieve it from federal income and excise taxes. As a result, no provision for U.S. federal income taxes is required.
The Fund may be subject to foreign taxation related to income received, capital gains on the sale of securities and certain foreign currency transactions in the foreign jurisdictions in which it invests. Foreign taxes, if any, are recorded based on the tax regulations and rates that exist in the foreign markets in which the Fund invests. When a capital gain tax is determined to apply, the Fund records an estimated deferred tax liability in an amount that would be payable if the securities were disposed of on the valuation date. As a result of several court cases, in certain countries across the European Union, the Fund filed additional tax reclaims for previously withheld taxes on dividends earned in those countries (EU reclaims). These additional filings are subject to various administrative proceedings by the local jurisdictions’ tax authorities within the European Union, as well as a number of related judicial proceedings. Income recognized, if any, for EU reclaims is reflected as other income in the Statement of Operations and any related receivable, if any, is reflected as European Union tax reclaims in the Statement of Assets and Liabilities. When uncertainty exists as to the ultimate resolution of these proceedings, the likelihood of receipt of these EU reclaims, and the potential timing of payment, no amounts are reflected in the financial statements.
The Fund may recognize an income tax liability related to its uncertain tax positions under U.S. GAAP when the uncertain tax position has a less than 50% probability that it will be
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NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
sustained upon examination by the tax authorities based on its technical merits. As of June 30, 2016, the Fund has determined that no tax liability is required in its financial statements related to uncertain tax positions for any open tax years (or expected to be taken in future tax years). Open tax years are those that remain subject to examination and are based on each tax jurisdiction’s statute of limitation.
j. Security Transactions, Investment Income, Expenses and Distributions
Security transactions are accounted for on trade date. Realized gains and losses on security transactions are determined on a specific identification basis. Interest income and estimated expenses are accrued daily. Amortization of premium and accretion of discount on debt securities are included in interest income. Dividend income and dividends declared on securities sold short are recorded on the ex-dividend date except for certain dividends from foreign securities where the dividend rate is not available. In such cases, the dividend is recorded as soon as the information is received by the Fund. Distributions to shareholders are recorded on the ex-dividend date and are determined according to income tax regulations (tax basis). Distributable earnings determined on a tax basis may differ from earnings recorded in accordance with U.S. GAAP. These differences may be permanent or temporary. Permanent differences are reclassified among capital accounts to reflect their tax character. These reclassifications have no impact on net assets or the results of operations. Temporary differences are not reclassified, as they may reverse in subsequent periods.
Common expenses incurred by the Trust are allocated among the funds based on the ratio of net assets of each fund to the combined net assets of the Trust. Fund specific expenses are charged directly to the fund that incurred the expense.
Realized and unrealized gains and losses and net investment income, not including class specific expenses, are allocated daily to each class of shares based upon the relative proportion of net assets of each class. Differences in per share distributions, by class, are generally due to differences in class specific expenses.
k. Accounting Estimates
The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the amounts of income and expenses during the reporting period. Actual results could differ from those estimates.
l. Guarantees and Indemnifications
Under the Trust’s organizational documents, its officers and trustees are indemnified by the Trust against certain liabilities arising out of the performance of their duties to the Trust. Additionally, in the normal course of business, the Trust, on behalf of the Fund, enters into contracts with service providers that contain general indemnification clauses. The Trust’s maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Trust that have not yet occurred. Currently, the Trust expects the risk of loss to be remote.
2. Shares of Beneficial Interest
At June 30, 2016, there were an unlimited number of shares authorized (without par value). Transactions in the Fund’s shares were as follows:
Six Months Ended | Year Ended | |||||||||
June 30, 2016 | December 31, 2015 | |||||||||
Shares | Amount | Shares | Amount | |||||||
Class Z Shares: | ||||||||||
Shares sold | 18,464,650 | $ | 481,091,129 | 18,527,093 | $ | 545,265,061 | ||||
Shares issued in reinvestment of distributions | — | — | 20,294,629 | 521,881,031 | ||||||
Shares redeemed | (16,230,239 | ) | (415,171,282 | ) | (27,833,775 | ) | (815,620,952 | ) | ||
Net increase (decrease) | 2,234,411 | $ | 65,919,847 | 10,987,947 | $ | 251,525,140 |
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NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
2. Shares of Beneficial Interest (continued) | |||||||||||
Six Months Ended | Year Ended | ||||||||||
June 30, 2016 | December 31, 2015 | ||||||||||
Shares | Amount | Shares | Amount | ||||||||
Class A Shares: | |||||||||||
Shares sold | 5,332,276 | $ | 135,300,087 | 15,761,911 | $ | 457,551,710 | |||||
Shares issued in reinvestment of distributions | — | — | 14,388,011 | 366,862,039 | |||||||
Shares redeemed | (15,924,246 | ) | (405,774,908 | ) | (27,287,017 | ) | (794,400,081 | ) | |||
Net increase (decrease) | (10,591,970 | ) | $ | (270,474,821 | ) | 2,862,905 | $ | 30,013,668 | |||
Class C Shares: | |||||||||||
Shares sold | 1,133,874 | $ | 28,512,914 | 3,234,045 | $ | 92,690,292 | |||||
Shares issued in reinvestment of distributions | — | — | 3,117,765 | 78,828,425 | |||||||
Shares redeemed | (3,679,246 | ) | (92,625,648 | ) | (5,988,237 | ) | (172,156,297 | ) | |||
Net increase (decrease) | (2,545,372 | ) | $ | (64,112,734 | ) | 363,573 | $ | (637,580 | ) | ||
Class R Shares: | |||||||||||
Shares sold | 295,732 | $ | 7,457,704 | 602,956 | $ | 17,551,336 | |||||
Shares issued in reinvestment of distributions | — | — | 420,635 | 10,682,958 | |||||||
Shares redeemed | (727,547 | ) | (18,518,031 | ) | (1,732,914 | ) | (50,407,695 | ) | |||
Net increase (decrease) | (431,815 | ) | $ | (11,060,327 | ) | (709,323 | ) | $ | (22,173,401 | ) | |
Class R6 Shares: | |||||||||||
Shares sold | 154,943 | $ | 3,895,777 | 827,212 | $ | 24,011,578 | |||||
Shares issued in reinvestment of distributions | — | — | 6,362,712 | 163,493,328 | |||||||
Shares redeemed | (5,263,120 | ) | (135,700,876 | ) | (9,407,142 | ) | (280,274,030 | ) | |||
Net increase (decrease) | (5,108,177 | ) | $ | (131,805,099 | ) | (2,217,218 | ) | $ | (92,769,124 | ) |
3. Transactions with Affiliates
Franklin Resources, Inc. is the holding company for various subsidiaries that together are referred to as Franklin Templeton Investments. Certain officers and trustees of the Fund are also officers and/or directors of the following subsidiaries:
Subsidiary | Affiliation |
Franklin Mutual Advisers, LLC (Franklin Mutual) | Investment manager |
Franklin Templeton Services, LLC (FT Services) | Administrative manager |
Franklin Templeton Distributors, Inc. (Distributors) | Principal underwriter |
Franklin Templeton Investor Services, LLC (Investor Services) | Transfer agent |
a. Management Fees
The Fund pays an investment management fee to Franklin Mutual based on the average daily net assets of the Fund as follows:
Annualized Fee Rate | Net Assets | |
0.675% | Up to and including $5 billion | |
0.645% | Over $5 billion, up to and including $10 billion | |
0.625% | Over $10 billion, up to and including $15 billion | |
0.595% | Over $15 billion, up to and including $20 billion | |
0.585% | Over $20 billion, up to and including $25 billion | |
0.565% | Over $25 billion, up to and including $30 billion | |
0.555% | Over $30 billion, up to and including $35 billion | |
0.545% | In excess of $35 billion |
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NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
For the period ended June 30, 2016, the annualized effective investment management fee rate was 0.649% of the Fund’s average daily net assets.
b. Administrative Fees
Under an agreement with Franklin Mutual, FT Services provides administrative services to the Fund. The fee is paid by Franklin Mutual based on the Fund’s average daily net assets, and is not an additional expense of the Fund.
c. Distribution Fees
The Board has adopted distribution plans for each share class, with the exception of Class Z and Class R6 shares, pursuant to Rule 12b-1 under the 1940 Act. Under the Fund’s Class A reimbursement distribution plan, the Fund reimburses Distributors for costs incurred in connection with the servicing, sale and distribution of the Fund’s shares up to the maximum annual plan rate. Under the Class A reimbursement distribution plan, costs exceeding the maximum for the current plan year cannot be reimbursed in subsequent periods. In addition, under the Fund’s Class C and R compensation distribution plans, the Fund pays Distributors for costs incurred in connection with the servicing, sale and distribution of the Fund’s shares up to the maximum annual plan rate for each class. The plan year, for purposes of monitoring compliance with the maximum annual plan rates, is February 1 through January 31 for each fund.
The maximum annual plan rates, based on the average daily net assets, for each class, are as follows:
Class A | 0.35 | % |
Class C | 1.00 | % |
Class R | 0.50 | % |
The Board has set the current rate at 0.25% per year for Class A shares until further notice and approval by the Board.
d. Sales Charges/Underwriting Agreements
Front-end sales charges and contingent deferred sales charges (CDSC) do not represent expenses of the Fund. These charges are deducted from the proceeds of sales of Fund shares prior to investment or from redemption proceeds prior to remittance, as applicable. Distributors has advised the Fund of the following commission transactions related to the sales and redemptions of the Fund’s shares for the period:
Sales charges retained net of commissions paid to unaffiliated broker/dealers | $ | 361,012 |
CDSC retained | $ | 18,763 |
e. Transfer Agent Fees
Each class of shares, except for Class R6, pays transfer agent fees to Investor Services for its performance of shareholder servicing obligations and reimburses Investor Services for out of pocket expenses incurred, including shareholder servicing fees paid to third parties. These fees are allocated daily based upon their relative proportion of such classes’ aggregate net assets. Class R6 pays Investor Services transfer agent fees specific to that class.
For the period ended June 30, 2016, the Fund paid transfer agent fees of $8,075,688 of which $3,631,235 was retained by Investor Services.
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FRANKLIN MUTUAL SHARES FUND
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
3. Transactions with Affiliates (continued)
f. Investments in Affiliated Management Investment Companies
The Fund invests in one or more affiliated management investment companies for purposes other than exercising a controlling influence over the management or policies. Management fees paid by the Fund are waived on assets invested in the affiliated management investment companies, as noted in the Statement of Operations, in an amount not to exceed the management and administrative fees paid directly or indirectly by each affiliate.
Number of | % of Affiliated | ||||||||
Shares | Number of | Fund Shares | |||||||
Held at | Shares Held | Value | Realized | Outstanding | |||||
Beginning | Gross | Gross | at End | at End | Investment | Gain | Held at End | ||
of Period | Additions | Reductions | of Period | of Period | Income | (Loss) | of Period | ||
Non-Controlled Affiliates | |||||||||
Institutional Fiduciary Trust | |||||||||
Money Market Portfolio | — | 80,712,000 | (80,712,000 | ) | — | $— | $— | $— | —% |
g. Waiver and Expense Reimbursements
Investor Services has contractually agreed in advance to waive or limit its fees so that the Class R6 transfer agent fees do not exceed 0.01% until April 30, 2017. There were no Class R6 transfer agent fees waived during the period ended June 30, 2016.
h. Other Affiliated Transactions
At June 30, 2016, one or more of the funds in Franklin Fund Allocator Series owned 11.8% of the Fund’s outstanding shares.
4. Expense Offset Arrangement
The Fund has entered into an arrangement with its custodian whereby credits realized as a result of uninvested cash balances are used to reduce a portion of the Fund’s custodian expenses. During the period ended June 30, 2016, the custodian fees were reduced as noted in the Statement of Operations.
5. Independent Trustees’ Retirement Plan
On January 1, 1993, the Trust adopted an Independent Trustees’ Retirement Plan (Plan). The Plan is an unfunded defined benefit plan that provides benefit payments to Trustees whose length of service and retirement age meets the eligibility requirements of the Plan. Benefits under the Plan are based on years of service and fees paid to each trustee at the time of retirement. Effective in December 1996, the Plan was closed to new participants.
During the period ended June 30, 2016, the Fund’s projected benefit obligation and benefit payments under the Plan were as follows:
aProjected benefit obligation at June 30, 2016 | $ | 764,140 | |
bIncrease in projected benefit obligation | $ | 23,244 | |
Benefit payments made to retired trustees | $ | (7,227 | ) |
aThe projected benefit obligation is included in trustees’ fees and expenses in the Statement of Assets and Liabilities.
bThe increase in projected benefit obligation is included in trustees’ fees and expenses in the Statement of Operations.
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NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
6. Income Taxes
At June 30, 2016, the cost of investments and net unrealized appreciation (depreciation) for income tax purposes were as follows:
Cost of investments | $ | 12,721,880,990 | |
Unrealized appreciation | $ | 3,871,853,157 | |
Unrealized depreciation | (1,657,752,536 | ) | |
Net unrealized appreciation (depreciation) | $ | 2,214,100,621 |
Differences between income and/or capital gains as determined on a book basis and a tax basis are primarily due to differing treatment of foreign currency transactions.
7. Investment Transactions
Purchases and sales of investments (excluding short term securities and securities sold short) for the period ended June 30, 2016, aggregated $1,356,389,311 and $1,486,337,431, respectively.
8. Credit Risk and Defaulted Securities
The Fund may purchase the pre-default or defaulted debt of distressed companies. Distressed companies are financially troubled and could be or are already involved in financial restructuring or bankruptcy. Risks associated with purchasing these securities include the possibility that the bankruptcy or other restructuring process takes longer than expected, or that distributions in restructuring are less than anticipated, either or both of which may result in unfavorable consequences to the Fund. If it becomes probable that the income on debt securities, including those of distressed companies, will not be collected, the Fund discontinues accruing income and recognizes an adjustment for uncollectible interest.
At June 30, 2016, the aggregate long value of distressed company securities for which interest recognition has been discontinued was $186,223,335, representing 1.3% of the Fund’s net assets. For information as to specific securities, see the accompanying Statement of Investments.
9. Restricted Securities
The Fund invests in securities that are restricted under the Securities Act of 1933 (1933 Act) or which are subject to legal, contractual, or other agreed upon restrictions on resale. Restricted securities are often purchased in private placement transactions, and cannot be sold without prior registration unless the sale is pursuant to an exemption under the 1933 Act. Disposal of these securities may require greater effort and expense, and prompt sale at an acceptable price may be difficult. The Fund may have registration rights for restricted securities. The issuer generally incurs all registration costs.
At June 30, 2016, the Fund held investments in restricted securities, excluding certain securities exempt from registration under the 1933 Act deemed to be liquid, as follows:
Principal | ||||||
Amount/ | ||||||
Shares/ | Acquisition | |||||
Units | Issuer | Dates | Cost | Value | ||
19,594 | Broadband Ventures III LLC, secured promissory note, | |||||
5.00%, 2/01/12 | 7/01/10 – 11/30/12 | $ | 19,594 | $ | — | |
43,105,703 | CB FIM Coinvestors LLC | 1/15/09 – 6/02/09 | — | — | ||
53,924,666 | FIM Coinvestor Holdings I, LLC | 11/20/06 – 6/02/09 | — | — | ||
7,234,813 | International Automotive Components Group Brazil LLC | 4/13/06 – 12/26/08 | 4,804,678 | 119,107 | ||
63,079,866 | International Automotive Components Group North America | |||||
LLC | 1/12/06 – 3/18/13 | 51,662,536 | 27,828,692 | |||
39,407 | Warrior Met Coal LLC, A | 9/19/14 – 12/04/14 | 51,755,872 | 3,972,872 | ||
92,157 | Warrior Met Coal LLC, B | 3/31/16 – 6/23/16 | 7,372,579 | 9,290,937 | ||
Total Restricted Securities (Value is 0.3% of Net Assets) | $ | 115,615,259 | $ | 41,211,608 |
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FRANKLIN MUTUAL SHARES FUND
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
10. Other Derivative Information
At June 30, 2016, the Fund’s investments in derivative contracts are reflected in the Statement of Assets and Liabilities as follows:
Asset Derivatives | Liability Derivatives | ||||||
Derivative Contracts | |||||||
Not Accounted for as | Statement of Assets and | Statement of Assets and | |||||
Hedging Instruments | Liabilities Location | Fair Value | Liabilities Location | Fair Value | |||
Foreign exchange contracts | Variation margin | $ | 37,192,806 | a | |||
Unrealized appreciation | 49,181,471 | Unrealized depreciation on | $ | 7,017,483 | |||
on OTC forward | OTC forward exchange | ||||||
exchange contracts | contracts | ||||||
Totals | $ | 86,374,277 | $ | 7,017,483 |
aThis amount reflects the cumulative appreciation (depreciation) of futures contracts as reported in the Statement of Investments. Only the variation margin receivable/payable
at period end is separately reported within the Statement of Assets and Liabilities. Prior variation margin movements were recorded to cash upon receipt or payment.
For the period ended June 30, 2016, the effect of derivative contracts in the Fund’s Statement of Operations was as follows:
Net Change in | ||||||||
Unrealized | ||||||||
Derivative Contracts | Net Realized | Appreciation | ||||||
Not Accounted for as | Statement of | Gain (Loss) | Statement of | (Depreciation) | ||||
Hedging Instruments | Operations Locations | for the Period | Operations Locations | for the Period | ||||
Net realized gain (loss) from: | Net change in unrealized | |||||||
appreciation (depreciation) on: | ||||||||
Foreign exchange contracts | Foreign currency transactions | $ | 36,409,183 | a | Translation of other assets and | $ | 7,196,467 | a |
liabilities denominated in | ||||||||
foreign currencies | ||||||||
Futures contracts | 5,286,547 | Futures contracts | 27,691,585 | |||||
Totals | $ | 41,695,730 | $ | 34,888,052 |
aForward exchange contracts are included in net realized gain (loss) from foreign currency transactions and net change in unrealized appreciation (depreciation) on translation of other assets and liabilities denominated in foreign currencies in the Statement of Operations.
For the period ended June 30, 2016, the average month end fair value of derivatives represented 0.5% of average month end net assets. The average month end number of open derivative contracts for the period was 135.
See Note 1(d) regarding derivative financial instruments.
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NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
11. Holdings of 5% Voting Securities of Portfolio Companies
The 1940 Act defines “affiliated companies” to include investments in portfolio companies in which a fund owns 5% or more of the outstanding voting securities. Investments in “affiliated companies” for the Fund for the period ended June 30, 2016, were as shown below.
Number of | Number of | ||||||||||
Shares Held | Shares Held | Value | Realized | ||||||||
at Beginning | Gross | Gross | at End | at End | Investment | Gain | |||||
Name of Issuer | of Period | Additions | Reductions | of Period | of Period | Income | (Loss) | ||||
Controlled Affiliatesa | |||||||||||
CB FIM Coinvestors LLC | 43,105,703 | — | — | 43,105,703 | $ | — | $ | — | $ | — | |
Non-Controlled Affiliates | |||||||||||
Alexander’s Inc | 326,675 | — | — | 326,675 | $ | 133,685,210 | $ | 2,613,400 | $ | 124,137 | |
Federal Signal Corp | 3,360,800 | — | — | 3,360,800 | 43,287,104 | 470,512 | — | ||||
Guaranty Bancorp | 1,146,366 | — | — | 1,146,366 | 19,144,312 | 263,664 | — | ||||
International Automotive Components | |||||||||||
Group Brazil LLC | 7,234,813 | — | — | 7,234,813 | 119,107 | — | — | ||||
International Automotive Components | |||||||||||
Group North America LLC | 63,079,866 | — | — | 63,079,866 | 27,828,692 | — | — | ||||
White Mountains Insurance | |||||||||||
Group Ltd | 655,346 | — | (196,827 | ) | 458,519 | 386,072,998 | 655,346 | 102,074,169 | |||
Total Non-Controlled Affiliates | 610,137,423 | 4,002,922 | 102,198,306 | ||||||||
Total Affiliated Securities (Value is 4.1% of Net Assets) | $ | 610,137,423 | $ | 4,002,922 | $ | 102,198,306 | |||||
aIssuer in which the Fund owns 25% or more of the outstanding voting securities. |
12. Credit Facility
The Fund, together with other U.S. registered and foreign investment funds (collectively, Borrowers), managed by Franklin Temple-ton Investments, are borrowers in a joint syndicated senior unsecured credit facility totaling $2 billion (Global Credit Facility) which matures on February 10, 2017. This Global Credit Facility provides a source of funds to the Borrowers for temporary and emergency purposes, including the ability to meet future unanticipated or unusually large redemption requests.
Under the terms of the Global Credit Facility, the Fund shall, in addition to interest charged on any borrowings made by the Fund and other costs incurred by the Fund, pay its share of fees and expenses incurred in connection with the implementation and maintenance of the Global Credit Facility, based upon its relative share of the aggregate net assets of all of the Borrowers, including an annual commitment fee of 0.07% based upon the unused portion of the Global Credit Facility. Effective February 12, 2016, the annual commitment fee is 0.15%. These fees are reflected in other expenses in the Statement of Operations. During the period ended June 30, 2016, the Fund did not use the Global Credit Facility.
13. Fair Value Measurements
The Fund follows a fair value hierarchy that distinguishes between market data obtained from independent sources (observable inputs) and the Fund’s own market assumptions (unobservable inputs). These inputs are used in determining the value of the Fund’s financial instruments and are summarized in the following fair value hierarchy:
- Level 1 – quoted prices in active markets for identical financial instruments
- Level 2 – other significant observable inputs (including quoted prices for similar financial instruments, interest rates, prepay- ment speed, credit risk, etc.)
- Level 3 – significant unobservable inputs (including the Fund’s own assumptions in determining the fair value of financial instruments)
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FRANKLIN MUTUAL SHARES FUND
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
13. Fair Value Measurements (continued)
The input levels are not necessarily an indication of the risk or liquidity associated with financial instruments at that level.
For movements between the levels within the fair value hierarchy, the Fund has adopted a policy of recognizing the transfers as of the date of the underlying event which caused the movement.
A summary of inputs used as of June 30, 2016, in valuing the Fund’s assets and liabilities carried at fair value, is as follows:
Level 1 | Level 2 | Level 3 | Total | |||||
Assets: | ||||||||
Investments in Securities: | ||||||||
Equity Investments:a | ||||||||
Auto Components | $ | — | $ | — | $ | 27,947,799 | $ | 27,947,799 |
Banks | 1,332,312,977 | 2,471,975 | — | 1,334,784,952 | ||||
Machinery | 242,825,827 | 38,095,783 | — | 280,921,610 | ||||
Oil, Gas & Consumable Fuels | 967,965,273 | — | 13,263,809 | 981,229,082 | ||||
All Other Equity Investments b | 10,332,796,834 | — | —c | 10,332,796,834 | ||||
Corporate Bonds, Notes and Senior Floating Rate | ||||||||
Interests | — | 612,542,121 | — | 612,542,121 | ||||
Corporate Notes and Senior Floating Rate Interests in | ||||||||
Reorganization | — | 186,223,335 | —c | 186,223,335 | ||||
Companies in Liquidation | 209,932 | 13,260,072 | —c | 13,470,004 | ||||
Municipal Bonds | — | 42,904,994 | — | 42,904,994 | ||||
Short Term Investments | 969,360,880 | 153,800,000 | — | 1,123,160,880 | ||||
Total Investments in Securities | $ | 13,845,471,723 | $ | 1,049,298,280 | $ | 41,211,608 | $ | 14,935,981,611 |
Other Financial Instruments | ||||||||
Futures Contracts | $ | 37,192,806 | $ | — | $ | — | $ | 37,192,806 |
Forward Exchange Contracts | — | 49,181,471 | — | 49,181,471 | ||||
Total Other Financial Instruments | $ | 37,192,806 | $ | 49,181,471 | $ | — | $ | 86,374,277 |
Liabilities: | ||||||||
Other Financial Instruments | ||||||||
Securities Sold Short | $ | 78,849,335 | $ | — | $ | — | $ | 78,849,335 |
Forward Exchange Contracts | — | 7,017,483 | — | 7,017,483 | ||||
Total Other Financial Instruments | $ | 78,849,335 | $ | 7,017,483 | $ | — | $ | 85,866,818 |
aIncludes common and convertible preferred stocks as well as other equity investments.
bFor detailed categories, see the accompanying Statement of Investments.
cIncludes securities determined to have no value at June 30, 2016.
A reconciliation of assets in which Level 3 inputs are used in determining fair value is presented when there are significant Level 3
financial instruments at the end of the period.
14. Subsequent Events
The Fund has evaluated subsequent events through the issuance of the financial statements and determined that no events have occurred that require disclosure.
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NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
Abbreviations | |||||
Counterparty | Currency | Selected Portfolio | |||
BANT | Bank of America N.A. | EUR | Euro | ADR | American Depositary Receipt |
BONY | Bank of New York Mellon | GBP | British Pound | FHLB | Federal Home Loan Bank |
DBFX | Deutsche Bank AG | USD | United States Dollar | GO | General Obligation |
FBCO | Credit Suisse International | PIK | Payment-In-Kind | ||
HSBC | HSBC Bank PLC | ||||
SSBT | State Street Bank and Trust Co., N.A. |
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FRANKLIN MUTUAL SHARES FUND
Shareholder Information
Board Review of Investment Management Agreement
The Board of Trustees (Board), including the independent trustees, at a Board meeting held on May 16, 2016, unanimously approved the renewal of the Fund’s investment management agreement. Prior to a meeting of all of the trustees for the purpose of considering such approval, the independent trustees participated in two other meetings held in connection with the renewal process (those trustees unable to attend in person were present by telephonic conference means). Throughout the process, the independent trustees received assistance and advice from and met separately with independent counsel. The independent trustees met with and interviewed officers of the investment manager (including portfolio managers), the transfer agent and shareholder services group and the distributor. In approving the renewal of the investment management agreement for the Fund, the Board, including the independent trustees, determined that the investment management fee structure was fair and reasonable and that continuance of the agreement was in the best interests of the Fund and its shareholders.
In reaching their decision on the investment management agreement, the trustees took into account information furnished throughout the year at regular Board meetings, as well as information specifically requested and furnished for the renewal process, which culminated in the meetings referred to above for the specific purpose of considering such agreement. Information furnished throughout the year included, among others, reports on the Fund’s investment performance, expenses, portfolio composition, portfolio brokerage execution, client commission arrangements, derivatives, securities lending, asset segregation, portfolio turnover, Rule 12b-1 plans, distribution, shareholder servicing, legal and compliance matters, pricing of securities and sales and redemptions, and marketing support payments made to financial intermediaries, as well as a third-party survey of transfer agent fees charged funds within the Franklin Templeton Investments (FTI) complex in comparison with those charged other fund complexes deemed comparable. Also, related financial statements and other information about the scope and quality of services provided by the investment manager and its affiliates and enhancements to such services over the past year were provided. In addition, the trustees received periodic reports throughout the year and during the renewal process relating to compliance with the Fund’s investment policies and restrictions. During the renewal process, the independent trustees considered the investment manager’s methods of operation within the Franklin Templeton group and its activities on behalf of other clients.
The information obtained by the trustees during the renewal process also included a special report prepared by Broadridge Financial Solutions, Inc. (Broadridge), an independent third-party analyst that utilizes data from Lipper, Inc. (“Lipper”), an independent third-party analyst,, comparing the Fund’s investment performance and expenses with those of other mutual funds deemed comparable to the Fund as selected by Lipper (Broadridge Section 15(c) Report). The trustees reviewed the Broadridge Section 15(c) Report and its usefulness in the approval process with respect to matters such as comparative fees, expenses, expense ratios, performance and volatility. They concluded that the report continues to be a reliable resource in the performance of their duties.
In addition, the trustees received a Profitability Study (Profitability Study) prepared by management discussing the profitability to FTI from its overall U.S. Fund operations, as well as on an individual fund-by-fund basis. Over the past year, the Board and counsel to the independent trustees continued to receive reports on management’s handling of recent regulatory inquiries and pending legal actions against the investment manager and its affiliates. The independent trustees were satisfied with the actions taken to date by management in response to such regulatory and legal matters.
Particular attention was given to management’s diligent risk management program, including continual monitoring and management of counterparty credit risk and attention given to derivatives and other complex instruments that are held and expected to be held by the Fund and how such instruments are used to carry out the Fund’s investment goals. The Board also took into account, among other things, management’s efforts in establishing a global credit facility for the benefit of the Fund and other accounts managed by FTI to provide a source of cash for temporary and emergency purposes or to meet unusual redemption requests as well as the strong financial position of the investment manager’s parent company and its commitment to the mutual fund business. In addition, the Board received updates from management on the Securities and Exchange Commission’s (SEC) progress in implementing the rule-making requirements established by the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), which was enacted July 21, 2010, and the investment manager’s compliance with rules and regulations already promulgated by the SEC under such act. The Board also noted that they received an annual report on all marketing support payments made by FTI to financial intermediaries, as well as a memorandum relating to third-party servicing arrangements in response to a Guidance Update from the SEC relating to mutual fund distribution and sub accounting fees.
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SHAREHOLDER INFORMATION
In addition to the above and other matters considered by the trustees throughout the course of the year, the following discussion relates to certain primary factors relevant to the Board’s decision. This discussion of the information and factors considered by the Board (as well as the discussion above) is not intended to be exhaustive, but rather summarizes certain factors considered by the Board. In view of the wide variety of factors considered, the Board did not, unless otherwise noted, find it practicable to quantify or otherwise assign relative weights to the foregoing factors. In addition, individual trustees may have assigned different weights to various factors.
NATURE, EXTENT AND QUALITY OF SERVICES. The trustees reviewed the nature, extent and quality of the services provided by the investment manager. In this regard, they reviewed the Fund’s investment approach and concluded that, in their view, it continues to differentiate the Fund from typical core investment products in the mutual fund field. The trustees cited the investment manager’s ability to implement the Fund’s disciplined value investment approach and its long-term relationship with the Fund as reasons that shareholders choose to invest, and remain invested, in the Fund. The trustees reviewed the Fund’s portfolio management team, including its performance, staffing, skills and compensation program. With respect to portfolio manager compensation, management assured the trustees that the Fund’s long-term performance is a significant component of incentive-based compensation and noted that a portion of a portfolio manager’s incentive-based compensation is paid in shares of predesignated funds from the portfolio manager’s fund management area. The trustees noted that the portfolio manager compensation program aligned the interests of the portfolio managers with that of Fund shareholders. The trustees discussed with management various other products, portfolios and entities that are advised by the investment manager and the allocation of assets and expenses among and within them, as well as their relative fees and reasons for differences with respect thereto and any potential conflicts. During regular Board meetings and the aforementioned meetings of the independent trustees, the trustees received reports and presentations on the investment manager’s best execution trading policies. The trustees considered periodic reports provided to them showing that the investment manager complied with the investment policies and restrictions of the Fund as well as other reports periodically furnished to the Board covering matters such as the compliance of portfolio managers and other management personnel with the code of ethics covering the investment management personnel, the adherence to fair value pricing procedures established by the Board and the accuracy of net asset value calculations. The Board noted the extent of the benefits provided to Fund shareholders from being part of the Franklin Templeton group, including the right to exchange investments between funds (same class) without a sales charge, the ability to reinvest Fund dividends into other funds and the right to combine holdings of other funds to obtain reduced sales charges. The trustees considered the investment manager’s significant efforts in developing and implementing compliance procedures established in accordance with SEC and other requirements.
The trustees also reviewed the nature, extent and quality of the Fund’s other service agreements to determine that, on an overall basis, Fund shareholders were well served. In this connection, the Board also took into account transfer agent and shareholder services provided to Fund shareholders by an affiliate of the investment manager, noting continuing expenditures by management to increase and improve the scope of such services and favorable periodic reports on shareholder services conducted by independent third parties. While such considerations directly affected the trustees’ decision in renewing the Fund’s transfer agent and shareholder services agreement, the Board also considered these commitments as incidental benefits to Fund shareholders deriving from the investment management relationship.
Based on their review, the trustees were satisfied with the nature and quality of the overall services provided by the investment manager and its affiliates to the Fund and its shareholders and were confident in the abilities of the management team to continue the disciplined value investment approach of the Fund and to provide quality services to the Fund and its shareholders.
INVESTMENT PERFORMANCE. The trustees reviewed and placed significant emphasis on the investment performance of the Fund over the one-, three-, five- and 10-year periods ended December 31, 2015. They considered the history of successful performance of the Fund relative to various benchmarks. As part of their review, they inquired of management regarding benchmarks, style drift and restrictions on permitted investments. Consideration was also given to performance in the context of available levels of cash during the periods. The trustees had meetings during the year, including the meetings referred to above held in connection with the approval process, with the Fund’s portfolio managers to discuss performance and the management of the Fund. In addition, particular attention in assessing performance was given to the Broadridge Section 15(c) Report. That report showed the investment performance of the Fund (Class A shares) in comparison to other funds determined comparable by Lipper.
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FRANKLIN MUTUAL SHARES FUND
SHAREHOLDER INFORMATION
The comparable funds to the Fund, as chosen by Lipper, included all retail and institutional large-cap value funds. The Fund had total returns in the middle performing quintile for the one-year period ended December 31, 2015, and had annualized total returns for the three- and five-year periods in the lowest performing quintile. The trustees noted that the Fund’s total return on an annualized basis for the 10-year period ended December 31, 2015, was in the second-lowest performing quin-tile. The trustees also compared Fund performance to other industry benchmarks, including measures of risk-adjusted performance of a fund, as part of their evaluation of investment performance. The Board discussed with management the reasons for the relative underperformance for the three-, five- and 10-year periods ended December 31, 2015. As part of such discussions, management discussed in detail the impact that holdings in European securities had on performance. In addition, management noted the recent change by Lipper in the Fund’s peer universe classification from large cap value to multi-cap value and the positive effect that such change had on the Fund’s relative peer universe rankings. Taking into account such discussions and intending to continuously monitor future performance, the Board did not believe such comparative performance warranted any change in portfolio management, and concluded that the Fund had performed in an acceptable manner in the context of the Fund’s objectives.
COMPARATIVE EXPENSES AND MANAGEMENT PROFITABILITY. The trustees considered the cost of the services provided and to be provided and the profits realized by the investment manager and its affiliates from their respective relationships with the Fund. As part of the approval process, they explored with management the trends in expense ratios over the past three fiscal years and the reasons for any increases in the Fund’s expense ratios (or components thereof). In considering the appropriateness of the management fee and other expenses charged to the Fund, the Board took into account various factors including investment performance and matters relating to Fund operations, including, but not limited to, the quality and experience of its portfolio managers and research staff. Consideration was also given to a comparative analysis in the Broadridge Section 15(c) Report of the investment management fee and total expense ratio of the Fund in comparison with those of a group of other funds selected by Lipper as its appropriate Lipper expense group. Lipper expense data is based upon information taken from the Fund’s most recent annual report, which reflects historical asset levels that may be quite different from those currently existing, particularly in a period of market volatility. While recognizing such inherent limitation and the fact that expense ratios generally increase as assets decline and decrease as assets grow, the Board believed the independent analysis conducted by Lipper to be an appropriate measure of comparative expenses.
In reviewing comparative costs, emphasis was given to the Fund’s contractual management fee in comparison with the contractual management fee that would have been charged by other funds within its Lipper expense group assuming they were similar in size to the Fund, as well as the actual total expenses of the Fund in comparison with those of its Lipper expense group. The Lipper contractual management fee analysis includes administrative charges as being part of the management fee, and total expenses, for comparative consistency, are shown by Lipper for Fund Class A shares.
The Fund’s contractual management fee rate was in the most expensive quintile of its Lipper expense group and its total expenses were in the most expensive quintile of such group. The noted that the Fund’s total expenses were within 7.5 basis points of its expense group median. The Board found such comparative fees and expenses to be acceptable in view of factors relating to the Fund’s operations, such as the quality and experience of its portfolio managers.
The trustees also reviewed the Profitability Study addressing profitability of Franklin Resources, Inc., from its overall U.S. fund business, as well as profitability to the Fund’s investment manager and its affiliates, from providing investment management and other services to the Fund during the 12-month period ended September 30, 2015, the most recent fiscal year-end of Franklin Resources, Inc. The trustees reviewed the basis on which such reports are prepared and the cost allocation methodology utilized in the Profitability Study, it being recognized that allocation methodologies may each be reasonable while producing different results. In this respect, the Board noted that the reasonableness of the cost allocation methodologies was reviewed by independent accountants on an every other year basis.
The independent trustees met with management to discuss the Profitability Study. This included, among other things, a comparison of investment management income with investment management expenses of the Fund; comparison of underwriting revenues and expenses; the relative relationship of investment management and underwriting expenses; shareholder servicing profitability; economies of scale; and the relative contribution of the Fund to the profitability of the investment manager and its parent. In discussing the Profitability Study with the Board, the investment manager stated its belief that the costs incurred in establishing the infrastructure necessary to operate the type of mutual fund operations conducted by it and its affiliates may
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not be fully reflected in the expenses allocated to the Fund in determining its profitability.
The Board also took into account management’s expenditures in improving shareholder services provided to the Fund, as well as the need to meet additional regulatory and compliance requirements resulting from the Sarbanes-Oxley Act, the Dodd-Frank Act and recent SEC and other regulatory requirements. The trustees also considered the extent to which the investment manager may derive ancillary benefits from Fund operations, including those derived from economies of scale, discussed below, the allocation of Fund brokerage and the use of commission dollars to pay for research and other similar services.
Based upon their consideration of all these factors, the trustees determined that the level of profits realized by the investment manager and its affiliates in providing services to the Fund was not excessive in view of the nature, quality and extent of services provided.
ECONOMIES OF SCALE. The trustees considered economies of scale realized by the investment manager and its affiliates as the Fund grows larger and the extent to which they are shared with Fund shareholders, as for example, in the level of the investment management fee charged, in the quality and efficiency of services rendered and in increased capital commitments benefiting the Fund directly or indirectly. While recognizing that any precise determination is inherently subjective, the trustees noted that, based upon the Profitability Study, as some funds increase in size, at some point economies of scale may result in the investment manager realizing a larger profit margin on investment management services provided to such a fund. The trustees also noted that benefits of economies of scale will be shared with Fund shareholders due to the decline in the effective investment management fee rate as breakpoints are achieved by the Fund.
The trustees noted that breakpoints had been instituted as part of the Fund’s investment management fee in 2004, with additional breakpoints being added as deemed appropriate by the Board. The trustees assessed the savings to shareholders resulting from such breakpoints and believed they were, and continue to be, appropriate and they agreed to continue to monitor the appropriateness of the breakpoints. The trustees also considered the effects an increase in assets under management would have on the investment management fee and expense ratio of the Fund. To the extent further economies of scale may be realized by the investment manager and its affiliates, the Board believed the investment management and administrative fees provide a sharing of benefits with the Fund and its shareholders.
Proxy Voting Policies and Procedures
The Fund’s investment manager has established Proxy Voting Policies and Procedures (Policies) that the Fund uses to determine how to vote proxies relating to portfolio securities. Shareholders may view the Fund’s complete Policies online at franklintempleton.com. Alternatively, shareholders may request copies of the Policies free of charge by calling the Proxy Group collect at (954) 527-7678 or by sending a written request to: Franklin Templeton Companies, LLC, 300 S.E. 2nd Street, Fort Lauderdale, FL 33301, Attention: Proxy Group. Copies of the Fund’s proxy voting records are also made available online at franklintempleton.com and posted on the U.S. Securities and Exchange Commission’s website at sec.gov and reflect the most recent 12-month period ended June 30.
Quarterly Statement of Investments
The Fund files a complete statement of investments with the U.S. Securities and Exchange Commission for the first and third quarters for each fiscal year on Form N-Q. Shareholders may view the filed Form N-Q by visiting the Commission’s website at sec.gov. The filed form may also be viewed and copied at the Commission’s Public Reference Room in Washington, DC. Information regarding the operations of the Public Reference Room may be obtained by calling (800) SEC-0330.
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Item 2. Code of Ethics.
(a) The Registrant has adopted a code of ethics that applies to its principal executive officers and principal financial and accounting officer.
(c) N/A
(d) N/A
(f) Pursuant to Item 12(a)(1), the Registrant is attaching as an exhibit a copy of its code of ethics that applies to its principal executive officers and principal financial and accounting officer.
Item 3. Audit Committee Financial Expert.
(a)(1) The Registrant has an audit committee financial expert serving on its audit committee.
(2) The audit committee financial expert is Ann Torre Bates, and she is “independent” as defined under the relevant Securities and Exchange Commission Rules and Releases.
Item 4. Principal Accountant Fees and Services. N/A
Item 5. Audit Committee of Listed Registrants. N/A
Item 6. Schedule of Investments. N/A
Item 7. Disclosure of Proxy Voting Policies and Procedures for
Closed-End Management Investment Companies. N/A
Item 8. Portfolio Managers of Closed-End Management Investment Companies. N/A
Item 9. Purchases of Equity Securities by Closed-End Management Investment Company and Affiliated Purchasers. N/A
Item 10. Submission of Matters to a Vote of Security Holders.
There have been no changes to the procedures by which shareholders may recommend nominees to the Registrant's Board of Trustees that would require disclosure herein.
Item 11. Controls and Procedures.
(a) Evaluation of Disclosure Controls and Procedures. The Registrant maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Registrant’s filings under the Securities Exchange Act of 1934 and the Investment Company Act of 1940 is recorded, processed, summarized and reported within the periods specified in the rules and forms of the Securities and Exchange Commission. Such information is accumulated and communicated to the Registrant’s management, including its principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. The Registrant’s management, including the principal executive officer and the principal financial officer, recognizes that any set of controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.
Within 90 days prior to the filing date of this Shareholder Report on Form N-CSR, the Registrant had carried out an evaluation, under the supervision and with the participation of the Registrant’s management, including the Registrant’s principal executive officer and the Registrant’s principal financial officer, of the effectiveness of the design and operation of the Registrant’s disclosure controls and procedures. Based on such evaluation, the Registrant’s principal executive officer and principal financial officer concluded that the Registrant’s disclosure controls and procedures are effective.
(b) Changes in Internal Controls. There have been no changes in the Registrant’s internal controls or in other factors that could materially affect the internal controls over financial reporting subsequent to the date of their evaluation in connection with the preparation of this Shareholder Report on Form N-CSR.
Item 12. Exhibits.
(a)(1) Code of Ethics
(a)(2) Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 of Laura F. Fergerson, Chief Executive Officer - Finance and Administration, and Robert G. Kubilis, Chief Financial Officer and Chief Accounting Officer
(b) Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of Laura F. Fergerson, Chief Executive Officer - Finance and Administration, and Robert G. Kubilis, Chief Financial Officer and Chief Accounting Officer
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
FRANKLIN MUTUAL SERIES FUNDS
By /s/Laura F. Fergerson
Laura F. Fergerson
Chief Executive Officer –
Finance and Administration
Date August 25, 2016
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
By /s/Laura F. Fergerson
Laura F. Fergerson
Chief Executive Officer –
Finance and Administration
Date August 25, 2016
By /s/Robert G. Kubilis
Robert G. Kubilis
Chief Financial Officer and
Chief Accounting Officer
Date: August 25, 2016