UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSRS
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number 811-02781
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TEMPLETON FUNDS
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(Exact name of registrant as specified in charter)
500 EAST BROWARD BLVD., SUITE 2100, FORT LAUDERDALE, FL 33394-3091
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(Address of principal executive offices) (Zip code)
CRAIG S. TYLE, ONE FRANKLIN PARKWAY, SAN MATEO, CA 94403-1906
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(Name and address of agent for service)
Registrant's telephone number, including area code: (954) 527-7500
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Date of fiscal year end: 8/31
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Date of reporting period: 2/28/09
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ITEM 1. REPORTS TO STOCKHOLDERS.
(GRAPHIC)
FEBRUARY 28, 2009
SEMIANNUAL REPORT
AND SHAREHOLDER LETTER
A series of Templeton Funds
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TEMPLETON WORLD FUND
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Franklin Templeton's distinct multi-manager
structure combines the specialized expertise of
three world-class investment management groups-
Franklin, Templeton and Mutual Series.
SPECIALIZED EXPERTISE Each of our portfolio management groups operates
autonomously, relying on its own research and
staying true to the unique investment disciplines
that underlie its success.
FRANKLIN. Founded in 1947, Franklin is a recognized
leader in fixed income investing and also brings
expertise in growth- and value-style U.S. equity
investing.
TEMPLETON. Founded in 1940, Templeton pioneered
international investing and, in 1954, launched what
has become the industry's oldest global fund. Today,
with offices in over 25 countries, Templeton offers
investors a truly global perspective.
MUTUAL SERIES. Founded in 1949, Mutual Series is
dedicated to a unique style of value investing,
searching aggressively for opportunity among what it
believes are undervalued stocks, as well as
arbitrage situations and distressed securities.
TRUE DIVERSIFICATION Because our management groups work independently and
adhere to different investment approaches, Franklin,
Templeton and Mutual Series funds typically have
distinct portfolios. That's why our funds can be
used to build truly diversified allocation plans
covering every major asset class.
RELIABILITY YOU CAN TRUST At Franklin Templeton Investments, we seek to
consistently provide investors with exceptional
risk-adjusted returns over the long term, as well as
the reliable, accurate and personal service that
has helped us become one of the most trusted names
in financial services.
MUTUAL FUNDS | RETIREMENT PLANS | 529 COLLEGE SAVINGS PLANS | SEPARATE ACCOUNTS
Not part of the semiannual report
Contents
SHAREHOLDER LETTER......................................................... 1
SEMIANNUAL REPORT
Templeton World Fund....................................................... 3
Performance Summary........................................................ 12
Your Fund's Expenses....................................................... 15
Financial Highlights and Statement of Investments.......................... 17
Financial Statements....................................................... 26
Notes to Financial Statements.............................................. 29
Shareholder Information.................................................... 38
Shareholder Letter
Dear Shareholder:
During the six months ended February 28, 2009, world economies entered into a
significant slowdown spawned by the U.S. housing and credit market crises.
Despite coordinated efforts by many governments to address these problems, the
severe economic conditions and high degree of uncertainty fueled market
volatility. Most major equity indexes suffered double-digit losses for the
reporting period. Although this difficult environment is bound to provoke great
concern, we believe it is important to put short-term market developments in
perspective. Keep in mind that as daunting as current conditions may be, we have
navigated through other periods of high market volatility, including global
stock markets' severe declines of 1987 and the bursting of the technology bubble
in 2000. We remain committed to our long-term perspective and our disciplined
investment philosophy. Therefore, we view recent declines as potential
opportunities to find bargains that we believe may be well positioned to become
eventual winners. Although conditions remain challenging, our experience gives
us reason to be optimistic about the potential for future market stabilization
and recovery.
Templeton World Fund's semiannual report goes into greater detail about
prevailing conditions during the period under review. In addition, the portfolio
managers discuss investment management decisions and Fund performance for the
period. You will also find performance data and financial information. Please
remember that all securities markets fluctuate, as do mutual fund share prices.
If you would like more frequent updates, FRANKLINTEMPLETON.COM provides daily
prices, monthly performance figures, portfolio holdings and other information.
You can also access your account, buy and sell shares, read timely articles, and
find helpful financial planning tools. We hope you will take advantage of these
online services.
NOT FDIC INSURED | MAY LOSE VALUE | NO BANK GUARANTEE
Not part of the semiannual report | 1
Historically, patient investors have achieved rewarding results by evaluating
their goals, diversifying their assets globally and maintaining a disciplined
investment program, all hallmarks of the Templeton investment philosophy
developed more than 50 years ago. We continue to recommend investors consult
their financial advisors and review their portfolios to design a long-term
strategy and portfolio allocation that meet their individual needs, goals and
risk tolerance. We firmly believe that most people benefit from professional
advice, and that advice is invaluable as investors navigate current market
conditions.
We thank you for investing with Franklin Templeton, welcome your questions and
comments, and look forward to serving your investment needs in the years ahead.
Sincerely,
/s/ Gary P. Motyl
Gary P. Motyl, CFA
President and Chief Executive Officer
- - Investment Management Templeton
Funds
THIS LETTER REFLECTS OUR ANALYSIS AND OPINIONS AS OF FEBRUARY 28, 2009. THE
INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET, COUNTRY,
INDUSTRY, SECURITY OR FUND. STATEMENTS OF FACT ARE FROM SOURCES CONSIDERED
RELIABLE.
2 | Not part of the semiannual report
Semiannual Report
Templeton World Fund
YOUR FUND'S GOAL AND MAIN INVESTMENTS: Templeton World Fund seeks long-term
capital growth. Under normal market conditions, the Fund invests primarily in
equity securities of companies located anywhere in the world, including emerging
markets.
GEOGRAPHIC BREAKDOWN
Based on Total Net Assets as of 2/28/09
North America 36.3%
Europe 34.9%
Asia 20.2%
Latin America & Caribbean 1.8%
Middle East & Africa 1.8%
Short-Term Investments &
Other Net Assets 5.0%
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. PLEASE VISIT FRANKLINTEMPLETON.COM OR CALL (800) 342-5236 FOR
MOST RECENT MONTH-END PERFORMANCE.
This semiannual report for Templeton World Fund covers the period ended February
28, 2009.
PERFORMANCE OVERVIEW
Templeton World Fund - Class A had a -39.90% cumulative total return for the six
months under review. The Fund performed better than its benchmark, the Morgan
Stanley Capital International (MSCI) World Index, which had a -43.38% total
return for the same period.(1) In line with our long-term investment strategy,
we are pleased with our long-term results, as shown in the
1. Source: (C) 2009 Morningstar. All Rights Reserved. The information
contained herein: (1) is proprietary to Morningstar and/or its content
providers; (2) may not be copied or distributed; and (3) is not warranted
to be accurate, complete or timely. Neither Morningstar nor its content
providers are responsible for any damages or losses arising from any use of
this information. The MSCI World Index is a free float-adjusted, market
capitalization-weighted index designed to measure equity market performance
in global developed markets. As of 2/28/09, the Fund's Class A 10-year
average annual total return not including the maximum sales charge was
+1.56%, compared with the -2.10% 10-year average annual total return of the
MSCI World Index. The index is unmanaged and includes reinvested dividends.
One cannot invest directly in an index, nor is an index 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 21.
Semiannual Report | 3
Performance Summary beginning on page 12. For the 10-year period ended February
28, 2009, Templeton World Fund - Class A delivered a +16.76% cumulative total
return, compared with the MSCI World Index's -19.10% cumulative total return for
the same period.(1) Please note that index performance information is provided
for reference and that we do not attempt to track the index, but rather
undertake investments on the basis of fundamental research. You can find more
performance data in the Performance Summary beginning on page 12.
ECONOMIC AND MARKET OVERVIEW
During the six months ended February 28, 2009, global economic conditions
continued to deteriorate. Business capital investment and consumer spending in
the U.S. and abroad showed steep declines, unemployment rose steadily, and
business and consumer confidence fell to new lows. In the U.S., gross domestic
product (GDP) fell 6.3% on an annualized basis in the fourth quarter of 2008.(2)
GDP in the eurozone fell 1.5% in the final three months of 2008 and is expected
to decelerate further in 2009.(3)
The economic slowdown and the seize-up in global credit markets, accompanied by
a decline in inflation indexes, led to easing of monetary policies in the U.S.,
Europe and many other industrialized and emerging countries. The U.S. Federal
Reserve Board cut rates aggressively, as did the European Central Bank and the
Bank of England. As of the end of the reporting period, interest rates in the
U.S. were near zero.
In addition, several countries enacted robust stimulus programs in response to
the global slowdown. In February 2009, the U.S. Congress passed President
Obama's fiscal stimulus package. The package totaled $787 billion and included
tax cuts and government spending of nearly $600 billion in 2009-2010 alone. In
Europe, deteriorating economic conditions led a number of large countries to
also introduce substantial stimulus packages and to continue attempts to revive
basic bank lending.
China announced a fiscal stimulus package during the period, which equaled about
15% of the country's 2008 GDP.(4) Although most observers believed this figure
overstated the actual stimulus effect, the package was significant and reflected
Chinese authorities' desire to avoid the social unrest that might come with
rising joblessness. With 6.8% year-over-year growth in fourth quarter 2008,
China's GDP declined to its slowest growth rate in seven years, although it was
still high relative to any other major economy.(5) Along with five successive
2. Source: Bureau of Economic Analysis.
3. Source: European Central Bank.
4. Source: International Monetary Fund.
5. Source: National Bureau of Statistics, China.
4 | Semiannual Report
rate cuts in late 2008, Chinese authorities introduced a series of measures and
public works projects to stimulate internal consumption and help offset a
slowdown in export growth.
Against this challenging economic backdrop, most global equity markets were
volatile, and nearly all local indexes suffered significant losses for the
six-month period. Despite negative economic data and an outlook for decelerating
corporate earnings and profit margins globally, many companies' balance sheets,
primarily outside the banking industry, remained relatively strong.
INVESTMENT STRATEGY
Our investment strategy employs a bottom-up, value-oriented, long-term approach.
We focus on the market price of a company's securities relative to our
evaluation of the company's long-term earnings, asset value and cash flow
potential. As we look worldwide, we consider specific companies, rather than
sectors or countries, while doing in-depth research to construct a bargain list
from which we buy. Before we make a purchase, we look at the company's
price/cash ratio, price/earnings ratio, profit margins and liquidation value.
MANAGER'S DISCUSSION
During the six months under review, nearly all investible asset classes in the
world's financial markets dramatically deteriorated. The scale and scope of the
downturn was comprehensive, and performance was highly correlated across asset
classes. By period-end, stock indexes were setting new bear market lows at
levels in some cases less than half their 2007 peaks and, since then, more than
$20 trillion have been lost globally in equity markets. The failure of U.S.
investment bank Lehman Brothers at the beginning of the period seemed to unleash
a systemic domino effect on financial institutions around the world.
Subsequently, the global economy suffered as risk aversion increased, credit
markets seized and large-scale deleveraging occurred. The dramatic downturn we
have since experienced has left many questioning what caused the system to fail
so spectacularly. Disregarding the shortcomings of specific individuals,
agencies or institutions, the financial conventions largely responsible for the
current situation are leverage and securitization. Over the past two decades,
the financial system accrued significantly increased leverage, which was largely
channeled into quantitatively engineered structured assets conceived by bankers
and traders. Issuers and holders of a significant portion of these assets
constituted a "shadow banking system" that operated outside the scope of
regulatory oversight and grew exponentially to dwarf the size of the traditional
banking system and securities markets.
Semiannual Report | 5
The securitization and packaging of the cash flows of prime and subprime
mortgages, credit cards, car loans and other assets into derivative securities
became increasingly prevalent. Numerous entities, including hedge funds,
insurance companies, banks, sovereign wealth funds and other special purpose
vehicles, purchased such securities for their extra yield and their purported
risk diversification. Years of accommodative monetary policy and low interest
rates, excessive credit creation, low risk aversion and leveraged buying, as
well as lax regulatory supervision and poor risk management, allowed such
securities to accumulate in the financial system. At its peak, the "shadow
banking system" was estimated to have grown to more than 10 times global GDP.(6)
As long as the asset prices that served as collateral for these structured
securities increased and the underlying cash flows were being collected, the
leverage used to finance them enhanced returns for their holders. But, the
liquidity wave receded just as the housing recession was gathering momentum and
the broader economic contraction was in its early stages. The housing market
weakness resulted in sustained price declines for the collateral underlying the
structured debt (primarily home prices), and the general economic weakness
resulted in rising default rates on the original loans. Consequently, the
structured securities that were supposed to diversify risk and smooth out
returns instead concentrated risk and pegged returns to an unstable web of
economic relationships.
By originating, distributing and trading these derivative securities, financial
and other institutions searching for yield took on exposure to an increasingly
over-valued housing market. Unwittingly, they had also jeopardized the
functionality of credit markets, the lifeblood of the capitalist system.
Ultimately, these securities' severe price declines, exacerbated by their
illiquidity when their undercapitalized holders needed to collectively sell them
to repair their balance sheets, threatened the solvency of the overall financial
system. Holders, including banks, investment banks and insurance companies,
began writing down the value of these unmarketable securities, which eroded
their capital bases and necessitated further sales and capital-raising schemes.
However, traditional credit markets were essentially closed, as banks balked at
lending much-needed cash to entities whose ongoing solvency was uncertain. In
our analysis, we believed beleaguered financial firms, desperate for capital,
had the following options: dilute shareholders through equity rights issues,
issue debt at penurious interest rates, become forced sellers of any remaining
marketable assets, draw on government bailout facilities and accept the
consequences of taxpayer funding, or simply, fail.
The reversal of credit creation (i.e., credit destruction or deleveraging) also
began to weigh heavily on the real economy during the period under review.
Already suffering from investment losses and home-price depreciation, and facing
an increasingly difficult labor market, consumers recoiled and retrenched.
Meanwhile,
6. Source: THE GLOBE AND MAIL, Canada, 9/27/08.
6 | Semiannual Report
businesses hurried to cut costs, and the collective belt-tightening effectively
muted the demand side of the global economy. Previously fast-growing emerging
markets, which generally supply the developed world with goods and services,
lost their biggest customers, and their own domestic demand proved unable to
fill the gap, resulting in the first truly global recession since World War II.
As economic conditions around the world deteriorated, demand for commodities
plummeted, and, subsequently, global trade shrank significantly. Valuations for
many of the energy and materials stocks that had rallied earlier in 2008
collapsed along with demand, and the world's inflationary momentum turned
decidedly deflationary by period-end.
No region was immune from the ensuing equity market rout, and many of the Fund's
global equity holdings were affected. In general, Asian markets fared best, and
European markets, which declined every month during the reporting period, fared
worst. Volatile currency swings also impacted the portfolio. The euro's marked
decline versus the U.S. dollar during the period was a detractor from relative
performance, as the Fund's overweighting in Europe relative to the MSCI World
Index negatively impacted euro-denominated investments. Inversely, the Fund's
underweighted exposure to the U.S. curtailed the positive effects of the
dollar's rally.
Industrials stocks were significant laggards during the six months under review,
as the gathering global recession punished stocks considered to have
economically sensitive revenue streams.(7) General Electric (GE) and Siemens,
large engineering firms based in the U.S. and Germany, respectively, were among
the Fund's biggest detractors from absolute performance. Both companies had to
contend with company-specific issues and slowing demand for big-ticket, capital
intensive infrastructure products. GE's price deteriorated significantly and
shareholders appeared to undervalue GE's cyclically challenged, but
well-positioned, industrial business because of concerns about the near-term
stresses on the company's financial business. In Siemens' case, an unproven
management team operating in a more rigid social environment seemed to attract
investor disdain. We remained confident in the new management team's ability to
restructure operations, cut costs, and align its interests with those of the
company's shareholders. In our analysis, Siemens's company-specific legacy
issues will be resolved and the company should benefit from the global stimulus
spending programs within our investment time frame. We continued to consider GE
and Siemens core Fund holdings, and would note that their current profiles --
high-quality companies made unpopular, and relatively inexpensive, by near-term
setbacks -- are characteristic of Templeton value stocks.
7. The industrials sector comprises aerospace and defense, air freight and
logistics, industrial conglomerates, and professional services in the SOI.
TOP 10 COUNTRIES
Based on Equity Securities
2/28/09
% OF TOTAL
NET ASSETS
----------
U.S. 35.7%
U.K. 13.0%
France 6.3%
Taiwan 5.3%
Hong Kong 4.3%
Germany 4.0%
Japan 3.7%
Switzerland 3.4%
Singapore 2.5%
South Korea 2.1%
Semiannual Report | 7
TOP 10 INDUSTRIES
Based on Equity Securities
2/28/09
% OF TOTAL
NET ASSETS
----------
Pharmaceuticals 12.9%
Oil, Gas & Consumable Fuels 11.4%
Media 8.1%
Software 8.0%
Diversified Telecommunication Services 7.6%
Industrial Conglomerates 4.4%
Semiconductors & Semiconductor
Equipment 4.4%
Wireless Telecommunication Services 3.1%
Air Freight & Logistics 3.0%
IT Services 2.9%
Despite absolute losses, our consumer discretionary sector holdings helped
relative results due to an overweighted position that performed better than the
MSCI World Index's consumer discretionary sector.(8) On the other hand, in a
period when consumer confidence fell to its lowest level on record, the Fund's
position in the retailing industry, which is closely correlated with credit
conditions and the economic cycle, was a notable detractor from relative Fund
performance.
Defensive stocks declined less severely than more cyclical stocks. Given the
global economic environment, materials and financials were some of the market's
riskiest sectors during the review period and delivered some of the worst
absolute returns. We have been underweighted in the materials sector for some
time, due to what we believed were expensive valuations and an unsustainable
global demand profile.(9) This decision negatively impacted relative performance
prior to last summer when commodities prices were soaring. However, our
below-benchmark weighting was finally vindicated as commodities prices declined
precipitously, and the materials sector was a significant contributor to
relative performance during the period under review. Financials represented
another sector where we have been underweighted since before the credit
crisis.(10) We were concerned by the sector's lack of balance sheet transparency
and the increasing levels of risk being employed by the financial services
industry to drive rapid growth over the past decade. Unsurprisingly, financials
was the Fund's worst performing sector in absolute terms during the period under
review. For example, Dutch financial services conglomerate ING Groep was one of
the Fund's biggest absolute detractors. It posted a loss tied to asset
write-downs and required access to the Dutch government's bailout facility.
However, our low relative exposure to the financials sector and our avoidance of
the investment banks at the center of the credit crisis cushioned the portfolio
from the full extent of the sector's collapse. As a result, the financials
sector was one of our best contributors relative to the MSCI World Index.
In a period that rewarded defensive stock selection, the Fund's overweighted
exposure and stock selection in information technology helped relative
performance.(11) Although such stocks are not traditionally considered
defensive, the ability of technology to help businesses realize efficiencies can
be a major advantage in periods of economic contraction. Technology stocks in
general generated high levels of free cash flow and had little debt, critical
advantages that we believe could help the sector weather the current credit
crunch. Finally, in our opinion, the ubiquity of technology --particularly
software-- in
(8.) The consumer discretionary sector comprises automobiles; hotels,
restaurants and leisure; media; specialty retail; and textiles,
apparel and luxury goods in the SOI.
(9.) The materials sector comprises chemicals, metals and mining, and paper and
forest products in the SOI.
(10.) The financials sector comprises capital markets, commercial banks,
consumer finance, diversified financial services, insurance, and real
estate management and development in the SOI.
(11.) The information technology sector comprises communications equipment;
computers and peripherals; electronic equipment, instruments and
components; IT services; semiconductors and semiconductor equipment; and
software in the SOI.
8 | Semiannual Report
households and businesses has become characteristic of a nondiscretionary
service, and we believe technology-related companies may prove resilient as they
become increasingly entrenched in the marketplace. Although falling in absolute
terms, Israeli software manufacturer Check Point Software Technologies (not an
index component) declined much less than the overall index and was among the
period's most resilient stocks. On the other hand, Microsoft was one of the
Fund's biggest detractors from absolute performance, falling roughly in line
with the broader market after the company's first-ever debt offering and
subsequent layoffs showed that even the market's strongest companies were
vulnerable to the economic downturn. Yet Microsoft's profits were comparable to
those of Google, Apple, Oracle, Yahoo! and SAP combined, its operating systems
are in 90% of the world's computers, and the company experienced double-digit
growth in all business units in its fiscal year 2008. Therefore, at period-end
we remained very positive on this core holding. Telecommunication services,
another sector not traditionally considered defensive, also performed better
than the MSCI World Index, and relative performance benefited from our
overweighted position.(12) Despite its past reputation as a high-flying growth
sector, telecommunication services has become a mature industry, and many
investors seemed to find attractive the stable revenue streams and high dividend
yields associated with telecommunications companies during the period.
Health care stocks, which have long been considered defensive, performed better
than the benchmark during the period.(13) We continued to favor health care
companies for their high free cash-flow yields and seemingly attractive
valuations. In addition, we believe an aging global population will increasingly
require the services provided by these companies. The Fund's largest new
acquisition during the period was German pharmaceutical and diagnostics company
Roche, which owns 55% of the U.S. biotechnology giant Genentech and has an
outstanding offer for the balance. Roche's stock fell as uncertainty over
long-term prospects for its cancer franchise and a tough research and
development environment for drug makers dampened investor enthusiasm. Our
analysis indicated that the stock's decline, which has been broadly in line with
the sector, appeared unwarranted given what we believe is the company's
interesting drug pipeline and the prospects for growth from its already approved
products. Roche is free of material patent expirations, which is a major
uncertainty clouding the outlook for many of the industry's biggest companies.
Additionally, its stock traded at a steep discount to its historical average
valuation when we purchased it during the period, which in our opinion was an
attractive entry point into a strong franchise with a world-class drug
portfolio.
(12.) The telecommunication services sector comprises diversified
telecommunication services and wireless telecommunication services in the
SOI.
(13.) The health care sector comprises biotechnology, health care equipment and
supplies, health care providers and services, and pharmaceuticals in the
SOI.
TOP 10 EQUITY HOLDINGS
2/28/09
COMPANY % OF TOTAL
SECTOR/INDUSTRY, COUNTRY NET ASSETS
- ------------------------ ----------
Microsoft Corp. 3.5%
SOFTWARE, U.S.
Accenture Ltd., A 2.9%
IT SERVICES, U.S.
Taiwan Semiconductor Manufacturing
Co. Ltd. 2.7%
SEMICONDUCTORS & SEMICONDUCTOR
EQUIPMENT, TAIWAN
Amgen Inc. 2.5%
BIOTECHNOLOGY, U.S.
Oracle Corp. 2.4%
SOFTWARE, U.S.
BP PLC 2.2%
OIL, GAS & CONSUMABLE FUELS, U.K.
Sanofi-Aventis 2.2%
PHARMACEUTICALS, FRANCE
Chevron Corp. 2.1%
OIL, GAS & CONSUMABLE FUELS, U.S.
United Parcel Service Inc., B 1.9%
AIR FREIGHT & LOGISTICS, U.S.
Telefonica SA 1.9%
DIVERSIFIED TELECOMMUNICATION SERVICES,
SPAIN
Semiannual Report | 9
Although Roche detracted from performance since we initiated our position, we
continued to hold it. The consumer staples sector was another defensive stalwart
during the period.(14) Consumer staples stocks are often favored by investors in
recessionary periods due to the nondiscretionary nature of their products. The
Fund's sector holdings declined less in value than the overall MSCI World Index;
however, we considered the sector expensive overall and unable to generate
strong secular earnings growth, and therefore held a significantly
below-benchmark weighting, a decision that negatively impacted performance
relative to the benchmark index.
The period under review was one of the most trying times in our investment
careers. We also believe it could prove to be one of the most promising as in
our opinion valuations of some of the market's highest quality stocks have
rarely been so compelling, which gives us solid conviction for our investment
portfolios' future returns. However, an absence of buyers in the market and the
intense selling pressure experienced globally skewed momentum dramatically to
the downside, severely impairing recent investment performance. Although Fund
performance has held up in relative terms, performing better than the MSCI World
Index over the period, absolute losses were substantial and painful. These
losses are indicative of the sweeping nature of the recent equity market
downturn. Templeton World Fund has been significantly underweighted in the
market's most precarious and artificially inflated sectors -- primarily
materials and financial services -- since well before the credit crisis began.
Yet, we were unable to sufficiently avoid the worst of the recent market
sell-off, as the global financial crisis struck indiscriminately. We remain
optimistic that the Fund could ultimately benefit from this broad market
decline, which in our opinion has created significant disparities between the
prices and values of what we believe are some of the market's highest quality
stocks.
A timeline for recovery is impossible to predict, though we believe that
credible evidence of financial system stabilization is a prerequisite for an
eventual upturn. This systemic stabilization still hinges largely on the housing
market that collateralizes the system and the credit markets that capitalize it.
These markets need not recover overnight, but rather need to show consistent
evidence of an ongoing stabilization and transition process. We believe the
unprecedented global stimulus measures recently enacted could help accelerate
this process. This, in turn, could buoy equity markets, which recently seemed
more concerned with investor psychology than with discounted future earnings
expectations, the metric that has typically driven markets in the past. Key
measures of volatility, risk appetite and consumer confidence hit historical
extremes during the review period, revealing a bear market not only in stocks
but also in sentiment. Importantly, this created conditions often associated
with points of maximum pessimism, which have historically been advantageous
periods to buy stocks.
(14.) The consumer staples sector comprises food and staples retailing in the
SOI.
10 | Semiannual Report
In times like these it is important to remind our shareholders that we have been
in difficult investment environments before and have dealt with adversity. Our
organization is more than 60 years old and has weathered numerous economic
cycles. Templeton's contrarian, value investment philosophy has often put us on
the wrong side of momentum markets, as experienced during the recent commodities
and credit bubbles, and before that, the technology and Japanese market bubbles.
Historically, though, the Fund has performed well in the aftermath of these
bubbles. We are supported by vast organizational strength and a proven
investment process. The foundation for future performance of equity portfolios
is being laid in today's market environment, and we remain optimistic about the
long-term investment implications of the market's current value disparities. We
thank you for your loyalty and trust in a difficult period.
(PHOTO OF CINDY L. SWEETING)
/s/ Cindy L. Sweeting
Cindy L. Sweeting, CFA
(PHOTO OF LISA F. MYERS)
/s/ Lisa F. Myers
Lisa F. Myers, J.D., CFA
(PHOTO OF TUCKER SCOTT)
/s/ Tucker Scott
Tucker Scott, CFA
Portfolio Management Team
Templeton World Fund
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS
AS OF FEBRUARY 28, 2009, 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.
Semiannual Report | 11
Performance Summary as of 2/28/09
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.
PRICE AND DISTRIBUTION INFORMATION
CLASS A (SYMBOL: TEMWX) CHANGE 2/28/09 8/31/08
- ----------------------- ------ ------- -------
Net Asset Value (NAV) -$6.83 $8.95 $15.78
DISTRIBUTIONS (9/1/08-2/28/09)
Dividend Income $0.3006
Long-Term Capital Gain $0.3343
TOTAL $0.6349
CLASS B (SYMBOL: TWDBX) CHANGE 2/28/09 8/31/08
- ----------------------- ------ ------- -------
Net Asset Value (NAV) -$6.62 $8.86 $15.48
DISTRIBUTIONS (9/1/08-2/28/09)
Dividend Income $0.1567
Long-Term Capital Gain $0.3343
TOTAL $0.4910
CLASS C (SYMBOL: TEWTX) CHANGE 2/28/09 8/31/08
- ----------------------- ------ ------- -------
Net Asset Value (NAV) -$6.53 $8.70 $15.23
DISTRIBUTIONS (9/1/08-2/28/09)
Dividend Income $0.1742
Long-Term Capital Gain $0.3343
TOTAL $0.5085
ADVISOR CLASS (SYMBOL: TWDAX) CHANGE 2/28/09 8/31/08
- ----------------------------- ------ ------- -------
Net Asset Value (NAV) -$6.85 $8.94 $15.79
DISTRIBUTIONS (9/1/08-2/28/09)
Dividend Income $0.3401
Long-Term Capital Gain $0.3343
TOTAL $0.6744
12 | Semiannual Report
Performance Summary (CONTINUED)
PERFORMANCE
CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETURNS AND
VALUE OF $10,000 INVESTMENT INCLUDE MAXIMUM SALES CHARGES. CLASS A: 5.75%
MAXIMUM INITIAL SALES CHARGE; CLASS B: CONTINGENT DEFERRED SALES CHARGE (CDSC)
DECLINING FROM 4% TO 1% OVER SIX YEARS, AND ELIMINATED THEREAFTER; CLASS C: 1%
CDSC IN FIRST YEAR ONLY; ADVISOR CLASS: NO SALES CHARGES.
CLASS A 6-MONTH 1-YEAR 5-YEAR 10-YEAR
- ------- ------- ------- ------- -------
Cumulative Total Return(1) -39.90% -43.88% -19.17% +16.76%
Average Annual Total Return(2) -43.34% -47.11% -5.30% +0.96%
Value of $10,000 Investment(3) $ 5,666 $ 5,289 $ 7,618 $11,006
Avg. Ann. Total Return (3/31/09)(4) -41.53% -3.49% +1.09%
Total Annual Operating Expenses(5) 1.05%
CLASS B 6-MONTH 1-YEAR 5-YEAR 10-YEAR
- ------- ------- ------- ------- -------
Cumulative Total Return(1) -40.10% -44.27% -22.16% +9.88%
Average Annual Total Return(2) -42.39% -46.40% -5.13% +0.95%
Value of $10,000 Investment(3) $ 5,761 $ 5,360 $ 7,684 $10,988
Avg. Ann. Total Return (3/31/09)(4) -40.80% -3.34% +1.07%
Total Annual Operating Expenses(5) 1.18%
CLASS C 6-MONTH 1-YEAR 5-YEAR 10-YEAR
- ------- ------- ------- ------- -------
Cumulative Total Return(1) -40.14% -44.34% -22.21% +8.17%
Average Annual Total Return(2) -40.71% -44.87% -4.90% +0.79%
Value of $10,000 Investment(3) $ 5,929 $ 5,513 $ 7,779 $10,817
Avg. Ann. Total Return (3/31/09)(4) -39.00% -3.08% +0.92%
Total Annual Operating Expenses(5) 1.80%
ADVISOR CLASS(6) 6-MONTH 1-YEAR 5-YEAR 10-YEAR
- ---------------- ------- ------- ------- -------
Cumulative Total Return(1) -39.79% -43.71% -18.58% +17.60%
Average Annual Total Return(2) -39.79% -43.71% -4.03% +1.63%
Value of $10,000 Investment(3) $ 6,021 $ 5,629 $ 8,142 $11,760
Avg. Ann. Total Return (3/31/09)(4) -37.80% -2.20% +1.76%
Total Annual Operating Expenses(5) 0.81%
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, SEE "FUNDS AND
PERFORMANCE" AT FRANKLINTEMPLETON.COM OR CALL (800) 342-5236.
Semiannual Report | 13
Performance Summary (CONTINUED)
ENDNOTES
SPECIAL RISKS ARE ASSOCIATED WITH FOREIGN INVESTING, INCLUDING CURRENCY
FLUCTUATIONS, ECONOMIC INSTABILITY AND POLITICAL DEVELOPMENTS. INVESTMENTS IN
DEVELOPING MARKETS INVOLVE HEIGHTENED RISKS RELATED TO THE SAME FACTORS, IN
ADDITION TO THOSE ASSOCIATED WITH THESE MARKETS' SMALLER SIZE AND LESSER
LIQUIDITY. THE FUND'S PROSPECTUS ALSO INCLUDES A DESCRIPTION OF THE MAIN
INVESTMENT RISKS.
CLASS B: These shares have higher annual fees and expenses than Class A
shares.
CLASS C: Prior to 1/1/04, these shares were offered with an initial sales
charge; thus actual total returns would have differed. These
shares have higher annual fees and expenses than Class A shares.
ADVISOR CLASS: 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. Six-month return has not been
annualized.
(3.) These figures represent the value of a hypothetical $10,000 investment in
the Fund over the periods indicated.
(4.) In accordance with SEC rules, we provide standardized average annual total
return information through the latest calendar quarter.
(5.) Figures are as stated in the Fund's prospectus current as of the date of
this report.
(6.) Effective 5/15/06, the Fund began offering Advisor Class shares, which do
not have sales charges or a Rule 12b-1 plan. Performance quotations for
this class reflect the following methods of calculation: (a) For periods
prior to 5/15/06, a restated figure is used based upon the Fund's Class A
performance, excluding the effect of Class A's maximum initial sales
charge, but reflecting the effect of the Class A Rule 12b-1 fees; and (b)
for periods after 5/14/06, actual Advisor Class performance is used
reflecting all charges and fees applicable to that class. Since 5/15/06
(commencement of sales), the cumulative and average annual total returns of
Advisor Class shares were -38.99% and -16.22%.
14 | Semiannual Report
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 X $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.
Semiannual Report | 15
Your Fund's Expenses (CONTINUED)
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 EXPENSES PAID
ACCOUNT ENDING ACCOUNT DURING PERIOD*
VALUE 9/1/08 VALUE 2/28/09 9/1/08-2/28/09
------------ -------------- --------------
CLASS A
Actual $1,000 $ 601.00 $4.41
Hypothetical (5% return before expenses) $1,000 $1,019.29 $5.56
CLASS B
Actual $1,000 $ 599.00 $7.37
Hypothetical (5% return before expenses) $1,000 $1,015.57 $9.30
CLASS C
Actual $1,000 $ 598.60 $7.33
Hypothetical (5% return before expenses) $1,000 $1,015.62 $9.25
ADVISOR CLASS
Actual $1,000 $ 602.10 $3.46
Hypothetical (5% return before expenses) $1,000 $1,020.48 $4.36
* Expenses are calculated using the most recent six-month expense ratio,
annualized for each class (A: 1.11%; B: 1.86%; C: 1.85%; and Advisor:
0.87%), multiplied by the average account value over the period, multiplied
by 181/365 to reflect the one-half year period.
16 | Semiannual Report
Templeton World Fund
FINANCIAL HIGHLIGHTS
SIX MONTHS ENDED YEAR ENDED AUGUST 31,
FEBRUARY 28, 2009 ------------------------------------------------------------------
CLASS A (UNAUDITED) 2008 2007 2006 2005 2004
- ------- ----------------- ---------- ---------- ---------- ---------- ----------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the
period)
Net asset value, beginning of period ... $ 15.78 $ 20.23 $ 19.46 $ 18.92 $ 16.78 $ 15.12
---------- ---------- ---------- ---------- ---------- ----------
Income from investment operations(a):
Net investment income(b) ............ 0.09 0.31 0.26 0.28 0.25 0.22
Net realized and unrealized gains
(losses) ......................... (6.29) (2.48) 2.45 2.23 3.46 1.74
---------- ---------- ---------- ---------- ---------- ----------
Total from investment operations ....... (6.20) (2.17) 2.71 2.51 3.71 1.96
---------- ---------- ---------- ---------- ---------- ----------
Less distributions from:
Net investment income ............... (0.30) (0.32) (0.34) (0.27) (0.32) (0.30)
Net realized gains .................. (0.33) (1.96) (1.60) (1.70) (1.25) --
---------- ---------- ---------- ---------- ---------- ----------
Total distributions .................... (0.63) (2.28) (1.94) (1.97) (1.57) (0.30)
---------- ---------- ---------- ---------- ---------- ----------
Redemption fees(c) ..................... -- --(d) --(d) --(d) --(d) --(d)
---------- ---------- ---------- ---------- ---------- ----------
Net asset value, end of period ......... $ 8.95 $ 15.78 $ 20.23 $ 19.46 $ 18.92 $ 16.78
========== ========== ========== ========== ========== ==========
Total return(e) ........................ (39.90)% (12.58)% 14.80% 14.92% 23.91% 13.10%
RATIOS TO AVERAGE NET ASSETS(f)
Expenses(g) ............................ 1.11% 1.05% 1.05% 1.06% 1.08% 1.11%
Net investment income .................. 1.62% 1.71% 1.29% 1.49% 1.41% 1.32%
SUPPLEMENTAL DATA
Net assets, end of period (000's) ...... $3,960,524 $7,277,382 $9,152,846 $8,627,348 $7,988,364 $6,924,779
Portfolio turnover rate ................ 11.15% 21.91% 33.12% 35.41% 24.13% 37.58%
(a) The 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 shares in relation to income earned
and/or fluctuating market value of the investments of the Fund.
(b) Based on average daily shares outstanding.
(c) Effective September 1, 2008, the redemption fee was eliminated.
(d) Amount rounds to less than $0.01 per share.
(e) Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable, and is not annualized for periods less than
one year.
(f) Ratios are annualized for periods less than one year.
(g) Benefit of expense reduction rounds to less than 0.01%.
The accompanying notes are an integral part of these financial statements.
Semiannual Report | 17
Templeton World Fund
FINANCIAL HIGHLIGHTS (CONTINUED)
SIX MONTHS ENDED YEAR ENDED AUGUST 31,
FEBRUARY 28, 2009 -------------------------------------------------------
CLASS B (UNAUDITED) 2008 2007 2006 2005 2004
- ------- ----------------- ------- ------- ------- ------- -------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the
period)
Net asset value, beginning of period ... $ 15.48 $ 19.87 $ 19.08 $ 18.61 $ 16.53 $ 14.92
------- ------- ------- ------- ------- -------
Income from investment operations(a):
Net investment income(b) ............ 0.05 0.16 0.10 0.13 0.12 0.10
Net realized and unrealized gains
(losses) ......................... (6.18) (2.44) 2.43 2.20 3.41 1.71
------- ------- ------- ------- ------- -------
Total from investment operations ....... (6.13) (2.28) 2.53 2.33 3.53 1.81
------- ------- ------- ------- ------- -------
Less distributions from:
Net investment income ............... (0.16) (0.15) (0.14) (0.16) (0.20) (0.20)
Net realized gains .................. (0.33) (1.96) (1.60) (1.70) (1.25) --
------- ------- ------- ------- ------- -------
Total distributions .................... (0.49) (2.11) (1.74) (1.86) (1.45) (0.20)
------- ------- ------- ------- ------- -------
Redemption fees(c) ..................... -- --(d) --(d) --(d) --(d) --(d)
------- ------- ------- ------- ------- -------
Net asset value, end of period ......... $ 8.86 $ 15.48 $ 19.87 $ 19.08 $ 18.61 $ 16.53
======= ======= ======= ======= ======= =======
Total return(e) ........................ (40.10)% (13.29)% 13.97% 14.03% 22.99% 12.24%
RATIOS TO AVERAGE NET ASSETS(f)
Expenses(g) ............................ 1.86% 1.81% 1.81% 1.82% 1.83% 1.86%
Net investment income .................. 0.87% 0.95% 0.53% 0.73% 0.66% 0.57%
SUPPLEMENTAL DATA
Net assets, end of period (000's) ...... $16,121 $33,986 $58,251 $64,381 $60,564 $49,419
Portfolio turnover rate ................ 11.15% 21.91% 33.12% 35.41% 24.13% 37.58%
(a) The 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 shares in relation to income earned
and/or fluctuating market value of the investments of the Fund.
(b) Based on average daily shares outstanding.
(c) Effective September 1, 2008, the redemption fee was eliminated.
(d) Amount rounds to less than $0.01 per share.
(e) Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable, and is not annualized for periods less than
one year.
(f) Ratios are annualized for periods less than one year.
(g) Benefit of expense reduction rounds to less than 0.01%.
The accompanying notes are an integral part of these financial statements.
18 | Semiannual Report
Templeton World Fund
FINANCIAL HIGHLIGHTS (CONTINUED)
SIX MONTHS ENDED YEAR ENDED AUGUST 31,
FEBRUARY 28, 2009 ------------------------------------------------------------
CLASS C (UNAUDITED) 2008 2007 2006 2005 2004
- ------- ----------------- -------- -------- -------- -------- --------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the
period)
Net asset value, beginning of period ... $ 15.23 $ 19.61 $ 18.86 $ 18.42 $ 16.37 $ 14.77
-------- -------- -------- -------- -------- --------
Income from investment operations(a):
Net investment income(b) ............ 0.05 0.16 0.11 0.14 0.11 0.09
Net realized and unrealized gains
(losses) ......................... (6.08) (2.40) 2.39 2.16 3.38 1.70
-------- -------- -------- -------- -------- --------
Total from investment operations ....... (6.03) (2.24) 2.50 2.30 3.49 1.79
-------- -------- -------- -------- -------- --------
Less distributions from:
Net investment income ............... (0.17) (0.18) (0.15) (0.16) (0.19) (0.19)
Net realized gains .................. (0.33) (1.96) (1.60) (1.70) (1.25) --
-------- -------- -------- -------- -------- --------
Total distributions .................... (0.50) (2.14) (1.75) (1.86) (1.44) (0.19)
-------- -------- -------- -------- -------- --------
Redemption fees(c) ..................... -- --(d) --(d) --(d) --(d) --(d)
-------- -------- -------- -------- -------- --------
Net asset value, end of period ......... $ 8.70 $ 15.23 $ 19.61 $ 18.86 $ 18.42 $ 16.37
======== ======== ======== ======== ======== ========
Total return(e) ........................ (40.14)% (13.31)% 14.00% 14.03% 23.00% 12.24%
RATIOS TO AVERAGE NET ASSETS(f)
Expenses(g) ............................ 1.85% 1.80% 1.80% 1.82% 1.83% 1.86%
Net investment income .................. 0.88% 0.96% 0.54% 0.73% 0.66% 0.57%
SUPPLEMENTAL DATA
Net assets, end of period (000's) ...... $176,121 $339,251 $446,046 $407,087 $351,430 $295,009
Portfolio turnover rate ................ 11.15% 21.91% 33.12% 35.41% 24.13% 37.58%
(a) The 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 shares in relation to income earned
and/or fluctuating market value of the investments of the Fund.
(b) Based on average daily shares outstanding.
(c) Effective September 1, 2008, the redemption fee was eliminated.
(d) Amount rounds to less than $0.01 per share.
(e) Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable, and is not annualized for periods less than
one year.
(f) Ratios are annualized for periods less than one year.
(g) Benefit of expense reduction rounds to less than 0.01%.
The accompanying notes are an integral part of these financial statements.
Semiannual Report | 19
Templeton World Fund
FINANCIAL HIGHLIGHTS (CONTINUED)
SIX MONTHS ENDED YEAR ENDED AUGUST 31,
FEBRUARY 28, 2009 ---------------------------------
ADVISOR CLASS (UNAUDITED) 2008 2007 2006(a)
- ------------- ----------------- -------- -------- -------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the
period)
Net asset value, beginning of period ... $ 15.79 $ 20.25 $ 19.48 $ 19.38
-------- -------- -------- -------
Income from investment operations(b):
Net investment income(c) ............ 0.11 0.34 0.32 0.11
Net realized and unrealized gains
(losses) ......................... (6.29) (2.47) 2.44 (0.01)
-------- -------- -------- -------
Total from investment operations ....... (6.18) (2.13) 2.76 0.10
-------- -------- -------- -------
Less distributions from:
Net investment income ............... (0.34) (0.37) (0.39) --
Net realized gains .................. (0.33) (1.96) (1.60) --
-------- -------- -------- -------
Total distributions .................... (0.67) (2.33) (1.99) --
-------- -------- -------- -------
Redemption fees(d) ..................... -- --(e) --(e) --(e)
-------- -------- -------- -------
Net asset value, end of period ......... $ 8.94 $ 15.79 $ 20.25 $ 19.48
======== ======== ======== =======
Total return(f) ........................ (39.79)% (12.40)% 15.06% 0.52%
RATIOS TO AVERAGE NET ASSETS(g)
Expenses(h) ............................ 0.87% 0.81% 0.81% 0.82%
Net investment income .................. 1.86% 1.95% 1.53% 1.73%
SUPPLEMENTAL DATA
Net assets, end of period (000's) ...... $110,026 $125,863 $193,581 $31,804
Portfolio turnover rate ................ 11.15% 21.91% 33.12% 35.41%
(a) For the period May 15, 2006 (effective date) to August 31, 2006.
(b) The 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 shares in relation to income earned
and/or fluctuating market value of the investments of the Fund.
(c) Based on average daily shares outstanding.
(d) Effective September 1, 2008, the redemption fee was eliminated.
(e) Amount rounds to less than $0.01 per share.
(f) Total return is not annualized for periods less than one year.
(g) Ratios are annualized for periods less than one year.
(h) Benefit of expense reduction rounds to less than 0.01%.
The accompanying notes are an integral part of these financial statements.
20 | Semiannual Report
Templeton World Fund
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009 (UNAUDITED)
INDUSTRY SHARES/UNITS VALUE
---------------------------------------------- --------------- --------------
COMMON STOCKS AND OTHER EQUITY
INTERESTS 92.5%
CHINA 0.5%
China Telecom Corp. Ltd., ADR .......... Diversified Telecommunication Services 657,000 $ 21,996,360
--------------
FINLAND 0.9%
UPM-Kymmene OYJ ........................ Paper & Forest Products 5,421,310 38,521,803
--------------
FRANCE 6.3%
France Telecom SA ...................... Diversified Telecommunication Services 2,756,030 62,170,930
Sanofi-Aventis ......................... Pharmaceuticals 1,800,000 93,281,295
Total SA, B ............................ Oil, Gas & Consumable Fuels 967,820 45,944,516
Vivendi SA ............................. Media 2,750,000 66,057,943
--------------
267,454,684
--------------
GERMANY 4.0%
Bayerische Motoren Werke AG ............ Automobiles 1,177,640 29,481,452
Deutsche Post AG ....................... Air Freight & Logistics 1,638,630 15,939,754
Merck KGaA ............................. Pharmaceuticals 323,380 24,366,695
SAP AG ................................. Software 912,830 29,621,602
Siemens AG ............................. Industrial Conglomerates 1,416,280 72,830,730
--------------
172,240,233
--------------
HONG KONG 4.3%
Cheung Kong (Holdings) Ltd. ............ Real Estate Management & Development 9,663,751 79,563,967
Hutchison Whampoa Ltd. ................. Industrial Conglomerates 13,611,060 71,959,080
Yue Yuen Industrial Holdings Ltd. ...... Textiles, Apparel & Luxury Goods 17,249,500 32,296,312
--------------
183,819,359
--------------
INDIA 1.5%
Reliance Industries Ltd. ............... Oil, Gas & Consumable Fuels 2,599,080 64,463,605
--------------
ISRAEL 1.4%
(a) Check Point Software Technologies
Ltd. ................................ Software 2,674,400 58,756,568
--------------
ITALY 1.6%
Eni SpA ................................ Oil, Gas & Consumable Fuels 2,541,076 51,045,839
Intesa Sanpaolo SpA .................... Commercial Banks 6,634,800 16,269,443
--------------
67,315,282
--------------
JAPAN 3.7%
Olympus Corp. .......................... Health Care Equipment & Supplies 1,912,000 25,821,159
Sumitomo Mitsui Financial Group Inc. ... Commercial Banks 780,300 25,345,059
Takeda Pharmaceutical Co. Ltd. ......... Pharmaceuticals 1,241,800 50,768,810
Toyota Motor Corp. ..................... Automobiles 1,740,500 56,711,819
--------------
158,646,847
--------------
NETHERLANDS 0.5%
ING Groep NV ........................... Diversified Financial Services 4,594,030 21,331,716
--------------
Semiannual Report | 21
Templeton World Fund
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009 (UNAUDITED) (CONTINUED)
INDUSTRY SHARES/UNITS VALUE
---------------------------------------------- --------------- --------------
COMMON STOCKS AND OTHER EQUITY
INTERESTS (CONTINUED)
NORWAY 0.7%
Telenor ASA ............................ Diversified Telecommunication Services 5,675,250 $ 29,420,893
--------------
PHILIPPINES 0.3%
Ayala Land Inc. ........................ Real Estate Management & Development 94,089,601 10,821,560
--------------
RUSSIA 0.7%
Gazprom, ADR ........................... Oil, Gas & Consumable Fuels 2,307,910 29,379,694
--------------
SINGAPORE 2.5%
DBS Group Holdings Ltd. ................ Commercial Banks 5,832,000 29,528,160
(a) Flextronics International Ltd. ......... Electronic Equipment, Instruments & Components 4,259,287 8,774,131
Parkway Holdings Ltd. .................. Health Care Providers & Services 22,029,333 14,938,035
Singapore Telecommunications Ltd. ...... Diversified Telecommunication Services 34,846,261 55,359,748
--------------
108,600,074
--------------
SOUTH AFRICA 0.4%
Massmart Holdings Ltd. ................. Food & Staples Retailing 2,307,600 16,533,423
--------------
SOUTH KOREA 2.1%
KB Financial Group Inc. ................ Commercial Banks 1,038,873 19,917,745
Samsung Electronics Co. Ltd. ........... Semiconductors & Semiconductor Equipment 229,519 71,394,935
--------------
91,312,680
--------------
SPAIN 1.9%
Telefonica SA .......................... Diversified Telecommunication Services 4,350,130 81,050,260
--------------
SWEDEN 0.6%
Telefonaktiebolaget LM Ericsson, B ..... Communications Equipment 3,186,720 26,512,843
--------------
SWITZERLAND 3.4%
Adecco SA .............................. Professional Services 1,169,530 35,790,316
Novartis AG ............................ Pharmaceuticals 1,575,950 57,463,943
Roche Holding AG ....................... Pharmaceuticals 466,090 52,960,248
--------------
146,214,507
--------------
TAIWAN 5.3%
Chunghwa Telecom Co. Ltd., ADR ......... Diversified Telecommunication Services 4,879,968 74,907,509
Compal Electronics Inc. ................ Computers & Peripherals 64,451,387 37,202,972
(b) Compal Electronics Inc., GDR, 144A ..... Computers & Peripherals 24,240 69,960
Taiwan Semiconductor Manufacturing
Co. Ltd. ............................ Semiconductors & Semiconductor Equipment 89,727,761 115,252,546
--------------
227,432,987
--------------
TURKEY 1.2%
Turkcell Iletisim Hizmetleri AS ........ Wireless Telecommunication Services 9,848,862 48,951,758
--------------
22 | Semiannual Report
Templeton World Fund
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009 (UNAUDITED) (CONTINUED)
INDUSTRY SHARES/UNITS VALUE
---------------------------------------------- --------------- --------------
COMMON STOCKS AND OTHER EQUITY
INTERESTS (CONTINUED)
UNITED KINGDOM 13.0%
Aviva PLC .............................. Insurance 6,771,466 $ 27,995,202
BAE Systems PLC ........................ Aerospace & Defense 11,670,208 62,021,245
BP PLC ................................. Oil, Gas & Consumable Fuels 14,722,804 94,409,108
British Sky Broadcasting Group PLC ..... Media 4,258,959 28,650,706
Compass Group PLC ...................... Hotels, Restaurants & Leisure 7,064,787 31,279,715
GlaxoSmithKline PLC .................... Pharmaceuticals 5,138,017 78,573,538
Kingfisher PLC ......................... Specialty Retail 15,848,820 28,680,752
Pearson PLC ............................ Media 4,991,862 47,095,611
Royal Dutch Shell PLC, A ............... Oil, Gas & Consumable Fuels 626,995 13,810,302
Royal Dutch Shell PLC, B ............... Oil, Gas & Consumable Fuels 2,427,995 51,579,522
Tesco PLC .............................. Food & Staples Retailing 5,093,050 24,276,496
Vodafone Group PLC ..................... Wireless Telecommunication Services 36,401,320 65,196,537
--------------
553,568,734
--------------
UNITED STATES 35.7%
Abbott Laboratories .................... Pharmaceuticals 860,100 40,717,134
Accenture Ltd., A ...................... IT Services 4,228,620 123,433,418
American Express Co. ................... Consumer Finance 605,960 7,307,878
(a) Amgen Inc. ............................. Biotechnology 2,200,000 107,646,000
Bank of America Corp. .................. Diversified Financial Services 1,500,910 5,928,594
Bristol-Myers Squibb Co. ............... Pharmaceuticals 2,981,970 54,898,068
Chevron Corp. .......................... Oil, Gas & Consumable Fuels 1,465,629 88,978,336
(a) Cisco Systems Inc. ..................... Communications Equipment 3,920,080 57,115,566
Comcast Corp., A ....................... Media 6,616,780 80,393,877
Covidien Ltd. .......................... Health Care Equipment & Supplies 1,225,450 38,810,001
(a) The DIRECTV Group Inc. ................. Media 1,170,220 23,334,187
E. I. du Pont de Nemours and Co. ....... Chemicals 1,017,390 19,086,236
FedEx Corp. ............................ Air Freight & Logistics 642,300 27,753,783
The Gap Inc. ........................... Specialty Retail 4,005,521 43,219,572
General Electric Co. ................... Industrial Conglomerates 5,168,590 43,984,701
Great Plains Energy Inc. ............... Electric Utilities 892,533 12,084,897
The Home Depot Inc. .................... Specialty Retail 674,100 14,081,949
Invesco Ltd. ........................... Capital Markets 2,924,969 33,432,396
JPMorgan Chase & Co. ................... Diversified Financial Services 623,600 14,249,260
KKR Private Equity Investors LP
(Units) ............................. Capital Markets 6,333,380 14,250,105
Merck & Co. Inc. ....................... Pharmaceuticals 1,809,240 43,783,608
Microsoft Corp. ........................ Software 9,157,720 147,897,178
News Corp., A .......................... Media 9,396,020 52,241,871
(a) Oracle Corp. ........................... Software 6,656,470 103,441,544
Pfizer Inc. ............................ Pharmaceuticals 4,352,300 53,576,813
(a) Progressive Corp. ...................... Insurance 2,137,430 24,730,065
Quest Diagnostics Inc. ................. Health Care Providers & Services 879,380 40,301,985
(a) Sprint Nextel Corp. .................... Wireless Telecommunication Services 5,721,070 18,822,320
Semiannual Report | 23
Templeton World Fund
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009 (UNAUDITED) (CONTINUED)
INDUSTRY SHARES/UNITS VALUE
---------------------------------------------- --------------- --------------
COMMON STOCKS AND OTHER EQUITY
INTERESTS (CONTINUED)
UNITED STATES (CONTINUED)
TECO Energy Inc. ....................... Multi-Utilities 2,301,100 $ 22,067,549
Time Warner Inc. ....................... Media 6,408,360 48,895,787
Torchmark Corp. ........................ Insurance 1,557,920 32,093,152
United Parcel Service Inc., B .......... Air Freight & Logistics 2,002,070 82,445,243
--------------
1,521,003,073
--------------
TOTAL COMMON STOCKS AND
OTHER EQUITY INTERESTS
(COST $6,093,718,206) ............... 3,945,348,943
--------------
PREFERRED STOCKS 1.8%
BRAZIL 1.8%
Companhia Vale do Rio Doce, ADR,
pfd., A ............................. Metals & Mining 2,526,000 28,164,900
Petroleo Brasileiro SA, ADR, pfd. ...... Oil, Gas & Consumable Fuels 2,161,790 48,380,860
--------------
TOTAL PREFERRED STOCKS
(COST $71,113,335) .................. 76,545,760
--------------
PRINCIPAL
AMOUNT(c)
---------------
FOREIGN GOVERNMENT AND AGENCY
SECURITIES 0.3%
CANADA 0.2%
Government of Canada, 6.00%,
6/01/11 ............................. 8,030,000 CAD 6,971,513
--------------
SWEDEN 0.1%
Government of Sweden, 5.50%,
10/08/12 ............................ 48,680,000 SEK 6,113,884
--------------
TOTAL FOREIGN GOVERNMENT AND
AGENCY SECURITIES
(COST $10,576,164) .................. 13,085,397
--------------
U.S. GOVERNMENT AND AGENCY
SECURITIES (COST $16,597,893)
0.4%
FHLMC, 5.50%, 12/01/35 ................. 16,839,967 17,285,399
--------------
TOTAL INVESTMENTS BEFORE
SHORT TERM INVESTMENTS
(COST $6,192,005,598) ............... 4,052,265,499
--------------
24 | Semiannual Report
Templeton World Fund
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009 (UNAUDITED) (CONTINUED)
PRINCIPAL
AMOUNT(c) VALUE
--------------- --------------
SHORT TERM INVESTMENTS 4.8%
TIME DEPOSITS (COST $123,625,000)
2.9%
UNITED STATES 2.9%
Dresdner Bank AG, 0.30%, 3/02/09 ... 123,625,000 $ 123,625,000
--------------
U.S. GOVERNMENT AND AGENCY
SECURITIES 1.9%
(d) FHLB, 3/03/09 - 5/11/09 ............ 30,000,000 29,990,450
(d) FNMA, 3/26/09 ...................... 25,000,000 24,998,425
(d) U.S. Treasury Bill, 3/26/09 ........ 25,000,000 24,997,675
--------------
TOTAL U.S. GOVERNMENT AND AGENCY
SECURITIES (COST $79,972,653) ... 79,986,550
--------------
TOTAL INVESTMENTS
(COST $6,395,603,251)
99.8% ........................... 4,255,877,049
OTHER ASSETS, LESS LIABILITIES
0.2% ............................ 6,914,820
--------------
NET ASSETS 100.0% .................. $4,262,791,869
==============
See Abbreviations on page 37.
(a) Non-income producing for the twelve months ended February 28, 2009.
(b) Security 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. This security has been deemed liquid under
guidelines approved by the Fund's Board of Trustees. At February 28, 2009,
the value of this security was $69,960, representing less than 0.01% of net
assets.
(c) The principal amount is stated in U.S. dollars unless otherwise indicated.
(d) The security is traded on a discount basis with no stated coupon rate.
The accompanying notes are an integral part of these financial statements.
Semiannual Report | 25
Templeton World Fund
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
February 28, 2009 (unaudited)
Assets:
Investments in securities:
Cost ................................................................. $ 6,395,603,251
===============
Value ................................................................ $ 4,255,877,049
Foreign Currency, at value (cost $262) .................................. 245
Receivables:
Capital shares sold .................................................. 1,721,425
Dividends and interest ............................................... 19,636,414
Other assets ............................................................ 323,715
---------------
Total assets ...................................................... 4,277,558,848
---------------
Liabilities:
Payables:
Capital shares redeemed .............................................. 8,963,736
Affiliates ........................................................... 3,970,885
Unaffiliated transfer agent fees ..................................... 807,451
Funds advanced by custodian ............................................. 194,567
Accrued expenses and other liabilities .................................. 830,340
---------------
Total liabilities ................................................. 14,766,979
---------------
Net assets, at value ........................................... $ 4,262,791,869
===============
Net assets consist of:
Paid-in capital ......................................................... $ 6,653,045,676
Undistributed net investment income ..................................... 44,129,795
Net unrealized appreciation (depreciation) .............................. (2,139,933,059)
Accumulated net realized gain (loss) .................................... (294,450,543)
---------------
Net assets, at value ........................................... $ 4,262,791,869
===============
CLASS A:
Net assets, at value .................................................... $ 3,960,523,923
---------------
Shares outstanding ...................................................... 442,566,699
---------------
Net asset value per share(a) ............................................ $ 8.95
---------------
Maximum offering price per share (net asset value per share / 94.25%) ... $ 9.50
---------------
CLASS B:
Net assets, at value .................................................... $ 16,120,764
---------------
Shares outstanding ...................................................... 1,820,001
---------------
Net asset value and maximum offering price per share(a) ................. $ 8.86
---------------
CLASS C:
Net assets, at value .................................................... $ 176,121,387
---------------
Shares outstanding ...................................................... 20,255,349
---------------
Net asset value and maximum offering price per share(a) ................. $ 8.70
---------------
ADVISOR CLASS:
Net assets, at value .................................................... $ 110,025,795
---------------
Shares outstanding ...................................................... 12,311,641
---------------
Net asset value and maximum offering price per share .................... $ 8.94
---------------
(a) Redemption price is equal to net asset value less contingent deferred sales
charges, if applicable.
The accompanying notes are an integral part of these financial statements.
26 | Semiannual Report
Templeton World Fund
FINANCIAL STATEMENTS (CONTINUED)
STATEMENT OF OPERATIONS for the six months ended February 28, 2009 (unaudited)
Investment income:
Dividends (net of foreign taxes of $4,001,081) ..................................... $ 71,494,088
Interest ........................................................................... 2,352,977
---------------
Total investment income ...................................................... 73,847,065
---------------
Expenses:
Management fees (Note 3a) .......................................................... 16,718,987
Administrative fees (Note 3b) ...................................................... 2,176,585
Distribution fees: (Note 3c)
Class A ......................................................................... 6,175,697
Class B ......................................................................... 110,915
Class C ......................................................................... 1,123,463
Transfer agent fees (Note 3e) ...................................................... 3,357,074
Custodian fees (Note 4) ............................................................ 721,043
Reports to shareholders ............................................................ 218,220
Registration and filing fees ....................................................... 116,538
Professional fees .................................................................. 45,020
Trustees' fees and expenses ........................................................ 57,197
Other .............................................................................. 64,079
---------------
Total expenses ............................................................... 30,884,818
Expense reductions (Note 4) .................................................. (5,925)
---------------
Net expenses .............................................................. 30,878,893
---------------
Net investment income .................................................. 42,968,172
---------------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments ..................................................................... (302,155,400)
Foreign currency transactions ................................................... (4,206,554)
---------------
Net realized gain (loss) ............................................... (306,361,954)
---------------
Net change in unrealized appreciation (depreciation) on:
Investments ..................................................................... (2,744,877,031)
Translation of other assets and liabilities denominated in foreign currencies ... 733,265
---------------
Net change in unrealized appreciation (depreciation) ............................... (2,744,143,766)
---------------
Net realized and unrealized gain (loss) ............................................... (3,050,505,720)
---------------
Net increase (decrease) in net assets resulting from operations ....................... $(3,007,537,548)
===============
The accompanying notes are an integral part of these financial statements.
Semiannual Report | 27
Templeton World Fund
FINANCIAL STATEMENTS (CONTINUED)
STATEMENT OF CHANGES IN NET ASSETS
SIX MONTHS ENDED
FEBRUARY 28, 2009 YEAR ENDED
(UNAUDITED) AUGUST 31, 2008
----------------- ---------------
Increase (decrease) in net assets:
Operations:
Net investment income ......................................................... $ 42,968,172 $ 153,547,495
Net realized gain (loss) from investments and foreign currency transactions ... (306,361,954) 234,608,706
Net change in unrealized appreciation (depreciation) on investments,
translation of other assets and liabilities denominated in foreign
currencies ................................................................. (2,744,143,766) (1,551,702,715)
--------------- ---------------
Net increase (decrease) in net assets resulting from operations ............ (3,007,537,548) (1,163,546,514)
--------------- ---------------
Distributions to shareholders from:
Net investment income:
Class A .................................................................... (130,800,362) (149,314,552)
Class B .................................................................... (303,763) (429,640)
Class C .................................................................... (3,506,520) (4,091,924)
Advisor Class .............................................................. (2,718,053) (3,659,274)
Net realized gains:
Class A .................................................................... (145,467,422) (883,471,102)
Class B .................................................................... (648,040) (5,496,035)
Class C .................................................................... (6,729,217) (44,374,985)
Advisor Class .............................................................. (2,671,700) (18,588,982)
--------------- ---------------
Total distributions to shareholders .............................................. (292,845,077) (1,109,426,494)
--------------- ---------------
Capital share transactions: (Note 2)
Class A .................................................................... (229,585,132) 238,151,309
Class B .................................................................... (4,183,152) (12,680,289)
Class C .................................................................... (23,765,682) (3,485,692)
Advisor Class .............................................................. 44,227,178 (23,272,809)
--------------- ---------------
Total capital share transactions ................................................. (213,306,788) 198,712,519
--------------- ---------------
Redemption fees .................................................................. -- 18,000
--------------- ---------------
Net increase (decrease) in net assets ...................................... (3,513,689,413) (2,074,242,489)
Net assets:
Beginning of period .............................................................. 7,776,481,282 9,850,723,771
--------------- ---------------
End of period .................................................................... $ 4,262,791,869 $ 7,776,481,282
=============== ===============
Undistributed net investment income included in net assets:
End of period .................................................................... $ 44,129,795 $ 138,490,321
=============== ===============
The accompanying notes are an integral part of these financial statements.
28 | Semiannual Report
Templeton World Fund
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Templeton Funds (Trust) is registered under the Investment Company Act of 1940,
as amended, (1940 Act) as an open-end investment company, consisting of two
separate funds. The Templeton World Fund (Fund) is included in this report. The
financial statements of the remaining fund in the Trust are presented
separately. The Fund offers four classes of shares: Class A, Class B, Class C,
and Advisor Class. Each class of shares differs by its initial sales load,
contingent deferred sales charges, distribution fees, voting rights on matters
affecting a single class and its exchange privilege.
The following summarizes the Fund's significant accounting policies.
A. SECURITY VALUATION
Securities listed on a securities 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. Over-the-counter securities and listed securities for
which there is no reported sale 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. Time deposits are valued at cost.
Government securities generally trade in the over-the-counter market rather than
on a securities exchange. The Fund may utilize independent pricing services,
quotations from bond dealers, and information with respect to bond and note
transactions, to assist in determining a current market value for each security.
The Fund's pricing services may use valuation models or matrix pricing which
considers information with respect to comparable bond and note transactions,
quotations from bond dealers, or by reference to other securities that are
considered comparable in such characteristics as rating, interest rate and
maturity date, option adjusted spread models, prepayment projections, interest
rate spreads and yield curves, to determine current value.
Foreign securities are valued as of the close of trading on the foreign stock
exchange on which the security is primarily traded, or the NYSE, whichever is
earlier. If no sale is reported at that time, the foreign security will be
valued within the range of the most recent quoted bid and ask prices. The value
is then converted into its U.S. dollar equivalent at the foreign exchange rate
in effect at the close of the NYSE on the day that the value of the foreign
security is determined.
The Fund has procedures to determine the fair value of individual securities and
other assets for which market prices are not readily available or which may not
be reliably priced. Methods for valuing these securities may include:
fundamental analysis, matrix pricing, discounts from market prices of similar
securities, or discounts applied due to the nature and duration of restrictions
on the disposition of the securities. Due to the inherent uncertainty of
valuations of such securities, the fair values may differ significantly from the
values that would have been used had a ready market for such investments
existed. Occasionally, events occur between the time at which trading in a
security is completed and the close of the NYSE that might call into question
the availability (including the reliability) of the value of a portfolio
security held by the Fund. The investment
Semiannual Report | 29
Templeton World Fund
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
A. SECURITY VALUATION (CONTINUED)
manager 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 Depository 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. If
such an event occurs, the securities may be valued using fair value procedures,
which may include the use of independent pricing services. All security
valuation procedures are approved by the Trust's Board of Trustees.
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. 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. 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 Trust's Board of Trustees.
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 on 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. FOREIGN CURRENCY CONTRACTS
When the Fund purchases or sells foreign securities it may enter into foreign
exchange contracts to minimize foreign exchange risk from the trade date to the
settlement date of the transactions. A foreign exchange contract is an agreement
between two parties to exchange different currencies at an agreed upon exchange
rate at a future date. Realized and unrealized gains and losses on these
contracts are included in the Statement of Operations.
The risks of these contracts include movement in the values of the foreign
currencies relative to the U.S. dollar and the possible inability of the
counterparties to fulfill their obligations under the contracts, which may be in
excess of the amount reflected in the Statement of Assets and Liabilities.
30 | Semiannual Report
Templeton World Fund
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
D. INCOME TAXES
No provision has been made for U.S. income taxes because it is the Fund's policy
to qualify as a regulated investment company under the Internal Revenue Code and
to distribute to shareholders substantially all of its taxable income and net
realized gains.
The Fund has reviewed the tax positions, taken on federal income tax returns,
for each of the three open tax years and as of February 28, 2009, and has
determined that no provision for income tax is required in the Fund's financial
statements.
Foreign securities held by the Fund may be subject to foreign taxation on
dividend and interest income received. Foreign taxes, if any, are recorded based
on the tax regulations and rates that exist in the foreign markets in which the
Fund invests.
The Fund may be subject to a tax imposed on net realized gains on securities of
certain foreign countries. The Fund records an estimated deferred tax liability
for net unrealized gains on these securities in an amount that would be payable
if the securities were disposed of on the valuation date.
E. 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 that certain
dividends from foreign securities are recognized as soon as the Fund is notified
of the ex-dividend date. 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 accounting principles generally accepted in
the United States of America. 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.
Semiannual Report | 31
Templeton World Fund
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
F. ACCOUNTING ESTIMATES
The preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America 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.
G. REDEMPTION FEES
A short term trading redemption fee was imposed, with some exceptions, on any
Fund shares that were redeemed or exchanged within seven calendar days following
their purchase date. The redemption fee was 2% of the amount redeemed. Such fees
were retained by the Fund and accounted for as an addition to paid-in capital.
Effective September 1, 2008, the redemption fee was eliminated.
H. 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 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 February 28, 2009, there were an unlimited number of shares of the Trust
authorized (without par value). Transactions in the Fund's shares were as
follows:
SIX MONTHS ENDED YEAR ENDED
FEBRUARY 28, 2009 AUGUST 31, 2008
--------------------------- -----------------------------
SHARES AMOUNT SHARES AMOUNT
----------- ------------- ----------- ---------------
CLASS A SHARES:
Shares sold ................. 19,081,965 $ 211,403,407 32,493,519 $ 587,448,743
Shares issued in reinvestment
of distributions ......... 23,106,833 245,856,693 48,796,248 928,986,133
Shares redeemed ............. (60,865,761) (686,845,232) (72,392,137) (1,278,283,567)
----------- ------------- ----------- ---------------
Net increase (decrease) ..... (18,676,963) $(229,585,132) 8,897,630 $ 238,151,309
=========== ============= =========== ===============
CLASS B SHARES:
Shares sold ................. 102,620$ 1,129,982 107,243 $ 1,937,328
Shares issued in reinvestment
of distributions ......... 75,304 793,700 272,093 5,106,482
Shares redeemed ............. (553,153) (6,106,834) (1,115,556) (19,724,099)
----------- ------------- ----------- ---------------
Net increase (decrease) ..... (375,229) $ (4,183,152) (736,220) $ (12,680,289)
=========== ============= =========== ===============
32 | Semiannual Report
Templeton World Fund
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
2. SHARES OF BENEFICIAL INTEREST (CONTINUED)
SIX MONTHS ENDED YEAR ENDED
FEBRUARY 28, 2009 AUGUST 31, 2008
------------------------- -------------------------
SHARES AMOUNT SHARES AMOUNT
---------- ------------ ---------- ------------
CLASS C SHARES:
Shares sold .................... 1,757,540 $ 18,839,094 1,833,422 $ 32,380,277
Shares issued in reinvestment of
distributions ............... 838,415 8,677,586 2,240,105 41,365,754
Shares redeemed ................ (4,610,873) (51,282,362) (4,552,436) (77,231,723)
---------- ------------ ---------- ------------
Net increase (decrease) ........ (2,014,918) $(23,765,682) (478,909) $ (3,485,692)
========== ============ ========== ============
ADVISOR CLASS SHARES:
Shares sold .................... 4,682,200 $ 48,600,685 3,110,165 $ 55,086,490
Shares issued in reinvestment of
distributions ............... 497,078 5,278,972 706,799 13,446,120
Shares redeemed ................ (836,934) (9,652,479) (5,405,787) (91,805,419)
---------- ------------ ---------- ------------
Net increase (decrease) ........ 4,342,344 $ 44,227,178 (1,588,823) $(23,272,809)
========== ============ ========== ============
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 Trust are also officers and/or directors of the following
subsidiaries:
SUBSIDIARY AFFILIATION
- ---------- -----------
Templeton Global Advisors Limited (TGAL) 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 TGAL based on the average daily
net assets of the Fund as follows:
ANNUALIZED FEE RATE NET ASSETS
- ------------------- ----------
0.630% Up to and including $1 billion
0.615% Over $1 billion, up to and including $5 billion
0.600% Over $5 billion, up to and including $10 billion
0.580% Over $10 billion, up to and including $15 billion
0.560% Over $15 billion, up to and including $20 billion
0.540% In excess of $20 billion
Semiannual Report | 33
Templeton World Fund
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
3. TRANSACTIONS WITH AFFILIATES (CONTINUED)
B. ADMINISTRATIVE FEES
The Fund pays its allocated share of an administrative fee to FT Services based
on the Trust's aggregate average daily net assets as follows:
ANNUALIZED FEE RATE NET ASSETS
- ------------------- ----------
0.150% Up to and including $200 million
0.135% Over $200 million, up to and including $700 million
0.100% Over $700 million, up to and including $1.2 billion
0.075% In excess of $1.2 billion
C. DISTRIBUTION FEES
The Trust's Board of Trustees has adopted distribution plans for each share
class, with the exception of Advisor Class 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 B and C 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 maximum annual plan rates, based on the average daily net assets, for each
class, are as follows:
Class A............. 0.25%
Class B............. 1.00%
Class C............. 1.00%
D. SALES CHARGES/UNDERWRITING AGREEMENTS
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 .................... $111,613
Contingent deferred sales charges retained ........ $ 16,968
E. TRANSFER AGENT FEES
For the period ended February 28, 2009, the Fund paid transfer agent fees of
$3,357,074, of which $2,246,419 was retained by Investor Services.
34 | Semiannual Report
Templeton World Fund
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
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 February 28, 2009, the
custodian fees were reduced as noted in the Statement of Operations.
5. INCOME TAXES
At February 28, 2009, the cost of investments and net unrealized appreciation
(depreciation) for income tax purposes were as follows:
Cost of investments ......................... $ 6,411,941,303
---------------
Unrealized appreciation ..................... $ 183,871,747
Unrealized depreciation ..................... (2,339,936,001)
---------------
Net unrealized appreciation (depreciation) .. $(2,156,064,254)
===============
Net investment income differs for financial statement and tax purposes primarily
due to differing treatment of foreign currency transactions, pass-through entity
income, and bond discounts and premiums.
Net realized gains (losses) differ for financial statement and tax purposes
primarily due to differing treatment of wash sales, foreign currency
transactions, pass through entity income, and bond discounts and premiums.
The Fund utilized a tax accounting practice to treat a portion of the proceeds
from capital shares redeemed as a distribution from realized gains.
6. INVESTMENT TRANSACTIONS
Purchases and sales of investments (excluding short term securities) for the
period ended February 28, 2009, aggregated $675,278,905 and $598,201,802,
respectively.
7. 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.
Semiannual Report | 35
Templeton World Fund
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
8. CREDIT FACILITY
Effective, January 23, 2009, the Fund, together with other U.S. registered and
foreign investment funds managed by Franklin Templeton Investments
(individually, "Borrower"; collectively "Borrowers"), entered into a joint
syndicated senior unsecured credit facility totaling $725 million (Global Credit
Facility) to provide 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 based upon the unused portion of the Global Credit
Facility. During the period, the Fund incurred commitment fees of $1,313 of its
pro rata portion of the Global Credit Facility, which is reflected in Other
expenses on the Statement of Operations. During the period ended February 28,
2009, the Fund did not utilize the Global Credit Facility.
9. FAIR VALUE MEASUREMENTS
The Fund adopted Financial Accounting Standards Board (FASB) Statement No. 157,
"Fair Value Measurement" (SFAS 157), on September 1, 2008. SFAS 157 defines fair
value, establishes a framework for measuring fair value, and expands disclosures
about fair value measurements. The Fund has determined that the implementation
of SFAS 157 did not have a material impact on the Fund's financial statements.
SFAS 157 establishes 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 investments and are summarized in the following fair
value hierarchy:
- Level 1 - quoted prices in active markets for identical securities
- Level 2 - other significant observable inputs (including quoted prices
for similar securities, interest rates, prepayment speed, credit risk,
etc.)
- Level 3 - significant unobservable inputs (including the Fund's own
assumptions in determining the fair value of investments)
The inputs or methodology used for valuing securities are not an indication of
the risk associated with investing in those securities.
36 | Semiannual Report
Templeton World Fund
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
9. FAIR VALUE MEASUREMENTS (CONTINUED)
The following is a summary of the inputs used as of February 28, 2009, in
valuing the Fund's assets carried at fair value:
LEVEL 1 LEVEL 2 LEVEL 3 TOTAL
-------------- ------------ ------- --------------
ASSETS:
Investments in Securities ... $4,046,822,418 $209,054,631 $-- $4,255,877,049
10. NEW ACCOUNTING PRONOUNCEMENTS
In March 2008, FASB issued FASB Statement No. 161, "Disclosures about Derivative
Instruments and Hedging Activities, an amendment of FASB Statement No. 133"
(SFAS 161), which expands disclosures about derivative investments and hedging
activities. SFAS 161 is effective for fiscal years and interim periods beginning
after November 15, 2008. The Trust believes applying the various provisions of
SFAS 161 will not have a material impact on its financial statements.
ABBREVIATIONS
CURRENCY SELECTED PORTFOLIO
CAD - Canadian Dollar ADR - American Depository Receipt
SEK - Swedish Krona FHLB - Federal Home Loan Bank
FHLMC - Federal Home Loan Mortgage Corp.
FNMA - Federal National Mortgage Association
GDR - Global Depository Receipt
Semiannual Report | 37
Templeton World Fund
SHAREHOLDER INFORMATION
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, 500 East Broward Boulevard, Suite 1500, Fort Lauderdale, FL
33394, 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.
38 | Semiannual Report
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Literature Request
LITERATURE REQUEST. TO RECEIVE A BROCHURE AND PROSPECTUS, PLEASE CALL US AT
(800) DIAL BEN/(800) 342-5236 OR VISIT franklintempleton.com. INVESTORS SHOULD
CAREFULLY CONSIDER A FUND'S INVESTMENT GOALS, RISKS, CHARGES AND EXPENSES BEFORE
INVESTING. THE PROSPECTUS CONTAINS THIS AND OTHER INFORMATION. PLEASE CAREFULLY
READ THE PROSPECTUS BEFORE INVESTING. TO ENSURE THE HIGHEST QUALITY OF SERVICE,
WE MAY MONITOR, RECORD AND ACCESS TELEPHONE CALLS TO OR FROM OUR SERVICE
DEPARTMENTS. THESE CALLS CAN BE IDENTIFIED BY THE PRESENCE OF A REGULAR BEEPING
TONE.
FRANKLIN TEMPLETON FUNDS
VALUE
Franklin All Cap Value Fund
Franklin Balance Sheet Investment Fund
Franklin Large Cap Value Fund
Franklin MicroCap Value Fund(1)
Franklin MidCap Value Fund
Franklin Small Cap Value Fund
Mutual Beacon Fund
Mutual Qualified Fund
Mutual Recovery Fund(2)
Mutual Shares Fund
BLEND
Franklin Focused Core Equity Fund
Franklin Large Cap Equity Fund
Franklin Rising Dividends Fund
GROWTH
Franklin Capital Growth Fund(1)
Franklin Flex Cap Growth Fund
Franklin Growth Fund
Franklin Growth Opportunities Fund(3)
Franklin Small Cap Growth Fund(4)
Franklin Small-Mid Cap Growth Fund
SECTOR
Franklin Biotechnology Discovery Fund
Franklin DynaTech Fund
Franklin Global Real Estate Fund
Franklin Gold and Precious Metals Fund
Franklin Natural Resources Fund
Franklin Real Estate Securities Fund
Franklin Utilities Fund
Mutual Financial Services Fund
GLOBAL
Mutual Discovery Fund
Templeton Global Long-Short Fund
Templeton Global Opportunities Trust
Templeton Global Smaller Companies Fund
Templeton Growth Fund
Templeton World Fund
INTERNATIONAL
Franklin India Growth Fund
Franklin International Growth Fund
Franklin International Small Cap Growth Fund
Mutual European Fund
Templeton BRIC Fund
Templeton China World Fund
Templeton Developing Markets Trust
Templeton Emerging Markets Small Cap Fund
Templeton Foreign Fund
Templeton Foreign Smaller Companies Fund
Templeton Frontier Markets Fund
HYBRID
Franklin Balanced Fund
Franklin Convertible Securities Fund
Franklin Equity Income Fund
Franklin Income Fund
Templeton Income Fund
ASSET ALLOCATION
Franklin Templeton Corefolio(R) Allocation Fund
Franklin Templeton Founding Funds Allocation Fund
Franklin Templeton Perspectives Allocation Fund
Franklin Templeton Conservative Target Fund
Franklin Templeton Growth Target Fund
Franklin Templeton Moderate Target Fund
Franklin Templeton 2015 Retirement Target Fund
Franklin Templeton 2025 Retirement Target Fund
Franklin Templeton 2035 Retirement Target Fund
Franklin Templeton 2045 Retirement Target Fund
FIXED INCOME
Franklin Adjustable U.S. Government Securities Fund(5)
Franklin Floating Rate Daily Access Fund
Franklin High Income Fund
Franklin Limited Maturity U.S. Government Securities Fund(5)
Franklin Low Duration Total Return Fund
Franklin Real Return Fund
Franklin Strategic Income Fund
Franklin Strategic Mortgage Portfolio
Franklin Templeton Hard Currency Fund
Franklin Total Return Fund
Franklin U.S. Government Securities Fund(5)
Templeton Global Bond Fund
Templeton Global Total Return Fund
Templeton International Bond Fund
TAX-FREE INCOME(6)
NATIONAL FUNDS
Double Tax-Free Income Fund
Federal Tax-Free Income Fund
High Yield Tax-Free Income Fund
Insured Tax-Free Income Fund(7)
LIMITED-/INTERMEDIATE-TERM FUNDS
California Intermediate-Term Tax-Free Income Fund
Federal Intermediate-Term Tax-Free Income Fund
Federal Limited-Term Tax-Free Income Fund
New York Intermediate-Term Tax-Free Income Fund
STATE-SPECIFIC
Alabama
Arizona
California(8)
Colorado
Connecticut
Florida
Georgia
Kentucky
Louisiana
Maryland
Massachusetts(7)
Michigan(7)
Minnesota(7)
Missouri
New Jersey
New York(8)
North Carolina
Ohio(7)
Oregon
Pennsylvania
Tennessee
Virginia
INSURANCE FUNDS
Franklin Templeton Variable Insurance Products Trust(9)
(1.) The fund is closed to new investors. Existing shareholders and select
retirement plans can continue adding to their accounts.
(2.) The fund is a continuously offered, closed-end fund. Shares may be
purchased daily; there is no daily redemption. However, each quarter,
pending board approval, the fund will authorize the repurchase of 5%-25% of
the outstanding number of shares. Investors may tender all or a portion of
their shares during the tender period.
(3.) Effective 11/1/07, Franklin Aggressive Growth Fund changed its name to
Franklin Growth Opportunities Fund. The fund's investment goal and strategy
remained the same.
(4.) Effective 3/31/08, Franklin Small Cap Growth Fund II changed its name to
Franklin Small Cap Growth Fund. The fund's investment goal and strategy
remained the same.
(5.) An investment in the fund is neither insured nor guaranteed by the U.S.
government or by any other entity or institution.
(6.) For investors subject to the alternative minimum tax, a small portion of
fund dividends may be taxable. Distributions of capital gains are generally
taxable.
(7.) The fund invests primarily in insured municipal securities.
(8.) These funds are available in four or more variations, including long-term
portfolios, intermediate-term portfolios, portfolios of insured securities,
a high-yield portfolio (CA only) and money market portfolios.
(9.) The funds of the Franklin Templeton Variable Insurance Products Trust are
generally available only through insurance company variable contracts.
12/08
Not part of the semiannual report
(FRANKLIN TEMPLETON INVESTMENTS(R) LOGO)
One Franklin Parkway
San Mateo, CA 94403-1906
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SEMIANNUAL REPORT AND SHAREHOLDER LETTER
TEMPLETON WORLD FUND
INVESTMENT MANAGER
Templeton Global Advisors Limited
PRINCIPAL UNDERWRITER
Franklin Templeton Distributors, Inc.
(800) DIAL BEN(R)
franklintempleton.com
SHAREHOLDER SERVICES
(800) 632-2301
Authorized for distribution only when accompanied or preceded by a prospectus.
Investors should carefully consider a fund's investment goals, risks, charges
and expenses before investing. Like any investment in securities, the value of
the Fund's portfolio will be subject to the risk of loss from market, currency,
economic, political and other factors. The Fund and its investors are not
protected from such losses by the investment manager. Therefore, investors who
cannot accept this risk should not invest in shares of the Fund. The prospectus
contains this and other information; please read it carefully before investing.
To ensure the highest quality of service, telephone calls to or from our service
departments may be monitored, recorded and accessed. These calls can be
identified by the presence of a regular beeping tone.
102 S2009 04/09
(GRAPHIC)
FEBRUARY 28, 2009
SEMIANNUAL REPORT
AND SHAREHOLDER LETTER
A series of Templeton Funds
SIGN UP FOR EDELIVERY
Log onto franklintempleton.com
and click "My Profile"
INTERNATIONAL
Templeton Foreign Fund
(FRANKLIN TEMPLETON INVESTMENTS(R) LOGO)
Franklin - TEMPLETON - Mutual Series
Franklin Templeton Investments
GAIN FROM OUR PERSPECTIVE(R)
Franklin Templeton's distinct multi-manager structure combines the
specialized expertise of three world-class investment management groups--
Franklin, Templeton and Mutual Series.
SPECIALIZED EXPERTISE Each of our portfolio management groups operates autonomously, relying
on its own research and staying true to the unique investment disciplines that
underlie its success.
FRANKLIN. Founded in 1947, Franklin is a recognized leader in fixed income
investing and also brings expertise in growth- and value-style U.S. equity
investing.
TEMPLETON. Founded in 1940, Templeton pioneered international investing
and, in 1954, launched what has become the industry's oldest global fund.
Today, with offices in over 25 countries, Templeton offers investors a truly
global perspective.
MUTUAL SERIES. Founded in 1949, Mutual Series is dedicated to a unique style of
value investing, searching aggressively for opportunity among what it believes
are undervalued stocks, as well as arbitrage situations and distressed securities.
TRUE DIVERSIFICATION Because our management groups work independently and adhere to different
investment approaches, Franklin, Templeton and Mutual Series funds typically
have distinct portfolios. That's why our funds can be used to build truly
diversified allocation plans covering every major asset class.
RELIABILITY YOU CAN TRUST At Franklin Templeton Investments, we seek to consistently provide investors
with exceptional risk-adjusted returns over the long term, as well as the
reliable, accurate and personal service that has helped us become one of the
most trusted names in financial services.
MUTUAL FUNDS | RETIREMENT PLANS | 529 COLLEGE SAVINGS PLANS | SEPARATE ACCOUNTS
(GRAPHIC)
Not part of the semiannual report
Contents
SHAREHOLDER LETTER ........................................................ 1
SEMIANNUAL REPORT
Templeton Foreign Fund .................................................... 3
Performance Summary ....................................................... 12
Your Fund's Expenses ...................................................... 15
Financial Highlights and Statement of Investments ......................... 17
Financial Statements ...................................................... 27
Notes to Financial Statements ............................................. 31
Shareholder Information ................................................... 41
Shareholder Letter
Dear Shareholder:
During the six months ended February 28, 2009, world economies entered into a
significant slowdown spawned by the U.S. housing and credit market crises.
Despite coordinated efforts by many governments to address these problems, the
severe economic conditions and high degree of uncertainty fueled market
volatility. Most major equity indexes suffered double-digit losses for the
reporting period. Although this difficult environment is bound to provoke great
concern, we believe it is important to put short-term market developments in
perspective. Keep in mind that as daunting as current conditions may be, we have
navigated through other periods of high market volatility, including global
stock markets' severe declines of 1987 and the bursting of the technology bubble
in 2000. We remain committed to our long-term perspective and our disciplined
investment philosophy. Therefore, we view recent declines as potential
opportunities to find bargains that we believe may be well positioned to become
eventual winners. Although conditions remain challenging, our experience gives
us reason to be optimistic about the potential for future market stabilization
and recovery.
Templeton Foreign Fund's semiannual report goes into greater detail about
prevailing conditions during the period under review. In addition, the portfolio
managers discuss investment management decisions and Fund performance for the
period. You will also find performance data and financial information. Please
remember that all securities markets fluctuate, as do mutual fund share prices.
If you would like more frequent updates, franklintempleton.com provides daily
prices, monthly performance figures, portfolio holdings and other information.
NOT FDIC INSURED | MAY LOSE VALUE | NO BANK GUARANTEE
Not part of the semiannual report | 1
You can also access your account, buy and sell shares, read timely articles, and
find helpful financial planning tools. We hope you will take advantage of these
online services.
Historically, patient investors have achieved rewarding results by evaluating
their goals, diversifying their assets globally and maintaining a disciplined
investment program, all hallmarks of the Templeton investment philosophy
developed more than 50 years ago. We continue to recommend investors consult
their financial advisors and review their portfolios to design a long-term
strategy and portfolio allocation that meet their individual needs, goals and
risk tolerance. We firmly believe that most people benefit from professional
advice, and that advice is invaluable as investors navigate changing market
environments.
We thank you for investing with Franklin Templeton, welcome your questions and
comments, and look forward to serving your investment needs in the years ahead.
Sincerely,
/s/ Gary P. Motyl
Gary P. Motyl, CFA
President and Chief Executive
Officer - Investment Management
Templeton Funds
THIS LETTER REFLECTS OUR ANALYSIS AND OPINIONS AS OF FEBRUARY 28, 2009. THE
INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET, COUNTRY,
INDUSTRY, SECURITY OR FUND. STATEMENTS OF FACT ARE FROM SOURCES CONSIDERED
RELIABLE.
2 | Not part of the semiannual report
Semiannual Report
Templeton Foreign Fund
YOUR FUND'S GOAL AND MAIN INVESTMENTS: Templeton Foreign Fund seeks long-term
capital growth. Under normal market conditions, the Fund invests primarily in
equity securities of companies located outside the U.S., including emerging
markets.
This semiannual report for Templeton Foreign Fund covers the period ended
February 28, 2009.
PERFORMANCE OVERVIEW
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. PLEASE VISIT FRANKLINTEMPLETON.COM OR CALL (800) 342-5236 FOR
MOST RECENT MONTH-END PERFORMANCE.
Templeton Foreign Fund - Class A had a -45.22% cumulative total return for the
six months under review. The Fund performed comparably to its benchmark, the
Morgan Stanley Capital International (MSCI) Europe, Australasia, Far East (EAFE)
Index, which had a -44.49% total return for the same period.(1) In line with our
long-term investment strategy, we are pleased with our long-term results, as
shown in the Performance Summary beginning on page 12. For the 10-year period
ended February 28, 2009, Templeton Foreign Fund - Class A delivered a +24.35%
cumulative total return, compared with the MSCI EAFE Index's -6.29% cumulative
total return for the same period.(1) Please note that index performance
information is provided for reference and that we do not attempt to track the
index, but rather undertake investments on the basis of fundamental research.
You can find more performance data in the Performance Summary beginning on page
12.
(1.) Source: (C) 2009 Morningstar. All Rights Reserved. The information
contained herein: (1) is proprietary to Morningstar and/or its content
providers; (2) may not be copied or distributed; and (3) is not warranted
to be accurate, complete or timely. Neither Morningstar nor its content
providers are responsible for any damages or losses arising from any use of
this information. The MSCI EAFE Index is a free float-adjusted, market
capitalization-weighted index designed to measure equity market performance
in global developed markets excluding the U.S. and Canada. As of 2/28/09,
the Fund's Class A 10-year average annual total return not including sales
charges was +2.20%, compared with the -0.65% 10-year average annual total
return of the MSCI EAFE Index. The index is unmanaged and includes
reinvested dividends. One cannot invest directly in an index, nor is an
index 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 22.
Semiannual Report | 3
GEOGRAPHIC BREAKDOWN
Based on Total Net Assets as of 2/28/09
(BAR CHART)
Europe 60.4%
Asia 32.5%
North America 2.3%
Latin America & Caribbean 1.7%
Middle East & Africa 1.3%
Short-Term Investments & Other Net Assets 1.8%
ECONOMIC AND MARKET OVERVIEW
During the six months ended February 28, 2009, global economic conditions
continued to deteriorate. Business capital investment and consumer spending in
the U.S. and abroad showed steep declines, unemployment rose steadily, and
business and consumer confidence fell to new lows. In the U.S., gross domestic
product (GDP) fell 6.3% on an annualized basis in the fourth quarter of 2008.(2)
GDP in the eurozone fell 1.5% in the final three months of 2008 and is expected
to decelerate further in 2009.(3)
The economic slowdown and the seize-up in global credit markets, accompanied by
a decline in inflation indexes, led to easing of monetary policies in the U.S.,
Europe and many other industrialized and emerging countries. The U.S. Federal
Reserve Board (Fed) cut rates aggressively, as did the European Central Bank and
the Bank of England. As of the end of the reporting period, interest rates in
the U.S. were near zero.
In addition, several countries enacted robust stimulus programs in response
to the global slowdown. In February 2009, the U.S. Congress passed President
Obama's fiscal stimulus package. The package totaled $787 billion and included
tax cuts and government spending of nearly $600 billion in 2009-2010 alone. In
Europe, deteriorating economic conditions led a number of large countries to
also introduce substantial stimulus packages and to continue attempts to revive
basic bank lending.
China announced a fiscal stimulus package during the period, which equaled about
15% of the country's 2008 GDP.(4) Although most observers believed this figure
overstated the actual stimulus effect, the package was significant and reflected
Chinese authorities' desire to avoid the social unrest that might come with
rising joblessness. With 6.8% year-over-year growth in fourth quarter 2008,
China's GDP declined to its slowest growth rate in seven years, although it was
still high relative to any other major economy.(5) Along with making five
successive rate cuts in late 2008, Chinese authorities introduced a series
of measures and public works projects to stimulate internal consumption and help
offset a slowdown in export growth.
Against this challenging economic backdrop, most global equity markets were
volatile, and nearly all local indexes suffered significant losses for the
six-month period. Despite negative economic data and an outlook for decelerating
(2.) Source: Bureau of Economic Analysis.
(3.) Source: European Central Bank.
(4.) Source: International Monetary Fund, World Economic Outlook Database,
October 2008.
(5.) Source: National Bureau of Statistics, China.
4 | Semiannual Report
corporate earnings and profit margins globally, many companies' balance sheets,
primarily outside the banking industry, remained relatively strong.
INVESTMENT STRATEGY
Our investment strategy employs a bottom-up, value-oriented, long-term approach.
We focus on the market price of a company's securities relative to our
evaluation of the company's long-term earnings, asset value and cash flow
potential. As we look internationally, we consider specific companies, rather
than sectors or countries, while doing in-depth research to construct a bargain
list from which we buy. Before we make a purchase, we look at the company's
price/cash flow ratio, price/earnings ratio, profit margins and liquidation
value.
MANAGER'S DISCUSSION
A global financial system crisis developed during the six months under review as
economies around the world slid into recession and equity markets shed more than
$20 trillion in value since their 2007 peaks. What began over a year ago as a
downturn in the U.S. housing market and a rise in subprime mortgage defaults
spiraled into a global crisis that necessitated the largest series of
government-sponsored financial bailouts in history. Virtually all investible
asset classes in all regions of the world were affected. There were very few
safe havens in capital markets; in equity markets, there were almost none. By
the end of the period, global equity markets had given back nearly all gains
accrued since the Asian currency crisis in 1997 and the technology bubble in
2000. Most of the world's major economies were in recession, and around the
world, policymakers were slashing interest rates and setting aside hundreds of
billions of dollars, euros, yens and pounds to stabilize the global economy.
The excesses in global capital markets have been building for some time, at
least since the late 1990s' technology stock bubble. After that bubble burst,
the Fed engineered a very low interest rate environment that in essence created
a housing bubble in place of the tech bubble. As home prices moved sharply
higher, financial firms securitized more and more mortgage debt into an array of
nonbank financial institutions around the world, which some called the "shadow
banking system." Securitization facilitated the distribution of various cash
flow streams to these non-traditional buyers and also separated the lender from
the ultimate owner of the loan, a major conflict of interest in retrospect.
These non-bank institutions, whether hedge funds, off-balance-sheet conduits, or
other entities, were able to apply more leverage to their holdings because they
were not subject to rules written for banks. Eventually, when the liquidity wave
receded and prices for the collateral underlying the structured debt (primarily
home prices) experienced sustained declines, in conjunction with
Semiannual Report | 5
TOP 10 COUNTRIES
Based on Equity Securities 2/28/09
% OF TOTAL
NET ASSETS
----------
U.K 22.0%
Taiwan 11.1%
France 9.6%
Germany 6.8%
Japan 5.4%
Netherlands 4.6%
Switzerland 4.3%
South Korea 3.9%
Norway 3.8%
Singapore 3.8%
rising default rates on the original loans, these securities that were supposed
to diversify risk and smooth out returns instead concentrated risk and their
expected returns ultimately proved illusory.
As economic conditions deteriorated and debtors began to default, starting with
the U.S. subprime mortgage market, losses on the associated securities mounted,
and institutions moved to unwind their positions and deleverage. A vicious cycle
ensued in which institutions began selling as prices that had moved too high
quickly went into reverse, accelerating the need for firms to deleverage, which
led to additional selling. Since there were few buyers for these securities,
many institutions were stuck with them on their books. Desperately in need of
capital to make up for losses, banks turned to traditional credit markets. But
credit markets had essentially frozen as banks feared issuing credit to
counterparties whose future as a going concern was uncertain. At this point,
many of the banks became technically insolvent and required the government
bailouts that have dominated headlines in recent months.
Because these banks finance global commerce by providing credit lines to
businesses and facilitating trade, their impairment had significant
repercussions for the global economy. Corporate and consumer access to credit
was severely curtailed, and consequently, global demand slowed. The demand
slowdown initially impacted emerging markets, which largely represent the supply
side of the global economy. Commodity prices, which tend to track global
economic growth, collapsed after reaching record highs earlier in 2008. By
period-end, the financial crisis had become a global economic crisis, and
conditions in the global economy turned from inflationary to deflationary. The
question remained whether the deleveraging cycle and economic recession will
result in a prolonged, depression-like downturn, or the unprecedented global
government stimulus programs will rescue the faltering system by flooding it
with cash, ultimately boosting capital markets and the economy.
During the six months under review, as the economy soured and global credit
markets became dysfunctional, no region was spared. Asian stock markets
generally fared best, and European markets, which declined every single month
during the reporting period, fared worst. Volatile currency swings also impacted
the portfolio as both the U.K. pound sterling and the euro declined against the
U.S. dollar. The yen initially strengthened during the period, as it has
historically during periods of increased risk aversion, but Japan's own economic
turmoil caused the yen to weaken considerably in early 2009, and the U.S. dollar
regained footing as the world's safe haven currency. The dollar's strength
during the period had a negative impact on Fund returns because investments
denominated in weakening foreign currencies were ultimately worth less when
translated back into dollars.
6 | Semiannual Report
Defensive stocks declined less severely than more cyclical stocks. Given the
global economic environment, financials and materials were some of the market's
riskiest sectors during the review period and delivered some of the worst
absolute returns. We have been underweighted in financials stocks relative to
the MSCI EAFE Index since before the credit crisis.(6) We were concerned by the
sector's lack of balance sheet transparency and the financial services
industry's rapid growth over the past decade, which we believed was driven by
leverage and securitization, flimsy catalysts for sustainable growth in our
opinion. Our cautious sector underweighting had a positive effect on relative
performance during the period; however, several of our holdings were severely
impacted by the market environment, and the financials sector was a major
detractor from absolute performance and a primary reason for the Fund's
underperformance relative to its benchmark index. Although we avoided the
investment banks at the center of the credit crisis, our holdings nonetheless
sustained significant declines. For example, Dutch financial services
conglomerate ING Groep was one of the biggest detractors, posting a loss tied to
asset write-downs and requiring access to the Dutch government's bailout
facility. We also have been underweighted in the materials sector for some time,
due to what we believed were expensive valuations and an unsustainable global
demand profile.(7) This decision negatively impacted relative performance prior
to last summer when commodity prices were soaring. However, our below-benchmark
weighting was finally vindicated as prices declined precipitously, and materials
stocks were significant contributors to relative performance during the period
under review.
In a period that rewarded defensive stock selection, the Fund's information
technology holdings helped relative performance.(8) Although technology stocks
are not traditionally considered defensive, the ability of technology to help
businesses realize efficiencies can be a major advantage in periods of economic
contraction. Technology stocks in general generated high levels of free cash
flow and had little debt, critical advantages that we believe could help the
sector weather the current credit crunch. Finally, the ubiquity of technology --
particularly software -- in households and businesses has become characteristic
of a non-discretionary service, and we believe technology-related companies may
prove resilient as they become increasingly entrenched in the marketplace.
Telecommunication services stocks, traditionally considered a growth sector,
also performed better than the MSCI EAFE Index, and relative Fund
TOP 10 INDUSTRIES
Based on Equity Securities
2/28/09
% OF TOTAL
NET ASSETS
----------
Oil, Gas & Consumable Fuels 11.3%
Diversified Telecommunication Services 10.3%
Semiconductors & Semiconductor Equipment 6.6%
Pharmaceuticals 6.4%
Commercial Banks 6.3%
Media 4.9%
Computers & Peripherals 4.5%
Wireless Telecommunication Services 4.3%
Insurance 4.2%
Professional Services 3.9%
(6.) The financials sector comprises capital markets, commercial banks,
diversified financial services, insurance, and real estate management and
development in the SOI.
(7.) The materials sector comprises metals and mining, and paper and forest
products in the SOI.
(8.) The information technology sector comprises communications equipment;
computers and peripherals; electronic equipment, instruments and
components; IT services; semiconductors and semiconductor equipment; and
software in the SOI.
Semiannual Report | 7
TOP 10 EQUITY HOLDINGS
2/28/09
COMPANY % OF TOTAL
SECTOR/INDUSTRY, COUNTRY NET ASSETS
- ------------------------ ----------
Taiwan Semiconductor Manufacturing Co. Ltd. 4.2%
SEMICONDUCTORS & SEMICONDUCTOR
EQUIPMENT, TAIWAN
BP PLC 2.9%
OIL, GAS & CONSUMABLE FUELS, U.K
Vodafone Group PLC 2.6%
WIRELESS TELECOMMUNICATION SERVICES, U.K
Compal Electronics Inc. 2.5%
COMPUTERS & PERIPHERALS, TAIWAN
Adecco SA 2.4%
PROFESSIONAL SERVICES, SWITZERLAND
Total SA, B 2.3%
OIL, GAS & CONSUMABLE FUELS, FRANCE
Siemens AG 2.2%
INDUSTRIAL CONGLOMERATES, GERMANY
Kingfisher PLC 2.2%
SPECIALTY RETAIL, U.K
Samsung Electronics Co. Ltd. 2.2%
SEMICONDUCTORS & SEMICONDUCTOR
EQUIPMENT, SOUTH KOREA
Sanofi-Aventis, ord. & 144A 2.1%
PHARMACEUTICALS, FRANCE
performance benefited from our overweighted position.(9) Many investors found
attractive the stable revenue streams and high dividend yields associated with
telecommunication services stocks during the period.
Health care stocks, which have long been considered defensive, performed better
than the benchmark during the period.(10) We continued to favor health care
companies for their high free cash-flow yields and seemingly attractive
valuations. In addition, we believe an aging global population will increasingly
require the services provided by these companies. One of the Fund's best
performing stocks was Canadian specialty pharmaceuticals company Biovail (not an
index component), which reported strong earnings and maintained a healthy
balance sheet amid the deteriorating global economic environment. The consumer
staples sector was another defensive stalwart during the period.(11) Consumer
staples companies are often favored by investors in recessionary periods due to
the non-discretionary nature of their products. However, our view of the
sector's expensive valuations and dubious secular earnings profile led us to
maintain a largely underweighted position, a decision that impaired relative
performance against the benchmark in a period when the sector declined
significantly less than the overall index. The Fund's overweighting in the
energy sector helped relative performance because the sector declined less than
the index. The steep oil price decline severely depressed sector valuations,
which created some interesting contrarian investment opportunities in our view.
The Fund's most significant new purchase during the period was Norwegian oil
exploration and production firm StatoilHydro. The stock is fairly sensitive to
oil prices, and oil's price decline during the period created seemingly oversold
conditions in Statoil, giving us an opportunity to own shares in what we
considered a quality company with a mature operation at a significantly
discounted price.
In general, economically sensitive sectors underperformed the market.
Industrials stocks are one example, and the Fund's holdings in this sector
moderately trailed the benchmark as the gathering global recession punished
stocks
(9.) The telecommunication services sector comprises diversified
telecommunication services and wireless telecommunication services in the
SOI.
(10.) The health care sector comprises health care equipment and supplies,
health care providers and services, and pharmaceuticals in the SOI.
(11.) The consumer staples sector comprises food products in the SOI.
8 | Semiannual Report
considered to have economically sensitive revenue streams.(12) Siemens, Europe's
largest engineering company, was a significant detractor from performance,
declining in value as customers cancelled or delayed orders, citing broader
economic strains. Nonetheless, we remained positive on the ability of the
company's new management team to restructure operations, cut costs and align its
interests with those of its shareholders. We anticipated that certain
company-specific legacy issues affecting the stock are likely to be resolved,
and the company could begin to benefit from global stimulus spending within the
time frame of our investment horizon. Consumer discretionary, another
economically sensitive sector, was the exception to the rule this period, and
our overweighted position and stock selection boosted performance relative to
the benchmark.(13) Media industry holdings were the biggest contributors in the
sector, holding up relatively well despite reduced revenues caused by a
deteriorating advertising environment. Consumer discretionary stocks are
generally considered early cyclicals, in the sense that they have been among the
first stocks to indicate a market recovery, and so have performed well early in
an economic cycle. We were encouraged that our holdings in this sector seemed to
weather the current consumer recession, and we remain optimistic about their
long-term performance amid an ultimate economic recovery.
The period under review was one of the most trying times in our investment
careers. We also believe it could prove to be one of the most promising as, in
our opinion, valuations of some of the market's highest quality stocks have
rarely been so compelling, which gives us solid conviction for our investment
portfolios' future returns. However, an absence of buyers in the market and the
intense selling pressure experienced globally skewed momentum dramatically to
the downside, severely impairing recent investment performance. Although Fund
performance has been comparable in relative terms, generally tracking the MSCI
EAFE Index over the period, absolute losses were substantial and painful. These
losses are indicative of the sweeping nature of the recent equity market
downturn. Templeton Foreign Fund has been significantly underweighted in the
market's most precarious and artificially inflated sectors -- primarily
materials and financial services -- since well before the credit crisis began.
Yet, we were unable to sufficiently avoid the worst of the recent market
sell-off, as the global financial crisis struck indiscriminately. We
(12.) The industrials sector comprises aerospace and defense, air freight and
logistics, commercial services and supplies, construction and engineering,
electrical equipment, industrial conglomerates, machinery, and
professional services in the SOI.
(13.) The consumer discretionary sector comprises automobiles; hotels,
restaurants and leisure; media; multiline retail; specialty retail; and
textiles, apparel and luxury goods in the SOI.
Semiannual Report | 9
remain optimistic that the Fund could ultimately benefit from this broad market
decline, which has created significant disparities between the prices and values
of what we believe are some of the market's highest quality stocks.
A timeline for recovery is impossible to predict, though we believe that
credible evidence of financial system stabilization is a prerequisite for an
eventual upturn. This systemic stabilization still hinges largely on the housing
market that collateralizes the system and the credit markets that capitalize it.
These markets need not recover overnight, but rather need to show consistent
evidence of an ongoing stabilization and transition process. We believe the
unprecedented global stimulus measures recently enacted could help accelerate
this process. This, in turn, could buoy equity markets, which recently seemed
more concerned with investor psychology than with discounted future earnings
expectations, the metric that has typically driven markets in the past. Key
measures of volatility, risk appetite and consumer confidence hit historical
extremes during the review period, revealing a bear market not only in stocks
but also in sentiment. Importantly, this created conditions often associated
with points of maximum pessimism, which have historically been advantageous
periods to buy stocks.
In times like these it is important to remind our shareholders that we have been
in difficult investment environments before and have dealt with adversity. Our
organization is now more than 60 years old and has weathered numerous economic
cycles. Templeton's contrarian, value investment philosophy has often put us on
the wrong side of momentum markets, as experienced during the recent commodities
and credit bubbles, and before that, the technology and Japanese market bubbles.
Historically, though, the Fund has performed well in the aftermath of these
bubbles. We are supported by vast organizational strength and a proven
investment process. Future equity performance always depends on the level at
which one enters the market. The foundation for future performance of equity
portfolios is
10 | Semiannual Report
being laid in today's market environment, and we remain optimistic about the
long-term investment implications of the market's current value disparities. We
thank you for your loyalty and trust in a difficult period.
(PHOTO OF TUCKER SCOTT)
/s/ Tucker Scott
Tucker Scott, CFA
(PHOTO OF CINDY L. SWEETING)
/s/ Cindy L. Sweeting
Cindy L. Sweeting, CFA
(PHOTO OF LISA F. MYERS)
/s/ Lisa F. Myers
Lisa F. Myers, J.D., CFA
Portfolio Management Team
Templeton Foreign Fund
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS
AS OF FEBRUARY 28, 2009, 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.
Semiannual Report | 11
Performance Summary as of 2/28/09
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.
PRICE AND DISTRIBUTION INFORMATION
CLASS A (SYMBOL: TEMFX) CHANGE 2/28/09 8/31/08
- ----------------------- ------ ------- -------
Net Asset Value (NAV) -$6.55 $3.69 $10.24
DISTRIBUTIONS (9/1/08-2/28/09)
Dividend Income $0.3151
Long-Term Capital Gain $1.9998
TOTAL $2.3149
CLASS B (SYMBOL: TFRBX) CHANGE 2/28/09 8/31/08
- ----------------------- ------ ------- -------
Net Asset Value (NAV) -$6.37 $3.61 $9.98
DISTRIBUTIONS (9/1/08-2/28/09)
Dividend Income $0.2247
Long-Term Capital Gain $1.9998
TOTAL $2.2245
CLASS C (SYMBOL: TEFTX) CHANGE 2/28/09 8/31/08
- ----------------------- ------ ------- -------
Net Asset Value (NAV) -$6.38 $3.62 $10.00
DISTRIBUTIONS (9/1/08-2/28/09)
Dividend Income $0.2257
Long-Term Capital Gain $1.9998
TOTAL $2.2255
CLASS R (SYMBOL: TEFRX) CHANGE 2/28/09 8/31/08
- ----------------------- ------ ------- -------
Net Asset Value (NAV) -$6.48 $3.64 $10.12
DISTRIBUTIONS (9/1/08-2/28/09)
Dividend Income $0.2892
Long-Term Capital Gain $1.9998
TOTAL $2.2890
ADVISOR CLASS (SYMBOL: TFFAX) CHANGE 2/28/09 8/31/08
- ----------------------------- ------ ------- -------
Net Asset Value (NAV) -$6.56 $3.65 $10.21
DISTRIBUTIONS (9/1/08-2/28/09)
Dividend Income $0.3468
Long-Term Capital Gain $1.9998
TOTAL $2.3466
12 | Semiannual Report
Performance Summary (CONTINUED)
PERFORMANCE
CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETURNS AND
VALUE OF $10,000 INVESTMENT INCLUDE MAXIMUM SALES CHARGES. CLASS A: 5.75%
MAXIMUM INITIAL SALES CHARGE; CLASS B: CONTINGENT DEFERRED SALES CHARGE(CDSC)
DECLINING FROM 4% TO 1% OVER SIX YEARS, AND ELIMINATED THEREAFTER; CLASS C: 1%
CDSC IN FIRST YEAR ONLY; CLASS R/ADVISOR CLASS: NO SALES CHARGES.
CLASS A 6-MONTH 1-YEAR 5-YEAR 10-YEAR
- ------- ------- ------- ------- -------
Cumulative Total Return(1) -45.22% -50.27% -21.21% +24.35%
Average Annual Total Return(2) -48.35% -53.14% -5.78% +1.60%
Value of $10,000 Investment(3) $ 5,165 $ 4,686 $ 7,425 $11,718
Avg. Ann. Total Return (3/31/09)(4) -46.63% -3.74% +1.78%
Total Annual Operating Expenses(5) 1.14%
CLASS B 6-MONTH 1-YEAR 5-YEAR 10-YEAR
- ------- ------- ------- ------- -------
Cumulative Total Return(1) -45.33% -50.58% -23.96% +17.12%
Average Annual Total Return(2) -46.78% -51.89% -5.50% +1.59%
Value of $10,000 Investment(3) $ 5,322 $ 4,811 $ 7,538 $11,712
Avg. Ann. Total Return (3/31/09)(4) -45.29% -3.50% +1.78%
Total Annual Operating Expenses(5) 1.89%
CLASS C 6-MONTH 1-YEAR 5-YEAR 10-YEAR
- ------- ------- ------- ------- -------
Cumulative Total Return(1) -45.36% -50.60% -24.02% +15.47%
Average Annual Total Return(2) -45.73% -50.93% -5.35% +1.45%
Value of $10,000 Investment(3) $ 5,427 $ 4,907 $ 7,598 $11,547
Avg. Ann. Total Return (3/31/09)(4) -44.27% -3.35% +1.61%
Total Annual Operating Expenses(5) 1.88%
CLASS R 6-MONTH 1-YEAR 5-YEAR INCEPTION (1/1/02)
- ------- ------- ------- ------- ------------------
Cumulative Total Return(1) -45.28% -50.42% -22.17% -4.06%
Average Annual Total Return(2) -45.28% -50.42% -4.89% -0.58%
Value of $10,000 Investment(3) $ 5,472 $ 4,958 $ 7,783 $9,594
Avg. Ann. Total Return (3/31/09)(4) -43.54% -2.85% +2.11%
Total Annual Operating Expenses(5) 1.39%
ADVISOR CLASS 6-MONTH 1-YEAR 5-YEAR 10-YEAR
- ------------- ------- ------- ------- -------
Cumulative Total Return(1) -45.18% -50.16% -20.30% +27.14%
Average Annual Total Return(2) -45.18% -50.16% -4.44% +2.43%
Value of $10,000 Investment(3) $ 5,482 $ 4,984 $ 7,970 $12,714
Avg. Ann. Total Return (3/31/09)(4) -43.32% -2.39% +2.61%
Total Annual Operating Expenses(5) 0.89%
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, SEE "FUNDS AND
PERFORMANCE" AT franklintempleton.com OR CALL (800) 342-5236.
Semiannual Report | 13
Performance Summary (CONTINUED)
ENDNOTES
SPECIAL RISKS ARE ASSOCIATED WITH FOREIGN INVESTING, INCLUDING CURRENCY
FLUCTUATIONS, ECONOMIC INSTABILITY AND POLITICAL DEVELOPMENTS. INVESTMENTS IN
DEVELOPING MARKETS INVOLVE HEIGHTENED RISKS RELATED TO THE SAME FACTORS, IN
ADDITION TO THOSE ASSOCIATED WITH THESE MARKETS' SMALLER SIZE AND LESSER
LIQUIDITY. THE FUND'S PROSPECTUS ALSO INCLUDES A DESCRIPTION OF THE MAIN
INVESTMENT RISKS.
CLASS B: These shares have higher annual fees and expenses than Class A
shares.
CLASS C: Prior to 1/1/04, these shares were offered with an initial sales
charge; thus actual total returns would have differed. 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.
ADVISOR CLASS: 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. Six-month return has not been
annualized.
(3.) These figures represent the value of a hypothetical $10,000 investment in
the Fund over the periods indicated.
(4.) In accordance with SEC rules, we provide standardized average annual total
return information through the latest calendar quarter.
(5.) Figures are as stated in the Fund's prospectus current as of the date of
this report.
14 | Semiannual Report
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 X $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.
Semiannual Report | 15
Your Fund's Expenses (CONTINUED)
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
CLASS A VALUE 9/1/08 VALUE 2/28/09 PERIOD* 9/1/08-2/28/09
- ------- ----------------- -------------- ----------------------
Actual $1,000 $ 547.80 $4.76
Hypothetical (5% return before expenses) $1,000 $1,018.65 $6.21
CLASS B
Actual $1,000 $ 546.70 $7.63
Hypothetical (5% return before expenses) $1,000 $1,014.93 $9.94
CLASS C
Actual $1,000 $ 546.40 $7.59
Hypothetical (5% return before expenses) $1,000 $1,014.98 $9.89
CLASS R
Actual $1,000 $ 547.20 $5.72
Hypothetical (5% return before expenses) $1,000 $1,017.41 $7.45
ADVISOR CLASS
Actual $1,000 $ 548.20 $3.80
Hypothetical (5% return before expenses) $1,000 $1,019.89 $4.96
* Expenses are calculated using the most recent six-month expense ratio,
annualized for each class (A: 1.24%; B: 1.99%; C: 1.98%; R: 1.49%; and
Advisor: 0.99%), multiplied by the average account value over the period,
multiplied by 181/365 to reflect the one-half year period.
16 | Semiannual Report
Templeton Foreign Fund
FINANCIAL HIGHLIGHTS
SIX MONTHS ENDED YEAR ENDED AUGUST 31,
FEBRUARY 28, 2009 ---------------------------------------------------------------------------
CLASS A (UNAUDITED) 2008 2007 2006 2005 2004
- ------- ----------------- ------------- ------------- -------------- ------------- --------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout
the period)
Net asset value, beginning of
period .......................... $ 10.24 $ 14.60 $ 13.79 $ 12.86 $ 10.75 $ 9.60
---------- ---------- ----------- ----------- ----------- -----------
Income from investment
operations(a):
Net investment income(b) ........ 0.04 0.26 0.21 0.27 0.21 0.17
Net realized and unrealized
gains (losses) ............... (4.27) (1.20) 2.08 1.54 2.15 1.17
---------- ---------- ----------- ----------- ----------- -----------
Total from investment operations ... (4.23) (0.94) 2.29 1.81 2.36 1.34
---------- ---------- ----------- ----------- ----------- -----------
Less distributions from:
Net investment income ........... (0.32) (0.24) (0.30) (0.21) (0.23) (0.19)
Net realized gains .............. (2.00) (3.18) (1.18) (0.67) (0.02) --
---------- ---------- ----------- ----------- ----------- -----------
Total distributions ................ (2.32) (3.42) (1.48) (0.88) (0.25) (0.19)
---------- ---------- ----------- ----------- ----------- -----------
Redemption fees(c) ................. -- --(d) --(d) --(d) --(d) --(d)
---------- ---------- ----------- ----------- ----------- -----------
Net asset value, end of period ..... $ 3.69 $ 10.24 $ 14.60 $ 13.79 $ 12.86 $ 10.75
---------- ---------- ----------- ----------- ----------- -----------
Total return(e) .................... (45.22)% (10.41)% 18.04% 15.08% 22.26% 14.03%
RATIOS TO AVERAGE NET ASSETS(f)
Expenses(g) ........................ 1.24% 1.14% 1.16% 1.16% 1.15% 1.23%
Net investment income .............. 1.21% 2.19% 1.53% 2.09% 1.71% 1.58%
SUPPLEMENTAL DATA
Net assets, end of period (000's) .. $2,767,583 $6,531,435 $10,802,308 $14,139,061 $15,466,639 $13,067,977
Portfolio turnover rate ............ 12.09% 22.42%(h) 18.07% 26.15%(h) 34.00% 25.32%
(a) The 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 shares in relation to income earned
and/or fluctuating market value of the investments of the Fund.
(b) Based on average daily shares outstanding.
(c) Effective September 1, 2008, the redemption fee was eliminated.
(d) Amount rounds to less than $0.01 per share.
(e) Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable, and is not annualized for periods less than
one year.
(f) Ratios are annualized for periods less than one year.
(g) Benefit of expense reduction rounds to less than 0.01%.
(h) Excludes the value of portfolio securities delivered as a result of
redemptions in-kind.
The accompanying notes are an integral part of these financial statements.
Semiannual Report | 17
Templeton Foreign Fund
FINANCIAL HIGHLIGHTS (CONTINUED)
SIX MONTHS ENDED YEAR ENDED AUGUST 31,
FEBRUARY 28, 2009 ---------------------------------------------------------------------------
CLASS B (UNAUDITED) 2008 2007 2006 2005 2004
- ------- ----------------- ------------- ------------- -------------- ------------- --------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout
the period)
Net asset value, beginning of
period .......................... $ 9.98 $ 14.29 $ 13.53 $ 12.63 $ 10.57 $ 9.46
------- -------- -------- -------- -------- --------
Income from investment
operations(a):
Net investment income(b) ........ 0.01 0.17 0.11 0.17 0.11 0.09
Net realized and unrealized
gains (losses) ............... (4.16) (1.17) 2.03 1.52 2.12 1.15
------- -------- -------- -------- -------- --------
Total from investment operations ... (4.15) (1.00) 2.14 1.69 2.23 1.24
------- -------- -------- -------- -------- --------
Less distributions from:
Net investment income ........... (0.22) (0.13) (0.20) (0.12) (0.15) (0.13)
Net realized gains .............. (2.00) (3.18) (1.18) (0.67) (0.02) --
------- -------- -------- -------- -------- --------
Total distributions ................ (2.22) (3.31) (1.38) (0.79) (0.17) (0.13)
------- -------- -------- -------- -------- --------
Redemption fees(c) ................. -- --(d) --(d) --(d) --(d) --(d)
------- -------- -------- -------- -------- --------
Net asset value, end of period ..... $ 3.61 $ 9.98 $ 14.29 $ 13.53 $ 12.63 $ 10.57
------- -------- -------- -------- -------- --------
Total return(e) .................... (45.33)% (11.03)% 17.10% 14.23% 21.30% 13.27%
RATIOS TO AVERAGE NET ASSETS(f)
Expenses(g) ........................ 1.99% 1.89% 1.91% 1.91% 1.90% 1.98%
Net investment income .............. 0.46% 1.44% 0.78% 1.34% 0.96% 0.83%
SUPPLEMENTAL DATA
Net assets, end of period (000's) .. $56,790 $139,437 $214,336 $229,616 $230,901 $195,116
Portfolio turnover rate ............ 12.09% 22.42%(h) 18.07% 26.15%(h) 34.00% 25.32%
(a) The 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 shares in relation to income earned
and/or fluctuating market value of the investments of the Fund.
(b) Based on average daily shares outstanding.
(c) Effective September 1, 2008, the redemption fee was eliminated.
(d) Amount rounds to less than $0.01 per share.
(e) Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable, and is not annualized for periods less than
one year.
(f) Ratios are annualized for periods less than one year.
(g) Benefit of expense reduction rounds to less than 0.01%.
(h) Excludes the value of portfolio securities delivered as a result of
redemptions in-kind.
The accompanying notes are an integral part of these financial statements.
18 | Semiannual Report
Templeton Foreign Fund
FINANCIAL HIGHLIGHTS (CONTINUED)
SIX MONTHS ENDED YEAR ENDED AUGUST 31,
FEBRUARY 28, 2009 -----------------------------------------------------------------------
CLASS C (UNAUDITED) 2008 2007 2006 2005 2004
- ------- ----------------- -------------- ------------ ------------- ------------ ------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout
the period)
Net asset value, beginning of
period ................ $ 10.00 $ 14.33 $ 13.56 $ 12.65 $ 10.59 $ 9.47
-------- ---------- ---------- ---------- ---------- ----------
Income from investment
operations(a):
Net investment income(b) ........ 0.01 0.18 0.12 0.18 0.11 0.09
Net realized and unrealized
gains (losses) ............... (4.16) (1.19) 2.03 1.52 2.12 1.16
-------- ---------- ---------- ---------- ---------- ----------
Total from investment operations ... (4.15) (1.01) 2.15 1.70 2.23 1.25
-------- ---------- ---------- ---------- ---------- ----------
Less distributions from:
Net investment income ........... (0.23) (0.14) (0.20) (0.12) (0.15) (0.13)
Net realized gains .............. (2.00) (3.18) (1.18) (0.67) (0.02) --
-------- ---------- ---------- ---------- ---------- ----------
Total distributions ................ (2.23) (3.32) (1.38) (0.79) (0.17) (0.13)
-------- ---------- ---------- ---------- ---------- ----------
Redemption fees(c) ................. -- --(d) --(d) --(d) --(d) --(d)
-------- ---------- ---------- ---------- ---------- ----------
Net asset value, end of period ..... $ 3.62 $ 10.00 $ 14.33 $ 13.56 $ 12.65 $ 10.59
-------- ---------- ---------- ---------- ---------- ----------
Total return(e) .................... (45.36)% (11.11)% 17.14% 14.31% 21.24% 13.29%
RATIOS TO AVERAGE NET ASSETS(f)
Expenses(g) ........................ 1.98% 1.88% 1.90% 1.90% 1.90% 1.98%
Net investment income .............. 0.47% 1.45% 0.79% 1.35% 0.96% 0.83%
SUPPLEMENTAL DATA
Net assets, end of period (000's) .. $439,317 $1,076,308 $1,470,046 $1,490,648 $1,459,630 $1,188,885
Portfolio turnover rate ............ 12.09% 22.42%(h) 18.07% 26.15%(h) 34.00% 25.32%
(a) The 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 shares in relation to income earned
and/or fluctuating market value of the investments of the Fund.
(b) Based on average daily shares outstanding.
(c) Effective September 1, 2008, the redemption fee was eliminated.
(d) Amount rounds to less than $0.01 per share.
(e) Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable, and is not annualized for periods less than
one year.
(f) Ratios are annualized for periods less than one year.
(g) Benefit of expense reduction rounds to less than 0.01%.
(h) Excludes the value of portfolio securities delivered as a result of
redemptions in-kind.
The accompanying notes are an integral part of these financial statements.
Semiannual Report | 19
Templeton Foreign Fund
FINANCIAL HIGHLIGHTS (CONTINUED)
SIX MONTHS ENDED YEAR ENDED AUGUST 31,
FEBRUARY 28, 2009 ----------------------------------------------------------------
CLASS R (UNAUDITED) 2008 2007 2006 2005 2004
- ------- ----------------- ------------ ----------- ----------- ---------- --------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout
the period)
Net asset value, beginning of
period .......................... $ 10.12 $ 14.46 $ 13.68 $ 12.77 $ 10.68 $ 9.56
------- -------- -------- -------- -------- --------
Income from investment
operations(a):
Net investment income(b) ........ 0.03 0.24 0.18 0.25 0.18 0.15
Net realized and unrealized
gains (losses) ............... (4.22) (1.20) 2.05 1.52 2.13 1.15
------- -------- -------- -------- -------- --------
Total from investment operations ... (4.19) (0.96) 2.23 1.77 2.31 1.30
------- -------- -------- -------- -------- --------
Less distributions from:
Net investment income ........... (0.29) (0.20) (0.27) (0.19) (0.20) (0.18)
Net realized gains .............. (2.00) (3.18) (1.18) (0.67) (0.02) --
------- -------- -------- -------- -------- --------
Total distributions ................ (2.29) (3.38) (1.45) (0.86) (0.22) (0.18)
------- -------- -------- -------- -------- --------
Redemption fees(c) ................. -- --(d) --(d) --(d) --(d) --(d)
------- -------- -------- -------- -------- --------
Net asset value, end of period ..... $ 3.64 $ 10.12 $ 14.46 $ 13.68 $ 12.77 $ 10.68
------- -------- -------- -------- -------- --------
Total return(e) .................... (45.28)% (10.60)% 17.66% 14.88% 21.88% 13.76%
RATIOS TO AVERAGE NET ASSETS(f)
Expenses(g) ........................ 1.49% 1.39% 1.41% 1.41% 1.40% 1.48%
Net investment income .............. 0.96% 1.94% 1.28% 1.84% 1.46% 1.33%
SUPPLEMENTAL DATA
Net assets, end of year (000's) .... $68,212 $151,035 $195,938 $218,355 $178,473 $114,301
Portfolio turnover rate ............ 12.09% 22.42%(h) 18.07% 26.15%(h) 34.00% 25.32%
(a) The 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 shares in relation to income earned
and/or fluctuating market value of the investments of the Fund.
(b) Based on average daily shares outstanding.
(c) Effective September 1, 2008, the redemption fee was eliminated.
(d) Amount rounds to less than $0.01 per share.
(e) Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable, and is not annualized for periods less than
one year.
(f) Ratios are annualized for periods less than one year.
(g) Benefit of expense reduction rounds to less than 0.01%.
(h) Excludes the value of portfolio securities delivered as a result of
redemptions in-kind.
The accompanying notes are an integral part of these financial statements.
20 | Semiannual Report
Templeton Foreign Fund
FINANCIAL HIGHLIGHTS (CONTINUED)
SIX MONTHS ENDED YEAR ENDED AUGUST 31,
FEBRUARY 28, 2009 -------------------------------------------------------------------------
ADVISOR CLASS (UNAUDITED) 2008 2007 2006 2005 2004
- ------------- ----------------- ------------- ------------ ------------- ------------ -----------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout
the period)
Net asset value, beginning of
period .......................... $ 10.21 $ 14.57 $ 13.77 $ 12.85 $ 10.75 $ 9.59
-------- ---------- ---------- ---------- ---------- --------
Income from investment
operations(a):
Net investment income(b) ........ 0.04 0.29 0.25 0.32 0.25 0.20
Net realized and unrealized
gains (losses) ............... (4.25) (1.19) 2.07 1.51 2.12 1.17
-------- ---------- ---------- ---------- ---------- --------
Total from investment operations ... (4.21) (0.90) 2.32 1.83 2.37 1.37
-------- ---------- ---------- ---------- ---------- --------
Less distributions from:
Net investment income ........... (0.35) (0.28) (0.34) (0.24) (0.25) (0.21)
Net realized gains .............. (2.00) (3.18) (1.18) (0.67) (0.02) --
-------- ---------- ---------- ---------- ---------- --------
Total distributions ................ (2.35) (3.46) (1.52) (0.91) (0.27) (0.21)
-------- ---------- ---------- ---------- ---------- --------
Redemption fees(c) ................. -- --(d) --(d) --(d) --(d) --(d)
-------- ---------- ---------- ---------- ---------- --------
Net asset value, end of period ..... $ 3.65 $ 10.21 $ 14.57 $ 13.77 $ 12.85 $ 10.75
-------- ---------- ---------- ---------- ---------- --------
Total return(e) .................... (45.18)% (10.15)% 18.33% 15.31% 22.46% 14.39%
RATIOS TO AVERAGE NET ASSETS(f)
Expenses(g) ........................ 0.99% 0.89% 0.91% 0.91% 0.90% 0.98%
Net investment income .............. 1.46% 2.44% 1.78% 2.34% 1.96% 1.83%
SUPPLEMENTAL DATA
Net assets, end of period (000's) .. $649,618 $1,200,021 $1,788,637 $2,176,785 $1,727,076 $762,207
Portfolio turnover rate ............ 12.09% 22.42%(h) 18.07% 26.15%(h) 34.00% 25.32%
(a) The 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 shares in relation to income earned
and/or fluctuating market value of the investments of the Fund.
(b) Based on average daily shares outstanding.
(c) Effective September 1, 2008, the redemption fee was eliminated.
(d) Amount rounds to less than $0.01 per share.
(e) Total return is not annualized for periods less than one year.
(f) Ratios are annualized for periods less than one year.
(g) Benefit of expense reduction rounds to less than 0.01%.
(h) Excludes the value of portfolio securities delivered as a result of
redemptions in-kind.
The accompanying notes are an integral part of these financial statements.
Semiannual Report | 21
Templeton Foreign Fund
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009 (UNAUDITED)
INDUSTRY SHARES/UNITS VALUE
----------------------------------------- ------------------- ----------------
COMMON STOCKS AND OTHER
EQUITY INTERESTS 97.2%
AUSTRIA 0.7%
Telekom Austria AG ...................... Diversified Telecommunication Services 2,241,657 $ 29,386,578
----------------
BRAZIL 0.7%
Companhia de Saneamento Basico do
Estado de Sao Paulo .................. Water Utilities 1,345,701 13,527,913
Embraer-Empresa Brasileira de
Aeronautica SA, ADR .................. Aerospace & Defense 1,396,790 15,099,300
----------------
28,627,213
----------------
CANADA 1.1%
Biovail Corp. ........................... Pharmaceuticals 4,150,760 44,102,539
----------------
CHINA 2.4%
China Shenhua Energy Co. Ltd., H ........ Oil, Gas & Consumable Fuels 8,893,700 17,660,906
China Telecom Corp. Ltd., H ............. Diversified Telecommunication Services 167,305,042 57,169,540
Shanghai Electric Group Co. Ltd. ........ Electrical Equipment 84,181,091 21,275,532
----------------
96,105,978
----------------
FINLAND 0.4%
UPM-Kymmene OYJ ......................... Paper & Forest Products 2,212,650 15,722,264
----------------
FRANCE 9.6%
AXA SA .................................. Insurance 3,521,371 32,724,258
Cap Gemini .............................. IT Services 568,890 16,551,174
France Telecom SA ....................... Diversified Telecommunication Services 2,703,741 60,991,387
Sanofi-Aventis .......................... Pharmaceuticals 1,505,047 77,995,963
(a) Sanofi-Aventis, 144A .................... Pharmaceuticals 97,556 5,055,639
Total SA, B ............................. Oil, Gas & Consumable Fuels 1,957,646 92,933,704
Vinci SA ................................ Construction & Engineering 1,113,202 36,299,979
Vivendi SA .............................. Media 2,390,490 57,422,128
----------------
379,974,232
----------------
GERMANY 6.8%
Bayerische Motoren Werke AG ............. Automobiles 1,021,615 25,575,467
Celesio AG .............................. Health Care Providers & Services 890,414 18,732,732
Deutsche Post AG ........................ Air Freight & Logistics 3,483,688 33,887,535
(b) Infineon Technologies AG ................ Semiconductors & Semiconductor Equipment 15,386,368 9,451,862
Muenchener Rueckversicherungs-
Gesellschaft AG ...................... Insurance 165,340 20,345,119
SAP AG .................................. Software 2,260,916 73,367,388
Siemens AG .............................. Industrial Conglomerates 1,740,774 89,517,497
----------------
270,877,600
----------------
22 | Semiannual Report
Templeton Foreign Fund
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009 (UNAUDITED) (CONTINUED)
INDUSTRY SHARES/UNITS VALUE
----------------------------------------- ------------------- ----------------
COMMON STOCKS AND OTHER EQUITY
INTERESTS (CONTINUED)
HONG KONG 3.4%
Cheung Kong (Holdings) Ltd. ............. Real Estate Management & Development 3,562,979 $ 29,334,856
Hutchison Whampoa Ltd. .................. Industrial Conglomerates 9,394,257 49,665,646
Kingboard Chemical Holdings Electronic Equipment, Instruments
Ltd. ................................. & Components 1,082,500 1,786,684
Yue Yuen Industrial Holdings Ltd. ....... Textiles, Apparel & Luxury Goods 30,056,124 56,274,208
----------------
137,061,394
----------------
INDIA 2.5%
GAIL India Ltd. ......................... Gas Utilities 11,654,530 46,453,601
Reliance Industries Ltd. ................ Oil, Gas & Consumable Fuels 2,116,893 52,504,176
----------------
98,957,777
----------------
ISRAEL 1.3%
(b) Check Point Software Technologies Ltd. .. Software 2,356,982 51,782,895
----------------
ITALY 1.7%
Autogrill SpA ........................... Hotels, Restaurants & Leisure 5,313,400 25,624,295
UniCredit SpA ........................... Commercial Banks 32,007,217 40,945,747
----------------
66,570,042
----------------
JAPAN 5.4%
EBARA Corp. ............................. Machinery 8,252,000 14,374,097
Mitsubishi UFJ Financial Group Inc. ..... Commercial Banks 3,809,000 17,719,002
Olympus Corp. ........................... Health Care Equipment & Supplies 2,946,337 39,789,663
Shinsei Bank Ltd. ....................... Commercial Banks 14,308,024 12,901,338
Takeda Pharmaceutical Co. Ltd. .......... Pharmaceuticals 837,244 34,229,249
Toyota Motor Corp. ...................... Automobiles 2,042,100 66,539,044
USS Co. Ltd. ............................ Specialty Retail 675,740 27,487,964
----------------
213,040,357
----------------
NETHERLANDS 4.6%
ING Groep NV ............................ Diversified Financial Services 16,577,026 76,973,030
Koninklijke Philips Electronics NV ...... Industrial Conglomerates 12,940 208,724
Randstad Holding NV ..................... Professional Services 2,202,760 32,350,235
Reed Elsevier NV ........................ Media 2,417,965 27,146,839
SBM Offshore NV ......................... Energy Equipment & Services 1,492,830 19,768,508
(c) USG People NV ........................... Professional Services 3,381,760 28,184,360
----------------
184,631,696
----------------
Semiannual Report | 23
Templeton Foreign Fund
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009 (UNAUDITED) (CONTINUED)
INDUSTRY SHARES/UNITS VALUE
----------------------------------------- ------------------- ----------------
COMMON STOCKS AND OTHER EQUITY
INTERESTS (CONTINUED)
NORWAY 3.8%
Aker Solutions ASA ...................... Energy Equipment & Services 4,693,660 $ 25,332,218
StatoilHydro ASA ........................ Oil, Gas & Consumable Fuels 3,962,170 66,403,826
Telenor ASA ............................. Diversified Telecommunication Services 11,738,296 60,852,148
----------------
152,588,192
----------------
RUSSIA 1.4%
Gazprom, ADR ............................ Oil, Gas & Consumable Fuels 2,693,460 34,287,746
Mobile TeleSystems, ADR ................. Wireless Telecommunication Services 893,988 21,178,576
----------------
55,466,322
----------------
SINGAPORE 3.8%
DBS Group Holdings Ltd. ................. Commercial Banks 5,849,000 29,614,234
(b) Flextronics International Electronic Equipment, Instruments
Ltd. ................................. & Components 17,946,100 36,968,966
Singapore Telecommunications Ltd. ....... Diversified Telecommunication Services 44,926,484 71,374,052
United Overseas Bank Ltd. ............... Commercial Banks 1,882,000 12,141,935
----------------
150,099,187
----------------
SOUTH KOREA 3.9%
Hana Financial Group Inc. ............... Commercial Banks 2,590,044 31,247,066
KB Financial Group Inc. ................. Commercial Banks 1,891,090 36,256,837
Samsung Electronics Co. Ltd. ............ Semiconductors & Semiconductor Equipment 278,554 86,647,923
----------------
154,151,826
----------------
SPAIN 2.0%
Telefonica SA ........................... Diversified Telecommunication Services 4,309,845 80,299,683
SWEDEN 1.9%
Niscayah Group AB ....................... Commercial Services & Supplies 12,474,430 8,787,100
Telefonaktiebolaget LM Ericsson, B ...... Communications Equipment 8,024,738 66,764,139
----------------
75,551,239
----------------
SWITZERLAND 4.3%
Adecco SA ............................... Professional Services 3,149,240 96,374,009
Novartis AG ............................. Pharmaceuticals 969,695 35,358,037
Swiss Reinsurance Co. ................... Insurance 1,792,327 22,249,049
(b) UBS AG .................................. Capital Markets 2,005,926 18,953,901
----------------
172,934,996
----------------
TAIWAN 11.1%
Chunghwa Telecom Co. Ltd., ADR .......... Diversified Telecommunication Services 3,290,813 50,513,979
Compal Electronics Inc. ................. Computers & Peripherals 171,425,820 98,951,324
(c) Lite-On Technology Corp. ................ Computers & Peripherals 132,346,020 78,284,401
24 | Semiannual Report
Templeton Foreign Fund
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009 (UNAUDITED) (CONTINUED)
INDUSTRY SHARES/UNITS VALUE
----------------------------------------- ------------------- ----------------
COMMON STOCKS AND OTHER EQUITY
INTERESTS (CONTINUED)
TAIWAN (CONTINUED)
Mega Financial Holding Co. Ltd. ......... Commercial Banks 167,743,000 $ 46,064,016
Taiwan Semiconductor Manufacturing
Co. Ltd. ............................. Semiconductors & Semiconductor Equipment 130,934,755 168,181,661
----------------
441,995,381
----------------
TURKEY 1.2%
Turkcell Iletisim Hizmetleri AS ......... Wireless Telecommunication Services 9,229,841 45,875,040
----------------
UNITED KINGDOM 22.0%
Aviva PLC ............................... Insurance 10,441,871 43,169,720
BP PLC .................................. Oil, Gas & Consumable Fuels 17,841,309 114,406,337
British Sky Broadcasting Group PLC ...... Media 11,912,444 80,136,938
Burberry Group PLC ...................... Textiles, Apparel & Luxury Goods 9,456,891 34,768,389
G4S PLC ................................. Commercial Services & Supplies 10,328,334 27,540,971
GlaxoSmithKline PLC ..................... Pharmaceuticals 3,885,382 59,417,517
HSBC Holdings PLC ....................... Commercial Banks 2,148,393 15,776,739
Kingfisher PLC .......................... Specialty Retail 48,984,207 88,644,067
Marks & Spencer Group PLC ............... Multiline Retail 12,465,256 46,541,972
Old Mutual PLC .......................... Insurance 81,216,567 48,216,512
Pearson PLC ............................. Media 2,663,985 25,133,307
(c) Persimmon PLC ........................... Household Durables 15,181,242 74,762,587
(c) Premier Foods PLC ....................... Food Products 56,527,240 24,259,515
Royal Bank of Scotland Group PLC ........ Commercial Banks 29,690,446 9,853,891
Royal Dutch Shell PLC, A ................ Oil, Gas & Consumable Fuels 773,659 17,040,749
Royal Dutch Shell PLC, B ................ Oil, Gas & Consumable Fuels 2,634,212 55,960,327
Vodafone Group PLC ...................... Wireless Telecommunication Services 58,200,372 104,239,701
Yell Group PLC .......................... Media 13,926,166 4,133,831
----------------
874,003,070
----------------
UNITED STATES 1.2%
Invesco Ltd. ............................ Capital Markets 1,545,965 17,670,380
KKR Private Equity Investors LP
(Units) .............................. Capital Markets 13,575,445 30,544,751
----------------
48,215,131
----------------
TOTAL COMMON STOCKS AND
OTHER EQUITY INTERESTS
(COST $7,070,396,203) ............. 3,868,020,632
----------------
PREFERRED STOCKS
(COST $12,965,351) 1.0%
BRAZIL 1.0%
Companhia Vale do Rio Doce, ADR,
pfd., A .............................. Metals & Mining 3,604,544 40,190,665
----------------
Semiannual Report | 25
Templeton Foreign Fund
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009 (UNAUDITED) (CONTINUED)
PRINCIPAL AMOUNT(e) VALUE
------------------- ----------------
FOREIGN GOVERNMENT AND
AGENCY SECURITIES
(COST $302,937) 0.0%(d)
SWEDEN 0.0%(d)
Government of Sweden, 5.50%, 10/08/12 ... 2,270,000 SEK $ 285,097
----------------
TOTAL INVESTMENTS BEFORE
SHORT TERM INVESTMENTS
(COST $7,083,664,491) ............. 3,908,496,394
----------------
SHORT TERM INVESTMENTS
(COST $79,565,000) 2.0%
TIME DEPOSITS 2.0%
UNITED STATES 2.0%
Dresdner Bank AG, 0.30%, 3/02/09 ........ 79,565,000 79,565,000
----------------
TOTAL INVESTMENTS
(COST $7,163,229,491)
100.2% ............................... 3,988,061,394
OTHER ASSETS, LESS LIABILITIES
(0.2)% ............................... (6,540,796)
----------------
NET ASSETS 100.0% ....................... $ 3,981,520,598
================
See Abbreviations on page 40.
(a) Security 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. This security has been deemed liquid under
guidelines approved by the Trust's Board of Trustees. At February 28, 2009,
the value of this security was $5,055,639, representing 0.13% of net
assets.
(b) Non-income producing for the twelve months ended February 28, 2009.
(c) See Note 8 regarding holdings of 5% voting securities.
(d) Rounds to less than 0.1% of net assets.
(e) The principal amount is stated in U.S. dollars unless otherwise indicated.
The accompanying notes are an integral part of these financial statements.
26 | Semiannual Report
Templeton Foreign Fund
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
February 28, 2009 (unaudited)
Assets:
Investments in securities:
Cost - Unaffiliated issuers ......................... $ 6,727,179,377
Cost - Non-controlled affiliated issuers (Note 8) ... 436,050,114
---------------
Total cost of investments ........................... $ 7,163,229,491
---------------
Value - Unaffiliated issuers ........................ $ 3,782,570,531
Value - Non-controlled affiliated issuers (Note 8) .. 205,490,863
---------------
Total value of investments .......................... 3,988,061,394
Cash ................................................... 2,628
Foreign currency, at value (cost $2,398) ............... 2,247
Receivables:
Investment securities sold .......................... 10,683,548
Capital shares sold ................................. 5,031,258
Dividends and interest .............................. 15,248,065
Other assets ........................................... 11,093
---------------
Total assets ..................................... 4,019,040,233
---------------
Liabilities:
Payables:
Investment securities purchased ..................... 3,961,536
Capital shares redeemed ............................. 20,806,267
Affiliates .......................................... 3,973,338
Unaffiliated transfer agent fees .................... 3,897,458
Deferred tax ........................................... 3,441,535
Accrued expenses and other liabilities ................. 1,439,501
---------------
Total liabilities ................................ 37,519,635
---------------
Net assets, at value .......................... $ 3,981,520,598
===============
Net assets consist of:
Paid-in capital ........................................ $ 7,140,235,149
Undistributed net investment income .................... 8,961,554
Net unrealized appreciation (depreciation) ............. (3,179,288,181)
Accumulated net realized gain (loss) ................... 11,612,076
---------------
Net assets, at value .......................... $ 3,981,520,598
===============
The accompanying notes are an integral part of these financial statements.
Semiannual Report | 27
Templeton Foreign Fund
FINANCIAL STATEMENTS (CONTINUED)
STATEMENT OF ASSETS AND LIABILITIES (CONTINUED)
February 28, 2009 (unaudited)
CLASS A:
Net assets, at value .................................................. $2,767,583,499
--------------
Shares outstanding .................................................... 749,634,232
--------------
Net asset value per share(a) .......................................... $ 3.69
--------------
Maximum offering price per share (net asset value per share /94.25%) .. $ 3.92
--------------
CLASS B:
Net assets, at value .................................................. $ 56,789,938
--------------
Shares outstanding .................................................... 15,746,130
--------------
Net asset value and maximum offering price per share(a) ............... $ 3.61
--------------
CLASS C:
Net assets, at value .................................................. $ 439,316,817
--------------
Shares outstanding .................................................... 121,394,960
--------------
Net asset value and maximum offering price per share(a) ............... $ 3.62
--------------
CLASS R:
Net assets, at value .................................................. $ 68,212,129
--------------
Shares outstanding .................................................... 18,730,782
--------------
Net asset value and maximum offering price per share .................. $ 3.64
--------------
ADVISOR CLASS:
Net assets, at value .................................................. $ 649,618,215
--------------
Shares outstanding .................................................... 177,852,403
--------------
Net asset value and maximum offering price per share .................. $ 3.65
--------------
(a) Redemption price is equal to net asset value less contingent deferred sales
charges, if applicable.
The accompanying notes are an integral part of these financial statements.
28 | Semiannual Report
Templeton Foreign Fund
FINANCIAL STATEMENTS (CONTINUED)
STATEMENT OF OPERATIONS
for the period ended February 28, 2009 (unaudited)
Investment income:
Dividends: (net of foreign taxes of $6,111,683)
Unaffiliated issuers ........................................................... $ 66,577,901
Non-controlled affiliated issuers (Note 8) ..................................... 1,316,201
Interest .......................................................................... 210,741
---------------
Total investment income .................................................. 68,104,843
---------------
Expenses:
Management fees (Note 3a) ......................................................... 17,195,576
Administrative fees (Note 3b) ..................................................... 2,238,932
Distribution fees: (Note 3c)
Class A ........................................................................ 4,918,231
Class B ........................................................................ 414,455
Class C ........................................................................ 3,179,487
Class R ........................................................................ 223,786
Transfer agent fees (Note 3e) ..................................................... 6,232,123
Custodian fees (Note 4) ........................................................... 1,119,230
Reports to shareholders ........................................................... 282,928
Registration and filing fees ...................................................... 141,660
Professional fees ................................................................. 43,457
Trustees' fees and expenses ....................................................... 72,142
Other ............................................................................. 90,677
---------------
Total expenses ........................................................... 36,152,684
Expense reductions (Note 4) .............................................. (3,157)
---------------
Net expenses .......................................................... 36,149,527
---------------
Net investment income .............................................. 31,955,316
---------------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments:
Unaffiliated issuers ........................................................ (233,527,790)
Non-controlled affiliated issuers (Note 8) .................................. (17,396,791)
Foreign currency transactions .................................................. (6,549,432)
---------------
Net realized gain (loss) ........................................... (257,474,013)
---------------
Net change in unrealized appreciation (depreciation) on:
Investments .................................................................... (3,630,862,691)
Translation of other assets and liabilities denominated in foreign currencies .. (3,169,721)
Change in deferred taxes on unrealized appreciation (depreciation) ................ (3,441,535)
---------------
Net change in unrealized appreciation (depreciation) ............... (3,637,473,947)
---------------
Net realized and unrealized gain (loss) .............................................. (3,894,947,960)
---------------
Net increase (decrease) in net assets resulting from operations ...................... $(3,862,992,644)
===============
The accompanying notes are an integral part of these financial statements.
Semiannual Report | 29
Templeton Foreign Fund
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF CHANGES IN NET ASSETS
SIX MONTHS
ENDED FEBRUARY
28, 2009 YEAR ENDED
(UNAUDITED) AUGUST 31, 2008
--------------- ---------------
Increase (decrease) in net assets:
Operations:
Net investment income ................................................................... $ 31,955,316 $ 257,928,805
Net realized gain (loss) from investments and foreign currency transactions ............. (257,474,013) 2,613,665,946
Net change in unrealized appreciation (depreciation) on investments, translation of other
assets and liabilities denominated in foreign currencies, and deferred taxes ......... (3,637,473,947) (3,876,231,174)
--------------- ---------------
Net increase (decrease) in net assets resulting from operations ...................... (3,862,992,644) (1,004,636,423)
--------------- ---------------
Distributions to shareholders from:
Net investment income:
Class A .............................................................................. (169,148,961) (172,210,281)
Class B .............................................................................. (2,639,859) (1,884,972)
Class C .............................................................................. (19,959,982) (13,664,015)
Class R .............................................................................. (3,681,412) (2,768,220)
Advisor Class ........................................................................ (41,372,087) (32,349,584)
Net realized gains:
Class A .............................................................................. (1,073,489,014) (2,328,246,113)
Class B .............................................................................. (23,494,391) (47,692,479)
Class C .............................................................................. (176,854,101) (331,076,028)
Class R .............................................................................. (25,456,734) (43,763,308)
Advisor Class ........................................................................ (238,569,487) (373,693,318)
--------------- ---------------
Total distributions to shareholders ........................................................ (1,774,666,028) (3,347,348,318)
--------------- ---------------
Capital share transactions: (Note 2)
Class A ................................................................................. 230,216,416 (1,074,184,416)
Class B ................................................................................. 2,232,358 (8,210,931)
Class C ................................................................................. 13,758,781 86,020,283
Class R ................................................................................. 7,290,692 19,167,967
Advisor Class ........................................................................... 267,444,178 (43,954,847)
--------------- ---------------
Total capital share transactions ........................................................... 520,942,425 (1,021,161,944)
--------------- ---------------
Redemption fees ............................................................................ -- 118,792
--------------- ---------------
Net increase (decrease) in net assets ................................................ (5,116,716,247) (5,373,027,893)
Net assets:
Beginning of period ........................................................................ 9,098,236,845 14,471,264,738
--------------- ---------------
End of period .............................................................................. $ 3,981,520,598 $ 9,098,236,845
=============== ===============
Undistributed net investment income included in net assets:
End of period .............................................................................. $ 8,961,554 $ 213,808,539
=============== ===============
The accompanying notes are an integral part of these financial statements.
30 | Semiannual Report
Templeton Foreign Fund
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Templeton Funds (Trust) is registered under the Investment Company Act of 1940,
as amended, (1940 Act) as an open-end investment company, consisting of two
separate funds. The Templeton Foreign Fund (Fund) is included in this report.
The financial statements of the remaining fund in the Trust are presented
separately. The Fund offers five classes of shares: Class A, Class B, Class C,
Class R, and Advisor Class. Each class of shares differs by its initial sales
load, contingent deferred sales charges, distribution fees, voting rights on
matters affecting a single class and its exchange privilege.
The following summarizes the Fund's significant accounting policies.
A. SECURITY VALUATION
Securities listed on a securities 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. Over-the-counter securities and listed securities for
which there is no reported sale 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. Time deposits are valued at cost.
Foreign securities are valued as of the close of trading on the foreign stock
exchange on which the security is primarily traded, or the NYSE, whichever is
earlier. If no sale is reported at that time, the foreign security will be
valued within the range of the most recent quoted bid and ask prices. The value
is then converted into its U.S. dollar equivalent at the foreign exchange rate
in effect at the close of the NYSE on the day that the value of the foreign
security is determined.
The Fund has procedures to determine the fair value of individual securities and
other assets for which market prices are not readily available or which may not
be reliably priced. Methods for valuing these securities may include:
fundamental analysis, matrix pricing, discounts from market prices of similar
securities, or discounts applied due to the nature and duration of restrictions
on the disposition of the securities. Due to the inherent uncertainty of
valuations of such securities, the fair values may differ significantly from the
values that would have been used had a ready market for such investments
existed. Occasionally, events occur between the time at which trading in a
security is completed and the close of the NYSE that might call into question
the availability (including the reliability) of the value of a portfolio
security held by the Fund. The investment manager 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 Depository
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. If such an event
occurs, the securities may be valued using fair value procedures, which may
include the use of independent pricing services. All security valuation
procedures are approved by the Trust's Board of Trustees.
Semiannual Report | 31
Templeton Foreign Fund
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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. 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. 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 Trust's Board of Trustees.
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 on 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. FOREIGN CURRENCY CONTRACTS
When the Fund purchases or sells foreign securities it may enter into foreign
exchange contracts to minimize foreign exchange risk from the trade date to the
settlement date of the transactions. A foreign exchange contract is an agreement
between two parties to exchange different currencies at an agreed upon exchange
rate at a future date. Realized and unrealized gains and losses on these
contracts are included in the Statement of Operations.
The risks of these contracts include movement in the values of the foreign
currencies relative to the U.S. dollar and the possible inability of the
counterparties to fulfill their obligations under the contracts, which may be in
excess of the amount reflected in the Statement of Assets and Liabilities.
D. INCOME TAXES AND DEFERRED TAXES
No provision has been made for U.S. income taxes because it is the Fund's policy
to qualify as a regulated investment company under the Internal Revenue Code and
to distribute to shareholders substantially all of its taxable income and net
realized gains.
The Fund has reviewed the tax positions, taken on federal income tax returns,
for each of the three open tax years and as of February 28, 2009, and has
determined that no provision for income tax is required in the Fund's financial
statements.
32 | Semiannual Report
Templeton Foreign Fund
NOTES TO FINANCIAL STATEMENTS(UNAUDITED) (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
D. INCOME TAXES AND DEFERRED TAXES (CONTINUED)
Foreign securities held by the Fund may be subject to foreign taxation on
dividend and interest income received. Foreign taxes, if any, are recorded based
on the tax regulations and rates that exist in the foreign markets in which the
Fund invests.
The Fund may be subject to a tax imposed on net realized gains on securities of
certain foreign countries. The Fund records an estimated deferred tax liability
for net unrealized gains on these securities in an amount that would be payable
if the securities were disposed of on the valuation date.
E. 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 that certain
dividends from foreign securities are recognized as soon as the Fund is notified
of the ex-dividend date. 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 accounting principles generally accepted in
the United States of America. 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.
F. ACCOUNTING ESTIMATES
The preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America 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.
Semiannual Report | 33
Templeton Foreign Fund
NOTES TO FINANCIAL STATEMENTS(UNAUDITED) (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
G. REDEMPTION FEES
A short term trading redemption fee was imposed, with some exceptions, on
any Fund shares that were redeemed or exchanged within seven calendar days
following their purchase date. The redemption fee was 2% of the amount redeemed.
Such fees were retained by the Fund and accounted for as an addition to paid-in
capital. Effective September 1, 2008, the redemption fee was eliminated.
H. 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 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 February 28, 2009, there were an unlimited number of shares of the Trust
authorized (without par value). Transactions in the Fund's shares were as
follows:
SIX MONTHS ENDED YEAR ENDED
FEBRUARY 28, 2009 AUGUST 31, 2008
------------------------------ ------------------------------
SHARES AMOUNT SHARES AMOUNT
------------ --------------- ------------ ---------------
CLASS A SHARES:
Shares sold ........................ 57,863,105 $ 308,833,112 98,452,891 $ 1,211,858,727
Shares issued in reinvestment
of distributions ................ 244,356,140 1,087,384,806 174,383,320 2,245,369,533
Shares redeemed in-kind (Note 10) .. -- -- (12,863,139) (157,573,459)
Shares redeemed .................... (190,460,248) (1,166,001,502) (362,137,943) (4,373,839,217)
------------ --------------- ------------ ---------------
Net increase (decrease) ............ 111,758,997 $ 230,216,416 (102,164,871) $(1,074,184,416)
============ =============== ============ ===============
CLASS B SHARES:
Shares sold ........................ 790,983 $ 4,165,776 675,174 $ 8,277,500
Shares issued in reinvestment
of distributions ................ 5,139,695 22,357,674 3,337,156 42,078,927
Shares redeemed .................... (4,157,894) (24,291,092) (5,034,222) (58,567,358)
------------ --------------- ------------ ---------------
Net increase (decrease) ............ 1,772,784 $ 2,232,358 (1,021,892) $ (8,210,931)
============ =============== ============ ===============
CLASS C SHARES:
Shares sold ........................ 9,406,692 $ 44,319,352 9,484,687 $ 115,366,091
Shares issued in reinvestment
of distributions ................ 36,456,948 159,316,863 21,893,871 276,658,696
Shares redeemed .................... (32,078,319) (189,877,434) (26,391,333) (306,004,504)
------------ --------------- ------------ ---------------
Net increase (decrease) ............ 13,785,321 $ 13,758,781 4,987,225 $ 86,020,283
============ =============== ============ ===============
34 | Semiannual Report
Templeton Foreign Fund
NOTES TO FINANCIAL STATEMENTS(UNAUDITED) (CONTINUED)
2. SHARES OF BENEFICIAL INTEREST (CONTINUED)
SIX MONTHS ENDED YEAR ENDED
FEBRUARY 28, 2009 AUGUST 31, 2008
--------------------------- ---------------------------
SHARES AMOUNT SHARES AMOUNT
----------- ------------- ----------- -------------
CLASS R SHARES:
Shares sold ....................... 2,881,233 $ 16,348,842 4,939,296 $ 59,080,424
Shares issued in reinvestment
of distributions ............... 6,361,484 27,926,914 3,469,964 44,224,681
Shares redeemed ................... (5,437,411) (36,985,064) (7,032,016) (84,137,138)
----------- ------------- ----------- -------------
Net increase (decrease) ........... 3,805,306 $ 7,290,692 1,377,244 $ 19,167,967
=========== ============= =========== =============
ADVISOR CLASS SHARES:
Shares sold ....................... 34,983,566 $ 198,324,734 36,336,163 $ 432,182,490
Shares issued in reinvestment
of distributions ............... 49,990,196 219,956,861 21,590,970 276,476,801
Shares redeemed ................... (24,708,358) (150,837,417) (63,125,915) (752,614,138)
----------- ------------- ----------- -------------
Net increase (decrease) ........... 60,265,404 $ 267,444,178 (5,198,782) $ (43,954,847)
=========== ============= =========== =============
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 Trust are also officers and/or directors of the following
subsidiaries:
SUBSIDIARY AFFILIATION
- ---------- -----------
Templeton Global Advisors Limited (TGAL) 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 TGAL based on the average daily
net assets of the Fund as follows:
ANNUALIZED FEE RATE NET ASSETS
- ------------------- ----------
0.630% Up to and including $1 billion
0.615% Over $1 billion, up to and including $5 billion
0.600% Over $5 billion, up to and including $10 billion
0.580% Over $10 billion, up to and including $15 billion
0.560% Over $15 billion, up to and including $20 billion
0.540% Over $20 billion, up to and including $25 billion
0.530% Over $25 billion, up to and including $30 billion
0.520% Over $30 billion, up to and including $35 billion
0.510% In excess of $35 billion
Semiannual Report | 35
Templeton Foreign Fund
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
3. TRANSACTIONS WITH AFFILIATES (CONTINUED)
B. ADMINISTRATIVE FEES
The Fund pays its allocated share of an administrative fee to FT Services based
on the Trust's aggregate average daily net assets as follows:
ANNUALIZED FEE RATE NET ASSETS
- ------------------- ----------
0.150% Up to and including $200 million
0.135% Over $200 million, up to and including $700 million
0.100% Over $700 million, up to and including $1.2 billion
0.075% In excess of $1.2 billion
C. DISTRIBUTION FEES
The Trust's Board of Trustees has adopted distribution plans for each share
class, with the exception of Advisor Class 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 B, 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 maximum annual plan rates, based on the average daily net assets, for each
class, are as follows:
Class A ........... 0.25%
Class B ........... 1.00%
Class C ........... 1.00%
Class R ........... 0.50%
D. SALES CHARGES/UNDERWRITING AGREEMENTS
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 .................. $86,770
Contingent deferred sales charges retained ...... $33,042
E. TRANSFER AGENT FEES
For the period ended February 28, 2009, the Fund paid transfer agent fees of
$6,232,123, of which $3,623,030 was retained by Investor Services.
36 | Semiannual Report
Templeton Foreign Fund
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
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 February 28, 2009, the
custodian fees were reduced as noted in the Statement of Operations.
5. INCOME TAXES
For tax purposes, capital losses may be carried over to offset future capital
gains, if any. At August 31, 2008, the Fund had remaining tax basis capital
losses of $10,785,544 from the merged Fiduciary International Equity Fund,
Templeton Latin America Fund, Templeton Pacific Growth Fund, and Victory
International Fund, which may be carried over to offset future capital gains,
subject to certain limitations under the Internal Revenue Code. At August 31,
2008, capital loss carryforwards were as follows:
Capital loss carryforwards expiring in:
2009 .............. $ 897,840
2010 .............. 7,613,629
2011 .............. 2,274,075
-----------
$10,785,544
===========
At February 28, 2009, the cost of investments and net unrealized appreciation
(depreciation) for income tax purposes were as follows:
Cost of investments ............................. $ 7,172,460,215
---------------
Unrealized appreciation ......................... $ 188,140,405
Unrealized depreciation ......................... (3,372,539,227)
---------------
Net unrealized appreciation (depreciation) ...... $(3,184,398,822)
===============
Net investment income differs for financial statement and tax purposes primarily
due to differing treatments of foreign currency transactions, foreign capital
gains tax, pass-through entity income, and bond discounts and premiums.
Net realized gains (losses) differ for financial statement and tax purposes
primarily due to differing treatments of wash sales, foreign currency
transactions, bond discounts and premiums, foreign capital gains tax, and gains
realized on in-kind shareholder redemption.
6. INVESTMENT TRANSACTIONS
Purchases and sales of investments (excluding short term securities) for the
period ended February 28, 2009, aggregated $708,225,293 and $1,988,099,429,
respectively.
Semiannual Report | 37
Templeton Foreign Fund
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
7. 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.
8. 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 February
28, 2009, were as shown below.
NUMBER OF NUMBER OF REALIZED
SHARES HELD SHARES HELD VALUE CAPITAL
AT 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
Compal Electronics Inc ......... 202,771,040 -- 31,345,220 171,425,820 $ --(a) $ -- $(16,378,616)
Lite-On Technology Corp. ....... 132,346,020 -- -- 132,346,020 78,284,401 -- --
Persimmon PLC .................. 15,276,482 -- 95,240 15,181,242 74,762,587 1,316,201 (886,487)
Premier Foods PLC .............. -- 56,692,550 165,310 56,527,240 24,259,515 -- (102,325)
USG People NV .................. -- 3,392,550 10,790 3,381,760 28,184,360 -- (29,363)
------------ ---------- ------------
TOTAL AFFILIATED SECURITIES (5.16% of Net Assets) .................................. $205,490,863 $1,316,201 $(17,396,791)
============ ========== ============
(a) As of February 28, 2009, no longer an affiliate.
9. CREDIT FACILITY
Effective, January 23, 2009, the Fund, together with other U.S. registered and
foreign investment funds managed by Franklin Templeton Investments
(individually, "Borrower"; collectively "Borrowers"), entered into a joint
syndicated senior unsecured credit facility totaling $725 million (Global Credit
Facility) to provide 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 based upon the unused portion of the Global Credit
Facility. During the period, the Fund incurred commitment fees of $1,248 of its
pro rata portion of the Global Credit Facility, which is reflected in Other
expenses on the Statement of Operations. During the period ended February 28,
2009, the Fund did not utilize the Global Credit Facility.
38 | Semiannual Report
Templeton Foreign Fund
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
10. REDEMPTION IN-KIND
During the year ended August 31, 2008, the Fund realized $40,043,335 of net
gains resulting from a redemption in-kind in which a shareholder redeemed fund
shares for securities held by the Fund rather than for cash. Because such gains
are not taxable to the Fund, and are not distributed to remaining shareholders,
they have been reclassified from accumulated net realized gains to paid-in
capital.
11. FAIR VALUE MEASUREMENTS
The Fund adopted Financial Accounting Standards Board (FASB) issued FASB
Statement No. 157, "Fair Value Measurement" (SFAS 157), on September 1, 2008.
SFAS 157 defines fair value, establishes a framework for measuring fair value,
and expands disclosures about fair value measurements. The Fund has determined
that the implementation of SFAS 157 did not have a material impact on the Fund's
financial statements.
SFAS 157 establishes 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 investments and are summarized in the following fair
value hierarchy:
- Level 1 - quoted prices in active markets for identical securities
- Level 2 - other significant observable inputs (including quoted prices
for similar securities, interest rates, prepayment speed, credit risk,
etc.)
- Level 3 - significant unobservable inputs (including the Fund's own
assumptions in determining the fair value of investments)
The inputs or methodology used for valuing securities are not an indication of
the risk associated with investing in those securities.
The following is a summary of the inputs used as of February 28, 2009, in
valuing the Fund's assets carried at fair value:
LEVEL 1 LEVEL 2 LEVEL 3 TOTAL
-------------- ----------- ------- --------------
ASSETS:
Investments in Securities ... $3,908,211,297 $79,850,097 $-- $3,988,061,394
Semiannual Report | 39
Templeton Foreign Fund
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
12. NEW ACCOUNTING PRONOUNCEMENT
In March 2008, FASB issued FASB Statement No. 161, "Disclosures about Derivative
Instruments and Hedging Activities, an amendment of FASB Statement No. 133"
(SFAS 161), which expands disclosures about derivative investments and hedging
activities. SFAS 161 is effective for fiscal years and interim periods beginning
after November 15, 2008. The Fund believes applying the various provisions of
SFAS 161 will not have a material impact on its financial statements.
ABBREVIATIONS
CURRENCY
SEK - Swedish Krona
SELECTED PORTFOLIO
ADR - American Depository Receipt
40 | Semiannual Report
Templeton Foreign Fund
SHAREHOLDER INFORMATION
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, 500 East Broward Boulevard, Suite 1500, Fort Lauderdale, FL
33394, 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.
Semiannual Report | 41
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Literature Request
LITERATURE REQUEST. TO RECEIVE A BROCHURE AND PROSPECTUS, PLEASE CALL US AT
(800) DIAL BEN/(800) 342-5236 OR VISIT franklintempleton.com. INVESTORS SHOULD
CAREFULLY CONSIDER A FUND'S INVESTMENT GOALS, RISKS, CHARGES AND EXPENSES BEFORE
INVESTING. THE PROSPECTUS CONTAINS THIS AND OTHER INFORMATION. PLEASE CAREFULLY
READ THE PROSPECTUS BEFORE INVESTING. TO ENSURE THE HIGHEST QUALITY OF SERVICE,
WE MAY MONITOR, RECORD AND ACCESS TELEPHONE CALLS TO OR FROM OUR SERVICE
DEPARTMENTS. THESE CALLS CAN BE IDENTIFIED BY THE PRESENCE OF A REGULAR
BEEPING TONE.
FRANKLIN TEMPLETON FUNDS
VALUE
Franklin All Cap Value Fund
Franklin Balance Sheet Investment Fund
Franklin Large Cap Value Fund
Franklin MicroCap Value Fund(1)
Franklin MidCap Value Fund
Franklin Small Cap Value Fund
Mutual Beacon Fund
Mutual Qualified Fund
Mutual Recovery Fund(2)
Mutual Shares Fund
BLEND
Franklin Focused Core Equity Fund
Franklin Large Cap Equity Fund
Franklin Rising Dividends Fund
GROWTH
Franklin Capital Growth Fund(1)
Franklin Flex Cap Growth Fund
Franklin Growth Fund
Franklin Growth Opportunities Fund(3)
Franklin Small Cap Growth Fund(4)
Franklin Small-Mid Cap Growth Fund
SECTOR
Franklin Biotechnology Discovery Fund
Franklin DynaTech Fund
Franklin Global Real Estate Fund
Franklin Gold and Precious Metals Fund
Franklin Natural Resources Fund
Franklin Real Estate Securities Fund
Franklin Utilities Fund
Mutual Financial Services Fund
GLOBAL
Mutual Discovery Fund
Templeton Global Long-Short Fund
Templeton Global Opportunities Trust
Templeton Global Smaller Companies Fund
Templeton Growth Fund
Templeton World Fund
INTERNATIONAL
Franklin India Growth Fund
Franklin International Growth Fund
Franklin International Small Cap Growth Fund
Mutual European Fund
Templeton BRIC Fund
Templeton China World Fund
Templeton Developing Markets Trust
Templeton Emerging Markets Small Cap Fund
Templeton Foreign Fund
Templeton Foreign Smaller Companies Fund
Templeton Frontier Markets Fund
HYBRID
Franklin Balanced Fund
Franklin Convertible Securities Fund
Franklin Equity Income Fund
Franklin Income Fund
Templeton Income Fund
ASSET ALLOCATION
Franklin Templeton Corefolio(R) Allocation Fund
Franklin Templeton Founding Funds Allocation Fund
Franklin Templeton Perspectives Allocation Fund
Franklin Templeton Conservative Target Fund
Franklin Templeton Growth Target Fund
Franklin Templeton Moderate Target Fund
Franklin Templeton 2015 Retirement Target Fund
Franklin Templeton 2025 Retirement Target Fund
Franklin Templeton 2035 Retirement Target Fund
Franklin Templeton 2045 Retirement Target Fund
FIXED INCOME
Franklin Adjustable U.S. Government Securities Fund(5)
Franklin Floating Rate Daily Access Fund
Franklin High Income Fund
Franklin Limited Maturity U.S. Government Securities Fund(5)
Franklin Low Duration Total Return Fund
Franklin Real Return Fund
Franklin Strategic Income Fund
Franklin Strategic Mortgage Portfolio
Franklin Templeton Hard Currency Fund
Franklin Total Return Fund
Franklin U.S. Government Securities Fund(5)
Templeton Global Bond Fund
Templeton Global Total Return Fund
Templeton International Bond Fund
TAX-FREE INCOME(6)
NATIONAL FUNDS
Double Tax-Free Income Fund
Federal Tax-Free Income Fund
High Yield Tax-Free Income Fund
Insured Tax-Free Income Fund(7)
LIMITED-/INTERMEDIATE-TERM FUNDS
California Intermediate-Term Tax-Free Income Fund
Federal Intermediate-Term Tax-Free Income Fund
Federal Limited-Term Tax-Free Income Fund
New York Intermediate-Term Tax-Free Income Fund
STATE-SPECIFIC
Alabama
Arizona
California(8)
Colorado
Connecticut
Florida
Georgia
Kentucky
Louisiana
Maryland
Massachusetts(7)
Michigan(7)
Minnesota(7)
Missouri
New Jersey
New York(8)
North Carolina
Ohio(7)
Oregon
Pennsylvania
Tennessee
Virginia
INSURANCE FUNDS
Franklin Templeton Variable Insurance Products Trust(9)
(1.) The fund is closed to new investors. Existing shareholders and select
retirement plans can continue adding to their accounts.
(2.) The fund is a continuously offered, closed-end fund. Shares may be
purchased daily; there is no daily redemption. However, each quarter,
pending board approval, the fund will authorize the repurchase of 5%-25% of
the outstanding number of shares. Investors may tender all or a portion of
their shares during the tender period.
(3.) Effective 11/1/07, Franklin Aggressive Growth Fund changed its name to
Franklin Growth Opportunities Fund. The fund's investment goal and strategy
remained the same.
(4.) Effective 3/31/08, Franklin Small Cap Growth Fund II changed its name to
Franklin Small Cap Growth Fund. The fund's investment goal and strategy
remained the same.
(5.) An investment in the fund is neither insured nor guaranteed by the U.S.
government or by any other entity or institution.
(6.) For investors subject to the alternative minimum tax, a small portion of
fund dividends may be taxable. Distributions of capital gains are generally
taxable.
(7.) The fund invests primarily in insured municipal securities.
(8.) These funds are available in four or more variations, including long-term
portfolios, intermediate-term portfolios, portfolios of insured securities,
a high-yield portfolio (CA only) and money market portfolios.
(9.) The funds of the Franklin Templeton Variable Insurance Products Trust are
generally available only through insurance company variable contracts.
12/08 Not part of the semiannual report
(FRANKLIN TEMPLETON INVESTMENTS(R) LOGO) One Franklin Parkway
San Mateo, CA 94403-1906
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SEMIANNUAL REPORT AND SHAREHOLDER LETTER
TEMPLETON FOREIGN FUND
INVESTMENT MANAGER
Templeton Global Advisors Limited
PRINCIPAL UNDERWRITER
Franklin Templeton Distributors, Inc.
(800) DIAL BEN(R)
franklintempleton.com
SHAREHOLDER SERVICES
(800) 632-2301
Authorized for distribution only when accompanied or preceded by a prospectus.
Investors should carefully consider a fund's investment goals, risks, charges
and expenses before investing. Like any investment in securities, the value of
the Fund's portfolio will be subject to the risk of loss from market, currency,
economic, political and other factors. The Fund and its investors are not
protected from such losses by the investment manager. Therefore, investors who
cannot accept this risk should not invest in shares of the Fund. The prospectus
contains this and other information; please read it carefully before investing.
To ensure the highest quality of service, telephone calls to and from our
service departments may be monitored, recorded and accessed. These calls can be
identified by the presence of a regular beeping tone.
104 S2009 04/09
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 David W. Niemiec and he 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 significant changes in the
Registrant's internal controls or in other factors that could significantly
affect the internal controls 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
Mark H. Otani, 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
Mark H. Otani, 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.
TEMPLETON FUNDS
By /s/LAURA F. FERGERSON
--------------------------------------
Laura F. Fergerson
Chief Executive Officer - Finance and
Administration
Date: April 27, 2009
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: April 27, 2009
By /s/MARK H. OTANI
-------------------------------------
Mark H. Otani
Chief Financial Officer and
Chief Accounting Officer
Date: April 27, 2009