UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number 811-05387
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FRANKLIN MUTUAL SERIES FUNDS
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(Exact name of registrant as specified in charter)
101 John F. Kennedy Parkway, Short Hills, NJ 07078-2705
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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: (210) 912-2100
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Date of fiscal year end: 12/31
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Date of reporting period: 12/31/08
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ITEM 1. REPORTS TO STOCKHOLDERS.
DECEMBER 31 , 2008
ANNUAL REPORT AND SHAREHOLDER LETTER VALUE
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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
[PICTURE]
Not part of the annual report
Contents
SHAREHOLDER LETTER 1 ANNUAL REPORT Financial Statements... 33 Tax Designation.............. 56
Mutual Shares Fund..... 5 Notes to Financial Board Members and Officers... 57
Statements............. 37
Performance Summary.... 12 Shareholder Information...... 61
Report of Independent
Your Fund's Expenses... 17 Registered Public
Accounting Firm........ 55
Financial Highlights
and Statement of
Investments ........... 19
Shareholder Letter
Dear Mutual Shares Fund Shareholder:
As we write this letter, 2008 has just drawn to a close. Like many
other investors, we are not sorry to see it pass. From a purely
financial perspective, it was a painful year, bringing stock market
declines ranging from 40% to 50% across most of the developed world
(with greater losses in many emerging markets) as well as a credit
crisis and climate of fear that prompted a global recession. These
events have effectively wiped out the shareholders of such
institutions as Fannie Mae, Freddie Mac, AIG, Bear Stearns, Lehman
Brothers, Fortis, Washington Mutual and Wachovia Bank, and have led
to extraordinary government intervention in the financial markets.
Policy makers have no definitive playbook for guidance, and the
world of finance is being remade before our eyes.
As stewards of our investors' capital, we have always followed an
investment approach that places a premium on limiting our
portfolio's downside exposure. This is inherent in our focus on
buying companies cheaply -- when their securities are trading at a
meaningful discount to our analysis of intrinsic value -- and
selling them as they trade close to that value. We are particularly
attracted to stocks where an identifiable catalyst exists to unlock
the valuation discount. We also buy distressed securities and
participate in merger arbitrage and privately negotiated
transactions when we feel we can generate attractive risk-adjusted
returns for Fund investors.
With markets down as much as they were in 2008, and given that we
are essentially "long only" investors, it would be unrealistic to
expect positive returns in this environment. Nevertheless, we
clearly are disappointed with
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Not part of the annual report | 1
the Fund's loss for the year. Several factors contributed to this,
some market related and others self-inflicted.
First, and perhaps most important, was the generally indiscriminate
devaluation of stocks across industries, geographies and market
capitalizations. In short, there were few safe havens as even
companies in the less cyclical, more defensive industries that make
up the Fund's core, including consumer staples, health care,
utilities and telecommunications companies, were all down at least
18% in 2008, and in some cases significantly more.
Second, we underestimated the ferocity of the economic downturn and
its impact on the valuations of some of the more economically
sensitive companies owned, including those in the industrials,
consumer discretionary and information technology sectors.
Third, while we did not buy into the oil and commodity bubble that
burst in July 2008, we did own or had established over the past
several months positions in a number of companies directly or
indirectly exposed to oil or other commodities. Such companies'
share prices plunged in the latter half of the year.
Fourth, entering 2008 the Fund owned shares of several large
European banks that we believed had very limited exposure to the
difficulties that roiled the U.S. financial system. Subsequent
events proved the contagion had spread to these institutions as
well.
Fifth, due to the repricing of corporate credit risk and paralysis
in the credit markets, the stocks of leveraged companies, i.e.,
companies with substantial debt, were disproportionately punished by
the markets.
Finally, our focus on merger arbitrage, private transactions and
catalyst-oriented investments, all of which have tended to protect
the Fund during periods of extended downward volatility, failed in
this mission in 2008. Several merger arbitrage positions declined
sharply after deals failed to close. We also substantially wrote
down several private transactions in which we were invested.
Catalyst-oriented positions were doubly affected when the catalysts
were postponed due to capital market constraints and the hedge funds
that typically owned large positions in these stocks were forced to
liquidate their positions due to investor redemptions.
In a year of few highlights, we did get some things right. A portion
of the Fund's assets were held in cash during the year, with about
17% of total net assets in cash at year-end, reflecting our caution
about valuations in general. We selectively used market puts at
various points during the year to protect
2| Not part of the annual report
against large downward market movements. We did have our share of positive stock
stories as noted in the following shareholder report. And we increased our
foreign currency hedges over the year, which mitigated the drag caused by an
appreciating dollar.
Looking forward, we are focused on a number of factors. Rather than try to be
macroeconomists or market strategists, we instead focus on our discipline of
buying securities at what we believe are very attractive prices and investing
for the long term. However, one cannot ignore the macroeconomic backdrop
entering 2009, and we are proceeding with a fairly high degree of caution.
Although the actions of central banks across the globe may have temporarily
stabilized the financial system, we are not convinced that the worst of the
economic news is behind us. Nevertheless, given the indiscriminate nature of the
market carnage, such an environment creates opportunities -- and we are focused
on four particular areas:
- Stocks of companies in economically defensive industries, with
strong market positions, high barriers to entry, reasonably
predictable earnings and cash flows, many of which we consider as
attractively valued today as they have been in years;
- Stocks disproportionately punished by the market, perhaps because
they were owned heavily by hedge funds or have a higher degree of
leverage but have no need to access the credit markets for a number
of years;
- Stocks of market-leading global companies, sometimes in more
economically sensitive industries, that are extremely attractive for
long-term investors, including a number of commodity-oriented
companies; and
- Distressed debt, a quiet area for the past several years due to
robust economic and capital market conditions. The leveraged buyout
boom from 2005 through mid-2007 is likely to result in defaults by
many good companies with bad balance sheets in the coming years. We
consider this an area of particular opportunity although it is still
early. Most of the distressed opportunities through year-end 2008
have been in bad companies with bad balance sheets, which interest
us little. In the meantime, we have sought to take advantage of
credit market dislocation and technical pressure to add positions in
a number of senior secured corporate loans that are trading at
levels we think will generate equity-like returns with, in our view,
a low risk of principal loss.
Not part of the annual report | 3
As a final note, periods of economic and market instability
historically have created favorable opportunities for long-term,
patient and disciplined investors. We believe the basic institutions
that underlie our economic and political system have proven their
ability to adapt to changing conditions and emerge stronger from
severe dislocations. We are excited about the prospects of
participating in this chapter, albeit a difficult one, of our
economic history and believe our approach should serve our
shareholders well over the long term. We certainly appreciate your
support over the past year and look forward to a more prosperous
year ahead.
Sincerely,
/s/ Peter A. Langerman
Peter A. Langerman
Chairman, President and Chief Executive Officer
Franklin Mutual Advisers, LLC
/s/ Michael J. Embler
Michael J. Embler
Senior Vice President and Chief Investment Officer
Franklin Mutual Advisers, LLC
THIS LETTER REFLECTS OUR ANALYSIS AND OPINIONS AS OF DECEMBER 31,
2008. THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF
ANY MARKET, COUNTRY, INDUSTRY, SECURITY OR FUND. STATEMENTS OF FACT
ARE OBTAINED FROM SOURCES CONSIDERED RELIABLE.
4 | Not part of the annual report
Annual Report
Mutual Shares Fund
YOUR FUND'S GOALS AND MAIN INVESTMENTS: Mutual Shares Fund seeks capital
appreciation, with income as a secondary goal, by investing primarily in equity
securities of companies the Fund's managers believe are at prices below their
intrinsic value. The Fund may invest up to 35% of its assets in foreign
securities.
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 annual report for Mutual Shares Fund covers the fiscal year ended December
31, 2008.
PERFORMANCE OVERVIEW
Mutual Shares Fund - Class Z had a -37.92% cumulative total return for the 12
months ended December 31, 2008. The Fund performed comparably to its benchmark,
the Standard & Poor's 500 Index (S&P 500), which had a -37.00% total return for
the same period.1 You can find the Fund's long-term performance data in the
Performance Summary beginning on page 12.
ECONOMIC AND MARKET OVERVIEW
In 2008, the U.S. economy faltered and The Conference Board's Consumer
Confidence Index fell to an all-time low since it began in 1967. The
government's abrupt conservatorship of Fannie Mae and Freddie Mac and the
failure of several blue-chip banks and financial institutions roiled the equity
markets. Despite government interventions and massive emergency funding, rapidly
weakening manufacturing activity and falling home prices exacerbated the
nation's economic troubles. Jobless claims mounted and the unemployment rate
rose to 7.2% by period-end.2 In early December, the National Bureau of Economic
Research officially declared the U.S. economy has been in recession since
December 2007.
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 S&P 500 consists
of 500 stocks chosen for market size, liquidity and industry group
representation. Each stock's weight in the index is proportionate to its market
value. The S&P 500 is one of the most widely used benchmarks of U.S. equity
performance. 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.
2. Source: Bureau of Labor Statistics.
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 24.
Annual Report | 5
GEOGRAPHIC BREAKDOWN
Based on Total Net Assets as of 12/31/08
U.S. 55.0%
U.K. 7.9%
Germany 5.0%
France 4.1%
Switzerland 3.3%
Netherlands 2.5%
Norway 1.2%
Denmark 1.0%
Other 4.3%
Short-Term Investments & Other Net Assets 15.7%
The weakening U.S. economy negatively impacted growth prospects around the
world. Although growth in the first half of the year was robust in developing
economies, particularly in Asia, signs of a global slowdown surfaced in the
latter half. In an environment of extremely high commodity prices that increased
inflationary pressure, the world's monetary authorities faced the choice of
lowering short-term interest rates to stimulate growth or raising them to fight
rising inflation. Stimulus provided through fiscal and monetary policies
implemented around the globe sought to restore financial market stability and
reignite economic growth.
The U.S. Treasury and the Federal Reserve Board took unprecedented steps,
including lowering short-term rates to near 0% from 4.25%. The European Central
Bank and many of the world's other central banks had raised rates due to
inflationary pressures. Later in the year, the potential for global recession
trumped inflationary concerns, and the world's monetary authorities cut interest
rates aggressively. The U.S. dollar, which had declined earlier in the period
versus many of the world's currencies, regained ground quickly toward period-end
as a flight to the relative safety of U.S. Treasuries prevailed.
In this challenging economic time, volatility came to define global equity
markets. Virtually all local indexes ended the 12-month period with marked
losses. Despite negative economic data and an outlook for decelerating corporate
earnings and profit margins globally, many companies outside the financials
sector retained relatively strong balance sheets.
INVESTMENT STRATEGY
At Mutual Series, we are committed to our distinctive value approach to
investing, which we believe can generate above-average risk-adjusted returns
over time for our shareholders. Our major investment strategy is investing in
undervalued stocks. When selecting undervalued equities, we are always attracted
to fundamentally strong companies with healthy balance sheets, high-quality
assets, substantial free cash flow and shareholder-oriented management teams and
whose stocks are trading at discounts to our assessment of the companies'
intrinsic or business value. We also look for asset rich companies whose shares
may be trading at depressed levels due to concerns over short-term earnings
disappointments, litigation, management strategy or other perceived negatives.
This strict value approach is not only intended to improve the likelihood of
upside potential, but it is also intended to reduce the risk of substantial
declines. While the vast majority of our undervalued equity investments are made
in publicly traded companies globally, we may invest occasionally in privately
held companies as well.
6 | Annual Report
We complement this more traditional investment strategy with two others. One is
distressed investing, a highly specialized field that has proven quite
profitable during certain periods over the years. Distressed investing is
complex and can take many forms. The most common distressed investment the Fund
undertakes is the purchase of financially troubled or bankrupt companies' debt
at a substantial discount to face value. After the financially distressed
company is reorganized, often in bankruptcy court, the old debt is typically
replaced with new securities issued by the financially stronger company.
The other piece of our investment strategy is participating in arbitrage
situations, another highly specialized field. When companies announce proposed
mergers or takeovers, commonly referred to as "deals," the target company may
trade at a discount to the bid it ultimately accepts. One form of arbitrage
involves purchasing the target company's stock when it is trading below the
value it would receive in a deal. In keeping with our commitment to a relatively
conservative investment approach, we typically focus our arbitrage efforts on
announced deals, and eschew rumored deals or other situations we consider
relatively risky.
In addition, we will generally seek to hedge the Fund's currency exposure when
we deem it advantageous for our shareholders.
MANAGER'S DISCUSSION
During the period under review, three investments that declined in value were
Constellation Energy, a power generation and distribution company; News Corp.,
an international media company; and International Paper, a paper and forest
products company.
In the second half of 2008, Constellation Energy's management disclosed that
collateral requirements for certain business operations had increased
substantially. This development triggered concerns about the company's capital
position, and its share price weakened materially. In September, MidAmerican
Energy Holdings, a utility controlled by Berkshire Hathaway, agreed to inject
capital into Constellation and also offered to purchase all of Constellation's
outstanding shares for $4.7 billion. Initially, Constellation's board supported
MidAmerican's offer, but by mid-December Electricite de France (EDF), a
Constellation joint venture partner, offered to purchase half of the company's
nuclear assets for $4.5 billion. The EDF proposal enabled existing investors to
retain a stake in half of Constellation's nuclear generation assets and complete
ownership of its remaining assets. Constellation's board ultimately endorsed
EDF's offer and terminated the second step of the MidAmerican deal. During
TOP 10 SECTORS/INDUSTRIES
Based on Equity Securities as of 12/31/08
% OF TOTAL
NET ASSETS
- ---------------------------------------- -----------
Tobacco 9.8%
Insurance 8.4%
Media 6.3%
Food Products 4.6%
Industrial Conglomerates 3.9%
Food & Staples Retailing 3.8%
Oil, Gas & Consumable Fuels 3.7%
Diversified Telecommunication Services 3.4%
Electric Utilities 2.9%
Paper & Forest Products 2.8%
Annual Report | 7
TOP 10 HOLDINGS
12/31/08
COMPANY % OF TOTAL
SECTOR/INDUSTRY, COUNTRY NET ASSETS
- ------------------------------------------- ----------
Berkshire Hathaway Inc., A & B 3.1%
Insurance, U.S.
British American Tobacco PLC, ord. & ADR 2.4%
Tobacco, U.K.
Comcast Corp., A 2.4%
Media, U.S.
Imperial Tobacco Group PLC 2.1%
Tobacco, U.K.
CVS Caremark Corp. 1.9%
Food & Staples Retailing, U.S.
Nestle SA 1.9%
Food Products, Switzerland
Microsoft Corp. 1.7%
Software, U.S.
E.ON AG 1.5%
Electric Utilities, Germany
News Corp., A 1.5%
Media, U.S.
Qwest Communications International Inc. 1.5%
Diversified Telecommunication
Services, U.S.
the course of 2008, the Fund's investment in Constellation fell 60% in value.
Although MidAmerican's capital injection was dilutive to shareholders and the
shares declined in value, we believed the share price at year-end materially
undervalued Constellation's combined assets.
News Corp. shares declined 55% for the year as early signs of recession curbed
advertising spending. The company has a diversified portfolio of media
properties including television networks and stations, cable networks,
newspapers and a film studio. While some of these platforms posted strong
growth, the television stations and newspaper operations proved particularly
vulnerable as consumers' multi-year migration away from those media formats was
exacerbated by a slowing advertising market. Although perhaps somewhat
counterintuitive, the company's significant cash balance also weighed on the
stock price. Investors were concerned about the company's suggestions that it
would prefer strategic acquisitions over stock repurchases despite the weak
business environment. We believed that the longer-term strategic value of News
Corp.'s assets remained intact.
Shares of International Paper, North America's largest producer of cardboard
boxes and the second-largest producer of copy paper in North America, declined
approximately 60% in value during the year under review. The stock came under
pressure as rising raw materials prices drove input costs higher, demand
declined due to overall economic weakness, and lower capacity utilization
negatively affected the company's financial performance. Despite these
headwinds, pricing for International Paper's products remained fairly firm as
the company (and most of its competitors) aggressively reduced production to
better match supply with demand. The company completed its purchase of
Weyerhaeuser's box business in August, which provided significant cost-saving
opportunities. We believed this holding's intrinsic value was significantly
higher than year-end market values and continued to hold the position into 2009.
In contrast to these disappointments, three of the Fund's best performing
investments were Valeant Pharmaceuticals International, a specialty
pharmaceuticals company; brewer Anheuser-Busch; and H&R Block, a financial
services company specializing in tax return preparation.
Valeant is a multinational company that develops and markets products primarily
in the neurology and therapeutic dermatology areas. Valeant's stock rose 91%
during the year, supported by a number of positive developments. In February
2008, Michael Pearson was named CEO, and his focus on the company's core
geographies was well received by investors. Pearson quickly began to deliver on
his strategy by selling the company's western European
8 | Annual Report
operations and announcing his intention to exit much of the central European
business. Over the course of 2008, Valeant also announced a cost reduction
program, a partnership with GlaxoSmithKline to develop the epilepsy drug
Retigabine, and acquisitions to bolster existing product lines.
Anheuser-Busch received an unsolicited $65-per-share cash takeover offer from
Belgian brewing giant InBev in the spring of 2008. In our analysis, the company
had been a long-time underperformer and suffered from a complacent management
team. After the initial announcement, we began to buy shares at a discount to
the offer as we believed the acquirer had the financial strength and management
aggressiveness to increase its price and complete the deal. In July, the board
of Anheuser-Busch accepted InBev's enhanced $70-per-share cash offer. As the
global credit crunch accelerated in September and October, Anheuser-Busch shares
traded lower over concerns that the deal might not close, and we used this
opportunity to add to the Fund's position. InBev completed the acquisition in
November, and the new company, Anheuser-Busch InBev, became the largest global
brewer. Overall, the Fund's investment appreciated more than 14% during 2008.
H&R Block (sold by period-end) is the largest U.S. tax preparer, serving clients
through both retail offices and the Internet. In recent years, the company
expanded its business portfolio by entering the subprime mortgage market and
suffered the consequences in 2007 and thereafter. In 2008, shareholders voted in
new board members who exited the mortgage business and improved operating
margins in H&R Block's remaining businesses. During the time we held it in 2008,
the Fund's shares rose 26% largely as a result of this management turnaround.
Finally, investors should note that we maintained our currency hedging posture
of being generally hedged to the U.S. dollar for most of our non-U.S. holdings.
Since the dollar was stronger compared with most foreign currencies during 2008,
the Fund benefited to the extent it was hedged.
Annual Report | 9
Thank you for your continued participation in Mutual Shares Fund. We
look forward to serving your future investment needs.
[PHOTO] /s/ Peter A. Langerman
Peter A. Langerman
Co-Portfolio Manager
[PHOTO] /s/ F. David Segal,
F. David Segal, CFA
Co-Portfolio Manager
[PHOTO] /s/ Debbie A. Turner, CFA
Debbie A. Turner, CFA
Assistant Portfolio Manager
Mutual Shares Fund
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND
PORTFOLIO HOLDINGS AS OF DECEMBER 31, 2008, 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.
10 | Annual Report
PETER LANGERMAN has been portfolio manager for Mutual Shares Fund since 2005. He
joined Franklin Templeton Investments in 1996, serving in various capacities,
including President and Chief Executive Officer of Franklin Mutual Advisers and
member of the management team of the Funds, including Mutual Shares Fund. From
2002 to 2005, he served as director of New Jersey's Division of Investment,
overseeing employee pension funds. Between 1986 and 1996, Mr. Langerman was
employed at Heine Securities Corporation, the Fund's former manager.
F. DAVID SEGAL has been portfolio manager for Mutual Shares Fund since 2005. He
joined Franklin Templeton Investments in 2002. Previously, he was an analyst in
the Structured Finance Group of MetLife for the period 1999-2002.
DEBBIE TURNER has been assistant portfolio manager for Mutual Shares Fund since
2001. She joined Franklin Templeton Investments in 1996. Between 1993 and 1996,
Ms. Turner was employed at Heine Securities Corporation, the Fund's former
manager.
Annual Report | 11
Performance Summary as of 12/31/08
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 and graphs do 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 Z (SYMBOL: MUTHX) CHANGE 12/31/08 12/31/07
- --------------------------------- ------- -------- ---------
Net Asset Value (NAV) -$10.01 $ 15.32 $ 25.33
DISTRIBUTIONS (1/1/08 - 12/31/08)
Dividend Income $0.2701
Short-Term Capital Gain $0.1653
Long-Term Capital Gain $0.0356
TOTAL $0.4710
CLASS A (SYMBOL: TESIX) CHANGE 12/31/08 12/31/07
- --------------------------------- ------- -------- ---------
Net Asset Value (NAV) -$9.92 $ 15.22 $ 25.14
DISTRIBUTIONS (1/1/08 - 12/31/08)
Dividend Income $0.2055
Short-Term Capital Gain $0.1653
Long-Term Capital Gain $0.0356
TOTAL $0.4064
CLASS B (SYMBOL: FMUBX) CHANGE 12/31/08 12/31/07
- --------------------------------- ------- ------- -------- ---------
Net Asset Value (NAV) -$9.66 $ 14.94 $ 24.60
DISTRIBUTIONS (1/1/08 - 12/31/08)
Dividend Income $0.0368
Short-Term Capital Gain $0.1653
Long-Term Capital Gain $0.0356
TOTAL $0.2377
CLASS C (SYMBOL: TEMTX) CHANGE 12/31/08 12/31/07
- --------------------------------- ------- -------- ---------
Net Asset Value (NAV) -$9.76 $ 15.10 $ 24.86
DISTRIBUTIONS (1/1/08 - 12/31/08)
Dividend Income $0.0446
Short-Term Capital Gain $0.1653
Long-Term Capital Gain $0.0356
TOTAL $0.2455
CLASS B (SYMBOL: TESRX) CHANGE 12/31/08 12/31/07
- --------------------------------- ------- -------- ---------
Net Asset Value (NAV) -$9.85 $ 15.15 $ 25.00
DISTRIBUTIONS (1/1/08 - 12/31/08)
Dividend Income $0.1598
Short-Term Capital Gain $0.1653
Long-Term Capital Gain $0.0356
TOTAL $0.3607
12 | Annual Report
Performance Summary (continued)
PERFORMANCE
Cumulative total return excludes sales charges. Average annual total return and
value of $10,000 investment include maximum sales charges. CLASS Z/R: no 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 Z (1) 1-YEAR 5-YEAR 10-YEAR
- -------------------------------------- -------- -------- ---------
Cumulative Total Return (2) -37.92% -4.57% +49.88%
Average Annual Total Return (3) -37.92% -0.93% +4.13%
Value of $10,000 Investment (4) $ 6,208 $ 9,543 $ 14,988
Total Annual Operating Expenses (5) 0.75%
CLASS A (1) 1-YEAR 5-YEAR 10-YEAR
- -------------------------------------- -------- -------- ---------
Cumulative Total Return (2) -38.10% -6.14% +44.86%
Average Annual Total Return (3) -41.65% -2.42% +3.16%
Value of $10,000 Investment (4) $ 5,835 $ 8,848 $ 13,652
Total Annual Operating Expenses (5) 1.07%
CLASS B (1) 1-YEAR 5-YEAR 10-YEAR
- -------------------------------------- -------- -------- ---------
Cumulative Total Return (2) -38.54% -9.25% +37.08%
Average Annual Total Return (3) -40.97% -2.24% +3.20%
Value of $10,000 Investment (4) $ 5,903 $ 8,930 $ 13,708
Total Annual Operating Expenses (5) 1.75%
CLASS C (1) 1-YEAR 5-YEAR 10-YEAR
- -------------------------------------- ---- -------- -------- ---------
Cumulative Total Return (2) -38.53% -9.19% +35.64%
Average Annual Total Return (3) -39.14% -1.91% +3.10%
Value of $10,000 Investment (4) $ 6,086 $ 9,081 $ 13,564
Total Annual Operating Expenses (5) 1.75%
Inception
CLASS R 1-YEAR 5-YEAR (1/1/02)
- -------------------------------------- -------- -------- ---------
Cumulative Total Return (2) -38.19% -6.88% +4.20%
Average Annual Total Return (3) -38.19% -1.42% +0.59%
Value of $10,000 Investment (4) $ 6,181 $ 9,312 $ 10,420
Total Annual Operating Expenses (5) 1.25%
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.
Annual Report | 13
Performance Summary (continued)
TOTAL RETURN INDEX COMPARISON FOR A HYPOTHETICAL $10,000 INVESTMENT
Total return represents the change in value of an investment over the periods
shown. It includes any current, applicable, maximum sales charge, Fund expenses,
account fees and reinvested distributions. The unmanaged index includes
reinvestment of any income or distributions. It differs from the Fund in
composition and does not pay management fees or expenses. One cannot invest
directly in an index.
AVERAGE ANNUAL TOTAL RETURN
CLASS Z(1) 12/31/08
- ---------- --------
1-Year -37.92%
5-Year -0.93%
10-Year +4.13%
CLASS Z (1/1/99 - 12/31/08)(1)
[LINE CHART]
Prepared by (HYD): Syed. Zakir
Reviewed by (HYD): Bejugama Manasa
Reviewed by (US): Jamie Grocock, Marketing Data & Analytics,x54525
Sources: (C) 2009 Thomson Reuters, (C) 2009 Morningstar
Sales Charges: Fund performance includes sales charges.
Rebalancing: N/A
Funds & Indexes Used: Mutual Shares Fund, S&P 500 Index
Notes: Sources: Morningstar EnCorr, Fundstation Performance
Report, MF Growth of 10K Report
S&P 500 TR (IA Extended)
DATE MUTUAL SHARES FUND - CLASS Z S&P 500 INDEX (%Total Return)
- ---------- ---------------------------- ------------- ------------------------
1/1/1999 $ 10,000 $ 10,000
1/31/1999 $ 10,159 $ 10,418 4.181630%
2/28/1999 $ 10,026 $ 10,094 -3.107890%
3/31/1999 $ 10,491 $ 10,498 4.000870%
4/30/1999 $ 11,305 $ 10,905 3.872520%
5/31/1999 $ 11,361 $ 10,647 -2.361360%
6/30/1999 $ 11,684 $ 11,238 5.549780%
7/31/1999 $ 11,361 $ 10,887 -3.122470%
8/31/1999 $ 10,923 $ 10,833 -0.494750%
9/30/1999 $ 10,641 $ 10,536 -2.741390%
10/31/1999 $ 11,059 $ 11,203 6.328070%
11/30/1999 $ 11,267 $ 11,431 2.032800%
12/31/1999 $ 11,500 $ 12,104 5.889610%
1/31/2000 $ 11,123 $ 11,496 -5.024240%
2/29/2000 $ 10,667 $ 11,278 -1.892950%
3/31/2000 $ 11,771 $ 12,382 9.782880%
4/30/2000 $ 11,647 $ 12,009 -3.008580%
5/31/2000 $ 11,793 $ 11,763 -2.051700%
6/30/2000 $ 11,587 $ 12,053 2.465300%
7/31/2000 $ 11,909 $ 11,864 -1.563400%
8/31/2000 $ 12,512 $ 12,601 6.211440%
9/30/2000 $ 12,500 $ 11,936 -5.279330%
10/31/2000 $ 12,798 $ 11,886 -0.422790%
11/30/2000 $ 12,396 $ 10,949 -7.883930%
12/31/2000 $ 13,091 $ 11,002 0.489410%
1/31/2001 $ 13,865 $ 11,392 3.547910%
2/28/2001 $ 13,872 $ 10,354 -9.118170%
3/31/2001 $ 13,521 $ 9,698 -6.335020%
4/30/2001 $ 14,070 $ 10,451 7.771040%
5/31/2001 $ 14,560 $ 10,521 0.669970%
6/30/2001 $ 14,649 $ 10,265 -2.433870%
7/31/2001 $ 14,642 $ 10,164 -0.984420%
8/31/2001 $ 14,308 $ 9,528 -6.260160%
9/30/2001 $ 13,048 $ 8,759 -8.075230%
10/31/2001 $ 12,993 $ 8,926 1.906880%
11/30/2001 $ 13,538 $ 9,610 7.670630%
12/31/2001 $ 13,919 $ 9,694 0.876050%
1/31/2002 $ 13,790 $ 9,553 -1.459330%
2/28/2002 $ 13,854 $ 9,369 -1.928500%
3/31/2002 $ 14,270 $ 9,721 3.760910%
4/30/2002 $ 14,355 $ 9,132 -6.062790%
5/31/2002 $ 14,363 $ 9,064 -0.736730%
6/30/2002 $ 13,431 $ 8,419 -7.122960%
7/31/2002 $ 12,624 $ 7,763 -7.795440%
8/31/2002 $ 12,755 $ 7,813 0.656560%
9/30/2002 $ 12,064 $ 6,964 -10.867930%
10/31/2002 $ 12,253 $ 7,577 8.801580%
11/30/2002 $ 12,501 $ 8,023 5.885910%
12/31/2002 $ 12,403 $ 7,552 -5.874760%
1/31/2003 $ 12,300 $ 7,354 -2.619660%
2/28/2003 $ 12,101 $ 7,244 -1.500380%
3/31/2003 $ 12,131 $ 7,314 0.970930%
4/30/2003 $ 12,845 $ 7,917 8.236990%
5/31/2003 $ 13,501 $ 8,334 5.268770%
6/30/2003 $ 13,705 $ 8,440 1.275640%
7/31/2003 $ 13,787 $ 8,589 1.763160%
8/31/2003 $ 14,113 $ 8,756 1.950210%
9/30/2003 $ 14,054 $ 8,663 -1.061950%
10/31/2003 $ 14,573 $ 9,153 5.657000%
11/30/2003 $ 15,041 $ 9,234 0.879830%
12/31/2003 $ 15,706 $ 9,718 5.244450%
1/31/2004 $ 15,833 $ 9,897 1.835510%
2/29/2004 $ 16,245 $ 10,034 1.389950%
3/31/2004 $ 16,222 $ 9,883 -1.508650%
4/30/2004 $ 15,953 $ 9,728 -1.569800%
5/31/2004 $ 15,975 $ 9,861 1.372260%
6/30/2004 $ 16,241 $ 10,053 1.944490%
7/31/2004 $ 15,993 $ 9,720 -3.309660%
8/31/2004 $ 16,136 $ 9,759 0.404490%
9/30/2004 $ 16,347 $ 9,865 1.083080%
10/31/2004 $ 16,542 $ 10,016 1.527680%
11/30/2004 $ 17,347 $ 10,421 4.046160%
12/31/2004 $ 17,887 $ 10,776 3.402870%
1/31/2005 $ 17,538 $ 10,513 -2.437480%
2/28/2005 $ 18,073 $ 10,734 2.104400%
3/31/2005 $ 17,941 $ 10,544 -1.770800%
4/30/2005 $ 17,771 $ 10,344 -1.896560%
5/31/2005 $ 18,151 $ 10,673 3.181860%
6/30/2005 $ 18,356 $ 10,689 0.141970%
7/31/2005 $ 18,831 $ 11,086 3.718830%
8/31/2005 $ 18,908 $ 10,985 -0.912400%
9/30/2005 $ 19,196 $ 11,074 0.809940%
10/31/2005 $ 18,815 $ 10,889 -1.667080%
11/30/2005 $ 19,290 $ 11,301 3.782210%
12/31/2005 $ 19,745 $ 11,305 0.034810%
1/31/2006 $ 20,239 $ 11,604 2.647780%
2/28/2006 $ 20,371 $ 11,636 0.271330%
3/31/2006 $ 21,006 $ 11,781 1.244750%
4/30/2006 $ 21,154 $ 11,939 1.342780%
5/31/2006 $ 20,808 $ 11,595 -2.878140%
6/30/2006 $ 20,821 $ 11,611 0.135570%
7/31/2006 $ 20,888 $ 11,683 0.616850%
8/31/2006 $ 21,481 $ 11,961 2.379310%
9/30/2006 $ 21,640 $ 12,269 2.577000%
10/31/2006 $ 22,417 $ 12,669 3.258610%
11/30/2006 $ 22,785 $ 12,909 1.901600%
12/31/2006 $ 23,371 $ 13,091 1.402780%
1/31/2007 $ 23,890 $ 13,289 1.512320%
2/28/2007 $ 23,667 $ 13,029 -1.955880%
3/31/2007 $ 24,114 $ 13,174 1.118500%
4/30/2007 $ 24,867 $ 13,758 4.429530%
5/31/2007 $ 25,745 $ 14,238 3.489510%
6/30/2007 $ 25,592 $ 14,001 -1.661330%
7/31/2007 $ 24,460 $ 13,567 -3.100480%
8/31/2007 $ 24,307 $ 13,771 1.499010%
9/30/2007 $ 24,720 $ 14,286 3.739880%
10/31/2007 $ 25,250 $ 14,513 1.590680%
11/30/2007 $ 24,523 $ 13,906 -4.180660%
12/31/2007 $ 24,143 $ 13,810 -0.693760%
1/31/2008 $ 22,752 $ 12,981 -5.998160%
2/29/2008 $ 22,314 $ 12,560 -3.248580%
3/31/2008 $ 21,923 $ 12,505 -0.431800%
4/30/2008 $ 22,676 $ 13,115 4.870310%
5/31/2008 $ 23,019 $ 13,284 1.295260%
6/30/2008 $ 20,665 $ 12,164 -8.430360%
7/31/2008 $ 20,818 $ 12,062 -0.840620%
8/31/2008 $ 21,028 $ 12,237 1.446470%
9/30/2008 $ 19,264 $ 11,146 -8.910730%
10/31/2008 $ 15,979 $ 9,274 -16.794790%
11/30/2008 $ 14,660 $ 8,609 -7.175460%
12/31/2008 $ 14,988 $ 8,700 1.064030%
Total Returns 49.88% -13.00%
AVERAGE ANNUAL TOTAL RETURN
CLASS A(1) 12/31/08
- ---------- --------
1-Year -41.65%
5-Year -2.42%
10-Year +3.16%
CLASS A (1/1/99 - 12/31/08)(1)
[LINE CHART]
Prepared by (HYD): Syed. Zakir
Reviewed by (HYD): Bejugama Manasa
Reviewed by (US): Jamie Grocock, Marketing Data & Analytics, x54525
Sources: (C) 2009 Thomson Reuters, (C) 2009 Morningstar
Sales Charges: Fund performance includes sales charges.
Rebalancing: N/A
Funds & Indexes Used: Mutual Shares Fund, S&P 500 Index
Notes: Sources: Morningstar EnCorr, Fundstation Performance
Report, MF Growth of 10K Report
S&P 500 TR (IA Extended)
DATE MUTUAL SHARES FUND - CLASS A S&P 500 INDEX (%Total Return)
- ---------- ---------------------------- ------------- ------------------------
1/1/1999 $ 9,425 $10,000
1/31/1999 $ 9,574 $10,418 4.18163000%
2/28/1999 $ 9,444 $10,094 -3.10789000%
3/31/1999 $ 9,884 $10,498 4.00087000%
4/30/1999 $10,643 $10,905 3.87252000%
5/31/1999 $10,691 $10,647 -2.36136000%
6/30/1999 $10,997 $11,238 5.54978000%
7/31/1999 $10,687 $10,887 -3.12247000%
8/31/1999 $10,269 $10,833 -0.49475000%
9/30/1999 $10,003 $10,536 -2.74139000%
10/31/1999 $10,392 $11,203 6.32807000%
11/30/1999 $10,584 $11,431 2.03280000%
12/31/1999 $10,803 $12,104 5.88961000%
1/31/2000 $10,443 $11,496 -5.02424000%
2/29/2000 $10,013 $11,278 -1.89295000%
3/31/2000 $11,047 $12,382 9.78288000%
4/30/2000 $10,925 $12,009 -3.00858000%
5/31/2000 $11,063 $11,763 -2.05170000%
6/30/2000 $10,864 $12,053 2.46530000%
7/31/2000 $11,162 $11,864 -1.56340000%
8/31/2000 $11,723 $12,601 6.21144000%
9/30/2000 $11,706 $11,936 -5.27933000%
10/31/2000 $11,987 $11,886 -0.42279000%
11/30/2000 $11,603 $10,949 -7.88393000%
12/31/2000 $12,253 $11,002 0.48941000%
1/31/2001 $12,973 $11,392 3.54791000%
2/28/2001 $12,973 $10,354 -9.11817000%
3/31/2001 $12,638 $ 9,698 -6.33502000%
4/30/2001 $13,154 $10,451 7.77104000%
5/31/2001 $13,607 $10,521 0.66997000%
6/30/2001 $13,687 $10,265 -2.43387000%
7/31/2001 $13,681 $10,164 -0.98442000%
8/31/2001 $13,361 $ 9,528 -6.26016000%
9/30/2001 $12,178 $ 8,759 -8.07523000%
10/31/2001 $12,126 $ 8,926 1.90688000%
11/30/2001 $12,625 $ 9,610 7.67063000%
12/31/2001 $12,981 $ 9,694 0.87605000%
1/31/2002 $12,860 $ 9,553 -1.45933000%
2/28/2002 $12,914 $ 9,369 -1.92850000%
3/31/2002 $13,296 $ 9,721 3.76091000%
4/30/2002 $13,369 $ 9,132 -6.06279000%
5/31/2002 $13,376 $ 9,064 -0.73673000%
6/30/2002 $12,501 $ 8,419 -7.12296000%
7/31/2002 $11,752 $ 7,763 -7.79544000%
8/31/2002 $11,868 $ 7,813 0.65656000%
9/30/2002 $11,228 $ 6,964 -10.86793000%
10/31/2002 $11,392 $ 7,577 8.80158000%
11/30/2002 $11,623 $ 8,023 5.88591000%
12/31/2002 $11,527 $ 7,552 -5.87476000%
1/31/2003 $11,431 $ 7,354 -2.61966000%
2/28/2003 $11,239 $ 7,244 -1.50038000%
3/31/2003 $11,266 $ 7,314 0.97093000%
4/30/2003 $11,926 $ 7,917 8.23699000%
5/31/2003 $12,530 $ 8,334 5.26877000%
6/30/2003 $12,711 $ 8,440 1.27564000%
7/31/2003 $12,787 $ 8,589 1.76316000%
8/31/2003 $13,084 $ 8,756 1.95021000%
9/30/2003 $13,022 $ 8,663 -1.06195000%
10/31/2003 $13,506 $ 9,153 5.65700000%
11/30/2003 $13,928 $ 9,234 0.87983000%
12/31/2003 $14,545 $ 9,718 5.24445000%
1/31/2004 $14,657 $ 9,897 1.83551000%
2/29/2004 $15,039 $10,034 1.38995000%
3/31/2004 $15,012 $ 9,883 -1.50865000%
4/30/2004 $14,761 $ 9,728 -1.56980000%
5/31/2004 $14,775 $ 9,861 1.37226000%
6/30/2004 $15,018 $10,053 1.94449000%
7/31/2004 $14,780 $ 9,720 -3.30966000%
8/31/2004 $14,906 $ 9,759 0.40449000%
9/30/2004 $15,102 $ 9,865 1.08308000%
10/31/2004 $15,277 $10,016 1.52768000%
11/30/2004 $16,011 $10,421 4.04616000%
12/31/2004 $16,508 $10,776 3.40287000%
1/31/2005 $16,177 $10,513 -2.43748000%
2/28/2005 $16,667 $10,734 2.10440000%
3/31/2005 $16,537 $10,544 -1.77080000%
4/30/2005 $16,379 $10,344 -1.89656000%
5/31/2005 $16,731 $10,673 3.18186000%
6/30/2005 $16,910 $10,689 0.14197000%
7/31/2005 $17,343 $11,086 3.71883000%
8/31/2005 $17,408 $10,985 -0.91240000%
9/30/2005 $17,675 $11,074 0.80994000%
10/31/2005 $17,314 $10,889 -1.66708000%
11/30/2005 $17,747 $11,301 3.78221000%
12/31/2005 $18,156 $11,305 0.03481000%
1/31/2006 $18,606 $11,604 2.64778000%
2/28/2006 $18,728 $11,636 0.27133000%
3/31/2006 $19,300 $11,781 1.24475000%
4/30/2006 $19,429 $11,939 1.34278000%
5/31/2006 $19,109 $11,595 -2.87814000%
6/30/2006 $19,116 $11,611 0.13557000%
7/31/2006 $19,170 $11,683 0.61685000%
8/31/2006 $19,719 $11,961 2.37931000%
9/30/2006 $19,858 $12,269 2.57700000%
10/31/2006 $20,561 $12,669 3.25861000%
11/30/2006 $20,894 $12,909 1.90160000%
12/31/2006 $21,420 $13,091 1.40278000%
1/31/2007 $21,891 $13,289 1.51232000%
2/28/2007 $21,685 $13,029 -1.95588000%
3/31/2007 $22,081 $13,174 1.11850000%
4/30/2007 $22,759 $13,758 4.42953000%
5/31/2007 $23,569 $14,238 3.48951000%
6/30/2007 $23,414 $14,001 -1.66133000%
7/31/2007 $22,378 $13,567 -3.10048000%
8/31/2007 $22,229 $13,771 1.49901000%
9/30/2007 $22,602 $14,286 3.73988000%
10/31/2007 $23,083 $14,513 1.59068000%
11/30/2007 $22,412 $13,906 -4.18066000%
12/31/2007 $22,056 $13,810 -0.69376000%
1/31/2008 $20,776 $12,981 -5.99816000%
2/29/2008 $20,381 $12,560 -3.24858000%
3/31/2008 $20,013 $12,505 -0.43180000%
4/30/2008 $20,697 $13,115 4.87031000%
5/31/2008 $21,004 $13,284 1.29526000%
6/30/2008 $18,855 $12,164 -8.43036000%
7/31/2008 $18,987 $12,062 -0.84062000%
8/31/2008 $19,180 $12,237 1.44647000%
9/30/2008 $17,569 $11,146 -8.91073000%
10/31/2008 $14,564 $ 9,274 -16.79479000%
11/30/2008 $13,358 $ 8,609 -7.17546000%
12/31/2008 $13,652 $ 8,700 1.06403000%
Total Returns 36.52% -13.00%
14 | Annual Report
Performance Summary (continued)
AVERAGE ANNUAL TOTAL RETURN
CLASS B(1) 12/31/08
- ---------- --------
1-Year -40.97%
5-Year -2.24%
10-Year +3.20%
CLASS B (1/1/99 - 12/31/08)(1)
[LINE CHART]
Prepared by (HYD): Syed. Zakir
Reviewed by (HYD): Bejugama Manasa
Reviewed by (US): Jamie Grocock, Marketing Data & Analytics, x54525
Sources: (C) 2009 Thomson Reuters, (C) 2009 Morningstar
Sales Charges: Fund performance includes sales charges.
Rebalancing: N/A
Funds & Indexes Used: Mutual Shares Fund, S&P 500 Index
Notes: Sources: Morningstar EnCorr, Fundstation Performance
Report, MF Growth of 10K Report
*After 8 years Class B shares convert to class A shares.
This performance is a hybrid of the two share classes.
S&P 500 Conversion of Mutual Shares Fund - S&P 500 TR (IA Extended)
DATE MUTUAL SHARES FUND - CLASS B INDEX Class B to Class A shares (%Total Return)
- ---------- ---------------------------- -------- ---------------------------------- -----------------------
1/1/1999 $ 10,000 $ 10,000
1/31/1999 $ 10,127 $ 10,418 4.18163000%
2/28/1999 $ 9,978 $ 10,094 -3.10789000%
3/31/1999 $ 10,439 $ 10,498 4.00087000%
4/30/1999 $ 11,232 $ 10,905 3.87252000%
5/31/1999 $ 11,283 $ 10,647 -2.36136000%
6/30/1999 $ 11,596 $ 11,238 5.54978000%
7/31/1999 $ 11,263 $ 10,887 -3.12247000%
8/31/1999 $ 10,815 $ 10,833 -0.49475000%
9/30/1999 $ 10,528 $ 10,536 -2.74139000%
10/31/1999 $ 10,935 $ 11,203 6.32807000%
11/30/1999 $ 11,127 $ 11,431 2.03280000%
12/31/1999 $ 11,352 $ 12,104 5.88961000%
1/31/2000 $ 10,971 $ 11,496 -5.02424000%
2/29/2000 $ 10,511 $ 11,278 -1.89295000%
3/31/2000 $ 11,587 $ 12,382 9.78288000%
4/30/2000 $ 11,458 $ 12,009 -3.00858000%
5/31/2000 $ 11,593 $ 11,763 -2.05170000%
6/30/2000 $ 11,380 $ 12,053 2.46530000%
7/31/2000 $ 11,689 $ 11,864 -1.56340000%
8/31/2000 $ 12,270 $ 12,601 6.21144000%
9/30/2000 $ 12,246 $ 11,936 -5.27933000%
10/31/2000 $ 12,524 $ 11,886 -0.42279000%
11/30/2000 $ 12,125 $ 10,949 -7.88393000%
12/31/2000 $ 12,792 $ 11,002 0.48941000%
1/31/2001 $ 13,538 $ 11,392 3.54791000%
2/28/2001 $ 13,531 $ 10,354 -9.11817000%
3/31/2001 $ 13,178 $ 9,698 -6.33502000%
4/30/2001 $ 13,708 $ 10,451 7.77104000%
5/31/2001 $ 14,166 $ 10,521 0.66997000%
6/30/2001 $ 14,241 $ 10,265 -2.43387000%
7/31/2001 $ 14,227 $ 10,164 -0.98442000%
8/31/2001 $ 13,884 $ 9,528 -6.26016000%
9/30/2001 $ 12,657 $ 8,759 -8.07523000%
10/31/2001 $ 12,590 $ 8,926 1.90688000%
11/30/2001 $ 13,109 $ 9,610 7.67063000%
12/31/2001 $ 13,465 $ 9,694 0.87605000%
1/31/2002 $ 13,331 $ 9,553 -1.45933000%
2/28/2002 $ 13,380 $ 9,369 -1.92850000%
3/31/2002 $ 13,768 $ 9,721 3.76091000%
4/30/2002 $ 13,838 $ 9,132 -6.06279000%
5/31/2002 $ 13,838 $ 9,064 -0.73673000%
6/30/2002 $ 12,929 $ 8,419 -7.12296000%
7/31/2002 $ 12,143 $ 7,763 -7.79544000%
8/31/2002 $ 12,257 $ 7,813 0.65656000%
9/30/2002 $ 11,585 $ 6,964 -10.86793000%
10/31/2002 $ 11,749 $ 7,577 8.80158000%
11/30/2002 $ 11,985 $ 8,023 5.88591000%
12/31/2002 $ 11,876 $ 7,552 -5.87476000%
1/31/2003 $ 11,768 $ 7,354 -2.61966000%
2/28/2003 $ 11,574 $ 7,244 -1.50038000%
3/31/2003 $ 11,588 $ 7,314 0.97093000%
4/30/2003 $ 12,264 $ 7,917 8.23699000%
5/31/2003 $ 12,875 $ 8,334 5.26877000%
6/30/2003 $ 13,059 $ 8,440 1.27564000%
7/31/2003 $ 13,131 $ 8,589 1.76316000%
8/31/2003 $ 13,428 $ 8,756 1.95021000%
9/30/2003 $ 13,355 $ 8,663 -1.06195000%
10/31/2003 $ 13,848 $ 9,153 5.65700000%
11/30/2003 $ 14,275 $ 9,234 0.87983000%
12/31/2003 $ 14,894 $ 9,718 5.24445000%
1/31/2004 $ 15,003 $ 9,897 1.83551000%
2/29/2004 $ 15,387 $ 10,034 1.38995000%
3/31/2004 $ 15,344 $ 9,883 -1.50865000%
4/30/2004 $ 15,075 $ 9,728 -1.56980000%
5/31/2004 $ 15,082 $ 9,861 1.37226000%
6/30/2004 $ 15,321 $ 10,053 1.94449000%
7/31/2004 $ 15,073 $ 9,720 -3.30966000%
8/31/2004 $ 15,197 $ 9,759 0.40449000%
9/30/2004 $ 15,387 $ 9,865 1.08308000%
10/31/2004 $ 15,554 $ 10,016 1.52768000%
11/30/2004 $ 16,297 $ 10,421 4.04616000%
12/31/2004 $ 16,785 $ 10,776 3.40287000%
1/31/2005 $ 16,449 $ 10,513 -2.43748000%
2/28/2005 $ 16,934 $ 10,734 2.10440000%
3/31/2005 $ 16,792 $ 10,544 -1.77080000%
4/30/2005 $ 16,628 $ 10,344 -1.89656000%
5/31/2005 $ 16,971 $ 10,673 3.18186000%
6/30/2005 $ 17,147 $ 10,689 0.14197000%
7/31/2005 $ 17,573 $ 11,086 3.71883000%
8/31/2005 $ 17,633 $ 10,985 -0.91240000%
9/30/2005 $ 17,887 $ 11,074 0.80994000%
10/31/2005 $ 17,513 $ 10,889 -1.66708000%
11/30/2005 $ 17,939 $ 11,301 3.78221000%
12/31/2005 $ 18,348 $ 11,305 0.03481000%
1/31/2006 $ 18,788 $ 11,604 2.64778000%
2/28/2006 $ 18,906 $ 11,636 0.27133000%
3/31/2006 $ 19,472 $ 11,781 1.24475000%
4/30/2006 $ 19,590 $ 11,939 1.34278000%
5/31/2006 $ 19,260 $ 11,595 -2.87814000%
6/30/2006 $ 19,255 $ 11,611 0.13557000%
7/31/2006 $ 19,303 $ 11,683 0.61685000%
8/31/2006 $ 19,837 $ 11,961 2.37931000%
9/30/2006 $ 19,964 $ 12,269 2.57700000%
10/31/2006 $ 20,665 $ 12,669 3.25861000%
11/30/2006 $ 20,984 $ 12,909 1.90160000%
12/31/2006 $ 21,506 $ 13,091 1.40278000%
1/31/2007 $ 21,979 $ 13,289 2.20% 1.51232000%
2/28/2007 $ 21,773 $ 13,029 -0.94% -1.95588000%
3/31/2007 $ 22,171 $ 13,174 1.83% 1.11850000%
4/30/2007 $ 22,852 $ 13,758 3.07% 4.42953000%
5/31/2007 $ 23,665 $ 14,238 3.56% 3.48951000%
6/30/2007 $ 23,509 $ 14,001 -0.66% -1.66133000%
7/31/2007 $ 22,470 $ 13,567 -4.42% -3.10048000%
8/31/2007 $ 22,319 $ 13,771 -0.67% 1.49901000%
9/30/2007 $ 22,694 $ 14,286 1.68% 3.73988000%
10/31/2007 $ 23,178 $ 14,513 2.13% 1.59068000%
11/30/2007 $ 22,503 $ 13,906 -2.91% -4.18066000%
12/31/2007 $ 22,148 $ 13,810 -1.58% -0.69376000%
1/31/2008 $ 20,861 $ 12,981 -5.81% -5.99816000%
2/29/2008 $ 20,464 $ 12,560 -1.90% -3.24858000%
3/31/2008 $ 20,094 $ 12,505 -1.81% -0.43180000%
4/30/2008 $ 20,781 $ 13,115 3.42% 4.87031000%
5/31/2008 $ 21,089 $ 13,284 1.48% 1.29526000%
6/30/2008 $ 18,931 $ 12,164 -10.23% -8.43036000%
7/31/2008 $ 19,064 $ 12,062 0.70% -0.84062000%
8/31/2008 $ 19,258 $ 12,237 1.02% 1.44647000%
9/30/2008 $ 17,641 $ 11,146 -8.40% -8.91073000%
10/31/2008 $ 14,624 $ 9,274 -17.10% -16.79479000%
11/30/2008 $ 13,413 $ 8,609 -8.28% -7.17546000%
12/31/2008 $ 13,708 $ 8,700 2.20% 1.06403000%
Total Returns 37.08% -13.00%
AVERAGE ANNUAL TOTAL RETURN
CLASS C(1) 12/31/08
- ---------- --------
1-Year -39.14%
5-Year -1.91%
10-Year +3.10%
CLASS C (1/1/99 - 12/31/08)(1)
[LINE CHART]
Prepared by (HYD): Syed. Zakir
Reviewed by (HYD): Bejugama Manasa
Reviewed by (US): Jamie Grocock, Marketing Data & Analytics, x54525
Sources: (C) 2009 Thomson Reuters, (C) 2009 Morningstar
Sales Charges: Fund performance includes sales charges.
Rebalancing: N/A
Funds & Indexes Used: Mutual Shares Fund, S&P 500 Index
Notes: Sources: Morningstar EnCorr, Fundstation Performance
Report, MF Growth of 10K Report
S&P 500 TR (IA Extended)
DATE MUTUAL SHARES FUND - CLASS C S&P 500 INDEX (%Total Return)
- ---------- ---------------------------- ------------- ------------------------
1/1/1999 $ 10,000 $ 10,000
1/31/1999 $ 10,149 $ 10,418 4.18163000%
2/28/1999 $ 10,005 $ 10,094 -3.10789000%
3/31/1999 $ 10,464 $ 10,498 4.00087000%
4/30/1999 $ 11,262 $ 10,905 3.87252000%
5/31/1999 $ 11,314 $ 10,647 -2.36136000%
6/30/1999 $ 11,628 $ 11,238 5.54978000%
7/31/1999 $ 11,292 $ 10,887 -3.12247000%
8/31/1999 $ 10,847 $ 10,833 -0.49475000%
9/30/1999 $ 10,559 $ 10,536 -2.74139000%
10/31/1999 $ 10,962 $ 11,203 6.32807000%
11/30/1999 $ 11,161 $ 11,431 2.03280000%
12/31/1999 $ 11,387 $ 12,104 5.88961000%
1/31/2000 $ 11,000 $ 11,496 -5.02424000%
2/29/2000 $ 10,540 $ 11,278 -1.89295000%
3/31/2000 $ 11,623 $ 12,382 9.78288000%
4/30/2000 $ 11,494 $ 12,009 -3.00858000%
5/31/2000 $ 11,629 $ 11,763 -2.05170000%
6/30/2000 $ 11,415 $ 12,053 2.46530000%
7/31/2000 $ 11,724 $ 11,864 -1.56340000%
8/31/2000 $ 12,306 $ 12,601 6.21144000%
9/30/2000 $ 12,282 $ 11,936 -5.27933000%
10/31/2000 $ 12,560 $ 11,886 -0.42279000%
11/30/2000 $ 12,160 $ 10,949 -7.88393000%
12/31/2000 $ 12,831 $ 11,002 0.48941000%
1/31/2001 $ 13,576 $ 11,392 3.54791000%
2/28/2001 $ 13,570 $ 10,354 -9.11817000%
3/31/2001 $ 13,217 $ 9,698 -6.33502000%
4/30/2001 $ 13,746 $ 10,451 7.77104000%
5/31/2001 $ 14,211 $ 10,521 0.66997000%
6/30/2001 $ 14,288 $ 10,265 -2.43387000%
7/31/2001 $ 14,268 $ 10,164 -0.98442000%
8/31/2001 $ 13,931 $ 9,528 -6.26016000%
9/30/2001 $ 12,693 $ 8,759 -8.07523000%
10/31/2001 $ 12,632 $ 8,926 1.90688000%
11/30/2001 $ 13,144 $ 9,610 7.67063000%
12/31/2001 $ 13,506 $ 9,694 0.87605000%
1/31/2002 $ 13,373 $ 9,553 -1.45933000%
2/28/2002 $ 13,422 $ 9,369 -1.92850000%
3/31/2002 $ 13,815 $ 9,721 3.76091000%
4/30/2002 $ 13,885 $ 9,132 -6.06279000%
5/31/2002 $ 13,885 $ 9,064 -0.73673000%
6/30/2002 $ 12,969 $ 8,419 -7.12296000%
7/31/2002 $ 12,186 $ 7,763 -7.79544000%
8/31/2002 $ 12,293 $ 7,813 0.65656000%
9/30/2002 $ 11,624 $ 6,964 -10.86793000%
10/31/2002 $ 11,787 $ 7,577 8.80158000%
11/30/2002 $ 12,022 $ 8,023 5.88591000%
12/31/2002 $ 11,915 $ 7,552 -5.87476000%
1/31/2003 $ 11,807 $ 7,354 -2.61966000%
2/28/2003 $ 11,607 $ 7,244 -1.50038000%
3/31/2003 $ 11,629 $ 7,314 0.97093000%
4/30/2003 $ 12,300 $ 7,917 8.23699000%
5/31/2003 $ 12,922 $ 8,334 5.26877000%
6/30/2003 $ 13,103 $ 8,440 1.27564000%
7/31/2003 $ 13,168 $ 8,589 1.76316000%
8/31/2003 $ 13,470 $ 8,756 1.95021000%
9/30/2003 $ 13,398 $ 8,663 -1.06195000%
10/31/2003 $ 13,887 $ 9,153 5.65700000%
11/30/2003 $ 14,318 $ 9,234 0.87983000%
12/31/2003 $ 14,937 $ 9,718 5.24445000%
1/31/2004 $ 15,045 $ 9,897 1.83551000%
2/29/2004 $ 15,434 $ 10,034 1.38995000%
3/31/2004 $ 15,398 $ 9,883 -1.50865000%
4/30/2004 $ 15,125 $ 9,728 -1.56980000%
5/31/2004 $ 15,132 $ 9,861 1.37226000%
6/30/2004 $ 15,375 $ 10,053 1.94449000%
7/31/2004 $ 15,122 $ 9,720 -3.30966000%
8/31/2004 $ 15,245 $ 9,759 0.40449000%
9/30/2004 $ 15,440 $ 9,865 1.08308000%
10/31/2004 $ 15,607 $ 10,016 1.52768000%
11/30/2004 $ 16,351 $ 10,421 4.04616000%
12/31/2004 $ 16,845 $ 10,776 3.40287000%
1/31/2005 $ 16,505 $ 10,513 -2.43748000%
2/28/2005 $ 16,993 $ 10,734 2.10440000%
3/31/2005 $ 16,853 $ 10,544 -1.77080000%
4/30/2005 $ 16,682 $ 10,344 -1.89656000%
5/31/2005 $ 17,030 $ 10,673 3.18186000%
6/30/2005 $ 17,205 $ 10,689 0.14197000%
7/31/2005 $ 17,628 $ 11,086 3.71883000%
8/31/2005 $ 17,694 $ 10,985 -0.91240000%
9/30/2005 $ 17,947 $ 11,074 0.80994000%
10/31/2005 $ 17,568 $ 10,889 -1.66708000%
11/30/2005 $ 17,998 $ 11,301 3.78221000%
12/31/2005 $ 18,407 $ 11,305 0.03481000%
1/31/2006 $ 18,854 $ 11,604 2.64778000%
2/28/2006 $ 18,964 $ 11,636 0.27133000%
3/31/2006 $ 19,537 $ 11,781 1.24475000%
4/30/2006 $ 19,662 $ 11,939 1.34278000%
5/31/2006 $ 19,325 $ 11,595 -2.87814000%
6/30/2006 $ 19,316 $ 11,611 0.13557000%
7/31/2006 $ 19,364 $ 11,683 0.61685000%
8/31/2006 $ 19,901 $ 11,961 2.37931000%
9/30/2006 $ 20,028 $ 12,269 2.57700000%
10/31/2006 $ 20,731 $ 12,669 3.25861000%
11/30/2006 $ 21,056 $ 12,909 1.90160000%
12/31/2006 $ 21,570 $ 13,091 1.40278000%
1/31/2007 $ 22,042 $ 13,289 1.51232000%
2/28/2007 $ 21,814 $ 13,029 -1.95588000%
3/31/2007 $ 22,210 $ 13,174 1.11850000%
4/30/2007 $ 22,875 $ 13,758 4.42953000%
5/31/2007 $ 23,674 $ 14,238 3.48951000%
6/30/2007 $ 23,505 $ 14,001 -1.66133000%
7/31/2007 $ 22,451 $ 13,567 -3.10048000%
8/31/2007 $ 22,290 $ 13,771 1.49901000%
9/30/2007 $ 22,653 $ 14,286 3.73988000%
10/31/2007 $ 23,117 $ 14,513 1.59068000%
11/30/2007 $ 22,434 $ 13,906 -4.18066000%
12/31/2007 $ 22,067 $ 13,810 -0.69376000%
1/31/2008 $ 20,780 $ 12,981 -5.99816000%
2/29/2008 $ 20,363 $ 12,560 -3.24858000%
3/31/2008 $ 19,990 $ 12,505 -0.43180000%
4/30/2008 $ 20,656 $ 13,115 4.87031000%
5/31/2008 $ 20,957 $ 13,284 1.29526000%
6/30/2008 $ 18,801 $ 12,164 -8.43036000%
7/31/2008 $ 18,917 $ 12,062 -0.84062000%
8/31/2008 $ 19,094 $ 12,237 1.44647000%
9/30/2008 $ 17,478 $ 11,146 -8.91073000%
10/31/2008 $ 14,484 $ 9,274 -16.79479000%
11/30/2008 $ 13,274 $ 8,609 -7.17546000%
12/31/2008 $ 13,564 $ 8,700 1.06403000%
Total Returns 35.64% -13.00%
Annual Report | 15
Performance Summary (continued)
AVERAGE ANNUAL TOTAL RETURN
CLASS R 12/31/08
- --------------------------- --------
1-Year -38.19%
5-Year -1.42%
Since Inception (1/1/02) +0.59%
CLASS R (1/1/02 - 12/31/08)
[LINE CHART]
Prepared by (HYD): Syed. Zakir
Reviewed by (HYD): Bejugama Manasa
Reviewed by (US): Jamie Grocock, Marketing Data & Analytics, x54525
Sources: (C) 2009 Thomson Reuters, (C) 2009 Morningstar
Sales Charges: Fund performance includes sales charges.
Rebalancing: N/A
Funds & Indexes Used: Mutual Shares Fund, S&P 500 Index
Notes: Sources: Morningstar EnCorr, Fundstation Performance
Report, MF Growth of 10K Report
Mutual Shares S&P 500 TR (IA Extended)
DATE MUTUAL SHARES FUND - CLASS R S&P 500 INDEX Fund - Class R (%Total Return)
- ---------- ---------------------------- ------------- -------------- -----------------------
1/1/2002 $ 10,000 $10,000
1/31/2002 $ 9,917 $ 9,854 -0.83000000% -1.45933000%
2/28/2002 $ 9,958 $ 9,664 0.41514783% -1.92850000%
3/31/2002 $ 10,258 $10,027 3.01502471% 3.76091000%
4/30/2002 $ 10,315 $ 9,420 0.54815975% -6.06279000%
5/31/2002 $ 10,320 $ 9,350 0.04867601% -0.73673000%
6/30/2002 $ 9,643 $ 8,684 -6.55833414% -7.12296000%
7/31/2002 $ 9,065 $ 8,007 -5.98771217% -7.79544000%
8/31/2002 $ 9,150 $ 8,060 0.93043864% 0.65656000%
9/30/2002 $ 8,657 $ 7,184 -5.38849868% -10.86793000%
10/31/2002 $ 8,782 $ 7,816 1.44994780% 8.80158000%
11/30/2002 $ 8,956 $ 8,276 1.97804711% 5.88591000%
12/31/2002 $ 8,880 $ 7,790 -0.85211347% -5.87476000%
1/31/2003 $ 8,805 $ 7,586 -0.83682008% -2.61966000%
2/28/2003 $ 8,662 $ 7,472 -1.63074467% -1.50038000%
3/31/2003 $ 8,678 $ 7,545 0.18548574% 0.97093000%
4/30/2003 $ 9,182 $ 8,166 5.80884055% 8.23699000%
5/31/2003 $ 9,648 $ 8,596 5.07436570% 5.26877000%
6/30/2003 $ 9,792 $ 8,706 1.49875104% 1.27564000%
7/31/2003 $ 9,846 $ 8,859 0.54347826% 1.76316000%
8/31/2003 $ 10,076 $ 9,032 2.33554309% 1.95021000%
9/30/2003 $ 10,022 $ 8,936 -0.52820411% -1.06195000%
10/31/2003 $ 10,391 $ 9,442 3.67698627% 5.65700000%
11/30/2003 $ 10,717 $ 9,525 3.14070352% 0.87983000%
12/31/2003 $ 11,190 $10,024 4.41300478% 5.24445000%
1/31/2004 $ 11,276 $10,208 0.76274228% 1.83551000%
2/29/2004 $ 11,566 $10,350 2.57369312% 1.38995000%
3/31/2004 $ 11,545 $10,194 -0.18232332% -1.50865000%
4/30/2004 $ 11,351 $10,034 -1.67869879% -1.56980000%
5/31/2004 $ 11,362 $10,172 0.09731069% 1.37226000%
6/30/2004 $ 11,544 $10,370 1.59964649% 1.94449000%
7/31/2004 $ 11,360 $10,026 -1.59185804% -3.30966000%
8/31/2004 $ 11,457 $10,067 0.85742067% 0.40449000%
9/30/2004 $ 11,608 $10,176 1.31463628% 1.08308000%
10/31/2004 $ 11,738 $10,332 1.11591696% 1.52768000%
11/30/2004 $ 12,304 $10,750 4.82504919% 4.04616000%
12/31/2004 $ 12,680 $11,115 3.06047499% 3.40287000%
1/31/2005 $ 12,431 $10,844 -1.96388977% -2.43748000%
2/28/2005 $ 12,803 $11,073 2.98869144% 2.10440000%
3/31/2005 $ 12,703 $10,877 -0.78431373% -1.77080000%
4/30/2005 $ 12,581 $10,670 -0.95652174% -1.89656000%
5/31/2005 $ 12,847 $11,010 2.11509298% 3.18186000%
6/30/2005 $ 12,984 $11,025 1.06299828% 0.14197000%
7/31/2005 $ 13,312 $11,435 2.52900232% 3.71883000%
8/31/2005 $ 13,362 $11,331 0.37715924% -0.91240000%
9/30/2005 $ 13,562 $11,423 1.49545352% 0.80994000%
10/31/2005 $ 13,284 $11,232 -2.05094032% -1.66708000%
11/30/2005 $ 13,618 $11,657 2.51719707% 3.78221000%
12/31/2005 $ 13,934 $11,661 2.31529273% 0.03481000%
1/31/2006 $ 14,275 $11,970 2.45027385% 2.64778000%
2/28/2006 $ 14,362 $12,003 0.61198649% 0.27133000%
3/31/2006 $ 14,803 $12,152 3.06928616% 1.24475000%
4/30/2006 $ 14,898 $12,315 0.63763397% 1.34278000%
5/31/2006 $ 14,651 $11,961 -1.65812888% -2.87814000%
6/30/2006 $ 14,649 $11,977 -0.01370802% 0.13557000%
7/31/2006 $ 14,690 $12,051 0.28105292% 0.61685000%
8/31/2006 $ 15,106 $12,338 2.83683095% 2.37931000%
9/30/2006 $ 15,214 $12,655 0.71124701% 2.57700000%
10/31/2006 $ 15,750 $13,068 3.52451983% 3.25861000%
11/30/2006 $ 16,000 $13,316 1.58750398% 1.90160000%
12/31/2006 $ 16,405 $13,503 2.52918288% 1.40278000%
1/31/2007 $ 16,767 $13,707 2.20970802% 1.51232000%
2/28/2007 $ 16,603 $13,439 -0.98215355% -1.95588000%
3/31/2007 $ 16,908 $13,590 1.83863554% 1.11850000%
4/30/2007 $ 17,423 $14,192 3.04668013% 4.42953000%
5/31/2007 $ 18,041 $14,687 3.54446430% 3.48951000%
6/30/2007 $ 17,920 $14,443 -0.66792831% -1.66133000%
7/31/2007 $ 17,122 $13,995 -4.45477978% -3.10048000%
8/31/2007 $ 17,007 $14,205 -0.66858249% 1.49901000%
9/30/2007 $ 17,288 $14,736 1.65318533% 3.73988000%
10/31/2007 $ 17,652 $14,970 2.10257304% 1.59068000%
11/30/2007 $ 17,135 $14,345 -2.92963195% -4.18066000%
12/31/2007 $ 16,860 $14,245 -1.60571964% -0.69376000%
1/31/2008 $ 15,882 $13,391 -5.80107207% -5.99816000%
2/29/2008 $ 15,578 $12,956 -1.90945878% -3.24858000%
3/31/2008 $ 15,295 $12,900 -1.81771303% -0.43180000%
4/30/2008 $ 15,814 $13,528 3.39417017% 4.87031000%
5/31/2008 $ 16,043 $13,703 1.44771097% 1.29526000%
6/30/2008 $ 14,399 $12,548 -10.25223759% -8.43036000%
7/31/2008 $ 14,499 $12,442 0.69739870% -0.84062000%
8/31/2008 $ 14,641 $12,622 0.97652192% 1.44647000%
9/30/2008 $ 13,406 $11,498 -8.42935528% -8.91073000%
10/31/2008 $ 11,117 $ 9,567 -17.07737248% -16.79479000%
11/30/2008 $ 10,190 $ 8,880 -8.33709692% -7.17546000%
12/31/2008 $ 10,420 $ 8,975 2.25660229% 1.06403000%
Total Returns 4.20% -10.25%
ENDNOTES
VALUE SECURITIES MAY NOT INCREASE IN PRICE AS ANTICIPATED OR MAY DECLINE FURTHER
IN VALUE. THE FUND'S INVESTMENTS IN FOREIGN SECURITIES INVOLVE SPECIAL RISKS.
FOREIGN SECURITIES RISKS INCLUDE CURRENCY FLUCTUATIONS, AND ECONOMIC AND
POLITICAL UNCERTAINTIES. THE FUND MAY ALSO INVEST IN COMPANIES ENGAGED IN
MERGERS, REORGANIZATIONS OR LIQUIDATIONS, WHICH INVOLVE SPECIAL RISKS AS PENDING
DEALS MAY NOT BE COMPLETED ON TIME OR ON FAVORABLE TERMS, AS WELL AS LOWER-RATED
BONDS, WHICH ENTAIL HIGHER CREDIT RISK. THE FUND'S PROSPECTUS ALSO INCLUDES A
DESCRIPTION OF THE MAIN INVESTMENT RISKS.
CLASS Z: Shares are available to certain eligible investors as described in the
prospectus.
CLASS 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.
1. Past expense reductions by the Fund's manager increased the Fund's total
returns. If the manager had not taken this action, the Fund's total returns
would have been lower.
2. Cumulative total return represents the change in value of an investment over
the periods indicated.
3. Average annual total return represents the average annual change in value of
an investment over the periods indicated.
4. These figures represent the value of a hypothetical $10,000 investment in the
Fund over the periods indicated.
5. Figures are as stated in the Fund's prospectus current as of the date of this
report.
6. Source: (C) 2009 Morningstar. The S&P 500 consists of 500 stocks chosen for
market size, liquidity and industry group representation. Each stock's weight in
the index is proportionate to its market value. The S&P 500 is one of the most
widely used benchmarks of U.S. equity performance.
16 | Annual 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
redemption fees; 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.
Annual Report | 17
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 or
redemption fees. 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 Z VALUE 7/1/08 VALUE 12/31/08 PERIOD* 7/1/08 - 12/31/08
Actual $ 1,000 $ 725.30 $ 3.56
Hypothetical (5% return before expenses) $ 1,000 $ 1,021.01 $ 4.17
CLASS A
Actual $ 1,000 $ 724.00 $ 4.81
Hypothetical (5% return before expenses) $ 1,000 $ 1,019.56 $ 5.63
CLASS B
Actual $ 1,000 $ 721.40 $ 7.88
Hypothetical (5% return before expenses) $ 1,000 $ 1,015.99 $ 9.22
CLASS C
Actual $ 1,000 $ 721.50 $ 7.79
Hypothetical (5% return before expenses) $ 1,000 $ 1,016.09 $ 9.12
CLASS R
Actual $ 1,000 $ 723.70 $ 5.72
Hypothetical (5% return before expenses) $ 1,000 $ 1,018.50 $ 6.70
* Expenses are calculated using the most recent expense ratio, annualized
for each class (Z: 0.82%; A: 1.11%; B: 1.82%; C: 1.80%; and R: 1.32%)
multiplied by the average account value over the period, multiplied by
184/366 to reflect the one-half year period.
18 | Annual Report
Mutual Shares Fund
FINANCIAL HIGHLIGHTS
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------
CLASS Z 2008 2007 2006 2005 2004
----------- ------------ ------------ ----------- -----------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year .......... $ 25.33 $ 26.08 $ 23.95 $ 23.05 $ 20.99
----------- ------------ ------------ ----------- -----------
Income from investment operations (a):
Net investment income (b) ................ 0.45 0.70 0.42 0.47 0.35
Net realized and unrealized gains
(losses) ................................. (9.99) 0.17 3.90 1.92 2.52
----------- ------------ ------------ ----------- -----------
Total from investment operations ............ (9.54) 0.87 4.32 2.39 2.87
----------- ------------ ------------ ----------- -----------
Less distributions from:
Net investment income .................... (0.27) (0.75) (0.52) (0.29) (0.39)
Net realized gains ....................... (0.20) (0.87) (1.67) (1.20) (0.42)
----------- ------------ ------------ ----------- -----------
Total distributions ......................... (0.47) (1.62) (2.19) (1.49) (0.81)
----------- ------------ ------------ ----------- -----------
Redemption fees (c,d)........................ -- -- -- -- --
----------- ------------ ------------ ----------- -----------
Net asset value, end of year ................ $ 15.32 $ 25.33 $ 26.08 $ 23.95 $ 23.05
=========== ============ ============ =========== ===========
Total return ................................ (37.92)% 3.30% 18.37% 10.39% 13.89%
RATIOS TO AVERAGE NET ASSETS
Expenses (e,f) .............................. 0.79% 0.75% 0.84% 0.81% 0.81%
Expenses - excluding dividend expense on
securities sold short(e) .................... 0.78% 0.74% 0.76% 0.76% 0.80%
Net investment income ....................... 2.14% 2.57% 1.63% 1.99% 1.62%
SUPPLEMENTAL DATA
Net assets, end of year (000's) ............. $ 7,236,112 $ 13,262,561 $ 11,577,506 $ 8,951,080 $ 7,240,641
Portfolio turnover rate ..................... 37.97% 40.57% 33.40% 21.57% 33.22%
(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) Amount rounds to less than $0.01 per share.
(d) Effective September 1, 2008, the redemption fee was eliminated.
(e) Benefit of expense reduction rounds to less than 0.01%.
(f) Includes dividend expense on securities sold short which varies from
period to period. See below for expense ratios that reflect only operating
expenses.
Annual Report | The accompanying notes are an
integral part of these financial statements. | 19
Mutual Shares Fund
FINANCIAL HIGHLIGHTS (continued)
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------
CLASS A 2008 2007 2006 2005 2004
----------- ----------- ----------- ---------- -----------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............. $ 25.14 $ 25.90 $ 23.82 $ 22.94 $ 20.90
----------- ----------- ----------- ---------- -----------
Income from investment operations (a):
Net investment income (b).................... 0.39 0.61 0.32 0.39 0.27
Net realized and unrealized gains (losses) .. (9.90) 0.17 3.88 1.91 2.51
----------- ----------- ----------- ---------- -----------
Total from investment operations ............... (9.51) 0.78 4.20 2.30 2.78
----------- ----------- ----------- ---------- -----------
Less distributions from:
Net investment income ....................... (0.21) (0.67) (0.45) (0.22) (0.32)
Net realized gains .......................... (0.20) (0.87) (1.67) (1.20) (0.42)
----------- ----------- ----------- ---------- -----------
Total distributions ............................ (0.41) (1.54) (2.12) (1.42) (0.74)
----------- ----------- ----------- ---------- -----------
Redemption fees (c,d) .......................... -- -- -- -- --
----------- ----------- ----------- ---------- -----------
Net asset value, end of year ................... $ 15.22 $ 25.14 $ 25.90 $ 23.82 $ 22.94
=========== =========== =========== ========== ===========
Total return (e) ............................... (38.10)% 2.97% 17.98% 9.98% 13.50%
RATIOS TO AVERAGE NET ASSETS
Expenses (f,g) ................................. 1.08% 1.07% 1.18% 1.16% 1.16%
Expenses - excluding dividend expense on
securities sold short (f) ...................... 1.07% 1.06% 1.10% 1.11% 1.15%
Net investment income .......................... 1.85% 2.25% 1.29% 1.64% 1.27%
SUPPLEMENTAL DATA
Net assets, end of year (000's) ................ $ 4,624,696 $ 8,469,264 $ 6,761,779 $4,211,238 $ 2,940,029
Portfolio turnover rate ........................ 37.97% 40.57% 33.40% 21.57% 33.22%
(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) Amount rounds to less than $0.01 per share.
(d) Effective September 1, 2008, the redemption fee was eliminated.
(e) Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
(f) Benefit of expense reduction rounds to less than 0.01%.
(g) Includes dividend expense on securities sold short which varies from
period to period. See below for expense ratios that reflect only operating
expenses.
20 | The accompanying notes are an
integral part of these financial statements | Annual Report
Mutual Shares Fund
FINANCIAL HIGHLIGHTS (continued)
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------
CLASS B 2008 2007 2006 2005 2004
--------- --------- --------- --------- ---------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ................... $ 24.60 $ 25.35 $ 23.35 $ 22.50 $ 20.54
--------- --------- --------- --------- ---------
Income from investment operations (a):
Net investment income (b) ......................... 0.23 0.41 0.16 0.23 0.13
Net realized and unrealized gains (losses) ........ (9.65) 0.18 3.78 1.88 2.44
--------- --------- --------- --------- ---------
Total from investment operations ..................... (9.42) 0.59 3.94 2.11 2.57
--------- --------- --------- --------- ---------
Less distributions from:
Net investment income ............................. (0.04) (0.47) (0.27) (0.06) (0.19)
Net realized gains ................................ (0.20) (0.87) (1.67) (1.20) (0.42)
--------- --------- --------- --------- ---------
Total distributions .................................. (0.24) (1.34) (1.94) (1.26) (0.61)
--------- --------- --------- --------- ---------
Redemption fees (c,d) ................................ -- -- -- -- --
--------- --------- --------- --------- ---------
Net asset value, end of year ......................... $ 14.94 $ 24.60 $ 25.35 $ 23.35 $ 22.50
========= ========= ========= ========= =========
Total returne ........................................ (38.54)% 2.25% 17.21% 9.31% 12.70%
RATIOS TO AVERAGE NET ASSETS
Expenses (f,g) ....................................... 1.79% 1.75% 1.84% 1.81% 1.81%
Expenses - excluding dividend expense on securities
sold short (f) ....................................... 1.78% 1.74% 1.76% 1.76% 1.80%
Net investment income ................................ 1.14% 1.57% 0.63% 0.99% 0.62%
SUPPLEMENTAL DATA
Net assets, end of year (000's) ...................... $ 272,750 $ 586,289 $ 659,186 $ 612,007 $ 588,401
Portfolio turnover rate .............................. 37.97% 40.57% 33.40% 21.57% 33.22%
(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) Amount rounds to less than $0.01 per share.
(d) Effective September 1, 2008, the redemption fee was eliminated.
(e) Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
(f) Benefit of expense reduction rounds to less than 0.01%.
(g) Includes dividend expense on securities sold short which varies from
period to period. See below for expense ratios that reflect only operating
expenses.
Annual Report | The accompanying notes are an
integral part of these financial statements | 21
Mutual Shares Fund
FINANCIAL HIGHLIGHTS (continued)
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------
CLASS C 2008 2007 2006 2005 2004
- --------------------------------------------------- ------------ ------------ ------------ ------------ ------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ................ $ 24.86 $ 25.63 $ 23.48 $ 22.76 $ 20.75
----------- ----------- ----------- ----------- -----------
Income from investment operations (a):
Net investment income (b) .................... 0.24 0.42 0.16 0.23 0.13
Net realized and unrealized gains (losses) ... (9.75) 0.17 3.82 1.89 2.49
----------- ----------- ----------- ----------- -----------
Total from investment operations .................. (9.51) 0.59 3.98 2.12 2.62
----------- ----------- ----------- ----------- -----------
Less distributions from:
Net investment income ........................ (0.05) (0.49) (0.16) (0.20) (0.19)
Net realized gains ........................... (0.20) (0.87) (1.67) (1.20) (0.42)
----------- ----------- ----------- ----------- -----------
Total distributions ............................... (0.25) (1.36) (1.83) (1.40) (0.61)
----------- ----------- ----------- ----------- -----------
Redemption fees (c,d) ............................. -- -- -- -- --
----------- ----------- ----------- ----------- -----------
Net asset value, end of year ...................... $ 15.10 $ 24.86 $ 25.63 $ 23.48 $ 22.76
=========== =========== =========== =========== ===========
Total return (e) .................................. (38.53)% 2.30% 17.18% 9.27% 12.77%
RATIOS TO AVERAGE NET ASSETS
Expenses (f,g) .................................... 1.77% 1.75% 1.84% 1.81% 1.81%
Expenses - excluding dividend expense on securities
sold short (f) ............................... 1.76% 1.74% 1.76% 1.76% 1.80%
Net investment income ............................. 1.16% 1.57% 0.63% 0.99% 0.62%
SUPPLEMENTAL DATA
Net assets, end of year (000's) ................... $ 1,296,171 $ 2,617,083 $ 2,387,517 $ 1,834,009 $ 1,551,111
Portfolio turnover rate ........................... 37.97% 40.57% 33.40% 21.57% 33.22%
</Table>
- ----------
(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) Amount rounds to less than $0.01 per share.
(d) Effective September 1, 2008, the redemption fee was eliminated.
(e) Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
(f) Benefit of expense reduction rounds to less than 0.01%.
(g) Includes dividend expense on securities sold short which varies from
period to period. See below for expense ratios that reflect only operating
expenses.
22 | The accompanying notes are an integral
part of these financial statements. | Annual Report
Mutual Shares Fund
FINANCIAL HIGHLIGHTS (continued)
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------
CLASS R 2008 2007 2006 2005 2004
- --------------------------------------------------- ------------ ------------ ------------ ------------ ------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............... $ 25.00 $ 25.77 $ 23.72 $ 22.85 $ 20.83
---------- ----------- ----------- ----------- -----------
Income from investment operations (a):
Net investment income (b) ................... 0.34 0.55 0.28 0.35 0.24
Net realized and unrealized gains (losses)... (9.83) 0.18 3.86 1.91 2.50
---------- ----------- ----------- ----------- -----------
Total from investment operations ................. (9.49) 0.73 4.14 2.26 2.74
---------- ----------- ----------- ----------- -----------
Less distributions from:
Net investment income ....................... (0.16) (0.63) (0.42) (0.19) (0.30)
Net realized gains .......................... (0.20) (0.87) (1.67) (1.20) (0.42)
---------- ----------- ----------- ----------- -----------
Total distributions .............................. (0.36) (1.50) (2.09) (1.39) (0.72)
---------- ----------- ----------- ----------- -----------
Redemption fees (c,d) ............................ -- -- -- -- --
---------- ----------- ----------- ----------- -----------
Net asset value, end of year ..................... $ 15.15 $ 25.00 $ 25.77 $ 23.72 $ 22.85
========== =========== =========== =========== ===========
Total return (e) ................................. (38.19)% 2.77% 17.73% 9.88% 13.32%
RATIOS TO AVERAGE NET ASSETS
Expenses (f,g) ................................... 1.29% 1.25% 1.34% 1.31% 1.31%
Expenses - excluding dividend expense
on securities sold short (f) ................... 1.28% 1.24% 1.26% 1.26% 1.30%
Net investment income ............................ 1.64% 2.07% 1.13% 1.49% 1.12%
SUPPLEMENTAL DATA
Net assets, end of year (000's) .................. $ 173,496 $ 297,777 $ 188,646 $ 109,305 $ 74,763
Portfolio turnover rate .......................... 37.97% 40.57% 33.40% 21.57% 33.22%
</Table>
- ----------
(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) Amount rounds to less than $0.01 per share.
(d) Effective September 1, 2008, the redemption fee was eliminated.
(e) Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
(f) Benefit of expense reduction rounds to less than 0.01%.
(g) Includes dividend expense on securities sold short which varies from
period to period. See below for expense ratios that reflect only operating
expenses.
Annual Report | The accompanying notes are an
integral part of these financial statements. | 23
Mutual Shares Fund
STATEMENT OF INVESTMENTS, DECEMBER 31, 2008
<Table>
<Caption>
SHARES/WARRANTS/
COUNTRY CONTRACTS VALUE
------------- ----------- ------------
COMMON STOCKS AND OTHER EQUITY INTERESTS 80.5%
AEROSPACE & DEFENSE 1.0%
(a) GenCorp Inc ............................................ United States 2,073,770 $ 7,631,474
United Technologies Corp. .............................. United States 2,398,370 128,552,632
------------
136,184,106
------------
AIR FREIGHT & LOGISTICS 1.2%
Deutsche Post AG ....................................... Germany 7,318,811 120,811,115
TNT NV ................................................. Netherlands 2,200,935 42,347,328
------------
163,158,443
------------
AIRLINES 0.4%
(a) ACE Aviation Holdings Inc., A .......................... Canada 2,497,781 13,856,034
(a) Delta Air Lines Inc .................................... United States 3,221,126 36,914,104
(a,b) Northwest Airlines Corp., Contingent Distribution ...... United States 111,348,000 70,149
------------
50,840,287
------------
AUTO COMPONENTS 0.2%
(a,b,c) Collins & Aikman Products Co., Contingent Distribution . United States 3,845,673 38,457
(a) Dana Holding Corp. ..................................... United States 1,925,188 1,424,639
(a,b) Dana Holding Corp., Contingent Distribution ............ United States 45,477,000 14,212
(a) Goodyear Tire & Rubber Co .............................. United States 4,294,179 25,636,249
(a) Lear Corp .............................................. United States 2,563,001 3,613,830
------------
30,727,387
------------
AUTOMOBILES 0.7%
Daimler AG ............................................. Germany 1,413,460 52,178,046
Harley-Davidson Inc .................................... United States 1,372,853 23,297,315
(a,d,e) IACNA Investor LLC ..................................... United States 678,719 6,787
(a,d,e,f) International Automotive Components Group Brazil LLC ... Brazil 7,234,813 5,756,165
(a,d,e,f) International Automotive Components Group Japan LLC .... Japan 1,104,272 1,193,429
(a,d,e,f) International Automotive Components Group LLC .......... Luxembourg 25,796,752 4,388,028
(a,d,e,f) International Automotive Components Group NA LLC, A .... United States 19,434,979 3,164,015
------------
89,983,785
------------
BEVERAGES 2.6%
Brown-Forman Corp., A .................................. United States 125,460 6,350,785
Brown-Forman Corp., B .................................. United States 788,910 40,620,976
Carlsberg AS, B ........................................ Denmark 984,186 31,663,539
Coca-Cola Enterprises Inc .............................. United States 3,071,914 36,955,125
(a) Dr Pepper Snapple Group Inc ............................ United States 5,639,999 91,649,984
Pernod Ricard SA ....................................... France 2,062,832 152,789,743
------------
360,030,152
------------
BIOTECHNOLOGY 0.8%
(a) Genentech Inc .......................................... United States 1,249,915 103,630,453
------------
BUILDING PRODUCTS 0.5%
Armstrong World Industries Inc. ........................ United States 410,714 8,879,636
(a) Owens Corning Inc ...................................... United States 3,320,705 57,448,197
------------
66,327,833
------------
</Table>
24 | Annual Report
Mutual Shares Fund
STATEMENT OF INVESTMENTS, DECEMBER 31, 2008 (continued)
<Table>
<Caption>
SHARES/WARRANTS/
COUNTRY CONTRACTS VALUE
------------- ----------- ------------
COMMON STOCKS AND OTHER EQUITY INTERESTS (CONTINUED)
CAPITAL MARKETS 0.3%
The Goldman Sachs Group Inc. ....................... United States 555,910 $ 46,913,245
------------
CHEMICALS 1.4%
(a,b,c) Dow Corning Corp., Contingent Distribution ......... United States 21,830,547 3,157,637
Koninklijke DSM NV ................................. Netherlands 1,813,228 46,461,879
Linde AG ........................................... Germany 1,730,358 144,810,644
------------
194,430,160
------------
COMMERCIAL BANKS 1.6%
Danske Bank AS ..................................... Denmark 2,506,224 24,483,580
(a,d,e) Elephant Capital Holdings Ltd. ..................... Japan 64,834 --
Fifth Third Bancorp ................................ United States 4,153,490 34,307,827
(a,e) Guaranty Bancorp ................................... United States 5,731,834 11,463,668
Intesa Sanpaolo SpA ................................ Italy 15,273,862 54,194,508
(a,d) NCB Warrant Holdings Ltd., A ....................... Japan 301,530 --
U.S. Bancorp ....................................... United States 3,774,279 94,394,719
------------
218,844,302
------------
COMMERCIAL SERVICES & SUPPLIES 0.0%(g)
(a) Comdisco Holding Co. Inc. .......................... United States 2,122 16,552
(a,b) Comdisco Holding Co. Inc., Contingent Distribution . United States 86,205,000 --
------------
16,552
------------
COMMUNICATIONS EQUIPMENT 1.0%
Motorola Inc. ...................................... United States 18,235,530 80,783,398
Telefonaktiebolaget LM Ericsson, B ................. Sweden 7,247,347 54,501,088
Telefonaktiebolaget LM Ericsson, B, ADR ............ Sweden 327,200 2,555,431
------------
137,839,917
------------
COMPUTERS & PERIPHERALS 1.3%
(a,d,e) DecisionOne Corp. .................................. United States 1,879,100 --
(a,d,e) DecisionOne Corp., wts., 6/08/17 ................... United States 1,031,766 --
(a) Dell Inc. .......................................... United States 13,795,240 141,263,258
Diebold Inc. ....................................... United States 1,252,148 35,172,837
------------
176,436,095
------------
CONSUMER FINANCE 0.3%
(a,d) Cerberus CG Investor I LLC ......................... United States 56,116,385 11,223,277
(a,d) Cerberus CG Investor II LLC ........................ United States 56,116,385 11,223,277
(a,d) Cerberus CG Investor III LLC ....................... United States 28,058,192 5,611,638
(a,d) Cerberus FIM Investors Holdco LLC .................. United States 53,207,750 11,269,282
------------
39,327,474
------------
CONTAINERS & PACKAGING 0.1%
Temple-Inland Inc. ................................. United States 4,053,220 19,455,456
------------
DIVERSIFIED CONSUMER SERVICES 0.2%
Hillenbrand Inc. ................................... United States 1,462,406 24,392,932
------------
</Table>
Annual Report | 25
Mutual Shares Fund
STATEMENT OF INVESTMENTS, DECEMBER 31, 2008 (continued)
<Table>
<Caption>
SHARES/WARRANTS/
COUNTRY CONTRACTS VALUE
-------------- ----------- ------------
COMMON STOCKS AND OTHER EQUITY INTERESTS (CONTINUED)
DIVERSIFIED FINANCIAL SERVICES 1.2%
CIT Group Inc. ........................................................... United States 10,693,435 $ 48,548,195
(a,d,e) GLCP Harrah's Investment LP .............................................. United States 22,185,100 6,655,530
JPMorgan Chase & Co. ..................................................... United States 3,390,360 106,898,051
(a,b) Marconi Corp., Contingent Distribution ................................... United Kingdom 77,739,439 --
------------
162,101,776
------------
DIVERSIFIED TELECOMMUNICATION SERVICES 3.4%
(a,d,e,f) AboveNet Inc. ............................................................ United States 842,420 42,121,000
(a,d,e,f) AboveNet Inc., stock grant, grant price $20.95, expiration date 9/09/13 .. United States 1,065 2,396
(a,d,e,f) AboveNet Inc., wts., 9/08/10 ............................................. United States 34,449 137,796
(a,b,c) Global Crossing Holdings Ltd., Contingent Distribution ................... United States 105,649,309 --
Koninklijke (Royal) KPN NV ............................................... Netherlands 7,497,726 108,824,652
Qwest Communications International Inc. .................................. United States 55,984,849 203,784,850
Telefonica SA ............................................................ Spain 5,098,560 112,999,669
------------
467,870,363
------------
ELECTRIC UTILITIES 2.9%
E.ON AG .................................................................. Germany 5,251,033 205,737,399
Entergy Corp. ............................................................ United States 821,510 68,292,126
Exelon Corp. ............................................................. United States 2,046,010 113,778,616
------------
387,808,141
------------
ELECTRONIC EQUIPMENT, INSTRUMENTS & COMPONENT 0.6%
Tyco Electronics Ltd. .................................................... United States 5,025,352 81,460,956
------------
ENERGY EQUIPMENT & SERVICES 1.4%
Baker Hughes Inc. ........................................................ United States 1,510,260 48,434,038
(a) Exterran Holding Inc. .................................................... United States 2,387,650 50,856,945
(a) Pride International Inc. ................................................. United States 1,850,030 29,563,479
(a) Transocean Ltd. .......................................................... United States 1,298,502 61,354,220
------------
190,208,682
------------
FOOD & STAPLES RETAILING 3.8%
Carrefour SA ............................................................. France 3,128,369 120,383,446
CVS Caremark Corp. ....................................................... United States 9,079,919 260,956,872
Kroger Co. ............................................................... United States 5,342,013 141,082,563
------------
522,422,881
------------
FOOD PRODUCTS 4.6%
Cadbury PLC .............................................................. United Kingdom 12,897,968 114,064,857
Groupe Danone ............................................................ France 1,342,702 81,070,461
Kraft Foods Inc., A ...................................................... United States 6,589,492 176,927,860
Nestle SA ................................................................ Switzerland 6,531,700 254,442,101
------------
626,505,279
------------
HEALTH CARE PROVIDERS & SERVICES 1.3%
(a) Community Health Systems Inc. ............................................ United States 4,806,000 70,071,480
(a,d,e) Kindred Healthcare Inc. .................................................. United States 2,883,197 35,662,264
Quest Diagnostics Inc. ................................................... United States 878,512 45,603,558
(a,e) Tenet Healthcare Corp. ................................................... United States 25,881,411 29,763,623
------------
181,100,925
------------
</Table>
26 | Annual Report
Mutual Shares Fund
STATEMENT OF INVESTMENTS, DECEMBER 31, 2008 (continued)
<Table>
<Caption>
SHARES/WARRANTS/
COUNTRY CONTRACTS VALUE
------------- -------------- --------------
COMMON STOCKS AND OTHER EQUITY INTERESTS (CONTINUED)
HOTELS, RESTAURANTS & LEISURE 0.0%(g)
(a) Trump Entertainment Resorts Inc .......................... United States 1,245,767 $ 212,279
--------------
INDEPENDENT POWER PRODUCERS & ENERGY TRADERS 0.8%
Constellation Energy Group ............................... United States 4,129,397 103,606,571
--------------
INDUSTRIAL CONGLOMERATES 3.9%
Keppel Corp Ltd .......................................... Singapore 16,278,934 49,206,132
Koninklijke Philips Electronics NV ....................... Netherlands 4,479,993 86,636,297
(f) Orkla ASA ................................................ Norway 24,350,543 159,130,992
Siemens AG ............................................... Germany 2,072,525 152,986,041
Tyco International Ltd ................................... United States 3,657,657 79,005,391
--------------
526,964,853
--------------
INSURANCE 8.4%
ACE Ltd .................................................. United States 2,345,100 124,102,692
(a) Alleghany Corp ........................................... United States 355,624 100,285,968
(a) Berkshire Hathaway Inc., A ............................... United States 1,590 153,594,000
(a) Berkshire Hathaway Inc., B ............................... United States 84,150 270,458,100
(a) Conseco Inc .............................................. United States 4,553,790 23,588,632
Old Republic International Corp .......................... United States 6,101,302 72,727,520
(a,d) Olympus Re Holdings Ltd .................................. United States 202,380 475,107
Prudential Financial Inc ................................. United States 1,971,280 59,650,933
The Travelers Cos Inc .................................... United States 1,385,982 62,646,386
(e) White Mountains Insurance Group Ltd ...................... United States 729,457 194,845,259
Zurich Financial Services AG ............................. Switzerland 352,340 74,895,758
--------------
1,137,270,355
--------------
INTERNET SOFTWARE & SERVICES 0.2%
(a,h) Yahoo! Inc ............................................... United States 2,583,330 31,516,626
--------------
IT SERVICES 0.7%
(a) Alliance Data Systems Corp ............................... United States 2,116,320 98,472,370
--------------
LEISURE EQUIPMENT & PRODUCTS 1.8%
Eastman Kodak Co ......................................... United States 8,494,150 55,891,507
Mattel Inc ............................................... United States 11,761,430 188,182,880
--------------
244,074,387
--------------
LIFE SCIENCES TOOLS & SERVICES 0.2%
(a) MDS Inc .................................................. Canada 3,411,468 21,167,475
--------------
MACHINERY 0.5%
AB SKF, B ................................................ Sweden 4,550,800 44,960,903
(e) Federal Signal Corp ...................................... United States 3,360,800 27,592,168
(a,d) Motor Coach Industries International Inc., wts., 5/27/09 . United States 12 --
--------------
72,553,071
--------------
MARINE 0.6%
A.P Moller - Maersk AS ................................... Denmark 15,130 79,872,438
--------------
MEDIA 6.3%
(a) Adelphia Recovery Trust .................................. United States 99,967,609 999,676
(a,b) Adelphia Recovery Trust, Arahova Contingent Value Vehicle,
Contingent Distribution ................................ United States 12,005,115 1,800,767
</Table>
Annual Report | 27
Mutual Shares Fund
STATEMENT OF INVESTMENTS, DECEMBER 31, 2008 (continued)
<Table>
<Caption>
SHARES/WARRANTS/
COUNTRY CONTRACTS VALUE
-------------- ------------ ------------
COMMON STOCKS AND OTHER EQUITY INTERESTS (CONTINUED)
MEDIA (CONTINUED)
(a,b) Century Communications Corp., Contingent Distribution . United States 33,138,000 $ --
Comcast Corp., A ...................................... United States 19,942,140 322,065,561
News Corp., A ......................................... United States 22,460,462 204,165,600
Time Warner Inc ....................................... United States 15,148,228 152,391,174
(a,c,e) TVMAX Holdings Inc .................................... United States 257,217 --
(a) Viacom Inc., B ........................................ United States 5,357,471 102,113,397
Virgin Media Inc ...................................... United Kingdom 14,209,364 70,904,726
------------
854,440,901
------------
METALS & MINING 0.8%
AK Steel Holding Corp ................................. United States 2,300,050 21,436,466
ArcelorMittal, N.Y shs., A ............................ Netherlands 2,086,250 51,300,888
Cliffs Natural Resources Inc .......................... United States 1,665,019 42,641,137
------------
115,378,491
------------
MULTI-UTILITIES 0.6%
GDF Suez .............................................. France 1,763,113 87,088,876
(a,b) NorthWestern Corp., Contingent Distribution ........... United States 21,590,000 --
------------
87,088,876
------------
OIL, GAS & CONSUMABLE FUELS 3.7%
(a,c) Apco Oil Corp ......................................... United States 9,200 --
BP PLC ................................................ United Kingdom 9,485,110 72,869,289
BP PLC, ADR ........................................... United Kingdom 46,400 2,168,736
Marathon Oil Corp ..................................... United States 4,694,580 128,443,709
Noble Energy Inc ...................................... United States 1,193,750 58,756,375
Royal Dutch Shell PLC, A .............................. United Kingdom 5,993,596 157,140,853
Total SA, B ........................................... France 1,523,752 82,904,076
------------
502,283,038
------------
PAPER & FOREST PRODUCTS 2.8%
(a) Domtar Corp ........................................... United States 16,037,820 26,783,159
International Paper Co ................................ United States 9,480,806 111,873,511
MeadWestvaco Corp ..................................... United States 4,116,457 46,063,154
Mondi Ltd ............................................. United Kingdom 236,911 865,051
Weyerhaeuser Co ....................................... United States 6,165,330 188,720,751
------------
374,305,626
------------
PHARMACEUTICALS 1.9%
Novartis AG ........................................... Switzerland 2,427,900 119,814,898
Schering-Plough Corp .................................. United States 1,289,063 21,952,743
(a) Valeant Pharmaceuticals International ................. United States 2,986,735 68,396,232
(a) Watson Pharmaceuticals Inc ............................ United States 1,606,334 42,680,294
------------
252,844,167
------------
REAL ESTATE INVESTMENT TRUSTS (REITS) 1.2%
(e) Alexander's Inc ....................................... United States 326,675 83,269,458
Link REIT ............................................. Hong Kong 26,742,694 44,167,439
Ventas Inc ............................................ United States 1,072,765 36,012,721
------------
163,449,618
------------
</Table>
28 | Annual Report
Mutual Shares Fund
STATEMENT OF INVESTMENTS, DECEMBER 31, 2008 (continued)
<Table>
<Caption>
SHARES/WARRANTS/
COUNTRY CONTRACTS VALUE
-------------- --------------- ---------------
COMMON STOCKS AND OTHER EQUITY INTERESTS (CONTINUED)
REAL ESTATE MANAGEMENT & DEVELOPMENT 0.7%
(c) Canary Wharf Group PLC ............................. United Kingdom 14,262,931 $ 54,978,930
(a) Forestar Real Estate Group ......................... United States 1,473,566 14,028,348
(a,j) The St Joe Co. ..................................... United States 1,100,535 26,765,011
---------------
95,772,289
---------------
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT 1.1%
(a) LSI Corp. .......................................... United States 24,355,334 80,129,049
Maxim Integrated Products Inc. ..................... United States 5,769,500 65,887,690
---------------
146,016,739
---------------
SOFTWARE 1.7%
Microsoft Corp. .................................... United States 12,183,240 236,842,186
---------------
TOBACCO 9.8%
Altria Group Inc. .................................. United States 8,067,584 121,497,815
British American Tobacco PLC ....................... United Kingdom 12,181,486 320,250,040
British American Tobacco PLC, ADR .................. United Kingdom 70,550 3,734,917
Imperial Tobacco Group PLC ......................... United Kingdom 10,399,933 281,008,002
Japan Tobacco Inc. ................................. Japan 30,953 102,442,126
KT&G Corp. ......................................... South Korea 1,387,080 86,870,964
Lorillard Inc. ..................................... United States 545,400 30,733,290
Philip Morris International Inc. ................... United States 1,599,950 69,613,825
Reynolds American Inc. ............................. United States 4,701,360 189,511,822
UST Inc. ........................................... United States 1,851,730 128,473,027
---------------
1,334,135,828
---------------
TRANSPORTATION INFRASTRUCTURE 0.0%(g)
(a) Groupe Eurotunnel SA ............................... France 30,676 165,143
(a) Groupe Eurotunnel SA, wts., 12/30/11 ............... France 2,855,237 327,383
---------------
492,526
---------------
TOTAL COMMON STOCKS AND OTHER EQUITY INTERESTS
(COST $14,853,713,811) ......................... 10,956,778,292
---------------
PREFERRED STOCKS 0.0%(g)
AUTO COMPONENTS 0.0%(g)
(d) Dana Holding Corp., 4.00%, cvt. pfd., B ............ United States 163,322 1,469,898
---------------
DIVERSIFIED TELECOMMUNICATION SERVICES 0.0%(g)
(a,d) PTV Inc., 10.00%, pfd., A .......................... United Kingdom 199,566 179,609
---------------
TOTAL PREFERRED STOCKS (COST $16,611,592) .......... 1,649,507
---------------
</Table>
Annual Report | 29
Mutual Shares Fund
STATEMENT OF INVESTMENTS, DECEMBER 31, 2008 (continued)
<Table>
<Caption>
COUNTRY PRINCIPAL AMOUNT(k) VALUE
------------- -------------------- ------------
CORPORATE BONDS & NOTES 3.6%
(l) ACE Aviation Holdings Inc., cvt., 144A, 4.25%, 6/01/35 ...... Canada 5,190,000 CAD $ 3,781,603
(m) Boston Generating LLC, FRN,
Revolver, 3.637%, 12/21/13 .............................. United States 652,667 391,600
Synthetic Letter of Credit, 3.637%, 12/21/13 ............ United States 2,330,900 1,398,540
Term Loan B, 6.012%, 12/21/13 ........................... United States 10,325,140 6,195,084
(m) Calpine Corp., Exit Term Loan, FRN, 6.645%, 3/29/14 ......... United States 106,026,892 78,649,264
(d) Cerberus CG Investor I LLC, 12.00%, 7/31/14 ................. United States 49,252,400 9,850,480
(d) Cerberus CG Investor II LLC, 12.00%, 7/31/14 ................ United States 49,252,400 9,850,480
(d) Cerberus CG Investor III LLC, 12.00%, 7/31/14 ............... United States 24,626,200 4,925,240
(d) Cerberus FIM Investors Holdco LLC, 12.00%, 11/22/13 ......... United States 159,591,548 33,801,132
(i,m) Charter Communications Operating LLC, Term Loan B, FRN,
3.63%, 3/06/14 .......................................... United States 20,276,776 13,697,976
(e) DecisionOne Corp.,
(d) 12.00%, 4/15/10. ............................................ United States 2,418,729 2,418,729
(c,m) FRN, 5.50%, 5/12/09 ......................................... United States 433,342 433,342
(m) First Data Corp., Term Loan, FRN, 3.211%, 9/24/14
B-1 ..................................................... United States 22,948,802 14,022,406
B-2 ..................................................... United States 5,758,122 3,518,386
B-3 ..................................................... United States 5,674,434 3,472,640
Groupe Eurotunnel SA, cvt., sub bond, NRS I,
T2, 3.00%, 7/28/09 ...................................... France 53,400 EUR 63,469
T2, 3.00%, 7/28/09 ...................................... France 43,989 GBP 64,248
T3, 3.00%, 7/28/10 ...................................... France 18,944,500 EUR 22,516,581
T3, 3.00%, 7/28/10 ...................................... France 11,239,769 GBP 16,416,244
(d,e,f) International Automotive Components Group
NA LLC, 9.00%, 4/01/17 ...................................... United States 5,851,000 2,820,654
(d,f,m,n) Pontus I LLC, junior note, 144A, FRN, 5.689%, 7/24/09 ....... United States 73,172,357 82,567,970
(d,f,m,n) Pontus II Trust, junior profit-participating note, 144A, FRN,
7.516%, 6/25/09 ......................................... United States 11,576,084 2,700,930
(m) Realogy Corp., FRN,
(0) 4.596%, 4/10/13 ............................................. United States 31,365,835 17,917,733
Delayed Draw Term B Loan, 5.706%, 10/10/13 .............. United States 2,853,034 1,799,788
Initial Term Loan B, 5.706%, 10/10/13 ................... United States 15,734,458 9,925,815
Synthetic Letter of Credit, 1.52%, 10/10/13 ............. United States 4,236,182 2,672,323
(c,m) Revel Entertainment Group LLC, FRN,
First Lien Loan, 4.97%, 5/30/09 ......................... United States 52,000,000 47,840,000
Second Lien Loan, 7.97%, 5/30/09 ........................ United States 52,000,000 47,840,000
(m) Texas Competitive Electric Holdings Co. LLC,FRN,
5.368%, 10/10/14 ........................................ United States 61,410,330 42,859,313
Term Loan B3, 5.368%, 10/10/14 .......................... United States 5,652,490 3,944,969
(c,e,p) TVMAX Holdings Inc., PIK,
11.50%, 3/31/09 ......................................... United States 978,922 685,245
14.00%, 3/31/09 ......................................... United States 1,838,287 1,286,801
------------
TOTAL CORPORATE BONDS & NOTES
(COST $875,200,584) ..................................... 490,328,985
------------
</Table>
30 | Annual Report
Mutual Shares Fund
STATEMENT OF INVESTMENTS, DECEMBER 31, 2008 (continued)
<Table>
<Caption>
SHARES/
COUNTRY PRINCIPAL AMOUNT(k) VALUE
------------- ------------------- ----------------
CORPORATE BONDS & NOTES IN REORGANIZATION 0.2%
(m,q) Motor Coach Industries International Inc., FRN,
(o) First Lien DIP Revolver, 7.75%, 9/19/09 ......................... United States 4,884,586 $ 4,770,238
(i) Second Lien DIP Trust A Term Loan, 12.75%, 9/19/09 .............. United States 7,163,332 5,873,932
Second Lien DIP Trust B Term Loan, 15.25%, 9/19/09 .............. United States 4,368,709 3,713,403
(i) Second Lien Senior Secured Term Loan, 11.00%, 12/01/08 .......... United States 5,903,094 4,692,960
(c) Third Lien Senior Secured Term Loan, 15.649%, 12/01/08 .......... United States 68,061,122 1,858,069
(c,q) Safety Kleen Services, senior sub. note, 9.25%, 6/01/08 ............. United States 85,000 425
(q) Trump Entertainment Resorts Inc., 8.50%, 5/20/15 .................... United States 36,590,212 5,031,154
(f,q) Wimar OPCO LLC/Finance Corp., senior sub. note, 9.625%, 12/15/14 .... United States 76,355,000 1,145,325
---------------
TOTAL CORPORATE BONDS & NOTES IN REORGANIZATION (COST $175,286,433) . 27,085,506
---------------
COMPANIES IN LIQUIDATION 0.0%(g)
(c) Peregrine Investments Holdings Ltd.,
6.70%, 1/15/98 ...................................................... Hong Kong 95,000,000 JPY --
6.70%, 6/30/00 ...................................................... Hong Kong 250,000,000 JPY --
zero cpn., 1/22/98 .................................................. Hong Kong 500,000 --
(c) PIV Investment Finance (Cayman) Ltd., 4.50%, 12/01/00 ............... Hong Kong 22,710,000 --
---------------
TOTAL COMPANIES IN LIQUIDATION (COST $ -- ) ......................... --
---------------
TOTAL INVESTMENTS BEFORE SHORT TERM INVESTMENTS
(COST $15,920,812,420) .............................................. 11,475,842,290
---------------
SHORT TERM INVESTMENTS 12.9%
U.S. GOVERNMENT AND AGENCY SECURITIES 12.8%
(r) FHLB, 1/02/09 - 12/14/09 ............................................ United States 1,725,794,000 1,722,529,254
(r) U.S. Treasury Bill, 11/19/09 ........................................ United States 20,000,000 19,941,860
---------------
TOTAL U.S. GOVERNMENT AND AGENCY SECURITIES
(COST $1,728,920,552) ............................................. 1,742,471,114
---------------
TOTAL INVESTMENTS BEFORE MONEY MARKET FUNDS
(COST $17,649,732,972) ............................................ 13,218,313,404
---------------
(s) INVESTMENTS FROM CASH COLLATERAL RECEIVED FOR
LOANED SECURITIES 0.1%
MONEY MARKET FUNDS (COST $6,187,146) 0.1%
(t) Bank of New York Institutional Cash Reserve Fund, 0.09% ............. United States 6,187,146 6,125,275
---------------
TOTAL INVESTMENTS (COST $17,655,920,118) 97.2% ...................... 13,224,438,679
OPTIONS WRITTEN 0.0%(g) ............................................. (332,368)
NET UNREALIZED APPRECIATION ON FORWARD EXCHANGE
CONTRACTS 0.7% .................................................... 88,775,030
OTHER ASSETS, LESS LIABILITIES 2.1% ................................. 290,343,407
---------------
NET ASSETS 100.0% ................................................... $13,603,224,748
===============
</Table>
Annual Report | 31
Mutual Shares Fund
STATEMENT OF INVESTMENTS, DECEMBER 31, 2008 (continued)
<Table>
<Caption>
COUNTRY CONTACTS VALUE
------------- -------- ---------
(u) OPTIONS WRITTEN 0.0%(g)
CALL OPTIONS 0.0%(g)
INTERNET SOFTWARE & SERVICES 0.0%(g)
Yahoo! Inc., Jan. 12.5 Calls, 1/17/09 ... United States 2,322 $ 178,794
Yahoo! Inc., Jan. 14 Calls, 1/17/09 ..... United States 4,846 150,226
Yahoo! Inc., Jan. 15 Calls, 1/17/09 ..... United States 186 3,348
---------
TOTAL OPTIONS WRITTEN
(PREMIUMS RECEIVED $1,185,782) .......... $ 332,368
---------
</Table>
- ----------
See Abbreviations on page 54.
(a) Non-income producing for the twelve months ended December 31, 2008.
(b) Contingent distributions represent the right to receive additional
distributions, if any, during the reorganization of the underlying
company. Shares represent total underlying principal of debt securities.
(c) Security has been deemed illiquid because it may not be able to be sold
within seven days. At December 31, 2008, the aggregate value of these
securities was $158,118,906, representing 1.16% of net assets.
(d) See Note 10 regarding restricted and illiquid securities.
(e) See Note 13 regarding holdings of 5% voting securities.
(f) See Note 14 regarding other considerations.
(g) Rounds to less than 0.1% of net assets.
(h) A portion or all of the security is held in connection with written option
contracts open at year end.
(i) A portion or all of the securities purchased on a delayed delivery basis.
See Note 1(c).
(j) A portion or all of the security is on loan at December 31, 2008. See Note
1(i).
(k) The principal amount is stated in U.S. dollars unless otherwise indicated.
(l) 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. These securities have been deemed liquid under
guidelines approved by the Trust's Board of Trustees. At December 31,
2008, the value of these securities were $3,781,603, representing 0.03% of
net assets.
(m) The coupon rate shown represents the rate at period end.
(n) See Note 1(h) regarding investments in special purpose entities.
(o) See Note 11 regarding unfunded loan commitments.
(p) Income may be received in additional securities and/or cash.
(q) See Note 9 regarding defaulted securities.
(r) The security is traded on a discount basis with no stated coupon rate.
(s) See Note 1(i) regarding securities on loan.
(t) The rate shown is the annualized seven-day yield at period end. (u) See
Note 1(f) regarding written options.
32 | The accompanying notes are an integral
part of these financial statements. | Annual Report
Mutual Shares Fund
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
December 31, 2008
Assets:
Investments in securities:
Cost - Unaffiliated issuers ........................................................ $ 17,051,841,017
Cost - Non-controlled affiliated issuers (Note 13) ................................. 604,079,101
-----------------
Total cost of investments .......................................................... $ 17,655,920,118
=================
Value - Unaffiliated issuers ....................................................... $ 12,770,772,322
Value - Non-controlled affiliated issuers (Note 13) ................................ 453,666,357
-----------------
Total value of investments (includes securities loaned in the amount of $6,080,000). 13,224,438,679
Cash ................................................................................. 222,148,261
Cash on deposit with brokers ......................................................... 86,696
Foreign currency, at value (cost $53,458,884) ........................................ 53,166,947
Receivables:
Investment securities sold ......................................................... 78,513,315
Capital shares sold ................................................................ 16,674,311
Dividends and interest ............................................................. 84,563,061
Unrealized appreciation on forward exchange contracts (Note 8) ....................... 201,078,684
-----------------
Total assets .................................................................... 13,880,669,955
-----------------
Liabilities:
Payables:
Investment securities purchased .................................................... 82,475,684
Capital shares redeemed ............................................................ 52,371,300
Affiliates ......................................................................... 13,285,816
Options written, at value (premiums received $1,185,782) ............................. 332,368
Payable upon return of securities loaned ............................................. 6,187,146
Unrealized depreciation on forward exchange contracts (Note 8) ....................... 112,303,654
Unrealized depreciation on unfunded loan commitments (Note 11) ....................... 2,881,887
Accrued expenses and other liabilities ............................................... 7,607,352
-----------------
Total liabilities ............................................................... 277,445,207
-----------------
Net assets, at value .......................................................... $ 13,603,224,748
=================
Net assets consist of:
Paid-in capital ...................................................................... $ 18,761,703,976
Undistributed net investment income .................................................. 185,022,528
Net unrealized appreciation (depreciation) ........................................... (4,345,132,875)
Accumulated net realized gain (loss) ................................................. (998,368,881)
-----------------
Net assets, at value .......................................................... $ 13,603,224,748
=================
Annual Report | The accompanying notes are an integral
part of these financial statements. | 33
Mutual Shares Fund
FINANCIAL STATEMENTS (continued)
STATEMENT OF ASSETS AND LIABILITIES (continued)
December 31, 2008
CLASS Z:
Net assets, at value ................................................... $ 7,236,111,800
---------------
Shares outstanding ..................................................... 472,283,396
---------------
Net asset value and maximum offering price per share ................... $ 15.32
---------------
CLASS A:
Net assets, at value ................................................... $ 4,624,696,479
---------------
Shares outstanding ..................................................... 303,823,921
---------------
Net asset value per share (a)........................................... $ 15.22
---------------
Maximum offering price per share (net asset value per share / 94.25%) .. $ 16.15
---------------
CLASS B:
Net assets, at value ................................................... $ 272,749,573
---------------
Shares outstanding ..................................................... 18,252,603
---------------
Net asset value and maximum offering price per share (a)................ $ 14.94
---------------
CLASS C:
Net assets, at value ................................................... $ 1,296,171,346
---------------
Shares outstanding ..................................................... 85,831,000
---------------
Net asset value and maximum offering price per share (a)................ $ 15.10
---------------
CLASS R:
Net assets, at value ................................................... $ 173,495,550
---------------
Shares outstanding ..................................................... 11,454,523
---------------
Net asset value and maximum offering price per share ................... $ 15.15
---------------
(a) Redemption price is equal to net asset value less contingent deferred sales
charges, if applicable.
34| The accompanying notes are an integral
part of these financial statements. | Annual Report
Mutual Shares Fund
FINANCIAL STATEMENTS (continued)
STATEMENT OF OPERATIONS
for the year ended December 31, 2008
Investment income:
Dividends: (net of foreign taxes of $24,158,713)
Unaffiliated issuers ........................................................... $ 430,273,109
Non-controlled affiliated issuers (Note 13) .................................... 6,011,145
Interest:
Unaffiliated issuers ........................................................... 145,484,189
Non-controlled affiliated issuers (Note 13) .................................... 1,151,434
Income from securities loaned .................................................... 4,788,197
---------------
Total investment income ..................................................... 587,708,074
---------------
Expenses:
Management fees (Note 3a) ........................................................ 112,821,986
Administrative fees (Note 3b) .................................................... 15,308,695
Distribution fees: (Note 3c)
Class A ........................................................................ 19,647,769
Class B ........................................................................ 4,354,227
Class C ........................................................................ 19,663,745
Class R ........................................................................ 1,265,925
Transfer agent fees (Note 3e) .................................................... 19,964,408
Custodian fees (Note 4) .......................................................... 1,975,124
Reports to shareholders .......................................................... 1,614,528
Registration and filing fees ..................................................... 606,341
Professional fees ................................................................ 3,417,519
Trustees' fees and expenses ...................................................... 653,338
Dividends on securities sold short ............................................... 988,342
Other ............................................................................ 855,490
---------------
Total expenses .............................................................. 203,137,437
Expense reductions (Note 4) ................................................. (149,276)
---------------
Net expenses .............................................................. 202,988,161
---------------
Net investment income ................................................ 384,719,913
---------------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments:
Unaffiliated issuers ........................................................... (1,210,548,089)
Non-controlled affiliated issuers (Note 13) .................................... (62,603,274)
Written options .................................................................. 5,368,703
Foreign currency transactions .................................................... 229,012,140
Securities sold short ............................................................ 26,116,187
---------------
Net realized gain (loss) ............................................... (1,012,654,333)
---------------
Net change in unrealized appreciation (depreciation) on:
Investments .................................................................... (8,576,411,447)
Translation of other assets and liabilities denominated in foreign currencies .. 141,208,728
---------------
Net change in unrealized appreciation (depreciation) ................... (8,435,202,719)
---------------
Net realized and unrealized gain (loss) ............................................. (9,447,857,052)
---------------
Net increase (decrease) in net assets resulting from operations ..................... $(9,063,137,139)
===============
Annual Report | The accompanying notes are an integral
part of these financial statements. | 35
Mutual Shares Fund
FINANCIAL STATEMENTS (continued)
STATEMENTS OF CHANGES IN NET ASSETS
YEAR ENDED DECEMBER 31,
--------------------------------------
2008 2007
------------------ -----------------
Increase (decrease) in net assets:
Operations:
Net investment income ............................................................... $ 384,719,913 $ 573,855,980
Net realized gain (loss) from investments, written options, securities
sold short, synthetic equity swaps, and foreign currency transactions ............ (1,012,654,333) 1,077,773,351
Net change in unrealized appreciation (depreciation) on investments and
translation of other assets and liabilities denominated in foreign currencies ... (8,435,202,719) (1,054,000,083)
----------------- ----------------
Net increase (decrease) in net assets resulting from operations ................ (9,063,137,139) 597,629,248
----------------- ----------------
Distributions to shareholders from:
Net investment income:
Class Z .......................................................................... (127,105,081) (371,465,429)
Class A .......................................................................... (62,555,645) (212,840,426)
Class B .......................................................................... (699,702) (10,736,304)
Class C .......................................................................... (3,935,667) (48,872,902)
Class R .......................................................................... (1,844,206) (7,033,626)
Net realized gains:
Class Z .......................................................................... (99,640,941) (430,826,291)
Class A .......................................................................... (64,633,914) (277,318,724)
Class B .......................................................................... (4,094,496) (19,938,898)
Class C .......................................................................... (18,867,642) (87,332,680)
Class R .......................................................................... (2,513,154) (9,674,981)
----------------- ----------------
Total distributions to shareholders ................................................... (385,890,448) (1,476,040,261)
----------------- ----------------
Capital share transactions: (Note 2)
Class Z .......................................................................... (1,040,714,353) 2,129,113,775
Class A .......................................................................... (637,960,764) 2,027,885,005
Class B .......................................................................... (110,710,385) (59,185,727)
Class C .......................................................................... (384,748,179) 316,218,501
Class R .......................................................................... (6,628,985) 122,655,907
----------------- ----------------
Total capital share transactions ...................................................... (2,180,762,666) 4,536,687,461
----------------- ----------------
Redemption fees ....................................................................... 41,515 62,755
----------------- ----------------
Net increase (decrease) in net assets .......................................... (11,629,748,738) 3,658,339,203
Net assets:
Beginning of year ..................................................................... 25,232,973,486 21,574,634,283
----------------- ----------------
End of year ........................................................................... $ 13,603,224,748 $ 25,232,973,486
================= ================
Undistributed net investment income included in net assets:
End of year ........................................................................... $ 185,022,528 $ 12,854,602
================= ================
36| The accompanying notes are an integral
part of these financial statements. | Annual Report
Mutual Shares Fund
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Franklin Mutual Series Funds (Trust) is registered under the Investment Company
Act of 1940, as amended, (1940 Act) as an open-end investment company,
consisting of six separate funds. The Mutual Shares Fund (Fund) is included in
this report. The financial statements of the remaining funds in the Trust are
presented separately. The Fund offers five classes of shares: Class Z, Class A,
Class B, Class C, and Class R. 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. Investments in open-end mutual funds are valued at the closing net asset
value.
Corporate debt securities and government securities generally trade in the
over-the-counter market rather than on a securities exchange. The Trust 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 Trust'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 Trust 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
Annual Report | 37
Mutual Shares Fund
NOTES TO FINANCIAL STATEMENTS (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
A. SECURITY VALUATION (continued)
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. At December 31, 2008,
a portion of the securities held by the Fund were fair valued. 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. SECURITIES PURCHASED ON A DELAYED DELIVERY BASIS
The Fund may purchase securities on a delayed delivery basis, with payment and
delivery scheduled for a future date. These transactions are subject to market
fluctuations and are subject to the risk that the value at delivery may be more
or less than the trade date purchase price. Although the Fund will generally
purchase these securities with the intention of holding the securities, it may
sell the securities before the settlement date. Sufficient assets have been
segregated for these securities.
38| Annual Report
Mutual Shares Fund
NOTES TO FINANCIAL STATEMENTS (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
D. 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 Fund may also enter into forward exchange contracts to hedge against
fluctuations in foreign exchange rates. These contracts are valued daily by the
Fund and the unrealized appreciation or depreciation on the contracts, as
measured by the difference between the contractual forward foreign exchange
rates and the forward rates at the reporting date, are included in the Statement
of Assets and Liabilities. 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.
E. SYNTHETIC EQUITY SWAPS
The Fund may engage in synthetic equity swaps. Synthetic equity swaps are
contracts entered into between a broker and the Fund under which the parties
agree to make payments to each other so as to replicate the economic
consequences that would apply had a purchase or short sale of the underlying
security taken place. Upon entering into synthetic equity swaps, the Fund is
required to pledge to the broker an amount of cash and/or other assets equal to
a certain percentage of the contract amount (margin account). Periodically,
payments are made to recognize changes in value of the contract resulting from
interest on the notional value of the contract, market value changes in the
underlying security, and/or dividends paid by the issuer of the underlying
security. The Fund recognizes a realized gain or loss when cash is received
from, or paid to, the broker. Synthetic equity swaps are valued daily by the
Fund and the unrealized appreciation or depreciation on the contracts (as
measured by the difference between the contract amount plus or minus cash
received or paid and the market value of the underlying securities) are recorded
in the Statement of Operations. The margin account and any net unrealized
appreciation or depreciation on open synthetic equity swaps are included in the
Statement of Assets and Liabilities. The risks of entering into synthetic equity
swaps include unfavorable price movements in the underlying securities or the
inability of the counterparties to fulfill their obligations under the contract.
Annual Report | 39
Mutual Shares Fund
NOTES TO FINANCIAL STATEMENTS (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
F. OPTIONS
The Fund may purchase or write options. Options are contracts entitling the
holder to purchase or sell securities or other financial instruments at a
specified price, or, in the case of index options, to receive or pay the
difference between the index value and the strike price of the index option.
Options purchased are recorded as investments; options written (sold) are
recorded as liabilities. Upon closing of an option which results in a cash
settlement, the difference between the premium (original option value) and the
settlement proceeds is realized as a gain or loss. When securities are acquired
or delivered upon exercise of an option, the acquisition cost or sale proceeds
are adjusted by the amount of the premium. When an option expires, the premium
is realized as a gain for options written or as a loss for options purchased.
The risks include the possibility there may be an illiquid options market or the
inability of the counterparties to fulfill their obligations under the contract.
Writing options involves, to varying degrees, elements of market risk in excess
of the amount recognized in the Statement of Assets and Liabilities.
G. SECURITIES SOLD SHORT
The Fund is engaged in selling securities short, which obligates the Fund to
replace a borrowed security with the same security at current market value. The
Fund incurs a loss if the price of the security increases between the date of
the short sale and the date on which the fund replaces the borrowed security.
The Fund realizes a gain if the price of the security declines between those
dates. Gains are limited to the price at which the Fund sold the security short,
while losses are potentially unlimited in size.
The Fund is required to establish a margin account with the broker lending the
security sold short. While the short sale is outstanding, the broker retains the
proceeds of the short sale and the Fund must maintain a deposit with broker
consisting of cash and securities having a value equal to a specified percentage
of the value of the securities sold short. The Fund is obligated to pay the
counterparty any dividends or interest due on securities sold short. Such
dividends and interest are recorded as an expense to the Fund.
H. INVESTMENTS IN SPECIAL PURPOSE ENTITIES
At December 31, 2008, the Fund had contributed an additional $63,133,105 as a
subordinated note holder of certain special purpose entities ("SPEs"). Such
contributions, while made at the discretion of the Fund, represent additional
capital contributions to the SPE in support of its underlying investments and
are subject first to the claims of the senior note holders of the SPE. These
contributions are recorded as an addition to the Fund's cost basis in the SPE
and are subject to the risk of loss in the event of continued unfavorable market
conditions related to the SPE's underlying investments.
40| Annual Report
Mutual Shares Fund
NOTES TO FINANCIAL STATEMENTS (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
I. SECURITIES LENDING
The Fund participates in an agency based security lending program. The Fund
receives cash collateral against the loaned securities in an amount equal to at
least 102% of the market value of the loaned securities. Collateral is
maintained over the life of the loan in an amount not less than 100% of the
market value of loaned securities, as determined at the close of Fund business
each day; any additional collateral required is delivered to the Fund on the
next business day. The collateral is invested in a non-registered money market
fund managed by the Fund's custodian on the Fund's behalf. The Fund receives
income from the investment of cash collateral, in addition to lending fees and
rebates paid by the borrower. The Fund bears the market risk with respect to the
collateral investment, securities loaned, and the risk that the agent may
default on its obligations to the Fund. The securities lending agent has agreed
to indemnify the Fund in the event of default by a third party borrower.
J. 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 December 31, 2008, 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.
K. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS
Security transactions are accounted for on trade date. Realized gains and losses
on security transactions are determined on a specific identification basis.
Interest income and estimated expenses are accrued daily. Amortization of
premium and accretion of discount on debt securities are included in interest
income. Dividend income and dividends declared on securities sold short are
recorded on the ex-dividend date except 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.
Annual Report | 41
Mutual Shares Fund
NOTES TO FINANCIAL STATEMENTS (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
K. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS
(continued)
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.
L. 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.
M. 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.
N. GUARANTEES AND INDEMNIFICATIONS
Under the Trust's organizational documents, its officers and trustees are
indemnified by the Trust against certain liabilities arising out of the
performance of their duties to the Trust. Additionally, in the normal course of
business, the Trust, on behalf of the Fund, enters into contracts with service
providers that contain general indemnification clauses. The Trust's maximum
exposure under these arrangements is unknown as this would involve future claims
that may be made against the Trust that have not yet occurred. Currently, the
Trust expects the risk of loss to be remote.
42| Annual Report
Mutual Shares Fund
NOTES TO FINANCIAL STATEMENTS (continued)
2. SHARES OF BENEFICIAL INTEREST
At December 31, 2008, there were an unlimited number of shares authorized
(without par value). Transactions in the Fund's shares were as follows:
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------
2008 2007
--------------------------------- --------------------------------
SHARES AMOUNT SHARES AMOUNT
------------- ----------------- ------------ -----------------
CLASS Z SHARES:
Shares sold .................................... 21,247,862 $ 433,408,039 72,422,280 $ 1,980,323,230
Shares issued in reinvestment of distributions . 11,801,196 209,921,901 29,171,280 744,740,385
Shares redeemed ................................ (84,323,664) (1,684,044,293) (21,942,690) (595,949,840)
------------ ---------------- ---------- ----------------
Net increase (decrease) ........................ (51,274,606) $ (1,040,714,353) 79,650,870 $ 2,129,113,775
============ ================ ========== ================
CLASS A SHARES:
Shares sold .................................... 76,308,129 $ 1,522,769,665 105,204,071 $ 2,849,290,589
Shares issued in reinvestment of distributions . 6,333,689 114,388,652 17,844,203 452,010,160
Shares redeemed ................................ (115,667,539) (2,275,119,081) (47,245,938) (1,273,415,744)
------------ ---------------- ---------- ----------------
Net increase (decrease) ........................ (33,025,721) $ (637,960,764) 75,802,336 $ 2,027,885,005
============ ================ ========== ================
CLASS B SHARES:
Shares sold .................................... 362,646 $ 7,153,214 605,798 $ 16,017,441
Shares issued in reinvestment of distributions . 225,906 4,479,374 1,151,048 28,532,034
Shares redeemed ................................ (6,173,610) (122,342,973) (3,923,216) (103,735,202)
------------ ---------------- ---------- ----------------
Net increase (decrease) ........................ (5,585,058) $ (110,710,385) (2,166,370) $ (59,185,727)
============ ================ ========== ================
CLASS C SHARES:
Shares sold .................................... 10,732,376 $ 210,664,085 20,396,970 $ 544,643,345
Shares issued in reinvestment of distributions . 1,032,282 20,495,376 4,871,395 122,037,887
Shares redeemed ................................ (31,195,589) (615,907,640) (13,168,608) (350,462,731)
------------ ---------------- ---------- ----------------
Net increase (decrease) ........................ (19,430,931) $ (384,748,179) 12,099,757 $ 316,218,501
============ ================ ========== ================
CLASS R SHARES:
Shares sold .................................... 3,686,186 $ 79,355,666 6,274,351 $ 169,055,165
Shares issued in reinvestment of distributions . 235,917 4,330,719 658,955 16,589,087
Shares redeemed ................................ (4,379,473) (90,315,370) (2,341,149) (62,988,345)
------------ ---------------- ---------- ----------------
Net increase (decrease) ........................ (457,370) $ (6,628,985) 4,592,157 $ 122,655,907
============ ================ ========== ================
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
- ------------------------------------------------------------- ----------------------
Franklin Mutual Advisers, LLC (Franklin Mutual) Investment manager
Franklin Templeton Services, LLC (FT Services) Administrative manager
Franklin Templeton Distributors, Inc. (Distributors) Principal underwriter
Franklin Templeton Investor Services, LLC (Investor Services) Transfer agent
Annual Report | 43
Mutual Shares Fund
NOTES TO FINANCIAL STATEMENTS (continued)
3. TRANSACTIONS WITH AFFILIATES (continued)
A. MANAGEMENT FEES
The Fund pays an investment management fee to Franklin Mutual based on the
average daily net assets of the Fund as follows:
ANNUALIZED FEE RATE NET ASSETS
- ------------------- --------------------------------------------------
0.600% Up to and including $5 billion
0.570% Over $5 billion, up to and including $10 billion
0.550% Over $10 billion, up to and including $15 billion
0.530% Over $15 billion, up to and including $20 billion
0.510% Over $20 billion, up to and including $25 billion
0.490% Over $25 billion, up to and including $30 billion
0.480% Over $30 billion, up to and including $35 billion
0.470% In excess of $35 billion
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 Fund's Board of Trustees has adopted distribution plans for each share
class, with the exception of Class Z 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 .......................................... 0.35%
Class B .......................................... 1.00%
Class C .......................................... 1.00%
Class R .......................................... 0.50%
44 | Annual Report
Mutual Shares Fund
NOTES TO FINANCIAL STATEMENTS (continued)
3. TRANSACTIONS WITH AFFILIATES (continued)
C. DISTRIBUTION FEES (continued)
Effective February 1, 2009, the Board of Trustees has set the current rate at
0.30% per year for Class A shares until further notice and approval by the
Board.
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 year:
Sales charges retained net of commissions paid to
unaffiliated broker/dealers.................... $ 3,382,193
Contingent deferred sales charges retained....... $ 391,105
E. TRANSFER AGENT FEES
For the year ended December 31, 2008, the Fund paid transfer agent fees of
$19,964,408, of which $11,788,962 was retained by Investor Services.
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 year ended December 31, 2008, the
custodian fees were reduced as noted in the Statement of Operations.
5. INDEPENDENT TRUSTEES' RETIREMENT PLAN
On January 1, 1993, the Trust adopted an Independent Trustees' Retirement Plan
("Plan"). The Plan is an unfunded defined benefit plan that provides benefit
payments to Trustees whose length of service and retirement age meets the
eligibility requirements of the Plan. Benefits under the plan are based on years
of service and fees paid to each trustee at the time of retirement. Effective in
December 1996 the Plan was closed to new participants.
During the year ended December 31, 2008 the Fund's projected benefit obligation
and benefit payments under the plan were as follows:
(a) Projected benefit obligation at December 31, 2008...... $ 478,309
(b) Increase in projected benefit obligation............... $ 43,679
Benefit payments made to retired trustees.............. $ 9,831
(a) The projected benefit obligation is included in accrued expenses and other
liabilities in the Statement of Assets and Liabilities.
(b) The increase in projected benefit obligation is included in trustees' fees
and expenses in the Statement of Operations.
Annual Report | 45
Mutual Shares Fund
NOTES TO FINANCIAL STATEMENTS (continued)
6. INCOME TAXES
For tax purposes, capital losses may be carried over to offset future capital
gains, if any. At December 31, 2008, the Fund had tax basis capital losses of
$246,320,571 expiring in 2016.
For tax purposes, realized capital losses occurring subsequent to October 31,
may be deferred and treated as occurring on the first day of the following
fiscal year. At December 31, 2008, the Fund deferred realized capital losses of
$579,189,099.
The tax character of distributions paid during the years ended December 31, 2008
and 2007, was as follows:
2008 2007
------------- ---------------
Distributions paid from:
Ordinary income ..................... $ 352,311,047 $ 676,893,393
Long term capital gain .............. 33,579,401 799,146,868
------------- ---------------
$ 385,890,448 $ 1,476,040,261
============= ===============
At December 31, 2008, the cost of investments, net unrealized appreciation
(depreciation), and undistributed ordinary income for income tax purposes were
as follows:
Cost of investments...................................... $ 17,755,670,599
=================
Unrealized appreciation.................................. $ 1,383,838,296
Unrealized depreciation.................................. (5,915,070,216)
-----------------
Net unrealized appreciation (depreciation)............... $ (4,531,231,920)
=================
Distributable earnings - undistributed ordinary income... $ 187,668,979
=================
Net investment income (loss) differs for financial statement and tax purposes
primarily due to differing treatments of defaulted securities, foreign currency
transactions, passive foreign investment company shares, pass-through entity
income, bond discounts and premiums, and certain dividends on securities sold
short.
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, synthetic equity swaps, pass-through
entity income, certain dividends on securities sold short, and tax straddles.
46| Annual Report
Mutual Shares Fund
NOTES TO FINANCIAL STATEMENTS (continued)
7. INVESTMENT TRANSACTIONS
Purchases and sales of investments (excluding short term securities and
securities sold short) for the year ended December 31, 2008, aggregated
$6,917,927,326 and $8,529,753,640, respectively.
Transactions in options written during the year ended December 31, 2008, were as
follows:
NUMBER OF PREMIUMS
CONTRACTS RECEIVED
---------- ------------
Options outstanding at December 31, 2007 ... 221,263 $ 5,478,661
Options written ............................ 9,477 2,541,005
Options expired ............................ (215,883) (1,823,912)
Options exercised -- --
Options closed ............................. (7,503) (5,009,972)
---------- ------------
Options outstanding at December 31, 2008 ... 7,354 $ 1,185,782
========== ============
8. FORWARD EXCHANGE CONTRACTS
At December 31, 2008, the Fund had the following forward exchange contracts
outstanding:
CONTRACT SETTLEMENT UNREALIZED UNREALIZED
AMOUNT DATE APPRECIATION DEPRECIATION
------------- ---------- ------------ -------------
CONTRACTS TO BUY
32,620,000 British Pound Sterling ... $ 57,358,901 1/12/09 $ -- $ (9,731,582)
38,488,500 Norwegian Krone .......... 5,400,000 1/12/09 128,845 --
337,181,606 Danish Krone ............. 58,537,095 1/23/09 4,698,625 --
83,914,598 Danish Krone ............. 15,863,845 1/23/09 -- (167,292)
52,318,829 Swiss Franc .............. 44,020,000 2/09/09 4,997,148 --
39,080,000 Euro ..................... 50,083,572 2/13/09 4,466,981 --
25,088,376 Canadian Dollar .......... 19,903,861 2/27/09 703,617 --
6,991,480 Swiss Franc .............. 6,308,861 3/09/09 243,668 --
45,820,000 British Pound Sterling ... 78,322,217 3/10/09 -- (11,496,794)
225,484,819 Swedish Krona ............ 31,530,000 3/16/09 -- (2,718,421)
59,504,556 Swedish Krona ............ 7,235,000 3/16/09 368,262 --
41,397,438 Singapore Dollar ......... 27,780,000 3/24/09 1,041,776 --
125,232,164 Norwegian Krone .......... 17,370,000 5/19/09 526,955 --
CONTRACTS TO SELL
90,576,015 British Pound Sterling ... 157,318,016 1/12/09 25,071,152 --
979,069,808 Norwegian Krone .......... 157,871,225 1/12/09 17,228,566 --
58,784,976 Norwegian Krone .......... 8,328,000 1/12/09 -- (116,419)
18,945,346 Euro ..................... 25,960,808 1/14/09 -- (513,412)
517,200,000 Danish Krone ............. 107,935,220 1/23/09 10,938,486 --
187,063,047 Danish Krone ............. 32,981,794 1/23/09 -- (2,100,388)
292,000,000 Euro ..................... 427,152,200 1/26/09 19,336,579 --
148,918,231 Swiss Franc .............. 141,624,566 2/09/09 2,104,107 --
19,712,516 Swiss Franc .............. 16,630,000 2/09/09 -- (1,838,520)
Annual Report | 47
Mutual Shares Fund
NOTES TO FINANCIAL STATEMENTS (continued)
8. FORWARD EXCHANGE CONTRACTS (continued)
CONTRACT SETTLEMENT UNREALIZED UNREALIZED
AMOUNT DATE APPRECIATION DEPRECIATION
------------- ---------- ------------ -------------
CONTRACTS TO SELL (continued)
219,000,000 Euro ..................... 325,499,700 2/13/09 $ 19,804,432 $ --
43,185,153 Canadian Dollar .......... 34,026,004 2/27/09 -- (1,446,085)
82,400,000 Euro ..................... 107,350,765 2/27/09 -- (7,627,384)
172,000,000 Swiss Franc .............. 155,325,337 3/09/09 -- (5,875,870)
195,500,000 British Pound Sterling ... 339,026,970 3/10/09 53,903,221 --
220,754,715 Euro ..................... 280,771,458 3/13/09 -- (27,159,719)
859,138,445 Swedish Krona ............ 126,291,454 3/16/09 16,514,063 --
113,633,347 Swedish Krona ............ 14,050,000 3/16/09 -- (469,630)
72,927,111 Singapore Dollar ......... 51,979,409 3/24/09 1,206,004 --
4,318,272 Singapore Dollar ......... 2,880,000 3/24/09 -- (126,473)
21,124,031,250 South Korean Won ......... 17,700,000 4/06/09 916,247 --
30,597,040,000 South Korean Won ......... 22,650,000 4/06/09 -- (1,660,377)
6,617,662,497 Japanese Yen ............. 75,372,010 4/20/09 2,250,415 --
99,710,000 Euro ..................... 129,822,420 4/30/09 -- (9,119,046)
109,380,000 British Pound Sterling ... 170,118,714 5/12/09 10,624,616 --
158,271,512 Euro ..................... 197,522,847 5/13/09 -- (22,962,666)
36,142,054 Norwegian Krone .......... 5,090,000 5/19/09 -- (75,069)
78,500,000 Euro ..................... 102,222,700 5/29/09 -- (7,098,507)
161,529,189 British Pound Sterling ... 239,554,563 9/14/09 4,004,919 --
------------ -------------
Unrealized appreciation (depreciation) on forward exchange contracts .. 201,078,684 (112,303,654)
------------ -------------
NET UNREALIZED APPRECIATION ON FORWARD EXCHANGE CONTRACTS ........ $ 88,775,030
============
9. CREDIT RISK AND DEFAULTED SECURITIES
The Fund may purchase the pre-default or defaulted debt of distressed companies.
Distressed companies are financially troubled and are about to be/or are already
involved in financial restructuring or bankruptcy. The Fund does not accrue
income on these securities, if it becomes probable that the income will not be
collected. Risks associated with purchasing these securities include the
possibility that the bankruptcy or other restructuring process takes longer than
expected, or that distributions in restructuring are less than anticipated,
either or both of which may result in unfavorable consequences to the Fund. At
December 31, 2008, the aggregate value of these securities was $27,085,506,
representing 0.20% of the Fund's net assets. For information as to specific
securities, see the accompanying Statement of Investments.
48| Annual Report
Mutual Shares Fund
NOTES TO FINANCIAL STATEMENTS (continued)
10. RESTRICTED SECURITIES
The Fund may invest in securities that are restricted under the Securities Act
of 1933 (1933 Act) or which are subject to legal, contractual, or other agreed
upon restrictions on resale. Restricted securities are often purchased in
private placement transactions, and cannot be sold without prior registration
unless the sale is pursuant to an exemption under the 1933 Act. Disposal of
these securities may require greater effort and expense, and prompt sale at an
acceptable price may be difficult. The Fund may have registration rights for
restricted securities. The issuer generally incurs all registration costs.
At December 31, 2008, the Fund held investments in restricted securities,
excluding 144A securities deemed to be liquid, valued in accordance with
procedures approved by the Trust's Board of Trustees as reflecting fair value,
as follows:
PRINCIPAL AMOUNT/
SHARES/WARRANTS/ ACQUISITION
CONTRACTS ISSUER DATES COST VALUE
- ----------------- ---------------------------------------------------------- ------------------ ------------- ------------
842,420 AboveNet Inc .......................................... 10/02/01 - 8/08/08 $ 44,630,142 $ 42,121,000
1,065 AboveNet Inc., stock grant, grant price
$20.95, expiration date 9/09/13 ..................... 4/17/06 - 9/08/06 -- 2,396
34,449 AboveNet Inc., wts., 9/08/10 .......................... 10/02/01 - 9/07/07 3,603,181 137,796
56,116,385 Cerberus CG Investor I LLC ............................ 7/26/07 - 6/17/08 56,116,385 11,223,277
49,252,400 Cerberus CG Investor I LLC, 12.00%, 7/31/14 ........... 7/26/07 49,252,400 9,850,480
56,116,385 Cerberus CG Investor II LLC ........................... 7/26/07 - 6/17/08 56,116,385 11,223,277
49,252,400 Cerberus CG Investor II LLC, 12.00%, 7/31/14 .......... 7/26/07 49,252,400 9,850,480
28,058,192 Cerberus CG Investor III LLC .......................... 7/26/07 - 6/17/08 28,058,192 5,611,638
24,626,200 Cerberus CG Investor III LLC, 12.00%, 7/31/14 ......... 7/26/07 24,626,200 4,925,240
53,207,750 Cerberus FIM Investors Holdco LLC ..................... 11/20/06 53,207,750 11,269,282
159,591,548 Cerberus FIM Investors Holdco LLC, 12.00%, 11/22/13 ... 11/20/06 159,591,548 33,801,132
163,322 (a)Dana Holding Corp., 4.00%, cvt. pfd., B ............... 12/27/07 16,332,200 1,469,898
1,879,100 (b)DecisionOne Corp. ..................................... 3/12/99 - 7/18/00 1,313,384 --
2,418,729 (b)DecisionOne Corp., 12.00%, 4/15/10 .................... 3/12/99 - 10/16/08 3,400,309 2,418,729
1,031,766 (b)DecisionOne Corp., wts., 6/08/17 ...................... 7/09/07 -- --
64,834 Elephant Capital Holdings Ltd ......................... 8/29/03 - 3/10/08 7,540,574 --
22,185,100 GLCP Harrah's Investment LP ........................... 1/15/08 22,185,100 6,655,530
678,719 IACNA Investor LLC .................................... 7/24/08 695,349 6,787
7,234,813 International Automotive Components Group Brazil LLC .. 4/13/06 - 12/26/08 4,853,277 5,756,165
1,104,272 International Automotive Components Group Japan LLC ... 9/26/06 - 3/27/07 9,586,763 1,193,429
25,796,752 International Automotive Components Group LLC ......... 1/12/06 - 10/16/06 25,803,435 4,388,028
5,851,000 International Automotive Components
Group NA LLC, 9.00%, 4/01/17 ........................ 3/30/07 5,938,765 2,820,654
Annual Report | 49
Mutual Shares Fund
NOTES TO FINANCIAL STATEMENTS (continued)
10. RESTRICTED SECURITIES (continued)
PRINCIPAL AMOUNT/
SHARES/WARRANTS/ ACQUISITION
CONTRACTS ISSUER DATES COST VALUE
- ----------------- ---------------------------------------------------------- ------------------ ------------- ------------
19,434,979 International Automotive Components
Group NA LLC, A ..................................... 3/30/07 - 10/10/07 $ 19,238,439 $ 3,164,015
2,883,197 Kindred Healthcare Inc. ............................... 4/28/99 - 7/08/08 26,648,091 35,662,264
12 (c)Motor Coach Industries International
Inc., wts., 5/27/09 ................................. 3/30/07 -- --
301,530 NCB Warrant Holdings Ltd., A .......................... 12/16/05 - 3/10/08 3,174,787 --
202,380 Olympus Re Holdings Ltd ............................... 12/19/01 19,570,491 475,107
Pontus I LLC, junior note, 144A, FRN,
73,172,357 5.689% .............................................. 1/22/08 - 2/25/08 134,598,830 82,567,970
11,576,084 Pontus II Trust, junior profit-participating
note, 144A, FRN, 7.516%, 6/25/09 .................... 2/29/08 13,282,716 2,700,930
199,566 PTV Inc., 10.00%, pfd., A ............................. 12/07/01 - 3/06/02 279,392 179,609
------------
TOTAL RESTRICTED SECURITIES (2.13% of Net Assets) $289,475,113
============
(a) The Fund also invests in unrestricted securities of the issuer, valued at
$1,438,851 as of December 31, 2008.
(b) The Fund also invests in unrestricted securities of the issuer, valued at
$433,342 as of December 31, 2008.
(c) The Fund also invests in unrestricted securities of the issuer, valued at
$20,908,602 as of December 31, 2008.
11. UNFUNDED LOAN COMMITMENTS
The Fund may enter into certain credit agreements, all or a portion of which may
be unfunded. The Fund is obligated to fund these loan commitments at the
borrowers' discretion. Funded portions of credit agreements are presented on the
Statement of Investments.
At December 31, 2008, unfunded commitments were as follows:
UNFUNDED
COMMITMENT
-------------
BORROWER
Motor Coach Industries International Inc., First Lien DIP
Revolver, FRN, 7.75%, 9/19/09 ............................. $ 2,775,334
Realogy Corp., FRN, 4.596%, 4/10/13 ......................... 14,312,565
-------------
$ 17,087,899
=============
Unfunded loan commitments and funded portions of credit agreements are marked to
market daily and any unrealized appreciation or depreciation is included in the
Statement of Assets and Liabilities and Statement of Operations.
12. UNFUNDED CAPITAL COMMITMENTS
At December 31, 2008, the Fund had aggregate unfunded capital commitments to
investments of $83,691,707.
50| Annual Report
Mutual Shares Fund
NOTES TO FINANCIAL STATEMENTS (continued)
13. 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 year ended December
31, 2008, were as shown below.
NUMBER OF SHARES/ NUMBER OF SHARES/
WARRANTS/CONTRACTS/ WARRANTS/CONTRACTS/
PRINCIPAL AMOUNT PRINCIPAL AMOUNT VALUE AT REALIZED
HELD AT BEGINNING GROSS GROSS HELD AT END END OF INVESTMENT CAPITAL
NAME OF ISSUER OF YEAR ADDITIONS REDUCTIONS OF YEAR YEAR INCOME GAIN (LOSS)
- -------------------------- ------------------- ---------- ---------- ------------------- ----------- ---------- ----------
NON-CONTROLLED AFFILIATES
AboveNet Inc. ............ 810,649 31,771 -- 842,420 $42,121,000 $ -- $ --
AboveNet Inc.,
stock grant,
grant price $20.95,
expiration date
9/09/13 ............... 1,065 -- -- 1,065 2,396 -- --
AboveNet Inc.,
wts., 9/08/08 .......... 29,283 -- 29,283 -- -- -- --
AboveNet Inc.,
wts., 9/08/10 .......... 34,449 -- -- 34,449 137,796 -- --
Alexander's Inc. ......... 326,675 -- -- 326,675 83,269,458 2,286,725 --
Beazer Homes USA Inc. .... 2,147,880 -- 2,147,880 -- -- -- (68,675,999)
Community Health
Systems Inc ............ 4,806,000 -- -- 4,806,000 --(a) -- --
DecisionOne Corp. ........ 1,879,100 -- -- 1,879,100 -- -- --
DecisionOne Corp.,
12.00%, 4/15/10 ........ 2,322,817 95,912 -- 2,418,729 2,418,729 283,018 --
DecisionOne Corp.,
FRN, 5.50%, 5/12/09 .... 433,342 -- -- 433,342 433,342 33,639 --
DecisionOne Corp.,
wts., 6/08/17 .......... 1,031,766 -- -- 1,031,766 -- -- --
Elephant Capital
Holdings Ltd ........... 26,671 38,163 -- 64,834 -- -- --
Esmark Inc. .............. 8,341,744 -- 8,341,744 -- -- -- 6,072,725
Federal Signal Corp. ..... 3,360,800 -- -- 3,360,800 27,592,168 806,592 --
GLCP Harrah's
Investment LP .......... -- 22,185,100 -- 22,185,100 6,655,530 -- --
Guaranty Bancorp ......... 5,731,834 -- -- 5,731,834 11,463,668 -- --
IACNA Investor LLC ....... -- 678,719 -- 678,719 6,787 -- --
International
Automotive
Components Group
Brazil LLC ............ 6,069,096 1,165,717 -- 7,234,813 5,756,165 -- --
International
Automotive
Components Group
Japan LLC ............. 1,104,272 -- -- 1,104,272 1,193,429 -- --
International
Automotive
Components Group
LLC ................... 25,796,752 -- -- 25,796,752 4,388,028 -- --
International
Automotive
Components Group
NA LLC,
9.00%, 4/01/17 ........ 5,851,000 -- -- 5,851,000 2,820,654 526,590 --
International
Automotive
Components Group
NA LLC, A ............. 19,434,979 -- -- 19,434,979 3,164,015 -- --
Kindred Healthcare Inc. .. 2,860,528 22,669 -- 2,883,197 35,662,264 -- --
Kindred Healthcare Inc., stock grants:
grant price $18.15,
expiration date
7/17/11 ............... 9,997 -- 9,997 -- -- -- --
grant price $19.87,
expiration date
1/01/12 ............... 2,999 -- 2,999 -- -- -- --
grant price $6.94,
expiration date
1/01/13 ............... 2,986 -- 2,986 -- -- -- --
grant price $19.87,
expiration date
1/01/14 ............... 2,230 -- 2,230 -- -- -- --
Annual Report | 51
Mutual Shares Fund
NOTES TO FINANCIAL STATEMENTS (continued)
13. HOLDINGS OF 5% VOTING SECURITIES OF PORTFOLIO COMPANIES (continued)
NUMBER OF SHARES/ NUMBER OF SHARES/
WARRANTS/CONTRACTS/ WARRANTS/CONTRACTS/
PRINCIPAL AMOUNT PRINCIPAL AMOUNT VALUE AT REALIZED
HELD AT BEGINNING GROSS GROSS HELD AT END END OF INVESTMENT CAPITAL
NAME OF ISSUER OF YEAR ADDITIONS REDUCTIONS OF YEAR YEAR INCOME GAIN (LOSS)
- -------------------------- ------------------- ---------- ---------- ------------------- ------------ ----------- -----------
NON-CONTROLLED AFFILIATES (continued)
Kindred Healthcare Inc., stock grants:
(continued)
grant price $21.33,
expiration date
1/10/15 ............... 1,238 -- 1,238 -- $ -- $ -- $ --
grant price $22.08,
expiration date
1/10/16 ............... 619 -- 619 -- -- -- --
grant price $19.40,
expiration date
1/10/17 ............... -- 619 619 -- -- -- --
Tenet Healthcare
Corp ................... 25,881,411 -- -- 25,881,411 29,763,623 -- --
TVMAX Holdings Inc ....... 257,217 -- -- 257,217 -- -- --
TVMAX Holdings
Inc., PIK,
11.50%, 3/31/09 ........ 632,919 346,003 -- 978,922 685,245 90,068 --
TVMAX Holdings Inc.,
PIK, 14.00%,
3/31/09 ............... 1,595,750 252,464 9,927 1,838,287 1,286,801 218,119 --
White Mountains
Insurance Group
Ltd. .................. 729,457 -- -- 729,457 194,845,259 2,917,828 --
------------ ----------- ------------
TOTAL AFFILIATED SECURITIES (3.33% of Net Assets) $ 453,666,3 $77,162,579 $(62,603,274)
============= ============ ============
(a) As of December 31, 2008, no longer an affiliate.
14. OTHER CONSIDERATIONS
Officers, directors or employees of the Fund's Investment Manager, may serve
from time to time as members of boards of directors of companies in which the
Fund invests. Such participation may result in the possession by the Investment
Manager of material non-public information which, pursuant to the Fund's
policies and the requirements of applicable securities laws, could prevent the
Fund from trading in the securities of such companies for limited or extended
periods of time.
Franklin Mutual serves as investment manager to certain special purpose
entities that issue securities held by the Fund. Franklin Mutual is not
compensated for such services and does not invest in or exercise control over
such entities. As investment manager, Franklin Mutual is primarily responsible
for recommending investments in unaffiliated issuers to be held by the special
purpose entities. Securities issued by these special purpose entities are
restricted under the Securities Act of 1933 and are deemed to be illiquid.
52| Annual Report
Mutual Shares Fund
NOTES TO FINANCIAL STATEMENTS (continued)
15. REORGANIZATION TO A DELAWARE STATUTORY TRUST
On April 11, 2007, the Board and shareholders approved an Agreement and Plan of
Reorganization whereby the investment company would be reorganized and its
domicile changed from a Maryland corporation to a Delaware statutory trust. In
connection with these changes, the Trust's name was also changed to Franklin
Mutual Series Funds, formerly known as the Franklin Mutual Series Funds, Inc.
The reorganization became effective on May 1, 2008.
16. FAIR VALUE MEASUREMENTS
The Fund adopted Financial Accounting Standards Board (FASB) Statement No. 157,
"Fair Value Measurement" (SFAS 157), on January 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 December 31, 2008, in
valuing the Fund's assets and liabilities carried at fair value:
LEVEL 1 LEVEL 2 LEVEL 3 TOTAL
---------------- --------------- ------------- ----------------
ASSETS:
Investments in Securities ........ $ 10,660,691,231 $ 2,117,802,937 $ 445,944,511 $ 13,224,438,679
Other Financial Instruments (a) .. -- 201,078,684 -- 201,078,684
LIABILITIES:
Options written .................. -- 332,368 -- 332,368
Other Financial Instruments (a) .. -- 115,185,541 -- 115,185,541
(a) Other financial instruments includes net unrealized appreciation
(depreciation) on forward exchange contracts and unfunded loan
commitments.
Annual Report | 53
Mutual Shares Fund
NOTES TO FINANCIAL STATEMENTS (continued)
16. FAIR VALUE MEASUREMENTS (continued)
At December 31, 2008, the reconciliation of assets in which significant
unobservable inputs (Level 3) were used in determining the Fund's fair value, is
as follows:
INVESTMENTS IN
SECURITIES
----------------
Beginning Balance - January 31, 2008 ..................... $ 1,008,166,894
Net realized gain (loss) ............................... 6,471,717
Net change in unrealized appreciation (depreciation) ... (603,578,853)
Net purchases (sales) .................................. 40,375,149
Transfers in and/or out of Level 3 ..................... (5,490,396)
----------------
Ending Balance ........................................... $ 445,944,511
================
Net change in unrealized appreciation (depreciation)
attributable to assets still held at end of year ....... $ (646,358,707)
================
17. 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 Fund is currently evaluating the impact, if any, of
applying the various provisions of SFAS 161.
18. SUBSEQUENT EVENTS
On January 23, 2009, the Fund entered into, along with certain other funds
managed by Franklin Templeton Investments (individually, "Borrower";
collectively "Borrowers"), a $725 million senior unsecured syndicated global
line of credit ("Global Credit Facility") to provide a source of funds to the
Borrowers for temporary and emergency purposes and to meet future unanticipated
or unusually large redemption requests.
Under the terms of the Global Credit Facility, each Borrower has agreed to pay
its proportionate share of fees and expenses incurred in connection with the
implementation and maintenance of the Global Credit Facility.
ABBREVIATIONS
CURRENCY SELECTED PORTFOLIO
CAD - Canadian Dollar ADR - American Depository Receipt
EUR - Euro DIP - Debtor-In-Possession
GBP - British Pound Sterling FHLB - Federal Home Loan Bank
JPY - Japanese Yen FRN - Floating Rate Note
PIK - Payment-In-Kind
54| Annual Report
Mutual Shares Fund
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO THE BOARD OF TRUSTEES OF FRANKLIN MUTUAL SERIES FUNDS AND SHAREHOLDERS OF THE
MUTUAL SHARES FUND:
We have audited the accompanying statement of assets and liabilities of the
Mutual Shares Fund (one of the Funds constituting the Franklin Mutual Series
Funds) (the "Fund"), including the statement of investments, as of December 31,
2008, and the related statement of operations for the year then ended, the
statements of changes in net assets for each of the two years in the period then
ended, and the financial highlights for each of the five years in the period
then ended. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. We were
not engaged to perform an audit of the Fund's internal control over financial
reporting. Our audits included consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Fund's internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements and financial highlights, assessing the accounting principles used
and significant estimates made by management, and evaluating the overall
financial statement presentation. Our procedures included confirmation of
securities owned as of December 31, 2008, by correspondence with the custodian
and brokers or by other appropriate auditing procedures where replies from the
brokers were not received. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
Mutual Shares Fund of the Franklin Mutual Series Funds at December 31, 2008, the
results of its operations for the year then ended, the changes in its net assets
for each of the two years in the period then ended, and the financial highlights
for each of the five years in the period then ended, in conformity with U.S.
generally accepted accounting principles.
[ERNST & YOUNG LLP]
Boston, Massachusetts
February 17, 2009
Annual Report | 55
Mutual Shares Fund
TAX DESIGNATION (UNAUDITED)
Under Section 852(b)(3)(C) of the Internal Revenue Code (Code), the Fund
designates the maximum amount allowable but no less than $33,579,401 as a long
term capital gain dividend for the fiscal year ended December 31, 2008.
Under Section 871(k)(2)(C) of the Code, the Fund designates the maximum amount
allowable but no less than $156,063,265 as a short term capital gain dividend
for purposes of the tax imposed under Section 871(a)(1)(A) of the Code for the
fiscal year ended December 31, 2008.
Under Section 854(b)(2) of the Code, the Fund designates the maximum amount
allowable but no less than $423,398,311 as qualified dividends for purposes of
the maximum rate under Section 1(h)(11) of the Code for the fiscal year ended
December 31, 2008. Distributions, including qualified dividend income, paid
during calendar year 2008 will be reported to shareholders on Form 1099-DIV in
January 2009. Shareholders are advised to check with their tax advisors for
information on the treatment of these amounts on their individual income tax
returns.
Under Section 854(b)(2) of the Code, the Fund designates 61.69% of the ordinary
income dividends as income qualifying for the dividends received deduction for
the fiscal year ended December 31, 2008.
Under Section 871(k)(1)(C) of the Code, the Fund designates the maximum amount
allowable but no less than $83,274,420 as interest related dividends for
purposes of the tax imposed under Section 871(a)(1)(A) of the Code for the
fiscal year ended December 31, 2008.
56| Annual Report
Mutual Shares Fund
BOARD MEMBERS AND OFFICERS
The name, year of birth and address of the officers and board members, as well
as their affiliations, positions held with the Fund, principal occupations
during the past five years and number of portfolios overseen in the Franklin
Templeton Investments fund complex are shown below. Generally, each board member
serves until that person's successor is elected and qualified.
INDEPENDENT BOARD MEMBERS
NUMBER OF PORTFOLIOS IN
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- --------------------------------- ------------ ---------------- ----------------------- ---------------------------------------
EDWARD I. ALTMAN, PH.D. (1941) Trustee Since 1987 7 None
c/o Franklin Mutual Advisers, LLC
101 John F. Kennedy Parkway
Short Hills, NJ 07078-2789
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Max L. Heine Professor of Finance and Director of The Credit and Debt Markets Research Program, Salomon Center, Stern School of
Business, New York University; editor and author of numerous financial publications; financial consultant; a director to numerous
financial publishing organizations; and FORMERLY, Vice Director, Salomon Center, Stern School of Business, New York University.
ANN TORRE BATES (1958) Trustee Since 1994 30 SLM Corporation (Sallie Mae) and
c/o Franklin Mutual Advisers, LLC Allied Capital Corporation (financial
101 John F. Kennedy Parkway services).
Short Hills, NJ 07078-2789
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Independent strategic and financial consultant; and FORMERLY, Executive Vice President and Chief Financial Officer, NHP
Incorporated (manager of multifamily housing) (1995-1997); and Vice President and Treasurer, US Airways, Inc. (until 1995).
BURTON J. GREENWALD (1929) Trustee Since 2002 14 Franklin Templeton Emerging Markets
c/o Franklin Mutual Advisers, LLC Debt Opportunities Fund PLC and
101 John F. Kennedy Parkway Fiduciary International Ireland Limited.
Short Hills, NJ 07078-2789
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Managing Director, B.J. Greenwald Associates (management consultants to the financial services industry); and FORMERLY, Chairman,
Fiduciary Trust International Funds; Executive Vice President, L.F Rothschild Fund Management, Inc.; President and Director, Merit
Mutual Funds; President, Underwriting Division and Director, National Securities & Research Corporation; Governor, Investment
Company Institute and Chairman, ICI Public Information Committee.
BRUCE A. MACPHERSON (1930) Trustee Since 1974 7 None
c/o Franklin Mutual Advisers, LLC
101 John F. Kennedy Parkway
Short Hills, NJ 07078-2789
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Retired, former Chairman, A.A. MacPherson, Inc., Canton, MA (representative for electrical manufacturers).
Annual Report | 57
NUMBER OF PORTFOLIOS IN
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- --------------------------------- ------------ ---------------- ----------------------- ---------------------------------------
CHARLES RUBENS II (1930) Trustee Since 1998 14 None
c/o Franklin Mutual Advisers, LLC
101 John F. Kennedy Parkway
Short Hills, NJ 07078-2789
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Private investor.
ROBERT E. WADE (1946) Trustee and Trustee 37 El Oro and Exploration Co., p.l.c.
c/o Franklin Mutual Advisers, LLC Chairman since 1991 and (investments).
101 John F. Kennedy Parkway of the Board Chairman of the
Short Hills, NJ 07078-2789 Board since 2005
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Retired, former practicing attorney.
INTERESTED BOARD MEMBERS AND OFFICERS
NUMBER OF PORTFOLIOS IN
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- --------------------------------- ------------ ---------------- ----------------------- -------------------------------------
**GREGORY E. JOHNSON (1961) Trustee Since 2007 92 None
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director, President and Chief Executive Officer, Franklin Resources, Inc.; President, Templeton Worldwide, Inc.; Director,
Templeton Asset Management Ltd.; and officer and/or director or trustee, as the case may be, of some of the other subsidiaries of
Franklin Resources, Inc. and of 33 of the investment companies in Franklin Templeton Investments.
**PETER A. LANGERMAN (1955) Trustee, Trustee 7 None
c/o Franklin Mutual Advisers, LLC President since 2007,
101 John F. Kennedy Parkway and Chief President and
Short Hills, NJ 07078-2702 Executive Chief Executive
Officer - Officer -
Investment Investment
Management Management
since 2005
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Chairman of the Board, Chief Executive Officer and President, Franklin Mutual Advisers, LLC; officer and/or director, as the case
may be, of three of the investment companies in Franklin Templeton Investments; and FORMERLY, Director, New Jersey's Division of
Investment.
JENNIFER J. BOLT (1964) Chief Since Not Applicable Not Applicable
One Franklin Parkway Executive December 2008
San Mateo, CA 94403-1906 Officer -
Finance and
Administration
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Executive Vice President - Operations and Technology, Franklin Resources, Inc.; Director, Templeton Global Advisors Limited;
officer and/or director, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and
of 46 of the investment companies in Franklin Templeton Investments.
58| Annual Report
NUMBER OF PORTFOLIOS IN
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- --------------------------------- -------------- ------------------ ----------------------- -----------------------------------
PHILIPPE BRUGERE-TRELAT (1949) Vice President Since 2005 Not Applicable Not Applicable
101 John F. Kennedy Parkway
Short Hills, NJ 07078-2789
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice President, Franklin Mutual Advisers, LLC; Portfolio Manager of Eurovest SA (French registered Investment Company, Sicav);
and officer of two of the investment companies in Franklin Templeton Investments.
JAMES M. DAVIS (1952) Chief Chief Compliance Not Applicable Not Applicable
One Franklin Parkway Compliance Officer since 2004
San Mateo, CA 94403-1906 Officer and and Vice President
Vice President - AML Compliance
- AML since 2006
Compliance
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director, Global Compliance, Franklin Resources, Inc.; officer of some of the other subsidiaries of Franklin Resources, Inc. and of
46 of the investment companies in Franklin Templeton Investments; and formerly, Director of Compliance, Franklin Resources, Inc.
(1994-2001).
MICHAEL J. EMBLER (1964) Senior Vice Since 2005 Not Applicable Not Applicable
101 John F. Kennedy Parkway President
Short Hills, NJ 07078-2789 and Chief
Investment
Officer
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Vice President and Chief Investment Officer, Franklin Mutual Advisers, LLC; and officer of two of the investment companies in
Franklin Templeton Investments.
LAURA F. FERGERSON (1962) Chief Financial Since Not Applicable Not Applicable
One Franklin Parkway Officer and February 2008
San Mateo, CA 94403-1906 Chief
Accounting
Officer
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice President, Franklin Templeton Services, LLC; officer of 46 of the investment companies in Franklin Templeton Investments;
and FORMERLY, Director and member of Audit and Valuation Committees, Runkel Funds, Inc. (2003-2004); Assistant Treasurer of
most of the investment companies in Franklin Templeton Investments (1997-2003); and Vice President, Franklin Templeton Services,
LLC (1997-2003).
JIMMY D. GAMBILL (1947) Vice President Since Not Applicable Not Applicable
500 East Broward Blvd. February 2008
Suite 2100
Fort Lauderdale, FL 33394-3091
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
President, Franklin Templeton Services, LLC; Senior Vice President, Templeton Worldwide, Inc.; and officer of some of the other
subsidiaries of Franklin Resources, Inc. and of 46 of the investment companies in Franklin Templeton Investments.
Annual Report | 59
NUMBER OF PORTFOLIOS IN
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- --------------------------------- -------------- ------------------ ----------------------- ----------------------------------
STEVEN J. GRAY (1955) Secretary Since 2005 Not Applicable Not Applicable
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Associate General Counsel, Franklin Templeton Investments; Secretary, Franklin Advisory Services, LLC, Franklin Mutual
Advisers, LLC and Franklin Templeton Distributors, Inc.; and officer of 41 of the investment companies in Franklin Templeton
Investments.
GREGORY R. SEWARD (1956) Treasurer Since 2005 Not Applicable Not Applicable
500 East Broward Blvd.
Suite 2100
Fort Lauderdale, FL 33394-3091
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice President, Franklin Templeton Services, LLC; officer of 18 of the investment companies in Franklin Templeton Investments;
and FORMERLY, Vice President, JPMorgan Chase (2000-2004) and American General Financial Group (1991-2000).
CRAIG S. TYLE (1960) Vice President Since 2005 Not Applicable Not Applicable
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
General Counsel and Executive Vice President, Franklin Resources, Inc.; officer of some of the other subsidiaries of Franklin
Resources, Inc. and of 46 of the investment companies in Franklin Templeton Investments; and FORMERLY, Partner, Shearman &
Sterling, LLP (2004-2005); and General Counsel, Investment Company Institute (ICI) (1997-2004).
* We base the number of portfolios on each separate series of the U.S.
registered investment companies within the Franklin Templeton Investments
fund complex. These portfolios have a common investment manager or
affiliated investment managers.
** Gregory E. Johnson is considered to be an interested person of the Fund
under the federal securities laws due to his position as an officer and
director of Franklin Resources, Inc., which is the parent company of the
Fund's investment manager and distributor. Peter A. Langerman is
considered to be an interested person of the Fund under the federal
securities laws due to his position as an officer of Franklin Mutual
Advisers, LLC, which is the parent company of the Fund's investment
manager.
Note 1: Officer information is current as of the date of this report. It is
possible that after this date, information about officers may change.
Note 2: Gregory E. Johnson is the brother of Jennifer J. Bolt.
THE FUND'S BOARD OF DIRECTORS HAS DETERMINED THAT CERTAIN OF THE MEMBERS OF THE
AUDIT COMMITTEE, INCLUDING ANN TORRE BATES, ARE AUDIT COMMITTEE FINANCIAL
EXPERTS, AND "INDEPENDENT," UNDER THOSE PROVISIONS OF THE SARBANES-OXLEY ACT OF
2002, AND THE RULES AND FORM AMENDMENTS ADOPTED BY THE SECURITIES AND EXCHANGE
COMMISSION, RELATING TO AUDIT COMMITTEE FINANCIAL EXPERTS.
THE STATEMENT OF ADDITIONAL INFORMATION (SAI) INCLUDES ADDITIONAL INFORMATION
ABOUT THE BOARD MEMBERS AND IS AVAILABLE, WITHOUT CHARGE, UPON REQUEST.
SHAREHOLDERS MAY CALL (800) DIAL BEN/(800) 342-5236 TO REQUEST THE SAI.
60| Annual Report
Mutual Shares 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.
Annual Report | 61
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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 Michigan (7)
Arizona Minnesota (7)
California (8) Missouri
Colorado New Jersey
Connecticut New York (8)
Florida North Carolina
Georgia Ohio (7)
Kentucky Oregon
Louisiana Pennsylvania
Maryland Tennessee
Massachusetts (7) 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.
Not part of the annual report
[FRANKLIN TEMPLETON INVESTMENT LOGO]
One Franklin Parkway
San Mateo, CA 94403-1906
- -- WANT TO RECEIVE THIS DOCUMENT FASTER VIA EMAIL?
Eligible shareholders can sign up for eDelivery at
franklintempleton.com. See inside for details.
ANNUAL REPORT AND SHARE HOLDER LETTER
MUTUAL SHARES FUND
INVESTMENT MANAGER
Franklin Mutual Advisers, LLC
101 John F. Kennedy Parkway
Short Hills, NJ 07078
DISTRIBUTOR
Franklin Templeton Distributors, Inc.
(800) DIAL BEN (R)
franklintempleton.com
SHAREHOLDER SERVICES
(800) 632-2301 - (Class A, B, C & R)
(800) 448-FUND - (Class Z)
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. 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.
(GRAPHIC)
DECEMBER 31, 2008
ANNUAL REPORT AND SHAREHOLDER LETTER VALUE
MUTUAL QUALIFIED FUND
WANT TO RECEIVE THIS DOCUMENT
FASTER VIA EMAIL?
Eligible shareholders can
sign up for eDelivery at
franklintempleton.com.
See inside for details.
(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 annual report
Contents
SHAREHOLDER LETTER ....................................................... 1
ANNUAL REPORT
Mutual Qualified Fund .................................................... 5
Performance Summary ...................................................... 11
Your Fund's Expenses ..................................................... 16
Financial Highlights and Statement of Investments ........................ 18
Financial Statements ..................................................... 30
Notes to Financial Statements ............................................ 34
Report of Independent Registered Public Accounting Firm .................. 51
Tax Designation .......................................................... 52
Board Members and Officers ............................................... 53
Shareholder Information .................................................. 57
Shareholder Letter
Dear Mutual Qualified Fund Shareholder:
As we write this letter, 2008 has just drawn to a close. Like many other
investors, we are not sorry to see it pass. From a purely financial perspective,
it was a painful year, bringing stock market declines ranging from 40% to 50%
across most of the developed world (with greater losses in many emerging
markets) as well as a credit crisis and climate of fear that prompted a global
recession. These events have effectively wiped out the shareholders of such
institutions as Fannie Mae, Freddie Mac, AIG, Bear Stearns, Lehman Brothers,
Fortis, Washington Mutual and Wachovia, and have led to extraordinary government
intervention in the financial markets. Policy makers have no definitive playbook
for guidance, and the world of finance is being remade before our eyes.
As stewards of our investors' capital, we have always followed an investment
approach that places a premium on limiting our portfolio's downside exposure.
This is inherent in our focus on buying companies cheaply -- when their
securities are trading at a meaningful discount to our analysis of intrinsic
value -- and selling them as they trade close to that value. We are particularly
attracted to stocks where an identifiable catalyst exists to unlock the
valuation discount. We also buy distressed securities and participate in merger
arbitrage and privately negotiated transactions when we feel we can generate
attractive risk-adjusted returns for Fund investors.
Although we did manage to perform better than our benchmark, not an
inconsiderable achievement in these markets, we are nevertheless dissatisfied by
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are eligible for eDelivery.
NOT FDIC INSURED | MAY LOSE VALUE | NO BANK GUARANTEE
Not part of the annual report | 1
Fund's absolute loss. Several factors contributed to this, some market related
and others self-inflicted.
First, and perhaps most important, was the generally indiscriminate devaluation
of stocks across industries, geographies and market capitalizations. In short,
there were few safe havens as even companies in the less cyclical, more
defensive industries that make up the Fund's core, including consumer staples,
health care, utilities and telecommunications companies, were all down at least
18% in 2008, and in some cases significantly more.
Second, we underestimated the ferocity of the economic downturn and its impact
on the valuations of some of the more economically sensitive companies owned,
including those in the industrials and consumer discretionary sectors.
Third, entering 2008 the Fund owned shares of several large European banks that
we believed had very limited exposure to the difficulties that roiled the U.S.
financial system. Subsequent events proved that the contagion had spread to
these institutions as well.
Fourth, due to the repricing of corporate credit risk and paralysis in the
credit markets, the stocks of leveraged companies, i.e., companies with
substantial debt, were disproportionately punished by the markets.
In a year of few highlights, we did get some things right. First, as a number of
securities reached our assessment of their intrinsic value, the cash position
that had started to rise in 2007 continued to do so in 2008 as we resisted the
temptation to reinvest proceeds from sales. Valuations, in some cases, appeared
very low, but this can be quite deceptive given that a significant amount of
earnings growth in past years has come from leverage.
Second, the put positions initiated in 2007 as cheap insurance against
catastrophic events fully played their role. As volatility reached new highs in
October, we unwound them.
Third, we increased our foreign currency hedges over the year, which mitigated
the drag caused by an appreciating dollar.
Fourth, with the exception of holding a few oil services stocks, the Fund
largely stayed on the sidelines during the commodity bubble that burst during
the summer of 2008. Although we sold some shares over the summer, the Fund still
owned some at year-end. International oil majors and national oil companies were
willing to pursue their investments and pushed day rates of some drilling
equipment to new highs in the fourth quarter; however, stock prices followed oil
price movements downward.
2 | Not part of the annual report
Fifth, merger arbitrage, an area that has historically provided returns with a
low to moderate correlation to the overall market, was a source of
outperformance as we focused on deals with sound industrial logic and strong
financial backing. Arbitrage markets experienced price dislocation after
September, and we used some of the Fund's cash to pursue this strategy.
Looking forward, we are focused on a number of factors. Rather than try to be
macroeconomists or market strategists, we instead focus on our discipline of
buying securities at what we believe are very attractive prices and investing
for the long term. However, one cannot ignore the macroeconomic backdrop
entering 2009, and we are proceeding with a fairly high degree of caution.
Although the actions of central banks across the globe may have temporarily
stabilized the financial system, we are not convinced that the worst of the
economic news is behind us. Nevertheless, given the indiscriminate nature of the
market carnage, such an environment creates opportunities -- and we are focused
on four particular areas:
- Distressed debt, a quiet area for the past several years due to robust
economic and capital market conditions. The leveraged buyout boom from
2005 through mid-2007 is likely to result in defaults by many good
companies with bad balance sheets in the coming years. We consider
this an area of particular opportunity although it is still early.
Most of the distressed opportunities through year-end 2008 have been
in bad companies with bad balance sheets, which interest us little. In
the meantime, we have sought to take advantage of credit market
dislocation and technical pressure to add positions in a number of
senior secured corporate loans that are trading at levels we think
will generate equity-like returns with, in our view, a low risk of
principal loss;
- Stocks of companies in economically defensive industries, with strong
market positions, high barriers to entry, and reasonably predictable
earnings and cash flows, many of which we consider as attractively
valued today as they have been in years;
- Stocks disproportionately punished by the market, perhaps because they
were owned heavily by hedge funds or have a higher degree of leverage
but have no need to access the credit markets for a number of years;
and
- Stocks of market-leading global companies, sometimes in more
economically sensitive industries, that are extremely attractive for
long-term investors, including a number of commodity-oriented
companies.
Not part of the annual report | 3
As a final note, periods of economic and market instability historically have
created favorable opportunities for long-term, patient and disciplined
investors. We believe this time should be no exception. The basic institutions
that underlie our economic and political system have proven their ability to
adapt to changing conditions and emerge stronger from severe dislocations. We
are excited about the prospects of participating in this chapter, albeit a
difficult one, of our economic history and believe our approach should serve our
shareholders well over the long term. We certainly appreciate your support over
the past year and look forward to a more prosperous year ahead.
Sincerely,
/s/ Peter A. Langerman
Peter A. Langerman
Chairman, President and
Chief Executive Officer
Franklin Mutual Advisers, LLC
/s/ Michael J. Embler
Michael J. Embler
Senior Vice President and
Chief Investment Officer
Franklin Mutual Advisers, LLC
THIS LETTER REFLECTS OUR ANALYSIS AND OPINIONS AS OF DECEMBER 31, 2008. 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.
4 | Not part of the annual report
Annual Report
Mutual Qualified Fund
YOUR FUND'S GOALS AND MAIN INVESTMENTS: Mutual Qualified Fund seeks capital
appreciation, with income as a secondary goal, by investing primarily in equity
securities of companies the Fund's managers believe are at prices below their
intrinsic value. The Fund may invest up to 50% of its assets in foreign
securities.
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 annual report for Mutual Qualified Fund covers the fiscal year ended
December 31, 2008.
PERFORMANCE OVERVIEW
Mutual Qualified Fund - Class Z had a -25.34% cumulative total return for the 12
months ended December 31, 2008. The Fund performed better than its benchmark,
the Standard & Poor's 500 Index (S&P 500), which had a -37.00% total return for
the same period.(1) You can find the Fund's long-term performance data in the
Performance Summary beginning on page 11.
ECONOMIC AND MARKET OVERVIEW
In 2008, the U.S. economy faltered and The Conference Board's Consumer
Confidence Index fell to an all-time low since it began in 1967. The
government's abrupt conservatorship of Fannie Mae and Freddie Mac and the
failure of several blue-chip banks and financial institutions roiled the equity
markets. Despite government interventions and massive emergency funding, rapidly
weakening manufacturing activity and falling home prices exacerbated the
nation's economic troubles. Jobless claims mounted and the unemployment rate
rose to 7.2% by period-end.(2) In early December, the National Bureau of
Economic Research officially declared the U.S. economy has been in recession
since December 2007.
(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 S&P 500 consists of 500 stocks chosen for market
size, liquidity and industry group representation. Each stock's weight in
the index is proportionate to its market value. The S&P 500 is one of the
most widely used benchmarks of U.S. equity performance. 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.
(2.) Source: Bureau of Labor Statistics.
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.
Annual Report | 5
GEOGRAPHIC BREAKDOWN
Based on Total Net Assets as of 12/31/08
(BAR CHART)
U.S. 24.3%
France 6.3%
U.K. 5.6%
Germany 3.7%
Switzerland 2.6%
South Korea 2.4%
Norway 1.7%
Finland 1.4%
Hong Kong 1.3%
Bermuda 1.3%
Other 2.8%
Short-Term Investments & Other Net Assets 46.6%
The weakening U.S. economy negatively impacted growth prospects around the
world. Although growth in the first half of the year was robust in developing
economies, particularly in Asia, signs of a global slowdown surfaced in the
latter half. In an environment of extremely high commodity prices that increased
inflationary pressure, the world's monetary authorities faced the choice of
lowering short-term interest rates to stimulate growth or raising them to fight
rising inflation. Stimulus provided through fiscal and monetary policies
implemented around the globe sought to restore financial market stability and
reignite economic growth.
The U.S. Treasury and the Federal Reserve Board took unprecedented steps,
including lowering short-term rates to near 0% from 4.25%. The European Central
Bank and many of the world's other central banks had raised rates due to
inflationary pressures. Later in the year, the potential for global recession
trumped inflationary concerns, and the world's monetary authorities cut interest
rates aggressively. The U.S. dollar, which had declined earlier in the period
versus many of the world's currencies, regained ground quickly toward period-end
as a flight to the relative safety of U.S. Treasuries prevailed.
In this challenging economic time, volatility came to define global equity
markets. Virtually all local indexes ended the 12-month period with marked
losses. Despite negative economic data and an outlook for decelerating corporate
earnings and profit margins globally, many companies outside the financials
sector retained relatively strong balance sheets.
INVESTMENT STRATEGY
At Mutual Series, we are committed to our distinctive value approach to
investing, which we believe can generate above-average risk-adjusted returns
over time for our shareholders. Our major investment strategy is investing in
undervalued stocks. When selecting undervalued equities, we are always attracted
to fundamentally strong companies with healthy balance sheets, high-quality
assets, substantial free cash flow and shareholder-oriented management teams and
whose stocks are trading at discounts to our assessment of the companies'
intrinsic or business value. We also look for asset rich companies whose shares
may be trading at depressed levels due to concerns over short-term earnings
disappointments, litigation, management strategy or other perceived negatives.
This strict value approach is not only intended to improve the likelihood of
upside potential, but it is also intended to reduce the risk of substantial
declines. While the vast majority of our undervalued equity investments are made
in publicly traded companies globally, we may invest occasionally in privately
held companies as well.
6 | Annual Report
We complement this more traditional investment strategy with two others. One is
distressed investing, a highly specialized field that has proven quite
profitable during certain periods over the years. Distressed investing is
complex and can take many forms. The most common distressed investment the Fund
undertakes is the purchase of financially troubled or bankrupt companies' debt
at a substantial discount to face value. After the financially distressed
company is reorganized, often in bankruptcy court, the old debt is typically
replaced with new securities issued by the financially stronger company.
The other piece of our investment strategy is participating in arbitrage
situations, another highly specialized field. When companies announce proposed
mergers or takeovers, commonly referred to as "deals," the target company may
trade at a discount to the bid it ultimately accepts. One form of arbitrage
involves purchasing the target company's stock when it is trading below the
value it would receive in a deal. In keeping with our commitment to a relatively
conservative investment approach, we typically focus our arbitrage efforts on
announced deals, and eschew rumored deals or other situations we consider
relatively risky.
In addition, we will generally seek to hedge the Fund's currency exposure when
we deem it advantageous for our shareholders.
MANAGER'S DISCUSSION
In 2008, all market sectors suffered double-digit declines, and we had our share
of poor-performing securities. During the period under review, three investments
that declined in value were property and casualty insurance and reinsurance
provider White Mountains Insurance Group; Carrefour, a global food retailer
based in France; and Virgin Media, a U.K.-based cable company.
White Mountains' share price declined 47% during the year as the company's book
value suffered from poor returns on its investment portfolio, losses from
Hurricane Ike, and dilution from its acquisition of Berkshire Hathaway's 16%
stake in White Mountains stock at $485 per share. Operationally, White
Mountains' businesses appeared well positioned to benefit if insurance pricing
improves toward the end of 2009 and into 2010. If capital markets revert to more
normal conditions, we believe the company's investment portfolio could add to
book value. The stock traded well below our assessment of its intrinsic value in
2008 as investors discounted its illiquidity and inability to capture value
through asset disposals during the year's market dislocation.
Carrefour is the second-largest food retailer chain after Wal-Mart with
operations mainly in Europe, but also in Asia and Latin America. During 2008,
Carrefour continued to announce some cost savings programs including the
conversion of its Champion supermarket chain into Carrefour Express. This
TOP 10 SECTORS/INDUSTRIES
Based on Equity Securities as of 12/31/08
% OF TOTAL
NET ASSETS
----------
Tobacco 14.4%
Insurance 7.7%
Food Products 6.7%
Industrial Conglomerates 2.6%
Energy Equipment & Services 2.2%
Beverages 1.9%
Real Estate Investment Trusts 1.7%
Health Care Providers & Services 1.7%
Machinery 1.6%
Real Estate Management & Development 1.5%
Annual Report | 7
TOP 10 HOLDINGS
12/31/08
COMPANY % OF TOTAL
SECTOR/INDUSTRY, COUNTRY NET ASSETS
- ------------------------ ----------
UST Inc. 3.9%
TOBACCO, U.S.
British American Tobacco PLC 2.4%
TOBACCO, U.K.
Groupe Danone 2.3%
FOOD PRODUCTS, FRANCE
Berkshire Hathaway Inc., A & B 2.2%
INSURANCE, U.S.
White Mountains Insurance Group Ltd. 2.1%
INSURANCE, U.S.
Reynolds American Inc. 1.6%
TOBACCO, U.S.
Orkla ASA 1.4%
INDUSTRIAL CONGLOMERATES, NORWAY
Nestle SA 1.4%
FOOD PRODUCTS, SWITZERLAND
Lorillard Inc. 1.4%
TOBACCO, U.S.
Imperial Tobacco Group PLC 1.4%
TOBACCO, U.K.
was not enough to offset weaker consumption in Carrefour's main European market,
a switch to private label products that generate lower gross margins and the
wrong price positioning in its global chain of hypermarkets (department store
and supermarket). As a result, our investment in the company fell nearly 41% in
local currency during the year. Carrefour made a number of management
appointments that looked promising to us, including a new CEO. The company also
tapped a new head for the company's French operations who had a successful track
record in Spain. He came from Nestle, where he was the number-two executive and
known as a good marketer and cost cutter.
Virgin Media is the U.K.'s largest cable provider. The Fund's shares declined
73% in local currency as the U.K. economic environment became increasingly
challenged and market fears arose that recent recessionary impacts on consumers'
discretionary spending might lead to deterioration in Virgin's customer metrics
and financial position going forward. Virgin's stock was also negatively
affected by the global credit crisis as the company is relatively leveraged. On
the upside, the company succeeded in paying off or refinancing most of its debt
maturing before 2012.
For the year, several holdings had successful outcomes. The Fund's
top-performing holdings included equity index put options, which allow holders
to profit if the equity market declines within a preset period of time; KT&G
Corp., a South Korean tobacco and ginseng producer; Esmark, a Chicago-based
steel company; Wm. Wrigley Jr. Company, the U.S. chewing gum giant that was the
subject of a takeover bid; and brewer Anheuser-Busch, which was another merger
arbitrage play.
We initially acquired S&P 500 puts as a hedge on potential market deterioration,
as these instruments generally increase in value as the U.S. stock market
declines. Index puts are normally priced relative to volatility, a measure of
the probability of significant moves in prices. Index puts were inexpensive in
historical terms in 2007, when we first began buying them, and they remained
relatively inexpensive into the beginning of 2008. As equity markets fell, we
profitably reduced the Fund's position. Their addition to Fund performance
helped offset some of the broad equity market's negative impact on other
portfolio securities. At period-end, the Fund held no position in index options.
KT&G, South Korea's largest tobacco company with over 65% in national market
share, has been a consistently profitable investment for the Fund. During 2008,
the Fund's shares rose nearly 10% in local currency. The company continued to
report earnings-per-share above expectations, largely due to higher selling
prices for its cigarettes, share buybacks and internal cost savings. Cost
savings were driven by the purchase of tobacco leaves on the international
market, where prices were 20% to 30% less than for tobacco farmed in South
Korea. KT&G attracted more attention from the investment community in 2008 due
to its historically defensive characteristics: cigarette consumption
8 | Annual Report
increased during the last economic downturn, in 1998; limited impact from a
weakening South Korean currency, the won; and stable cash flows in a market
dominated by cyclical industries. As KT&G's share price rose, we took profits on
part of the Fund's investment during 2008.
Esmark (sold by period-end) was started to consolidate the highly fragmented
steel service center industry that was ultimately merged with Wheeling
Pittsburgh Steel Company (WPSC) in September of 2007. During 2008, the newly
combined company received several competing acquisition proposals before
ultimately being sold in an all-cash transaction to Russian steelmaker Severstal
for $19.25 per share. Overall, the Fund's Esmark shares rose more than 51% while
we held them in 2008.
Privately-held candy firm Mars successfully completed its acquisition of
Wrigley, transforming the publicly-traded chewing gum giant into a Mars
subsidiary. Several arbitrage transactions attempted during 2008 failed for lack
of financing or material adverse changes in the underlying business. We believed
neither problem would affect this deal because of the companies' solid operating
performance and fully-committed and well-documented financing. In fact, prior
failures and extremely tight credit markets created an opportunity for us to
take advantage of an exceptionally wide spread (the difference between the
Fund's purchase price for the target company and the price at which the target
was eventually taken over) on this acquisition. Financing for the transaction
was provided by well-regarded institutions such as Berkshire Hathaway, Goldman
Sachs and JPMorgan Chase. Berkshire Hathaway will continue to hold a minority
equity investment in the Wrigley subsidiary. Our investment in Wrigley rose
nearly 4% for the period we held it.
Anheuser-Busch received an unsolicited $65-per-share cash takeover offer from
Belgian brewing giant InBev in the spring of 2008. In our analysis, the company
had been a long-time underperformer and suffered from a complacent management
team. After the initial announcement, we began to buy shares at a discount to
the offer as we believed the acquirer had the financial strength and management
aggressiveness to increase its price and complete the deal. In July, the board
of Anheuser-Busch accepted InBev's enhanced $70-per-share cash offer. As the
global credit crunch accelerated in September and October, Anheuser-Busch shares
traded lower over concerns that the deal might not close, and we used this
opportunity to add to the Fund's position. InBev completed the acquisition in
November, and the new company, Anheuser-Busch InBev, became the largest global
brewer. Overall, the Fund's investment appreciated almost 9% during 2008.
Finally, investors should note that we maintained our currency hedging posture
of being generally hedged to the U.S. dollar for most of our non-U.S. holdings.
Since the dollar was stronger compared with most foreign currencies during 2008,
the Fund benefited to the extent it was hedged.
Annual Report | 9
Thank you for your continued participation in Mutual Qualified Fund. We look
forward to serving your future investment needs.
(PHOTO OF ANNE E. GUDEFIN)
/s/ Anne E. Gudefin
Anne E. Gudefin, CFA
Portfolio Manager
(PHOTO OF SHAWN M. TUMULTY)
/s/ Shawn M. Tumulty
Shawn M. Tumulty, CFA
Assistant Portfolio Manager
Mutual Qualified Fund
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS
AS OF DECEMBER 31, 2008, 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.
ANNE GUDEFIN has been portfolio manager for Mutual Qualified Fund since 2002.
She is also portfolio manager for Mutual Discovery Fund and has been a member of
the management team of the Mutual Series Funds since 2000, when she joined
Franklin Templeton Investments. Previously, she was an analyst at Perry Capital.
SHAWN TUMULTY has been assistant portfolio manager for Mutual Qualified Fund
since 2003. He joined Franklin Templeton Investments in 2000. Prior to joining
Franklin Templeton Investments, Mr. Tumulty was an analyst and portfolio manager
at Hamilton Partners Limited.
10 | Annual Report
Performance Summary as of 12/31/08
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 and graphs do 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 Z (SYMBOL: MQIFX) CHANGE 12/31/08 12/31/07
- ----------------------- ------ -------- --------
Net Asset Value (NAV) -$7.25 $14.59 $21.84
DISTRIBUTIONS (1/1/08-12/31/08)
Dividend Income $0.3196
Short-Term Capital Gain $0.9134
Long-Term Capital Gain $0.4935
TOTAL $1.7265
CLASS A (SYMBOL: TEQIX) CHANGE 12/31/08 12/31/07
- ----------------------- ------ -------- --------
Net Asset Value (NAV) -$7.20 $14.50 $21.70
DISTRIBUTIONS (1/1/08-12/31/08)
Dividend Income $0.2590
Short-Term Capital Gain $0.9134
Long-Term Capital Gain $0.4935
TOTAL $1.6659
CLASS B (SYMBOL: TEBQX) CHANGE 12/31/08 12/31/07
- ----------------------- ------ -------- --------
Net Asset Value (NAV) -$7.05 $14.19 $21.24
DISTRIBUTIONS (1/1/08-12/31/08)
Dividend Income $0.1120
Short-Term Capital Gain $0.9134
Long-Term Capital Gain $0.4935
TOTAL $1.5189
CLASS C (SYMBOL: TEMQX) CHANGE 12/31/08 12/31/07
- ----------------------- ------ -------- --------
Net Asset Value (NAV) -$7.12 $14.38 $21.50
DISTRIBUTIONS (1/1/08-12/31/08)
Dividend Income $0.1211
Short-Term Capital Gain $0.9134
Long-Term Capital Gain $0.4935
TOTAL $1.5280
Annual Report | 11
Performance Summary (CONTINUED)
PERFORMANCE(1)
CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETURN AND
VALUE OF $10,000 INVESTMENT INCLUDE MAXIMUM SALES CHARGES. CLASS Z: NO 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 Z 1-YEAR 5-YEAR 10-YEAR
- ------- ------- ------- --------
Cumulative Total Return(2) -25.34% +26.12% +101.86%
Average Annual Total Return(3) -25.34% +4.75% +7.28%
Value of $10,000 Investment(4) $ 7,466 $12,612 $20,186
Total Annual Operating Expenses(5) 0.80%
CLASS A 1-YEAR 5-YEAR 10-YEAR
- ------- ------- ------- --------
Cumulative Total Return(2) -25.55% +24.08% +95.10%
Average Annual Total Return(3) -29.82% +3.18% +6.28%
Value of $10,000 Investment(4) $ 7,018 $11,692 $18,390
Total Annual Operating Expenses(5) 1.14%
CLASS B 1-YEAR 5-YEAR 10-YEAR
- ------- ------- ------- --------
Cumulative Total Return(2) -26.09% +19.96% +85.30%
Average Annual Total Return(3) -28.76% +3.43% +6.36%
Value of $10,000 Investment(4) $ 7,124 $11,835 $18,530
Total Annual Operating Expenses(5) 1.80%
CLASS C 1-YEAR 5-YEAR 10-YEAR
- ------- ------- ------- --------
Cumulative Total Return(2) -26.06% +20.00% +82.82%
Average Annual Total Return(3) -26.73% +3.71% +6.22%
Value of $10,000 Investment(4) $ 7,327 $12,000 $18,282
Total Annual Operating Expenses(5) 1.80%
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.
12 | Annual Report
Performance Summary (CONTINUED)
TOTAL RETURN INDEX COMPARISON FOR A HYPOTHETICAL $10,000 INVESTMENT(1)
Total return represents the change in value of an investment over the periods
shown. It includes any current, applicable, maximum sales charge, Fund expenses,
account fees and reinvested distributions. The unmanaged index includes
reinvestment of any income or distributions. It differs from the Fund in
composition and does not pay management fees or expenses. One cannot invest
directly in an index.
AVERAGE ANNUAL TOTAL RETURN
CLASS Z 12/31/08
- ------- --------
1-Year -25.34%
5-Year +4.75%
10-Year +7.28%
CLASS Z (1/1/99-12/31/08)
(PERFORMANCE GRAPH)
MUTUAL QUALIFIED S&P 500 TR (IA Extended)
DATE FUND - CLASS Z S&P 500 INDEX (%Total Return)
- ---------- ---------------- ------------- ------------------------
1/1/1999 $10,000 $10,000
1/31/1999 $10,067 $10,418 4.18163000%
2/28/1999 $ 9,793 $10,094 -3.10789000%
3/31/1999 $10,292 $10,498 4.00087000%
4/30/1999 $11,197 $10,905 3.87252000%
5/31/1999 $11,337 $10,647 -2.36136000%
6/30/1999 $11,672 $11,238 5.54978000%
7/31/1999 $11,453 $10,887 -3.12247000%
8/31/1999 $10,914 $10,833 -0.49475000%
9/30/1999 $10,664 $10,536 -2.74139000%
10/31/1999 $10,952 $11,203 6.32807000%
11/30/1999 $11,271 $11,431 2.03280000%
12/31/1999 $11,364 $12,104 5.88961000%
1/31/2000 $11,048 $11,496 -5.02424000%
2/29/2000 $10,544 $11,278 -1.89295000%
3/31/2000 $11,693 $12,382 9.78288000%
4/30/2000 $11,707 $12,009 -3.00858000%
5/31/2000 $11,962 $11,763 -2.05170000%
6/30/2000 $11,772 $12,053 2.46530000%
7/31/2000 $12,129 $11,864 -1.56340000%
8/31/2000 $12,667 $12,601 6.21144000%
9/30/2000 $12,704 $11,936 -5.27933000%
10/31/2000 $12,813 $11,886 -0.42279000%
11/30/2000 $12,412 $10,949 -7.88393000%
12/31/2000 $12,983 $11,002 0.48941000%
1/31/2001 $13,679 $11,392 3.54791000%
2/28/2001 $13,656 $10,354 -9.11817000%
3/31/2001 $13,359 $ 9,698 -6.33502000%
4/30/2001 $13,992 $10,451 7.77104000%
5/31/2001 $14,492 $10,521 0.66997000%
6/30/2001 $14,718 $10,265 -2.43387000%
7/31/2001 $14,783 $10,164 -0.98442000%
8/31/2001 $14,526 $ 9,528 -6.26016000%
9/30/2001 $13,177 $ 8,759 -8.07523000%
10/31/2001 $13,080 $ 8,926 1.90688000%
11/30/2001 $13,634 $ 9,610 7.67063000%
12/31/2001 $14,049 $ 9,694 0.87605000%
1/31/2002 $13,990 $ 9,553 -1.45933000%
2/28/2002 $14,058 $ 9,369 -1.92850000%
3/31/2002 $14,543 $ 9,721 3.76091000%
4/30/2002 $14,646 $ 9,132 -6.06279000%
5/31/2002 $14,646 $ 9,064 -0.73673000%
6/30/2002 $13,649 $ 8,419 -7.12296000%
7/31/2002 $12,687 $ 7,763 -7.79544000%
8/31/2002 $12,799 $ 7,813 0.65656000%
9/30/2002 $11,967 $ 6,964 -10.86793000%
10/31/2002 $12,132 $ 7,577 8.80158000%
11/30/2002 $12,435 $ 8,023 5.88591000%
12/31/2002 $12,265 $ 7,552 -5.87476000%
1/31/2003 $12,168 $ 7,354 -2.61966000%
2/28/2003 $11,913 $ 7,244 -1.50038000%
3/31/2003 $11,940 $ 7,314 0.97093000%
4/30/2003 $12,758 $ 7,917 8.23699000%
5/31/2003 $13,470 $ 8,334 5.26877000%
6/30/2003 $13,692 $ 8,440 1.27564000%
7/31/2003 $13,895 $ 8,589 1.76316000%
8/31/2003 $14,240 $ 8,756 1.95021000%
9/30/2003 $14,169 $ 8,663 -1.06195000%
10/31/2003 $14,771 $ 9,153 5.65700000%
11/30/2003 $15,267 $ 9,234 0.87983000%
12/31/2003 $16,005 $ 9,718 5.24445000%
1/31/2004 $16,158 $ 9,897 1.83551000%
2/29/2004 $16,552 $10,034 1.38995000%
3/31/2004 $16,552 $ 9,883 -1.50865000%
4/30/2004 $16,068 $ 9,728 -1.56980000%
5/31/2004 $16,202 $ 9,861 1.37226000%
6/30/2004 $16,508 $10,053 1.94449000%
7/31/2004 $16,257 $ 9,720 -3.30966000%
8/31/2004 $16,472 $ 9,759 0.40449000%
9/30/2004 $16,867 $ 9,865 1.08308000%
10/31/2004 $17,055 $10,016 1.52768000%
11/30/2004 $18,114 $10,421 4.04616000%
12/31/2004 $18,668 $10,776 3.40287000%
1/31/2005 $18,256 $10,513 -2.43748000%
2/28/2005 $18,764 $10,734 2.10440000%
3/31/2005 $18,611 $10,544 -1.77080000%
4/30/2005 $18,458 $10,344 -1.89656000%
5/31/2005 $18,917 $10,673 3.18186000%
6/30/2005 $19,305 $10,689 0.14197000%
7/31/2005 $19,936 $11,086 3.71883000%
8/31/2005 $19,907 $10,985 -0.91240000%
9/30/2005 $20,227 $11,074 0.80994000%
10/31/2005 $19,703 $10,889 -1.66708000%
11/30/2005 $20,295 $11,301 3.78221000%
12/31/2005 $20,770 $11,305 0.03481000%
1/31/2006 $21,263 $11,604 2.64778000%
2/28/2006 $21,557 $11,636 0.27133000%
3/31/2006 $22,364 $11,781 1.24475000%
4/30/2006 $22,500 $11,939 1.34278000%
5/31/2006 $22,175 $11,595 -2.87814000%
6/30/2006 $22,147 $11,611 0.13557000%
7/31/2006 $22,285 $11,683 0.61685000%
8/31/2006 $22,913 $11,961 2.37931000%
9/30/2006 $23,008 $12,269 2.57700000%
10/31/2006 $23,784 $12,669 3.25861000%
11/30/2006 $24,327 $12,909 1.90160000%
12/31/2006 $24,778 $13,091 1.40278000%
1/31/2007 $25,434 $13,289 1.51232000%
2/28/2007 $25,434 $13,029 -1.95588000%
3/31/2007 $26,080 $13,174 1.11850000%
4/30/2007 $26,873 $13,758 4.42953000%
5/31/2007 $27,835 $14,238 3.48951000%
6/30/2007 $27,790 $14,001 -1.66133000%
7/31/2007 $27,119 $13,567 -3.10048000%
8/31/2007 $26,891 $13,771 1.49901000%
9/30/2007 $27,221 $14,286 3.73988000%
10/31/2007 $27,653 $14,513 1.59068000%
11/30/2007 $27,255 $13,906 -4.18066000%
12/31/2007 $27,038 $13,810 -0.69376000%
1/31/2008 $25,800 $12,981 -5.99816000%
2/29/2008 $25,615 $12,560 -3.24858000%
3/31/2008 $25,540 $12,505 -0.43180000%
4/30/2008 $25,899 $13,115 4.87031000%
5/31/2008 $26,295 $13,284 1.29526000%
6/30/2008 $24,600 $12,164 -8.43036000%
7/31/2008 $24,390 $12,062 -0.84062000%
8/31/2008 $24,501 $12,237 1.44647000%
9/30/2008 $23,386 $11,146 -8.91073000%
10/31/2008 $20,895 $ 9,274 -16.79479000%
11/30/2008 $19,924 $ 8,609 -7.17546000%
12/31/2008 $20,186 $ 8,700 1.06403000%
Total Returns 101.86% -13.00%
AVERAGE ANNUAL TOTAL RETURN
CLASS A 12/31/08
- ------- --------
1-Year -29.82%
5-Year +3.18%
10-Year +6.28%
CLASS A (1/1/99-12/31/08)
(PERFORMANCE GRAPH)
MUTUAL QUALIFIED S&P 500 TR (IA Extended)
DATE FUND - CLASS A S&P 500 INDEX (%Total Return)
- ---------- ---------------- ------------- ------------------------
1/1/1999 $ 9,426 $10,000
1/31/1999 $ 9,489 $10,418 4.18163000%
2/28/1999 $ 9,225 $10,094 -3.10789000%
3/31/1999 $ 9,696 $10,498 4.00087000%
4/30/1999 $10,545 $10,905 3.87252000%
5/31/1999 $10,677 $10,647 -2.36136000%
6/30/1999 $10,987 $11,238 5.54978000%
7/31/1999 $10,774 $10,887 -3.12247000%
8/31/1999 $10,265 $10,833 -0.49475000%
9/30/1999 $10,029 $10,536 -2.74139000%
10/31/1999 $10,295 $11,203 6.32807000%
11/30/1999 $10,591 $11,431 2.03280000%
12/31/1999 $10,677 $12,104 5.88961000%
1/31/2000 $10,380 $11,496 -5.02424000%
2/29/2000 $ 9,899 $11,278 -1.89295000%
3/31/2000 $10,975 $12,382 9.78288000%
4/30/2000 $10,981 $12,009 -3.00858000%
5/31/2000 $11,221 $11,763 -2.05170000%
6/30/2000 $11,045 $12,053 2.46530000%
7/31/2000 $11,374 $11,864 -1.56340000%
8/31/2000 $11,867 $12,601 6.21144000%
9/30/2000 $11,901 $11,936 -5.27933000%
10/31/2000 $11,997 $11,886 -0.42279000%
11/30/2000 $11,621 $10,949 -7.88393000%
12/31/2000 $12,152 $11,002 0.48941000%
1/31/2001 $12,798 $11,392 3.54791000%
2/28/2001 $12,776 $10,354 -9.11817000%
3/31/2001 $12,489 $ 9,698 -6.33502000%
4/30/2001 $13,084 $10,451 7.77104000%
5/31/2001 $13,546 $10,521 0.66997000%
6/30/2001 $13,748 $10,265 -2.43387000%
7/31/2001 $13,808 $10,164 -0.98442000%
8/31/2001 $13,559 $ 9,528 -6.26016000%
9/30/2001 $12,301 $ 8,759 -8.07523000%
10/31/2001 $12,210 $ 8,926 1.90688000%
11/30/2001 $12,723 $ 9,610 7.67063000%
12/31/2001 $13,105 $ 9,694 0.87605000%
1/31/2002 $13,042 $ 9,553 -1.45933000%
2/28/2002 $13,105 $ 9,369 -1.92850000%
3/31/2002 $13,552 $ 9,721 3.76091000%
4/30/2002 $13,640 $ 9,132 -6.06279000%
5/31/2002 $13,640 $ 9,064 -0.73673000%
6/30/2002 $12,703 $ 8,419 -7.12296000%
7/31/2002 $11,811 $ 7,763 -7.79544000%
8/31/2002 $11,909 $ 7,813 0.65656000%
9/30/2002 $11,138 $ 6,964 -10.86793000%
10/31/2002 $11,284 $ 7,577 8.80158000%
11/30/2002 $11,560 $ 8,023 5.88591000%
12/31/2002 $11,402 $ 7,552 -5.87476000%
1/31/2003 $11,312 $ 7,354 -2.61966000%
2/28/2003 $11,074 $ 7,244 -1.50038000%
3/31/2003 $11,082 $ 7,314 0.97093000%
4/30/2003 $11,845 $ 7,917 8.23699000%
5/31/2003 $12,501 $ 8,334 5.26877000%
6/30/2003 $12,704 $ 8,440 1.27564000%
7/31/2003 $12,885 $ 8,589 1.76316000%
8/31/2003 $13,199 $ 8,756 1.95021000%
9/30/2003 $13,141 $ 8,663 -1.06195000%
10/31/2003 $13,686 $ 9,153 5.65700000%
11/30/2003 $14,148 $ 9,234 0.87983000%
12/31/2003 $14,821 $ 9,718 5.24445000%
1/31/2004 $14,963 $ 9,897 1.83551000%
2/29/2004 $15,321 $10,034 1.38995000%
3/31/2004 $15,321 $ 9,883 -1.50865000%
4/30/2004 $14,863 $ 9,728 -1.56980000%
5/31/2004 $14,988 $ 9,861 1.37226000%
6/30/2004 $15,267 $10,053 1.94449000%
7/31/2004 $15,025 $ 9,720 -3.30966000%
8/31/2004 $15,217 $ 9,759 0.40449000%
9/30/2004 $15,584 $ 9,865 1.08308000%
10/31/2004 $15,751 $10,016 1.52768000%
11/30/2004 $16,726 $10,421 4.04616000%
12/31/2004 $17,232 $10,776 3.40287000%
1/31/2005 $16,842 $10,513 -2.43748000%
2/28/2005 $17,312 $10,734 2.10440000%
3/31/2005 $17,161 $10,544 -1.77080000%
4/30/2005 $17,019 $10,344 -1.89656000%
5/31/2005 $17,436 $10,673 3.18186000%
6/30/2005 $17,782 $10,689 0.14197000%
7/31/2005 $18,357 $11,086 3.71883000%
8/31/2005 $18,330 $10,985 -0.91240000%
9/30/2005 $18,627 $11,074 0.80994000%
10/31/2005 $18,133 $10,889 -1.66708000%
11/30/2005 $18,672 $11,301 3.78221000%
12/31/2005 $19,101 $11,305 0.03481000%
1/31/2006 $19,557 $11,604 2.64778000%
2/28/2006 $19,818 $11,636 0.27133000%
3/31/2006 $20,545 $11,781 1.24475000%
4/30/2006 $20,671 $11,939 1.34278000%
5/31/2006 $20,371 $11,595 -2.87814000%
6/30/2006 $20,339 $11,611 0.13557000%
7/31/2006 $20,466 $11,683 0.61685000%
8/31/2006 $21,026 $11,961 2.37931000%
9/30/2006 $21,105 $12,269 2.57700000%
10/31/2006 $21,812 $12,669 3.25861000%
11/30/2006 $22,304 $12,909 1.90160000%
12/31/2006 $22,719 $13,091 1.40278000%
1/31/2007 $23,314 $13,289 1.51232000%
2/28/2007 $23,314 $13,029 -1.95588000%
3/31/2007 $23,899 $13,174 1.11850000%
4/30/2007 $24,609 $13,758 4.42953000%
5/31/2007 $25,486 $14,238 3.48951000%
6/30/2007 $25,439 $14,001 -1.66133000%
7/31/2007 $24,810 $13,567 -3.10048000%
8/31/2007 $24,600 $13,771 1.49901000%
9/30/2007 $24,893 $14,286 3.73988000%
10/31/2007 $25,292 $14,513 1.59068000%
11/30/2007 $24,914 $13,906 -4.18066000%
12/31/2007 $24,702 $13,810 -0.69376000%
1/31/2008 $23,575 $12,981 -5.99816000%
2/29/2008 $23,393 $12,560 -3.24858000%
3/31/2008 $23,325 $12,505 -0.43180000%
4/30/2008 $23,643 $13,115 4.87031000%
5/31/2008 $23,996 $13,284 1.29526000%
6/30/2008 $22,449 $12,164 -8.43036000%
7/31/2008 $22,244 $12,062 -0.84062000%
8/31/2008 $22,346 $12,237 1.44647000%
9/30/2008 $21,326 $11,146 -8.91073000%
10/31/2008 $19,036 $ 9,274 -16.79479000%
11/30/2008 $18,155 $ 8,609 -7.17546000%
12/31/2008 $18,390 $ 8,700 1.06403000%
Total Returns 83.90% -13.00%
Annual Report | 13
Performance Summary (CONTINUED)
AVERAGE ANNUAL TOTAL RETURN
CLASS B 12/31/08
- ------- --------
1-Year -28.76%
5-Year +3.43%
10-Year +6.36%
CLASS B (1/1/99-12/31/08)
(PERFORMANCE GRAPH)
Mutual Qualified Fund - Class B to A S&P 500 TR (IA Extended)
DATE MUTUAL QUALIFIED FUND - CLASS B S&P 500 INDEX conversion after 8 years* (%Total Return)
- ------------- ------------------------------- ------------- ------------------------------------ ------------------------
1/1/1999 $10,000 $10,000
1/31/1999 $10,061 $10,418 4.18163000%
2/28/1999 $ 9,787 $10,094 -3.10789000%
3/31/1999 $10,274 $10,498 4.00087000%
4/30/1999 $11,163 $10,905 3.87252000%
5/31/1999 $11,297 $10,647 -2.36136000%
6/30/1999 $11,617 $11,238 5.54978000%
7/31/1999 $11,385 $10,887 -3.12247000%
8/31/1999 $10,851 $10,833 -0.49475000%
9/30/1999 $10,588 $10,536 -2.74139000%
10/31/1999 $10,864 $11,203 6.32807000%
11/30/1999 $11,171 $11,431 2.03280000%
12/31/1999 $11,255 $12,104 5.88961000%
1/31/2000 $10,933 $11,496 -5.02424000%
2/29/2000 $10,423 $11,278 -1.89295000%
3/31/2000 $11,550 $12,382 9.78288000%
4/30/2000 $11,557 $12,009 -3.00858000%
5/31/2000 $11,805 $11,763 -2.05170000%
6/30/2000 $11,605 $12,053 2.46530000%
7/31/2000 $11,946 $11,864 -1.56340000%
8/31/2000 $12,461 $12,601 6.21144000%
9/30/2000 $12,491 $11,936 -5.27933000%
10/31/2000 $12,585 $11,886 -0.42279000%
11/30/2000 $12,186 $10,949 -7.88393000%
12/31/2000 $12,731 $11,002 0.48941000%
1/31/2001 $13,405 $11,392 3.54791000%
2/28/2001 $13,366 $10,354 -9.11817000%
3/31/2001 $13,064 $ 9,698 -6.33502000%
4/30/2001 $13,676 $10,451 7.77104000%
5/31/2001 $14,156 $10,521 0.66997000%
6/30/2001 $14,358 $10,265 -2.43387000%
7/31/2001 $14,413 $10,164 -0.98442000%
8/31/2001 $14,151 $ 9,528 -6.26016000%
9/30/2001 $12,830 $ 8,759 -8.07523000%
10/31/2001 $12,719 $ 8,926 1.90688000%
11/30/2001 $13,252 $ 9,610 7.67063000%
12/31/2001 $13,644 $ 9,694 0.87605000%
1/31/2002 $13,569 $ 9,553 -1.45933000%
2/28/2002 $13,628 $ 9,369 -1.92850000%
3/31/2002 $14,089 $ 9,721 3.76091000%
4/30/2002 $14,173 $ 9,132 -6.06279000%
5/31/2002 $14,165 $ 9,064 -0.73673000%
6/30/2002 $13,184 $ 8,419 -7.12296000%
7/31/2002 $12,253 $ 7,763 -7.79544000%
8/31/2002 $12,338 $ 7,813 0.65656000%
9/30/2002 $11,536 $ 6,964 -10.86793000%
10/31/2002 $11,681 $ 7,577 8.80158000%
11/30/2002 $11,963 $ 8,023 5.88591000%
12/31/2002 $11,792 $ 7,552 -5.87476000%
1/31/2003 $11,689 $ 7,354 -2.61966000%
2/28/2003 $11,439 $ 7,244 -1.50038000%
3/31/2003 $11,448 $ 7,314 0.97093000%
4/30/2003 $12,222 $ 7,917 8.23699000%
5/31/2003 $12,900 $ 8,334 5.26877000%
6/30/2003 $13,099 $ 8,440 1.27564000%
7/31/2003 $13,280 $ 8,589 1.76316000%
8/31/2003 $13,600 $ 8,756 1.95021000%
9/30/2003 $13,523 $ 8,663 -1.06195000%
10/31/2003 $14,076 $ 9,153 5.65700000%
11/30/2003 $14,543 $ 9,234 0.87983000%
12/31/2003 $15,237 $ 9,718 5.24445000%
1/31/2004 $15,368 $ 9,897 1.83551000%
2/29/2004 $15,733 $10,034 1.38995000%
3/31/2004 $15,715 $ 9,883 -1.50865000%
4/30/2004 $15,246 $ 9,728 -1.56980000%
5/31/2004 $15,359 $ 9,861 1.37226000%
6/30/2004 $15,634 $10,053 1.94449000%
7/31/2004 $15,382 $ 9,720 -3.30966000%
8/31/2004 $15,573 $ 9,759 0.40449000%
9/30/2004 $15,938 $ 9,865 1.08308000%
10/31/2004 $16,104 $10,016 1.52768000%
11/30/2004 $17,086 $10,421 4.04616000%
12/31/2004 $17,594 $10,776 3.40287000%
1/31/2005 $17,188 $10,513 -2.43748000%
2/28/2005 $17,658 $10,734 2.10440000%
3/31/2005 $17,502 $10,544 -1.77080000%
4/30/2005 $17,336 $10,344 -1.89656000%
5/31/2005 $17,760 $10,673 3.18186000%
6/30/2005 $18,100 $10,689 0.14197000%
7/31/2005 $18,678 $11,086 3.71883000%
8/31/2005 $18,632 $10,985 -0.91240000%
9/30/2005 $18,921 $11,074 0.80994000%
10/31/2005 $18,408 $10,889 -1.66708000%
11/30/2005 $18,949 $11,301 3.78221000%
12/31/2005 $19,375 $11,305 0.03481000%
1/31/2006 $19,826 $11,604 2.64778000%
2/28/2006 $20,086 $11,636 0.27133000%
3/31/2006 $20,817 $11,781 1.24475000%
4/30/2006 $20,928 $11,939 1.34278000%
5/31/2006 $20,607 $11,595 -2.87814000%
6/30/2006 $20,562 $11,611 0.13557000%
7/31/2006 $20,673 $11,683 0.61685000%
8/31/2006 $21,242 $11,961 2.37931000%
9/30/2006 $21,313 $12,269 2.57700000%
10/31/2006 $22,004 $12,669 3.25861000%
11/30/2006 $22,491 $12,909 1.90160000%
12/31/2006 $22,893 $13,091 1.40278000%
1/31/2007 $23,493 $13,289 2.62% 1.51232000%
2/28/2007 $23,493 $13,029 0.00% -1.95588000%
3/31/2007 $24,082 $13,174 2.51% 1.11850000%
4/30/2007 $24,798 $13,758 2.97% 4.42953000%
5/31/2007 $25,681 $14,238 3.56% 3.48951000%
6/30/2007 $25,632 $14,001 -0.19% -1.66133000%
7/31/2007 $24,999 $13,567 -2.47% -3.10048000%
8/31/2007 $24,789 $13,771 -0.84% 1.49901000%
9/30/2007 $25,084 $14,286 1.19% 3.73988000%
10/31/2007 $25,485 $14,513 1.60% 1.59068000%
11/30/2007 $25,105 $13,906 -1.49% -4.18066000%
12/31/2007 $24,892 $13,810 -0.85% -0.69376000%
1/31/2008 $23,757 $12,981 -4.56% -5.99816000%
2/29/2008 $23,574 $12,560 -0.77% -3.24858000%
3/31/2008 $23,505 $12,505 -0.29% -0.43180000%
4/30/2008 $23,827 $13,115 1.37% 4.87031000%
5/31/2008 $24,183 $13,284 1.49% 1.29526000%
6/30/2008 $22,623 $12,164 -6.45% -8.43036000%
7/31/2008 $22,417 $12,062 -0.91% -0.84062000%
8/31/2008 $22,520 $12,237 0.46% 1.44647000%
9/30/2008 $21,491 $11,146 -4.57% -8.91073000%
10/31/2008 $19,183 $ 9,274 -10.74% -16.79479000%
11/30/2008 $18,295 $ 8,609 -4.63% -7.17546000%
12/31/2008 $18,530 $ 8,700 1.30% 1.06403000%
Total Returns 83.90% -13.00%
AVERAGE ANNUAL TOTAL RETURN
CLASS C 12/31/08
- ------- --------
1-Year -26.73%
5-Year +3.71%
10-Year +6.22%
CLASS C (1/1/99-12/31/08)
(PERFORMANCE GRAPH)
S&P 500 TR (IA Extended)
DATE MUTUAL QUALIFIED FUND - CLASS C S&P 500 INDEX (%Total Return)
- ------------- ------------------------------- ------------- ------------------------
1/1/1999 $10,000 $10,000
1/31/1999 $10,061 $10,418 4.18163000%
2/28/1999 $ 9,780 $10,094 -3.10789000%
3/31/1999 $10,269 $10,498 4.00087000%
4/30/1999 $11,162 $10,905 3.87252000%
5/31/1999 $11,297 $10,647 -2.36136000%
6/30/1999 $11,619 $11,238 5.54978000%
7/31/1999 $11,386 $10,887 -3.12247000%
8/31/1999 $10,852 $10,833 -0.49475000%
9/30/1999 $10,587 $10,536 -2.74139000%
10/31/1999 $10,864 $11,203 6.32807000%
11/30/1999 $11,172 $11,431 2.03280000%
12/31/1999 $11,254 $12,104 5.88961000%
1/31/2000 $10,933 $11,496 -5.02424000%
2/29/2000 $10,424 $11,278 -1.89295000%
3/31/2000 $11,549 $12,382 9.78288000%
4/30/2000 $11,556 $12,009 -3.00858000%
5/31/2000 $11,803 $11,763 -2.05170000%
6/30/2000 $11,602 $12,053 2.46530000%
7/31/2000 $11,943 $11,864 -1.56340000%
8/31/2000 $12,464 $12,601 6.21144000%
9/30/2000 $12,493 $11,936 -5.27933000%
10/31/2000 $12,580 $11,886 -0.42279000%
11/30/2000 $12,182 $10,949 -7.88393000%
12/31/2000 $12,730 $11,002 0.48941000%
1/31/2001 $13,402 $11,392 3.54791000%
2/28/2001 $13,371 $10,354 -9.11817000%
3/31/2001 $13,070 $ 9,698 -6.33502000%
4/30/2001 $13,672 $10,451 7.77104000%
5/31/2001 $14,158 $10,521 0.66997000%
6/30/2001 $14,363 $10,265 -2.43387000%
7/31/2001 $14,411 $10,164 -0.98442000%
8/31/2001 $14,149 $ 9,528 -6.26016000%
9/30/2001 $12,825 $ 8,759 -8.07523000%
10/31/2001 $12,722 $ 8,926 1.90688000%
11/30/2001 $13,254 $ 9,610 7.67063000%
12/31/2001 $13,641 $ 9,694 0.87605000%
1/31/2002 $13,574 $ 9,553 -1.45933000%
2/28/2002 $13,633 $ 9,369 -1.92850000%
3/31/2002 $14,083 $ 9,721 3.76091000%
4/30/2002 $14,166 $ 9,132 -6.06279000%
5/31/2002 $14,158 $ 9,064 -0.73673000%
6/30/2002 $13,188 $ 8,419 -7.12296000%
7/31/2002 $12,247 $ 7,763 -7.79544000%
8/31/2002 $12,340 $ 7,813 0.65656000%
9/30/2002 $11,535 $ 6,964 -10.86793000%
10/31/2002 $11,679 $ 7,577 8.80158000%
11/30/2002 $11,967 $ 8,023 5.88591000%
12/31/2002 $11,795 $ 7,552 -5.87476000%
1/31/2003 $11,693 $ 7,354 -2.61966000%
2/28/2003 $11,437 $ 7,244 -1.50038000%
3/31/2003 $11,446 $ 7,314 0.97093000%
4/30/2003 $12,221 $ 7,917 8.23699000%
5/31/2003 $12,894 $ 8,334 5.26877000%
6/30/2003 $13,099 $ 8,440 1.27564000%
7/31/2003 $13,279 $ 8,589 1.76316000%
8/31/2003 $13,596 $ 8,756 1.95021000%
9/30/2003 $13,527 $ 8,663 -1.06195000%
10/31/2003 $14,084 $ 9,153 5.65700000%
11/30/2003 $14,547 $ 9,234 0.87983000%
12/31/2003 $15,234 $ 9,718 5.24445000%
1/31/2004 $15,363 $ 9,897 1.83551000%
2/29/2004 $15,733 $10,034 1.38995000%
3/31/2004 $15,716 $ 9,883 -1.50865000%
4/30/2004 $15,243 $ 9,728 -1.56980000%
5/31/2004 $15,355 $ 9,861 1.37226000%
6/30/2004 $15,635 $10,053 1.94449000%
7/31/2004 $15,385 $ 9,720 -3.30966000%
8/31/2004 $15,574 $ 9,759 0.40449000%
9/30/2004 $15,936 $ 9,865 1.08308000%
10/31/2004 $16,100 $10,016 1.52768000%
11/30/2004 $17,081 $10,421 4.04616000%
12/31/2004 $17,598 $10,776 3.40287000%
1/31/2005 $17,188 $10,513 -2.43748000%
2/28/2005 $17,662 $10,734 2.10440000%
3/31/2005 $17,498 $10,544 -1.77080000%
4/30/2005 $17,334 $10,344 -1.89656000%
5/31/2005 $17,753 $10,673 3.18186000%
6/30/2005 $18,098 $10,689 0.14197000%
7/31/2005 $18,680 $11,086 3.71883000%
8/31/2005 $18,634 $10,985 -0.91240000%
9/30/2005 $18,920 $11,074 0.80994000%
10/31/2005 $18,412 $10,889 -1.66708000%
11/30/2005 $18,947 $11,301 3.78221000%
12/31/2005 $19,372 $11,305 0.03481000%
1/31/2006 $19,828 $11,604 2.64778000%
2/28/2006 $20,085 $11,636 0.27133000%
3/31/2006 $20,808 $11,781 1.24475000%
4/30/2006 $20,927 $11,939 1.34278000%
5/31/2006 $20,600 $11,595 -2.87814000%
6/30/2006 $20,566 $11,611 0.13557000%
7/31/2006 $20,676 $11,683 0.61685000%
8/31/2006 $21,238 $11,961 2.37931000%
9/30/2006 $21,308 $12,269 2.57700000%
10/31/2006 $22,000 $12,669 3.25861000%
11/30/2006 $22,492 $12,909 1.90160000%
12/31/2006 $22,890 $13,091 1.40278000%
1/31/2007 $23,473 $13,289 1.51232000%
2/28/2007 $23,463 $13,029 -1.95588000%
3/31/2007 $24,036 $13,174 1.11850000%
4/30/2007 $24,736 $13,758 4.42953000%
5/31/2007 $25,616 $14,238 3.48951000%
6/30/2007 $25,545 $14,001 -1.66133000%
7/31/2007 $24,906 $13,567 -3.10048000%
8/31/2007 $24,672 $13,771 1.49901000%
9/30/2007 $24,959 $14,286 3.73988000%
10/31/2007 $25,342 $14,513 1.59068000%
11/30/2007 $24,949 $13,906 -4.18066000%
12/31/2007 $24,725 $13,810 -0.69376000%
1/31/2008 $23,576 $12,981 -5.99816000%
2/29/2008 $23,392 $12,560 -3.24858000%
3/31/2008 $23,300 $12,505 -0.43180000%
4/30/2008 $23,610 $13,115 4.87031000%
5/31/2008 $23,955 $13,284 1.29526000%
6/30/2008 $22,392 $12,164 -8.43036000%
7/31/2008 $22,174 $12,062 -0.84062000%
8/31/2008 $22,266 $12,237 1.44647000%
9/30/2008 $21,233 $11,146 -8.91073000%
10/31/2008 $18,944 $ 9,274 -16.79479000%
11/30/2008 $18,054 $ 8,609 -7.17546000%
12/31/2008 $18,282 $ 8,700 1.06403000%
Total Returns 82.82% -13.00%
14 | Annual Report
Performance Summary (CONTINUED)
ENDNOTES
VALUE SECURITIES MAY NOT INCREASE IN PRICE AS ANTICIPATED OR MAY DECLINE FURTHER
IN VALUE. THE FUND'S INVESTMENTS IN SMALLER-COMPANY STOCKS AND FOREIGN
SECURITIES INVOLVE SPECIAL RISKS. SMALLER-COMPANY STOCKS HAVE EXHIBITED GREATER
PRICE VOLATILITY THAN LARGER-COMPANY STOCKS, PARTICULARLY OVER THE SHORT TERM.
FOREIGN SECURITIES RISKS INCLUDE CURRENCY FLUCTUATIONS AND ECONOMIC AND
POLITICAL UNCERTAINTIES. THE FUND MAY ALSO INVEST IN COMPANIES ENGAGED IN
MERGERS, REORGANIZATIONS OR LIQUIDATIONS, WHICH INVOLVE SPECIAL RISKS, AS
PENDING DEALS MAY NOT BE COMPLETED ON TIME OR ON FAVORABLE TERMS, AS WELL AS
LOWER-RATED BONDS, WHICH ENTAIL HIGHER CREDIT RISK. THE FUND'S PROSPECTUS ALSO
INCLUDES A DESCRIPTION OF THE MAIN INVESTMENT RISKS.
CLASS Z: Shares are available to certain eligible investors as described in the
prospectus.
CLASS 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.
(1.) Past expense reductions by the Fund's manager increased the Fund's total
returns. If the manager had not taken this action, the Fund's total returns
would have been lower.
(2.) Cumulative total return represents the change in value of an investment
over the periods indicated.
(3.) Average annual total return represents the average annual change in value
of an investment over the periods indicated.
(4.) These figures represent the value of a hypothetical $10,000 investment in
the Fund over the periods indicated.
(5.) Figures are as stated in the Fund's prospectus current as of the date of
this report.
(6.) Source: (C) 2009 Morningstar. The S&P 500 consists of 500 stocks chosen for
market size, liquidity and industry group representation. Each stock's
weight in the index is proportionate to its market value. The S&P 500 is
one of the most widely used benchmarks of U.S. equity performance.
Annual Report | 15
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
redemption fees; 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.
16 | Annual Report
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 OR
REDEMPTION FEES. 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
VALUE 7/1/08 VALUE 12/31/08 PERIOD* 7/1/08-12/31/08
----------------- -------------- -----------------------
CLASS Z
Actual $1,000 $ 820.60 $3.75
Hypothetical (5% return before expenses) $1,000 $1,021.01 $4.17
CLASS A
Actual $1,000 $ 819.20 $5.17
Hypothetical (5% return before expenses) $1,000 $1,019.46 $5.74
CLASS B
Actual $1,000 $ 816.30 $8.26
Hypothetical (5% return before expenses) $1,000 $1,016.04 $9.17
CLASS C
Actual $1,000 $ 816.40 $8.22
Hypothetical (5% return before expenses) $1,000 $1,016.09 $9.12
* Expenses are calculated using the most recent six-month expense ratio,
annualized for each class (Z: 0.82%; A: 1.13%; B: 1.81%; and C: 1.80%)
multiplied by the average account value over the period, multiplied by
184/366 to reflect the one-half year period.
Annual Report | 17
Mutual Qualified Fund
FINANCIAL HIGHLIGHTS
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
CLASS Z 2008 2007 2006 2005 2004
- ------- ---------- ---------- ---------- ---------- ----------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ................ $ 21.84 $ 21.88 $ 19.81 $ 19.49 $ 17.88
---------- ---------- ---------- ---------- ----------
Income from investment operations(a):
Net investment income(b) ....................... 0.38 0.61 0.38 0.41 0.37
Net realized and unrealized gains (losses) ..... (5.90) 1.37 3.39 1.77 2.56
---------- ---------- ---------- ---------- ----------
Total from investment operations .................. (5.52) 1.98 3.77 2.18 2.93
---------- ---------- ---------- ---------- ----------
Less distributions from:
Net investment income .......................... (0.32) (0.71) (0.40) (0.42) (0.39)
Net realized gains ............................. (1.41) (1.31) (1.30) (1.44) (0.93)
---------- ---------- ---------- ---------- ----------
Total distributions ............................... (1.73) (2.02) (1.70) (1.86) (1.32)
---------- ---------- ---------- ---------- ----------
Redemption fees(c, d) ............................. -- -- -- -- --
---------- ---------- ---------- ---------- ----------
Net asset value, end of year ...................... $ 14.59 $ 21.84 $ 21.88 $ 19.81 $ 19.49
========== ========== ========== ========== ==========
Total return ...................................... (25.34)% 9.12% 19.29% 11.26% 16.64%
RATIOS TO AVERAGE NET ASSETS
Expenses(e, f) .................................... 0.81% 0.80% 0.83% 0.85% 0.82%
Expenses - excluding dividend expense on securities
sold short(f) .................................. 0.81% 0.79% 0.81% 0.81% 0.81%
Net investment income ............................. 1.97% 2.58% 1.77% 2.04% 2.01%
SUPPLEMENTAL DATA
Net assets, end of year (000's) ................... $3,071,302 $4,421,592 $4,200,899 $3,646,593 $3,419,744
Portfolio turnover rate ........................... 25.52% 26.25% 23.64% 20.98% 37.61%
(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) Amount rounds to less than $0.01 per share.
(d) Effective September 1, 2008, the redemption fee was eliminated.
(e) Includes dividend expense on securities sold short which varies from period
to period. See below for expense ratios that reflect only operating
expenses.
(f) Benefit of expense reduction rounds to less than 0.01%.
The accompanying notes are an integral part of these financial statements.
18 | Annual Report
Mutual Qualified Fund
FINANCIAL HIGHLIGHTS (CONTINUED)
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
CLASS A 2008 2007 2006 2005 2004
- ------- ---------- ---------- ---------- ---------- ----------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ................ $ 21.70 $ 21.75 $ 19.71 $ 19.41 $ 17.81
---------- ---------- ---------- ---------- ----------
Income from investment operations(a):
Net investment income(b) ....................... 0.32 0.52 0.31 0.34 0.31
Net realized and unrealized gains (losses) ..... (5.85) 1.38 3.36 1.75 2.55
---------- ---------- ---------- ---------- ----------
Total from investment operations .................. (5.53) 1.90 3.67 2.09 2.86
---------- ---------- ---------- ---------- ----------
Less distributions from:
Net investment income .......................... (0.26) (0.64) (0.33) (0.35) (0.33)
Net realized gains ............................. (1.41) (1.31) (1.30) (1.44) (0.93)
---------- ---------- ---------- ---------- ----------
Total distributions ............................... (1.67) (1.95) (1.63) (1.79) (1.26)
---------- ---------- ---------- ---------- ----------
Redemption fees(c, d) ............................. -- -- -- -- --
---------- ---------- ---------- ---------- ----------
Net asset value, end of year ...................... $ 14.50 $ 21.70 $ 21.75 $ 19.71 $ 19.41
========== ========== ========== ========== ==========
Total return(e) ................................... (25.55)% 8.73% 18.94% 10.85% 16.27%
RATIOS TO AVERAGE NET ASSETS
Expenses(f, g) .................................... 1.11% 1.14% 1.15% 1.20% 1.17%
Expenses - excluding dividend expense on securities
sold short(g) .................................. 1.11% 1.13% 1.13% 1.16% 1.16%
Net investment income ............................. 1.67% 2.24% 1.45% 1.69% 1.66%
SUPPLEMENTAL DATA
Net assets, end of year (000's) ................... $ 883,955 $1,290,899 $ 993,364 $ 794,789 $ 692,523
Portfolio turnover rate ........................... 25.52% 26.25% 23.64% 20.98% 37.61%
(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) Amount rounds to less than $0.01 per share.
(d) Effective September 1, 2008, the redemption fee was eliminated.
(e) Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
(f) Includes dividend expense on securities sold short which varies from period
to period. See below for expense ratios that reflect only operating
expenses.
(g) Benefit of expense reduction rounds to less than 0.01%.
The accompanying notes are an integral part of these financial statements.
Annual Report | 19
Mutual Qualified Fund
FINANCIAL HIGHLIGHTS (CONTINUED)
YEAR ENDED DECEMBER 31,
-----------------------------------------------
CLASS B 2008 2007 2006 2005 2004
- ------- ------- ------- ------- ------- -------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............. $ 21.24 $ 21.32 $ 19.34 $ 19.08 $ 17.54
------- ------- ------- ------- -------
Income from investment operations (a):
Net investment income (b) ................... 0.19 0.36 0.16 0.20 0.19
Net realized and unrealized gains (losses) .. (5.72) 1.34 3.31 1.72 2.50
------- ------- ------- ------- -------
Total from investment operations ............... (5.53) 1.70 3.47 1.92 2.69
------- ------- ------- ------- -------
Less distributions from:
Net investment income ....................... (0.11) (0.47) (0.19) (0.22) (0.22)
Net realized gains .......................... (1.41) (1.31) (1.30) (1.44) (0.93)
------- ------- ------- ------- -------
Total distributions ............................ (1.52) (1.78) (1.49) (1.66) (1.15)
------- ------- ------- ------- -------
Redemption fees (c, d) ......................... -- -- -- -- --
------- ------- ------- ------- -------
Net asset value, end of year ................... $ 14.19 $ 21.24 $ 21.32 $ 19.34 $ 19.08
------- ------- ------- ------- -------
Total return (e) ............................... (26.09)% 8.04% 18.16% 10.12% 15.46%
RATIOS TO AVERAGE NET ASSETS
Expenses (f, g) ................................ 1.81% 1.80% 1.82% 1.85% 1.82%
Expenses - excluding dividend expense on
securities sold short (g) ................... 1.81% 1.79% 1.80% 1.81% 1.81%
Net investment income .......................... 0.97% 1.58% 0.78% 1.04% 1.01%
SUPPLEMENTAL DATA
Net assets, end of year (000's) ................ $41,704 $70,266 $74,470 $69,847 $67,714
Portfolio turnover rate ........................ 25.52% 26.25% 23.64% 20.98% 37.61%
(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) Amount rounds to less than $0.01 per share.
(d) Effective September 1, 2008, the redemption fee was eliminated.
(e) Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
(f) Includes dividend expense on securities sold short which varies from period
to period. See below for expense ratios that reflect only operating
expenses. gBenefit of expense reduction rounds to less than 0.01%.
The accompanying notes are an integral part of these financial statements.
20 | Annual Report
Mutual Qualified Fund
FINANCIAL HIGHLIGHTS (CONTINUED)
YEAR ENDED DECEMBER 31,
----------------------------------------------------
CLASS C 2008 2007 2006 2005 2004
- ------- -------- -------- ------- -------- --------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year $ 21.50 $ 21.58 $ 19.58 $ 19.30 $ 17.72
-------- -------- -------- -------- --------
Income from investment operations (a):
Net investment income (b) 0.19 0.36 0.16 0.20 0.19
Net realized and unrealized gains (losses) (5.78) 1.36 3.34 1.74 2.52
-------- -------- -------- -------- --------
Total from investment operations (5.59) 1.72 3.50 1.94 2.71
-------- -------- -------- -------- --------
Less distributions from:
Net investment income (0.12) (0.49) (0.20) (0.22) (0.20)
Net realized gains (1.41) (1.31) (1.30) (1.44) (0.93)
-------- -------- -------- -------- --------
Total distributions (1.53) (1.80) (1.50) (1.66) (1.13)
-------- -------- -------- -------- --------
Redemption fees (c, d) -- -- -- -- --
-------- -------- -------- -------- --------
Net asset value, end of year $ 14.38 $ 21.50 $ 21.58 $ 19.58 $ 19.30
-------- -------- -------- -------- --------
Total return (e) (26.06)% 8.02% 18.16% 10.08% 15.52%
RATIOS TO AVERAGE NET ASSETS
Expenses (f, g) 1.80% 1.80% 1.83% 1.85% 1.82%
Expenses - excluding dividend expense on
securities sold short (g) 1.80% 1.79% 1.81% 1.81% 1.81%
Net investment income 0.98% 1.58% 0.77% 1.04% 1.01%
SUPPLEMENTAL DATA
Net assets, end of year (000's) $337,583 $504,802 $420,806 $336,786 $311,071
Portfolio turnover rate 25.52% 26.25% 23.64% 20.98% 37.61%
(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) Amount rounds to less than $0.01 per share.
(d) Effective September 1, 2008, the redemption fee was eliminated.
(e) Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
(f) Includes dividend expense on securities sold short which varies from period
to period. See below for expense ratios that reflect only operating
expenses.
(g) Benefit of expense reduction rounds to less than 0.01%.
The accompanying notes are an integral part of these financial statements.
Annual Report | 21
Mutual Qualified Fund
STATEMENT OF INVESTMENTS, DECEMBER 31, 2008
SHARES/WARRANTS/
COUNTRY CONTRACTS VALUE
-------------- ----------------- --------------
COMMON STOCKS AND OTHER EQUITY INTERESTS 51.6%
AIRLINES 0.2%
(a) ACE Aviation Holdings Inc., A ................................. Canada 1,217,946 $ 6,756,357
(a,b) Northwest Airlines Corp., Contingent Distribution ............. United States 28,232,000 17,786
--------------
6,774,143
--------------
AUTO COMPONENTS 0.0%(c)
(a,b,d) Collins & Aikman Products Co., Contingent Distribution ........ United States 1,217,404 12,174
(a) Dana Holding Corp. ............................................ United States 575,326 425,741
(a,b) Dana Holding Corp., Contingent Distribution ................... United States 13,598,000 4,250
--------------
442,165
--------------
AUTOMOBILES 0.1%
(a,e) IACNA Investor LLC ............................................ United States 180,986 1,810
(a,e,f) International Automotive Components Group Brazil LLC .......... Brazil 2,363,058 1,880,097
(a,e,f) International Automotive Components Group Japan LLC ........... Japan 307,801 332,652
(a,e,f) International Automotive Components Group LLC ................. Luxembourg 8,425,843 1,433,236
(a,e,f) International Automotive Components Group NA LLC, A ........... United States 5,182,488 843,709
--------------
4,491,504
--------------
BEVERAGES 2.0%
Brown-Forman Corp., A ......................................... United States 79,200 4,009,104
Brown-Forman Corp., B ......................................... United States 19,800 1,019,502
Carlsberg AS, B ............................................... Denmark 250,882 8,071,454
(a) Dr. Pepper Snapple Group Inc. ................................. United States 1,317,046 21,401,997
(g) Pernod Ricard SA .............................................. France 673,496 49,884,470
--------------
84,386,527
--------------
BUILDING PRODUCTS 0.2%
Armstrong World Industries Inc. ............................... United States 142,220 3,074,796
(a) Owens Corning Inc. ............................................ United States 279,965 4,843,395
--------------
7,918,191
--------------
CAPITAL MARKETS 0.2%
The Goldman Sachs Group Inc. .................................. United States 123,910 10,456,765
--------------
CHEMICALS 0.2%
(a,b,d) Dow Corning Corp., Contingent Distribution .................... United States 20,809,194 3,022,299
Sika AG ....................................................... Switzerland 6,147 5,180,541
--------------
8,202,840
--------------
COMMERCIAL BANKS 0.6%
BNP Paribas SA ................................................ France 278,219 11,768,267
(a,e,h) Elephant Capital Holdings Ltd. ................................ Japan 27,946 --
(a,e,h) First Chicago Bancorp ......................................... United States 659,105 4,998,809
(a) Guaranty Bancorp .............................................. United States 1,735,639 3,471,278
(a,e) NCB Warrant Holdings Ltd., A .................................. Japan 129,974 --
Svenska Handelsbanken AB, A ................................... Sweden 452,960 7,299,266
--------------
27,537,620
--------------
22 | Annual Report
Mutual Qualified Fund
STATEMENT OF INVESTMENTS, DECEMBER 31, 2008 (CONTINUED)
SHARES/WARRANTS/
COUNTRY CONTRACTS VALUE
-------------- ----------------- --------------
COMMON STOCKS AND OTHER EQUITY INTERESTS (CONTINUED)
COMMERCIAL SERVICES & SUPPLIES 0.1%
(a) Comdisco Holding Co. Inc. ..................................... United States 997 $ 7,777
(a,b) Comdisco Holding Co. Inc., Contingent Distribution ............ United States 40,189,000 --
Insun ENT Co. Ltd. ............................................ South Korea 1,448,946 3,900,567
--------------
3,908,344
--------------
COMPUTERS & PERIPHERALS 0.0%
(a,e,h) DecisionOne Corp .............................................. United States 1,008,199 --
--------------
(a,e,h) DecisionOne Corp., wts., 6/08/17 .............................. United States 553,576 --
--------------
CONSUMER FINANCE 0.3%
(a,e) Cerberus CG Investor I LLC .................................... United States 7,519,799 1,503,960
(a,e) Cerberus CG Investor II LLC ................................... United States 7,519,799 1,503,960
(a,e) Cerberus CG Investor III LLC .................................. United States 3,759,899 751,980
(a,e) Cerberus FIM Investors Holdco LLC ............................. United States 15,919,000 3,371,608
(a,h) White River Capital Inc. ...................................... United States 549,751 3,600,869
--------------
10,732,377
--------------
DIVERSIFIED FINANCIAL SERVICES 0.1%
(g) Deutsche Boerse AG ............................................ Germany 66,220 4,703,848
(a,b) Marconi Corp., Contingent Distribution ........................ United Kingdom 34,293,500 --
--------------
4,703,848
--------------
DIVERSIFIED TELECOMMUNICATION SERVICES 0.5%
(a,e,f) AboveNet Inc. ................................................. United States 402,522 20,126,100
(a,e,f) AboveNet Inc., stock grant, grant price $20.95, expiration date
9/09/13 .................................................... United States 510 1,148
(a,e,f) AboveNet Inc., wts., 9/08/10 .................................. United States 16,099 64,396
(a,b,d) Global Crossing Holdings Ltd., Contingent Distribution ........ United States 49,411,586 --
--------------
20,191,644
--------------
ELECTRIC UTILITIES 1.1%
E.ON AG ....................................................... Germany 1,192,640 46,728,073
--------------
ENERGY EQUIPMENT & SERVICES 2.2%
(i) Bourbon SA .................................................... France 579,563 14,619,669
(a) BW Offshore Ltd. .............................................. Norway 2,813,120 1,739,278
(a) Pride International Inc. ...................................... United States 1,042,880 16,665,222
Seadrill Ltd .................................................. Bermuda 4,055,672 32,131,179
(a) Transocean Ltd ................................................ United States 677,655 32,019,199
--------------
97,174,547
--------------
FOOD & STAPLES RETAILING 1.0%
Carrefour SA .................................................. France 1,178,243 45,340,224
--------------
FOOD PRODUCTS 6.7%
(g) Cadbury PLC ................................................... United Kingdom 3,288,176 29,079,412
CSM NV ........................................................ Netherlands 1,909,144 30,699,895
(g) Groupe Danone ................................................. France 1,681,422 101,521,898
Kraft Foods Inc., A ........................................... United States 435,256 11,686,624
(a,d) Lighthouse Caledonia ASA ...................................... Norway 416,331 9,578
Lotte Confectionary Co. Ltd. .................................. South Korea 30,405 31,416,093
Annual Report | 23
Mutual Qualified Fund
STATEMENT OF INVESTMENTS, DECEMBER 31, 2008 (CONTINUED)
SHARES/WARRANTS/
COUNTRY CONTRACTS VALUE
-------------- ----------------- --------------
COMMON STOCKS AND OTHER EQUITY INTERESTS (CONTINUED)
FOOD PRODUCTS (CONTINUED)
(a,i) Marine Harvest ................................................ Norway 48,980,183 $ 7,394,723
(g) Nestle SA ..................................................... Switzerland 1,607,500 62,620,096
Nong Shim Co. Ltd. ............................................ South Korea 81,743 15,824,357
--------------
290,252,676
--------------
HEALTH CARE PROVIDERS & SERVICES 1.7%
(a,e) Kindred Healthcare Inc. ....................................... United States 1,456,113 18,010,662
Rhoen-Klinikum AG ............................................. Germany 2,314,092 55,235,019
--------------
73,245,681
--------------
HOTELS, RESTAURANTS & LEISURE 0.0%(c)
(a) Trump Entertainment Resorts Inc. .............................. United States 473,917 80,755
--------------
INDUSTRIAL CONGLOMERATES 2.6%
Keppel Corp. Ltd. ............................................. Singapore 5,486,488 16,583,939
(f) Orkla ASA ..................................................... Norway 9,599,083 62,730,084
Siemens AG .................................................... Germany 460,520 33,993,863
--------------
113,307,886
--------------
INSURANCE 7.7%
ACE Ltd. ...................................................... United States 96,280 5,095,138
(a) Alleghany Corp. ............................................... United States 146,672 41,361,504
(a) Berkshire Hathaway Inc., A .................................... United States 468 45,208,800
(a) Berkshire Hathaway Inc., B .................................... United States 16,044 51,565,416
(a,e,h) Imagine Group Holdings Ltd. ................................... Bermuda 2,814,856 23,053,671
Old Republic International Corp. .............................. United States 1,096,314 13,068,063
(a,e) Olympus Re Holdings Ltd. ...................................... United States 97,300 228,421
Prudential Financial Inc. ..................................... United States 461,000 13,949,860
(a,e) Symetra Financial ............................................. United States 3,434,760 45,647,960
White Mountains Insurance Group Ltd. .......................... United States 346,730 92,615,050
--------------
331,793,883
--------------
MACHINERY 1.6%
Kone OYJ, B ................................................... Finland 2,877,200 62,480,123
(a,e) Motor Coach Industries International Inc., wts., 5/27/09 ...... United States 5 --
NACCO Industries Inc., A ...................................... United States 172,254 6,444,022
--------------
68,924,145
--------------
MEDIA 0.3%
(a) Adelphia Recovery Trust ....................................... United States 38,254,708 382,547
(a,b) Adelphia Recovery Trust, Arahova Contingent Value Vehicle,
Contingent Distribution ....................................... United States 4,899,492 734,924
(a,b) Century Communications Corp., Contingent Distribution ......... United States 13,497,000 --
CJ CGV Co. Ltd. ............................................... South Korea 574,910 6,918,949
(a,d) TVMAX Holdings Inc. ........................................... United States 111,391 --
Virgin Media Inc. ............................................. United Kingdom 937,859 4,679,916
--------------
12,716,336
--------------
METALS & MINING 0.0%c
ArcelorMittal ................................................. Netherlands 79,650 1,893,368
--------------
24 | Annual Report
Mutual Qualified Fund
STATEMENT OF INVESTMENTS, DECEMBER 31, 2008 (CONTINUED)
SHARES/WARRANTS/
COUNTRY CONTRACTS VALUE
-------------- ----------------- --------------
COMMON STOCKS AND OTHER EQUITY INTERESTS (CONTINUED)
MULTI-UTILITIES 0.0%
(a,b) NorthWestern Corp., Contingent Distribution ................... United States 9,300,000 $ --
MULTILINE RETAIL 1.0%
--------------
Jelmoli Holding AG ............................................ Switzerland 24,399 45,009,861
--------------
OIL, GAS & CONSUMABLE FUELS 1.4%
BP PLC ........................................................ United Kingdom 494,400 3,798,224
BP PLC, ADR ................................................... United Kingdom 193,700 9,053,538
Eni SpA ....................................................... Italy 523,870 12,262,509
Total SA, B ................................................... France 665,472 36,206,904
--------------
61,321,175
--------------
PAPER & FOREST PRODUCTS 0.5%
Mondi Ltd. .................................................... United Kingdom 49,172 179,545
Weyerhaeuser Co. .............................................. United States 686,788 21,022,581
--------------
21,202,126
--------------
PHARMACEUTICALS 0.5%
(a) Valeant Pharmaceuticals International ......................... United States 869,500 19,911,550
--------------
REAL ESTATE INVESTMENT TRUSTS (REITS) 1.7%
Alexander's Inc. .............................................. United States 108,590 27,679,591
Link REIT ..................................................... Hong Kong 15,202,605 25,108,171
Ventas Inc. ................................................... United States 669,525 22,475,954
--------------
75,263,716
--------------
REAL ESTATE MANAGEMENT & DEVELOPMENT 1.5%
(d) Canary Wharf Group PLC ........................................ United Kingdom 8,298,072 31,986,351
Swire Pacific Ltd., A ......................................... Hong Kong 3,620,800 24,924,477
Swire Pacific Ltd., B ......................................... Hong Kong 5,292,600 7,020,197
--------------
63,931,025
--------------
SOFTWARE 0.6%
(g) Microsoft Corp ................................................ United States 1,354,430 26,330,119
--------------
THRIFTS & MORTGAGE FINANCE 0.0%c
(h) Imperial Capital Bancorp Inc. ................................. United States 445,796 1,003,041
--------------
TOBACCO 14.5%
Altria Group Inc .............................................. United States 2,484,297 37,413,513
(g) British American Tobacco PLC .................................. United Kingdom 3,939,454 103,567,849
(g) Imperial Tobacco Group PLC .................................... United Kingdom 2,263,678 61,164,974
Japan Tobacco Inc. ............................................ Japan 9,642 31,911,187
KT&G Corp. .................................................... South Korea 750,886 47,026,986
(g) Lorillard Inc. ................................................ United States 1,097,000 61,815,950
Philip Morris International Inc. .............................. United States 1,137,077 49,474,220
(g) Reynolds American Inc. ........................................ United States 1,685,320 67,935,249
UST Inc. ...................................................... United States 2,433,580 168,841,780
--------------
629,151,708
--------------
TRADING COMPANIES & DISTRIBUTORS 0.5%
Kloeckner & Co. SE ............................................ Germany 1,209,391 21,121,733
--------------
Annual Report | 25
Mutual Qualified Fund
STATEMENT OF INVESTMENTS, DECEMBER 31, 2008 (CONTINUED)
SHARES/WARRANTS/
COUNTRY CONTRACTS VALUE
-------------- ----------------- --------------
COMMON STOCKS AND OTHER EQUITY INTERESTS (CONTINUED)
TRANSPORTATION INFRASTRUCTURE 0.0%(c)
(a) Groupe Eurotunnel SA .......................................... France 17,485 $ 94,130
(a) Groupe Eurotunnel SA, wts., 12/30/11 .......................... France 1,861,027 213,386
--------------
307,516
--------------
TOTAL COMMON STOCKS AND OTHER EQUITY INTERESTS
(COST $ 2,144,572,906) ........................................ 2,235,757,112
--------------
PREFERRED STOCKS 0.0%(c)
AUTO COMPONENTS 0.0%(c)
(e) Dana Holding Corp., 4.00%, cvt. pfd., B ....................... United States 48,807 439,263
--------------
DIVERSIFIED TELECOMMUNICATION SERVICES 0.0%(c)
(a,e) PTV Inc., 10.00%, pfd., A ..................................... United Kingdom 92,938 83,644
--------------
TOTAL PREFERRED STOCKS (COST $5,010,813) ...................... 522,907
--------------
PRINCIPAL
AMOUNT(j)
-------------
CORPORATE BONDS & NOTES 1.8%
(k) ACE Aviation Holdings Inc., cvt., 144A, 4.25%, 6/01/35 ........ Canada 2,505,000 CAD 1,825,224
(l) Calpine Corp., Exit Term Loan, FRN, 6.645%, 3/29/14 ........... United States 15,416,927 11,436,061
(e) Cerberus CG Investor I LLC, 12.00%, 7/31/14 ................... United States 6,600,000 1,320,000
(e) Cerberus CG Investor II LLC, 12.00%, 7/31/14 .................. United States 6,600,000 1,320,000
(e) Cerberus CG Investor III LLC, 12.00%, 7/31/14 ................. United States 3,300,000 660,000
(e) Cerberus FIM Investors Holdco LLC, 12.00%, 11/22/13 ........... United States 47,747,515 10,112,817
(h) DecisionOne Corp.,
(e) 12.00%, 4/15/10 ............................................ United States 1,297,728 1,297,728
(d,l) FRN, 5.50%, 5/12/09 ........................................ United States 232,502 232,502
Groupe Eurotunnel SA, cvt., sub. bond, NRS I,
T2, 3.00%, 7/28/09 ......................................... France 31,400 EUR 37,321
T2, 3.00%, 7/28/09 ......................................... France 24,416 GBP 35,660
T3, 3.00%, 7/28/10 ......................................... France 9,114,500 EUR 10,833,085
T3, 3.00%, 7/28/10 ......................................... France 5,276,020 GBP 7,705,891
(k) Indianapolis Downs LLC, 144A,
senior secured note, 11.00%, 11/01/12 ...................... United States 2,950,000 1,622,500
(m) senior secured sub. note, PIK, 15.50%, 11/01/13 ............ United States 11,672,776 4,610,746
(e,f) International Automotive Components Group NA LLC, 9.00%,
4/01/17 .................................................... United States 1,560,200 752,142
(e,f,l,n) Pontus I LLC, junior note, 144A, FRN, 5.689%, 7/24/09 ......... United States 18,184,516 20,519,486
(e,f,l,n) Pontus II Trust, junior profit-participating note, 144A, FRN,
7.516%, 6/25/09 ............................................ United States 2,876,884 671,234
(d,m) TVMAX Holdings Inc., PIK,
11.50%, 3/31/09 ............................................ United States 488,896 342,227
14.00%, 3/31/09 ............................................ United States 835,212 584,648
--------------
TOTAL CORPORATE BONDS & NOTES (COST $181,325,040) ............. 75,919,272
--------------
26 | Annual Report
Mutual Qualified Fund
STATEMENT OF INVESTMENTS, DECEMBER 31, 2008 (CONTINUED)
PRINCIPAL
AMOUNT(j)/
COUNTRY SHARES VALUE
-------------- ----------------- --------------
CORPORATE BONDS & NOTES IN REORGANIZATION 0.2%
(l,o) Motor Coach Industries International Inc., FRN,
(p) First Lien DIP Revolver, 7.75%, 9/19/09 .................... United States 1,867,232 $ 1,823,520
(q) Second Lien DIP Trust A Term Loan, 12.75%, 9/19/09 ......... United States 2,738,329 2,245,430
Second Lien DIP Trust B Term Loan, 15.25%, 9/19/09 ......... United States 1,670,028 1,419,524
(q) Second Lien, Senior Secured Term Loan, 11.00%, 12/01/08 .... United States 2,256,578 1,793,980
(d) Third Lien, Senior Secured Term Loan, 15.649%, 12/01/08 .... United States 26,017,748 710,285
(d,o) Safety Kleen Services, senior sub. note, 9.25%, 6/01/08 ....... United States 40,000 200
(o) Trump Entertainment Resorts Inc., 8.50%, 5/20/15 .............. United States 13,553,108 1,863,552
--------------
TOTAL CORPORATE BONDS & NOTES IN REORGANIZATION
(COST $47,326,539) ......................................... 9,856,491
--------------
TOTAL INVESTMENTS BEFORE SHORT TERM INVESTMENTS
(COST $2,378,235,298) ...................................... 2,322,055,782
--------------
SHORT TERM INVESTMENTS 44.7%
U.S. GOVERNMENT AND AGENCY SECURITIES 44.6%
(r) FHLB,
1/05/09 - 12/14/09 ......................................... United States 1,457,473,000 1,454,440,990
1/12/09 .................................................... United States 61,599,000 61,599,431
1/14/09 .................................................... United States 50,000,000 50,000,400
3/13/09 .................................................... United States 50,000,000 49,995,600
5/06/09 .................................................... United States 20,000,000 19,984,500
11/13/09 ................................................... United States 50,000,000 49,726,550
11/20/09 ................................................... United States 50,000,000 49,720,500
12/04/09 ................................................... United States 60,000,000 59,622,000
(r) U.S. Treasury Bills,
3/26/09 - 11/19/09 ......................................... United States 45,000,000 44,923,825
5/21/09 .................................................... United States 50,000,000 49,987,450
6/18/09 .................................................... United States 45,000,000 44,968,905
--------------
TOTAL U.S. GOVERNMENT AND AGENCY SECURITIES
(COST $1,920,447,769) ...................................... 1,934,970,151
--------------
TOTAL INVESTMENTS BEFORE MONEY MARKET FUNDS
(COST $4,298,683,067) ...................................... 4,257,025,933
--------------
(s) INVESTMENTS FROM CASH COLLATERAL RECEIVED FOR LOANED
SECURITIES 0.1%
MONEY MARKET FUNDS (COST $3,033,444) 0.1%
(t) Bank of New York Institutional Cash Reserve Fund, 0.09% ....... United States 3,033,444 3,003,110
--------------
TOTAL INVESTMENTS (COST $4,301,716,511) 98.3% ................. 4,260,029,043
OPTIONS WRITTEN (0.2)% ........................................ (9,919,592)
NET UNREALIZED APPRECIATION ON FORWARD EXCHANGE
CONTRACTS 0.4% ............................................. 16,640,590
OTHER ASSETS, LESS LIABILITIES 1.5% ........................... ` 67,793,506
--------------
NET ASSETS 100.0% ............................................. $4,334,543,547
==============
Annual Report | 27
Mutual Qualified Fund
STATEMENT OF INVESTMENTS, DECEMBER 31, 2008 (CONTINUED)
COUNTRY CONTRACTS VALUE
-------------- ----------------- --------------
(u) OPTIONS WRITTEN 0.2%
CALL OPTIONS 0.2%
BEVERAGES 0.1%
Pernod Ricard SA, Jun. 52 Calls, 6/19/09 ...................... France 455 $ 489,258
Pernod Ricard SA, Jun. 52 Calls, 6/19/09 ...................... France 2,061 2,279,580
Pernod Ricard SA, Mar. 52 Calls, 3/20/09 ...................... France 1,142 900,628
Pernod Ricard SA, Mar. 52 Calls, 3/20/09 ...................... France 126 101,307
--------------
3,770,773
--------------
DIVERSIFIED FINANCIAL SERVICES 0.0%(c)
Deutsche Boerse AG, Mar. 64 Calls, 3/20/09 .................... Germany 512 84,480
--------------
FOOD PRODUCTS 0.0%(c)
Cadbury PLC, Jun. 6 Calls, 6/19/09 ............................ United Kingdom 573 186,658
Cadbury PLC, Jun. 6.4 Calls, 6/19/09 .......................... United Kingdom 573 359,865
Groupe Danone, Mar. 48 Calls, 3/20/09 ......................... France 2,746 583,639
Nestle SA, Mar. 48 Calls, 3/20/09 ............................. Switzerland 1,696 46,057
--------------
1,176,219
--------------
SOFTWARE 0.0%(c)
Microsoft Corp., Apr. 26 Calls, 4/18/09 ....................... United States 1,681 40,344
--------------
TOBACCO 0.1%
British American Tobacco PLC, Jun. 18 Calls, 6/19/09 .......... United Kingdom 126 316,530
British American Tobacco PLC, Mar. 18 Calls, 3/20/09 .......... United Kingdom 310 554,644
British American Tobacco PLC, Mar. 18 Calls, 3/20/09 .......... United Kingdom 146 261,220
Imperial Tobacco Group PLC, Jun. 18 Calls, 6/19/09 ............ United Kingdom 645 1,860,558
Imperial Tobacco Group PLC, Mar. 18 Calls, 3/20/09 ............ United Kingdom 310 608,976
Imperial Tobacco Group PLC, Mar. 18 Calls, 3/20/09 ............ United Kingdom 620 1,217,953
Lorillard Inc., Mar. 70 Calls, 3/21/09 ........................ United States 168 8,400
Reynolds American Inc., Feb. 45 Calls, 2/21/09 ................ United States 200 11,800
Reynolds American Inc., May. 45 Calls, 5/16/09 ................ United States 57 7,695
--------------
4,847,776
--------------
TOTAL OPTIONS WRITTEN
(PREMIUMS RECEIVED $8,642,578) ............................. $ 9,919,592
==============
28 | Annual Report
Mutual Qualified Fund
STATEMENT OF INVESTMENTS, DECEMBER 31, 2008 (CONTINUED)
See Abbreviations on page 50.
(a) Non-income producing for the twelve months ended December 31, 2008.
(b) Contingent distributions represent the right to receive additional
distributions, if any, during the reorganization of the underlying company.
Shares represent total underlying principal of debt securities.
(c) Rounds to less than 0.1% of net assets.
(d) Security has been deemed illiquid because it may not be able to be sold
within seven days. At December 31, 2008, the aggregate value of these
securities was $36,900,264, representing 0.85% of net assets.
(e) See Note 10 regarding restricted and illiquid securities.
(f) See Note 14 regarding other considerations.
(g) A portion or all of the security is held in connection with written option
contracts open at year end.
(h) See Note 13 regarding holdings of 5% voting securities.
(i) A portion or all of the security is on loan at December 31, 2008. See Note
1(i).
(j) The principal amount is stated in U.S. dollars unless otherwise indicated.
(k) 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. These securities have been deemed liquid under
guidelines approved by the Trust's Board of Trustees. At December 31, 2008,
the aggregate value of these securities was $8,058,470, representing 0.19%
of net assets.
(l) The coupon rate shown represents the rate at period end.
(m) Income may be received in additional securities and/or cash.
(n) See Note 1(h) regarding investments in special purpose entities.
(o) See Note 9 regarding defaulted securities.
(p) See Note 11 regarding unfunded loan commitments.
(q) A portion or all of the security purchased on a delayed delivery basis. See
Note 1(c).
(r) The security is traded on a discount basis with no stated coupon rate.
(s) See Note 1(i) regarding securities on loan.
(t) The rate shown is the annualized seven-day yield at period end.
(u) See Note 1(f) regarding written options.
The accompanying notes are an integral part of these financial statements.
Annual Report | 29
Mutual Qualified Fund
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
December 31, 2008
Assets:
Investments in securities:
Cost - Unaffiliated issuers ............................ $4,229,462,191
Cost - Non-controlled affiliated issuers (Note 13) ..... 72,254,320
--------------
Total cost of investments .............................. $4,301,716,511
==============
Value - Unaffiliated issuers ........................... $4,225,842,423
Value - Non-controlled affiliated issuers (Note 13) .... 34,186,620
--------------
Total value of investments (includes securities
loaned in the amount of $3,096,940) ................. 4,260,029,043
Cash ...................................................... 14,716,649
Cash on deposit with brokers .............................. 10,188,601
Foreign currency, at value (cost $40,578,863) ............. 40,486,700
Receivables:
Investment securities sold ............................. 4,189,847
Capital shares sold .................................... 11,187,993
Dividends and interest ................................. 20,204,272
Unrealized appreciation on forward exchange contracts
(Note 8) ............................................... 54,224,977
--------------
Total assets ........................................ 4,415,228,082
--------------
Liabilities:
Payables:
Investment securities purchased ........................ 16,046,615
Capital shares redeemed ................................ 9,175,536
Affiliates ............................................. 3,814,029
Options written, at value (premiums received $8,642,578) .. 9,919,592
Payable upon return of securities loaned .................. 3,033,444
Unrealized depreciation on forward exchange contracts
(Note 8) ............................................... 37,584,387
Unrealized depreciation on unfunded loan commitments
(Note 11) .............................................. 5,744
Accrued expenses and other liabilities .................... 1,105,188
--------------
Total liabilities ................................... 80,684,535
--------------
Net assets, at value ............................. $4,334,543,547
==============
Net assets consist of:
Paid-in capital ........................................... $4,406,300,534
Distributions in excess of net investment income .......... (1,346,885)
Net unrealized appreciation (depreciation) ................ (26,430,665)
Accumulated net realized gain (loss) ...................... (43,979,437)
--------------
Net assets, at value ............................. $4,334,543,547
==============
The accompanying notes are an integral part of these financial statements.
30 | Annual Report
Mutual Qualified Fund
FINANCIAL STATEMENTS (CONTINUED)
STATEMENT OF ASSETS AND LIABILITIES (CONTINUED)
December 31, 2008
CLASS Z:
Net assets, at value ...................................... $3,071,302,188
--------------
Shares outstanding ........................................ 210,475,367
--------------
Net asset value and maximum offering price per share ...... $ 14.59
--------------
CLASS A:
Net assets, at value ...................................... $ 883,955,151
--------------
Shares outstanding ........................................ 60,959,480
--------------
Net asset value per share(a) .............................. $ 14.50
--------------
Maximum offering price per share (net asset value per
share / 94.25%) ........................................ $ 15.38
--------------
CLASS B:
Net assets, at value ...................................... $ 41,703,556
--------------
Shares outstanding ........................................ 2,938,284
--------------
Net asset value and maximum offering price per share(a) ... $ 14.19
--------------
CLASS C:
Net assets, at value ...................................... $ 337,582,652
--------------
Shares outstanding ........................................ 23,476,997
--------------
Net asset value and maximum offering price per share(a) ... $ 14.38
--------------
(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.
Annual Report | 31
Mutual Qualified Fund
FINANCIAL STATEMENTS (CONTINUED)
STATEMENT OF OPERATIONS
for the year ended December 31, 2008
Investment income:
Dividends: (net of foreign taxes of $7,501,688)
Unaffiliated issuers ................................... $ 98,293,271
Non-controlled affiliated issuers (Note 13) ............ 71,327
Interest:
Unaffiliated issuers ................................... 51,942,955
Non-controlled affiliated issuers (Note 13) ............ 169,896
Income from securities loaned ............................. 57,944
---------------
Total investment income ............................. 150,535,393
---------------
Expenses:
Management fees (Note 3a) ................................. 32,369,580
Administrative fees (Note 3b) ............................. 4,123,967
Distribution fees: (Note 3c)
Class A ................................................ 3,320,914
Class B ................................................ 566,246
Class C ................................................ 4,265,848
Transfer agent fees (Note 3e) ............................. 4,456,410
Custodian fees (Note 4) ................................... 901,719
Reports to shareholders ................................... 322,622
Registration and filing fees .............................. 218,698
Professional fees ......................................... 875,198
Trustees' fees and expenses ............................... 264,792
Dividends on securities sold short ........................ 292,778
Other ..................................................... 166,005
---------------
Total expenses ...................................... 52,144,777
Expense reductions (Note 4) ......................... (17,460)
---------------
Net expenses ..................................... 52,127,317
---------------
Net investment income ......................... 98,408,076
---------------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments:
Unaffiliated issuers ................................ 230,018,208
Non-controlled affiliated issuers (Note 13) ......... 2,247,351
Foreign currency transactions .......................... 93,424,872
---------------
Net realized gain (loss) ......................... 325,690,431
---------------
Net change in unrealized appreciation (depreciation) on:
Investments ............................................ (2,000,732,741)
Translation of other assets and liabilities denominated
in foreign currencies ............................... 29,505,113
---------------
Net change in unrealized appreciation
(depreciation) ................................ (1,971,227,628)
---------------
Net realized and unrealized gain (loss) ...................... (1,645,537,197)
---------------
Net increase (decrease) in net assets resulting from
operations ................................................ $(1,547,129,121)
===============
The accompanying notes are an integral part of these financial statements.
32 | Annual Report
MUTUAL QUALIFIED FUND
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF CHANGES IN NET ASSETS
YEAR ENDED DECEMBER 31,
--------------------------------
2008 2007
--------------- --------------
Increase (decrease) in net assets:
Operations:
Net investment income .................................. $ 98,408,076 $ 151,499,775
Net realized gain (loss) from investments, securities
sold short, synthetic equity swaps, and foreign
currency transactions ............................... 325,690,431 392,665,509
Net change in unrealized appreciation (depreciation) on
investments and translation of other assets and
liabilities denominated in foreign currencies ....... (1,971,227,628) (36,681,335)
--------------- --------------
Net increase (decrease) in net assets resulting
from operations ............................... (1,547,129,121) 507,483,949
--------------- --------------
Distributions to shareholders from:
Net investment income:
Class Z ............................................. (61,395,078) (133,801,897)
Class A ............................................. (14,205,288) (34,706,443)
Class B ............................................. (308,286) (1,467,618)
Class C ............................................. (2,613,022) (10,641,199)
Net realized gains:
Class Z ............................................. (269,629,983) (245,908,236)
Class A ............................................. (76,838,699) (71,535,285)
Class B ............................................. (3,820,054) (4,072,725)
Class C ............................................. (30,141,995) (28,564,865)
--------------- --------------
Total distributions to shareholders ....................... (458,952,405) (530,698,268)
--------------- --------------
Capital share transactions: (Note 2)
Class Z ............................................. 70,935,652 219,666,981
Class A ............................................. (1,449,463) 316,804,502
Class B ............................................. (7,916,883) (4,572,363)
Class C ............................................. (8,518,953) 89,317,402
--------------- --------------
Total capital share transactions .......................... 53,050,353 621,216,522
--------------- --------------
Redemption fees ........................................... 15,547 17,800
--------------- --------------
Net increase (decrease) in net assets ............ (1,953,015,626) 598,020,003
Net assets:
Beginning of year ......................................... 6,287,559,173 5,689,539,170
--------------- --------------
End of year ............................................... $ 4,334,543,547 $6,287,559,173
--------------- --------------
(Distributions in excess of net investment income)
/undistributed net investment income included in net
assets:
End of year ............................................... $ (1,346,885) $ 2,003,039
=============== ==============
The accompanying notes are an integral part of these financial statements.
Annual Report | 33
MUTUAL QUALIFIED FUND
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Franklin Mutual Series Funds (Trust) is registered under the Investment Company
Act of 1940, as amended, (1940 Act) as an open-end investment company,
consisting of six separate funds. The Mutual Qualified Fund (Fund) is included
in this report. The financial statements of the remaining funds in the Trust are
presented separately. The Fund offers four classes of shares: Class Z, Class A,
Class B, and Class C. 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. Investments in open-end mutual funds are valued at the closing net asset
value.
Corporate debt securities and government securities generally trade in the
over-the-counter market rather than on a securities exchange. The Trust 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 Trust'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 Trust 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
34 | Annual Report
Mutual Qualified Fund
NOTES TO FINANCIAL STATEMENTS (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. At December 31, 2008,
a portion of the securities held by the Fund were fair valued. 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. SECURITIES PURCHASED ON A DELAYED DELIVERY BASIS
The Fund may purchase securities on a delayed delivery basis, with payment and
delivery scheduled for a future date. These transactions are subject to market
fluctuations and are subject to the risk that the value at delivery may be more
or less than the trade date purchase price. Although the Fund will generally
purchase these securities with the intention of holding the securities, it may
sell the securities before the settlement date. Sufficient assets have been
segregated for these securities.
Annual Report | 35
Mutual Qualified Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
D. 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 Fund may also enter into forward exchange contracts to hedge against
fluctuations in foreign exchange rates. These contracts are valued daily by the
Fund and the unrealized appreciation or depreciation on the contracts, as
measured by the difference between the contractual forward foreign exchange
rates and the forward rates at the reporting date, are included in the Statement
of Assets and Liabilities. 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.
E. SYNTHETIC EQUITY SWAPS
The Fund may engage in synthetic equity swaps. Synthetic equity swaps are
contracts entered into between a broker and the Fund under which the parties
agree to make payments to each other so as to replicate the economic
consequences that would apply had a purchase or short sale of the underlying
security taken place. Upon entering into synthetic equity swaps, the Fund is
required to pledge to the broker an amount of cash and/or other assets equal to
a certain percentage of the contract amount (margin account). Periodically,
payments are made to recognize changes in value of the contract resulting from
interest on the notional value of the contract, market value changes in the
underlying security, and/or dividends paid by the issuer of the underlying
security. The Fund recognizes a realized gain or loss when cash is received
from, or paid to, the broker. Synthetic equity swaps are valued daily by the
Fund and the unrealized appreciation or depreciation on the contracts (as
measured by the difference between the contract amount plus or minus cash
received or paid and the market value of the underlying securities) are recorded
in the Statement of Operations. The margin account and any net unrealized
appreciation or depreciation on open synthetic equity swaps are included in the
Statement of Assets and Liabilities. The risks of entering into synthetic equity
swaps include unfavorable price movements in the underlying securities or the
inability of the counterparties to fulfill their obligations under the contract.
36 | Annual Report
Mutual Qualified Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
F. OPTIONS
The Fund may purchase or write options. Options are contracts entitling the
holder to purchase or sell securities or other financial instruments at a
specified price, or, in the case of index options, to receive or pay the
difference between the index value and the strike price of the index option.
Options purchased are recorded as investments; options written (sold) are
recorded as liabilities. Upon closing of an option which results in a cash
settlement, the difference between the premium (original option value) and the
settlement proceeds is realized as a gain or loss. When securities are acquired
or delivered upon exercise of an option, the acquisition cost or sale proceeds
are adjusted by the amount of the premium. When an option expires, the premium
is realized as a gain for options written or as a loss for options purchased.
The risks include the possibility there may be an illiquid options market or the
inability of the counterparties to fulfill their obligations under the contract.
Writing options involves, to varying degrees, elements of market risk in excess
of the amount recognized in the Statement of Assets and Liabilities.
G. SECURITIES SOLD SHORT
The Fund is engaged in selling securities short, which obligates the Fund to
replace a borrowed security with the same security at current market value. The
Fund incurs a loss if the price of the security increases between the date of
the short sale and the date on which the Fund replaces the borrowed security.
The Fund realizes a gain if the price of the security declines between those
dates. Gains are limited to the price at which the Fund sold the security short,
while losses are potentially unlimited in size.
The Fund is required to establish a margin account with the broker lending the
security sold short. While the short sale is outstanding, the broker retains the
proceeds of the short sale and the Fund must maintain a deposit with broker
consisting of cash and securities having a value equal to a specified percentage
of the value of the securities sold short. The Fund is obligated to pay the
counterparty any dividends or interest due on securities sold short. Such
dividends and interest are recorded as an expense to the Fund.
H. INVESTMENTS IN SPECIAL PURPOSE ENTITIES
At December 31, 2008, the Fund had contributed an additional $15,689,602 as a
subordinated note holder of certain special purpose entities ("SPEs"). Such
contributions, while made at the discretion of the Fund, represent additional
capital contributions to the SPE in support of its underlying investments and
are subject first to the claims of the senior note holders of the SPE. These
contributions are recorded as an addition to the Fund's cost basis in the SPE
and are subject to the risk of loss in the event of continued unfavorable market
conditions related to the SPE's underlying investments.
Annual Report | 37
Mutual Qualified Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
I. SECURITIES LENDING
The Fund participates in an agency based security lending program. The Fund
receives cash collateral against the loaned securities in an amount equal to at
least 102% of the market value of the loaned securities. Collateral is
maintained over the life of the loan in an amount not less than 100% of the
market value of loaned securities, as determined at the close of Fund business
each day; any additional collateral required is delivered to the Fund on the
next business day. The collateral is invested in a non-registered money market
fund managed by the Fund's custodian on the Fund's behalf. The Fund receives
income from the investment of cash collateral, in addition to lending fees and
rebates paid by the borrower. The Fund bears the market risk with respect to the
collateral investment, securities loaned, and the risk that the agent may
default on its obligations to the Fund. The securities lending agent has agreed
to indemnify the Fund in the event of default by a third party borrower.
J. 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 December 31, 2008, 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.
K. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS
Security transactions are accounted for on trade date. Realized gains and losses
on security transactions are determined on a specific identification basis.
Interest income and estimated expenses are accrued daily. Amortization of
premium and accretion of discount on debt securities are included in interest
income. Dividend income and dividends declared on securities sold short are
recorded on the ex-dividend date except 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.
38 | Annual Report
Mutual Qualified Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
K. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS
(CONTINUED)
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.
L. 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.
M. 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.
N. GUARANTEES AND INDEMNIFICATIONS
Under the Trust's organizational documents, its officers and trustees are
indemnified by the Trust against certain liabilities arising out of the
performance of their duties to the Trust. Additionally, in the normal course of
business, the Trust, on behalf of the Fund, enters into contracts with service
providers that contain general indemnification clauses. The Trust's maximum
exposure under these arrangements is unknown as this would involve future claims
that may be made against the Trust that have not yet occurred. Currently, the
Trust expects the risk of loss to be remote.
Annual Report | 39
Mutual Qualified Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SHARES OF BENEFICIAL INTEREST
At December 31, 2008, there were an unlimited number of shares authorized
(without par value). Transactions in the Fund's shares were as follows:
YEAR ENDED DECEMBER 31,
---------------------------------------------------------
2008 2007
--------------------------- ---------------------------
SHARES AMOUNT SHARES AMOUNT
----------- ------------- ----------- -------------
CLASS Z SHARES:
Shares sold ........................................ 11,122,574 $ 209,614,477 11,498,413 $ 269,849,858
Shares issued in reinvestment of distributions ..... 21,179,571 311,672,139 16,420,954 360,016,285
Shares redeemed .................................... (24,315,473) (450,350,964) (17,456,173) (410,199,162)
---------- ----------- ---------- -----------
Net increase (decrease) ............................ 7,986,672 $ 70,935,652 10,463,194 $ 219,666,981
========== =========== ========== ===========
CLASS A SHARES:
Shares sold ........................................ 18,274,974 $ 333,446,293 19,622,769 $ 459,150,297
Shares issued in reinvestment of distributions ..... 5,851,226 85,559,773 4,576,592 99,690,375
Shares redeemed .................................... (22,653,674) (420,455,529) (10,374,895) (242,036,170)
---------- ----------- ---------- -----------
Net increase (decrease) ............................ 1,472,526 $ (1,449,463) 13,824,466 $ 316,804,502
========== =========== ========== ===========
CLASS B SHARES:
Shares sold ........................................ 186,946 $ 3,373,974 180,171 $ 4,119,296
Shares issued in reinvestment of distributions ..... 267,986 3,835,934 237,389 5,061,976
Shares redeemed .................................... (825,352) (15,126,791) (602,357) (13,753,635)
---------- ----------- ---------- -----------
Net increase (decrease) ............................ (370,420) $ (7,916,883) (184,797) $ (4,572,363)
========== =========== ========== ===========
CLASS C SHARES:
Shares sold ........................................ 4,076,156 $ 73,178,814 5,112,901 $ 118,074,250
Shares issued in reinvestment of distributions ..... 2,049,328 29,714,490 1,634,857 35,274,002
Shares redeemed .................................... (6,127,082) (111,412,257) (2,772,446) (64,030,850)
---------- ----------- ---------- -----------
Net increase (decrease) ............................ (1,598) $ (8,518,953) 3,975,312 $ 89,317,402
========== =========== ========== ===========
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
- ---------- -----------
Franklin Mutual Advisers, LLC (Franklin Mutual) Investment manager
Franklin Templeton Investment Management Limited
(FTIML) 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
40 | Annual Report
Mutual Qualified Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. TRANSACTIONS WITH AFFILIATES (CONTINUED)
A. MANAGEMENT FEES
The Fund pays an investment management fee to Franklin Mutual based on the
average daily net assets of the Fund as follows:
ANNUALIZED FEE RATE NET ASSETS
- ------------------- ----------
0.600% Up to and including $5 billion
0.570% Over $5 billion, up to and including $7 billion
0.550% Over $7 billion, up to and including $10 billion
0.540% In excess of $10 billion
Under a subadvisory agreement, FTIML, an affiliate of Franklin Mutual, provides
subadvisory services to the Fund and receives from Franklin Mutual fees based on
the average daily net assets of the Fund.
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 Fund's Board of Trustees has adopted distribution plans for each share
class, with the exception of Class Z 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.. 0.35%
Class B.. 1.00%
Class C.. 1.00%
Effective February 1, 2009, the Board of Trustees has set the current rate at
0.30% per year for Class A shares until further notice and approval by the
Board.
Annual Report | 41
Mutual Qualified Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. TRANSACTIONS WITH AFFILIATES (CONTINUED)
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 year:
Sales charges retained net of commissions paid to
unaffiliated broker/dealers .................... $530,262
Contingent deferred sales charges retained ........ $ 98,706
E. TRANSFER AGENT FEES
For the year ended December 31, 2008, the Fund paid transfer agent fees of
$4,456,410, of which $3,130,004 was retained by Investor Services.
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 year ended December 31, 2008, the
custodian fees were reduced as noted in the Statement of Operations.
5. INDEPENDENT TRUSTEES' RETIREMENT PLAN
On January 1, 1993, the Trust adopted an Independent Trustees' Retirement Plan
("Plan"). The Plan is an unfunded defined benefit plan that provides benefit
payments to Trustees whose length of service and retirement age meets the
eligibility requirements of the Plan. Benefits under the plan are based on years
of service and fees paid to each trustee at the time of retirement. Effective in
December 1996 the Plan was closed to new participants.
During the year ended December 31, 2008 the Fund's projected benefit obligation
and benefit payments under the plan were as follows:
(a) Projected benefit obligation at December 31, 2008.. $158,385
(b) Increase in projected benefit obligation $ 14,464
Benefit payments made to retired trustees....... $ 2,589
(a) The projected benefit obligation is included in accrued expenses and other
liabilities in the Statement of Assets and Liabilities.
(b) The increase in projected benefit obligation is included in trustees' fees
and expenses in the Statement of Operations.
42 | Annual Report
Mutual Qualified Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. INCOME TAXES
For tax purposes, realized capital losses and realized currency losses occurring
subsequent to October 31, may be deferred and treated as occurring on the first
day of the following fiscal year. At December 31, 2008, the Fund deferred
realized capital losses and realized currency losses of $22,557,980 and
$4,033,228 respectively.
The tax character of distributions paid during the years ended December 31, 2008
and 2007, was as follows:
2008 2007
------------ ------------
Distributions paid from:
Ordinary income .......... $324,732,262 $180,623,450
Long term capital gain ... 134,220,143 350,074,818
------------ ------------
$458,952,405 $530,698,268
============ ============
At December 31, 2008, the cost of investments, net unrealized appreciation
(depreciation), and undistributed long term capital gains for income tax
purposes were as follows:
Cost of investments .............................................. $4,310,096,639
==============
Unrealized appreciation .......................................... $ 595,303,232
Unrealized depreciation .......................................... (645,370,828)
--------------
Net unrealized appreciation (depreciation) ....................... $ (50,067,596)
==============
Distributable earnings - undistributed long term capital gains ... $ 4,147,929
==============
Net investment income (loss) differs for financial statement and tax purposes
primarily due to differing treatments of defaulted securities, foreign currency
transactions, passive foreign investment company shares, 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, 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 capital gains.
Annual Report | 43
Mutual Qualified Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. INVESTMENT TRANSACTIONS
Purchases and sales of investments (excluding short term securities and
securities sold short) for the year ended December 31, 2008, aggregated
$1,026,783,473 and $1,998,395,209, respectively.
Transactions in options written during the year ended December 31, 2008, were as
follows:
NUMBER OF PREMIUMS
CONTRACTS RECEIVED
--------- ----------
Options outstanding at December 31, 2007 ... -- $ --
Options written ............................ 13,858 8,642,578
Options expired ............................ -- --
Options exercised .......................... -- --
Options closed ............................. -- --
------ ----------
Options outstanding at December 31, 2008 ... 13,858 $8,642,578
====== ==========
8. FORWARD EXCHANGE CONTRACTS
At December 31, 2008, the Fund had the following forward exchange contracts
outstanding:
CONTRACT SETTLEMENT UNREALIZED UNREALIZED
AMOUNT DATE APPRECIATION DEPRECIATION
------------ ---------- ------------ ------------
CONTRACTS TO BUY
8,680,000 British Pound Sterling ..... $ 15,281,568 1/12/09 $ -- $(2,608,204)
60,775,450 Norwegian Krone ............ 9,700,000 1/12/09 -- (969,651)
19,900,560 Norwegian Krone ............ 2,830,000 1/12/09 28,700 --
2,442,354 Danish Krone ............... 468,268 1/23/09 -- (10,224)
67,129,895 Danish Krone ............... 11,532,025 1/23/09 1,057,651 --
27,697,785 Swiss Franc ................ 23,430,000 2/09/09 2,519,863 --
29,756,844 Euro ....................... 38,110,419 2/13/09 3,426,232 --
2,490,058 Canadian Dollar ............ 1,984,327 2/27/09 60,995 --
1,185,560 Swiss Franc ................ 1,069,807 3/09/09 41,319 --
13,730,000 British Pound Sterling ..... 23,504,205 3/10/09 -- (3,479,913)
2,863,060 Swedish Krona .............. 400,000 3/16/09 -- (34,169)
18,113,796 Swedish Krona .............. 2,241,121 3/16/09 73,390 --
13,977,313 Singapore Dollar ........... 9,380,000 3/24/09 351,302 --
36,077,591 Norwegian Krone ............ 5,005,000 5/19/09 150,856 --
CONTRACTS TO SELL
22,595,268 British Pound Sterling ..... 39,166,901 1/12/09 6,176,343 --
12,780,720 Norwegian Krone ............ 1,800,000 1/12/09 -- (35,941)
12,666,493 Euro ....................... 17,356,896 1/14/09 -- (343,258)
7,845,998 Danish Krone ............... 1,357,000 1/23/09 -- (114,454)
102,500,000 Danish Krone ............... 20,828,580 1/23/09 1,605,523 --
42,000,000 Euro ....................... 61,439,700 1/26/09 2,781,289 --
4,384,214 Swiss Franc ................ 3,870,000 2/09/09 -- (237,540)
40,444,170 Swiss Franc ................ 38,463,309 2/09/09 571,447 --
89,000,000 Euro ....................... 132,280,700 2/13/09 8,048,377 --
231,653,577 Japanese Yen ............... 2,419,462 2/19/09 -- (136,467)
11,125,205 Canadian Dollar ............ 8,871,350 2/27/09 -- (266,843)
34,260,000 Euro ....................... 44,632,681 2/27/09 -- (3,172,554)
44 | Annual Report
Mutual Qualified Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. FORWARD EXCHANGE CONTRACTS (CONTINUED)
CONTRACT SETTLEMENT UNREALIZED UNREALIZED
AMOUNT DATE APPRECIATION DEPRECIATION
------------ ---------- ------------ ------------
CONTRACTS TO SELL (CONTINUED)
56,000,000 Swiss Franc ................ 50,570,960 3/09/09 $ -- $ (1,913,154)
70,000,000 British Pound Sterling ..... 121,390,740 3/10/09 19,300,395 --
66,951,081 Euro ....................... 88,508,125 3/13/09 -- (4,882,066)
7,864,542 Swedish Krona .............. 975,000 3/16/09 -- (29,901)
63,891,433 Swedish Krona .............. 9,452,960 3/16/09 1,289,160 --
1,394,442 Singapore Dollar ........... 930,000 3/24/09 -- (40,840)
24,632,832 Singapore Dollar ........... 17,557,257 3/24/09 407,356 --
35,702,860,000 South Korean Won ........... 26,390,000 4/06/09 -- (1,977,122)
21,960,418,750 South Korean Won ........... 18,400,000 4/06/09 951,709 --
1,820,000,000 Japanese Yen ............... 20,728,929 4/20/09 618,912 --
40,785,000 Euro ....................... 53,089,157 4/30/09 -- (3,742,933)
41,175,000 British Pound Sterling ..... 64,039,478 5/12/09 3,999,530 --
72,491,810 Euro ....................... 90,832,238 5/13/09 -- (10,154,944)
507,139,068 Norwegian Krone ............ 71,889,588 5/19/09 -- (585,763)
31,500,000 Euro ....................... 41,019,300 5/29/09 -- (2,848,446)
30,773,840 British Pound Sterling ..... 45,640,523 9/14/09 764,628 --
----------- ------------
Unrealized appreciation (depreciation) on forward exchange contracts ....... 54,224,977 (37,584,387)
----------- ------------
NET UNREALIZED APPRECIATION ON FORWARD EXCHANGE CONTRACTS ............... $16,640,590
===========
9. CREDIT RISK AND DEFAULTED SECURITIES
The Fund may purchase the pre-default or defaulted debt of distressed companies.
Distressed companies are financially troubled and are about to be/or are already
involved in financial restructuring or bankruptcy. The Fund does not accrue
income on these securities, if it becomes probable that the income will not be
collected. Risks associated with purchasing these securities include the
possibility that the bankruptcy or other restructuring process takes longer than
expected, or that distributions in restructuring are less than anticipated,
either or both of which may result in unfavorable consequences to the Fund. At
December 31, 2008, the aggregate value of these securities was $9,856,491,
representing 0.23% of the Fund's net assets. For information as to specific
securities, see the accompanying Statement of Investments.
10. RESTRICTED SECURITIES
The Fund may invest in securities that are restricted under the Securities Act
of 1933 (1933 Act) or which are subject to legal, contractual, or other agreed
upon restrictions on resale. Restricted securities are often purchased in
private placement transactions, and cannot be sold without prior registration
unless the sale is pursuant to an exemption under the 1933 Act. Disposal of
these securities may require greater effort and expense, and prompt sale at an
acceptable price may be difficult. The Fund may have registration rights for
restricted securities. The issuer generally incurs all registration costs.
Annual Report | 45
Mutual Qualified Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. RESTRICTED SECURITIES (CONTINUED)
At December 31, 2008, the Fund held investments in restricted securities,
excluding 144A securities deemed to be liquid, valued in accordance with
procedures approved by the Trust's Board of Trustees as reflecting fair value,
as follows:
PRINCIPAL
AMOUNT/
SHARES/
WARRANTS/ ACQUISITION
CONTRACTS ISSUER DATES COST VALUE
- ---------- ------------------------------------------------------ ------------------ ----------- ------------
402,522 AboveNet Inc. .................................... 10/02/01 - 8/08/08 $21,273,721 $ 20,126,100
510 AboveNet Inc., stock grant, grant price
$20.95, expiration date 9/09/13 .................. 4/17/06 - 9/08/06 -- 1,148
16,099 AboveNet Inc., wts., 9/08/10 ..................... 10/02/01 - 9/07/07 1,681,195 64,396
7,519,799 Cerberus CG Investor I LLC ....................... 7/26/07 - 6/17/08 7,519,799 1,503,960
6,600,000 Cerberus CG Investor I LLC, 12.00%,
7/31/14 ....................................... 7/26/07 6,600,000 1,320,000
7,519,799 Cerberus CG Investor II LLC ...................... 7/26/07 - 6/17/08 7,519,799 1,503,960
6,600,000 Cerberus CG Investor II LLC, 12.00%,
7/31/14 ....................................... 7/26/07 6,600,000 1,320,000
3,759,899 Cerberus CG Investor III LLC ..................... 7/26/07 - 6/17/08 3,759,899 751,980
3,300,000 Cerberus CG Investor III LLC, 12.00%,
7/31/14 ....................................... 7/26/07 3,300,000 660,000
15,919,000 Cerberus FIM Investors Holdco LLC ................ 11/20/06 15,919,000 3,371,608
47,747,515 Cerberus FIM Investors Holdco LLC,
12.00%, 11/22/13 .............................. 11/20/06 47,747,515 10,112,817
48,807 (a) Dana Holding Corp., 4.00%, cvt,
pfd., B ....................................... 12/27/07 4,880,700 439,263
1,008,199 (b) DecisionOne Corp. ................................ 3/12/99 - 7/18/00 700,978 --
1,297,728 (b) DecisionOne Corp., 12.00%, 4/15/10 ............... 3/12/99 - 10/16/08 1,822,410 1,297,728
553,576 (b) DecisionOne Corp., wts., 6/08/17 ................. 7/09/07 -- --
27,946 Elephant Capital Holdings Ltd. ................... 8/29/03 - 3/10/08 3,250,275 --
659,105 First Chicago Bancorp ............................ 11/16/06 9,227,470 4,998,809
180,986 IACNA Investor LLC ............................... 7/24/08 - 8/08/08 185,348 1,810
2,814,856 Imagine Group Holdings Ltd. ...................... 8/31/04 28,828,348 23,053,671
2,363,058 International Automotive Components
Group Brazil LLC .............................. 4/13/06 - 12/26/08 1,585,194 1,880,097
307,801 International Automotive Components
Group Japan LLC ............................... 9/26/06 - 3/27/07 2,672,236 332,652
8,425,843 International Automotive Components
Group LLC ..................................... 1/12/06 - 10/16/06 8,428,025 1,433,236
1,560,200 International Automotive Components
Group NA LLC, 9.00%, 4/01/17 .................. 3/30/07 1,583,603 752,142
5,182,488 International Automotive Components
Group NA LLC, A ............................... 3/30/07 - 10/10/07 5,130,079 843,709
1,456,113 Kindred Healthcare Inc. .......................... 4/28/99 - 7/08/08 13,378,743 18,010,662
46 | Annual Report
Mutual Qualified Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. RESTRICTED SECURITIES (CONTINUED)
PRINCIPAL
AMOUNT/
SHARES/
WARRANTS/ ACQUISITION
CONTRACTS ISSUER DATES COST VALUE
- ---------- ------------------------------------------------------ ------------------ ----------- ------------
5 (c) Motor Coach Industries International
Inc., wts., 5/27/09 ........................... 3/30/07 $ -- $ --
129,974 NCB Warrant Holdings Ltd., A ..................... 12/16/05 - 3/10/08 1,368,433 --
97,300 Olympus Re Holdings Ltd. ......................... 12/19/01 9,409,076 228,421
18,184,516 Pontus I LLC, junior note, 144A, FRN,
5.689%, 7/24/09 ............................... 1/22/08 - 2/25/08 33,449,986 20,519,486
2,876,884 Pontus II Trust, junior profit-
participating note, 144A, FRN,
7.516%, 6/25/09 ............................... 2/29/08 3,301,016 671,234
92,938 PTV Inc., 10.00%, pfd., A ........................ 12/07/01 - 3/06/02 130,113 83,644
3,434,760 Symetra Financial ................................ 7/27/04 39,480,000 45,647,960
------------
TOTAL RESTRICTED SECURITIES (3.71% of Net Assets) ................................... $160,930,493
============
(a) The Fund also invests in unrestricted securities of the issuer, valued at
$429,991 as of December 31, 2008.
(b) The Fund also invests in unrestricted securities of the issuer, valued at
$232,502 as of December 31, 2008.
(c) The Fund also invests in unrestricted securities of the issuer, valued at
$7,992,739 as of December 31, 2008.
11. UNFUNDED LOAN COMMITMENTS
The Fund may enter into certain credit agreements, all or a portion of which may
be unfunded. The Fund is obligated to fund these loan commitments at the
borrowers' discretion. Funded portions of credit agreements are presented on the
Statement of Investments.
At December 31, 2008, unfunded commitments were as follows:
UNFUNDED
COMMITMENT
----------
BORROWER
Motor Coach Industries International Inc., First Lien
DIP Revolver, FRN, 7.75%, 9/19/09 ................ $1,060,928
==========
Unfunded loan commitments and funded portions of credit agreements are marked to
market daily and any unrealized appreciation or depreciation is included in the
Statement of Assets and Liabilities and Statement of Operations.
12. UNFUNDED CAPITAL COMMITMENTS
At December 31, 2008, the Fund had aggregate unfunded capital commitments to
investments of $26,777,903.
Annual Report | 47
Mutual Qualified Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
13. 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 year ended December
31, 2008, were as shown below.
NUMBER OF NUMBER OF
SHARES/ SHARES/
WARRANTS/ WARRANTS/
PRINCIPAL PRINCIPAL
AMOUNT AMOUNT
HELD AT HELD AT VALUE AT REALIZED'
BEGINNING GROSS GROSS END END OF INVESTMENT CAPITAL
NAME OF ISSUER OF YEAR ADDITIONS REDUCTIONS OF YEAR YEAR INCOME GAIN (LOSS)
- -------------- --------- --------- ---------- --------- ----------- ---------- -----------
NON-CONTROLLED AFFILIATES
DecisionOne Corp. ........................ 1,008,199 -- -- 1,008,199 $ -- $ -- $ --
DecisionOne Corp., 12.00%, 4/15/10 ....... 1,246,268 51,460 -- 1,297,728 1,297,728 151,848 --
DecisionOne Corp., FRN, 7.25%, 5/12/09 ... 232,502 -- -- 232,502 232,502 18,048 --
DecisionOne Corp., wts., 6/08/17 ......... 553,576 -- -- 553,576 -- -- --
Elephant Capital Holdings Ltd. ........... 11,496 16,450 -- 27,946 -- -- --
Esmark Inc. .............................. 3,087,162 -- 3,087,162 -- -- -- 2,247,351
First Chicago Bancorp .................... 659,105 -- -- 659,105 4,998,809 -- --
Imagine Group Holdings Ltd. .............. 2,814,856 -- -- 2,814,856 23,053,671 -- --
Imperial Capital Bancorp Inc. ............ 445,796 -- -- 445,796 1,003,041 71,327 --
White River Capital Inc. ................. 549,751 -- -- 549,751 3,600,869 -- --
----------- -------- ----------
TOTAL AFFILIATED SECURITIES (0.79% of Net Assets) ...................................... $34,186,620 $241,223 $2,247,351
=========== ======== ==========
14. OTHER CONSIDERATIONS
Officers, directors or employees of the Fund's Investment Manager, may serve
from time to time as members of bondholders' steering committees, official
creditors' committees, or boards of directors of companies in which the Fund
invests. Such participation may result in the possession by the Investment
Manager of material non-public information which, pursuant to the Fund's
policies and the requirements of applicable securities laws, could prevent the
Fund from trading in the securities of such companies for limited or extended
periods of time.
Franklin Mutual serves as investment manager to certain special purpose entities
that issue securities held by the Fund. Franklin Mutual is not compensated for
such services and does not invest in or exercise control over such entities. As
investment manager, Franklin Mutual is primarily responsible for recommending
investments in unaffiliated issuers to be held by the special purpose entities.
Securities issued by these special purpose entities are restricted under the
Securities Act of 1933 and are deemed to be illiquid.
48 | Annual Report
Mutual Qualified Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
15. REORGANIZATION TO A DELAWARE STATUTORY TRUST
On April 11, 2007, the Board and shareholders approved an Agreement and Plan of
Reorganization whereby the investment company would be reorganized and its
domicile changed from a Maryland corporation to a Delaware statutory trust. In
connection with these changes, the Trust's name was also changed to Franklin
Mutual Series Funds, formerly known as the Franklin Mutual Series Funds, Inc.
The reorganization became effective on May 1, 2008.
16. FAIR VALUE MEASUREMENTS
The Fund adopted Financial Accounting Standards Board (FASB) Statement No. 157,
"Fair Value Measurement" (SFAS 157), on January 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 December 31, 2008, in
valuing the Fund's assets and liabilities carried at fair value:
LEVEL 1 LEVEL 2 LEVEL 3 TOTAL
-------------- -------------- ------------ --------------
ASSETS:
Investments in Securities ........ $2,158,958,337 $1,903,762,857 $197,307,849 $4,260,029,043
Other Financial Instruments(a) ... -- 54,224,977 -- 54,224,977
LIABILITIES:
Options Written .................. -- 9,919,592 -- 9,919,592
Other Financial Instruments(a) ... -- 37,590,131 -- 37,590,131
(a) Other financial instruments includes net unrealized appreciation
(depreciation) on forward exchange contracts and unfunded loan commitments.
Annual Report | 49
Mutual Qualified Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
16. FAIR VALUE MEASUREMENTS (CONTINUED)
At December 31, 2008, the reconciliation of assets in which significant
unobservable inputs (Level 3) were used in determining the Fund's fair value, is
as follows:
INVESTMENTS
IN SECURITIES
-------------
Beginning Balance - January 1, 2008 ...................... $ 422,461,938
Net realized gain (loss) .............................. 2,416,655
Net change in unrealized appreciation (depreciation) .. (204,607,210)
Net purchases (sales) ................................. (14,406,821)
Transfers in and/or out of Level 3 .................... (8,556,713)
-------------
Ending Balance ........................................... $ 197,307,849
=============
Net change in unrealized appreciation (depreciation)
attributable to assets still held at end of year ...... $(220,568,964)
=============
17. 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 Fund is currently evaluating the impact, if any, of
applying the various provisions of SFAS 161.
18. SUBSEQUENT EVENTS
On January 23, 2009, the Fund entered into, along with certain other funds
managed by Franklin Templeton Investments (individually, "Borrower";
collectively "Borrowers"), a $725 million senior unsecured syndicated global
line of credit ("Global Credit Facility") to provide a source of funds to the
Borrowers for temporary and emergency purposes and to meet future unanticipated
or unusually large redemption requests.
Under the terms of the Global Credit Facility, each Borrower has agreed to pay
its proportionate share of fees and expenses incurred in connection with the
implementation and maintenance of the Global Credit Facility.
ABBREVIATIONS CURRENCY
CAD - Canadian Dollar
EUR - Euro
GBP - British Pound Sterling
SELECTED PORTFOLIO
ADR - American Depository Receipt
DIP - Debtor-In-Possession
FHLB - Federal Home Loan Bank
FRN - Floating Rate Note
PIK - Payment-In-Kind
50 | Annual Report
Mutual Qualified Fund
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO THE BOARD OF TRUSTEES OF FRANKLIN MUTUAL SERIES FUNDS AND SHAREHOLDERS OF THE
MUTUAL QUALIFIED FUND:
We have audited the accompanying statement of assets and liabilities of the
Mutual Qualified Fund (one of the Funds constituting the Franklin Mutual Series
Funds) (the "Fund"), including the statement of investments, as of December 31,
2008, and the related statement of operations for the year then ended, the
statements of changes in net assets for each of the two years in the period then
ended, and the financial highlights for each of the five years in the period
then ended. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. We were
not engaged to perform an audit of the Fund's internal control over financial
reporting. Our audits included consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Fund's internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements and financial highlights, assessing the accounting principles used
and significant estimates made by management, and evaluating the overall
financial statement presentation. Our procedures included confirmation of
securities owned as of December 31, 2008, by correspondence with the custodian
and brokers or by other appropriate auditing procedures where replies from the
brokers were not received. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
Mutual Qualified Fund of the Franklin Mutual Series Funds at December 31, 2008,
the results of its operations for the year then ended, the changes in its net
assets for each of the two years in the period then ended, and the financial
highlights for each of the five years in the period then ended, in conformity
with U.S. generally accepted accounting principles.
(Ernst & Young LLP)
Boston, Massachusetts
February 17, 2009
Annual Report | 51
Mutual Qualified Fund
TAX DESIGNATION (UNAUDITED)
Under Section 852(b)(3)(C) of the Internal Revenue Code (Code), the Fund
designates the maximum amount allowable but no less than $171,551,506 as a long
term capital gain dividend for the fiscal year ended December 31, 2008.
Under Section 871(k)(2)(C) of the Code, the Fund designates the maximum amount
allowable but no less than $251,567,516 as a short term capital gain dividend
for purposes of the tax imposed under Section 871(a)(1)(A) of the Code for the
fiscal year ended December 31, 2008.
Under Section 854(b)(2) of the Code, the Fund designates 9.16% of the ordinary
income dividends as income qualifying for the dividends received deduction for
the fiscal year ended December 31, 2008.
Under Section 854(b)(2) of the Code, the Fund designates the maximum amount
allowable but no less than $87,608,037 as qualified dividends for purposes of
the maximum rate under Section 1(h)(11) of the Code for the fiscal year ended
December 31, 2008. Distributions, including qualified dividend income, paid
during calendar year 2008 will be reported to shareholders on Form 1099-DIV in
January 2009. Shareholders are advised to check with their tax advisors for
information on the treatment of these amounts on their individual income tax
returns.
Under Section 871(k)(1)(C) of the Code, the Fund designates the maximum amount
allowable but no less than $39,648,743 as interest related dividends for
purposes of the tax imposed under Section 871(a)(1)(A) of the Code for the
fiscal year ended December 31, 2008.
52 | Annual Report
Mutual Qualified Fund
BOARD MEMBERS AND OFFICERS
The name, year of birth and address of the officers and board members, as well
as their affiliations, positions held with the Fund, principal occupations
during the past five years and number of portfolios overseen in the Franklin
Templeton Investments fund complex are shown below. Generally, each board member
serves until that person's successor is elected and qualified.
INDEPENDENT BOARD MEMBERS
NUMBER OF PORTFOLIOS IN
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- --------------------------------- --------------- ------------------ ----------------------- -------------------------------
EDWARD I. ALTMAN, PH.D. (1941) Trustee Since 1987 7 None
c/o Franklin Mutual Advisers, LLC
101 John F. Kennedy Parkway
Short Hills, NJ 07078-2789
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Max L. Heine Professor of Finance and Director of The Credit and Debt Markets Research Program, Salomon Center, Stern School of
Business, New York University; editor and author of numerous financial publications; financial consultant; a director to numerous
financial publishing organizations; and FORMERLY, Vice Director, Salomon Center, Stern School of Business, New York University.
ANN TORRE BATES (1958) Trustee Since 1994 30 SLM Corporation (Sallie Mae)
c/o Franklin Mutual Advisers, LLC and Allied Capital Corparation
101 John F. Kennedy Parkway (financial services).
Short Hills, NJ 07078-2789
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Independent strategic and financial consultant; and FORMERLY, Executive Vice President and Chief Financial Officer, NHP Incorporated
(manager of multifamily housing) (1995-1997); and Vice President and Treasurer, US Airways, Inc. (until 1995).
BURTON J. GREENWALD (1929) Trustee Since 2002 14 Franklin Templeton Emerging
c/o Franklin Mutual Advisers, LLC Markets Debt Opportunities Fund
101 John F. Kennedy Parkway PLC and Fiduciary International
Short Hills, NJ 07078-2789 Ireland Limited.
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Managing Director, B.J. Greenwald Associates (management consultants to the financial services industry); and FORMERLY, Chairman,
Fiduciary Trust International Funds; Executive Vice President, L.F Rothschild Fund Management, Inc.; President and Director, Merit
Mutual Funds; President, Underwriting Division and Director, National Securities & Research Corporation; Governor, Investment
Company Institute and Chairman, ICI Public Information Committee.
BRUCE A. MACPHERSON (1930) Trustee Since 1974 7 None
c/o Franklin Mutual Advisers, LLC
101 John F. Kennedy Parkway
Short Hills, NJ 07078-2789
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Retired, former Chairman, A.A. MacPherson, Inc., Canton, MA (representative for electrical manufacturers).
Annual Report | 53
NUMBER OF PORTFOLIOS IN
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- --------------------------------- --------------- ------------------ ----------------------- -------------------------------
CHARLES RUBENS II (1930) Trustee Since 1998 14 None
c/o Franklin Mutual Advisers, LLC
101 John F. Kennedy Parkway
Short Hills, NJ 07078-2789
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Private investor.
ROBERT E. WADE (1946) Trustee and Trustee 37 El Oro and Exploration Co.,
c/o Franklin Mutual Advisers, LLC Chairman since 1991 and p.l.c. (investments).
101 John F. Kennedy Parkway of the Board Chairman of the
Short Hills, NJ 07078-2789 Board since 2005
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Retired, former practicing attorney.
INTERESTED BOARD MEMBERS AND OFFICERS
NUMBER OF PORTFOLIOS IN
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- --------------------------------- --------------- ------------------ ----------------------- -------------------------------
**GREGORY E. JOHNSON (1961) Trustee Since 2007 92 None
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director, President and Chief Executive Officer, Franklin Resources, Inc.; President, Templeton Worldwide, Inc.; Director, Templeton
Asset Management Ltd.; and officer and/or director or trustee, as the case may be, of some of the other subsidiaries of Franklin
Resources, Inc. and of 33 of the investment companies in Franklin Templeton Investments.
**PETER A. LANGERMAN (1955) Trustee, Trustee 7 None
c/o Franklin Mutual Advisers, LLC President since 2007,
101 John F. Kennedy Parkway and Chief President and
Short Hills, NJ 07078-2702 Executive Chief Executive
Officer - Officer -
Investment Investment
Management Management
since 2005
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Chairman of the Board, Chief Executive Officer and President, Franklin Mutual Advisers, LLC; officer and/or director, as the case
may be, of three of the investment companies in Franklin Templeton Investments; and FORMERLY, Director, New Jersey's Division of
Investment.
JENNIFER J. BOLT (1964) Chief Since Not Applicable Not Applicable
One Franklin Parkway Executive December 2008
San Mateo, CA 94403-1906 Officer -
Finance and
Administration
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Executive Vice President - Operations and Technology, Franklin Resources, Inc.; Director, Templeton Global Advisors Limited; officer
and/or director, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 46 of the investment
companies in Franklin Templeton Investments.
54 | Annual Report
NUMBER OF PORTFOLIOS IN
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- --------------------------------- --------------- ------------------ ----------------------- -------------------------------
PHILIPPE BRUGERE-TRELAT (1949) Vice President Since 2005 Not Applicable Not Applicable
101 John F. Kennedy Parkway
Short Hills, NJ 07078-2789
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice President, Franklin Mutual Advisers, LLC; Portfolio Manager of Eurovest SA (French registered Investment Company, Sicav); and
officer of two of the investment companies in Franklin Templeton Investments.
JAMES M. DAVIS (1952) Chief Chief Compliance Not Applicable Not Applicable
One Franklin Parkway Compliance Officer since 2004
San Mateo, CA 94403-1906 Officer and and Vice President
Vice President - AML Compliance
- AML since 2006
Compliance
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director, Global Compliance, Franklin Resources, Inc.; officer of some of the other subsidiaries of Franklin Resources, Inc. and of
46 of the investment companies in Franklin Templeton Investments; and FORMERLY, Director of Compliance, Franklin Resources, Inc.
(1994-2001).
MICHAEL J. EMBLER (1964) Senior Vice Since 2005 Not Applicable Not Applicable
101 John F. Kennedy Parkway President
Short Hills, NJ 07078-2789 and Chief
Investment
Officer
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Vice President and Chief Investment Officer, Franklin Mutual Advisers, LLC; and officer of two of the investment companies in
Franklin Templeton Investments.
LAURA F. FERGERSON (1962) Chief Financial Since Not Applicable Not Applicable
One Franklin Parkway Officer and February 2008
San Mateo, CA 94403-1906 Chief
Accounting
Officer
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice President, Franklin Templeton Services, LLC; officer of 46 of the investment companies in Franklin Templeton Investments; and
FORMERLY, Director and member of Audit and Valuation Committees, Runkel Funds, Inc. (2003-2004); Assistant Treasurer of most of the
investment companies in Franklin Templeton Investments (1997-2003); and Vice President, Franklin Templeton Services, LLC
(1997-2003).
JIMMY D. GAMBILL (1947) Vice President Since Not Applicable Not Applicable
500 East Broward Blvd. February 2008
Suite 2100
Fort Lauderdale, FL 33394-3091
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
President, Franklin Templeton Services, LLC; Senior Vice President, Templeton Worldwide, Inc.; and officer of some of the other
subsidiaries of Franklin Resources, Inc. and of 46 of the investment companies in Franklin Templeton Investments.
Annual Report | 55
NUMBER OF PORTFOLIOS IN
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- --------------------------------- --------------- ------------------ ----------------------- -------------------------------
STEVEN J. GRAY (1955) Secretary Since 2005 Not Applicable Not Applicable
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Associate General Counsel, Franklin Templeton Investments; Secretary, Franklin Advisory Services, LLC, Franklin Mutual
Advisers, LLC and Franklin Templeton Distributors, Inc.; and officer of 41 of the investment companies in Franklin Templeton
Investments.
GREGORY R. SEWARD (1956) Treasurer Since 2005 Not Applicable Not Applicable
500 East Broward Blvd.
Suite 2100
Fort Lauderdale, FL 33394-3091
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice President, Franklin Templeton Services, LLC; officer of 18 of the investment companies in Franklin Templeton Investments; and
FORMERLY, Vice President, JPMorgan Chase (2000-2004) and American General Financial Group (1991-2000).
CRAIG S. TYLE (1960) Vice President Since 2005 Not Applicable Not Applicable
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
General Counsel and Executive Vice President, Franklin Resources, Inc.; officer of some of the other subsidiaries of Franklin
Resources, Inc. and of 46 of the investment companies in Franklin Templeton Investments; and FORMERLY, Partner, Shearman & Sterling,
LLP (2004-2005); and General Counsel, Investment Company Institute (ICI) (1997-2004).
* We base the number of portfolios on each separate series of the U.S.
registered investment companies within the Franklin Templeton Investments
fund complex. These portfolios have a common investment manager or
affiliated investment managers.
** Gregory E. Johnson is considered to be an interested person of the Fund
under the federal securities laws due to his position as an officer and
director of Franklin Resources, Inc., which is the parent company of the
Fund's investment manager and distributor. Peter A. Langerman is considered
to be an interested person of the Fund under the federal securities laws
due to his position as an officer of Franklin Mutual Advisers, LLC, which
is the parent company of the Fund's investment manager.
Note 1: Officer information is current as of the date of this report. It is
possible that after this date, information about officers may change.
Note 2: Gregory E. Johnson is the brother of Jennifer J. Bolt.
THE FUND'S BOARD OF DIRECTORS HAS DETERMINED THAT CERTAIN OF THE MEMBERS OF THE
AUDIT COMMITTEE, INCLUDING ANN TORRE BATES, ARE AUDIT COMMITTEE FINANCIAL
EXPERTS, AND "INDEPENDENT," UNDER THOSE PROVISIONS OF THE SARBANES-OXLEY ACT OF
2002, AND THE RULES AND FORM AMENDMENTS ADOPTED BY THE SECURITIES AND EXCHANGE
COMMISSION, RELATING TO AUDIT COMMITTEE FINANCIAL EXPERTS.
THE STATEMENT OF ADDITIONAL INFORMATION (SAI) INCLUDES ADDITIONAL INFORMATION
ABOUT THE BOARD MEMBERS AND IS AVAILABLE, WITHOUT CHARGE, UPON REQUEST.
SHAREHOLDERS MAY CALL (800) DIAL BEN/(800) 342-5236 TO REQUEST THE SAI.
56 | Annual Report
Mutual Qualified 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.
Annual Report | 57
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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 annual report
(FRANKLIN TEMPLETON INVESTMENTS(R) LOGO)
One Franklin Parkway
San Mateo, CA 94403-1906
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ANNUAL REPORT AND SHARE HOLDER LETTER
MUTUAL QUALIFIED FUND
INVESTMENT MANAGER
Franklin Mutual Advisers, LLC
101 John F. Kennedy Parkway
Short Hills, NJ 07078
DISTRIBUTOR
Franklin Templeton Distributors, Inc.
(800) DIAL BEN(R)
franklintempleton.com
SHARE HOLDER SERVICES
(800) 632-2301 - (Class A, B & C)
(800) 448-FUND - (Class Z)
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. 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.
475 A2008 02/09
(GRAPHIC)
DECEMBER 31, 2008
ANNUAL REPORT AND SHAREHOLDER LETTER
GLOBAL
MUTUAL DISCOVERY FUND
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(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 annual report
Contents
SHAREHOLDER LETTER ........................................................ 1
ANNUAL REPORT
Mutual Discovery Fund ..................................................... 5
Performance Summary ....................................................... 13
Your Fund's Expenses ...................................................... 18
Financial Highlights and Statement of Investments ......................... 20
Financial Statements ...................................................... 33
Notes to Financial Statements ............................................. 37
Report of Independent Registered Public Accounting Firm ................... 54
Tax Designation ........................................................... 55
Board Members and Officers ................................................ 56
Shareholder Information ................................................... 60
Shareholder Letter
Dear Mutual Discovery Fund Shareholder:
As we write this letter, 2008 has just drawn to a close. Like many other
investors, we are not sorry to see it pass. From a purely financial perspective,
it was a painful year, bringing stock market declines ranging from 40% to 50%
across most of the developed world (with greater losses in many emerging
markets) as well as a credit crisis and climate of fear that prompted a global
recession. These events have effectively wiped out the shareholders of such
institutions as Fannie Mae, Freddie Mac, AIG, Bear Stearns, Lehman Brothers,
Fortis, Washington Mutual and Wachovia, and have led to extraordinary government
intervention in the financial markets. Policy makers have no definitive playbook
for guidance, and the world of finance is being remade before our eyes.
As stewards of our investors' capital, we have always followed an investment
approach that places a premium on limiting our portfolio's downside exposure.
This is inherent in our focus on buying companies cheaply -- when their
securities are trading at a meaningful discount to our analysis of intrinsic
value -- and selling them as they trade close to that value. We are particularly
attracted to stocks where an identifiable catalyst exists to unlock the
valuation discount. We also buy distressed securities and participate in merger
arbitrage and privately negotiated transactions when we feel we can generate
attractive risk-adjusted returns for Fund investors.
Although we did manage to perform better than our benchmarks, not an
inconsiderable achievement in these markets, we are nevertheless dissatisfied by
the Fund's absolute loss. Several factors contributed to this, some market
related and others self-inflicted.
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NOT FDIC INSURED | MAY LOSE VALUE | NO BANK GUARANTEE
Not part of the annual report | 1
First, and perhaps most important, was the generally indiscriminate devaluation
of stocks across industries, geographies and market capitalizations. In short,
there were few safe havens as even companies in the less cyclical, more
defensive industries that make up the Fund's core, including consumer staples,
health care, utilities and telecommunications companies, were all down at least
18% in 2008 and in some cases significantly more.
Second, we underestimated the ferocity of the economic downturn and its impact
on the valuations of some of the more economically sensitive companies owned,
including those in the industrials, consumer discretionary and information
technology sectors.
Third, entering 2008 the Fund owned shares of several large European banks that
we believed had very limited exposure to the excesses that roiled the U.S.
financial system. Subsequent events proved that the contagion had spread to
these institutions as well.
Fourth, due to the repricing of corporate credit risk and paralysis in the
credit markets, the stocks of leveraged companies, i.e., companies with
substantial debt, were disproportionately punished by the markets.
In a year of few highlights, we did get some things right. First, as a number of
securities reached our assessment of their intrinsic value, the cash position
that had started to rise in 2007 continued to do so in 2008 because we resisted
the temptation to reinvest proceeds from sales. Valuations, in some cases,
appeared very low, but this can be quite deceptive given that a significant
amount of earnings growth in past years has come from leverage.
Second, the put positions initiated in 2007 as cheap insurance against
catastrophic events fully played their role. As volatility reached new highs in
October, we unwound them.
Third, we increased our foreign currency hedges over the year, which mitigated
the drag caused by an appreciating dollar.
Fourth, the Fund stayed on the sidelines of the emerging market bubble. We made
investments in emerging markets in Asia's more stable economies: South Korea,
Singapore, Hong Kong, for example, which are still considered emerging markets
from a technical perspective. Investments in BRIC countries (Brazil, Russia,
India and China) represented less than 1% of the Fund's assets. The Fund also
stayed largely on the sideline of the commodity bubble, a by-product of the
emerging market bubble, with some exceptions. Although we sold some oil services
stocks over the summer, the Fund still owned some at
2 | Not part of the annual report
period-end. Oil majors and national oil companies were willing to pursue their
investments and pushed day rates of some drilling equipment to new highs in the
fourth quarter, but stock prices followed oil price movements.
Fifth, merger arbitrage, an area that has provided returns uncorrelated to the
overall market, was a source of favorable performance as we focused on deals
with sound industrial logic and strong financial backing. Arbitrage markets
experienced price dislocation after September, and we used some of the Fund's
cash to pursue this strategy.
Looking forward, we are focused on a number of factors. Rather than try to be
macroeconomists or market strategists, we instead focus on our discipline of
buying securities at what we believe are very attractive prices and investing
for the long term. However, one cannot ignore the macroeconomic backdrop
entering 2009, and we are proceeding with a fair degree of caution. Although the
actions of central banks across the globe may have temporarily stabilized the
financial system, we are not convinced that the worst of the economic news is
behind us. Nevertheless, given the indiscriminate nature of the market carnage,
such an environment creates opportunities -- and we are focused on four
particular areas:
- Distressed debt, a quiet area for the past several years due to robust
economic and capital market conditions. The leveraged buyout boom from
2005 through mid-2007 is likely to result in defaults by many good
companies with bad balance sheets in the coming years. We consider
this an area of particular opportunity although it is still early.
Most of the distressed opportunities through year-end 2008 have been
in bad companies with bad balance sheets, which interest us little. In
the meantime, we have sought to take advantage of credit market
dislocation and technical pressure to add positions in a number of
senior secured corporate loans that are trading at levels we think
will generate equity-like returns with, in our view, a low risk of
principal loss;
- Stocks of companies in economically defensive industries, with strong
market positions, high barriers to entry, and reasonably predictable
earnings and cash flows, many of which we consider as attractively
valued today as they have been in years;
- Stocks disproportionately punished by the market, perhaps because they
were owned heavily by hedge funds or have a higher degree of leverage
but have no need to access the credit markets for a number of years;
and
- Stocks of market-leading global companies, sometimes in more
economically sensitive industries, that are extremely attractive for
long-term investors, including a number of commodity-oriented
companies.
Not part of the annual report | 3
As a final note, periods of economic and market instability historically have
created favorable opportunities for long-term, patient and disciplined
investors. We believe this time should be no exception. The basic institutions
that underlie our economic and political system have proven their ability to
adapt to changing conditions and emerge stronger from severe dislocations. We
are excited about the prospects of participating in this chapter, albeit a
difficult one, of our economic history and believe our approach should serve our
shareholders well over the long term. We certainly appreciate your support over
the past year and look forward to a more prosperous year ahead.
Sincerely,
/s/ Peter A. Langerman
Peter A. Langerman
Chairman, President and Chief Executive Officer
Franklin Mutual Advisers, LLC
/s/ Michael J. Embler
Michael J. Embler
Senior Vice President and Chief Investment Officer
Franklin Mutual Advisers, LLC
THIS LETTER REFLECTS OUR ANALYSIS AND OPINIONS AS OF DECEMBER 31, 2008. 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.
4 | Not part of the annual report
Annual Report
Mutual Discovery Fund
YOUR FUND'S GOAL AND MAIN INVESTMENTS: Mutual Discovery Fund seeks capital
appreciation by investing primarily in equity securities of companies of any
nation the Fund's managers believe are at prices below their intrinsic value.
The Fund may invest up to 100% of its assets in foreign securities.
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 annual report for Mutual Discovery Fund covers the fiscal year ended
December 31, 2008.
PERFORMANCE OVERVIEW
Mutual Discovery Fund - Class Z had a -26.55% cumulative total return for the 12
months ended December 31, 2008. The Fund performed better than its benchmarks,
the Standard & Poor's 500 Index (S&P 500) and the Morgan Stanley Capital
International (MSCI) World Index, which had -37.00% and -40.33% total returns
for the same period.(1) You can find the Fund's long-term performance data in
the Performance Summary beginning on page 13.
ECONOMIC AND MARKET OVERVIEW
The U.S. experienced a marked slowdown in gross domestic product (GDP) growth as
housing prices declined, consumer demand softened, and a credit crisis
originally related to U.S. subprime loan losses intensified and spread globally.
Although GDP growth rebounded in the second quarter of 2008, largely due to
fiscal stimulus, the domestic economy contracted in the third and fourth
quarters. Fear of recession spanned the entire period, and in the summer most
economists agreed that a recession had already begun. By then, the faltering
U.S. economy -- which is the world's largest and accounts for roughly 25% of
global GDP -- had negatively impacted growth prospects around the world.
Although signs of a global slowdown surfaced in the latter half of the reporting
period, in the first half growth remained robust in developing economies,
particularly in Asia.
(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 S&P 500 consists of 500 stocks chosen for market
size, liquidity and industry group representation. Each stock's weight in
the index is proportionate to its market value. The S&P 500 is one of the
most widely used benchmarks of U.S. equity performance. The MSCI World
Index is a free float-adjusted, market capitalization-weighted index
designed to measure equity market performance in global developed markets.
The indexes are unmanaged and include 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 25.
Annual Report | 5
GEOGRAPHIC BREAKDOWN
Based on Total Net Assets as of 12/31/08
(BAR CHART)
U.S. 13.4%
France 6.9%
U.K. 6.4%
Hong Kong 3.5%
Germany 3.3%
South Korea 3.0%
Switzerland 2.6%
Norway 1.8%
Netherlands 1.2%
Japan 1.2%
Denmark 1.1%
Bermuda 1.0%
Other 3.0%
Short-Term Investments & Other Net Assets 51.6%
The China-led demand for oil, natural gas, and industrial and agricultural
commodities propelled commodity prices and those of related equities to higher
levels. The steep rise in the price of oil, which peaked at $145 per barrel in
early July, was one of the most extreme market trends during the year. As a
result, oil was a major focus of attention due to its impact on everything from
inflation to corporate earnings to consumer spending. The price boom for
commodities in general was broadly based and included natural gas, precious
metals and most agricultural and industrial commodities, all of which added to
global inflationary pressures. In this environment, the world's monetary
authorities faced the choice of lowering short-term interest rates to stimulate
growth or raising them to fight rising inflation. Stimulus provided through
fiscal and monetary policies implemented around the globe sought to restore
financial market stability and reignite economic growth.
The U.S. Treasury and the Federal Reserve Board took unprecedented steps,
including lowering short-term rates to near 0% from 4.25%. The eurozone had made
controlling inflation its main goal and kept rates steady at 4.00% until July,
when the European Central Bank (ECB) joined many of the world's central banks
whose concerns about inflation had led them to raise rates. The potential for
global recession, however, exacerbated by the virtual freeze in the global
financial system in September and October, trumped inflationary concerns, and
the world's monetary authorities, including the ECB and the Bank of England, cut
interest rates aggressively. The U.S. dollar, which had declined earlier in the
period versus many of the world's currencies, regained ground quickly toward
period-end as a flight to the relative safety of U.S. Treasuries prevailed. The
greenback appreciated 8.6% relative to most currencies during the year under
review.(2)
In this challenging economic time, volatility came to define global equity
markets. Virtually all local indexes ended the 12-month period with marked
losses. Despite negative economic data and an outlook for decelerating corporate
earnings and profit margins globally, many companies outside the financials
sector retained relatively strong balance sheets.
INVESTMENT STRATEGY
At Mutual Series, we are committed to our distinctive value approach to
investing, which we believe can generate above-average risk-adjusted returns
over time for our shareholders. Our major investment strategy is investing in
undervalued stocks. When selecting undervalued equities, we are always attracted
to fundamentally strong companies with healthy balance sheets,
(2.) Source: Federal Reserve H10 report.
6 | Annual Report
TOP 10 SECTORS/INDUSTRIES
Based on Equity Securities as of 12/31/08
% OF TOTAL
NET ASSETS
----------
Tobacco 13.7%
Food Products 4.6%
Beverages 4.1%
Industrial Conglomerates 3.8%
Insurance 3.4%
Energy Equipment & Services 2.5%
Media 2.0%
Real Estate Investment Trusts 1.4%
Machinery 1.1%
Electric Utilities 1.0%
high-quality assets, substantial free cash flow and shareholder-oriented
management teams and whose stocks are trading at discounts to our assessment of
the companies' intrinsic or business value. We also look for asset rich
companies whose shares may be trading at depressed levels due to concerns over
short-term earnings disappointments, litigation, management strategy or other
perceived negatives. This strict value approach is not only intended to improve
the likelihood of upside potential, but it is also intended to reduce the risk
of substantial declines. While the vast majority of our undervalued equity
investments are made in publicly traded companies globally, we may invest
occasionally in privately held companies as well.
We complement this more traditional investment strategy with two others. One is
distressed investing, a highly specialized field that has proven quite
profitable during certain periods over the years. Distressed investing is
complex and can take many forms. The most common distressed investment the Fund
undertakes is the purchase of financially troubled or bankrupt companies' debt
at a substantial discount to face value. After the financially distressed
company is reorganized, often in bankruptcy court, the old debt is typically
replaced with new securities issued by the financially stronger company.
The other piece of our investment strategy is participating in arbitrage
situations, another highly specialized field. When companies announce proposed
mergers or takeovers, commonly referred to as "deals," the target company may
trade at a discount to the bid it ultimately accepts. One form of arbitrage
involves purchasing the target company's stock when it is trading below the
value it would receive in a deal. In keeping with our commitment to a relatively
conservative investment approach, we typically focus our arbitrage efforts on
announced deals, and eschew rumored deals or other situations we consider
relatively risky.
In addition, we will generally seek to hedge the Fund's currency exposure when
we deem it advantageous for our shareholders.
MANAGER'S DISCUSSION
The economic deceleration in the first half of 2008 gained momentum in the
second half as the credit crisis spread and exacerbated the weakening demand
outlook. Adherence to our proven investment philosophy was insufficient to
overcome such headwinds. At year-end, however, we remained confident in the
soundness of our approach over the long term.
Annual Report | 7
TOP 10 HOLDINGS
12/31/08
COMPANY % OF TOTAL
SECTOR/INDUSTRY, COUNTRY NET ASSETS
- ------------------------ ----------
UST Inc. 4.1%
TOBACCO, U.S.
Imperial Tobacco Group PLC 2.6%
TOBACCO, U.K.
British American Tobacco PLC 2.3%
TOBACCO, U.K.
Berkshire Hathaway Inc., A & B 1.5%
INSURANCE, U.S.
Groupe Danone 1.4%
FOOD PRODUCTS, FRANCE
Eutelsat Communications 1.3%
MEDIA, FRANCE
Pernod Ricard SA 1.3%
BEVERAGES, FRANCE
Link REIT 1.2%
REAL ESTATE INVESTMENT TRUSTS, HONG KONG
Japan Tobacco Inc. 1.2%
TOBACCO, JAPAN
Orkla ASA 1.1%
Industrial Conglomerates, Norway
Among the Fund's largest detractors were Orkla, a Norwegian conglomerate;
Carlsberg, a Denmark-based beer company; and Fortis, a Belgian bank.
Orkla's assets lie predominantly in food and brands, solar energy and aluminum.
During 2008, Orkla reported strong results from its food and brands division in
which it managed to offset higher raw material costs through price increases,
restoring profit margins to 2007 levels. Orkla continued to refocus on its core
businesses by divesting some media and eastern European operations. However,
Orkla's more cyclical businesses had a difficult year. Aluminum profiles felt
the effects of rapidly declining European demand, resulting in lower volumes and
greater profit margin pressure. Furthermore, the share price of Renewable Energy
Corp. (REC), in which Orkla has a 39.7% ownership stake, declined on concerns
that its long-term (five- to six-year) polysilicon contracts could be
renegotiated. In 2008, Orkla's share price fell nearly 55% in local currency.
Denmark-based brewer Carlsberg became the fourth-largest beer company after the
acquisition of some of U.K. beer and cider maker Scottish & Newcastle's assets.
The Fund's Carlsberg shares, which fell 64% in local currency during 2008, was
penalized by the equity issue to finance that acquisition and by its leveraged
balance sheet, despite the fact that the company produced resilient cash flows.
Investors were also concerned about ruble devaluation and a weakening Russian
beer market following cooler weather in the summer of 2008 when compared to
2007, making for difficult year-over-year comparisons. For the long term, we
believe Carlsberg continues to have attractive characteristics: a focus on cost
reduction as its margins still lagged those of its peers at year-end, and a
leading position in Russia, the third-largest profit pool in the beer industry
with some structural growth drivers. Russia is a market where per-capita beer
consumption has increased because of the country's growing preference for beer
rather than vodka. Carlsberg expanded its market share at the expense of the
industry's number-two player, InBev, which in our opinion was more focused on
its 2008 acquisition of U.S. brewer Anheuser-Busch.
Fortis was also one of the larger detractors from performance this year despite
our having sold this position prior to interventions by the governments of
Benelux (Belgium/Netherlands/Luxembourg). For the time we held it during the
period, the stock declined 58% in local currency. Capital issues plagued
8 | Annual Report
the company since its ill-timed acquisition of ABN AMRO's Dutch banking business
amid the crash of the U.S. and European housing markets, which only complicated
matters for Belgium's largest bank. Although capital was raised and management
replaced over the course of 2008, Fortis' inability to defend its share price
led to a loss of confidence and rapid deposit withdrawals in September.
Ultimately, this forced a government rescue of the bank, setting off a marked
decline in the company's equity value.
The bulk of our invested capital has been directed outside the U.S. as most
major European economies have weathered the macroeconomic headwinds better than
the U.S. Deflation, currency swings and credit issues around the world continued
to affect our investments; however, the growing number of companies in our
research pipeline, across all classes of securities, indicated we were beginning
to uncover value in some of the poorer-performing sectors.
During the year under review, the best performing positions in the Fund included
defensive consumer staples and merger arbitrage opportunities. Among the Fund's
top-performing stock investments for the year were KT&G, a South Korean tobacco
and ginseng producer; Wm. Wrigley Jr. Company, the U.S. chewing gum giant that
was the subject of a takeover bid; and the merger arbitrage opportunity afforded
by our participation in the combination of Toronto Dominion Bank and Commerce
Bancorp.
KT&G, South Korea's largest tobacco company with over 65% in national market
share, has been a consistently profitable investment for the Fund. During 2008,
the Fund's investment rose 8% in local currency. The company continued to report
earnings-per-share above expectations, largely due to higher selling prices for
its cigarettes, share buybacks and internal cost savings. Cost savings were
driven by the purchase of tobacco leaves on the international market, where
prices were 20% to 30% less than for tobacco farmed in South Korea. KT&G
attracted more attention from the investment community in 2008 due to its
historically defensive characteristics: cigarette consumption increased during
the last economic downturn, in 1998; limited impact from a weakening South
Korean currency, the won; and stable cash flows in a market dominated by
cyclical industries. As KT&G's share price rose, we took profits on part of the
Fund's investment during 2008.
Annual Report | 9
Privately held candy firm Mars successfully completed its acquisition of
Wrigley, transforming the publicly traded chewing gum giant into a Mars
subsidiary. Several arbitrage transactions attempted during 2008 failed for lack
of financing or material adverse changes in the underlying business. We believed
neither problem would affect this deal because of the companies' solid operating
performance and fully committed and well-documented financing. In fact, prior
deal failures and extremely tight credit markets created an opportunity for us
to take advantage of an exceptionally wide spread (the difference between the
Fund's purchase price for the target company and the price at which the target
was eventually taken over) on this acquisition. Financing for the transaction
was provided by well-regarded institutions such as Berkshire Hathaway, Goldman
Sachs and JPMorgan Chase. Berkshire Hathaway will continue to hold a minority
equity investment in the Wrigley subsidiary. Our investment in Wrigley rose
almost 4% during the period we held it.
Our focus on merger arbitrage produced another top contributor when Toronto
Dominion Bank (TD) and Commerce Bancorp combined forces. TD launched its bid on
Commerce to capitalize on its strong deposit franchise and branch network, and
to add to TD's growing U.S. presence in attractive locations. As a Canadian
bank, TD has been reaching outside its home market into the U.S. for some time,
and is proving to be an adept acquirer. In our analysis, financing of the deal
was quite manageable and without substantial risk. A further analysis of the
acquisition showed TD adequately contained operating risks and could overcome
any regulatory hurdles. The deal ultimately closed in March 2008, providing
shareholders an attractive spread with relatively low risk. Our investment
gained 38% in 2008.
Finally, investors should note that we maintained our currency hedging posture
of being generally hedged to the U.S. dollar for most of our non-U.S. holdings.
Since the dollar was stronger compared with most foreign currencies during 2008,
the Fund benefited to the extent it was hedged.
10 | Annual Report
Thank you for your continued participation in Mutual Discovery Fund. We look
forward to serving your future investment needs.
(PHOTO OF ANNE E. GUDEFIN)
/s/ Anne E. Gudefin
Anne E. Gudefin, CFA
Co-Portfolio Manager
(PHOTO OF CHARLES M. LAHR)
/s/ Charles M. Lahr
Charles M. Lahr, CFA
Co-Portfolio Manager
(PHOTO OF MANDANA HORMOZI)
/s/ Mandana Hormozi
Mandana Hormozi
Assistant Portfolio Manager
Mutual Discovery Fund
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS
AS OF DECEMBER 31, 2008, 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.
Annual Report | 11
ANNE GUDEFIN has been portfolio manager for Mutual Discovery Fund since 2005.
She is also portfolio manager for Mutual Qualified Fund, and has been a member
of the management team of the Funds since 2000, when she joined Franklin
Templeton Investments. Previously, she was an analyst at Perry Capital.
CHARLES LAHR has been portfolio manager for Mutual Discovery Fund since 2007. He
has also been portfolio manager for Mutual Financial Services Fund since 2004.
He joined Franklin Templeton Investments in 2003. Previously, he was a senior
analyst for the State of Wisconsin Investment Board and also worked for U.S.
Bancorp and Principal Financial Group.
MANDANA HORMOZI has been assistant portfolio manager for Mutual Discovery Fund
since 2007. She joined Franklin Templeton Investments in 2003. Previously, she
was a senior vice president in the equity research department at Lazard Freres.
Also, she was an economic research analyst at Mitsubishi Bank.
12 | Annual Report
Performance Summary as of 12/31/08
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 and graphs do 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 Z (SYMBOL: MDISX) CHANGE 12/31/08 12/31/07
- ----------------------- ------ -------- --------
Net Asset Value (NAV) -$9.91 $22.54 $32.45
DISTRIBUTIONS (1/1/08-12/31/08)
Dividend Income $0.4461
Short-Term Capital Gain $0.7715
Long-Term Capital Gain $0.0951
TOTAL $1.3127
CLASS A (SYMBOL: TEDIX) CHANGE 12/31/08 12/31/07
- ----------------------- ------ -------- --------
Net Asset Value (NAV) -$9.79 $22.30 $32.09
DISTRIBUTIONS (1/1/08-12/31/08)
Dividend Income $0.3635
Short-Term Capital Gain $0.7715
Long-Term Capital Gain $0.0951
TOTAL $1.2301
CLASS B (SYMBOL: TEDBX) CHANGE 12/31/08 12/31/07
- ----------------------- ------ -------- --------
Net Asset Value (NAV) -$9.57 $21.89 $31.46
DISTRIBUTIONS (1/1/08-12/31/08)
Dividend Income $0.1400
Short-Term Capital Gain $0.7715
Long-Term Capital Gain $0.0951
TOTAL $1.0066
CLASS C (SYMBOL: TEDSX) CHANGE 12/31/08 12/31/07
- ----------------------- ------ -------- --------
Net Asset Value (NAV) -$9.68 $22.16 $31.84
DISTRIBUTIONS (1/1/08-12/31/08)
Dividend Income $0.1504
Short-Term Capital Gain $0.7715
Long-Term Capital Gain $0.0951
TOTAL $1.0170
CLASS R (SYMBOL: TEDRX) CHANGE 12/31/08 12/31/07
- ----------------------- ------ -------- --------
Net Asset Value (NAV) -$9.73 $22.12 $31.85
DISTRIBUTIONS (1/1/08-12/31/08)
Dividend Income $0.3074
Short-Term Capital Gain $0.7715
Long-Term Capital Gain $0.0951
TOTAL $1.1740
Annual Report | 13
Performance Summary (CONTINUED)
PERFORMANCE
CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETURN AND
VALUE OF $10,000 INVESTMENT INCLUDE MAXIMUM SALES CHARGES. CLASS Z/R: NO 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 Z(1) 1-YEAR 5-YEAR 10-YEAR
- ---------- ------- ------- ---------
Cumulative Total Return(2) -26.55% +39.40% +141.09%
Average Annual Total Return(3) -26.55% +6.87% +9.20%
Value of $10,000 Investment(4) $ 7,345 $13,940 $ 24,109
Total Annual Operating Expenses(5) 1.01%
CLASS A(1) 1-YEAR 5-YEAR 10-YEAR
- ---------- ------- ------- ---------
Cumulative Total Return(2) -26.73% +37.19% +133.28%
Average Annual Total Return(3) -30.95% +5.27% +8.20%
Value of $10,000 Investment(4) $ 6,905 $12,930 $ 21,985
Total Annual Operating Expenses(5) 1.32%
CLASS B(1) 1-YEAR 5-YEAR 10-YEAR
- ---------- ------- ------- ---------
Cumulative Total Return(2) -27.28% +32.64% +121.32%
Average Annual Total Return(3) -30.06% +5.49% +8.27%
Value of $10,000 Investment(4) $ 6,994 $13,064 $ 22,132
Total Annual Operating Expenses(5) 2.01%
CLASS C(1) 1-YEAR 5-YEAR 10-YEAR
- ---------- ------- ------- ---------
Cumulative Total Return(2) -27.27% +32.60% +118.25%
Average Annual Total Return(3) -27.96% +5.81% +8.12%
Value of $10,000 Investment(4) $ 7,204 $13,260 $ 21,825
Total Annual Operating Expenses(5) 2.01%
INCEPTION
CLASS R 1-YEAR 5-YEAR (1/1/02)
- ------- ------- ------- ---------
Cumulative Total Return(2) -26.92% +35.97% +61.06%
Average Annual Total Return(3) -26.92% +6.34% +7.05%
Value of $10,000 Investment(4) $ 7,308 $13,597 $16,106
Total Annual Operating Expenses(5) 1.51%
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.
14 | Annual Report
Performance Summary (CONTINUED)
TOTAL RETURN INDEX COMPARISON FOR A HYPOTHETICAL $10,000 INVESTMENT
Total return represents the change in value of an investment over the periods
shown. It includes any current, applicable, maximum sales charge, Fund expenses,
account fees and reinvested distributions. The unmanaged indexes include
reinvestment of any income or distributions. They differ from the Fund in
composition and do not pay management fees or expenses. One cannot invest
directly in an index.
CLASS Z (1/1/99-12/31/08)(1)
(PERFORMANCE GRAPH)
MUTUAL DISCOVERY S&P 500 MSCI WORLD
DATE FUND - CLASS Z INDEX(6) INDEX (6)
- ------------- ---------------- --------- -----------
1/1/1999 $10,000 $10,000 $10,000
1/31/1999 $10,069 $10,418 $10,212
2/28/1999 $ 9,954 $10,094 $ 9,940
3/31/1999 $10,411 $10,498 $10,363
4/30/1999 $11,112 $10,905 $10,773
5/31/1999 $11,118 $10,647 $10,390
6/30/1999 $11,513 $11,238 $10,883
7/31/1999 $11,383 $10,887 $10,846
8/31/1999 $11,248 $10,833 $10,833
9/30/1999 $11,101 $10,536 $10,729
10/31/1999 $11,330 $11,203 $11,280
11/30/1999 $11,925 $11,431 $11,599
12/31/1999 $12,680 $12,104 $12,533
1/31/2000 $12,632 $11,496 $11,813
2/29/2000 $13,035 $11,278 $11,845
3/31/2000 $13,593 $12,382 $12,673
4/30/2000 $13,443 $12,009 $12,141
5/31/2000 $13,521 $11,763 $11,846
6/30/2000 $13,560 $12,053 $12,247
7/31/2000 $13,734 $11,864 $11,899
8/31/2000 $14,139 $12,601 $12,291
9/30/2000 $13,998 $11,936 $11,638
10/31/2000 $14,107 $11,886 $11,439
11/30/2000 $13,869 $10,949 $10,745
12/31/2000 $14,277 $11,002 $10,915
1/31/2001 $14,714 $11,392 $11,127
2/28/2001 $14,714 $10,354 $10,188
3/31/2001 $14,277 $ 9,698 $ 9,521
4/30/2001 $14,692 $10,451 $10,227
5/31/2001 $15,137 $10,521 $10,100
6/30/2001 $15,207 $10,265 $ 9,785
7/31/2001 $15,176 $10,164 $ 9,656
8/31/2001 $15,023 $ 9,528 $ 9,195
9/30/2001 $13,746 $ 8,759 $ 8,386
10/31/2001 $13,785 $ 8,926 $ 8,547
11/30/2001 $14,136 $ 9,610 $ 9,054
12/31/2001 $14,457 $ 9,694 $ 9,112
1/31/2002 $14,505 $ 9,553 $ 8,837
2/28/2002 $14,648 $ 9,369 $ 8,762
3/31/2002 $15,133 $ 9,721 $ 9,151
4/30/2002 $15,395 $ 9,132 $ 8,844
5/31/2002 $15,515 $ 9,064 $ 8,864
6/30/2002 $14,562 $ 8,419 $ 8,328
7/31/2002 $13,602 $ 7,763 $ 7,627
8/31/2002 $13,738 $ 7,813 $ 7,643
9/30/2002 $13,018 $ 6,964 $ 6,804
10/31/2002 $13,066 $ 7,577 $ 7,308
11/30/2002 $13,258 $ 8,023 $ 7,703
12/31/2002 $13,148 $ 7,552 $ 7,331
1/31/2003 $12,928 $ 7,354 $ 7,110
2/28/2003 $12,579 $ 7,244 $ 6,988
3/31/2003 $12,635 $ 7,314 $ 6,969
4/30/2003 $13,604 $ 7,917 $ 7,591
5/31/2003 $14,368 $ 8,334 $ 8,029
6/30/2003 $14,613 $ 8,440 $ 8,171
7/31/2003 $14,793 $ 8,589 $ 8,338
8/31/2003 $15,235 $ 8,756 $ 8,520
9/30/2003 $15,317 $ 8,663 $ 8,575
10/31/2003 $15,972 $ 9,153 $ 9,085
11/30/2003 $16,529 $ 9,234 $ 9,226
12/31/2003 $17,296 $ 9,718 $ 9,807
1/31/2004 $17,512 $ 9,897 $ 9,966
2/29/2004 $18,069 $10,034 $10,137
3/31/2004 $18,003 $ 9,883 $10,073
4/30/2004 $17,695 $ 9,728 $ 9,873
5/31/2004 $17,687 $ 9,861 $ 9,969
6/30/2004 $18,023 $10,053 $10,178
7/31/2004 $17,839 $ 9,720 $ 9,849
8/31/2004 $17,957 $ 9,759 $ 9,896
9/30/2004 $18,442 $ 9,865 $10,086
10/31/2004 $18,818 $10,016 $10,336
11/30/2004 $19,897 $10,421 $10,883
12/31/2004 $20,650 $10,776 $11,302
1/31/2005 $20,190 $10,513 $11,050
2/28/2005 $21,058 $10,734 $11,405
3/31/2005 $20,880 $10,544 $11,188
4/30/2005 $20,718 $10,344 $10,952
5/31/2005 $21,160 $10,673 $11,155
6/30/2005 $21,617 $10,689 $11,256
7/31/2005 $22,354 $11,086 $11,652
8/31/2005 $22,440 $10,985 $11,745
9/30/2005 $23,074 $11,074 $12,054
10/31/2005 $22,354 $10,889 $11,764
11/30/2005 $23,057 $11,301 $12,162
12/31/2005 $23,891 $11,305 $12,435
1/31/2006 $24,710 $11,604 $12,992
2/28/2006 $25,310 $11,636 $12,978
3/31/2006 $26,265 $11,781 $13,270
4/30/2006 $26,492 $11,939 $13,680
5/31/2006 $25,819 $11,595 $13,225
6/30/2006 $25,875 $11,611 $13,226
7/31/2006 $26,116 $11,683 $13,312
8/31/2006 $26,811 $11,961 $13,664
9/30/2006 $27,071 $12,269 $13,831
10/31/2006 $27,933 $12,669 $14,341
11/30/2006 $28,572 $12,909 $14,700
12/31/2006 $29,488 $13,091 $15,003
1/31/2007 $30,320 $13,289 $15,183
2/28/2007 $30,098 $13,029 $15,110
3/31/2007 $30,979 $13,174 $15,393
4/30/2007 $32,247 $13,758 $16,081
5/31/2007 $33,370 $14,238 $16,547
6/30/2007 $33,289 $14,001 $16,426
7/31/2007 $32,611 $13,567 $16,065
8/31/2007 $32,194 $13,771 $16,060
9/30/2007 $33,037 $14,286 $16,829
10/31/2007 $33,726 $14,513 $17,349
11/30/2007 $32,814 $13,906 $16,648
12/31/2007 $32,827 $13,810 $16,438
1/31/2008 $30,520 $12,981 $15,185
2/29/2008 $30,591 $12,560 $15,105
3/31/2008 $30,379 $12,505 $14,967
4/30/2008 $31,410 $13,115 $15,766
5/31/2008 $31,684 $13,284 $16,026
6/30/2008 $29,590 $12,164 $14,754
7/31/2008 $29,124 $12,062 $14,397
8/31/2008 $29,175 $12,237 $14,201
9/30/2008 $27,471 $11,146 $12,518
10/31/2008 $24,559 $ 9,274 $10,148
11/30/2008 $23,857 $ 8,609 $ 9,498
12/31/2008 $24,109 $ 8,700 $ 9,808
AVERAGE ANNUAL TOTAL RETURN
CLASS Z(1) 12/31/08
- ---------- --------
1-Year -26.55%
5-Year +6.87%
10-Year +9.20%
CLASS A (1/1/99-12/31/08)(1)
(PERFORMANCE GRAPH)
MUTUAL DISCOVERY S&P 500 MSCI WORLD
DATE FUND - CLASS A INDEX(6) INDEX (6)
- ------------- ---------------- --------- -----------
1/1/1999 $ 9,424 $10,000 $10,000
1/31/1999 $ 9,490 $10,418 $10,212
2/28/1999 $ 9,375 $10,094 $ 9,940
3/31/1999 $ 9,808 $10,498 $10,363
4/30/1999 $10,461 $10,905 $10,773
5/31/1999 $10,466 $10,647 $10,390
6/30/1999 $10,837 $11,238 $10,883
7/31/1999 $10,715 $10,887 $10,846
8/31/1999 $10,575 $10,833 $10,833
9/30/1999 $10,436 $10,536 $10,729
10/31/1999 $10,648 $11,203 $11,280
11/30/1999 $11,205 $11,431 $11,599
12/31/1999 $11,911 $12,104 $12,533
1/31/2000 $11,859 $11,496 $11,813
2/29/2000 $12,239 $11,278 $11,845
3/31/2000 $12,761 $12,382 $12,673
4/30/2000 $12,614 $12,009 $12,141
5/31/2000 $12,688 $11,763 $11,846
6/30/2000 $12,718 $12,053 $12,247
7/31/2000 $12,876 $11,864 $11,899
8/31/2000 $13,253 $12,601 $12,291
9/30/2000 $13,113 $11,936 $11,638
10/31/2000 $13,216 $11,886 $11,439
11/30/2000 $12,986 $10,949 $10,745
12/31/2000 $13,371 $11,002 $10,915
1/31/2001 $13,776 $11,392 $11,127
2/28/2001 $13,769 $10,354 $10,188
3/31/2001 $13,350 $ 9,698 $ 9,521
4/30/2001 $13,733 $10,451 $10,227
5/31/2001 $14,145 $10,521 $10,100
6/30/2001 $14,208 $10,265 $ 9,785
7/31/2001 $14,179 $10,164 $ 9,656
8/31/2001 $14,035 $ 9,528 $ 9,195
9/30/2001 $12,833 $ 8,759 $ 8,386
10/31/2001 $12,869 $ 8,926 $ 8,547
11/30/2001 $13,193 $ 9,610 $ 9,054
12/31/2001 $13,487 $ 9,694 $ 9,112
1/31/2002 $13,532 $ 9,553 $ 8,837
2/28/2002 $13,659 $ 9,369 $ 8,762
3/31/2002 $14,106 $ 9,721 $ 9,151
4/30/2002 $14,345 $ 9,132 $ 8,844
5/31/2002 $14,449 $ 9,064 $ 8,864
6/30/2002 $13,559 $ 8,419 $ 8,328
7/31/2002 $12,666 $ 7,763 $ 7,627
8/31/2002 $12,786 $ 7,813 $ 7,643
9/30/2002 $12,110 $ 6,964 $ 6,804
10/31/2002 $12,155 $ 7,577 $ 7,308
11/30/2002 $12,328 $ 8,023 $ 7,703
12/31/2002 $12,221 $ 7,552 $ 7,331
1/31/2003 $12,016 $ 7,354 $ 7,110
2/28/2003 $11,689 $ 7,244 $ 6,988
3/31/2003 $11,742 $ 7,314 $ 6,969
4/30/2003 $12,632 $ 7,917 $ 7,591
5/31/2003 $13,340 $ 8,334 $ 8,029
6/30/2003 $13,557 $ 8,440 $ 8,171
7/31/2003 $13,726 $ 8,589 $ 8,338
8/31/2003 $14,131 $ 8,756 $ 8,520
9/30/2003 $14,208 $ 8,663 $ 8,575
10/31/2003 $14,805 $ 9,153 $ 9,085
11/30/2003 $15,318 $ 9,234 $ 9,226
12/31/2003 $16,026 $ 9,718 $ 9,807
1/31/2004 $16,220 $ 9,897 $ 9,966
2/29/2004 $16,724 $10,034 $10,137
3/31/2004 $16,662 $ 9,883 $10,073
4/30/2004 $16,375 $ 9,728 $ 9,873
5/31/2004 $16,367 $ 9,861 $ 9,969
6/30/2004 $16,669 $10,053 $10,178
7/31/2004 $16,497 $ 9,720 $ 9,849
8/31/2004 $16,599 $ 9,759 $ 9,896
9/30/2004 $17,043 $ 9,865 $10,086
10/31/2004 $17,379 $10,016 $10,336
11/30/2004 $18,369 $10,421 $10,883
12/31/2004 $19,067 $10,776 $11,302
1/31/2005 $18,632 $10,513 $11,050
2/28/2005 $19,432 $10,734 $11,405
3/31/2005 $19,257 $10,544 $11,188
4/30/2005 $19,107 $10,344 $10,952
5/31/2005 $19,503 $10,673 $11,155
6/30/2005 $19,923 $10,689 $11,256
7/31/2005 $20,593 $11,086 $11,652
8/31/2005 $20,664 $10,985 $11,745
9/30/2005 $21,246 $11,074 $12,054
10/31/2005 $20,577 $10,889 $11,764
11/30/2005 $21,215 $11,301 $12,162
12/31/2005 $21,983 $11,305 $12,435
1/31/2006 $22,726 $11,604 $12,992
2/28/2006 $23,267 $11,636 $12,978
3/31/2006 $24,145 $11,781 $13,270
4/30/2006 $24,339 $11,939 $13,680
5/31/2006 $23,723 $11,595 $13,225
6/30/2006 $23,769 $11,611 $13,226
7/31/2006 $23,984 $11,683 $13,312
8/31/2006 $24,612 $11,961 $13,664
9/30/2006 $24,844 $12,269 $13,831
10/31/2006 $25,627 $12,669 $14,341
11/30/2006 $26,212 $12,909 $14,700
12/31/2006 $27,043 $13,091 $15,003
1/31/2007 $27,797 $13,289 $15,183
2/28/2007 $27,590 $13,029 $15,110
3/31/2007 $28,389 $13,174 $15,393
4/30/2007 $29,546 $13,758 $16,081
5/31/2007 $30,559 $14,238 $16,547
6/30/2007 $30,487 $14,001 $16,426
7/31/2007 $29,859 $13,567 $16,065
8/31/2007 $29,464 $13,771 $16,060
9/30/2007 $30,227 $14,286 $16,829
10/31/2007 $30,846 $14,513 $17,349
11/30/2007 $30,002 $13,906 $16,648
12/31/2007 $30,007 $13,810 $16,438
1/31/2008 $27,894 $12,981 $15,185
2/29/2008 $27,959 $12,560 $15,105
3/31/2008 $27,754 $12,505 $14,967
4/30/2008 $28,689 $13,115 $15,766
5/31/2008 $28,941 $13,284 $16,026
6/30/2008 $27,015 $12,164 $14,754
7/31/2008 $26,585 $12,062 $14,397
8/31/2008 $26,622 $12,237 $14,201
9/30/2008 $25,068 $11,146 $12,518
10/31/2008 $22,396 $ 9,274 $10,148
11/30/2008 $21,756 $ 8,609 $ 9,498
12/31/2008 $21,985 $ 8,700 $ 9,808
AVERAGE ANNUAL TOTAL RETURN
CLASS A(1) 12/31/08
- ---------- --------
1-Year -30.95%
5-Year +5.27%
10-Year +8.20%
Annual Report | 15
Performance Summary (CONTINUED)
CLASS B (1/1/99-12/31/08)(1)
(PERFORMANCE GRAPH)
MUTUAL DISCOVERY S&P 500 MSCI WORLD
DATE FUND - CLASS B INDEX(6) INDEX (6)
- ---------- ---------------- --------- -----------
1/1/1999 $10,000 $10,000 $10,000
1/31/1999 $10,070 $10,418 $10,212
2/28/1999 $ 9,942 $10,094 $ 9,940
3/31/1999 $10,396 $10,498 $10,363
4/30/1999 $11,076 $10,905 $10,773
5/31/1999 $11,076 $10,647 $10,390
6/30/1999 $11,462 $11,238 $10,883
7/31/1999 $11,320 $10,887 $10,846
8/31/1999 $11,172 $10,833 $10,833
9/30/1999 $11,018 $10,536 $10,729
10/31/1999 $11,231 $11,203 $11,280
11/30/1999 $11,816 $11,431 $11,599
12/31/1999 $12,555 $12,104 $12,533
1/31/2000 $12,495 $11,496 $11,813
2/29/2000 $12,885 $11,278 $11,845
3/31/2000 $13,420 $12,382 $12,673
4/30/2000 $13,264 $12,009 $12,141
5/31/2000 $13,330 $11,763 $11,846
6/30/2000 $13,356 $12,053 $12,247
7/31/2000 $13,517 $11,864 $11,899
8/31/2000 $13,903 $12,601 $12,291
9/30/2000 $13,755 $11,936 $11,638
10/31/2000 $13,851 $11,886 $11,439
11/30/2000 $13,607 $10,949 $10,745
12/31/2000 $13,998 $11,002 $10,915
1/31/2001 $14,411 $11,392 $11,127
2/28/2001 $14,396 $10,354 $10,188
3/31/2001 $13,961 $ 9,698 $ 9,521
4/30/2001 $14,351 $10,451 $10,227
5/31/2001 $14,771 $10,521 $10,100
6/30/2001 $14,832 $10,265 $ 9,785
7/31/2001 $14,787 $10,164 $ 9,656
8/31/2001 $14,627 $ 9,528 $ 9,195
9/30/2001 $13,373 $ 8,759 $ 8,386
10/31/2001 $13,403 $ 8,926 $ 8,547
11/30/2001 $13,730 $ 9,610 $ 9,054
12/31/2001 $14,028 $ 9,694 $ 9,112
1/31/2002 $14,068 $ 9,553 $ 8,837
2/28/2002 $14,193 $ 9,369 $ 8,762
3/31/2002 $14,656 $ 9,721 $ 9,151
4/30/2002 $14,892 $ 9,132 $ 8,844
5/31/2002 $14,994 $ 9,064 $ 8,864
6/30/2002 $14,061 $ 8,419 $ 8,328
7/31/2002 $13,121 $ 7,763 $ 7,627
8/31/2002 $13,247 $ 7,813 $ 7,643
9/30/2002 $12,536 $ 6,964 $ 6,804
10/31/2002 $12,576 $ 7,577 $ 7,308
11/30/2002 $12,749 $ 8,023 $ 7,703
12/31/2002 $12,633 $ 7,552 $ 7,331
1/31/2003 $12,410 $ 7,354 $ 7,110
2/28/2003 $12,068 $ 7,244 $ 6,988
3/31/2003 $12,115 $ 7,314 $ 6,969
4/30/2003 $13,032 $ 7,917 $ 7,591
5/31/2003 $13,749 $ 8,334 $ 8,029
6/30/2003 $13,971 $ 8,440 $ 8,171
7/31/2003 $14,131 $ 8,589 $ 8,338
8/31/2003 $14,540 $ 8,756 $ 8,520
9/30/2003 $14,612 $ 8,663 $ 8,575
10/31/2003 $15,221 $ 9,153 $ 9,085
11/30/2003 $15,742 $ 9,234 $ 9,226
12/31/2003 $16,452 $ 9,718 $ 9,807
1/31/2004 $16,646 $ 9,897 $ 9,966
2/29/2004 $17,155 $10,034 $10,137
3/31/2004 $17,082 $ 9,883 $10,073
4/30/2004 $16,775 $ 9,728 $ 9,873
5/31/2004 $16,759 $ 9,861 $ 9,969
6/30/2004 $17,058 $10,053 $10,178
7/31/2004 $16,871 $ 9,720 $ 9,849
8/31/2004 $16,969 $ 9,759 $ 9,896
9/30/2004 $17,416 $ 9,865 $10,086
10/31/2004 $17,749 $10,016 $10,336
11/30/2004 $18,757 $10,421 $10,883
12/31/2004 $19,450 $10,776 $11,302
1/31/2005 $18,998 $10,513 $11,050
2/28/2005 $19,803 $10,734 $11,405
3/31/2005 $19,614 $10,544 $11,188
4/30/2005 $19,450 $10,344 $10,952
5/31/2005 $19,844 $10,673 $11,155
6/30/2005 $20,261 $10,689 $11,256
7/31/2005 $20,931 $11,086 $11,652
8/31/2005 $20,997 $10,985 $11,745
9/30/2005 $21,576 $11,074 $12,054
10/31/2005 $20,881 $10,889 $11,764
11/30/2005 $21,518 $11,301 $12,162
12/31/2005 $22,286 $11,305 $12,435
1/31/2006 $23,027 $11,604 $12,992
2/28/2006 $23,559 $11,636 $12,978
3/31/2006 $24,439 $11,781 $13,270
4/30/2006 $24,622 $11,939 $13,680
5/31/2006 $23,977 $11,595 $13,225
6/30/2006 $24,011 $11,611 $13,226
7/31/2006 $24,215 $11,683 $13,312
8/31/2006 $24,837 $11,961 $13,664
9/30/2006 $25,059 $12,269 $13,831
10/31/2006 $25,831 $12,669 $14,341
11/30/2006 $26,409 $12,909 $14,700
12/31/2006 $27,224 $13,091 $15,003
1/31/2007 $27,984 $13,289 $15,183
2/28/2007 $27,776 $13,029 $15,110
3/31/2007 $28,579 $13,174 $15,393
4/30/2007 $29,745 $13,758 $16,081
5/31/2007 $30,766 $14,238 $16,547
6/30/2007 $30,692 $14,001 $16,426
7/31/2007 $30,059 $13,567 $16,065
8/31/2007 $29,663 $13,771 $16,060
9/30/2007 $30,431 $14,286 $16,829
10/31/2007 $31,055 $14,513 $17,349
11/30/2007 $30,204 $13,906 $16,648
12/31/2007 $30,210 $13,810 $16,438
1/31/2008 $28,083 $12,981 $15,185
2/29/2008 $28,148 $12,560 $15,105
3/31/2008 $27,939 $12,505 $14,967
4/30/2008 $28,881 $13,115 $15,766
5/31/2008 $29,135 $13,284 $16,026
6/30/2008 $27,195 $12,164 $14,754
7/31/2008 $26,762 $12,062 $14,397
8/31/2008 $26,800 $12,237 $14,201
9/30/2008 $25,235 $11,146 $12,518
10/31/2008 $22,545 $ 9,274 $10,148
11/30/2008 $21,900 $ 8,609 $ 9,498
12/31/2008 $22,132 $ 8,700 $ 9,808
AVERAGE ANNUAL TOTAL RETURN
CLASS B(1) 12/31/08
- ---------- --------
1-Year -30.06%
5-Year +5.49%
10-Year +8.27%
CLASS C (1/1/99-12/31/08)(1)
(PERFORMANCE GRAPH)
MUTUAL DISCOVERY S&P 500 MSCI WORLD
DATE FUND - CLASS C INDEX(6) INDEX (6)
- ---------- ---------------- --------- -----------
1/1/1999 $10,000 $10,000 $10,000
1/31/1999 $10,058 $10,418 $10,212
2/28/1999 $ 9,936 $10,094 $ 9,940
3/31/1999 $10,385 $10,498 $10,363
4/30/1999 $11,072 $10,905 $10,773
5/31/1999 $11,072 $10,647 $10,390
6/30/1999 $11,460 $11,238 $10,883
7/31/1999 $11,318 $10,887 $10,846
8/31/1999 $11,171 $10,833 $10,833
9/30/1999 $11,017 $10,536 $10,729
10/31/1999 $11,236 $11,203 $11,280
11/30/1999 $11,815 $11,431 $11,599
12/31/1999 $12,550 $12,104 $12,533
1/31/2000 $12,496 $11,496 $11,813
2/29/2000 $12,885 $11,278 $11,845
3/31/2000 $13,424 $12,382 $12,673
4/30/2000 $13,269 $12,009 $12,141
5/31/2000 $13,335 $11,763 $11,846
6/30/2000 $13,358 $12,053 $12,247
7/31/2000 $13,518 $11,864 $11,899
8/31/2000 $13,902 $12,601 $12,291
9/30/2000 $13,755 $11,936 $11,638
10/31/2000 $13,851 $11,886 $11,439
11/30/2000 $13,608 $10,949 $10,745
12/31/2000 $13,997 $11,002 $10,915
1/31/2001 $14,414 $11,392 $11,127
2/28/2001 $14,399 $10,354 $10,188
3/31/2001 $13,960 $ 9,698 $ 9,521
4/30/2001 $14,355 $10,451 $10,227
5/31/2001 $14,772 $10,521 $10,100
6/30/2001 $14,830 $10,265 $ 9,785
7/31/2001 $14,792 $10,164 $ 9,656
8/31/2001 $14,626 $ 9,528 $ 9,195
9/30/2001 $13,372 $ 8,759 $ 8,386
10/31/2001 $13,402 $ 8,926 $ 8,547
11/30/2001 $13,727 $ 9,610 $ 9,054
12/31/2001 $14,032 $ 9,694 $ 9,112
1/31/2002 $14,071 $ 9,553 $ 8,837
2/28/2002 $14,195 $ 9,369 $ 8,762
3/31/2002 $14,654 $ 9,721 $ 9,151
4/30/2002 $14,888 $ 9,132 $ 8,844
5/31/2002 $14,997 $ 9,064 $ 8,864
6/30/2002 $14,061 $ 8,419 $ 8,328
7/31/2002 $13,121 $ 7,763 $ 7,627
8/31/2002 $13,247 $ 7,813 $ 7,643
9/30/2002 $12,542 $ 6,964 $ 6,804
10/31/2002 $12,573 $ 7,577 $ 7,308
11/30/2002 $12,753 $ 8,023 $ 7,703
12/31/2002 $12,632 $ 7,552 $ 7,331
1/31/2003 $12,411 $ 7,354 $ 7,110
2/28/2003 $12,072 $ 7,244 $ 6,988
3/31/2003 $12,112 $ 7,314 $ 6,969
4/30/2003 $13,026 $ 7,917 $ 7,591
5/31/2003 $13,752 $ 8,334 $ 8,029
6/30/2003 $13,970 $ 8,440 $ 8,171
7/31/2003 $14,128 $ 8,589 $ 8,338
8/31/2003 $14,541 $ 8,756 $ 8,520
9/30/2003 $14,612 $ 8,663 $ 8,575
10/31/2003 $15,222 $ 9,153 $ 9,085
11/30/2003 $15,738 $ 9,234 $ 9,226
12/31/2003 $16,459 $ 9,718 $ 9,807
1/31/2004 $16,651 $ 9,897 $ 9,966
2/29/2004 $17,162 $10,034 $10,137
3/31/2004 $17,082 $ 9,883 $10,073
4/30/2004 $16,779 $ 9,728 $ 9,873
5/31/2004 $16,763 $ 9,861 $ 9,969
6/30/2004 $17,065 $10,053 $10,178
7/31/2004 $16,880 $ 9,720 $ 9,849
8/31/2004 $16,976 $ 9,759 $ 9,896
9/30/2004 $17,418 $ 9,865 $10,086
10/31/2004 $17,756 $10,016 $10,336
11/30/2004 $18,752 $10,421 $10,883
12/31/2004 $19,449 $10,776 $11,302
1/31/2005 $18,995 $10,513 $11,050
2/28/2005 $19,806 $10,734 $11,405
3/31/2005 $19,619 $10,544 $11,188
4/30/2005 $19,449 $10,344 $10,952
5/31/2005 $19,846 $10,673 $11,155
6/30/2005 $20,259 $10,689 $11,256
7/31/2005 $20,929 $11,086 $11,652
8/31/2005 $20,994 $10,985 $11,745
9/30/2005 $21,574 $11,074 $12,054
10/31/2005 $20,880 $10,889 $11,764
11/30/2005 $21,517 $11,301 $12,162
12/31/2005 $22,281 $11,305 $12,435
1/31/2006 $23,030 $11,604 $12,992
2/28/2006 $23,563 $11,636 $12,978
3/31/2006 $24,433 $11,781 $13,270
4/30/2006 $24,622 $11,939 $13,680
5/31/2006 $23,976 $11,595 $13,225
6/30/2006 $24,012 $11,611 $13,226
7/31/2006 $24,213 $11,683 $13,312
8/31/2006 $24,836 $11,961 $13,664
9/30/2006 $25,055 $12,269 $13,831
10/31/2006 $25,835 $12,669 $14,341
11/30/2006 $26,405 $12,909 $14,700
12/31/2006 $27,220 $13,091 $15,003
1/31/2007 $27,965 $13,289 $15,183
2/28/2007 $27,747 $13,029 $15,110
3/31/2007 $28,538 $13,174 $15,393
4/30/2007 $29,675 $13,758 $16,081
5/31/2007 $30,685 $14,238 $16,547
6/30/2007 $30,588 $14,001 $16,426
7/31/2007 $29,942 $13,567 $16,065
8/31/2007 $29,523 $13,771 $16,060
9/30/2007 $30,279 $14,286 $16,829
10/31/2007 $30,880 $14,513 $17,349
11/30/2007 $30,015 $13,906 $16,648
12/31/2007 $30,007 $13,810 $16,438
1/31/2008 $27,868 $12,981 $15,185
2/29/2008 $27,915 $12,560 $15,105
3/31/2008 $27,698 $12,505 $14,967
4/30/2008 $28,612 $13,115 $15,766
5/31/2008 $28,848 $13,284 $16,026
6/30/2008 $26,916 $12,164 $14,754
7/31/2008 $26,463 $12,062 $14,397
8/31/2008 $26,492 $12,237 $14,201
9/30/2008 $24,928 $11,146 $12,518
10/31/2008 $22,265 $ 9,274 $10,148
11/30/2008 $21,611 $ 8,609 $ 9,498
12/31/2008 $21,825 $ 8,700 $ 9,808
AVERAGE ANNUAL TOTAL RETURN
CLASS C(1) 12/31/08
- ---------- --------
1-Year -27.96%
5-Year +5.81%
10-Year +8.12%
16 | Annual Report
Performance Summary (CONTINUED)
CLASS R (1/1/02-12/31/08)
(PERFORMANCE GRAPH)
MUTUAL DISCOVERY S&P 500 MSCI WORLD
DATE FUND - CLASS R INDEX(6) INDEX (6)
- ---------- ---------------- --------- -----------
1/1/2002 $10,000 $10,000 $10,000
1/31/2002 $10,033 $ 9,854 $ 9,698
2/28/2002 $10,127 $ 9,664 $ 9,616
3/31/2002 $10,459 $10,027 $10,043
4/30/2002 $10,630 $ 9,420 $ 9,705
5/31/2002 $10,708 $ 9,350 $ 9,728
6/30/2002 $10,050 $ 8,684 $ 9,140
7/31/2002 $ 9,382 $ 8,007 $ 8,370
8/31/2002 $ 9,471 $ 8,060 $ 8,388
9/30/2002 $ 8,970 $ 7,184 $ 7,467
10/31/2002 $ 9,004 $ 7,816 $ 8,020
11/30/2002 $ 9,132 $ 8,276 $ 8,454
12/31/2002 $ 9,051 $ 7,790 $ 8,046
1/31/2003 $ 8,893 $ 7,586 $ 7,803
2/28/2003 $ 8,655 $ 7,472 $ 7,669
3/31/2003 $ 8,689 $ 7,545 $ 7,648
4/30/2003 $ 9,351 $ 8,166 $ 8,331
5/31/2003 $ 9,871 $ 8,596 $ 8,811
6/30/2003 $10,033 $ 8,706 $ 8,967
7/31/2003 $10,153 $ 8,859 $ 9,151
8/31/2003 $10,454 $ 9,032 $ 9,351
9/30/2003 $10,505 $ 8,936 $ 9,410
10/31/2003 $10,949 $ 9,442 $ 9,970
11/30/2003 $11,324 $ 9,525 $10,125
12/31/2003 $11,845 $10,024 $10,762
1/31/2004 $11,989 $10,208 $10,937
2/29/2004 $12,364 $10,350 $11,124
3/31/2004 $12,312 $10,194 $11,055
4/30/2004 $12,099 $10,034 $10,835
5/31/2004 $12,093 $10,172 $10,941
6/30/2004 $12,316 $10,370 $11,170
7/31/2004 $12,189 $10,026 $10,808
8/31/2004 $12,258 $10,067 $10,860
9/30/2004 $12,589 $10,176 $11,069
10/31/2004 $12,838 $10,332 $11,343
11/30/2004 $13,568 $10,750 $11,944
12/31/2004 $14,076 $11,115 $12,403
1/31/2005 $13,753 $10,844 $12,126
2/28/2005 $14,341 $11,073 $12,516
3/31/2005 $14,211 $10,877 $12,278
4/30/2005 $14,100 $10,670 $12,019
5/31/2005 $14,394 $11,010 $12,242
6/30/2005 $14,699 $11,025 $12,353
7/31/2005 $15,190 $11,435 $12,788
8/31/2005 $15,243 $11,331 $12,890
9/30/2005 $15,669 $11,423 $13,228
10/31/2005 $15,178 $11,232 $12,910
11/30/2005 $15,646 $11,657 $13,347
12/31/2005 $16,207 $11,661 $13,646
1/31/2006 $16,751 $11,970 $14,258
2/28/2006 $17,152 $12,003 $14,243
3/31/2006 $17,791 $12,152 $14,563
4/30/2006 $17,935 $12,315 $15,013
5/31/2006 $17,478 $11,961 $14,513
6/30/2006 $17,510 $11,977 $14,515
7/31/2006 $17,664 $12,051 $14,609
8/31/2006 $18,123 $12,338 $14,995
9/30/2006 $18,289 $12,655 $15,179
10/31/2006 $18,870 $13,068 $15,739
11/30/2006 $19,291 $13,316 $16,132
12/31/2006 $19,898 $13,503 $16,465
1/31/2007 $20,450 $13,707 $16,662
2/28/2007 $20,297 $13,439 $16,582
3/31/2007 $20,882 $13,590 $16,893
4/30/2007 $21,726 $14,192 $17,648
5/31/2007 $22,477 $14,687 $18,160
6/30/2007 $22,408 $14,443 $18,026
7/31/2007 $21,949 $13,995 $17,631
8/31/2007 $21,656 $14,205 $17,625
9/30/2007 $22,215 $14,736 $18,469
10/31/2007 $22,667 $14,970 $19,040
11/30/2007 $22,042 $14,345 $18,270
12/31/2007 $22,039 $14,245 $18,040
1/31/2008 $20,483 $13,391 $16,665
2/29/2008 $20,524 $12,956 $16,577
3/31/2008 $20,372 $12,900 $16,426
4/30/2008 $21,057 $13,528 $17,302
5/31/2008 $21,237 $13,703 $17,588
6/30/2008 $19,825 $12,548 $16,191
7/31/2008 $19,500 $12,442 $15,800
8/31/2008 $19,528 $12,622 $15,585
9/30/2008 $18,382 $11,498 $13,738
10/31/2008 $16,419 $ 9,567 $11,137
11/30/2008 $15,945 $ 8,880 $10,424
12/31/2008 $16,106 $ 8,975 $10,764
AVERAGE ANNUAL TOTAL RETURN
CLASS R 12/31/08
- ------------------------ --------
1-Year -26.92%
5-Year +6.34%
Since Inception (1/1/02) +7.05%
ENDNOTES
VALUE SECURITIES MAY NOT INCREASE IN PRICE AS ANTICIPATED OR MAY DECLINE FURTHER
IN VALUE. THE FUND'S INVESTMENTS IN FOREIGN SECURITIES INVOLVE CERTAIN RISKS
INCLUDING CURRENCY FLUCTUATIONS AND ECONOMIC AND POLITICAL UNCERTAINTIES.
SMALLER-COMPANY STOCKS HAVE EXHIBITED GREATER PRICE VOLATILITY THAN
LARGER-COMPANY STOCKS, PARTICULARLY OVER THE SHORT TERM. THE FUND'S INVESTMENTS
IN COMPANIES ENGAGED IN MERGERS, REORGANIZATIONS OR LIQUIDATIONS ALSO INVOLVE
SPECIAL RISKS AS PENDING DEALS MAY NOT BE COMPLETED ON TIME OR ON FAVORABLE
TERMS. THE FUND MAY INVEST IN LOWER-RATED BONDS, WHICH ENTAIL HIGHER CREDIT
RISK. THE FUND'S PROSPECTUS ALSO INCLUDES A DESCRIPTION OF THE MAIN INVESTMENT
RISKS.
CLASS Z: Shares are available to certain eligible investors as described in the
prospectus.
CLASS 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.
(1.) Past expense reductions by the Fund's manager increased the Fund's total
returns. If the manager had not taken this action, the Fund's total returns
would have been lower.
(2.) Cumulative total return represents the change in value of an investment
over the periods indicated.
(3.) Average annual total return represents the average annual change in value
of an investment over the periods indicated.
(4.) These figures represent the value of a hypothetical $10,000 investment in
the Fund over the periods indicated.
(5.) Figures are as stated in the Fund's prospectus current as of the date of
this report.
(6.) Source: (C) 2009 Morningstar. The S&P 500 consists of 500 stocks chosen for
market size, liquidity and industry group representation. Each stock's
weight in the index is proportionate to its market value. The S&P 500 is
one of the most widely used benchmarks of U.S. equity performance. The MSCI
World Index is a free float-adjusted, market capitalization-weighted index
designed to measure equity market performance in global developed markets.
Annual Report | 17
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
redemption fees; 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 Fund's actual expense ratio for each class and an
assumed 5% annual rate of return before expenses, which does not represent the
Fund's actual return. The figure under the heading "Expenses Paid During Period"
shows the hypothetical expenses your account would have incurred under this
scenario. You can compare this figure with the 5% hypothetical examples that
appear in shareholder reports of other funds.
18 | Annual Report
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 OR
REDEMPTION FEES. 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
VALUE 7/1/08 VALUE 12/31/08 PERIOD* 7/1/08-12/31/08
----------------- -------------- -----------------------
CLASS Z
Actual $1,000 $ 814.80 $ 4.74
Hypothetical (5% return before expenses) $1,000 $1,019.91 $ 5.28
CLASS A
Actual $1,000 $ 813.80 $ 5.97
Hypothetical (5% return before expenses) $1,000 $1,018.55 $ 6.65
CLASS B
Actual $1,000 $ 810.70 $ 9.29
Hypothetical (5% return before expenses) $1,000 $1,014.88 $10.33
CLASS C
Actual $1,000 $ 810.90 $ 9.20
Hypothetical (5% return before expenses) $1,000 $1,014.98 $10.23
CLASS R
Actual $1,000 $ 812.40 $ 7.02
Hypothetical (5% return before expenses) $1,000 $1,017.39 $ 7.81
* Expenses are calculated using the most recent six-month expense ratio,
annualized for each class (Z: 1.04%; A: 1.31%; B: 2.04%; C: 2.02%; and R:
1.54%), multiplied by the average account value over the period, multiplied
by 184/366 to reflect the one-half year period.
Annual Report | 19
Mutual Discovery Fund
FINANCIAL HIGHLIGHTS
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------
CLASS Z 2008 2007 2006 2005 2004
- ------- ---------- ---------- ---------- ---------- ----------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ................ $ 32.45 $ 30.45 $ 26.28 $ 24.26 $ 20.81
---------- ---------- ---------- ---------- ----------
Income from investment operations(a):
Net investment income(b) ....................... 0.51 0.69 0.67 0.37 0.41
Net realized and unrealized gains (losses) ..... (9.11) 2.76 5.36 3.43 3.58
---------- ---------- ---------- ---------- ----------
Total from investment operations .................. (8.60) 3.45 6.03 3.80 3.99
---------- ---------- ---------- ---------- ----------
Less distributions from:
Net investment income .......................... (0.44) (0.74) (0.63) (0.44) (0.54)
Net realized gains ............................. (0.87) (0.71) (1.23) (1.34) --
---------- ---------- ---------- ---------- ----------
Total distributions ............................... (1.31) (1.45) (1.86) (1.78) (0.54)
---------- ---------- ---------- ---------- ----------
Redemption fees(c, d) ............................. -- -- -- -- --
---------- ---------- ---------- ---------- ----------
Net asset value, end of year ...................... $ 22.54 $ 32.45 $ 30.45 $ 26.28 $ 24.26
========== ========== ========== ========== ==========
Total return ...................................... (26.55)% 11.32% 23.43% 15.70% 19.39%
RATIOS TO AVERAGE NET ASSETS
Expenses(e, f) .................................... 1.02% 1.01% 1.05% 1.07% 1.07%
Expenses - excluding dividend expense on securities
sold short(e) .................................. 1.02% 1.01% 1.02% 1.04% 1.06%
Net investment income ............................. 1.81% 2.09% 2.28% 1.42% 1.87%
SUPPLEMENTAL DATA
Net assets, end of year (000's) ................... $3,490,622 $4,720,388 $3,923,802 $3,033,756 $2,578,585
Portfolio turnover rate ........................... 25.23% 25.12% 22.27% 25.69% 34.34%
(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) Amount rounds to less than $0.01 per share.
(d) Effective September 1, 2008, the redemption fee was eliminated.
(e) Benefit of expense reduction rounds to less than 0.01%.
(f) Includes dividend expense on securities sold short which varies from period
to period. See below for expense ratios that reflect only operating
expenses.
The accompanying notes are an integral part of these financial statements.
20 | Annual Report
Mutual Discovery Fund
FINANCIAL HIGHLIGHTS (CONTINUED)
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------
CLASS A 2008 2007 2006 2005 2004
- ------- ---------- ---------- ---------- ---------- ----------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ................ $ 32.09 $ 30.14 $ 26.04 $ 24.07 $ 20.67
---------- ---------- ---------- ---------- ----------
Income from investment operations(a):
Net investment income(b) ....................... 0.43 0.58 0.55 0.27 0.33
Net realized and unrealized gains (losses) ..... (8.99) 2.73 5.34 3.41 3.54
---------- ---------- ---------- ---------- ----------
Total from investment operations .................. (8.56) 3.31 5.89 3.68 3.87
---------- ---------- ---------- ---------- ----------
Less distributions from:
Net investment income .......................... (0.36) (0.65) (0.56) (0.37) (0.47)
Net realized gains ............................. (0.87) (0.71) (1.23) (1.34) --
---------- ---------- ---------- ---------- ----------
Total distributions ............................... (1.23) (1.36) (1.79) (1.71) (0.47)
---------- ---------- ---------- ---------- ----------
Redemption fees(c, d) ............................. -- -- -- -- --
---------- ---------- ---------- ---------- ----------
Net asset value, end of year ...................... $ 22.30 $ 32.09 $ 30.14 $ 26.04 $ 24.07
========== ========== ========== ========== ==========
Total return(e) ................................... (26.73)% 10.96% 23.02% 15.29% 18.98%
RATIOS TO AVERAGE NET ASSETS
Expenses(f, g) .................................... 1.30% 1.32% 1.36% 1.42% 1.42%
Expenses - excluding dividend expense on securities
sold short(f) .................................. 1.30% 1.32% 1.33% 1.39% 1.41%
Net investment income ............................. 1.53% 1.78% 1.97% 1.07% 1.52%
SUPPLEMENTAL DATA
Net assets, end of year (000's) ................... $5,900,616 $8,913,527 $6,128,353 $3,545,288 $2,106,695
Portfolio turnover rate ........................... 25.23% 25.12% 22.27% 25.69% 34.34%
(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) Amount rounds to less than $0.01 per share.
(d) Effective September 1, 2008, the redemption fee was eliminated.
(e) Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
(f) Benefit of expense reduction rounds to less than 0.01%.
(g) Includes dividend expense on securities sold short which varies from period
to period. See below for expense ratios that reflect only operating
expenses.
The accompanying notes are an integral part of these financial statements.
Annual Report | 21
Mutual Discovery Fund
FINANCIAL HIGHLIGHTS (CONTINUED)
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
CLASS B 2008 2007 2006 2005 2004
- ------- -------- -------- -------- -------- --------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ................ $ 31.46 $ 29.55 $ 25.57 $ 23.67 $ 20.35
-------- -------- -------- -------- --------
Income from investment operations(a):
Net investment income(b) ....................... 0.23 0.36 0.38 0.11 0.18
Net realized and unrealized gains (losses) ..... (8.79) 2.67 5.19 3.33 3.49
-------- -------- -------- -------- --------
Total from investment operations .................. (8.56) 3.03 5.57 3.44 3.67
-------- -------- -------- -------- --------
Less distributions from:
Net investment income .......................... (0.14) (0.41) (0.36) (0.20) (0.35)
Net realized gains ............................. (0.87) (0.71) (1.23) (1.34) --
-------- -------- -------- -------- --------
Total distributions ............................... (1.01) (1.12) (1.59) (1.54) (0.35)
-------- -------- -------- -------- --------
Redemption fees(c, d) ............................. -- -- -- -- --
-------- -------- -------- -------- --------
Net asset value, end of year ...................... $ 21.89 $ 31.46 $ 29.55 $ 25.57 $ 23.67
======== ======== ======== ======== ========
Total return(e) ................................... (27.28)% 10.22% 22.16% 14.59% 18.22%
RATIOS TO AVERAGE NET ASSETS
Expenses(f, g) .................................... 2.02% 2.01% 2.05% 2.07% 2.07%
Expenses - excluding dividend expense on securities
sold short(f) .................................. 2.02% 2.01% 2.02% 2.04% 2.06%
Net investment income ............................. 0.81% 1.09% 1.28% 0.42% 0.87%
SUPPLEMENTAL DATA
Net assets, end of year (000's) ................... $160,174 $276,175 $274,181 $225,158 $186,841
Portfolio turnover rate ........................... 25.23% 25.12% 22.27% 25.69% 34.34%
(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) Amount rounds to less than $0.01 per share.
(d) Effective September 1, 2008, the redemption fee was eliminated.
(e) Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
(f) Benefit of expense reduction rounds to less than 0.01%.
(g) Includes dividend expense on securities sold short which varies from period
to period. See below for expense ratios that reflect only operating
expenses.
The accompanying notes are an integral part of these financial statements.
22 | Annual Report
Mutual Discovery Fund
FINANCIAL HIGHLIGHTS (CONTINUED)
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------
CLASS C 2008 2007 2006 2005 2004
- ------- ---------- ---------- ---------- ---------- --------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ................ $ 31.84 $ 29.93 $ 25.90 $ 23.97 $ 20.59
---------- ---------- ---------- ---------- --------
Income from investment operations(a):
Net investment income(b) ....................... 0.23 0.36 0.36 0.11 0.19
Net realized and unrealized gains (losses) ..... (8.89) 2.70 5.28 3.38 3.53
---------- ---------- ---------- ---------- --------
Total from investment operations .................. (8.66) 3.06 5.64 3.49 3.72
---------- ---------- ---------- ---------- --------
Less distributions from:
Net investment income .......................... (0.15) (0.44) (0.38) (0.22) (0.34)
Net realized gains ............................. (0.87) (0.71) (1.23) (1.34) --
---------- ---------- ---------- ---------- --------
Total distributions ............................... (1.02) (1.15) (1.61) (1.56) (0.34)
---------- ---------- ---------- ---------- --------
Redemption fees(c, d) ............................. -- -- -- -- --
---------- ---------- ---------- ---------- --------
Net asset value, end of year ...................... $ 22.16 $ 31.84 $ 29.93 $ 25.90 $ 23.97
========== ========== ========== ========== ========
Total return(e) ................................... (27.27)% 10.24% 22.17% 14.56% 18.17%
RATIOS TO AVERAGE NET ASSETS
Expenses(f, g) .................................... 2.01% 2.01% 2.05% 2.07% 2.07%
Expenses - excluding dividend expense on securities
sold short(f) .................................. 2.01% 2.01% 2.02% 2.04% 2.06%
Net investment income ............................. 0.82% 1.09% 1.28% 0.42% 0.87%
SUPPLEMENTAL DATA
Net assets, end of year (000's) ................... $1,978,793 $3,075,593 $2,242,348 $1,435,702 $968,934
Portfolio turnover rate ........................... 25.23% 25.12% 22.27% 25.69% 34.34%
(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) Amount rounds to less than $0.01 per share.
(d) Effective September 1, 2008, the redemption fee was eliminated.
(e) Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
(f) Benefit of expense reduction rounds to less than 0.01%.
(g) Includes dividend expense on securities sold short which varies from period
to period. See below for expense ratios that reflect only operating
expenses.
The accompanying notes are an integral part of these financial statements.
Annual Report | 23
Mutual Discovery Fund
FINANCIAL HIGHLIGHTS (CONTINUED)
YEAR ENDED DECEMBER 31,
---------------------------------------------------
CLASS R 2008 2007 2006 2005 2004
- ------- -------- -------- -------- ------- -------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ................ $ 31.85 $ 29.93 $ 25.88 $ 23.94 $ 20.57
-------- -------- -------- ------- -------
Income from investment operations(a):
Net investment income(b) ...................... 0.36 0.51 0.50 0.22 0.29
Net realized and unrealized gains (losses) .... (8.92) 2.72 5.29 3.40 3.54
-------- -------- -------- ------- -------
Total from investment operations .................. (8.56) 3.23 5.79 3.62 3.83
-------- -------- -------- ------- -------
Less distributions from:
Net investment income ......................... (0.30) (0.60) (0.51) (0.34) (0.46)
Net realized gains ............................ (0.87) (0.71) (1.23) (1.34) --
-------- -------- -------- ------- -------
Total distributions ............................... (1.17) (1.31) (1.74) (1.68) (0.46)
-------- -------- -------- ------- -------
Redemption fees(c, d) ............................. -- -- -- -- --
-------- -------- -------- ------- -------
Net asset value, end of year ...................... $ 22.12 $ 31.85 $ 29.93 $ 25.88 $ 23.94
======== ======== ======== ======= =======
Total return(e) ................................... (26.92)% 10.76% 22.78% 15.13% 18.84%
RATIOS TO AVERAGE NET ASSETS
Expenses(f, g) .................................... 1.52% 1.51% 1.55% 1.57% 1.57%
Expenses - excluding dividend expense on securities
sold short(f) .................................. 1.52% 1.51% 1.52% 1.54% 1.56%
Net investment income ............................. 1.31% 1.59% 1.78% 0.92% 1.37%
SUPPLEMENTAL DATA
Net assets, end of year (000's) ................... $206,858 $275,002 $175,790 $99,501 $46,690
Portfolio turnover rate ........................... 25.23% 25.12% 22.27% 25.69% 34.34%
(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) Amount rounds to less than $0.01 per share.
(d) Effective September 1, 2008, the redemption fee was eliminated.
(e) Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
(f) Benefit of expense reduction rounds to less than 0.01%.
(g) Includes dividend expense on securities sold short which varies from period
to period. See below for expense ratios that reflect only operating
expenses.
The accompanying notes are an integral part of these financial statements.
24 | Annual Report
Mutual Discovery Fund
STATEMENT OF INVESTMENTS, DECEMBER 31, 2008
SHARES/WARRANTS/
COUNTRY CONTRACTS VALUE
-------------- ----------------- ----------------
COMMON STOCKS AND OTHER EQUITY INTERESTS 47.2%
AIRLINES 0.1%
(a) ACE Aviation Holdings Inc., A ....................................... Canada 1,341,927 $ 7,444,122
(a,b) Northwest Airlines Corp., Contingent Distribution ................... United States 69,160,000 43,571
---------------
7,487,693
---------------
AUTO COMPONENTS 0.0%(c)
(a,b,d) Collins & Aikman Products Co., Contingent Distribution .............. United States 1,967,769 19,678
(a) Dana Holding Corp. .................................................. United States 1,058,904 783,589
(a,b) Dana Holding Corp., Contingent Distribution ......................... United States 25,003,000 7,813
---------------
811,080
---------------
AUTOMOBILES 0.1%
(a,e,f) IACNA Investor LLC .................................................. United States 402,771 4,028
(a,e,f,g) International Automotive Components Group Brazil LLC ................ Brazil 3,819,425 3,038,812
(a,e,f,g) International Automotive Components Group Japan LLC ................. Japan 650,533 703,056
(a,e,g) International Automotive Components Group LLC ....................... Luxembourg 13,618,870 2,316,570
(a,e,g) International Automotive Components Group NA LLC, A ................. United States 11,533,276 1,877,617
---------------
7,940,083
---------------
BEVERAGES 4.1%
Brown-Forman Corp., A ............................................... United States 143,200 7,248,784
Brown-Forman Corp., B ............................................... United States 525,362 27,050,889
Carlsberg AS, A ..................................................... Denmark 113,300 4,086,795
Carlsberg AS, B ..................................................... Denmark 3,760,381 120,980,151
(a) Dr. Pepper Snapple Group Inc. ....................................... United States 3,459,219 56,212,309
Fomento Economico Mexicano SAB de CV, ADR ........................... Mexico 3,150,684 94,930,109
Lotte Chilsung Beverage Co. Ltd. .................................... South Korea 25,119 19,033,162
(h) Pernod Ricard SA .................................................... France 2,089,636 154,775,060
---------------
484,317,259
---------------
BUILDING PRODUCTS 0.3%
KCC Corp. ........................................................... South Korea 160,170 36,459,917
---------------
CAPITAL MARKETS 0.4%
The Goldman Sachs Group Inc. ........................................ United States 331,040 27,936,466
(a) Marfin Investment Group Holdings SA ................................. Greece 4,581,317 18,577,561
---------------
46,514,027
---------------
CHEMICALS 0.6%
(a,b,d) Dow Corning Corp., Contingent Distribution .......................... United States 14,735,153 2,857,538
Sika AG ............................................................. Switzerland 85,406 71,978,088
---------------
74,835,626
---------------
COMMERCIAL BANKS 0.7%
BNP Paribas SA ...................................................... France 991,591 41,942,887
Danske Bank AS ...................................................... Denmark 672,341 6,568,174
(a,e,f) FE Capital Holdings Ltd. ............................................ Japan 29,212 --
Intesa Sanpaolo SpA ................................................. Italy 9,756,274 34,617,078
(a) Investors Bancorp Inc. .............................................. United States 1,775 23,838
(a,e) NCB Warrant Holdings Ltd., A ........................................ Japan 135,864 --
---------------
83,151,977
---------------
Annual Report | 25
Mutual Discovery Fund
STATEMENT OF INVESTMENTS, DECEMBER 31, 2008 (CONTINUED)
SHARES/WARRANTS/
COUNTRY CONTRACTS VALUE
-------------- ----------------- ----------------
COMMON STOCKS AND OTHER EQUITY INTERESTS (CONTINUED)
COMMERCIAL SERVICES & SUPPLIES 0.1%
(a) Comdisco Holding Co. Inc. ........................................... United States 929 $ 7,246
(a,b) Comdisco Holding Co. Inc., Contingent Distribution .................. United States 37,660,000 --
Fursys Inc. ......................................................... South Korea 547,260 8,839,354
---------------
8,846,600
---------------
COMPUTERS & PERIPHERALS 0.0%
(a,e) DecisionOne Corp. ................................................... United States 359,884 --
(a,e) DecisionOne Corp., wts., 6/08/17 .................................... United States 197,603 --
---------------
--
---------------
CONSTRUCTION MATERIALS 0.4%
Ciments Francais SA ................................................. France 399,572 33,774,717
Hanil Cement Co. Ltd. ............................................... South Korea 296,309 15,366,777
---------------
49,141,494
---------------
CONSUMER FINANCE 0.1%
(a,e) Cerberus CG Investor I LLC .......................................... United States 9,005,073 1,801,015
(a,e) Cerberus CG Investor II LLC ......................................... United States 9,005,073 1,801,015
(a,e) Cerberus CG Investor III LLC ........................................ United States 4,502,537 900,507
(a,e) Cerberus FIM Investors Holdco LLC ................................... United States 29,877,000 6,327,882
---------------
10,830,419
---------------
DIVERSIFIED FINANCIAL SERVICES 1.0%
(h) Deutsche Boerse AG .................................................. Germany 1,404,621 99,775,345
Guinness Peat Group PLC ............................................. United Kingdom 30,515,624 17,830,279
(a,b) Marconi Corp., Contingent Distribution .............................. United Kingdom 33,909,700 --
---------------
117,605,624
---------------
DIVERSIFIED TELECOMMUNICATION SERVICES 0.7%
(a,e,g) AboveNet Inc. ....................................................... United States 366,651 18,332,550
(a,e,g) AboveNet Inc., stock grant, grant price $20.95, expiration date
9/09/13 .......................................................... United States 464 1,044
(a,e,g) AboveNet Inc., wts., 9/08/10 ........................................ United States 14,911 59,644
(a,b,d) Global Crossing Holdings Ltd., Contingent Distribution .............. United States 45,658,716 --
(h) Koninklijke (Royal) KPN NV .......................................... Netherlands 4,511,679 65,484,108
---------------
83,877,346
---------------
ELECTRIC UTILITIES 1.0%
E.ON AG ............................................................. Germany 2,496,540 97,815,352
Union Electrica Fenosa SA ........................................... Spain 847,082 21,000,738
---------------
118,816,090
---------------
ENERGY EQUIPMENT & SERVICES 2.5%
(i) Bourbon SA .......................................................... France 1,031,595 26,022,327
(a) BW Offshore Ltd. .................................................... Norway 18,666,535 11,541,025
(a) Compagnie Generale de Geophysique SA ................................ France 2,902,660 43,023,169
(a,f) Dockwise Ltd. ....................................................... Norway 12,379,100 7,030,697
(a) Petroleum Geo-Services ASA .......................................... Norway 1,796,568 7,142,513
(a) Pride International Inc. ............................................ United States 2,855,610 45,632,648
Seadrill Ltd. ....................................................... Bermuda 10,795,821 85,530,204
(a) Transocean Ltd. ..................................................... United States 1,544,674 72,985,847
---------------
298,908,430
---------------
26 | Annual Report
Mutual Discovery Fund
STATEMENT OF INVESTMENTS, DECEMBER 31, 2008 (CONTINUED)
SHARES/WARRANTS/
COUNTRY CONTRACTS VALUE
-------------- ----------------- ----------------
COMMON STOCKS AND OTHER EQUITY INTERESTS (CONTINUED)
FOOD PRODUCTS 4.6%
(h) Cadbury PLC ......................................................... United Kingdom 8,202,694 $ 72,541,591
Cermaq ASA .......................................................... Norway 1,259,560 4,781,179
(f) CSM NV .............................................................. Netherlands 4,036,926 64,915,588
(f) Farmer Brothers Co. ................................................. United States 904,637 22,561,647
(h) Groupe Danone ....................................................... France 2,686,412 162,201,783
(a,d) Lighthouse Caledonia ASA ............................................ Norway 1,401,289 32,237
Lotte Confectionary Co. Ltd. ........................................ South Korea 52,189 53,924,501
(a,f,i) Marine Harvest ...................................................... Norway 178,709,281 26,980,416
(h) Nestle SA ........................................................... Switzerland 1,644,220 64,050,522
Nong Shim Co. Ltd. .................................................. South Korea 210,569 40,763,357
Premier Foods PLC ................................................... United Kingdom 24,478,659 10,993,834
Rieber & Son ASA .................................................... Norway 3,605,065 18,401,519
---------------
542,148,174
---------------
HEALTH CARE PROVIDERS & SERVICES 0.8%
(a,e) Kindred Healthcare Inc. ............................................. United States 1,144,480 14,156,073
Rhoen-Klinikum AG ................................................... Germany 3,163,170 75,501,646
---------------
89,657,719
---------------
HOTELS, RESTAURANTS & LEISURE 0.0%(c)
(a) Trump Entertainment Resorts Inc. .................................... United States 573,493 97,723
---------------
INDUSTRIAL CONGLOMERATES 3.8%
Jardine Matheson Holdings Ltd. ...................................... Hong Kong 4,120,069 76,221,277
Jardine Strategic Holdings Ltd. ..................................... Hong Kong 9,657,583 100,438,863
Keppel Corp. Ltd. ................................................... Singapore 17,381,344 52,538,373
Koninklijke Philips Electronics NV .................................. Netherlands 272,485 5,269,448
(g) Orkla ASA ........................................................... Norway 20,568,718 134,416,736
Siemens AG .......................................................... Germany 1,005,019 74,186,742
---------------
443,071,439
---------------
INSURANCE 3.4%
ACE Ltd. ............................................................ United States 560,010 29,635,729
(a) Alleghany Corp. ..................................................... United States 76,545 21,585,690
(a) Berkshire Hathaway Inc., A .......................................... United States 853 82,399,800
(a) Berkshire Hathaway Inc., B .......................................... United States 29,300 94,170,200
E-L Financial Corp. Ltd. ............................................ Canada 177,619 65,687,500
(a,e,f) Imagine Group Holdings Ltd. ......................................... Bermuda 4,551,501 37,276,793
Old Republic International Corp. .................................... United States 1,246,689 14,860,533
(a,e) Olympus Re Holdings Ltd. ............................................ United States 47,160 110,713
Prudential Financial Inc. ........................................... United States 421,200 12,745,512
White Mountains Insurance Group Ltd. ................................ United States 172,815 46,160,615
---------------
404,633,085
---------------
MACHINERY 1.1%
(a,e) Motor Coach Industries International Inc., wts., 5/27/09 ............ United States 5 --
Schindler Holding AG ................................................ Switzerland 2,263,002 101,929,391
Schindler Holding AG, Registered .................................... Switzerland 659,880 29,073,278
---------------
131,002,669
---------------
Annual Report | 27
Mutual Discovery Fund
STATEMENT OF INVESTMENTS, DECEMBER 31, 2008 (CONTINUED)
SHARES/WARRANTS/
COUNTRY CONTRACTS VALUE
-------------- ----------------- ----------------
COMMON STOCKS AND OTHER EQUITY INTERESTS (CONTINUED)
MEDIA 2.0%
(a) Adelphia Recovery Trust ............................................. United States 45,477,593 $ 454,776
(a,b) Adelphia Recovery Trust, Arahova Contingent Value Vehicle,
Contingent Distribution .......................................... United States 5,538,790 830,818
(a,b) Century Communications Corp., Contingent Distribution ............... United States 15,282,000 --
CJ CGV Co. Ltd. ..................................................... South Korea 849,040 10,218,059
Daekyo Co. Ltd. ..................................................... South Korea 3,675,700 14,289,538
(a) Eutelsat Communications ............................................. France 6,644,123 157,241,330
JC Decaux SA ........................................................ France 2,791,333 47,686,381
(a,d) TVMAX Holdings Inc. ................................................. United States 118,432 --
Virgin Media Inc. ................................................... United Kingdom 983,718 4,908,753
---------------
235,629,655
---------------
METALS & MINING 0.0%(c)
ArcelorMittal ....................................................... Netherlands 170,570 4,054,637
---------------
MULTI-UTILITIES 0.3%
(h) GDF Suez ............................................................ France 573,006 28,303,602
(a,b) NorthWestern Corp., Contingent Distribution ......................... United States 9,790,000 --
(a) Suez Environnement SA ............................................... France 106,367 1,792,232
---------------
30,095,834
---------------
MULTILINE RETAIL 0.3%
Jelmoli Holding AG .................................................. Switzerland 19,024 35,094,372
---------------
OIL, GAS & CONSUMABLE FUELS 0.9%
BP PLC .............................................................. United Kingdom 5,264,794 40,446,742
BP PLC, ADR ......................................................... United Kingdom 180,900 8,455,266
Total SA, B ......................................................... France 510,684 27,785,220
Total SA, B, ADR .................................................... France 417,296 23,076,469
---------------
99,763,697
---------------
PAPER & FOREST PRODUCTS 0.3%
Mondi Ltd ........................................................... United Kingdom 278,762 1,017,865
Weyerhaeuser Co. .................................................... United States 1,148,084 35,142,851
---------------
36,160,716
---------------
PERSONAL PRODUCTS 0.3%
Amorepacific Corp. .................................................. South Korea 64,004 33,142,214
---------------
PROFESSIONAL SERVICES 0.3%
Teleperformance ..................................................... France 1,465,107 40,686,371
---------------
REAL ESTATE INVESTMENT TRUSTS (REITS) 1.4%
Link REIT ........................................................... Hong Kong 85,650,544 141,457,893
Ventas Inc. ......................................................... United States 516,500 17,338,905
---------------
158,796,798
---------------
REAL ESTATE MANAGEMENT & DEVELOPMENT 1.0%
(d) Canary Wharf Group PLC .............................................. United Kingdom 5,400,183 20,815,938
Great Eagle Holdings Ltd. ........................................... Hong Kong 12,911,868 14,344,299
Swire Pacific Ltd., A ............................................... Hong Kong 9,379,950 64,568,699
Swire Pacific Ltd., B ............................................... Hong Kong 13,605,000 18,045,908
---------------
117,774,844
---------------
28 | Annual Report
Mutual Discovery Fund
STATEMENT OF INVESTMENTS, DECEMBER 31, 2008 (CONTINUED)
SHARES/WARRANTS/
COUNTRY CONTRACTS VALUE
-------------- ----------------- ----------------
COMMON STOCKS AND OTHER EQUITY INTERESTS (CONTINUED)
SOFTWARE 0.5%
(h) Microsoft Corp. ..................................................... United States 2,949,730 $ 57,342,751
---------------
TOBACCO 13.7%
Altria Group Inc. ................................................... United States 2,750,018 41,415,271
(h) British American Tobacco PLC ........................................ United Kingdom 10,342,443 271,901,785
(h) Imperial Tobacco Group PLC .......................................... United Kingdom 11,259,039 304,221,196
ITC Ltd. ............................................................ India 15,068,790 53,137,475
Japan Tobacco Inc. .................................................. Japan 41,878 138,599,533
KT&G Corp. .......................................................... South Korea 1,857,368 116,324,473
(h) Lorillard Inc. ...................................................... United States 1,778,070 100,194,244
Philip Morris International Inc. .................................... United States 1,213,908 52,817,137
(h) Reynolds American Inc. .............................................. United States 1,149,030 46,317,399
UST Inc. ............................................................ United States 7,018,370 486,934,511
---------------
1,611,863,024
---------------
TRADING COMPANIES & DISTRIBUTORS 0.4%
(f) Kloeckner & Co. SE .................................................. Germany 2,511,604 43,864,580
---------------
TRANSPORTATION INFRASTRUCTURE 0.0%(c)
(a) Groupe Eurotunnel SA ................................................ France 7,050 37,953
(a) Groupe Eurotunnel SA, wts., 12/30/11 ................................ France 200,763 23,020
---------------
60,973
---------------
TOTAL COMMON STOCKS AND OTHER EQUITY INTERESTS
(COST $6,103,369,622) ............................................... 5,544,484,940
---------------
PREFERRED STOCKS 0.0%(c)
AUTO COMPONENTS 0.0%(c)
(e) Dana Holding Corp., 4.00%, cvt. pfd., B ............................. United States 89,831 808,479
---------------
DIVERSIFIED TELECOMMUNICATION SERVICES 0.0%(c)
(a,e) PTV Inc., 10.00%, pfd., A ........................................... United Kingdom 86,280 77,652
---------------
TOTAL PREFERRED STOCKS (COST $9,103,892) ............................ 886,131
---------------
PRINCIPAL
AMOUNT(j)
-----------------
CORPORATE BONDS & NOTES 1.1%
(k) ACE Aviation Holdings Inc., cvt., 144A, 4.25%, 6/01/35 .............. Canada 2,761,000 CAD 2,011,754
(l) Calpine Corp., Exit Term Loan, FRN, 6.645%, 3/29/14 ................. United States 41,902,553 31,082,727
(e) Cerberus CG Investor I LLC, 12.00%, 7/31/14 ......................... United States 7,903,600 1,580,720
(e) Cerberus CG Investor II LLC, 12.00%, 7/31/14 ........................ United States 7,903,600 1,580,720
(e) Cerberus CG Investor III LLC, 12.00%, 7/31/14 ....................... United States 3,951,800 790,360
(e) Cerberus FIM Investors Holdco LLC, 12.00%, 11/22/13 ................. United States 89,613,199 18,979,874
DecisionOne Corp.,
(e) 12.00%, 4/15/10 ..................................................... United States 463,234 463,234
(d,l) FRN, 5.50%, 5/12/09 ................................................. United States 82,993 82,993
Groupe Eurotunnel SA, cvt., sub. bond, NRS I,
T2, 3.00%, 7/28/09 ............................................... France 9,600 EUR 11,410
T2, 3.00%, 7/28/09 ............................................... France 11,935 GBP 17,432
T3, 3.00%, 7/28/10 ............................................... France 7,220,400 EUR 8,581,843
T3, 3.00%, 7/28/10 ............................................... France 4,866,820 GBP 7,108,234
Annual Report | 29
Mutual Discovery Fund
STATEMENT OF INVESTMENTS, DECEMBER 31, 2008 (CONTINUED)
PRINCIPAL
COUNTRY AMOUNT(j) VALUE
-------------- ----------------- ----------------
CORPORATE BONDS & NOTES (CONTINUED)
(e,g) International Automotive Components Group NA LLC, 9.00%,
4/01/17 .......................................................... United States 3,472,200 $ 1,673,880
(e,g,l,m) Pontus I LLC, junior note, 144A, FRN, 5.689%, 7/24/09 ............... United States 48,060,014 54,231,090
(e,g,l,m) Pontus II Trust, junior profit-participating note, 144A, FRN,
7.516%, 6/25/09 .................................................. United States 7,603,287 1,773,998
(d,n) TVMAX Holdings Inc., PIK,
11.50%, 3/31/09 .................................................. United States 440,571 308,400
14.00%, 3/31/09 .................................................. United States 839,276 587,493
---------------
TOTAL CORPORATE BONDS & NOTES
(COST $287,966,124) ................................................. 130,866,162
---------------
CORPORATE BONDS & NOTES IN REORGANIZATION 0.1%
(l,o) Motor Coach Industries International Inc., FRN,
(p) First Lien DIP Revolver, 7.75%, 9/19/09 ............................. United States 2,200,650 2,149,133
(q) Second Lien DIP Trust A Term Loan, 12.75%, 9/19/09 .................. United States 3,227,295 2,646,381
Second Lien DIP Trust B Term Loan, 15.25%, 9/19/09 .................. United States 1,968,234 1,672,999
(q) Second Lien Senior Secured Term Loan, 11.00%, 12/01/08 .............. United States 2,659,520 2,114,319
(d) Third Lien Senior Secured Term Loan, 15.649%, 12/01/08 .............. United States 30,663,564 837,115
(d,o) Safety Kleen Services, senior sub. note, 9.25%, 6/01/08 ............. United States 40,000 200
(o) Trump Entertainment Resorts Inc., 8.50%, 5/20/15 .................... United States 17,141,134 2,356,906
---------------
TOTAL CORPORATE BONDS & NOTES IN REORGANIZATION
(COST $56,906,539) .................................................. 11,777,053
---------------
TOTAL INVESTMENTS BEFORE SHORT TERM INVESTMENTS
(COST $6,457,346,177) ............................................... 5,688,014,286
---------------
SHORT TERM INVESTMENTS 50.3%
FOREIGN GOVERNMENT AND AGENCY SECURITIES (COST $62,905,385) 0.6%
(r) German Treasury Bill, 4/22/09 ....................................... Germany 50,000,000 EUR 69,592,449
---------------
U.S. GOVERNMENT AND AGENCY SECURITIES 49.7%
(r) FHLB,
1/02/09 .......................................................... United States 145,515,000 145,515,000
1/05/09 .......................................................... United States 128,000,000 128,000,256
1/07/09 - 12/14/09 ............................................... United States 4,705,742,000 4,696,664,178
1/12/09 .......................................................... United States 306,215,000 306,217,143
12/04/09 ......................................................... United States 125,000,000 124,212,500
(r) U.S. Treasury Bills,
3/26/09 - 11/19/09 ............................................... United States 170,000,000 169,829,360
4/02/09 .......................................................... United States 140,000,000 139,963,600
6/18/09 .......................................................... United States 125,000,000 124,913,625
---------------
TOTAL U.S. GOVERNMENT AND AGENCY SECURITIES
(COST $5,792,053,547) ............................................... 5,835,315,662
---------------
TOTAL INVESTMENTS BEFORE MONEY MARKET FUNDS
(COST $12,312,305,109) .............................................. 11,592,922,397
---------------
30 | Annual Report
Mutual Discovery Fund
STATEMENT OF INVESTMENTS, DECEMBER 31, 2008 (CONTINUED)
COUNTRY SHARES/CONTRACTS VALUE
-------------- ----------------- ---------------
SHORT TERM INVESTMENTS (CONTINUED)
(s) INVESTMENTS FROM CASH COLLATERAL RECEIVED FOR LOANED
SECURITIES 0.0%(c)
MONEY MARKET FUNDS (COST $3,021,761) 0.0%(c)
(t) Bank of New York Institutional Cash Reserve Fund, 0.09% ............. United States 3,021,761 $ 2,991,543
---------------
TOTAL INVESTMENTS (COST $12,315,326,870) 98.7% ...................... 11,595,913,940
OPTIONS WRITTEN (0.2)% .............................................. (31,657,917)
NET UNREALIZED APPRECIATION ON FORWARD EXCHANGE CONTRACTS 1.0% ...... 120,320,052
OTHER ASSETS, LESS LIABILITIES 0.5% ................................. 52,486,672
---------------
NET ASSETS 100.0% ................................................... $11,737,062,747
===============
(u) OPTIONS WRITTEN 0.2%
CALL OPTIONS 0.2%
BEVERAGES 0.1%
Pernod Ricard SA, Mar. 52 Calls, 3/20/09 ............................ France 3,117 $ 2,458,195
Pernod Ricard SA, Mar. 52 Calls, 3/20/09 ............................ France 324 260,503
Pernod Ricard SA, Jun. 52 Calls, 6/19/09 ............................ France 1,232 1,324,761
Pernod Ricard SA, Jun. 52 Calls, 6/19/09 ............................ France 5,591 6,183,955
---------------
10,227,414
---------------
DIVERSIFIED FINANCIAL SERVICES 0.0%(c)
Deutsche Boerse AG, Mar. 64 Calls, 3/20/09 .......................... Germany 2,788 460,018
Deutsche Boerse AG, Jun. 64 Calls, 6/19/09 .......................... Germany 1,288 520,492
---------------
980,510
---------------
DIVERSIFIED TELECOMMUNICATION SERVICES 0.0%(c)
Koninklijke (Royal) KPN NV, Mar. 11 Calls, 3/20/09 .................. Netherlands 28,098 1,571,577
---------------
FOOD PRODUCTS 0.0%(c)
Cadbury PLC, Mar. 6 Calls, 3/20/09 .................................. United Kingdom 777 510,681
Cadbury PLC, Jun. 6.4 Calls, 6/19/09 ................................ United Kingdom 1,548 972,200
Groupe Danone, Mar. 48 Calls, 3/20/09 ............................... France 7,498 1,593,637
Nestle SA, Mar. 48 Calls, 3/20/09 ................................... Switzerland 4,629 125,706
---------------
3,202,224
---------------
MULTI-UTILITIES 0.0%(c)
GDF Suez, Mar. 36 Calls, 3/20/09 .................................... France 4,999 1,929,268
---------------
SOFTWARE 0.0%(c)
Microsoft Corp., Apr. 26 Calls, 4/18/09 ............................. United States 4,617 110,808
---------------
TOBACCO 0.1%
British American Tobacco PLC, Mar. 18 Calls, 3/20/09 ................ United Kingdom 970 1,735,498
British American Tobacco PLC, Mar. 18 Calls, 3/20/09 ................ United Kingdom 396 708,513
British American Tobacco PLC, Jun. 18 Calls, 6/19/09 ................ United Kingdom 342 859,154
Imperial Tobacco Group PLC, Mar. 18 Calls, 3/20/09 .................. United Kingdom 970 1,905,507
Imperial Tobacco Group PLC, Mar. 18 Calls, 3/20/09 .................. United Kingdom 1,692 3,323,832
Imperial Tobacco Group PLC, Jun. 18 Calls, 6/19/09 .................. United Kingdom 1,748 5,042,257
Lorillard Inc., Mar. 70 Calls, 3/21/09 .............................. United States 460 23,000
Annual Report | 31
Mutual Discovery Fund
STATEMENT OF INVESTMENTS, DECEMBER 31, 2008 (CONTINUED)
COUNTRY CONTRACTS VALUE
-------------- ----------------- ---------------
OPTIONS WRITTEN (CONTINUED)
CALL OPTIONS (CONTINUED)
TOBACCO (CONTINUED)
Reynolds American Inc., Feb. 45 Calls, 2/21/09 ...................... United States 300 $ 17,700
Reynolds American Inc., May. 45 Calls, 5/16/09 ...................... United States 153 20,655
---------------
13,636,116
---------------
TOTAL OPTIONS WRITTEN
(PREMIUMS RECEIVED $31,331,380) .................................... $ 31,657,917
---------------
See Abbreviations on page 53.
(a) Non-income producing for the twelve months ended December 31, 2008.
(b) Contingent distributions represent the right to receive additional
distributions, if any, during the reorganization of the underlying company.
Shares represent total underlying principal of debt securities.
(c) Rounds to less than 0.1% of net assets.
(d) Security has been deemed illiquid because it may not be able to be sold
within seven days. At December 31, 2008, the aggregate value of these
securities was $25,541,592, representing 0.22% of net assets.
(e) See Note 10 regarding restricted and illiquid securities.
(f) See Note 13 regarding holdings of 5% voting securities.
(g) See Note 14 regarding other considerations.
(h) A portion or all of the security is held in connection with written option
contracts open at year end.
(i) A portion or all of the security is on loan at December 31, 2008. See Note
1(i).
(j) The principal amount is stated in U.S. dollars unless otherwise indicated.
(k) 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. These securities have been deemed liquid under
guidelines approved by the Trust's Board of Trustees. At December 31, 2008,
the value of these securities was $2,011,754, representing 0.02% of net
assets.
(l) The coupon rate shown represents the rate at period end.
(m) See Note 1(h) regarding investments in special purpose entities.
(n) Income may be received in additional securities and/or cash.
(o) See Note 9 regarding defaulted securities.
(p) See Note 11 regarding unfunded loan commitments.
(q) A portion or all of the securities purchased on a delayed delivery basis.
See Note 1(c).
(r) The security is traded on a discount basis with no stated coupon rate.
(s) See Note 1(i) regarding securities on loan.
(t) The rate shown is the annualized seven-day yield at period end.
(u) See Note 1(f) regarding written options.
The accompanying notes are an integral part of these financial statements.
32 | Annual Report
Mutual Discovery Fund
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
December 31, 2008
Assets:
Investments in securities:
Cost - Unaffiliated issuers ....................................................... $11,803,187,337
Cost - Non-controlled affiliated issuers (Note 13) ................................ 512,139,533
---------------
Total cost of investments ......................................................... $12,315,326,870
===============
Value - Unaffiliated issuers ...................................................... $11,389,538,323
Value - Non-controlled affiliated issuers (Note 13) ............................... 206,375,617
---------------
Total value of investments (includes securities loaned in the amount of
$3,605,708) .................................................................... 11,595,913,940
Cash ................................................................................. 43,176,063
Cash on deposit with brokers ......................................................... 37,143,450
Foreign currency, at value (cost $ 121,891,788) ...................................... 121,877,801
Receivables:
Investment securities sold ........................................................ 14,425,762
Capital shares sold ............................................................... 35,895,392
Dividends and interest ............................................................ 39,363,835
Unrealized appreciation on forward exchange contracts (Note 8) ....................... 236,840,420
---------------
Total assets ................................................................... 12,124,636,663
---------------
Liabilities:
Payables:
Investment securities purchased ................................................... 174,639,246
Capital shares redeemed ........................................................... 41,313,327
Affiliates ........................................................................ 15,608,974
Options written, at value (premiums received $ 31,331,380) ........................... 31,657,917
Payable upon return of securities loaned ............................................. 3,021,761
Unrealized depreciation on forward exchange contracts (Note 8) ....................... 116,520,368
Unrealized depreciation on unfunded loan commitments (Note 11) ....................... 6,770
Accrued expenses and other liabilities ............................................... 4,805,553
---------------
Total liabilities .............................................................. 387,573,916
---------------
Net assets, at value ........................................................ $11,737,062,747
===============
Net assets consist of:
Paid-in capital ................................................................... $12,544,850,344
Distributions in excess of net investment income .................................. (7,772,983)
Net unrealized appreciation (depreciation) (599,572,505)
Accumulated net realized gain (loss) .............................................. (200,442,109)
---------------
Net assets, at value ........................................................ $11,737,062,747
===============
The accompanying notes are an integral part of these financial statements.
Annual Report | 33
Mutual Discovery Fund
FINANCIAL STATEMENTS (CONTINUED)
STATEMENT OF ASSETS AND LIABILITIES (CONTINUED)
December 31, 2008
CLASS Z:
Net assets, at value ........................................................ $3,490,621,543
--------------
Shares outstanding .......................................................... 154,868,261
--------------
Net asset value and maximum offering price per share ........................ $ 22.54
--------------
CLASS A:
Net assets, at value ........................................................ $5,900,616,466
--------------
Shares outstanding .......................................................... 264,652,088
--------------
Net asset value per share(a) ................................................ $ 22.30
--------------
Maximum offering price per share (net asset value per share / 94.25%) ....... $ 23.66
--------------
CLASS B:
Net assets, at value ........................................................ $ 160,174,411
--------------
Shares outstanding .......................................................... 7,318,206
--------------
Net asset value and maximum offering price per share(a) ..................... $ 21.89
--------------
CLASS C:
Net assets, at value ........................................................ $1,978,792,696
--------------
Shares outstanding .......................................................... 89,309,632
--------------
Net asset value and maximum offering price per share(a) ..................... $ 22.16
--------------
CLASS R:
Net assets, at value ........................................................ $ 206,857,631
--------------
Shares outstanding .......................................................... 9,349,743
--------------
Net asset value and maximum offering price per share ........................ $ 22.12
--------------
(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.
34 | Annual Report
Mutual Discovery Fund
FINANCIAL STATEMENTS (CONTINUED)
STATEMENT OF OPERATIONS
for the year ended December 31, 2008
Investment income:
Dividends: (net of foreign taxes of $26,494,589)
Unaffiliated issuers ........................................................... $ 283,577,951
Non-controlled affiliated issuers (Note 13) .................................... 7,909,192
Interest .......................................................................... 130,272,077
Income from securities loaned ..................................................... 250,334
---------------
Total investment income ..................................................... 422,009,554
---------------
Expenses:
Management fees (Note 3a) ......................................................... 112,854,391
Administrative fees (Note 3b) ..................................................... 11,324,570
Distribution fees: (Note 3c)
Class A ........................................................................ 21,165,012
Class B ........................................................................ 2,192,414
Class C ........................................................................ 25,690,027
Class R ........................................................................ 1,242,347
Transfer agent fees (Note 3e) ..................................................... 20,268,154
Custodian fees (Note 4) ........................................................... 3,256,554
Reports to shareholders ........................................................... 1,307,228
Registration and filing fees ...................................................... 500,958
Professional fees ................................................................. 932,374
Trustees' fees and expenses ....................................................... 714,022
Dividends on securities sold short ................................................ 894,030
Other ............................................................................. 349,595
---------------
Total expenses .......................................................... 202,691,676
Expense reductions (Note 4) ............................................. (46,271)
---------------
Net expenses ......................................................... 202,645,405
---------------
Net investment income ............................................. 219,364,149
---------------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments:
Unaffiliated issuers ........................................................ (157,341,542)
Controlled affiliated issuers (Note 13) ..................................... (10,726,352)
Non-controlled affiliated issuers (Note 13) ................................. (28,176,071)
Foreign currency transactions .................................................. 349,684,025
Securities sold short .......................................................... 20,902,319
---------------
Net realized gain (loss) .............................................. 174,342,379
---------------
Net change in unrealized appreciation (depreciation) on:
Investments ....................................................................... (5,139,947,446)
Translation of other assets and liabilities denominated in foreign currencies ..... 154,160,690
---------------
Net change in unrealized appreciation (depreciation) .................. (4,985,786,756)
---------------
Net realized and unrealized gain (loss) .............................................. (4,811,444,377)
---------------
Net increase (decrease) in net assets resulting from operations ...................... $(4,592,080,228)
===============
The accompanying notes are an integral part of these financial statements.
Annual Report | 35
Mutual Discovery Fund
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF CHANGES IN NET ASSETS
YEAR ENDED DECEMBER 31,
---------------------------------
2008 2007
--------------- ---------------
Increase (decrease) in net assets:
Operations:
Net investment income ................................................................ $ 219,364,149 $ 271,664,382
Net realized gain (loss) from investments, written options, securities sold short,
synthetic equity swaps, and foreign currency transactions ......................... 174,342,379 477,542,610
Net change in unrealized appreciation (depreciation) on investments and translation of
other assets and liabilities denominated in foreign currencies .................... (4,985,786,756) 717,017,288
--------------- ---------------
Net increase (decrease) in net assets resulting from operations ................ (4,592,080,228) 1,466,224,280
--------------- ---------------
Distributions to shareholders from:
Net investment income:
Class Z ........................................................................... (65,871,812) (103,525,166)
Class A ........................................................................... (92,982,728) (172,255,326)
Class B ........................................................................... (1,003,689) (3,477,494)
Class C ........................................................................... (13,077,925) (40,926,857)
Class R ........................................................................... (2,751,569) (4,909,917)
Net realized gains:
Class Z ........................................................................... (127,950,427) (98,813,037)
Class A ........................................................................... (222,997,703) (188,175,584)
Class B ........................................................................... (6,243,078) (6,040,635)
Class C ........................................................................... (75,713,594) (65,710,419)
Class R ........................................................................... (7,772,855) (5,833,119)
--------------- ---------------
Total distributions to shareholders ..................................................... (616,365,380) (689,667,554)
--------------- ---------------
Capital share transactions: (Note 2)
Class Z ........................................................................... 228,990,518 546,678,826
Class A ........................................................................... (333,643,137) 2,422,442,924
Class B ........................................................................... (39,919,592) (16,203,793)
Class C ........................................................................... (190,280,863) 697,882,683
Class R ........................................................................... 19,620,226 88,798,021
--------------- ---------------
Total capital share transactions ........................................................ (315,232,848) 3,739,598,661
--------------- ---------------
Redemption fees ......................................................................... 55,764 56,157
--------------- ---------------
Net increase (decrease) in net assets .......................................... (5,523,622,692) 4,516,211,544
Net assets:
Beginning of year ....................................................................... 17,260,685,439 12,744,473,895
--------------- ---------------
End of year ............................................................................. $11,737,062,747 $17,260,685,439
--------------- ---------------
Distributions in excess of net investment income included in net assets:
End of year ............................................................................. $ (7,772,983) $ (10,579,632)
=============== ===============
The accompanying notes are an integral part of these financial statements.
36 | Annual Report
Mutual Discovery Fund
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Franklin Mutual Series Funds (Trust) is registered under the Investment Company
Act of 1940, as amended, (1940 Act) as an open-end investment company,
consisting of six separate funds. The Mutual Discovery Fund (Fund) is included
in this report. The financial statements of the remaining funds in the Trust are
presented separately. The Fund offers five classes of shares: Class Z, Class A,
Class B, Class C, and Class R. 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. Investments in open-end mutual funds are valued at the closing net asset
value.
Corporate debt securities and government securities generally trade in the
over-the-counter market rather than on a securities exchange. The Trust 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 Trust'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 Trust 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
Annual Report | 37
Mutual Discovery Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
A. SECURITY VALUATION (CONTINUED)
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. At December 31, 2008,
a portion of the securities held by the Fund were fair valued. 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. SECURITIES PURCHASED ON A DELAYED DELIVERY BASIS
The Fund may purchase securities on a delayed delivery basis, with payment and
delivery scheduled for a future date. These transactions are subject to market
fluctuations and are subject to the risk that the value at delivery may be more
or less than the trade date purchase price. Although the Fund will generally
purchase these securities with the intention of holding the securities, it may
sell the securities before the settlement date. Sufficient assets have been
segregated for these securities.
38 | Annual Report
Mutual Discovery Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
D. 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 Fund may also enter into forward exchange contracts to hedge against
fluctuations in foreign exchange rates. These contracts are valued daily by the
Fund and the unrealized appreciation or depreciation on the contracts, as
measured by the difference between the contractual forward foreign exchange
rates and the forward rates at the reporting date, are included in the Statement
of Assets and Liabilities. 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.
E. SYNTHETIC EQUITY SWAPS
The Fund may engage in synthetic equity swaps. Synthetic equity swaps are
contracts entered into between a broker and the Fund under which the parties
agree to make payments to each other so as to replicate the economic
consequences that would apply had a purchase or short sale of the underlying
security taken place. Upon entering into synthetic equity swaps, the Fund is
required to pledge to the broker an amount of cash and/or other assets equal to
a certain percentage of the contract amount (margin account). Periodically,
payments are made to recognize changes in value of the contract resulting from
interest on the notional value of the contract, market value changes in the
underlying security, and/or dividends paid by the issuer of the underlying
security. The Fund recognizes a realized gain or loss when cash is received
from, or paid to, the broker. Synthetic equity swaps are valued daily by the
Fund and the unrealized appreciation or depreciation on the contracts (as
measured by the difference between the contract amount plus or minus cash
received or paid and the market value of the underlying securities) are recorded
in the Statement of Operations. The margin account and any net unrealized
appreciation or depreciation on open synthetic equity swaps are included in the
Statement of Assets and Liabilities. The risks of entering into synthetic equity
swaps include unfavorable price movements in the underlying securities or the
inability of the counterparties to fulfill their obligations under the contract.
Annual Report | 39
Mutual Discovery Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
F. OPTIONS
The Fund may purchase or write options. Options are contracts entitling the
holder to purchase or sell securities or other financial instruments at a
specified price, or, in the case of index options, to receive or pay the
difference between the index value and the strike price of the index option.
Options purchased are recorded as investments; options written (sold) are
recorded as liabilities. Upon closing of an option which results in a cash
settlement, the difference between the premium (original option value) and the
settlement proceeds is realized as a gain or loss. When securities are acquired
or delivered upon exercise of an option, the acquisition cost or sale proceeds
are adjusted by the amount of the premium. When an option expires, the premium
is realized as a gain for options written or as a loss for options purchased.
The risks include the possibility there may be an illiquid options market or the
inability of the counterparties to fulfill their obligations under the
contract. Writing options involves, to varying degrees, elements of market risk
in excess of the amount recognized in the Statement of Assets and Liabilities.
G. SECURITIES SOLD SHORT
The Fund is engaged in selling securities short, which obligates the Fund to
replace a borrowed security with the same security at current market value. The
Fund incurs a loss if the price of the security increases between the date of
the short sale and the date on which the Fund replaces the borrowed security.
The Fund realizes a gain if the price of the security declines between those
dates. Gains are limited to the price at which the Fund sold the security short,
while losses are potentially unlimited in size.
The Fund is required to establish a margin account with the broker lending the
security sold short. While the short sale is outstanding, the broker retains the
proceeds of the short sale and the Fund must maintain a deposit with broker
consisting of cash and securities having a value equal to a specified percentage
of the value of the securities sold short. The Fund is obligated to pay the
counterparty any dividends or interest due on securities sold short. Such
dividends and interest are recorded as an expense to the Fund.
H. INVESTMENTS IN SPECIAL PURPOSE ENTITIES
At December 31, 2008, the Fund had contributed an additional $41,466,188 as a
subordinated note holder of certain special purpose entities ("SPEs"). Such
contributions, while made at the discretion of the Fund, represent additional
capital contributions to the SPE in support of its underlying investments and
are subject first to the claims of the senior note holders of the SPE. These
contributions are recorded as an addition to the Fund's cost basis in the SPE
and are subject to the risk of loss in the event of continued unfavorable market
conditions related to the SPE's underlying investments.
40 | Annual Report
Mutual Discovery Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
I. SECURITIES LENDING
The Fund participates in an agency based security lending program. The Fund
receives cash collateral against the loaned securities in an amount equal to at
least 102% of the market value of the loaned securities. Collateral is
maintained over the life of the loan in an amount not less than 100% of the
market value of loaned securities, as determined at the close of Fund business
each day; any additional collateral required is delivered to the Fund on the
next business day. The collateral is invested in a non-registered money market
fund managed by the Fund's custodian on the Fund's behalf. The Fund receives
income from the investment of cash collateral, in addition to lending fees and
rebates paid by the borrower. The Fund bears the market risk with respect to the
collateral investment, securities loaned, and the risk that the agent may
default on its obligations to the Fund. The securities lending agent has agreed
to idemnify the Fund in the event of default by a third party borrower.
J. 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 December 31, 2008, 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.
K. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS
Security transactions are accounted for on trade date. Realized gains and losses
on security transactions are determined on a specific identification basis.
Interest income and estimated expenses are accrued daily. Amortization of
premium and accretion of discount on debt securities are included in interest
income. Dividend income and dividends declared on securities sold short are
recorded on the ex-dividend date except 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.
Annual Report | 41
Mutual Discovery Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
K. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS
(CONTINUED)
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.
L. 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.
M. 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.
N. GUARANTEES AND INDEMNIFICATIONS
Under the Trust's organizational documents, its officers and trustees are
indemnified by the Trust against certain liabilities arising out of the
performance of their duties to the Trust. Additionally, in the normal course of
business, the Trust, on behalf of the Fund, enters into contracts with service
providers that contain general indemnification clauses. The Trust's maximum
exposure under these arrangements is unknown as this would involve future claims
that may be made against the Trust that have not yet occurred. Currently, the
Trust expects the risk of loss to be remote.
42 | Annual Report
Mutual Discovery Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SHARES OF BENEFICIAL INTEREST
At December 31, 2008, there were an unlimited number of shares authorized
(without par value). Transactions in the Fund's shares were as follows:
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------
2008 2007
----------------------------- -----------------------------
SHARES AMOUNT SHARES AMOUNT
----------- --------------- ----------- ---------------
CLASS Z SHARES:
Shares sold .................... 28,477,645 $ 775,233,356 24,056,002 $ 798,541,198
Shares issued in reinvestment of
distributions ............... 7,473,281 171,960,747 5,514,378 177,662,386
Shares redeemed ................ (26,564,255) (718,203,585) (12,948,159) (429,524,758)
----------- --------------- ----------- ---------------
Net increase (decrease) ........ 9,386,671 $ 228,990,518 16,622,221 $ 546,678,826
=========== =============== =========== ===============
CLASS A SHARES:
Shares sold .................... 62,541,929 $ 1,746,894,696 99,655,862 $ 3,253,322,579
Shares issued in reinvestment of
distributions ............... 12,976,267 296,273,641 10,564,327 336,532,210
Shares redeemed ................ (88,608,493) (2,376,811,474) (35,803,944) (1,167,411,865)
----------- --------------- ----------- ---------------
Net increase (decrease) ........ (13,090,297) $ (333,643,137) 74,416,245 $ 2,422,442,924
=========== =============== =========== ===============
CLASS B SHARES:
Shares sold .................... 729,461 $ 19,560,586 764,950 $ 24,471,455
Shares issued in reinvestment of
distributions ............... 290,356 6,523,655 272,720 8,514,149
Shares redeemed ................ (2,480,999) (66,003,833) (1,535,785) (49,189,397)
----------- --------------- ----------- ---------------
Net increase (decrease) ........ (1,461,182) $ (39,919,592) (498,115) $ (16,203,793)
=========== =============== =========== ===============
CLASS C SHARES:
Shares sold .................... 16,071,463 $ 441,711,886 27,970,919 $ 903,746,320
Shares issued in reinvestment of
distributions ............... 3,412,597 77,595,846 2,910,663 91,972,642
Shares redeemed ................ (26,776,661) (709,588,595) (9,203,919) (297,836,279)
----------- --------------- ----------- ---------------
Net increase (decrease) ........ (7,292,601) $ (190,280,863) 21,677,663 $ 697,882,683
=========== =============== =========== ===============
CLASS R SHARES:
Shares sold .................... 2,738,385 $ 76,292,952 3,907,963 $ 126,322,542
Shares issued in reinvestment of
distributions ............... 454,146 10,280,244 333,189 10,535,932
Shares redeemed ................ (2,475,951) (66,952,970) (1,480,501) (48,060,453)
----------- --------------- ----------- ---------------
Net increase (decrease) ........ 716,580 $ 19,620,226 2,760,651 $ 88,798,021
=========== =============== =========== ===============
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
- ---------- ----------------------
Franklin Mutual Advisers, LLC (Franklin Mutual) Investment manager
Franklin Templeton Investment Management Limited (FTIML) 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
Annual Report | 43
Mutual Discovery Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. TRANSACTIONS WITH AFFILIATES (CONTINUED)
A. MANAGEMENT FEES
The Fund pays an investment management fee to Franklin Mutual based on the
average daily net assets of the Fund as follows:
ANNUALIZED FEE RATE NET ASSETS
- ------------------- -------------------------------------------------
0.800% Up to and including $4 billion
0.770% Over $4 billion, up to and including $7 billion
0.750% Over $7 billion, up to and including $10 billion
0.730% Over $10 billion, up to and including $13 billion
0.710% Over $13 billion, up to and including $16 billion
0.690% In excess of $16 billion
Under a subadvisory agreement, FTIML, an affiliate of Franklin Mutual, provides
subadvisory services to the Fund and receives from Franklin Mutual fees based on
the average daily net assets of the Fund.
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 Fund's Board of Trustees has adopted distribution plans for each share
class, with the exception of Class Z 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 ............ 0.35%
Class B ............ 1.00%
Class C ............ 1.00%
Class R ............ 0.50%
44 | Annual Report
Mutual Discovery Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. TRANSACTIONS WITH AFFILIATES (CONTINUED)
C. DISTRIBUTION FEES (CONTINUED)
Effective February 1, 2009, the Board of Trustees has set the current rate at
0.30% per year for Class A shares until further notice and approval by the
Board.
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 year:
Sales charges retained net of commissions paid to unaffiliated broker/dealers ... $3,684,806
Contingent deferred sales charges retained ...................................... $ 730,431
E. TRANSFER AGENT FEES
For the year ended December 31, 2008, the Fund paid transfer agent fees of
$20,268,154, of which $10,150,990 was retained by Investor Services.
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 year ended December 31, 2008, the
custodian fees were reduced as noted in the Statement of Operations.
5. INDEPENDENT TRUSTEES' RETIREMENT PLAN
On January 1, 1993, the Trust adopted an Independent Trustees' Retirement Plan
("Plan"). The Plan is an unfunded defined benefit plan that provides benefit
payments to Trustees whose length of service and retirement age meets the
eligibility requirements of the Plan. Benefits under the plan are based on years
of service and fees paid to each trustee at the time of retirement. Effective in
December 1996 the Plan was closed to new participants.
During the year ended December 31, 2008, the Fund's projected benefit obligation
and benefit payments under the plan were as follows:
(a)Projected benefit obligation at December 31, 2008 ... $450,444
(b)Increase in projected benefit obligation ............ $ 41,135
Benefit payments made to retired trustees ........... $ 7,096
(a) The projected benefit obligation is included in accrued expenses and other
liabilities in the Statement of Assets and Liabilities.
(b) The increase in projected benefit obligation is indicated in trustees' fees
and expenses in the Statement of Operations.
Annual Report | 45
Mutual Discovery Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. INCOME TAXES
For tax purposes, realized capital losses and realized currency losses occurring
subsequent to October 31, may be deferred and treated as occurring on the first
day of the following fiscal year. At December 31, 2008, the Fund deferred
realized capital losses and realized currency losses of $114,222,949 and
$6,353,595, respectively.
The tax character of distributions paid during the years ended December 31, 2008
and 2007, was as follows:
2008 2007
------------ ------------
Distributions paid from:
Ordinary income ............................... $565,444,514 $325,094,760
Long term capital gain ........................ 50,920,866 364,572,794
------------ ------------
$616,365,380 $689,667,554
============ ============
At December 31, 2008, the cost of investments, net unrealized appreciation
(depreciation), and undistributed ordinary income for income tax purposes were
as follows:
Cost of investments ........................................ $ 12,330,380,576
================
Unrealized appreciation .................................... $ 1,031,188,353
Unrealized depreciation .................................... (1,765,654,989)
----------------
Net unrealized appreciation (depreciation) ................. $ (734,466,636)
================
Distributable earnings - undistributed ordinary income ..... $ 7,516,962
================
Net investment income differs for financial statement and tax purposes primarily
due to differing treatments of defaulted securities, foreign currency
transactions, passive foreign investment company shares, 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, defaulted securities,
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 capital gains.
46 | Annual Report
Mutual Discovery Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. INVESTMENT TRANSACTIONS
Purchases and sales of investments (excluding short term securities and
securities sold short) for the year ended December 31, 2008, aggregated
$2,697,255,095 and $6,103,307,739, respectively.
Transactions in options written during the year ended December 31, 2008, were as
follows:
NUMBER OF PREMIUMS
CONTRACTS RECEIVED
--------- -----------
Options outstanding at December 31, 2007 ............. -- $ --
Options written ...................................... 73,537 31,331,380
Options expired ...................................... -- --
Options exercised .................................... -- --
Options closed ....................................... -- --
------ -----------
Options outstanding at December 31, 2008 ............. 73,537 $31,331,380
====== ===========
8. FORWARD EXCHANGE CONTRACTS
At December 31, 2008, the Fund had the following forward exchange contracts
outstanding:
CONTRACT SETTLEMENT UNREALIZED UNREALIZED
AMOUNT DATE APPRECIATION DEPRECIATION
------------ ---------- ------------ -------------
CONTRACTS TO BUY
33,614,568 British Pound Sterling ............................... $ 59,125,888 1/12/09 $ -- $ (10,046,436)
36,909,210 Norwegian Krone ...................................... 5,860,000 1/12/09 -- (558,018)
52,753,459 Danish Krone ......................................... 10,087,682 1/23/09 -- (205,180)
858,250,626 Danish Krone ......................................... 146,618,481 1/23/09 14,339,577 --
347,283,790 Swiss Franc .......................................... 304,675,411 2/09/09 20,692,364 --
113,245,750 Euro ................................................. 146,350,069 2/13/09 11,726,140 --
16,562,770 Canadian Dollar ...................................... 13,188,581 2/27/09 416,003 --
43,479,397 British Pound Sterling ............................... 74,188,666 3/10/09 -- (10,776,857)
70,685,267 Singapore Dollar ..................................... 47,680,000 3/24/09 1,532,586 --
3,645,703 Euro ................................................. 4,618,535 5/13/09 460,235 --
122,144,323 Norwegian Krone ...................................... 16,945,000 5/19/09 510,671 --
CONTRACTS TO SELL
63,308,548 British Pound Sterling ............................... 109,135,036 1/12/09 16,700,444 --
17,196,912 Norwegian Krone ...................................... 2,456,000 1/12/09 -- (14,324)
1,144,747,259 Norwegian Krone ...................................... 184,586,461 1/12/09 20,144,358 --
10,000,000 Euro ................................................. 13,703,000 1/14/09 -- (270,997)
115,751,702 Danish Krone ......................................... 20,032,000 1/23/09 -- (1,676,308)
1,486,121,200 Danish Krone ......................................... 304,299,085 1/23/09 25,588,912 --
43,000,000 Euro ................................................. 63,209,050 1/26/09 3,154,010 --
10,524,394 Swiss Franc .......................................... 9,110,000 2/09/09 -- (750,232)
258,323,798 Swiss Franc .......................................... 245,671,705 2/09/09 3,649,929 --
356,000,000 Euro ................................................. 529,122,800 2/13/09 32,193,507 --
85,469,861 Canadian Dollar ...................................... 67,562,460 2/27/09 -- (2,642,097)
132,180,000 Euro ................................................. 172,185,745 2/27/09 -- (12,253,717)
331,000,000 Swiss Franc .......................................... 298,911,104 3/09/09 -- (11,307,496)
196,000,000 British Pound Sterling ............................... 339,893,910 3/10/09 54,040,944 --
Annual Report | 47
Mutual Discovery Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. FORWARD EXCHANGE CONTRACTS (CONTINUED)
CONTRACT SETTLEMENT UNREALIZED UNREALIZED
AMOUNT DATE APPRECIATION DEPRECIATION
------------ ---------- ------------ -------------
CONTRACTS TO SELL (CONTINUED)
158,274,623 Euro ................................................. $209,264,175 3/13/09 $ -- $ (11,513,401)
7,377,048 Singapore Dollar ..................................... 4,920,000 3/24/09 -- (216,058)
124,430,431 Singapore Dollar ..................................... 88,688,832 3/24/09 2,057,720 --
186,870,462,500 South Korean Won ..................................... 138,055,000 4/06/09 -- (10,419,863)
106,841,487,500 South Korean Won ..................................... 89,525,000 4/06/09 4,635,847 --
10,092,126,269 Japanese Yen ......................................... 114,944,491 4/20/09 3,431,946 --
160,486,143 Euro ................................................. 208,746,700 4/30/09 -- (14,883,629)
96,325,000 British Pound Sterling ............................... 149,814,273 5/12/09 9,356,519 --
113,353,035 Euro ................................................. 142,031,353 5/13/09 -- (15,878,949)
11,642,842 Euro ................................................. 16,365,994 5/13/09 146,537 --
109,000,000 Euro ................................................. 141,939,800 5/29/09 -- (9,856,527)
27,825,253 New Zealand Dollar ................................... 14,830,860 9/10/09 -- (1,066,730)
140,507,833 British Pound Sterling ............................... 208,388,511 9/14/09 3,493,220 --
Unrealized appreciation (depreciation) on offsetting forward exchange
contracts ........................................................ 8,568,951 (2,183,549)
------------ -------------
Unrealized appreciation (depreciation) on forward exchange
contracts ........................................................ 236,840,420 (116,520,368)
------------ -------------
NET UNREALIZED APPRECIATION ON FORWARD EXCHANGE CONTRACTS ........ $120,320,052
============
9. CREDIT RISK AND DEFAULTED SECURITIES
The Fund may purchase the pre-default or defaulted debt of distressed companies.
Distressed companies are financially troubled and are about to be/or are already
involved in financial restructuring or bankruptcy. The Fund does not accrue
income on these securities, if it becomes probable that the income will not be
collected. Risks associated with purchasing these securities include the
possibility that the bankruptcy or other restructuring process takes longer than
expected, or that distributions in restructuring are less than anticipated,
either or both of which may result in unfavorable consequences to the Fund. At
December 31, 2008, the aggregate value of these securities was $11,777,053,
representing 0.10% of the Fund's net assets. For information as to specific
securities, see the accompanying Statement of Investments.
10. RESTRICTED SECURITIES
The Fund may invest in securities that are restricted under the Securities Act
of 1933 (1933 Act) or which are subject to legal, contractual, or other agreed
upon restrictions on resale. Restricted securities are often purchased in
private placement transactions, and cannot be sold without prior registration
unless the sale is pursuant to an exemption under the 1933 Act. Disposal of
these securities may require greater effort and expense, and prompt sale at an
acceptable price may be difficult. The Fund may have registration rights for
restricted securities. The issuer generally incurs all registration costs.
48 | Annual Report
Mutual Discovery Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. RESTRICTED SECURITIES (CONTINUED)
At December 31, 2008, the Fund held investments in restricted securities,
excluding 144A securities deemed to be liquid, valued in accordance with
procedures approved by the Trust's Board of Trustees as reflecting fair value,
as follows:
PRINCIPAL
AMOUNT/
SHARES/
WARRANTS/ ACQUISITION
CONTRACTS ISSUER DATES COST VALUE
- ---------- ---------------------------------------------- ------------------- ----------- ------------
366,651 AboveNet Inc. ............................ 10/02/01 - 8/08/08 $19,186,841 $ 18,332,550
464 AboveNet Inc., stock grant, grant price
$20.95, expiration date 9/09/13 ....... 4/17/06 - 9/08/06 -- 1,044
14,911 AboveNet Inc., wts., 9/08/10 ............. 10/02/01 - 9/07/07 1,843,189 59,644
9,005,073 Cerberus CG Investor I LLC ............... 7/26/07 - 6/17/08 9,005,073 1,801,015
7,903,600 Cerberus CG Investor I LLC, 12.00%,
7/31/14 ............................... 7/26/07 7,903,600 1,580,720
9,005,073 Cerberus CG Investor II LLC .............. 7/26/07 - 6/17/08 9,005,073 1,801,015
7,903,600 Cerberus CG Investor II LLC, 12.00%,
7/31/14 ............................... 7/26/07 7,903,600 1,580,720
4,502,537 Cerberus CG Investor III LLC ............. 7/26/07 - 6/17/08 4,502,537 900,507
3,951,800 Cerberus CG Investor III LLC, 12.00%,
7/31/14 ............................... 7/26/07 3,951,800 790,360
29,877,000 Cerberus FIM Investors Holdco LLC ........ 11/20/06 29,877,000 6,327,882
89,613,199 Cerberus FIM Investors Holdco LLC,
12.00%, 11/22/13 ...................... 11/20/06 89,613,199 18,979,874
89,831 (a) Dana Holding Corp., 4.00%, cvt. pfd., B .. 12/27/07 8,983,100 808,479
359,884 (b) DecisionOne Corp. ........................ 9/28/99 - 7/18/00 273,004 --
463,234 (b) DecisionOne Corp., 12.00%, 4/15/10 ....... 10/29/99 - 10/16/08 667,881 463,234
197,603 (b) DecisionOne Corp., wts., 6/08/17 ......... 7/09/07 -- --
29,212 FE Capital Holdings Ltd. ................. 8/29/03 - 3/10/08 3,397,430 --
402,771 IACNA Investor LLC ....................... 7/24/08 412,479 4,028
4,551,501 Imagine Group Holdings Ltd. .............. 8/31/04 46,614,197 37,276,793
3,819,425 International Automotive Components
Group Brazil LLC ...................... 4/13/06 - 12/26/08 2,562,157 3,038,812
650,533 International Automotive Components
Group Japan LLC ....................... 9/26/06 - 3/27/07 5,647,603 703,056
13,618,870 International Automotive Components
Group LLC ............................. 1/12/06 - 10/16/06 13,622,397 2,316,570
3,472,200 International Automotive Components
Group NA LLC, 9.00%, 4/01/17 .......... 3/30/07 3,524,283 1,673,880
11,533,276 International Automotive Components
Group NA LLC, A ....................... 3/30/07 - 10/10/07 11,416,643 1,877,617
1,144,480 Kindred Healthcare Inc. .................. 5/20/99 - 7/08/08 10,783,439 14,156,073
5 (c) Motor Coach Industries International
Inc., wts., 5/27/09 ................... 3/30/07 -- --
135,864 NCB Warrant Holdings Ltd., A ............. 12/16/05 - 3/10/08 1,430,514 --
47,160 Olympus Re Holdings Ltd. ................. 12/19/01 4,560,452 110,713
Annual Report | 49
Mutual Discovery Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. RESTRICTED SECURITIES (CONTINUED)
PRINCIPAL
AMOUNT/
SHARES/
WARRANTS/ ACQUISITION
CONTRACTS ISSUER DATES COST VALUE
- ---------- ---------------------------------------------- ------------------- ----------- ------------
48,060,014 Pontus I LLC, junior note, 144A, FRN,
5.689%, 7/24/09 ....................... 1/22/08 - 2/25/08 $88,405,269 $ 54,231,090
7,603,287 Pontus II Trust, junior profit-
participating note, 144A, FRN,
7.516%, 6/25/09 ....................... 2/29/08 8,724,219 1,773,998
86,280 PTV Inc., 10.00%, pfd., A ................ 12/07/01 - 3/06/02 120,792 77,652
------------
TOTAL RESTRICTED SECURITIES (1.45% of Net. Assets) ........................... $170,667,326
============
(a) The Fund also invests in unrestricted securities of the issuer, valued at
$791,402 as of December 31, 2008.
(b) The Fund also invests in unrestricted securities of the issuer, valued at
$82,993 as of December 31, 2008.
(c) The Fund also invests in unrestricted securities of the issuer, valued at
$9,419,947 as of December 31, 2008.
11. UNFUNDED LOAN COMMITMENTS
The Fund may enter into certain credit agreements, all or a portion of which may
be unfunded. The Fund is obligated to fund these loan commitments at the
borrowers' discretion. Funded portions of credit agreements are presented on the
Statement of Investments.
At December 31, 2008, unfunded commitments were as follows:
UNFUNDED
COMMITMENT
----------
BORROWER
Motor Coach Industries International Inc., First Lien
DIP Revolver, FRN, 7.75%, 9/19/09 .................... $1,250,370
==========
Unfunded loan commitments and funded portions of credit agreements are marked to
market daily and any unrealized appreciation or depreciation is included in the
Statement of Assets and Liabilities and Statement of Operations.
12. UNFUNDED CAPITAL COMMITMENTS
At December 31, 2008, the Fund had aggregate unfunded capital commitments to
investments of $32,344,692.
50 | Annual Report
Mutual Discovery Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
13. 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 year ended December
31, 2008, were as shown below.
NUMBER OF NUMBER OF
SHARES/ SHARES/
PRINCIPAL PRINCIPAL
AMOUNT AMOUNT
HELD AT HELD AT REALIZED
BEGINNING GROSS GROSS END OF VALUE AT INVESTMENT CAPITAL
NAME OF ISSUER OF YEAR ADDITIONS REDUCTIONS YEAR END OF YEAR INCOME GAIN (LOSS)
- -------------- ----------- ---------- ---------- ----------- ------------ ---------- ------------
CONTROLLED AFFILIATES(a)
Hancock Discovery LLC ............... 8,758,216 -- 8,758,216 -- $ -- $ -- $(10,726,352)
------------ ---------- ------------
NON-CONTROLLED AFFILIATES
Aker Yards ASA ...................... 5,752,030 -- 5,752,030 -- $ -- $ -- $(18,932,573)
Augsberg Re AG ...................... 66,860 -- 66,860 -- -- -- (66,860)
Augsberg Re AG, zero cpn.,
8/31/08 .......................... 768,890 -- 768,890 -- -- -- (583,420)
CSM NV .............................. 4,036,926 -- -- 4,036,926 64,915,588 4,735,067 --
Dockwise Ltd. ....................... 12,379,100 -- -- 12,379,100 7,030,697 -- --
Esmark Inc. ......................... 3,850,425 -- 3,850,425 -- -- -- 2,803,193
Farmer Brothers Co. ................. 904,637 -- -- 904,637 22,561,647 416,133 --
FE Capital Holdings Ltd. ............ 12,017 17,195 -- 29,212 -- -- --
IACNA Investor LLC .................. -- 402,771 -- 402,771 4,028 -- --
Imagine Group Holdings Ltd. ......... 4,551,501 -- -- 4,551,501 37,276,793 -- --
International Automotive
Components Group Brazil LLC ...... 3,204,016 615,409 -- 3,819,425 3,038,812 -- --
International Automotive
Components Group Japan LLC ....... 650,533 -- -- 650,533 703,056 -- --
Kloeckner & Co. SE .................. 2,796,264 -- 284,660 2,511,604 43,864,580 2,757,992 (11,396,411)
Marine Harvest ...................... 164,857,626 13,851,655 -- 178,709,281 26,980,416 -- --
------------ ---------- ------------
TOTAL NON-CONTROLLED AFFILIATES .................................................... $206,375,617 $7,909,192 $(28,176,071)
------------ ---------- ------------
TOTAL AFFILIATED SECURITIES
(1.76% of Net Assets) ....................................................... $206,375,617 $7,909,192 $(38,902,423)
============ ========== ============
(a) Issuer in which the Fund owns 25% or more of the outstanding voting
securities.
14. OTHER CONSIDERATIONS
Officers, directors or employees of the Fund's Investment Manager, may serve
from time to time as members of bondholders' steering committees, official
creditors' committees, or boards of directors of companies in which the Fund
invests. Such participation may result in the possession by the Investment
Manager of material non-public information which, pursuant to the Fund's
policies and the requirements of applicable securities laws, could prevent the
Fund from trading in the securities of such companies for limited or extended
periods of time.
Franklin Mutual serves as investment manager to certain special purpose entities
that issue securities held by the Fund. Franklin Mutual is not compensated for
such services and does not invest in or exercise control over such entities. As
investment manager, Franklin Mutual is primarily responsible for recommending
investments in unaffiliated issuers to be held by the special purpose entities.
Securities issued by these special purpose entities are restricted under the
Securities Act of 1933 and are deemed to be illiquid.
Annual Report | 51
Mutual Discovery Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
15. REORGANIZATION TO A DELAWARE STATUTORY TRUST
On April 11, 2007, the Board and shareholders approved an Agreement and Plan of
Reorganization whereby the investment company would be reorganized and its
domicile changed from a Maryland corporation to a Delaware statutory trust. In
connection with these changes, the Trust's name was also changed to Franklin
Mutual Series Funds, formerly known as the Franklin Mutual Series Funds, Inc.
The reorganization became effective on May 1, 2008.
16. FAIR VALUE MEASUREMENTS
The Fund adopted Financial Accounting Standards Board (FASB) Statement No. 157,
"Fair Value Measurement" (SFAS 157), on January 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 December 31, 2008, in
valuing the Fund's assets and liabilities carried at fair value:
LEVEL 1 LEVEL 2 LEVEL 3 TOTAL
-------------- -------------- ------------ ---------------
ASSETS:
Investments in Securities ....... $5,746,637,754 $5,653,953,398 $195,322,788 $11,595,913,940
Other Financial Instruments(a) .. -- 236,840,420 -- 236,840,420
LIABILITIES:
Options Written ................. -- 31,657,917 -- 31,657,917
Other Financial Instruments(a) .. -- 116,527,138 -- 116,527,138
(a) Other financial instruments includes net unrealized appreciation
(depreciation) on forward exchange contracts and unfunded loan commitments.
52 | Annual Report
Mutual Discovery Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
16. FAIR VALUE MEASUREMENTS (CONTINUED)
At December 31, 2008, the reconciliation of assets in which significant
unobservable inputs (Level 3) were used in determining the Fund's fair value, is
as follows:
INVESTMENTS
IN SECURITIES
-------------
Beginning Balance - January 1, 2008 ....................... $ 411,076,030
Net realized gain (loss) ............................... 2,332,398
Net change in unrealized appreciation (depreciation) ... (247,382,882)
Net purchases (sales) .................................. 31,965,692
Transfers in and/or out of Level 3 ..................... (2,668,450)
-------------
Ending Balance ............................................ $ 195,322,788
=============
Net change in unrealized appreciation (depreciation)
attributable to assets still held at end of year ....... $(268,103,412)
=============
17. 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 Fund is currently evaluating the impact, if any, of
applying the various provisions of SFAS 161.
18. SUBSEQUENT EVENTS
On January 23, 2009, the Fund entered into, along with certain other funds
managed by Franklin Templeton Investments (individually, "Borrower";
collectively "Borrowers"), a $725 million senior unsecured syndicated global
line of credit ("Global Credit Facility") to provide a source of funds to the
Borrowers for temporary and emergency purposes and to meet future unanticipated
or unusually large redemption requests.
Under the terms of the Global Credit Facility, each Borrower has agreed to pay
its proportionate share of fees and expenses incurred in connection with the
implementation and maintenance of the Global Credit Facility.
ABBREVIATIONS
CURRENCY
CAD - Canadian Dollar
EUR - Euro
GBP - British Pound Sterling
SELECTED PORTFOLIO
ADR - American Depository Receipt
DIP - Debtor-In-Possession
FHLB - Federal Home Loan Bank
FRN - Floating Rate Note
PIK - Payment-In-Kind
Annual Report | 53
Mutual Discovery Fund
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO THE BOARD OF TRUSTEES OF FRANKLIN MUTUAL SERIES FUNDS AND SHAREHOLDERS OF THE
MUTUAL DISCOVERY FUND:
We have audited the accompanying statement of assets and liabilities of the
Mutual Discovery Fund (one of the Funds constituting the Franklin Mutual Series
Funds) (the "Fund"), including the statement of investments, as of December 31,
2008, and the related statement of operations for the year then ended, the
statements of changes in net assets for each of the two years in the period then
ended, and the financial highlights for each of the five years in the period
then ended. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. We were
not engaged to perform an audit of the Fund's internal control over financial
reporting. Our audits included consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Fund's internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements and financial highlights, assessing the accounting principles used
and significant estimates made by management, and evaluating the overall
financial statement presentation. Our procedures included confirmation of
securities owned as of December 31, 2008, by correspondence with the custodian
and brokers or by other appropriate auditing procedures where replies from the
brokers were not received. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
Mutual Discovery Fund of the Franklin Mutual Series Funds at December 31, 2008,
the results of its operations for the year then ended, the changes in its net
assets for each of the two years in the period then ended, and the financial
highlights for each of the five years in the period then ended, in conformity
with U.S. generally accepted accounting principles.
(Ernst & Young LLP)
Boston, Massachusetts
February 17, 2009
54 | Annual Report
Mutual Discovery Fund
TAX DESIGNATION (UNAUDITED)
Under Section 852(b)(3)(C) of the Internal Revenue Code (Code), the Fund
designates the maximum amount allowable but no less than $50,937,660 as a long
term capital gain dividend for the fiscal year ended December 31, 2008.
Under Section 871(k)(2)(C) of the Code, the Fund designates the maximum amount
allowable but no less than $450,705,863 as a short term capital gain dividend
for purposes of the tax imposed under Section 871(a)(1)(A) of the Code for the
fiscal year ended December 31, 2008.
Under Section 854(b)(2) of the Code, the Fund designates 7.21% of the ordinary
income dividends as income qualifying for the dividends received deduction for
the fiscal year ended December 31, 2008.
Under Section 854(b)(2) of the Code, the Fund designates the maximum amount
allowable but no less than $260,971,067 as qualified dividends for purposes of
the maximum rate under Section 1(h)(11) of the Code for the fiscal year ended
December 31, 2008. Distributions, including qualified dividend income, paid
during calendar year 2008 will be reported to shareholders on Form 1099-DIV in
January 2009. Shareholders are advised to check with their tax advisors for
information on the treatment of these amounts on their individual income tax
returns.
Under Section 871(k)(1)(C) of the Code, the Fund designates the maximum amount
allowable but no less than $86,560,910 as interest related dividends for
purposes of the tax imposed under Section 871(a)(1)(A) of the Code for the
fiscal year ended December 31, 2008.
Annual Report | 55
Mutual Discovery Fund
BOARD MEMBERS AND OFFICERS
The name, year of birth and address of the officers and board members, as well
as their affiliations, positions held with the Fund, principal occupations
during the past five years and number of portfolios overseen in the Franklin
Templeton Investments fund complex are shown below. Generally, each board member
serves until that person's successor is elected and qualified.
INDEPENDENT BOARD MEMBERS
NUMBER OF PORTFOLIOS IN
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- --------------------------------- --------------- ---------------- ----------------------- ---------------------------------
EDWARD I. ALTMAN, PH.D. (1941) Trustee Since 1987 7 None
c/o Franklin Mutual Advisers, LLC
101 John F. Kennedy Parkway
Short Hills, NJ 07078-2789
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Max L. Heine Professor of Finance and Director of The Credit and Debt Markets Research Program, Salomon Center, Stern School of
Business, New York University; editor and author of numerous financial publications; financial consultant; a director to numerous
financial publishing organizations; and FORMERLY, Vice Director, Salomon Center, Stern School of Business, New York University.
ANN TORRE BATES (1958) Trustee Since 1994 30 SLM Corporation (Sallie Mae) and
c/o Franklin Mutual Advisers, LLC Allied Capital Corporation
101 John F. Kennedy Parkway (financial services).
Short Hills, NJ 07078-2789
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Independent strategic and financial consultant; and FORMERLY, Executive Vice President and Chief Financial Officer, NHP Incorporated
(manager of multifamily housing) (1995-1997); and Vice President and Treasurer, US Airways, Inc. (until 1995).
BURTON J. GREENWALD (1929) Trustee Since 2002 14 Franklin Templeton Emerging
c/o Franklin Mutual Advisers, LLC Markets Debt Opportunities Fund
101 John F. Kennedy Parkway PLC and Fiduciary International
Short Hills, NJ 07078-2789 Ireland Limited.
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Managing Director, B.J. Greenwald Associates (management consultants to the financial services industry); and FORMERLY, Chairman,
Fiduciary Trust International Funds; Executive Vice President, L.F Rothschild Fund Management, Inc.; President and Director, Merit
Mutual Funds; President, Underwriting Division and Director, National Securities & Research Corporation; Governor, Investment
Company Institute and Chairman, ICI Public Information Committee.
BRUCE A. MACPHERSON (1930) Trustee Since 1974 7 None
c/o Franklin Mutual Advisers, LLC
101 John F. Kennedy Parkway
Short Hills, NJ 07078-2789
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Retired, former Chairman, A.A. MacPherson, Inc., Canton, MA (representative for electrical manufacturers).
56 | Annual Report
NUMBER OF PORTFOLIOS IN
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- --------------------------------- --------------- ---------------- ----------------------- ---------------------------------
CHARLES RUBENS II (1930) Trustee Since 1998 14 None
c/o Franklin Mutual Advisers, LLC
101 John F. Kennedy Parkway
Short Hills, NJ 07078-2789
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Private investor.
ROBERT E. WADE (1946) Trustee and Trustee 37 El Oro and Exploration Co.,
c/o Franklin Mutual Advisers, LLC Chairman since 1991 and p.l.c. (investments).
101 John F. Kennedy Parkway of the Board Chairman of the
Short Hills, NJ 07078-2789 Board since 2005
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Retired, former practicing attorney.
INTERESTED BOARD MEMBERS AND OFFICERS
NUMBER OF PORTFOLIOS IN
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- --------------------------------- --------------- ---------------- ----------------------- ---------------------------------
**GREGORY E. JOHNSON (1961) Trustee Since 2007 92 None
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director, President and Chief Executive Officer, Franklin Resources, Inc.; President, Templeton Worldwide, Inc.; Director, Templeton
Asset Management Ltd.; and officer and/or director or trustee, as the case may be, of some of the other subsidiaries of Franklin
Resources, Inc. and of 33 of the investment companies in Franklin Templeton Investments.
**PETER A. LANGERMAN (1955) Trustee, Trustee 7 None
c/o Franklin Mutual Advisers, LLC President since 2007,
101 John F. Kennedy Parkway and Chief President and
Short Hills, NJ 07078-2702 Executive Chief Executive
Officer - Officer -
Investment Investment
Management Management
since 2005
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Chairman of the Board, Chief Executive Officer and President, Franklin Mutual Advisers, LLC; officer and/or director, as the case
may be, of three of the investment companies in Franklin Templeton Investments; and FORMERLY, Director, New Jersey's Division of
Investment.
JENNIFER J. BOLT (1964) Chief Since Not Applicable Not Applicable
One Franklin Parkway Executive December 2008
San Mateo, CA 94403-1906 Officer -
Finance and
Administration
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Executive Vice President - Operations and Technology, Franklin Resources, Inc.; Director, Templeton Global Advisors Limited; officer
and/or director, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 46 of the investment
companies in Franklin Templeton Investments.
Annual Report | 57
NUMBER OF PORTFOLIOS IN
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- --------------------------------- --------------- ---------------- ----------------------- ---------------------------------
PHILIPPE BRUGERE-TRELAT (1949) Vice President Since 2005 Not Applicable Not Applicable
101 John F. Kennedy Parkway
Short Hills, NJ 07078-2789
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice President, Franklin Mutual Advisers, LLC; Portfolio Manager of Eurovest SA (French registered Investment Company, Sicav); and
officer of two of the investment companies in Franklin Templeton Investments.
JAMES M. DAVIS (1952) Chief Chief Compliance Not Applicable Not Applicable
One Franklin Parkway Compliance Officer since
San Mateo, CA 94403-1906 Officer and 2004 and Vice
Vice President President - AML
- AML Compliance
Compliance since 2006
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director, Global Compliance, Franklin Resources, Inc.; officer of some of the other subsidiaries of Franklin Resources, Inc. and of
46 of the investment companies in Franklin Templeton Investments; and FORMERLY, Director of Compliance, Franklin Resources, Inc.
(1994-2001).
MICHAEL J. EMBLER (1964) Senior Vice Since 2005 Not Applicable Not Applicable
101 John F. Kennedy Parkway President
Short Hills, NJ 07078-2789 and Chief
Investment
Officer
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Vice President and Chief Investment Officer, Franklin Mutual Advisers, LLC; and officer of two of the investment companies in
Franklin Templeton Investments.
LAURA F. FERGERSON (1962) Chief Financial Since Not Applicable Not Applicable
One Franklin Parkway Officer and February 2008
San Mateo, CA 94403-1906 Chief
Accounting
Officer
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice President, Franklin Templeton Services, LLC; officer of 46 of the investment companies in Franklin Templeton Investments; and
FORMERLY, Director and member of Audit and Valuation Committees, Runkel Funds, Inc. (2003-2004); Assistant Treasurer of most of the
investment companies in Franklin Templeton Investments (1997-2003); and Vice President, Franklin Templeton Services, LLC
(1997-2003).
JIMMY D. GAMBILL (1947) Vice President Since Not Applicable Not Applicable
500 East Broward Blvd. February 2008
Suite 2100
Fort Lauderdale, FL 33394-3091
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
President, Franklin Templeton Services, LLC; Senior Vice President, Templeton Worldwide, Inc.; and officer of some of the other
subsidiaries of Franklin Resources, Inc. and of 46 of the investment companies in Franklin Templeton Investments.
58 | Annual Report
NUMBER OF PORTFOLIOS IN
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- --------------------------------- --------------- ---------------- ----------------------- ---------------------------------
STEVEN J. GRAY (1955) Secretary Since 2005 Not Applicable Not Applicable
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Associate General Counsel, Franklin Templeton Investments; Secretary, Franklin Advisory Services, LLC, Franklin Mutual
Advisers, LLC and Franklin Templeton Distributors, Inc.; and officer of 41 of the investment companies in Franklin Templeton
Investments.
GREGORY R. SEWARD (1956) Treasurer Since 2005 Not Applicable Not Applicable
500 East Broward Blvd.
Suite 2100
Fort Lauderdale, FL 33394-3091
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice President, Franklin Templeton Services, LLC; officer of 18 of the investment companies in Franklin Templeton Investments; and
FORMERLY, Vice President, JPMorgan Chase (2000-2004) and American General Financial Group (1991-2000).
CRAIG S. TYLE (1960) Vice President Since 2005 Not Applicable Not Applicable
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
General Counsel and Executive Vice President, Franklin Resources, Inc.; officer of some of the other subsidiaries of Franklin
Resources, Inc. and of 46 of the investment companies in Franklin Templeton Investments; and FORMERLY, Partner, Shearman & Sterling,
LLP (2004-2005); and General Counsel, Investment Company Institute (ICI) (1997-2004).
* We base the number of portfolios on each separate series of the U.S.
registered investment companies within the Franklin Templeton Investments
fund complex. These portfolios have a common investment manager or
affiliated investment managers.
** Gregory E. Johnson is considered to be an interested person of the Fund
under the federal securities laws due to his position as an officer and
director of Franklin Resources, Inc., which is the parent company of the
Fund's investment manager and distributor. Peter A. Langerman is considered
to be an interested person of the Fund under the federal securities laws
due to his position as an officer of Franklin Mutual Advisers, LLC, which
is the parent company of the Fund's investment manager.
Note 1: Officer information is current as of the date of this report. It is
possible that after this date, information about officers may change.
Note 2: Gregory E. Johnson is the brother of Jennifer J. Bolt.
THE FUND'S BOARD OF DIRECTORS HAS DETERMINED THAT CERTAIN OF THE MEMBERS OF THE
AUDIT COMMITTEE, INCLUDING ANN TORRE BATES, ARE AUDIT COMMITTEE FINANCIAL
EXPERTS, AND "INDEPENDENT," UNDER THOSE PROVISIONS OF THE SARBANES-OXLEY ACT OF
2002, AND THE RULES AND FORM AMENDMENTS ADOPTED BY THE SECURITIES AND EXCHANGE
COMMISSION, RELATING TO AUDIT COMMITTEE FINANCIAL EXPERTS.
THE STATEMENT OF ADDITIONAL INFORMATION (SAI) INCLUDES ADDITIONAL INFORMATION
ABOUT THE BOARD MEMBERS AND IS AVAILABLE, WITHOUT CHARGE, UPON REQUEST.
SHAREHOLDERS MAY CALL (800) DIAL BEN/(800) 342-5236 TO REQUEST THE SAI.
Annual Report | 59
Mutual Discovery 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.
60 | Annual Report
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 annual report
(FRANKLIN TEMPLETON INVESTMENTS(R) LOGO) One Franklin Parkway
San Mateo, CA 94403-1906
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ANNUAL REPORT AND SHAREHOLDER LETTER
MUTUAL DISCOVERY FUND
INVESTMENT MANAGER
Franklin Mutual Advisers, LLC
101 John F. Kennedy Parkway
Short Hills, NJ 07078
DISTRIBUTOR
Franklin Templeton Distributors, Inc.
(800) DIAL BEN(R)
franklintempleton.com
SHAREHOLDER SERVICES
(800) 632-2301 - (Class A, B, C & R)
(800) 448-FUND - (Class Z)
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. 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.
477 A2008 02/09
(GRAPHIC)
DECEMBER 31, 2008
ANNUAL REPORT AND SHAREHOLDER LETTER
INTERNATIONAL
MUTUAL EUROPEAN FUND
WANT TO RECEIVE THIS DOCUMENT
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sign up for eDelivery at
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(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 annual report
Contents
Shareholder Letter ........................................................ 1
ANNUAL REPORT
Mutual European Fund ...................................................... 5
Performance Summary ....................................................... 11
Your Fund's Expenses ...................................................... 16
Financial Highlights and
Statement of Investments .................................................. 18
Financial Statements ...................................................... 28
Notes to Financial
Statements ................................................................ 32
Report of Independent
Registered Public
Accounting Firm ........................................................... 47
Tax Designation ........................................................... 48
Board Members and Officers ................................................ 49
Shareholder Information ................................................... 53
Shareholder Letter
Dear Mutual European Fund Shareholder:
As we write this letter, 2008 has just drawn to a close. Like many other
investors, we are not sorry to see it pass. From a purely financial perspective,
it was a painful year, bringing stock market declines ranging from 40% to 50%
across most of the developed world (with greater losses in many emerging
markets) as well as a credit crisis and climate of fear that prompted a global
recession. These events have effectively wiped out the shareholders of such
institutions as Fannie Mae, Freddie Mac, AIG, Bear Stearns and Lehman Brothers
in the U.S. and Fortis, HBOS and Kaupting in Europe, and have led to
extraordinary government intervention in the financial markets. Policy makers
have no definitive playbook for guidance, and the world of finance is being
remade before our eyes.
As stewards of our investors' capital, we have always followed an investment
approach that places a premium on limiting our portfolio's downside exposure.
This is inherent in our focus on buying companies cheaply -- when their
securities are trading at a meaningful discount to our analysis of intrinsic
value -- and selling them as they trade close to that value. We are particularly
attracted to stocks where an identifiable catalyst exists to unlock the
valuation discount. We also buy distressed securities and participate in merger
arbitrage and privately negotiated transactions when we feel we can generate
attractive risk-adjusted returns for Fund investors.
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are eligible for eDelivery.
NOT FDIC INSURED | MAY LOSE VALUE | NO BANK GUARANTEE
Not part of the annual report | 1
Although we did manage to perform better than our benchmark, not an
inconsiderable achievement in these markets, we are nevertheless dissatisfied by
the Fund's absolute loss. Several factors contributed to this, some market
related and others self-inflicted.
First, and perhaps most important, was the generally indiscriminate devaluation
of stocks across industries, geographies and market capitalizations. In short,
there were few safe havens as even companies in the less cyclical, more
defensive industries that make up the Fund's core, including consumer staples,
health care, utilities and telecommunications companies, were all down at least
18% in 2008 and in some cases significantly more.
Second, we underestimated the ferocity of the economic downturn and its impact
on the valuations of some of the more economically sensitive companies owned,
including those in the industrials and consumer discretionary sectors.
Third, entering 2008 the Fund owned shares of several large banks that we
believed had very limited exposure to the difficulties that roiled the U.S.
financial system. Subsequent events proved that the contagion had spread to
these institutions as well.
Finally, due to the repricing of corporate credit risk and paralysis in the
credit markets, the stocks of leveraged companies, i.e., companies with
substantial debt, were disproportionately punished by the markets.
In a year of few highlights, we did get some things right. The Fund's cash
balance rose from a high single digit earlier in the year to over 26% of total
net assets in the later part of 2008, reflecting our increasing caution. We
selectively used market puts at various points during the year to protect
against large downward market movements. We continued to keep a very diversified
portfolio, which helped us manage investment risk over a large number of
individual positions. We did have our share of positive stock stories as noted
in the following shareholder report. And we increased our foreign currency
hedges over the year, which mitigated the drag caused by an appreciating dollar.
2 | Not part of the annual report
Looking forward, we are focused on a number of factors. Rather than try to be
macroeconomists or market strategists, we instead focus on our discipline of
buying securities at what we believe are very attractive prices and investing
for the long term. However, one cannot ignore the macroeconomic backdrop
entering 2009, and we are proceeding with a fair degree of caution. Although the
actions of central banks across the globe may have temporarily stabilized the
financial system, we are not convinced that the worst of the economic news is
behind us. Nevertheless, given the indiscriminate nature of the market carnage,
such an environment creates opportunities -- and we are focused on four
particular areas:
- Stocks of companies in economically defensive industries, with strong
market positions, high barriers to entry, and reasonably predictable
earnings and cash flows, many of which we consider as attractively
valued today as they have been in years;
- Stocks disproportionately punished by the market, perhaps because they
were owned heavily by hedge funds or have a higher degree of leverage
but have no need to access the credit markets for a number of years;
- Stocks of market-leading global companies, sometimes in more
economically sensitive industries, that are extremely attractive for
long-term investors, including a number of commodity-oriented
companies; and
- Distressed debt, a quiet area for the past several years due to robust
economic and capital market conditions. The leveraged buyout boom from
2005 through mid-2007 is likely to result in defaults by many good
companies with bad balance sheets in the coming years. We consider
this an area of particular opportunity although it is still early.
Most of the distressed opportunities through year-end 2008 have been
in bad companies with bad balance sheets, which interest us little. In
the meantime, we have sought to take advantage of credit market
dislocation and technical pressure to add positions in a number of
senior secured corporate loans that are trading at levels we think
will generate equity-like returns with, in our view, a low risk of
principal loss.
Not part of the annual report | 3
As a final note, periods of economic and market instability historically have
created favorable opportunities for long-term, patient and disciplined
investors. We believe the basic institutions that underlie our economic and
political system have proven their ability to adapt to changing conditions and
emerge stronger from severe dislocations. We are excited about the prospects of
participating in this chapter, albeit a difficult one, of our economic history
and believe our approach should serve our shareholders well over the long term.
We certainly appreciate your support over the past year and look forward to a
more prosperous year ahead.
Sincerely,
/s/ Peter A. Langerman
- -------------------------------------
Peter A. Langerman
Chairman, President and
Chief Executive Officer
Franklin Mutual Advisers, LLC
/s/ Michael J. Embler
- -------------------------------------
Michael J. Embler
Senior Vice President and
Chief Investment Officer
Franklin Mutual Advisers, LLC
THIS LETTER REFLECTS OUR ANALYSIS AND OPINIONS AS OF DECEMBER 31, 2008. 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.
4 | Not part of the annual report
Annual Report
Mutual European Fund
YOUR FUND'S GOALS AND MAIN INVESTMENTS: Mutual European Fund seeks capital
appreciation, with income as a secondary goal, by investing at least 80% of its
net assets in securities of European companies that the manager believes are
available at market prices less than their intrinsic value. The Fund defines
European companies as issuers organized under the laws of, or whose principal
business operations are located in, or who earn at least 50% of their revenue
from, European countries, as defined in the prospectus.
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 annual report for Mutual European Fund covers the fiscal year ended
December 31, 2008.
PERFORMANCE OVERVIEW
Mutual European Fund - Class Z had -32.47% cumulative total return for the 12
months ended December 31, 2008. The Fund performed better than its new
benchmark, the MSCI Europe Index, which had a -38.91% total return in local
currency terms.(1) The Fund also performed better than its previous benchmark,
the Morgan Stanley Capital International (MSCI) All Country (AC) Europe Index,
which had a -47.30% total return (in U.S. dollars) for the same period.(2) We
changed the benchmark index because we think the new index better reflects the
Fund's portfolio as well as its long-standing policy of hedging European
currencies against the U.S. dollar. You can find the Fund's long-term
performance data in the Performance Summary beginning on page 11.
ECONOMIC AND MARKET OVERVIEW
The U.S. experienced a marked slowdown in gross domestic product (GDP) growth as
housing prices declined, consumer demand softened, and a credit
(1.) Source: MSCI, Inc. The MSCI Europe Index is a market
capitalization-weighted index designed to measure equity market performance
in the European region and includes reinvested daily net dividends.
(2.) 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 AC Europe Index is a free float-adjusted, market
capitalization-weighted index designed to measure equity market performance
in the European region and includes reinvested dividends.
The indexes are unmanaged. 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.
Annual Report | 5
GEOGRAPHIC BREAKDOWN
Based on Total Net Assets as of 12/31/08
(BAR CHART)
France 19.2%
U.K. 13.3%
Germany 12.4%
Switzerland 9.9%
Netherlands 6.2%
Denmark 3.2%
Italy 2.8%
Spain 2.7%
Sweden 2.2%
U.S. 1.6%
Norway 1.6%
Belgium 1.5%
Ireland 1.1%
Jersey Islands 0.5%
Short-Term Investments & Other Net Assets 21.8%
crisis originally related to U.S. subprime loan losses intensified and spread
globally. Although GDP growth rebounded in the second quarter of 2008, largely
due to fiscal stimulus, the domestic economy contracted in the third and fourth
quarters. Fear of recession spanned the entire period, and in the summer most
economists agreed that a recession had already begun. By then, the faltering
U.S. economy -- which is the world's largest and accounts for roughly 25% of
global GDP -- had negatively impacted growth prospects around the world.
Although signs of a global slowdown surfaced in the latter half of the reporting
period, in the first half growth remained robust in developing economies,
particularly in Asia.
The China-led demand for oil, natural gas, and industrial and agricultural
commodities propelled commodity prices and those of related equities to higher
levels. The steep rise in the price of oil, which peaked at $145 per barrel in
early July, was one of the most extreme market trends during the year. As a
result, oil was a major focus of attention due to its impact on everything from
inflation to corporate earnings to consumer spending. The price boom for
commodities in general was broadly based and included natural gas, precious
metals and most agricultural and industrial commodities, all of which added to
global inflationary pressures. In this environment, the world's monetary
authorities faced the choice of lowering short-term interest rates to stimulate
growth or raising them to fight rising inflation. Stimulus provided through
fiscal and monetary policies implemented around the globe sought to restore
financial market stability and reignite economic growth.
The U.S. Treasury and the Federal Reserve Board took unprecedented steps,
including lowering short-term rates to near 0% from 4.25%. The eurozone had made
controlling inflation its main goal and kept rates steady at 4.00% until July,
when the European Central Bank (ECB) joined many of the world's central banks
whose concerns about inflation had led them to raise rates. The potential for
global recession, however, exacerbated by the virtual freeze in the global
financial system in September and October, trumped inflationary concerns, and
the world's monetary authorities, including the ECB and the Bank of England, cut
interest rates aggressively. The U.S. dollar, which had declined earlier in the
period versus many of the world's currencies, regained ground quickly toward
period-end as a flight to the relative safety of U.S. Treasuries prevailed. The
greenback appreciated 8.6% relative to most currencies during the year under
review.3
3. Source: Federal Reserve H10 report.
6 | Annual Report
In this challenging economic time, volatility came to define global equity
markets. Virtually all local indexes ended the 12-month period with marked
losses. Despite negative economic data and an outlook for decelerating corporate
earnings and profit margins globally, many companies outside the financials
sector retained relatively strong balance sheets.
INVESTMENT STRATEGY
We follow a distinctive value investment approach, which combines investments in
what we believe are undervalued common stocks with distressed debt investing and
risk arbitrage. Our style aims to provide our shareholders with superior
risk-adjusted results over time. We employ rigorous, fundamental analysis to
find compelling situations. In our opinion, successful investing is as much
about assessing risk and containing losses as it is about achieving profits. In
choosing investments, we look at the market price of an individual company's
securities relative to our evaluation of its intrinsic value based on factors
including book value, cash flow generation, long-term earnings potential and
earnings multiples. We may invest in bankrupt or distressed companies if we
believe the market overreacted to adverse developments or failed to appreciate
positive changes.
In addition, we will generally seek to hedge the Fund's currency exposure when
we deem it advantageous for our shareholders.
MANAGER'S DISCUSSION
In 2008, all market sectors suffered double-digit declines, and we had our share
of poor-performing securities. Three investments that detracted most from Fund
performance during 2008 were German electronics and industrial engineering firm
Siemens, Belgian bank Fortis and German securities exchange platform provider
Deutsche Boerse.
The Fund's stock in Siemens, one of Germany's premier industrial groups and one
of Europe's largest companies, fell nearly 50% in local currency during 2008
largely because of investors' concerns about a deepening global recession. The
company's position as an important and widely traded constituent of the German
DAX Index made it an easy target for short sellers and investors searching for
liquidity in difficult times. At year-end, we continued to look favorably upon
Siemens' management efforts to tackle numerous inefficiencies that exist within
the group, particularly in regard to its bloated cost structure.
TOP 10 SECTORS/INDUSTRIES
Based on Equity Securities as of 12/31/08
% OF TOTAL
NET ASSETS
----------
Food Products 8.0%
Multi-Utilities 5.6%
Oil, Gas & Consumable Fuels 5.5%
Diversified Telecommunication Services 5.1%
Electric Utilities 4.9%
Diversified Financial Services 4.5%
Insurance 4.1%
Tobacco 4.0%
Pharmaceuticals 3.9%
Chemicals 3.7%
Annual Report | 7
TOP 10 HOLDINGS
12/31/08
COMPANY % OF TOTAL
SECTOR/INDUSTRY, COUNTRY NET ASSETS
- ------------------------ ----------
Nestle SA 3.1%
FOOD PRODUCTS, SWITZERLAND
GDF Suez 3.1%
MULTI-UTILITIES, FRANCE
Telefonica SA 2.6%
DIVERSIFIED TELECOMMUNICATION SERVICES,
SPAIN
E.ON AG 2.5%
ELECTRIC UTILITIES, GERMANY
British American Tobacco PLC 2.4%
TOBACCO, U.K.
Novartis AG 2.4%
PHARMACEUTICALS, SWITZERLAND
Electricite de France 2.3%
ELECTRIC UTILITIES, FRANCE
Koninklijke (Royal) KPN NV 2.3%
DIVERSIFIED TELECOMMUNICATION SERVICES,
NETHERLANDS
RWE AG 2.3%
MULTI-UTILITIES, GERMANY
Schindler Holding AG, ord. & registered 2.0%
MACHINERY, SWITZERLAND
Fortis was the Fund's biggest detractor from performance this year despite our
having sold this position prior to interventions by the governments of Benelux
(Belgium/Netherlands/Luxembourg). For the time we held it during 2008, the stock
declined 62% in local currency terms. Capital issues plagued the company since
its ill-timed acquisition of ABN AMRO's Dutch banking business amid the crash of
the U.S. and European housing markets, which only complicated matters for
Belgium's largest bank. Although capital was raised and management replaced over
the course of 2008, Fortis' inability to defend its share price led to a loss of
confidence and rapid deposit withdrawals in September. Ultimately, this forced a
government rescue of the bank, setting off a marked decline in the company's
equity value.
Deutsche Boerse, which operates the Xetra cash market, Eurex Derivatives market
and Clearstream exchange platform, detracted from performance this year as the
Fund's investment declined 54% in local currency. Shares fell because of a
combination of lower trading volumes, investor concerns about profitability due
to disintermediation and forced selling from hedge funds. Deutsche Boerse's
earnings grew roughly 28% in 2008 versus 2007 as a result of the frenetic
trading activity that took place this year, particularly within its derivatives
business. The company also cut its costs more than 7% while continuing to
optimize costs where opportunities presented themselves. Although many investors
harbored fears about Deutsche Boerse, we view this company, like most financial
exchanges, as an integral part of the global financial system. The lack of
credit risk and high level of cash generation inherent in Deutsche Boerse are
attributes that we continued to find attractive, and at year-end our analytical
models indicated the stock was trading at a significant discount to its
intrinsic value.
For the year, several holdings had successful outcomes. Among the Fund's
top-performing investments were Dow Jones EURO STOXX 50 Index put options, which
allow holders to profit if the equity market declines within a preset period of
time; shares of U.K.-based Globe Specialty Metals, among the world's largest
producers of silicon metal, foundry alloys and steelmaking alloys; Lancashire
Holdings, a U.K. insurer and reinsurer; and London-based Vodafone Group, the
world's leading mobile telecommunications provider.
8 | Annual Report
The Fund's position in EURO STOXX 50 Index puts were initially acquired as a
hedge on potential market drops, as they generally increase in value as European
stock markets decline. Index puts were inexpensive in historical terms during
2007, when we first began buying them, and remained relatively inexpensive into
the beginning of 2008. As equity markets fell throughout the remainder of 2008,
the puts grew profitable and the Fund gradually reduced its position. Their
addition to Fund performance helped offset some of the broad equity market's
negative impact on other portfolio securities. At period-end, the Fund held no
position in index options.
The Fund's investment in Globe Specialty Metals rose 42% in value during the
year. The company is a leading silicon producer and benefited as silicon prices
rose.
Lancashire Holdings shares advanced nearly 31% in local currency during the
year. Lancashire benefited from strong relative underwriting performance,
particularly during the Gulf of Mexico hurricane season. In addition, investors
were expecting the property and casualty insurance industry to experience better
pricing conditions through 2009 and into 2010, led by energy, property
catastrophe and retrocessional (reinsurance of reinsurers) lines, areas where we
believe Lancashire is well positioned.
Shares of Vodafone, which focuses on mobile and broadband services, were under
pressure for much of 2008 as investors feared the company's growth rate would be
hampered by the global economic slowdown. Another concern involved the company's
capital expenditures for next generation licenses and networks, which might
limit its scope for dividends and share buybacks. The Fund acquired Vodafone
shares during the latter part of 2008. The stock rallied in November, as new
management indicated a focus on the company's existing operations and markets
and laid out specific spending reduction opportunities should the economic
environment continue to deteriorate. During the time we held it in 2008, the
Fund's Vodafone shares rose 9% in local currency.
Finally, investors should note that we maintained our currency hedging posture
of being generally hedged to the U.S. dollar for most of our non-U.S. holdings.
Since the dollar was stronger compared with most foreign currencies during 2008,
the Fund benefited to the extent it was hedged.
Annual Report | 9
Thank you for your continued participation in Mutual European Fund. We look
forward to serving your future investment needs.
(PHOTO OF PHILIPPE BRUGERE-TRELAT)
/s/ Philippe Brugere-Trelat
- -------------------------------------
Philippe Brugere-Trelat
Portfolio Manager
(PHOTO OF KATRINA DUDLEY)
/s/ Katrina Dudley
- -------------------------------------
Katrina Dudley, CFA
Assistant Portfolio Manager
Mutual European Fund
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS
AS OF DECEMBER 31, 2008, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT
OUR MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE
DEPENDING ON FACTORS SUCH AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY
NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY.
THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET,
COUNTRY, INDUSTRY, SECURITY OR THE FUND. STATEMENTS OF FACT ARE FROM SOURCES
CONSIDERED RELIABLE, BUT THE INVESTMENT MANAGER MAKES NO REPRESENTATION OR
WARRANTY AS TO THEIR COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE
IS NO GUARANTEE OF FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR
INVESTMENT MANAGEMENT PHILOSOPHY.
PHILIPPE BRUGERE-TRELAT has been lead portfolio manager for Mutual European Fund
since 2005. He has been a member of the management team of the Mutual Series
Funds since 2004, when he rejoined Franklin Templeton Investments. Previously,
he was president and portfolio manager of Eurovest. Between 1984 and 1994, Mr.
Brugere-Trelat was employed at Heine Securities Corporation, the Fund's former
manager.
KATRINA DUDLEY has been assistant portfolio manager for Mutual European Fund
since 2007. She follows industrial companies (foreign and domestic) including
transportation, manufacturers, machinery, electrical equipment and general
industrial, as well as domestic health care companies. Prior to joining Franklin
Templeton Investments in 2002, Ms. Dudley was an investment analyst at Federated
Investors, Inc., responsible for the technology and health care sectors. From
1995 to 2001, Ms. Dudley was a senior manager in the corporate finance division
of Ernst & Young LLP, where she specialized in valuation and litigation
consulting.
10 | Annual Report
Performance Summary as of 12/31/08
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 and graphs do 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 Z (SYMBOL: MEURX) CHANGE 12/31/08 12/31/07
- ------------------------------- ------ -------- --------
Net Asset Value (NAV) -$9.07 $17.25 $26.32
DISTRIBUTIONS (1/1/08-12/31/08)
Dividend Income $0.0286
Short-Term Capital Gain $0.1512
Long-Term Capital Gain $0.4671
TOTAL $0.6469
CLASS A (SYMBOL: TEMIX) CHANGE 12/31/08 12/31/07
- ------------------------------- ------ -------- --------
Net Asset Value (NAV) -$8.97 $16.89 $25.86
DISTRIBUTIONS (1/1/08-12/31/08)
Dividend Income $0.0221
Short-Term Capital Gain $0.1512
Long-Term Capital Gain $0.4671
TOTAL $0.6404
CLASS B (SYMBOL: TEUBX) CHANGE 12/31/08 12/31/07
- ------------------------------- ------ -------- --------
Net Asset Value (NAV) -$8.87 $16.37 $25.24
DISTRIBUTIONS (1/1/08-12/31/08)
Dividend Income $0.0050
Short-Term Capital Gain $0.1512
Long-Term Capital Gain $0.4671
TOTAL $0.6233
CLASS C (SYMBOL: TEURX) CHANGE 12/31/08 12/31/07
- ------------------------------- ------ -------- --------
Net Asset Value (NAV) -$9.06 $16.76 $25.82
DISTRIBUTIONS (1/1/08-12/31/08)
Dividend Income $0.0056
Short-Term Capital Gain $0.1512
Long-Term Capital Gain $0.4671
TOTAL $0.6239
Annual Report | 11
Performance Summary (CONTINUED)
PERFORMANCE(1)
CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETURN AND
VALUE OF $10,000 INVESTMENT INCLUDE MAXIMUM SALES CHARGES. CLASS Z: NO 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 Z 1-YEAR 5-YEAR 10-YEAR
- ---------------------------------- ------- ------- -------
Cumulative Total Return(2) -32.47% +44.53% +183.65%
Average Annual Total Return(3) -32.47% +7.64% +10.99%
Value of $10,000 Investment(4) $ 6,753 $14,453 $28,365
Total Annual Operating
Expenses(5) 1.04%
CLASS A 1-YEAR 5-YEAR 10-YEAR
- ---------------------------------- ------- ------- -------
Cumulative Total Return(2) -32.68% +42.34% +173.99%
Average Annual Total Return(3) -36.56% +6.05% +9.95%
Value of $10,000 Investment(4) $ 6,344 $13,417 $25,825
Total Annual Operating
Expenses(5) 1.34%
CLASS B 1-YEAR 5-YEAR 10-YEAR
- ---------------------------------- ------- ------- -------
Cumulative Total Return(2) -33.15% +37.58% +160.08%
Average Annual Total Return(3) -35.74% +6.28% +10.03%
Value of $10,000 Investment(4) $ 6,426 $13,558 $26,008
Total Annual Operating
Expenses(5) 2.04%
CLASS C 1-YEAR 5-YEAR 10-YEAR
- ---------------------------------- ------- ------- -------
Cumulative Total Return(2) -33.14% +37.58% +157.16%
Average Annual Total Return(3) -33.79% +6.59% +9.91%
Value of $10,000 Investment(4) $ 6,621 $13,758 $25,716
Total Annual Operating
Expenses(5) 2.04%
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.
12 | Annual Report
Performance Summary (CONTINUED)
TOTAL RETURN INDEX COMPARISON FOR A HYPOTHETICAL $10,000 INVESTMENT(1)
Total return represents the change in value of an investment over the periods
shown. It includes any current, applicable, maximum sales charge, Fund expenses,
account fees and reinvested distributions. The unmanaged indexes include
reinvestment of any income or distributions. They differ from the Fund in
composition and do not pay management fees or expenses. One cannot invest
directly in an index.
CLASS Z (1/1/99-12/31/08)
(PERFORMANCE GRAPH)
MUTUAL EUROPEAN MSCI AC MSCI
DATE FUND - CLASS Z EUROPE INDEX EUROPE INDEX
- ---- --------------- ------------ ------------
1/1/1999 $10,000 $10,000 $10,000
1/31/1999 $10,024 $ 9,950 $ 9,938
2/28/1999 $10,152 $ 9,707 $ 9,688
3/31/1999 $10,383 $ 9,829 $ 9,796
4/30/1999 $10,989 $10,133 $10,091
5/31/1999 $11,013 $ 9,707 $ 9,608
6/30/1999 $11,396 $ 9,869 $ 9,773
7/31/1999 $11,412 $ 9,991 $ 9,866
8/31/1999 $11,517 $10,093 $ 9,969
9/30/1999 $11,517 $10,011 $ 9,895
10/31/1999 $11,888 $10,357 $10,261
11/30/1999 $12,889 $10,641 $10,540
12/31/1999 $14,681 $11,758 $11,623
1/31/2000 $15,011 $10,933 $10,787
2/29/2000 $16,932 $11,493 $11,349
3/31/2000 $16,411 $11,772 $11,628
4/30/2000 $15,959 $11,271 $11,131
5/31/2000 $15,985 $11,199 $11,070
6/30/2000 $15,996 $11,421 $11,317
7/31/2000 $16,097 $11,238 $11,136
8/31/2000 $16,501 $11,101 $11,012
9/30/2000 $16,097 $10,571 $10,487
10/31/2000 $16,281 $10,478 $10,401
11/30/2000 $16,216 $10,024 $ 9,993
12/31/2000 $16,805 $10,721 $10,677
1/31/2001 $17,270 $10,738 $10,682
2/28/2001 $17,173 $ 9,779 $ 9,745
3/31/2001 $16,501 $ 9,053 $ 9,021
4/30/2001 $16,999 $ 9,715 $ 9,670
5/31/2001 $17,292 $ 9,256 $ 9,210
6/30/2001 $17,184 $ 8,909 $ 8,866
7/31/2001 $17,087 $ 8,920 $ 8,889
8/31/2001 $16,924 $ 8,692 $ 8,660
9/30/2001 $14,990 $ 7,818 $ 7,796
10/31/2001 $15,479 $ 8,078 $ 8,043
11/30/2001 $15,805 $ 8,410 $ 8,366
12/31/2001 $16,008 $ 8,632 $ 8,580
1/31/2002 $16,352 $ 8,196 $ 8,133
2/28/2002 $16,597 $ 8,184 $ 8,131
3/31/2002 $17,252 $ 8,635 $ 8,575
4/30/2002 $17,607 $ 8,585 $ 8,516
5/31/2002 $17,707 $ 8,567 $ 8,500
6/30/2002 $17,031 $ 8,265 $ 8,209
7/31/2002 $15,709 $ 7,350 $ 7,296
8/31/2002 $15,732 $ 7,353 $ 7,297
9/30/2002 $14,735 $ 6,394 $ 6,337
10/31/2002 $14,780 $ 7,012 $ 6,950
11/30/2002 $14,926 $ 7,359 $ 7,291
12/31/2002 $14,774 $ 7,091 $ 7,028
1/31/2003 $14,364 $ 6,758 $ 6,696
2/28/2003 $13,920 $ 6,546 $ 6,478
3/31/2003 $14,125 $ 6,446 $ 6,384
4/30/2003 $15,252 $ 7,331 $ 7,256
5/31/2003 $16,221 $ 7,820 $ 7,735
6/30/2003 $16,437 $ 7,901 $ 7,815
7/31/2003 $16,815 $ 8,059 $ 7,975
8/31/2003 $17,170 $ 8,059 $ 7,961
9/30/2003 $17,445 $ 8,226 $ 8,123
10/31/2003 $18,179 $ 8,768 $ 8,667
11/30/2003 $18,844 $ 9,139 $ 9,036
12/31/2003 $19,626 $ 9,894 $ 9,778
1/31/2004 $19,848 $10,014 $ 9,894
2/29/2004 $20,503 $10,316 $10,185
3/31/2004 $20,421 $10,018 $ 9,871
4/30/2004 $20,257 $ 9,927 $ 9,801
5/31/2004 $20,316 $10,094 $ 9,973
6/30/2004 $20,772 $10,235 $10,111
7/31/2004 $20,537 $ 9,955 $ 9,834
8/31/2004 $20,596 $ 9,972 $ 9,842
9/30/2004 $21,209 $10,378 $10,237
10/31/2004 $21,751 $10,757 $10,607
11/30/2004 $22,906 $11,539 $11,387
12/31/2004 $23,861 $12,032 $11,870
1/31/2005 $23,462 $11,818 $11,651
2/28/2005 $24,659 $12,430 $12,235
3/31/2005 $24,139 $12,103 $11,931
4/30/2005 $23,825 $11,809 $11,648
5/31/2005 $24,212 $11,872 $11,705
6/30/2005 $24,780 $12,052 $11,871
7/31/2005 $25,703 $12,508 $12,305
8/31/2005 $26,129 $12,719 $12,491
9/30/2005 $26,712 $13,057 $12,795
10/31/2005 $26,299 $12,630 $12,393
11/30/2005 $27,052 $12,866 $12,605
12/31/2005 $28,164 $13,320 $13,049
1/31/2006 $29,103 $14,221 $13,903
2/28/2006 $29,897 $14,253 $13,915
3/31/2006 $31,364 $14,786 $14,462
4/30/2006 $31,748 $15,580 $15,217
5/31/2006 $30,637 $15,126 $14,823
6/30/2006 $30,743 $15,183 $14,879
7/31/2006 $31,052 $15,439 $15,108
8/31/2006 $32,170 $15,924 $15,588
9/30/2006 $32,735 $16,020 $15,723
10/31/2006 $33,798 $16,715 $16,399
11/30/2006 $34,390 $17,346 $16,986
12/31/2006 $35,855 $17,906 $17,532
1/31/2007 $37,006 $17,988 $17,637
2/28/2007 $36,554 $17,913 $17,575
3/31/2007 $38,319 $18,583 $18,219
4/30/2007 $40,258 $19,761 $19,420
5/31/2007 $41,687 $20,110 $19,797
6/30/2007 $41,855 $20,175 $19,800
7/31/2007 $40,906 $19,806 $19,381
8/31/2007 $40,628 $19,560 $19,170
9/30/2007 $42,001 $20,585 $20,141
10/31/2007 $43,198 $21,598 $21,083
11/30/2007 $42,117 $20,934 $20,413
12/31/2007 $42,002 $20,621 $20,055
1/31/2008 $38,044 $18,408 $17,965
2/29/2008 $38,236 $18,749 $18,258
3/31/2008 $37,581 $18,806 $18,340
4/30/2008 $39,417 $19,677 $19,203
5/31/2008 $40,183 $19,928 $19,338
6/30/2008 $36,257 $18,214 $17,659
7/31/2008 $35,379 $17,647 $17,153
8/31/2008 $35,810 $16,862 $16,480
9/30/2008 $32,788 $14,275 $13,997
10/31/2008 $29,253 $11,148 $11,024
11/30/2008 $28,052 $10,352 $10,274
12/31/2008 $28,365 $10,867 $10,814
Total Returns 183.65% 8.67% 8.14%
AVERAGE ANNUAL TOTAL RETURN
CLASS Z 12/31/08
- ------- --------
1-Year -32.47%
5-Year +7.64%
10-Year +10.99%
CLASS A (1/1/99-12/31/08)
(PERFORMANCE GRAPH)
MUTUAL EUROPEAN MSCI AC.EUROPE MSCI
DATE FUND - CLASS A INDEX EUROPE INDEX
- ---- --------------- -------------- ------------
1/1/1999 $ 9,426 $10,000 $10,000
1/31/1999 $ 9,448 $ 9,950 $ 9,938
2/28/1999 $ 9,562 $ 9,707 $ 9,688
3/31/1999 $ 9,773 $ 9,829 $ 9,796
4/30/1999 $10,348 $10,133 $10,091
5/31/1999 $10,355 $ 9,707 $ 9,608
6/30/1999 $10,709 $ 9,869 $ 9,773
7/31/1999 $10,724 $ 9,991 $ 9,866
8/31/1999 $10,824 $10,093 $ 9,969
9/30/1999 $10,816 $10,011 $ 9,895
10/31/1999 $11,160 $10,357 $10,261
11/30/1999 $12,093 $10,641 $10,540
12/31/1999 $13,766 $11,758 $11,623
1/31/2000 $14,070 $10,933 $10,787
2/29/2000 $15,870 $11,493 $11,349
3/31/2000 $15,377 $11,772 $11,628
4/30/2000 $14,950 $11,271 $11,131
5/31/2000 $14,974 $11,199 $11,070
6/30/2000 $14,971 $11,421 $11,317
7/31/2000 $15,067 $11,238 $11,136
8/31/2000 $15,431 $11,101 $11,012
9/30/2000 $15,058 $10,571 $10,487
10/31/2000 $15,223 $10,478 $10,401
11/30/2000 $15,162 $10,024 $ 9,993
12/31/2000 $15,703 $10,721 $10,677
1/31/2001 $16,132 $10,738 $10,682
2/28/2001 $16,030 $ 9,779 $ 9,745
3/31/2001 $15,407 $ 9,053 $ 9,021
4/30/2001 $15,867 $ 9,715 $ 9,670
5/31/2001 $16,132 $ 9,256 $ 9,210
6/30/2001 $16,027 $ 8,909 $ 8,866
7/31/2001 $15,924 $ 8,920 $ 8,889
8/31/2001 $15,781 $ 8,692 $ 8,660
9/30/2001 $13,966 $ 7,818 $ 7,796
10/31/2001 $14,427 $ 8,078 $ 8,043
11/30/2001 $14,725 $ 8,410 $ 8,366
12/31/2001 $14,909 $ 8,632 $ 8,580
1/31/2002 $15,223 $ 8,196 $ 8,133
2/28/2002 $15,442 $ 8,184 $ 8,131
3/31/2002 $16,048 $ 8,635 $ 8,575
4/30/2002 $16,372 $ 8,585 $ 8,516
5/31/2002 $16,466 $ 8,567 $ 8,500
6/30/2002 $15,826 $ 8,265 $ 8,209
7/31/2002 $14,604 $ 7,350 $ 7,296
8/31/2002 $14,614 $ 7,353 $ 7,297
9/30/2002 $13,687 $ 6,394 $ 6,337
10/31/2002 $13,718 $ 7,012 $ 6,950
11/30/2002 $13,845 $ 7,359 $ 7,291
12/31/2002 $13,710 $ 7,091 $ 7,028
1/31/2003 $13,325 $ 6,758 $ 6,696
2/28/2003 $12,908 $ 6,546 $ 6,478
3/31/2003 $13,090 $ 6,446 $ 6,384
4/30/2003 $14,137 $ 7,331 $ 7,256
5/31/2003 $15,024 $ 7,820 $ 7,735
6/30/2003 $15,223 $ 7,901 $ 7,815
7/31/2003 $15,567 $ 8,059 $ 7,975
8/31/2003 $15,900 $ 8,059 $ 7,961
9/30/2003 $16,147 $ 8,226 $ 8,123
10/31/2003 $16,814 $ 8,768 $ 8,667
11/30/2003 $17,426 $ 9,139 $ 9,036
12/31/2003 $18,143 $ 9,894 $ 9,778
1/31/2004 $18,340 $10,014 $ 9,894
2/29/2004 $18,942 $10,316 $10,185
3/31/2004 $18,865 $10,018 $ 9,871
4/30/2004 $18,712 $ 9,927 $ 9,801
5/31/2004 $18,756 $10,094 $ 9,973
6/30/2004 $19,177 $10,235 $10,111
7/31/2004 $18,946 $ 9,955 $ 9,834
8/31/2004 $19,001 $ 9,972 $ 9,842
9/30/2004 $19,552 $10,378 $10,237
10/31/2004 $20,049 $10,757 $10,607
11/30/2004 $21,118 $11,539 $11,387
12/31/2004 $21,995 $12,032 $11,870
1/31/2005 $21,611 $11,818 $11,651
2/28/2005 $22,705 $12,430 $12,235
3/31/2005 $22,220 $12,103 $11,931
4/30/2005 $21,927 $11,809 $11,648
5/31/2005 $22,277 $11,872 $11,705
6/30/2005 $22,789 $12,052 $11,871
7/31/2005 $23,628 $12,508 $12,305
8/31/2005 $24,013 $12,719 $12,491
9/30/2005 $24,546 $13,057 $12,795
10/31/2005 $24,160 $12,630 $12,393
11/30/2005 $24,852 $12,866 $12,605
12/31/2005 $25,856 $13,320 $13,049
1/31/2006 $26,718 $14,221 $13,903
2/28/2006 $27,433 $14,253 $13,915
3/31/2006 $28,776 $14,786 $14,462
4/30/2006 $29,120 $15,580 $15,217
5/31/2006 $28,098 $15,126 $14,823
6/30/2006 $28,189 $15,183 $14,879
7/31/2006 $28,477 $15,439 $15,108
8/31/2006 $29,493 $15,924 $15,588
9/30/2006 $30,007 $16,020 $15,723
10/31/2006 $30,960 $16,715 $16,399
11/30/2006 $31,500 $17,346 $16,986
12/31/2006 $32,826 $17,906 $17,532
1/31/2007 $33,884 $17,988 $17,637
2/28/2007 $33,450 $17,913 $17,575
3/31/2007 $35,065 $18,583 $18,219
4/30/2007 $36,829 $19,761 $19,420
5/31/2007 $38,132 $20,110 $19,797
6/30/2007 $38,280 $20,175 $19,800
7/31/2007 $37,411 $19,806 $19,381
8/31/2007 $37,139 $19,560 $19,170
9/30/2007 $38,389 $20,585 $20,141
10/31/2007 $39,476 $21,598 $21,083
11/30/2007 $38,470 $20,934 $20,413
12/31/2007 $38,362 $20,621 $20,055
1/31/2008 $34,742 $18,408 $17,965
2/29/2008 $34,906 $18,749 $18,258
3/31/2008 $34,297 $18,806 $18,340
4/30/2008 $35,974 $19,677 $19,203
5/31/2008 $36,656 $19,928 $19,338
6/30/2008 $33,066 $18,214 $17,659
7/31/2008 $32,265 $17,647 $17,153
8/31/2008 $32,651 $16,862 $16,480
9/30/2008 $29,877 $14,275 $13,997
10/31/2008 $26,651 $11,148 $11,024
11/30/2008 $25,550 $10,352 $10,274
12/31/2008 $25,825 $10,867 $10,814
Total Returns 158.25% 8.67% 8.14%
AVERAGE ANNUAL TOTAL RETURN
CLASS A 12/31/08
- ------- --------
1-Year -36.56%
5-Year +6.05%
10-Year +9.95%
Annual Report | 13
Performance Summary (CONTINUED)
CLASS B (1/1/99-12/31/08)
(PERFORMANCE GRAPH)
MUTUAL EUROPEAN MSCI AC MSCI
DATE FUND - CLASS B EUROPE INDEX EUROPE INDEX
- ---- --------------- ------------ ------------
1/1/1999 $10,000 $10,000 $10,000
1/31/1999 $10,016 $ 9,950 $ 9,938
2/28/1999 $10,136 $ 9,707 $ 9,688
3/31/1999 $10,361 $ 9,829 $ 9,796
4/30/1999 $10,954 $10,133 $10,091
5/31/1999 $10,962 $ 9,707 $ 9,608
6/30/1999 $11,334 $ 9,869 $ 9,773
7/31/1999 $11,342 $ 9,991 $ 9,866
8/31/1999 $11,439 $10,093 $ 9,969
9/30/1999 $11,431 $10,011 $ 9,895
10/31/1999 $11,788 $10,357 $10,261
11/30/1999 $12,770 $10,641 $10,540
12/31/1999 $14,517 $11,758 $11,623
1/31/2000 $14,831 $10,933 $10,787
2/29/2000 $16,713 $11,493 $11,349
3/31/2000 $16,190 $11,772 $11,628
4/30/2000 $15,729 $11,271 $11,131
5/31/2000 $15,746 $11,199 $11,070
6/30/2000 $15,738 $11,421 $11,317
7/31/2000 $15,820 $11,238 $11,136
8/31/2000 $16,206 $11,101 $11,012
9/30/2000 $15,802 $10,571 $10,487
10/31/2000 $15,967 $10,478 $10,401
11/30/2000 $15,894 $10,024 $ 9,993
12/31/2000 $16,450 $10,721 $10,677
1/31/2001 $16,894 $10,738 $10,682
2/28/2001 $16,775 $ 9,779 $ 9,745
3/31/2001 $16,114 $ 9,053 $ 9,021
4/30/2001 $16,580 $ 9,715 $ 9,670
5/31/2001 $16,861 $ 9,256 $ 9,210
6/30/2001 $16,744 $ 8,909 $ 8,866
7/31/2001 $16,624 $ 8,920 $ 8,889
8/31/2001 $16,462 $ 8,692 $ 8,660
9/30/2001 $14,572 $ 7,818 $ 7,796
10/31/2001 $15,028 $ 8,078 $ 8,043
11/30/2001 $15,332 $ 8,410 $ 8,366
12/31/2001 $15,518 $ 8,632 $ 8,580
1/31/2002 $15,838 $ 8,196 $ 8,133
2/28/2002 $16,058 $ 8,184 $ 8,131
3/31/2002 $16,675 $ 8,635 $ 8,575
4/30/2002 $17,006 $ 8,585 $ 8,516
5/31/2002 $17,094 $ 8,567 $ 8,500
6/30/2002 $16,425 $ 8,265 $ 8,209
7/31/2002 $15,136 $ 7,350 $ 7,296
8/31/2002 $15,147 $ 7,353 $ 7,297
9/30/2002 $14,169 $ 6,394 $ 6,337
10/31/2002 $14,203 $ 7,012 $ 6,950
11/30/2002 $14,325 $ 7,359 $ 7,291
12/31/2002 $14,182 $ 7,091 $ 7,028
1/31/2003 $13,778 $ 6,758 $ 6,696
2/28/2003 $13,329 $ 6,546 $ 6,478
3/31/2003 $13,520 $ 6,446 $ 6,384
4/30/2003 $14,586 $ 7,331 $ 7,256
5/31/2003 $15,494 $ 7,820 $ 7,735
6/30/2003 $15,696 $ 7,901 $ 7,815
7/31/2003 $16,034 $ 8,059 $ 7,975
8/31/2003 $16,373 $ 8,059 $ 7,961
9/30/2003 $16,621 $ 8,226 $ 8,123
10/31/2003 $17,298 $ 8,768 $ 8,667
11/30/2003 $17,919 $ 9,139 $ 9,036
12/31/2003 $18,642 $ 9,894 $ 9,778
1/31/2004 $18,836 $10,014 $ 9,894
2/29/2004 $19,442 $10,316 $10,185
3/31/2004 $19,351 $10,018 $ 9,871
4/30/2004 $19,191 $ 9,927 $ 9,801
5/31/2004 $19,225 $10,094 $ 9,973
6/30/2004 $19,633 $10,235 $10,111
7/31/2004 $19,391 $ 9,955 $ 9,834
8/31/2004 $19,437 $ 9,972 $ 9,842
9/30/2004 $19,990 $10,378 $10,237
10/31/2004 $20,485 $10,757 $10,607
11/30/2004 $21,568 $11,539 $11,387
12/31/2004 $22,448 $12,032 $11,870
1/31/2005 $22,060 $11,818 $11,651
2/28/2005 $23,163 $12,430 $12,235
3/31/2005 $22,647 $12,103 $11,931
4/30/2005 $22,342 $11,809 $11,648
5/31/2005 $22,682 $11,872 $11,705
6/30/2005 $23,191 $12,052 $11,871
7/31/2005 $24,039 $12,508 $12,305
8/31/2005 $24,416 $12,719 $12,491
9/30/2005 $24,946 $13,057 $12,795
10/31/2005 $24,533 $12,630 $12,393
11/30/2005 $25,216 $12,866 $12,605
12/31/2005 $26,234 $13,320 $13,049
1/31/2006 $27,089 $14,221 $13,903
2/28/2006 $27,802 $14,253 $13,915
3/31/2006 $29,141 $14,786 $14,462
4/30/2006 $29,472 $15,580 $15,217
5/31/2006 $28,414 $15,126 $14,823
6/30/2006 $28,491 $15,183 $14,879
7/31/2006 $28,764 $15,439 $15,108
8/31/2006 $29,776 $15,924 $15,588
9/30/2006 $30,269 $16,020 $15,723
10/31/2006 $31,229 $16,715 $16,399
11/30/2006 $31,735 $17,346 $16,986
12/31/2006 $33,058 $17,906 $17,532
1/31/2007 $34,122 $17,988 $17,637
2/28/2007 $33,686 $17,913 $17,575
3/31/2007 $35,313 $18,583 $18,219
4/30/2007 $37,089 $19,761 $19,420
5/31/2007 $38,402 $20,110 $19,797
6/30/2007 $38,552 $20,175 $19,800
7/31/2007 $37,677 $19,806 $19,381
8/31/2007 $37,402 $19,560 $19,170
9/30/2007 $38,658 $20,585 $20,141
10/31/2007 $39,752 $21,598 $21,083
11/30/2007 $38,739 $20,934 $20,413
12/31/2007 $38,630 $20,621 $20,055
1/31/2008 $34,983 $18,408 $17,965
2/29/2008 $35,148 $18,749 $18,258
3/31/2008 $34,536 $18,806 $18,340
4/30/2008 $36,225 $19,677 $19,203
5/31/2008 $36,913 $19,928 $19,338
6/30/2008 $33,300 $18,214 $17,659
7/31/2008 $32,494 $17,647 $17,153
8/31/2008 $32,884 $16,862 $16,480
9/30/2008 $30,088 $14,275 $13,997
10/31/2008 $26,839 $11,148 $11,024
11/30/2008 $25,730 $10,352 $10,274
12/31/2008 $26,008 $10,867 $10,814
Total Returns 160.08% 8.67% 8.14%
AVERAGE ANNUAL TOTAL RETURN
CLASS B 12/31/08
- ------- --------
1-Year -35.74%
5-Year +6.28%
10-Year +10.03%
CLASS C (1/1/99-12/31/08)
(PERFORMANCE GRAPH)
MUTUAL EUROPEAN MSCI AC MSCI
DATE FUND - CLASS C EUROPE INDEX EUROPE INDEX
- ---- --------------- ------------ ------------
1/1/1999 $10,000 $10,000 $10,000
1/31/1999 $10,016 $ 9,950 $ 9,938
2/28/1999 $10,137 $ 9,707 $ 9,688
3/31/1999 $10,361 $ 9,829 $ 9,796
4/30/1999 $10,956 $10,133 $10,091
5/31/1999 $10,964 $ 9,707 $ 9,608
6/30/1999 $11,338 $ 9,869 $ 9,773
7/31/1999 $11,346 $ 9,991 $ 9,866
8/31/1999 $11,443 $10,093 $ 9,969
9/30/1999 $11,435 $10,011 $ 9,895
10/31/1999 $11,792 $10,357 $10,261
11/30/1999 $12,773 $10,641 $10,540
12/31/1999 $14,540 $11,758 $11,623
1/31/2000 $14,852 $10,933 $10,787
2/29/2000 $16,753 $11,493 $11,349
3/31/2000 $16,224 $11,772 $11,628
4/30/2000 $15,764 $11,271 $11,131
5/31/2000 $15,781 $11,199 $11,070
6/30/2000 $15,770 $11,421 $11,317
7/31/2000 $15,862 $11,238 $11,136
8/31/2000 $16,245 $11,101 $11,012
9/30/2000 $15,834 $10,571 $10,487
10/31/2000 $16,008 $10,478 $10,401
11/30/2000 $15,926 $10,024 $ 9,993
12/31/2000 $16,491 $10,721 $10,677
1/31/2001 $16,931 $10,738 $10,682
2/28/2001 $16,824 $ 9,779 $ 9,745
3/31/2001 $16,148 $ 9,053 $ 9,021
4/30/2001 $16,620 $ 9,715 $ 9,670
5/31/2001 $16,899 $ 9,256 $ 9,210
6/30/2001 $16,779 $ 8,909 $ 8,866
7/31/2001 $16,661 $ 8,920 $ 8,889
8/31/2001 $16,499 $ 8,692 $ 8,660
9/30/2001 $14,596 $ 7,818 $ 7,796
10/31/2001 $15,069 $ 8,078 $ 8,043
11/30/2001 $15,370 $ 8,410 $ 8,366
12/31/2001 $15,560 $ 8,632 $ 8,580
1/31/2002 $15,876 $ 8,196 $ 8,133
2/28/2002 $16,104 $ 8,184 $ 8,131
3/31/2002 $16,714 $ 8,635 $ 8,575
4/30/2002 $17,052 $ 8,585 $ 8,516
5/31/2002 $17,139 $ 8,567 $ 8,500
6/30/2002 $16,464 $ 8,265 $ 8,209
7/31/2002 $15,179 $ 7,350 $ 7,296
8/31/2002 $15,190 $ 7,353 $ 7,297
9/30/2002 $14,214 $ 6,394 $ 6,337
10/31/2002 $14,235 $ 7,012 $ 6,950
11/30/2002 $14,367 $ 7,359 $ 7,291
12/31/2002 $14,215 $ 7,091 $ 7,028
1/31/2003 $13,805 $ 6,758 $ 6,696
2/28/2003 $13,374 $ 6,546 $ 6,478
3/31/2003 $13,551 $ 6,446 $ 6,384
4/30/2003 $14,624 $ 7,331 $ 7,256
5/31/2003 $15,542 $ 7,820 $ 7,735
6/30/2003 $15,730 $ 7,901 $ 7,815
7/31/2003 $16,075 $ 8,059 $ 7,975
8/31/2003 $16,409 $ 8,059 $ 7,961
9/30/2003 $16,665 $ 8,226 $ 8,123
10/31/2003 $17,343 $ 8,768 $ 8,667
11/30/2003 $17,966 $ 9,139 $ 9,036
12/31/2003 $18,692 $ 9,894 $ 9,778
1/31/2004 $18,883 $10,014 $ 9,894
2/29/2004 $19,492 $10,316 $10,185
3/31/2004 $19,401 $10,018 $ 9,871
4/30/2004 $19,244 $ 9,927 $ 9,801
5/31/2004 $19,277 $10,094 $ 9,973
6/30/2004 $19,690 $10,235 $10,111
7/31/2004 $19,451 $ 9,955 $ 9,834
8/31/2004 $19,497 $ 9,972 $ 9,842
9/30/2004 $20,053 $10,378 $10,237
10/31/2004 $20,552 $10,757 $10,607
11/30/2004 $21,630 $11,539 $11,387
12/31/2004 $22,511 $12,032 $11,870
1/31/2005 $22,119 $11,818 $11,651
2/28/2005 $23,215 $12,430 $12,235
3/31/2005 $22,707 $12,103 $11,931
4/30/2005 $22,396 $11,809 $11,648
5/31/2005 $22,742 $11,872 $11,705
6/30/2005 $23,255 $12,052 $11,871
7/31/2005 $24,101 $12,508 $12,305
8/31/2005 $24,472 $12,719 $12,491
9/30/2005 $25,005 $13,057 $12,795
10/31/2005 $24,599 $12,630 $12,393
11/30/2005 $25,283 $12,866 $12,605
12/31/2005 $26,288 $13,320 $13,049
1/31/2006 $27,152 $14,221 $13,903
2/28/2006 $27,866 $14,253 $13,915
3/31/2006 $29,220 $14,786 $14,462
4/30/2006 $29,545 $15,580 $15,217
5/31/2006 $28,493 $15,126 $14,823
6/30/2006 $28,556 $15,183 $14,879
7/31/2006 $28,837 $15,439 $15,108
8/31/2006 $29,844 $15,924 $15,588
9/30/2006 $30,341 $16,020 $15,723
10/31/2006 $31,297 $16,715 $16,399
11/30/2006 $31,820 $17,346 $16,986
12/31/2006 $33,149 $17,906 $17,532
1/31/2007 $34,191 $17,988 $17,637
2/28/2007 $33,739 $17,913 $17,575
3/31/2007 $35,343 $18,583 $18,219
4/30/2007 $37,099 $19,761 $19,420
5/31/2007 $38,388 $20,110 $19,797
6/30/2007 $38,518 $20,175 $19,800
7/31/2007 $37,613 $19,806 $19,381
8/31/2007 $37,324 $19,560 $19,170
9/30/2007 $38,559 $20,585 $20,141
10/31/2007 $39,616 $21,598 $21,083
11/30/2007 $38,601 $20,934 $20,413
12/31/2007 $38,461 $20,621 $20,055
1/31/2008 $34,812 $18,408 $17,965
2/29/2008 $34,961 $18,749 $18,258
3/31/2008 $34,320 $18,806 $18,340
4/30/2008 $35,973 $19,677 $19,203
5/31/2008 $36,644 $19,928 $19,338
6/30/2008 $33,039 $18,214 $17,659
7/31/2008 $32,205 $17,647 $17,153
8/31/2008 $32,577 $16,862 $16,480
9/30/2008 $29,798 $14,275 $13,997
10/31/2008 $26,560 $11,148 $11,024
11/30/2008 $25,456 $10,352 $10,274
12/31/2008 $25,716 $10,867 $10,814
Total Returns 157.16% 8.67% 8.14%
AVERAGE ANNUAL TOTAL RETURN
CLASS C 12/31/08
- ------- --------
1-Year -33.79%
5-Year +6.59%
10-Year +9.91%
14 | Annual Report
Performance Summary (CONTINUED)
ENDNOTES
VALUE SECURITIES MAY NOT INCREASE IN PRICE AS ANTICIPATED OR MAY DECLINE FURTHER
IN VALUE. BECAUSE THE FUND INVESTS IN ISSUERS LOCATED IN EUROPE, IT MAY
EXPERIENCE GREATER VOLATILITY THAN A GEOGRAPHICALLY DIVERSIFIED FUND. FOREIGN
SECURITIES RISKS INCLUDE CURRENCY FLUCTUATIONS AND ECONOMIC AND POLITICAL
UNCERTAINTIES. IN ADDITION, THE FUND'S INVESTMENTS IN SMALLER-COMPANY STOCKS
CARRY AN INCREASED RISK OF PRICE FLUCTUATION, ESPECIALLY OVER THE SHORT TERM.
THE FUND MAY ALSO INVEST IN COMPANIES ENGAGED IN MERGERS, REORGANIZATIONS OR
LIQUIDATIONS, WHICH INVOLVE CERTAIN RISKS, AS PENDING DEALS MAY NOT BE COMPLETED
ON TIME OR ON FAVORABLE TERMS, AS WELL AS LOWER-RATED BONDS, WHICH ENTAIL HIGHER
CREDIT RISK. THE FUND'S PROSPECTUS ALSO INCLUDES A DESCRIPTION OF THE MAIN
INVESTMENT RISKS.
CLASS Z: Shares are available to certain eligible investors as described in the
prospectus.
CLASS 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.
(1.) Past expense reductions by the Fund's manager increased the Fund's total
returns. If the manager had not taken this action, the Fund's total returns
would have been lower.
(2.) Cumulative total return represents the change in value of an investment
over the periods indicated.
(3.) Average annual total return represents the average annual change in value
of an investment over the periods indicated.
(4.) These figures represent the value of a hypothetical $10,000 investment in
the Fund over the periods indicated.
(5.) Figures are as stated in the Fund's prospectus current as of the date of
this report.
(6.) Sources: (C) 2009 Morningstar; MSCI, Inc. The MSCI AC Europe Index is a
free float-adjusted, market capitalization-weighted index designed to
measure equity market performance in the European region. The MSCI Europe
Index is a market capitalization-weighted index designed to measure equity
market performance in the European region in local currency and includes
reinvested daily net dividends.
Annual Report | 15
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
redemption fees; 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.
16 | Annual Report
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 OR
REDEMPTION FEES. 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
VALUE 7/1/08 VALUE 12/31/08 PERIOD* 7/1/08-12/31/08
----------------- -------------- -----------------------
CLASS Z
Actual $1,000 $ 782.30 $ 4.93
Hypothetical (5% return before expenses) $1,000 $1,019.61 $ 5.58
CLASS A
Actual $1,000 $ 781.00 $ 6.27
Hypothetical (5% return before expenses) $1,000 $1,018.10 $ 7.10
CLASS B
Actual $1,000 $ 778.30 $ 9.34
Hypothetical (5% return before expenses) $1,000 $1,014.63 $10.58
CLASS C
Actual $1,000 $ 778.40 $ 9.21
Hypothetical (5% return before expenses) $1,000 $1,014.78 $10.43
* Expenses are calculated using the most recent six-month expense ratio,
annualized for each class (Z: 1.10%; A: 1.40%; B: 2.09%; and C: 2.06%),
multiplied by the average account value over the period, multiplied by
184/366 to reflect the one-half year period.
Annual Report | 17
Mutual European Fund
FINANCIAL HIGHLIGHTS
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
CLASS Z 2008 2007 2006 2005 2004
- ------- -------- ---------- ---------- -------- --------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year .................. $ 26.32 $ 24.59 $ 21.30 $ 19.75 $ 16.79
-------- ---------- ---------- -------- --------
Income from investment operations(a):
Net investment income(b) ......................... 0.48 0.46 0.62 0.42 0.37
Net realized and unrealized gains (losses) ....... (8.90) 3.74 5.08 3.11 3.21
-------- ---------- ---------- -------- --------
Total from investment operations .................... (8.42) 4.20 5.70 3.53 3.58
-------- ---------- ---------- -------- --------
Less distributions from:
Net investment income ............................ (0.03) (0.68) (0.66) (0.55) (0.60)
Net realized gains ............................... (0.62) (1.79) (1.75) (1.43) (0.02)
-------- ---------- ---------- -------- --------
Total distributions ................................. (0.65) (2.47) (2.41) (1.98) (0.62)
-------- ---------- ---------- -------- --------
Redemption fees(c, d) ............................... -- -- -- -- --
-------- ---------- ---------- -------- --------
Net asset value, end of year ........................ $ 17.25 $ 26.32 $ 24.59 $ 21.30 $ 19.75
======== ========== ========== ======== ========
Total return ........................................ (32.47)% 17.15% 27.30% 18.03% 21.58%
RATIOS TO AVERAGE NET ASSETS
Expenses(e, f) ...................................... 1.09% 1.04% 1.05% 1.05% 1.07%
Expenses - excluding dividend expense on securities
sold short(e) .................................... 1.09% 1.04% 1.04% 1.04% 1.07%
Net investment income ............................... 2.22% 1.65% 2.64% 1.99% 2.10%
SUPPLEMENTAL DATA
Net assets, end of year (000's) ..................... $800,264 $1,250,521 $1,034,000 $788,228 $650,547
Portfolio turnover rate ............................. 42.15% 39.60% 37.65% 29.84% 33.11%
(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) Amount rounds to less than $0.01 per share.
(d) Effective September 1, 2008, the redemption fee was eliminated.
(e) Benefit of expense reduction rounds to less than 0.01%.
(f) Includes dividend expense on securities sold short which varies from period
to period. See below for expense ratios that reflect only operating
expenses.
The accompanying notes are an integral part of these financial statements.
18 | Annual Report
Mutual European Fund
FINANCIAL HIGHLIGHTS (CONTINUED)
YEAR ENDED DECEMBER 31,
------------------------------------------------------
CLASS A 2008 2007 2006 2005 2004
- ------- -------- ---------- -------- -------- --------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year .................. $ 25.86 $ 24.19 $ 20.99 $ 19.50 $ 16.59
-------- ---------- -------- -------- --------
Income from investment operations (a):
Net investment income (b) ........................ 0.42 0.36 0.56 0.34 0.31
Net realized and unrealized gains (losses) ....... (8.75) 3.70 4.98 3.07 3.16
-------- ---------- -------- -------- --------
Total from investment operations .................... (8.33) 4.06 5.54 3.41 3.47
-------- ---------- -------- -------- --------
Less distributions from:
Net investment income ............................ (0.02) (0.60) (0.59) (0.49) (0.54)
Net realized gains ............................... (0.62) (1.79) (1.75) (1.43) (0.02)
-------- ---------- -------- -------- --------
Total distributions ................................. (0.64) (2.39) (2.34) (1.92) (0.56)
-------- ---------- -------- -------- --------
Redemption fees (c, d) .............................. -- -- -- -- --
-------- ---------- -------- -------- --------
Net asset value, end of year ........................ $16.89 $ 25.86 $ 24.19 $ 20.99 $ 19.50
======== ========== ======== ======== ========
Total return (e) .................................... (32.68)% 16.86% 26.96% 17.56% 21.23%
RATIOS TO AVERAGE NET ASSETS
Expenses (f, g) ..................................... 1.38% 1.34% 1.34% 1.38% 1.42%
Expenses - excluding dividend expense on securities
sold short (f) ................................... 1.38% 1.34% 1.33% 1.37% 1.42%
Net investment income ............................... 1.93% 1.35% 2.35% 1.66% 1.75%
SUPPLEMENTAL DATA
Net assets, end of year (000's) ..................... $688,842 $1,333,176 $964,717 $707,995 $545,120
Portfolio turnover rate ............................. 42.15% 39.60% 37.65% 29.84% 33.11%
(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) Amount rounds to less than $0.01 per share.
(d) Effective September 1, 2008, the redemption fee was eliminated.
(e) Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
(f) Benefit of expense reduction rounds to less than 0.01%.
(g) Includes dividend expense on securities sold short which varies from period
to period. See below for expense ratios that reflect only operating
expenses.
The accompanying notes are an integral part of these financial statements.
Annual Report | 19
Mutual European Fund
FINANCIAL HIGHLIGHTS (CONTINUED)
YEAR ENDED DECEMBER 31,
------------------------------------------------
CLASS B 2008 2007 2006 2005 2004
- ------- ------- ------- -------- ------- -------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year................... $ 25.24 $ 23.65 $ 20.58 $ 19.14 $ 16.31
------- ------- ------- ------- -------
Income from investment operations (a):
Net investment income (b).......................... 0.27 0.18 0.38 0.21 0.19
Net realized and unrealized gains (losses)......... (8.51) 3.60 4.87 3.01 3.10
------- ------- ------- ------- -------
Total from investment operations..................... (8.24) 3.78 5.25 3.22 3.29
------- ------- ------- ------- -------
Less distributions from:
Net investment income............................. (0.01) (0.40) (0.43) (0.35) (0.44)
Net realized gains................................ (0.62) (1.79) (1.75) (1.43) (0.02)
------- ------- ------- ------- -------
Total distributions.................................. (0.63) (2.19) (2.18) (1.78) (0.46)
------- ------- ------- ------- -------
Redemption fees (c, d) .............................. -- -- -- -- --
------- ------- ------- ------- -------
Net asset value, end of year......................... $ 16.37 $ 25.24 $ 23.65 $ 20.58 $ 19.14
======= ======= ======= ======= =======
Total return (e)..................................... (33.15)% 16.05% 26.01% 16.87% 20.41%
RATIOS TO AVERAGE NET ASSETS
Expenses (f, g)...................................... 2.09% 2.04% 2.05% 2.05% 2.07%
Expenses - excluding dividend expense on
securities sold short (f)......................... 2.09% 2.04% 2.04% 2.04% 2.07%
Net investment income................................ 1.22% 0.65% 1.64% 0.99% 1.10%
SUPPLEMENTAL DATA
Net assets, end of year (000's)...................... $30,017 $65,317 $63,219 $55,303 $50,216
Portfolio turnover rate.............................. 42.15% 39.60% 37.65% 29.84% 33.11%
(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) Amount rounds to less than $0.01 per share.
(d) Effective September 1, 2008, the redemption fee was eliminated.
(e) Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
(f) Benefit of expense reduction rounds to less than 0.01%.
(g) Includes dividend expense on securities sold short which varies from period
to period. See below for expense ratios that reflect only operating
expenses.
The accompanying notes are an integral part of these financial statements.
20 | Annual Report
Mutual European Fund
FINANCIAL HIGHLIGHTS (CONTINUED)
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
CLASS C 2008 2007 2006 2005 2004
- ------- -------- -------- -------- -------- --------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year..................... $ 25.82 $ 24.17 $ 20.98 $ 19.50 $ 16.60
-------- -------- -------- -------- --------
Income from investment operations (a):
Net investment income (b)........................... 0.28 0.17 0.38 0.21 0.20
Net realized and unrealized gains (losses).......... (8.71) 3.69 4.99 3.05 3.15
-------- -------- -------- -------- --------
Total from investment operations....................... (8.43) 3.86 5.37 3.26 3.35
-------- -------- -------- -------- --------
Less distributions from:
Net investment income............................... (0.01) (0.42) (0.43) (0.35) (0.43)
Net realized gains.................................. (0.62) (1.79) (1.75) (1.43) (0.02)
-------- -------- -------- -------- --------
Total distributions.................................... (0.63) (2.21) (2.18) (1.78) (0.45)
-------- -------- -------- -------- --------
Redemption fees (c, d) ................................ -- -- -- -- --
-------- -------- -------- -------- --------
Net asset value, end of year........................... $ 16.76 $ 25.82 $ 24.17 $ 20.98 $19.50
======== ======== ======== ======== ========
Total return (e)....................................... (33.14)% 16.03% 26.10% 16.78% 20.43%
RATIOS TO AVERAGE NET ASSETS
Expenses (f, g)........................................ 2.08% 2.04% 2.05% 2.05% 2.07%
Expenses - excluding dividend expense on
securities sold short (f)........................... 2.08% 2.04% 2.04% 2.04% 2.07%
Net investment income.................................. 1.23% 0.65% 1.64% 0.99% 1.10%
SUPPLEMENTAL DATA
Net assets, end of year (000's)........................ $189,244 $384,861 $303,259 $242,894 $205,197
Portfolio turnover rate................................ 42.15% 39.60% 37.65% 29.84% 33.11%
(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) Amount rounds to less than $0.01 per share.
(d) Effective September 1, 2008, the redemption fee was eliminated.
(e) Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
(f) Benefit of expense reduction rounds to less than 0.01%.
(g) Includes dividend expense on securities sold short which varies from period
to period. See below for expense ratios that reflect only operating
expenses.
The accompanying notes are an integral part of these financial statements.
Annual Report | 21
Mutual European Fund
STATEMENT OF INVESTMENTS, DECEMBER 31, 2008
SHARES/WARRANTS/
COUNTRY CONTRACTS VALUE
-------------- ---------------- --------------
COMMON STOCKS AND OTHER EQUITY INTERESTS 77.6%
AIR FREIGHT & LOGISTICS 0.5%
Deutsche Post AG ................................... Germany 533,826 $ 8,811,829
--------------
AUTO COMPONENTS 1.1%
(a) Continental AG ..................................... Germany 185,030 18,705,995
--------------
AUTOMOBILES 0.5%
Daimler AG ......................................... Germany 235,560 8,695,726
--------------
BEVERAGES 3.1%
Carlsberg AS, A .................................... Denmark 28,600 1,031,618
Carlsberg AS, B .................................... Denmark 612,720 19,712,619
(b) Pernod Ricard SA ................................... France 446,741 33,089,191
--------------
53,833,428
--------------
CHEMICALS 3.7%
Akzo Nobel NV ...................................... Netherlands 113,109 4,656,240
Koninklijke DSM NV ................................. Netherlands 398,745 10,217,381
Linde AG ........................................... Germany 402,392 33,675,485
Sika AG ............................................ Switzerland 8,141 6,861,036
Symrise AG ......................................... Germany 509,462 7,109,560
--------------
62,519,702
--------------
COMMERCIAL BANKS 1.5%
BNP Paribas SA ..................................... France 146,250 6,186,167
Intesa Sanpaolo SpA ................................ Italy 3,335,212 11,833,953
Unione di Banche Italiane Scpa ..................... Italy 532,914 7,667,837
--------------
25,687,957
--------------
CONSTRUCTION MATERIALS 1.1%
CRH PLC ............................................ Ireland 775,614 19,521,740
--------------
DIVERSIFIED FINANCIAL SERVICES 4.5%
(b) Deutsche Boerse AG ................................. Germany 255,721 18,164,794
Groupe Bruxelles Lambert SA ........................ Belgium 319,534 25,405,298
Guinness Peat Group PLC ............................ United Kingdom 10,294,556 6,015,109
Investor AB, B ..................................... Sweden 1,534,613 22,963,259
(a,c) Marconi Corp., Contingent Distribution ............. United Kingdom 28,582,000 --
Oslo Bors VPS Holding ASA .......................... Norway 340,000 3,666,506
--------------
76,214,966
--------------
DIVERSIFIED TELECOMMUNICATION SERVICES 5.1%
(a,d,e) AboveNet Inc. ...................................... United States 92,335 4,616,750
(a,d,e) AboveNet Inc., stock grant, grant price $20.95,
expiration date 9/09/13 ......................... United States 117 263
(a,d,e) AboveNet Inc., wts., 9/08/10 ....................... United States 3,781 15,124
Koninklijke (Royal) KPN NV ......................... Netherlands 2,693,008 39,087,273
Telefonica SA ...................................... Spain 1,975,274 43,778,107
--------------
87,497,517
--------------
22 | Annual Report
Mutual European Fund
STATEMENT OF INVESTMENTS, DECEMBER 31, 2008 (CONTINUED)
SHARES/WARRANTS/
COUNTRY CONTRACTS VALUE
-------------- ---------------- --------------
COMMON STOCKS AND OTHER EQUITY INTERESTS (CONTINUED)
ELECTRIC UTILITIES 4.9%
E.ON AG ............................................ Germany 1,072,050 $ 42,003,312
Electricite de France .............................. France 673,852 39,103,262
Union Electrica Fenosa SA .......................... Spain 124,834 3,094,867
--------------
84,201,441
--------------
ENERGY EQUIPMENT & SERVICES 0.8%
(f) Bourbon SA ......................................... France 373,667 9,425,874
(a) Compagnie Generale de Geophysique SA ............... France 236,970 3,512,365
--------------
12,938,239
--------------
FOOD & STAPLES RETAILING 1.9%
Carrefour SA ....................................... France 846,724 32,582,970
--------------
FOOD PRODUCTS 8.0%
Cadbury PLC ........................................ United Kingdom 3,156,509 27,914,998
CSM NV ............................................. Netherlands 816,226 13,125,281
Groupe Danone ...................................... France 556,240 33,584,990
Nestle SA .......................................... Switzerland 1,370,370 53,382,706
Rieber & Son ASA ................................... Norway 1,548,350 7,903,323
--------------
135,911,298
--------------
HEALTH CARE PROVIDERS & SERVICES 1.0%
Rhoen-Klinikum AG .................................. Germany 746,476 17,817,622
--------------
HOTELS, RESTAURANTS & LEISURE 1.3%
Accor SA ........................................... France 448,873 22,037,112
--------------
INDUSTRIAL CONGLOMERATES 2.7%
Koninklijke Philips Electronics NV ................. Netherlands 698,632 13,510,487
(e) Orkla ASA .......................................... Norway 2,445,205 15,979,434
Siemens AG ......................................... Germany 232,241 17,143,162
--------------
46,633,083
--------------
INSURANCE 4.1%
AXA SA ............................................. France 964,589 21,371,496
Brit Insurance Holdings PLC ........................ United Kingdom 1,773,603 5,718,387
Lancashire Holdings Ltd. ........................... United Kingdom 1,639,810 10,035,152
(a,d) Olympus Re Holdings Ltd. ........................... United States 16,080 37,749
White Mountains Insurance Group Ltd. ............... United States 57,372 15,324,635
Zurich Financial Services AG ....................... Switzerland 84,930 18,053,292
--------------
70,540,711
--------------
MACHINERY 2.8%
AB SKF, B .......................................... Sweden 1,404,177 13,872,960
Schindler Holding AG ............................... Switzerland 406,243 18,297,863
Schindler Holding AG, Registered ................... Switzerland 352,315 15,522,447
--------------
47,693,270
--------------
MARINE 2.0%
A.P. Moller - Maersk AS ............................ Denmark 6,379 33,675,233
--------------
Annual Report | 23
Mutual European Fund
STATEMENT OF INVESTMENTS, DECEMBER 31, 2008 (CONTINUED)
SHARES/WARRANTS/
COUNTRY CONTRACTS VALUE
-------------- ---------------- --------------
COMMON STOCKS AND OTHER EQUITY INTERESTS (CONTINUED)
MEDIA 1.9%
(a) Eutelsat Communications ............................ France 1,394,206 $ 32,995,597
--------------
METALS & MINING 3.5%
Anglo American PLC ................................. United Kingdom 963,394 21,753,535
Anglo American PLC, ADR ............................ United Kingdom 341,070 3,963,234
ArcelorMittal ...................................... Netherlands 1,076,656 25,593,298
(a,g) Globe Specialty Metals Inc., 144A .................. United States 1,430,000 7,865,000
--------------
59,175,067
--------------
MULTI-UTILITIES 5.6%
GDF Suez ........................................... France 1,056,138 52,167,882
RWE AG ............................................. Germany 434,224 38,452,420
(a) Suez Environnement SA France 309,885 5,221,412
--------------
95,841,714
--------------
MULTILINE RETAIL 1.0%
Jelmoli Holding AG ................................. Switzerland 8,844 16,314,898
--------------
OIL, GAS & CONSUMABLE FUELS 5.5%
Eni SpA ............................................ Italy 1,215,535 28,452,687
(a,d,h) Euro Wagon LP ...................................... Jersey Islands 16,127,149 8,492,240
Royal Dutch Shell PLC, A ........................... United Kingdom 1,097,394 28,771,614
Total SA, B ........................................ France 511,908 27,851,816
--------------
93,568,357
--------------
PHARMACEUTICALS 3.9%
GlaxoSmithKline PLC ................................ United Kingdom 1,396,803 26,205,092
Novartis AG ........................................ Switzerland 824,734 40,699,955
--------------
66,905,047
--------------
REAL ESTATE MANAGEMENT & DEVELOPMENT 0.0%i
(j) Canary Wharf Group PLC ............................. United Kingdom 192,100 740,483
--------------
TOBACCO 4.0%
British American Tobacco PLC ....................... United Kingdom 1,581,901 41,588,018
Imperial Tobacco Group PLC ......................... United Kingdom 1,023,834 27,664,173
--------------
69,252,191
--------------
TRANSPORTATION INFRASTRUCTURE 0.0%i
(a) Groupe Eurotunnel SA ............................... France 5,749 30,949
(a) Groupe Eurotunnel SA, wts., 12/30/11 ............... France 444,134 50,925
--------------
81,874
--------------
WIRELESS TELECOMMUNICATION SERVICES 1.6%
Vodafone Group PLC ................................. United Kingdom 13,089,041 26,572,906
--------------
TOTAL COMMON STOCKS AND OTHER EQUITY INTERESTS
(COST $1,291,583,591) ........................... 1,326,967,973
--------------
24 | Annual Report
Mutual European Fund
STATEMENT OF INVESTMENTS, DECEMBER 31, 2008 (CONTINUED)
COUNTRY SHARES VALUE
-------------- ---------------- --------------
PREFERRED STOCKS 0.1%
AUTOMOBILES 0.1%
Porsche Automobile Holding SE, pfd. ................ Germany 14,206 $ 1,108,227
--------------
DIVERSIFIED TELECOMMUNICATION SERVICES 0.0%(i)
(a,d) PTV Inc., 10.00%, pfd., A .......................... United Kingdom 46,841 42,157
--------------
TOTAL PREFERRED STOCKS (COST $938,389) ............. 1,150,384
--------------
PRINCIPAL
AMOUNT(k)
----------------
CORPORATE BONDS & NOTES 0.5%
Groupe Eurotunnel SA, cvt., sub. bond, NRS I,
T2, 3.00%, 7/28/09 .............................. France 8,000 EUR 9,508
T2, 3.00%, 7/28/09 .............................. France 9,616 GBP 14,045
T3, 3.00%, 7/28/10 .............................. France 3,439,700 EUR 4,088,273
T3, 3.00%, 7/28/10 .............................. France 2,751,256 GBP 4,018,347
--------------
TOTAL CORPORATE BONDS & NOTES (COST $20,759,751) ... 8,130,173
--------------
TOTAL INVESTMENTS BEFORE SHORT TERM INVESTMENTS
(COST $1,313,281,731) ........................... 1,336,248,530
--------------
SHORT TERM INVESTMENTS 22.2%
FOREIGN GOVERNMENT AND AGENCY SECURITIES 21.6%
(l) Belgium Treasury Bills, 2/19/09 - 5/14/09 .......... Belgium 20,000,000 EUR 27,860,918
(l) Dutch Treasury Bill, 2/18/09 ....................... Netherlands 20,000,000 EUR 27,910,348
(l) French Treasury Bills,
1/22/09 ......................................... France 15,000,000 EUR 20,953,945
2/19/09 ......................................... France 20,000,000 EUR 27,928,526
3/26/09 - 9/24/09 ............................... France 50,000,000 EUR 69,369,874
5/20/09 ......................................... France 20,000,000 EUR 27,783,383
(l) German Treasury Bills,
1/14/09 ......................................... Germany 20,000,000 EUR 27,953,556
4/22/09 ......................................... Germany 30,000,000 EUR 41,755,469
5/13/09 ......................................... Germany 30,000,000 EUR 41,716,247
6/17/09 ......................................... Germany 15,000,000 EUR 20,813,941
Government of Germany,
3.75%, 3/13/09 .................................. Germany 10,000,000 EUR 14,047,490
4.00%, 9/11/09 .................................. Germany 15,000,000 EUR 21,305,898
TOTAL FOREIGN GOVERNMENT AND AGENCY SECURITIES
(COST $349,485,927) ............................. 369,399,595
--------------
U.S. GOVERNMENT AND AGENCY SECURITIES
(COST $4,952,750) 0.3%
(l) FHLB, 5/06/09 ...................................... United States 5,000,000 4,996,125
--------------
TOTAL INVESTMENTS BEFORE MONEY MARKET FUND
(COST $1,667,720,408) ........................... 1,710,644,250
--------------
Annual Report | 25
Mutual European Fund
STATEMENT OF INVESTMENTS, DECEMBER 31, 2008 (CONTINUED)
COUNTRY SHARES/CONTRACTS VALUE
-------------- ---------------- --------------
SHORT TERM INVESTMENTS (CONTINUED)
(m) INVESTMENTS FROM CASH COLLATERAL RECEIVED FOR LOANED
SECURITIES 0.3%
MONEY MARKET FUNDS (COST $4,702,865) 0.3%
(n) Bank of New York Institutional Cash Reserve Fund,
0.09% ........................................... United States 4,702,865 $ 4,655,836
--------------
TOTAL INVESTMENTS (COST $1,672,423,273) 100.4% ..... 1,715,300,086
OPTIONS WRITTEN (0.1)% ............................. (2,114,131)
NET UNREALIZED DEPRECIATION ON FORWARD EXCHANGE
CONTRACTS (0.5)% ................................ (7,775,946)
OTHER ASSETS, LESS LIABILITIES 0.2% ................ 2,957,032
--------------
NET ASSETS 100.0% .................................. $1,708,367,041
==============
(o) OPTIONS WRITTEN 0.1%
CALL OPTIONS 0.1%
BEVERAGES 0.1%
Pernod Ricard SA, Jun. 52 Calls, 6/19/09 ........... France 186 $ 200,004
Pernod Ricard SA, Jun. 52 Calls, 6/19/09 ........... France 840 929,087
--------------
1,129,091
--------------
DIVERSIFIED FINANCIAL SERVICES 0.0%(i)
Deutsche Boerse AG, Jun. 64 Calls, 6/19/09 ......... Germany 484 195,589
--------------
PUT OPTIONS 0.0%(i)
INSURANCE 0.0%(i)
AXA SA, Mar. 9.6 Puts, 3/20/09 ..................... France 41,956 264,002
--------------
METALS & MINING 0.0%(i)
Anglo American PLC, Mar. 11 Puts, 3/20/09 .......... United Kingdom 154 175,441
ArcelorMittal, Mar. 14 Puts, 3/20/09 ............... Netherlands 1,414 286,694
--------------
462,135
--------------
WIRELESS TELECOMUNICATION SERVICES 0.0%(i)
Vodafone Group PLC, Mar. 100 Puts, 3/20/09 ......... United Kingdom 1,734 63,314
--------------
TOTAL OPTIONS WRITTEN
(PREMIUMS RECEIVED $3,126,687) .................. $ 2,114,131
--------------
26 | Annual Report
Mutual European Fund
STATEMENT OF INVESTMENTS, DECEMBER 31, 2008 (CONTINUED)
See Abbreviations on page 46.
(a) Non-income producing for the twelve months ended December 31, 2008.
(b) A portion or all of the security is held in connection with written option
contracts open at year end.
(c) Contingent distributions represent the right to receive additional
distributions, if any, during the reorganization of the underlying company.
Shares represent total underlying principal of debt securities.
(d) See Note 10 regarding restricted and illiquid securities.
(e) See Note 12 regarding other considerations.
(f) A portion or all of the security is on loan at December 31, 2008. See Note
1(g).
(g) 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. These securities have been deemed liquid under
guidelines approved by the Trust's Board of Trustees. At December 31, 2008,
the aggregate value of these securities was $7,865,000, representing 0.46%
of net assets.
(h) See Note 11 regarding holdings of 5% voting securities.
(i) Rounds to less than 0.1% of net assets.
(j) Security has been deemed illiquid because it may not be able to be sold
within seven days. At December 31, 2008, the value of these securities was
$740,483, representing 0.04% of net assets.
(k) The principal amount is stated in U.S. dollars unless otherwise indicated.
(l) The security is traded on a discount basis with no stated coupon rate.
(m) See Note 1(g) regarding securities on loan.
(n) The rate shown is the annualized seven-day yield at period end.
(o) See Note 1(e) regarding written options.
The accompanying notes are an integral part of these financial statements.
Annual Report | 27
Mutual European Fund
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
December 31, 2008
Assets:
Investments in securities:
Cost - Unaffiliated issuers ................................... $1,666,125,030
Cost - Controlled affiliated issuers (Note 11) ................ 6,298,243
--------------
Total cost of investments ..................................... $1,672,423,273
==============
Value - Unaffiliated issuers .................................. $1,706,807,846
Value - Controlled affiliated issuers (Note 11) ............... 8,492,240
--------------
Total value of investments (includes securities loaned in
the amount of $4,459,889) .................................. 1,715,300,086
Cash ............................................................. 1,559,461
Cash on deposit with brokers for written options ................. 881,905
Foreign currency, at value (cost $24,401,370) .................... 24,265,829
Receivables:
Investment securities sold .................................... 1,996,798
Capital shares sold ........................................... 1,998,310
Dividends and interest ........................................ 3,049,903
Unrealized appreciation on forward exchange contracts (Note 8) ... 62,395,293
--------------
Total assets ............................................... 1,811,447,585
--------------
Liabilities:
Payables:
Investment securities purchased ............................... 17,074,021
Capital shares redeemed ....................................... 6,059,953
Affiliates .................................................... 2,215,306
Options written, at value (premiums received $3,126,687) ......... 2,114,131
Payable upon return of securities loaned ......................... 4,702,865
Unrealized depreciation on forward exchange contracts (Note 8) ... 70,171,239
Accrued expenses and other liabilities ........................... 743,029
--------------
Total liabilities .......................................... 103,080,544
--------------
Net assets, at value .................................... $1,708,367,041
==============
Net assets consist of:
Paid-in capital .................................................. $1,781,472,280
Undistributed net investment income .............................. 47,634,774
Net unrealized appreciation (depreciation) ....................... 36,188,645
Accumulated net realized gain (loss) ............................. (156,928,658)
--------------
Net assets, at value .................................... $1,708,367,041
==============
The accompanying notes are an integral part of these financial statements.
28 | Annual Report
Mutual European Fund
FINANCIAL STATEMENTS (CONTINUED)
STATEMENT OF ASSETS AND LIABILITIES (CONTINUED)
December 31, 2008
CLASS Z:
Net assets, at value ............................................. $800,263,614
------------
Shares outstanding ............................................... 46,383,560
------------
Net asset value and maximum offering price per share ............. $ 17.25
------------
CLASS A:
Net assets, at value ............................................. $688,841,938
------------
Shares outstanding ............................................... 40,773,895
------------
Net asset value per share(a) ..................................... $ 16.89
------------
Maximum offering price per share (net asset value per
share / 94.25%) ............................................... $ 17.92
------------
CLASS B:
Net assets, at value ............................................. $ 30,017,271
------------
Shares outstanding ............................................... 1,833,417
------------
Net asset value and maximum offering price per share(a) .......... $ 16.37
------------
CLASS C:
Net assets, at value ............................................. $189,244,218
------------
Shares outstanding ............................................... 11,290,250
------------
Net asset value and maximum offering price per share(a) .......... $ 16.76
------------
(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.
Annual Report | 29
Mutual European Fund
FINANCIAL STATEMENTS (CONTINUED)
STATEMENT OF OPERATIONS
for the year ended December 31, 2008
Investment income:
Dividends (net of foreign taxes of $9,881,914) ................... $ 71,863,049
Interest ......................................................... 7,881,421
Income from securities loaned .................................... 28,476
-------------
Total investment income .................................... 79,772,946
-------------
Expenses:
Management fees (Note 3a) ........................................ 18,781,137
Administrative fees (Note 3b) .................................... 1,834,208
Distribution fees: (Note 3c)
Class A ....................................................... 3,005,990
Class B ....................................................... 474,457
Class C ....................................................... 2,861,022
Transfer agent fees (Note 3e) .................................... 4,186,265
Custodian fees (Note 4) .......................................... 536,702
Reports to shareholders .......................................... 195,002
Registration and filing fees ..................................... 203,101
Professional fees ................................................ 222,722
Trustees' fees and expenses ...................................... 109,050
Dividends on securities sold short ............................... 156,559
Other ............................................................ 84,358
-------------
Total expenses ............................................. 32,650,573
-------------
Expense reductions (Note 4) ................................ (3,876)
-------------
Net expenses ............................................ 32,646,697
-------------
Net investment income ................................ 47,126,249
-------------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments:
Unaffiliated issuers ....................................... (263,163,135)
Non-controlled affiliated issuers (Note 11) ................ 26,692,621
Written options ............................................... 1,311,609
Foreign currency transactions ................................. 70,849,368
Synthetic equity swaps ........................................ (625,394)
-------------
Net realized gain (loss) ................................ (164,934,931)
-------------
Net change in unrealized appreciation (depreciation) on:
Investments ...................................................... (826,213,538)
Translation of other assets and liabilities denominated in
foreign currencies ............................................ 3,228,961
-------------
Net change in unrealized appreciation (depreciation) .... (822,984,577)
-------------
Net realized and unrealized gain (loss) ............................. (987,919,508)
-------------
Net increase (decrease) in net assets resulting from operations ..... $(940,793,259)
=============
The accompanying notes are an integral part of these financial statements.
30 | Annual Report
Mutual European Fund
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF CHANGES IN NET ASSETS
YEAR ENDED DECEMBER 31,
--------------------------------
2008 2007
--------------- --------------
Increase (decrease) in net assets:
Operations:
Net investment income ......................................... $ 47,126,249 $ 38,303,729
Net realized gain (loss) from investments, written options,
securities sold short, synthetic equity swaps, and foreign
currency transactions ...................................... (164,934,931) 292,362,144
Net change in unrealized appreciation (depreciation) on
investments and translation of other assets and liabilities
denominated in foreign currencies .......................... (822,984,577) 76,646,805
--------------- --------------
Net increase (decrease) in net assets resulting from
operations ........................................... (940,793,259) 407,312,678
--------------- --------------
Distributions to shareholders from:
Net investment income:
Class Z .................................................... (1,344,248) (29,457,929)
Class A .................................................... (1,021,671) (28,346,985)
Class B .................................................... (10,630) (963,571)
Class C .................................................... (71,542) (5,742,756)
Net realized gains:
Class Z .................................................... (28,735,359) (77,736,999)
Class A .................................................... (28,582,364) (84,839,816)
Class B .................................................... (1,314,467) (4,299,240)
Class C .................................................... (8,013,566) (24,673,303)
--------------- --------------
Total distributions to shareholders .............................. (69,093,847) (256,060,599)
--------------- --------------
Capital share transactions: (Note 2)
Class Z .................................................... (21,190,077) 143,919,250
Class A .................................................... (206,303,695) 313,315,961
Class B .................................................... (15,249,087) (2,507,612)
Class C .................................................... (72,883,564) 62,682,338
--------------- --------------
Total capital share transactions ................................. (315,626,423) 517,409,937
--------------- --------------
Redemption fees .................................................. 6,214 17,946
--------------- --------------
Net increase (decrease) in net assets ................... (1,325,507,315) 668,679,962
Net assets:
Beginning of year ................................................ 3,033,874,356 2,365,194,394
--------------- --------------
End of year ...................................................... $ 1,708,367,041 $3,033,874,356
=============== ==============
Undistributed net investment income included in net assets:
End of year ...................................................... $ 47,634,774 $ 1,270,818
=============== ==============
The accompanying notes are an integral part of these financial statements.
Annual Report | 31
Mutual European Fund
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Franklin Mutual Series Funds (Trust) is registered under the Investment Company
Act of 1940, as amended, (1940 Act) as an open-end investment company,
consisting of six separate funds. The Mutual European Fund (Fund) is included in
this report. The financial statements of the remaining funds in the Trust are
presented separately. The Fund offers four classes of shares: Class Z, Class A,
Class B, and Class C. 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. Investments in open-end mutual funds are valued at the closing net
assets value.
Corporate debt securities and government securities generally trade in the
over-the-counter market rather than on a securities exchange. The Trust 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 Trust'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 Trust 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
32 | Annual Report
Mutual European Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
A. SECURITY VALUATION (CONTINUED)
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.
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.
Annual Report | 33
Mutual European Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
C. FOREIGN CURRENCY CONTRACTS (CONTINUED)
The Fund may also enter into forward exchange contracts to hedge against
fluctuations in foreign exchange rates. These contracts are valued daily by the
Fund and the unrealized appreciation or depreciation on the contracts, as
measured by the difference between the contractual forward foreign exchange
rates and the forward rates at the reporting date, are included in the Statement
of Assets and Liabilities. 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. SYNTHETIC EQUITY SWAPS
The Fund may engage in synthetic equity swaps. Synthetic equity swaps are
contracts entered into between a broker and the Fund under which the parties
agree to make payments to each other so as to replicate the economic
consequences that would apply had a purchase or short sale of the underlying
security taken place. Upon entering into synthetic equity swaps, the Fund is
required to pledge to the broker an amount of cash and/or other assets equal to
a certain percentage of the contract amount (margin account). Periodically,
payments are made to recognize changes in value of the contract resulting from
interest on the notional value of the contract, market value changes in the
underlying security, and/or dividends paid by the issuer of the underlying
security. The Fund recognizes a realized gain or loss when cash is received
from, or paid to, the broker. Synthetic equity swaps are valued daily by the
Fund and the unrealized appreciation or depreciation on the contracts (as
measured by the difference between the contract amount plus or minus cash
received or paid and the market value of the underlying securities) are recorded
in the Statement of Operations. The margin account and any net unrealized
appreciation or depreciation on open synthetic equity swaps are included in the
Statement of Assets and Liabilities. The risks of entering into synthetic equity
swaps include unfavorable price movements in the underlying securities or the
inability of the counterparties to fulfill their obligations under the contract.
34 | Annual Report
Mutual European Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
E. OPTIONS
The Fund may purchase or write options. Options are contracts entitling the
holder to purchase or sell securities or other financial instruments at a
specified price or exchange rate, or, in the case of index options, to receive
or pay the difference between the index value and the strike price of the index
option. Options purchased are recorded as investments; options written (sold)
are recorded as liabilities. Upon closing of an option which results in a cash
settlement, the difference between the premium (original option value) and the
settlement proceeds is realized as a gain or loss. When securities are acquired
or delivered upon exercise of an option, the acquisition cost or sale proceeds
are adjusted by the amount of the premium. When an option expires, the premium
is realized as a gain for options written or as a loss for options purchased.
The risks include the possibility there may be an illiquid options market or the
inability of the counterparties to fulfill their obligations under the contract.
Writing options involves, to varying degrees, elements of market risk in excess
of the amount recognized in the Statement of Assets and Liabilities.
F. SECURITIES SOLD SHORT
The Fund is engaged in selling securities short, which obligates the Fund to
replace a borrowed security with the same security at current market value. The
Fund incurs a loss if the price of the security increases between the date of
the short sale and the date on which the fund replaces the borrowed security.
The Fund realizes a gain if the price of the security declines between those
dates. Gains are limited to the price at which the fund sold the security short,
while losses are potentially unlimited in size.
The Fund is required to establish a margin account with the broker lending the
security sold short. While the short sale is outstanding, the broker retains the
proceeds of the short sale and the Fund must maintain a deposit with broker
consisting of cash and securities having a value equal to a specified percentage
of the value of the securities sold short. The Fund is obligated to pay the
counterparty any dividends or interest due on securities sold short. Such
dividends and interest are recorded as an expense to the Fund.
G. SECURITIES LENDING
The Fund participates in an agency based security lending program. The Fund
receives cash collateral against the loaned securities in an amount equal to at
least 102% of the market value of the loaned securities. Collateral is
maintained over the life of the loan in an amount not less than 100% of the
market value of loaned securities, as determined at the close of fund business
each day; any additional collateral required is delivered to the Fund on the
next business day. The collateral is invested in a non-registered money market
fund managed by the Fund's custodian on the Fund's behalf. The Fund receives
income from the investment of cash collateral, in addition to lending fees and
rebates paid by the borrower. The Fund bears the market risk with respect to the
collateral investment, securities loaned, and the risk that the agent may
default on its obligations to the Fund. The securities lending agent has agreed
to indemnify the Fund in the event of default by a third party borrower.
Annual Report | 35
Mutual European Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
H. 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 December 31, 2008, 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.
I. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS
Security transactions are accounted for on trade date. Realized gains and losses
on security transactions are determined on a specific identification basis.
Interest income and estimated expenses are accrued daily. Amortization of
premium and accretion of discount on debt securities are included in interest
income. Dividend income and dividends declared on securities sold short are
recorded on the ex-dividend date except 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.
36 | Annual Report
Mutual European Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
J. 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.
K. 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.
L. GUARANTEES AND INDEMNIFICATIONS
Under the Trust's organizational documents, its officers and trustees are
indemnified by the Trust against certain liabilities arising out of the
performance of their duties to the Trust. Additionally, in the normal course of
business, the Trust, on behalf of the Fund, enters into contracts with service
providers that contain general indemnification clauses. The Trust's maximum
exposure under these arrangements is unknown as this would involve future claims
that may be made against the Trust that have not yet occurred. Currently, the
Trust expects the risk of loss to be remote.
2. SHARES OF BENEFICIAL INTEREST
At December 31, 2008, there were an unlimited number of shares authorized
(without par value). Transactions in the Fund's shares were as follows:
YEAR ENDED DECEMBER 31,
---------------------------------------------------------
2008 2007
--------------------------- ---------------------------
SHARES AMOUNT SHARES AMOUNT
----------- ------------- ----------- -------------
CLASS Z SHARES:
Shares sold ..................................... 6,362,672 $ 139,583,893 8,588,857 $ 236,306,017
Shares issued in reinvestment of distributions .. 1,334,515 28,398,589 3,857,533 100,877,481
Shares redeemed ................................. (8,831,021) (189,172,559) (6,985,286) (193,264,248)
----------- ------------- ----------- -------------
Net increase (decrease) ......................... (1,133,834) $ (21,190,077) 5,461,104 $ 143,919,250
=========== ============= =========== =============
CLASS A SHARES:
Shares sold ..................................... 11,146,433 $ 237,432,604 20,148,175 $ 546,548,967
Shares issued in reinvestment of distributions .. 996,973 20,786,953 3,168,417 81,378,544
Shares redeemed ................................. (22,931,814) (464,523,252) (11,635,446) (314,611,550)
----------- ------------- ----------- -------------
Net increase (decrease) ......................... (10,788,408) $(206,303,695) 11,681,146 $ 313,315,961
=========== ============= =========== =============
Annual Report | 37
Mutual European Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SHARES OF BENEFICIAL INTEREST (CONTINUED)
YEAR ENDED DECEMBER 31,
------------------------------------------------------
2008 2007
-------------------------- -------------------------
SHARES AMOUNT SHARES AMOUNT
---------- ------------- ---------- ------------
CLASS B SHARES:
Shares sold .................... 49,442 $ 1,083,347 235,198 $ 6,197,833
Shares issued in reinvestment of
distributions ............... 58,945 1,194,222 188,922 4,735,011
Shares redeemed ................ (863,163) (17,526,656) (508,873) (13,440,456)
---------- ------------- ---------- ------------
Net increase (decrease) ........ (754,776) $ (15,249,087) (84,753) $ (2,507,612)
========== ============= ========== ============
CLASS C SHARES:
Shares sold .................... 1,111,026 $ 24,508,416 3,438,611 $ 92,797,536
Shares issued in reinvestment of
distributions ............... 333,804 6,907,799 1,035,139 26,543,890
Shares redeemed ................ (5,062,256) (104,299,779) (2,115,360) (56,659,088)
---------- ------------- ---------- ------------
Net increase (decrease) ........ (3,617,426) $ (72,883,564) 2,358,390 $ 62,682,338
========== ============= ========== ============
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
- ------------------------------------------------------------- ----------------------
Franklin Mutual Advisers, LLC (Franklin Mutual) Investment manager
Franklin Templeton Services, LLC (FT Services) Administrative manager
Franklin Templeton Distributors, Inc. (Distributors) Principal underwriter
Franklin Templeton Investor Services, LLC (Investor Services) Transfer agent
A. MANAGEMENT FEES
The Fund pays an investment management fee to Franklin Mutual based on the
average daily net assets of the Fund as follows:
ANNUALIZED FEE RATE NET ASSETS
- ------------------- ------------------------------------------------
0.800% Up to and including $1 billion
0.770% Over $1 billion, up to and including $2 billion
0.750% Over $2 billion, up to and including $5 billion
0.730% In excess of $5 billion
38 | Annual Report
Mutual European Fund
NOTES TO FINANCIAL STATEMENTS (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 Fund's Board of Trustees has adopted distribution plans for each share
class, with the exception of Class Z 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 ... 0.35%
Class B ... 1.00%
Class C ... 1.00%
Effective February 1, 2009, the Board of Trustees has set the current rate at
0.30% per year for Class A shares until further notice and approval by the
Board.
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 year:
Sales charges retained net of commissions paid to
unaffiliated broker/dealers .................. $225,775
Contingent deferred sales charges retained ...... $ 85,057
E. TRANSFER AGENT FEES
For the year ended December 31, 2008, the Fund paid transfer agent fees of
$4,186,265, of which $2,603,571 was retained by Investor Services.
Annual Report | 39
Mutual European Fund
NOTES TO FINANCIAL STATEMENTS (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 year ended December 31, 2008, the
custodian fees were reduced as noted in the Statement of Operations.
5. INDEPENDENT TRUSTEES' RETIREMENT PLAN
On January 1, 1993, the Trust adopted an Independent Trustees' Retirement Plan
("Plan"). The Plan is an unfunded defined benefit plan that provides benefit
payments to Trustees whose length of service and retirement age meets the
eligibility requirements of the Plan. Benefits under the plan are based on years
of service and fees paid to each trustee at the time of retirement. Effective in
December 1996 the Plan was closed to new participants.
During the year ended December 31, 2008, the Fund's projected benefit obligation
and benefit payments under the plan were as follows:
(a) Projected benefit obligation at December 31, 2008 ... $63,617
(b) Increase in projected benefit obligation ............ $ 5,810
Benefit payments made to retired trustees ........... $ 1,168
(a) The projected benefit obligation is included in accrued expenses and other
liabilities in the Statement of Assets and Liabilities.
(b) The increase in projected benefit obligation is included in trustees' fees
and expenses in the Statement of Operations.
6. INCOME TAXES
For tax purposes, capital losses may be carried over to offset future capital
gains, if any. At December 31, 2008, the Fund had tax basis capital losses of
$58,865,131 expiring in 2016.
For tax purposes, realized capital losses occurring subsequent to October 31,
may be deferred and treated as occurring on the first day of the following
fiscal year. At December 31, 2008, the Fund deferred realized capital losses of
$108,888,655.
The tax character of distributions paid during the years ended December 31, 2008
and 2007, was as follows:
2008 2007
----------- ------------
Distributions paid from:
Ordinary income .......... $18,745,741 $ 64,511,241
Long term capital gain ... 50,348,106 191,549,358
----------- ------------
$69,093,847 $256,060,599
=========== ============
40 | Annual Report
Mutual European Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. INCOME TAXES (CONTINUED)
At December 31, 2008, the cost of investments, net unrealized appreciation
(depreciation), and undistributed ordinary income for income tax purposes were
as follows:
Cost of investments ...................................... $1,676,756,739
==============
Unrealized appreciation .................................. $ 202,505,789
Unrealized depreciation .................................. (163,962,442)
--------------
Net unrealized appreciation (depreciation) ............... $ 38,543,347
==============
Distributable earnings - undistributed ordinary income ... $ 49,866,265
==============
Net investment income differs for financial statement and tax purposes primarily
due to differing treatments of defaulted securities, foreign currency
transactions, passive foreign investment company shares, synthetic equity swaps,
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, defaulted securities,
foreign currency transactions, synthetic equity swaps, pass-through entity
income, and bond discounts and premiums.
7. INVESTMENT TRANSACTIONS
Purchases and sales of investments (excluding short term securities and
securities sold short) for the year ended December 31, 2008, aggregated
$911,365,746 and $1,150,724,555, respectively.
Transactions in options written during the year ended December 31, 2008, were as
follows:
NUMBER OF PREMIUMS
CONTRACTS RECEIVED
--------- -----------
Options outstanding at December 31, 2007 ... 180,000 $ 1,311,609
Options written ............................ 46,768 3,126,687
Options expired ............................ (180,000) (1,311,609)
Options exercised .......................... -- --
Options closed ............................. -- --
-------- -----------
Options outstanding at December 31, 2008 ... 46,768 $ 3,126,687
======== ===========
Annual Report | 41
Mutual European Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. FORWARD EXCHANGE CONTRACTS
At December 31, 2008, the Fund had the following forward exchange contracts
outstanding:
CONTRACT SETTLEMENT UNREALIZED UNREALIZED
AMOUNT DATE APPRECIATION DEPRECIATION
------------ ---------- ------------ -------------
CONTRACTS TO BUY
1,440,000 British Pound Sterling .. $ 2,558,262 1/12/09 $ -- $ (455,768)
16,107,145 Norwegian Krone ......... 2,570,000 1/12/09 -- (256,220)
8,975,525 Norwegian Krone ......... 1,270,000 1/12/09 19,328 --
154,401,157 Danish Krone ............ 26,213,042 1/23/09 2,743,663 --
9,204,119 Danish Krone ............ 1,767,427 1/23/09 -- (41,268)
64,014,581 Swiss Franc ............. 55,523,386 2/09/09 4,451,431 --
18,531,476 Euro .................... 26,643,018 2/13/09 -- (775,508)
8,110,142 Euro .................... 10,385,700 2/13/09 934,993 --
23,796,165 British Pound Sterling .. 43,270,038 3/10/09 -- (8,564,914)
164,600,709 Swedish Krona ........... 22,923,970 3/16/09 -- (1,891,927)
117,352,063 Swedish Krona ........... 14,650,815 3/16/09 344,539 --
10,277,053 Norwegian Krone ......... 1,425,000 5/19/09 43,696 --
750,000 New Zealand Dollar ...... 405,893 9/10/09 22,610 --
CONTRACTS TO SELL
27,834,324 British Pound Sterling .. 44,967,339 1/12/09 4,327,418 --
2,154,730 British Pound Sterling .. 3,117,779 1/12/09 -- (28,266)
72,206,175 Euro .................... 98,841,510 1/14/09 -- (2,059,375)
183,678,648 Danish Krone ............ 37,801,949 1/23/09 3,354,484 --
83,929,114 Danish Krone ............ 14,821,828 1/23/09 -- (918,408)
166,000,000 Euro .................... 242,833,100 1/26/09 10,992,713 --
91,715,033 Swiss Franc ............. 87,161,410 2/09/09 1,306,094 --
27,438,539 Swiss Franc ............. 24,058,251 2/09/09 -- (1,648,726)
121,000,000 Euro .................... 179,842,300 2/13/09 10,942,175 --
11,711,171 Euro .................... 15,036,207 2/13/09 -- (1,311,052)
126,012,586 Euro .................... 164,000,771 2/27/09 -- (11,832,893)
93,600,000 Swiss Franc ............. 84,525,901 3/09/09 -- (3,197,546)
40,000,000 British Pound Sterling .. 69,366,150 3/10/09 11,028,810 --
55,750,401 Euro .................... 73,708,998 3/13/09 -- (4,057,343)
471,690,458 Swedish Krona ........... 69,260,950 3/16/09 8,990,166 --
98,281,997 Swedish Krona ........... 12,212,774 3/16/09 -- (345,320)
66,416,022 Euro .................... 86,106,708 4/30/09 -- (6,441,075)
25,095,420 British Pound Sterling .. 39,030,907 5/12/09 2,437,641 --
177,099,640 Euro .................... 223,685,345 5/13/09 -- (23,029,333)
218,070,936 Norwegian Krone ......... 30,912,453 5/19/09 -- (252,110)
29,500,000 Euro .................... 38,414,900 5/29/09 -- (2,667,592)
10,345,021 New Zealand Dollar ...... 5,513,896 9/10/09 -- (396,595)
18,315,522 British Pound Sterling .. 27,164,109 9/14/09 455,532 --
----------- ------------
Unrealized appreciation (depreciation)
on forward exchange contracts ................................. 62,395,293 (70,171,239)
----------- ------------
NET UNREALIZED DEPRECIATION ON FORWARD EXCHANGE CONTRACTS .. $ (7,775,946)
============
42 | Annual Report
Mutual European Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. CONCENTRATION OF RISK
Investing in foreign securities may include certain risks and considerations not
typically associated with investing in U.S. securities, such as fluctuating
currency values and changing local and regional economic, political and social
conditions, which may result in greater market volatility. In addition, certain
foreign securities may not be as liquid as U.S. securities.
10. RESTRICTED SECURITIES
The Fund may invest in securities that are restricted under the Securities Act
of 1933 (1933 Act) or which are subject to legal, contractual, or other agreed
upon restrictions on resale. Restricted securities are often purchased in
private placement transactions, and cannot be sold without prior registration
unless the sale is pursuant to an exemption under the 1933 Act. Disposal of
these securities may require greater effort and expense, and prompt sale at an
acceptable price may be difficult. The Fund may have registration rights for
restricted securities. The issuer generally incurs all registration costs.
At December 31, 2008, the Fund held investments in restricted securities,
excluding 144A securities deemed to be liquid, valued in accordance with
procedures approved by the Trust's Board of Trustees as reflecting fair value,
as follows:
SHARES/WARRANTS/ ACQUISITION
CONTRACTS ISSUER DATES COST VALUE
- ---------------- ----------------------------------------------------- ------------------ ---------- ------------
92,335 AboveNet Inc. ....................................... 10/02/01 - 8/08/08 $4,586,047 $ 4,616,750
117 AboveNet Inc., stock grant, grant
price $20.95, expiration date 9/09/13 ............ 4/17/06 - 9/08/06 -- 263
3,781 AboveNet Inc., wts., 9/08/10 ........................ 10/02/01 - 9/07/07 392,580 15,124
16,127,149 Euro Wagon LP ....................................... 12/08/05 - 1/02/08 6,298,244 8,492,240
16,080 Olympus Re Holdings Ltd. ............................ 12/19/01 1,554,963 37,749
46,841 PTV Inc., 10.00%, pfd., A ........................... 12/07/01 - 3/06/02 65,577 42,157
-----------
TOTAL RESTRICTED SECURITIES (0.77% of Net Assets) ... $13,204,283
===========
Annual Report | 43
Mutual European Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
11. HOLDINGS OF 5% VOTING SECURITIES OF PORTFOLIO COMPANIES
The 1940 Act defines "affiliated companies" to include investments in portfolio
companies in which a fund owns 5% or more of the outstanding voting securities.
Investments in "affiliated companies" for the Fund for the year ended December
31, 2008, were as shown below.
NUMBER OF SHARES NUMBER OF
HELD AT SHARES VALUE AT REALIZED
BEGINNING GROSS GROSS HELD AT END END OF INVESTMENT CAPITAL
NAME OF ISSUER OF YEAR ADDITIONS REDUCTIONS OF YEAR YEAR INCOME GAIN (LOSS)
- -------------- ----------------- --------- ---------- ----------- ---------- ---------- -----------
CONTROLLED AFFILIATES(a)
Euro Wagon LP ................. 16,127,149 -- -- 16,127,149 $8,492,240 $-- $ --
---------- --- -----------
NON-CONTROLLED AFFILIATES
Globe Speciality
Metals Inc., 144A .......... 2,830,952 -- 1,400,952 1,430,000 --(b) -- 26,692,621
---------- --- -----------
TOTAL AFFILIATED SECURITIES
(0.50% of Net Assets) ... $8,492,240 $-- $26,692,621
========== === ===========
(a) Issuer in which the Fund owns 25% or more of the outstanding voting
securities.
(b) As of December 31, 2008, no longer an affiliate.
12. OTHER CONSIDERATIONS
Officers, directors or employees of the Fund's Investment Manager, may serve
from time to time as members of boards of bondholders' steering committees,
official creditors' committees, or board of directors of companies in which the
Fund invests. Such participation may result in the possession by the Investment
Manager of material non-public information which, pursuant to the Fund's
policies and the requirements of applicable securities laws, could prevent the
Fund from trading in the securities of such companies for limited or extended
periods of time.
13. REORGANIZATION TO A DELAWARE STATUTORY TRUST
On April 11, 2007, the Board and shareholders approved an Agreement and Plan of
Reorganization (Agreement) whereby the investment company would be reorganized
and its domicile changed from a Maryland corporation to a Delaware statutory
trust. In connection with these changes, the Trust's name was also changed to
Franklin Mutual Series Funds, formerly known as the Franklin Mutual Series
Funds, Inc. The reorganization became effective on May 1, 2008.
14. FAIR VALUE MEASUREMENTS
The Fund adopted Financial Accounting Standards Board (FASB) Statement No. 157,
"Fair Value Measurement" (SFAS 157), on January 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.
44 | Annual Report
Mutual European Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
14. FAIR VALUE MEASUREMENTS (CONTINUED)
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 December 31, 2008, in
valuing the Fund's assets and liabilities carried at fair value:
LEVEL 1 LEVEL 2 LEVEL 3 TOTAL
-------------- ----------- ----------- --------------
ASSETS:
Investments in Securities ....... $1,640,937,949 $60,459,528 $13,902,609 $1,715,300,086
Other Financial Instruments(a) .. -- 62,395,293 -- 62,395,293
LIABILITIES:
Options Written ................. -- 2,114,131 -- 2,114,131
Other Financial Instruments(a) .. -- 70,171,239 -- 70,171,239
(a) Other financial instruments include net unrealized appreciation
(depreciation) on forward exchange contracts.
At December 31, 2008, the reconciliation of assets in which significant
unobservable inputs (Level 3) were used in determining the Fund's fair value, is
as follows:
INVESTMENTS
IN SECURITIES
------------
Beginning Balance - January 1, 2008 ......................... $ 59,565,050
Net realized gain (loss) ................................. (174,183)
Net change in unrealized appreciation (depreciation) ..... 23,824,041
Net purchases (sales) .................................... 46,025
Transfers in and/or out of Level 3 .......................... (69,358,324)
------------
Ending Balance .............................................. $ 13,902,609
------------
Net change in unrealized appreciation (depreciation)
attributable to assets still held at end of year ......... $(13,044,839)
============
Annual Report | 45
Mutual European Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
15. 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 Fund is currently evaluating the impact, if any, of
applying the various provisions of SFAS 161.
16. SUBSEQUENT EVENTS
On January 23, 2009, the Fund entered into, along with certain other funds
managed by Franklin Templeton Investments (individually, "Borrower";
collectively "Borrowers"), a $725 million senior unsecured syndicated global
line of credit ("Global Credit Facility") to provide a source of funds to the
Borrowers for temporary and emergency purposes and to meet future unanticipated
or unusually large redemption requests.
Under the terms of the Global Credit Facility, each Borrower has agreed to pay
its proportionate share of fees and expenses incurred in connection with the
implementation and maintenance of the Global Credit Facility.
ABBREVIATIONS
CURRENCY
EUR - Euro
GBP - British Pound Sterling
SELECTED PORTFOLIO
ADR - American Depository Receipt
FHLB - Federal Home Loan Bank
46 | Annual Report
Mutual European Fund
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO THE BOARD OF TRUSTEES OF FRANKLIN MUTUAL SERIES FUNDS AND SHAREHOLDERS OF THE
MUTUAL EUROPEAN FUND:
We have audited the accompanying statement of assets and liabilities of the
Mutual European Fund (one of the Funds constituting the Franklin Mutual Series
Funds) (the "Fund"), including the statement of investments, as of December 31,
2008, and the related statement of operations for the year then ended, the
statements of changes in net assets for each of the two years in the period then
ended, and the financial highlights for each of the five years in the period
then ended. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. We were
not engaged to perform an audit of the Fund's internal control over financial
reporting. Our audits included consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Fund's internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements and financial highlights, assessing the accounting principles used
and significant estimates made by management, and evaluating the overall
financial statement presentation. Our procedures included confirmation of
securities owned as of December 31, 2008, by correspondence with the custodian
and brokers or by other appropriate auditing procedures where replies from the
brokers were not received. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
Mutual European Fund of the Franklin Mutual Series Funds at December 31, 2008,
the results of its operations for the year then ended, the changes in its net
assets for each of the two years in the period then ended, and the financial
highlights for each of the five years in the period then ended, in conformity
with U.S. generally accepted accounting principles.
Ernst & Young LLP
Boston, Massachusetts
February 17, 2009
Annual Report | 47
Mutual European Fund
TAX DESIGNATION (UNAUDITED)
Under Section 852(b)(3)(C) of the Internal Revenue Code (Code), the Fund
designates the maximum amount allowable but no less than $50,348,106 as a long
term capital gain dividend for the fiscal year ended December 31, 2008.
Under Section 871(k)(2)(C) of the Code, the Fund designates the maximum amount
allowable but no less than $12,332,021 as a short term capital gain dividend for
purposes of the tax imposed under Section 871(a)(1)(A) of the Code for the
fiscal year ended December 31, 2008.
Under Section 854(b)(2) of the Code, the Fund designates 4.67% of the ordinary
income dividends as income qualifying for the dividends received deduction for
the fiscal year ended December 31, 2008.
Under Section 854(b)(2) of the Code, the Fund designates the maximum amount
allowable but no less than $74,543,996 as qualified dividends for purposes of
the maximum rate under Section 1(h)(11) of the Code for the fiscal year ended
December 31, 2008. Distributions, including qualified dividend income, paid
during calendar year 2008 will be reported to shareholders on Form 1099-DIV in
January 2009. Shareholders are advised to check with their tax advisors for
information on the treatment of these amounts on their individual income tax
returns.
Under Section 871(k)(1)(C) of the Code, the Fund designates the maximum amount
allowable but no less than $16,297,652 as interest related dividends for
purposes of the tax imposed under Section 871(a)(1)(A) of the Code for the
fiscal year ended December 31, 2008.
48 | Annual Report
Mutual European Fund
BOARD MEMBERS AND OFFICERS
The name, year of birth and address of the officers and board members, as well
as their affiliations, positions held with the Fund, principal occupations
during the past five years and number of portfolios overseen in the Franklin
Templeton Investments fund complex are shown below. Generally, each board member
serves until that person's successor is elected and qualified.
INDEPENDENT BOARD MEMBERS
NUMBER OF
PORTFOLIOS
IN FUND COMPLEX
NAME, YEAR OF BIRTH LENGTH OF OVERSEEN BY
AND ADDRESS POSITION TIME SERVED BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ----------------------------------------- --------------- ------------------ --------------- -------------------------------
EDWARD I. ALTMAN, PH.D. (1941) Trustee Since 1987 7 None
c/o Franklin Mutual Advisers, LLC
101 John F. Kennedy Parkway
Short Hills, NJ 07078-2789
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Max L. Heine Professor of Finance and Director of The Credit and Debt Markets Research Program, Salomon Center, Stern School of
Business, New York University; editor and author of numerous financial publications; financial consultant; a director to numerous
financial publishing organizations; and FORMERLY, Vice Director, Salomon Center, Stern School of Business, New York University.
ANN TORRE BATES (1958) Trustee Since 1994 30 SLM Corporation (Sallie Mae)
c/o Franklin Mutual Advisers, LLC and Allied Capital Corporation
101 John F. Kennedy Parkway (financial services).
Short Hills, NJ 07078-2789
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Independent strategic and financial consultant; and FORMERLY, Executive Vice President and Chief Financial Officer, NHP Incorporated
(manager of multifamily housing) (1995-1997); and Vice President and Treasurer, US Airways, Inc. (until 1995).
BURTON J. GREENWALD (1929) Trustee Since 2002 14 Franklin Templeton Emerging
c/o Franklin Mutual Advisers, LLC Markets Debt Opportunities Fund
101 John F. Kennedy Parkway PLC and Fiduciary International
Short Hills, NJ 07078-2789 Ireland Limited.
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Managing Director, B.J. Greenwald Associates (management consultants to the financial services industry); and FORMERLY, Chairman,
Fiduciary Trust International Funds; Executive Vice President, L.F Rothschild Fund Management, Inc.; President and Director, Merit
Mutual Funds; President, Underwriting Division and Director, National Securities & Research Corporation; Governor, Investment
Company Institute and Chairman, ICI Public Information Committee.
BRUCE A. MACPHERSON (1930) Trustee Since 1974 7 None
c/o Franklin Mutual Advisers, LLC
101 John F. Kennedy Parkway
Short Hills, NJ 07078-2789
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Retired, former Chairman, A.A. MacPherson, Inc., Canton, MA (representative for electrical manufacturers).
Annual Report | 49
NUMBER OF
PORTFOLIOS
IN FUND COMPLEX
NAME, YEAR OF BIRTH LENGTH OF OVERSEEN BY
AND ADDRESS POSITION TIME SERVED BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ----------------------------------------- --------------- ------------------ --------------- -------------------------------
CHARLES RUBENS II (1930) Trustee Since 1998 14 None
c/o Franklin Mutual Advisers, LLC
101 John F. Kennedy Parkway
Short Hills, NJ 07078-2789
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Private investor.
ROBERT E. WADE (1946) Trustee and Trustee 37 El Oro and Exploration Co.,
c/o Franklin Mutual Advisers, LLC Chairman since 1991 and p.l.c. (investments).
101 John F. Kennedy Parkway of the Board Chairman of the
Short Hills, NJ 07078-2789 Board since 2005
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Retired, former practicing attorney.
INTERESTED BOARD MEMBERS AND OFFICERS
NUMBER OF
PORTFOLIOS
IN FUND COMPLEX
NAME, YEAR OF BIRTH LENGTH OF OVERSEEN BY
AND ADDRESS POSITION TIME SERVED BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ----------------------------------------- --------------- ------------------ --------------- -------------------------------
**GREGORY E. JOHNSON (1961) Trustee Since 2007 92 None
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director, President and Chief Executive Officer, Franklin Resources, Inc.; President, Templeton Worldwide, Inc.; Director, Templeton
Asset Management Ltd.; and officer and/or director or trustee, as the case may be, of some of the other subsidiaries of Franklin
Resources, Inc. and of 33 of the investment companies in Franklin Templeton Investments.
**PETER A. LANGERMAN (1955) Trustee, Trustee 7 None
c/o Franklin Mutual Advisers, LLC President since 2007,
101 John F. Kennedy Parkway and Chief President and
Short Hills, NJ 07078-2702 Executive Chief Executive
Officer - Officer -
Investment Investment
Management Management
since 2005
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Chairman of the Board, Chief Executive Officer and President, Franklin Mutual Advisers, LLC; officer and/or director, as the case
may be, of three of the investment companies in Franklin Templeton Investments; and FORMERLY, Director, New Jersey's Division of
Investment.
JENNIFER J. BOLT (1964) Chief Since Not Applicable Not Applicable
One Franklin Parkway Executive December 2008
San Mateo, CA 94403-1906 Officer -
Finance and
Administration
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Executive Vice President - Operations and Technology, Franklin Resources, Inc.; Director, Templeton Global Advisors Limited; officer
and/or director, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 46 of the investment
companies in Franklin Templeton Investments.
50 | Annual Report
NUMBER OF
PORTFOLIOS
IN FUND COMPLEX
NAME, YEAR OF BIRTH LENGTH OF OVERSEEN BY
AND ADDRESS POSITION TIME SERVED BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ----------------------------------------- --------------- ------------------ --------------- -------------------------------
PHILIPPE BRUGERE-TRELAT (1949) Vice President Since 2005 Not Applicable Not Applicable
101 John F. Kennedy Parkway
Short Hills, NJ 07078-2789
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice President, Franklin Mutual Advisers, LLC; Portfolio Manager of Eurovest SA (French registered Investment Company, Sicav); and
officer of two of the investment companies in Franklin Templeton Investments.
JAMES M. DAVIS (1952) Chief Chief Compliance Not Applicable Not Applicable
One Franklin Parkway Compliance Officer since 2004
San Mateo, CA 94403-1906 Officer and and Vice President
Vice President - AML Compliance
- AML since 2006
Compliance
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director, Global Compliance, Franklin Resources, Inc.; officer of some of the other subsidiaries of Franklin Resources, Inc. and of
46 of the investment companies in Franklin Templeton Investments; and FORMERLY, Director of Compliance, Franklin Resources, Inc.
(1994-2001).
MICHAEL J. EMBLER (1964) Senior Vice Since 2005 Not Applicable Not Applicable
101 John F. Kennedy Parkway President
Short Hills, NJ 07078-2789 and Chief
Investment
Officer
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Vice President and Chief Investment Officer, Franklin Mutual Advisers, LLC; and officer of two of the investment companies in
Franklin Templeton Investments.
LAURA F. FERGERSON (1962) Chief Financial Since Not Applicable Not Applicable
One Franklin Parkway Officer and February 2008
San Mateo, CA 94403-1906 Chief
Accounting
Officer
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice President, Franklin Templeton Services, LLC; officer of 46 of the investment companies in Franklin Templeton Investments; and
FORMERLY, Director and member of Audit and Valuation Committees, Runkel Funds, Inc. (2003-2004); Assistant Treasurer of most of the
investment companies in Franklin Templeton Investments (1997-2003); and Vice President, Franklin Templeton Services, LLC
(1997-2003).
JIMMY D. GAMBILL (1947) Vice President Since Not Applicable Not Applicable
500 East Broward Blvd. February 2008
Suite 2100
Fort Lauderdale, FL 33394-3091
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
President, Franklin Templeton Services, LLC; Senior Vice President, Templeton Worldwide, Inc.; and officer of some of the other
subsidiaries of Franklin Resources, Inc. and of 46 of the investment companies in Franklin Templeton Investments.
Annual Report | 51
NUMBER OF
PORTFOLIOS
IN FUND COMPLEX
NAME, YEAR OF BIRTH LENGTH OF OVERSEEN BY
AND ADDRESS POSITION TIME SERVED BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ----------------------------------------- --------------- ------------------ --------------- -------------------------------
STEVEN J. GRAY (1955) Secretary Since 2005 Not Applicable Not Applicable
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Associate General Counsel, Franklin Templeton Investments; Secretary, Franklin Advisory Services, LLC, Franklin Mutual
Advisers, LLC and Franklin Templeton Distributors, Inc.; and officer of 41 of the investment companies in Franklin Templeton
Investments.
GREGORY R. SEWARD (1956) Treasurer Since 2005 Not Applicable Not Applicable
500 East Broward Blvd.
Suite 2100
Fort Lauderdale, FL 33394-3091
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice President, Franklin Templeton Services, LLC; officer of 18 of the investment companies in Franklin Templeton Investments; and
FORMERLY, Vice President, JPMorgan Chase (2000-2004) and American General Financial Group (1991-2000).
CRAIG S. TYLE (1960) Vice President Since 2005 Not Applicable Not Applicable
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
General Counsel and Executive Vice President, Franklin Resources, Inc.; officer of some of the other subsidiaries of Franklin
Resources, Inc. and of 46 of the investment companies in Franklin Templeton Investments; and FORMERLY, Partner, Shearman & Sterling,
LLP (2004-2005); and General Counsel, Investment Company Institute (ICI) (1997-2004).
* We base the number of portfolios on each separate series of the U.S.
registered investment companies within the Franklin Templeton Investments
fund complex. These portfolios have a common investment manager or
affiliated investment managers.
** Gregory E. Johnson is considered to be an interested person of the Fund
under the federal securities laws due to his position as an officer and
director of Franklin Resources, Inc., which is the parent company of the
Fund's investment manager and distributor. Peter A. Langerman is considered
to be an interested person of the Fund under the federal securities laws
due to his position as an officer of Franklin Mutual Advisers, LLC, which
is the parent company of the Fund's investment manager.
Note 1: Officer information is current as of the date of this report. It is
possible that after this date, information about officers may change.
Note 2: Gregory E. Johnson is the brother of Jennifer J. Bolt.
THE FUND'S BOARD OF DIRECTORS HAS DETERMINED THAT CERTAIN OF THE MEMBERS OF THE
AUDIT COMMITTEE, INCLUDING ANN TORRE BATES, ARE AUDIT COMMITTEE FINANCIAL
EXPERTS, AND "INDEPENDENT," UNDER THOSE PROVISIONS OF THE SARBANES-OXLEY ACT OF
2002, AND THE RULES AND FORM AMENDMENTS ADOPTED BY THE SECURITIES AND EXCHANGE
COMMISSION, RELATING TO AUDIT COMMITTEE FINANCIAL EXPERTS.
THE STATEMENT OF ADDITIONAL INFORMATION (SAI) INCLUDES ADDITIONAL INFORMATION
ABOUT THE BOARD MEMBERS AND IS AVAILABLE, WITHOUT CHARGE, UPON REQUEST.
SHAREHOLDERS MAY CALL (800) DIAL BEN/(800) 342-5236 TO REQUEST THE SAI.
52 | Annual Report
Mutual European 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.
Annual Report | 53
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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 annual report
(FRANKLIN TEMPLETON INVESTMENTS(R) LOGO) One Franklin Parkway
San Mateo, CA 94403-1906
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ANNUAL REPORT AND SHAREHOLDER LETTER
MUTUAL EUROPEAN FUND
INVESTMENT MANAGER
Franklin Mutual Advisers, LLC
101 John F. Kennedy Parkway
Short Hills, NJ 07078
DISTRIBUTOR
Franklin Templeton Distributors, Inc.
(800) DIAL BEN(R)
franklintempleton.com
SHAREHOLDER SERVICES
(800) 632-2301 - (Class A, B & C)
(800) 448-FUND - (Class Z)
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. 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.
478 A2008 02/09
(GRAPHIC)
DECEMBER 31, 2008
ANNUAL REPORT AND SHAREHOLDER LETTER SECTOR
MUTUAL FINANCIAL SERVICES FUND
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(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.
(GRAPHIC)
MUTUAL FUNDS | RETIREMENT PLANS | 529 COLLEGE SAVINGS PLANS | SEPARATE ACCOUNTS
Not part of the annual report
Contents
SHAREHOLDER LETTER ........................................................ 1
ANNUAL REPORT
Mutual Financial Services Fund ............................................ 5
Performance Summary ....................................................... 11
Your Fund's Expenses ...................................................... 16
Financial Highlights and Statement of Investments ......................... 18
Financial Statements ...................................................... 26
Notes to Financial Statements ............................................. 30
Report of Independent Registered Public Accounting Firm ................... 45
Tax Designation ........................................................... 46
Board Members and Officers ................................................ 47
Shareholder Information ................................................... 51
Shareholder Letter
Dear Mutual Financial Services Fund Shareholder:
As we write this letter, 2008 has just drawn to a close. Like many other
investors, we are not sorry to see it pass. From a purely financial perspective,
it was a painful year, bringing stock market declines ranging from 40% to 50%
across most of the developed world (with greater losses in many emerging
markets) as well as a credit crisis and climate of fear that prompted a global
recession. These events have effectively wiped out the shareholders of such
institutions as Fannie Mae, Freddie Mac, AIG, Bear Stearns, Lehman Brothers,
Fortis, Washington Mutual and Wachovia, and have led to extraordinary government
intervention in the financial markets. Policy makers have no definitive playbook
for guidance, and the world of finance is being remade before our eyes.
As stewards of our investors' capital, we have always followed an investment
approach that places a premium on limiting our portfolio's downside exposure.
This is inherent in our focus on buying companies cheaply -- when their
securities are trading at a meaningful discount to our analysis of intrinsic
value -- and selling them as they trade close to that value. We are particularly
attracted to stocks where an identifiable catalyst exists to unlock the
valuation discount. We also buy distressed securities and participate in merger
arbitrage and privately negotiated transactions when we feel we can generate
attractive risk-adjusted returns for Fund investors.
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NOT FDIC INSURED | MAY LOSE VALUE | NO BANK GUARANTEE
Not part of the annual report | 1
Although we did manage to perform better than our narrow benchmark, not an
inconsiderable achievement in these markets, we are nevertheless dissatisfied by
the Fund's absolute loss. Several factors contributed to this, some market
related and others self-inflicted.
First and perhaps most important, was the generally indiscriminate devaluation
of stocks across industries, geographies and market capitalizations. In short,
particularly in the financial services sector, there were few safe havens as
even companies in more defensive areas that make up the Fund's core, including
retail banks, thrifts and insurance, were all down significantly in 2008.
Second, entering 2008 the Fund owned shares of several large European banks that
we believed had very limited exposure to the difficulties that roiled the U.S.
financial system. Subsequent events proved that the contagion had spread to
these institutions as well.
Third, reaching to nearly all corners of the globe, banks are proving to be
capital deficient in the environment following the boom (and now bust) in
lending and housing over the past decade. Hence, almost all positions with
banking operations suffered due to the negative spiral created by the deflation
of housing and related assets, the subsequent drag on capital levels and then
the liquidation of positions that drove further reductions in asset values.
In a year of few highlights, we did get some things right. As a number of
securities reached our assessment of their intrinsic value, the cash position
that had started to rise in 2007 continued to do so in 2008 because we resisted
the temptation to reinvest proceeds from sales. Valuations, in some cases,
appeared very low, but this can be quite deceptive given that a significant
amount of earnings growth in past years has come from leverage. We selectively
used market puts at various points during the year to protect against large
downward market movements. We did have our share of positive stock stories as
noted in the following shareholder report. And we increased our foreign currency
hedges to the U.S. dollar over the year, which mitigated the drag caused by an
appreciating dollar.
Looking forward, we are focused on a number of factors. Rather than try to be
macroeconomists or market strategists, we instead focus on our discipline of
buying securities at what we believe are very attractive prices and investing
for the long term. However, one cannot ignore the macroeconomic backdrop
entering 2009, and we are proceeding with a fair degree of caution. Although the
2 | Not part of the annual report
actions of central banks across the globe may have temporarily stabilized the
financial system, we are not convinced that the worst of the economic news is
behind us. Nevertheless, given the indiscriminate nature of the market carnage,
such an environment creates opportunities -- and we are focused on four
particular areas:
- Financial companies across multiple industries with defensive models,
strong market positions, reasonably predictable earnings and solid
balance sheets, many of which we consider as attractively valued today
as they have been in years;
- Stocks disproportionately punished by the market, perhaps because they
were owned heavily by hedge funds or because of issues that can be
resolved through restructuring and rebuilding of their balance sheets;
- Financial companies of extremely high quality that are market leaders,
possibly residing in commodity-driven economies with far less banking
services penetration than that of consumption-based western economies;
and
- Distressed debt, a quiet area for the past several years due to robust
economic and capital market conditions. The leveraged buyout boom from
2005 through mid-2007 is likely to result in defaults by many good
companies with bad balance sheets in the coming years. We consider
this an area of particular opportunity, although it is still early.
Most of the distressed opportunities through year-end 2008 have been
in bad companies with bad balance sheets, which interest us little. As
the cycle continues, we believe distressed debt investing in the
financial services sector should prove to be an area of opportunity.
Given that these are unprecedented times for the global financial
system, we think it is prudent to recognize distressed investing will
also harbor a significant number of investments that we prefer to
avoid. Of course, a corollary of all the acceleration in distressed
debt opportunities is that we will be selective in investing in banks
whose balance sheets are exposed to further deterioration in credit
conditions.
Not part of the annual report | 3
As a final note, periods of economic and market instability historically have
created favorable opportunities for long-term, patient and disciplined
investors. We believe the basic institutions that underlie our economic and
political system have proven their ability to adapt to changing conditions and
emerge stronger from severe dislocations. We are excited about the prospects of
participating in this chapter, albeit a difficult one, of our economic history
and believe our approach should serve our shareholders well over the long term.
We certainly appreciate your support over the past year and look forward to a
more prosperous year ahead.
Sincerely,
/s/ Peter A. Langerman
Peter A. Langerman
Chairman, President and Chief Executive Officer
Franklin Mutual Advisers, LLC
/s/ Michael J. Embler
Michael J. Embler
Senior Vice President and Chief Investment Officer
Franklin Mutual Advisers, LLC
THIS LETTER REFLECTS OUR ANALYSIS AND OPINIONS AS OF DECEMBER 31, 2008. 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.
4 | Not part of the annual report
Annual Report
Mutual Financial Services Fund
YOUR FUND'S GOALS AND MAIN INVESTMENTS: Mutual Financial Services Fund seeks
capital appreciation, with income as a secondary goal, by investing 80% of its
net assets in securities of financial services companies that the manager
believes are available at market prices less than their intrinsic value. The
Fund concentrates its investments in securities of issuers such as banks,
savings and loan organizations, credit card companies, brokerage firms, finance
companies, subprime lending institutions, investment advisors, investment
companies and insurance companies.
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 annual report for Mutual Financial Services Fund covers the fiscal year
ended December 31, 2008.
PERFORMANCE OVERVIEW
Mutual Financial Services Fund - Class Z had a -40.08% cumulative total return
for the 12 months ended December 31, 2008. The Fund underper-formed its broad
benchmark, the Standard & Poor's 500 Index (S&P 500), which had a -37.00% total
return for the same period, but performed better than its narrow benchmark, the
S&P 500 Financials Index, which had a -55.32% total return.(1) You can find the
Fund's long-term performance data in the Performance Summary beginning on page
11.
ECONOMIC AND MARKET OVERVIEW
The U.S. experienced a marked slowdown in gross domestic product (GDP) growth as
housing prices declined, consumer demand softened, and a credit crisis
originally related to U.S. subprime loan losses intensified and spread globally.
Although GDP growth rebounded in the second quarter of 2008, largely due to
fiscal stimulus, the domestic economy contracted in the third
(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 S&P 500 consists of 500 stocks chosen for market
size, liquidity and industry group representation. Each stock's weight in
the index is proportionate to its market value. The S&P 500 is one of the
most widely used benchmarks of U.S. equity performance. The S&P 500
Financials Index is market value weighted and includes all the financial
stocks in the S&P 500. The indexes are unmanaged and include 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.
Annual Report | 5
GEOGRAPHIC BREAKDOWN
Based on Total Net Assets as of 12/31/08
U.S. 39.0%
U.K. 3.9%
Switzerland 2.9%
Germany 2.8%
Norway 2.7%
Bermuda 2.3%
Sweden 2.1%
Italy 2.1%
China 1.4%
France 1.4%
Greece 1.3%
Australia 1.2%
Hong Kong 1.2%
Spain 1.1%
Japan 1.1%
Other 1.3%
Short-Term Investments & Other Net Assets 32.2%
and fourth quarters. Fear of recession spanned the entire period, and in the
summer most economists agreed that a recession had already begun. By then, the
faltering U.S. economy -- which is the world's largest and accounts for roughly
25% of global GDP -- had negatively impacted growth prospects around the world.
Although signs of a global slowdown surfaced in the latter half of the reporting
period, in the first half growth remained robust in developing economies,
particularly in Asia.
The China-led demand for oil, natural gas, and industrial and agricultural
commodities propelled commodity prices and those of related equities to higher
levels. The steep rise in the price of oil, which peaked at $145 per barrel in
early July, was one of the most extreme market trends during the year. As a
result, oil was a major focus of attention due to its impact on everything from
inflation to corporate earnings to consumer spending. The price boom for
commodities in general was broadly based and included natural gas, precious
metals and most agricultural and industrial commodities, all of which added to
global inflationary pressures. In this environment, the world's monetary
authorities faced the choice of lowering short-term interest rates to stimulate
growth or raising them to fight rising inflation. Stimulus provided through
fiscal and monetary policies implemented around the globe sought to restore
financial market stability and reignite economic growth.
The U.S. Treasury and the Federal Reserve Board took unprecedented steps,
including lowering short-term rates to near 0% from 4.25%. The eurozone had made
controlling inflation its main goal and kept rates steady at 4.00% until July,
when the European Central Bank (ECB) joined many of the world's central banks
whose concerns about inflation had led them to raise rates. The potential for
global recession, however, exacerbated by the virtual freeze in the global
financial system in September and October, trumped inflationary concerns, and
the world's monetary authorities, including the ECB and the Bank of England cut
interest rates aggressively. The U.S. dollar, which had declined earlier in the
period versus many of the world's currencies, regained ground quickly toward
period-end as a flight to the relative safety of U.S. Treasuries prevailed. The
greenback appreciated 8.6% relative to most currencies during the year under
review.(2)
In this challenging economic time, volatility came to define global equity
markets. Virtually all local indexes ended the 12-month period with marked
losses. Despite negative economic data and an outlook for decelerating corporate
earnings and profit margins globally, many companies outside the financials
sector retained relatively strong balance sheets.
(2.) Source: Federal Reserve H10 report.
6 | Annual Report
INVESTMENT STRATEGY
We strive to provide investors with superior risk-adjusted returns over time
through our distinctive, value investment style, which includes investments in
undervalued common stocks, distressed debt and risk arbitrage. Rigorous
fundamental analysis drives our investment process. We attempt to determine each
investment's intrinsic value as well as the price at which we would be willing
to commit shareholder funds. While valuation remains our key consideration, we
utilize numerous fundamental factors such as return on equity, financial
leverage and long-term earnings power. We also consider factors such as
management quality and competitive position. As always, our approach to
successful investing is as much about assessing risk and containing losses as it
is about achieving profits.
In addition, we will generally seek to hedge the Fund's currency exposure when
we deem it advantageous for our shareholders.
MANAGER'S DISCUSSION
With few exceptions, 2008 was very difficult for the financial services sector
globally. Against this backdrop, the Fund's largest detractors included German
securities exchange platform provider Deutsche Boerse; Hellenic Exchanges, the
Greek stock exchange; and Belgium-based Fortis, whose operations are focused in
banking, insurance and investment management.
Deutsche Boerse, which operates the Xetra cash market, Eurex Derivatives market
and Clearstream exchange platform, detracted from performance this year as the
Fund's investment declined 57% in local currency. Shares fell because of a
combination of lower trading volumes, investor concerns about profitability due
to disintermediation and forced selling from hedge funds. Deutsche Boerse's
earnings grew roughly 28% in 2008 versus 2007 as a result of the frenetic
trading activity that took place this year, particularly within its derivatives
business. The company also cut its costs more than 7% while continuing to
optimize costs where opportunities presented themselves. Although many investors
harbored fears about Deutsche Boerse, we view this company, like most financial
exchanges, as an integral part of the global financial system. The lack of
credit risk and high level of cash generation inherent in Deutsche Boerse are
attributes that we continued to find attractive, and at year-end our analytical
models indicated the stock was trading at a significant discount to its
intrinsic value.
WHAT IS RETURN ON EQUITY?
Return on equity is an amount, expressed as a percentage, earned on a company's
common stock investment for a given period. It is calculated by dividing common
stock equity (net worth) over the average of the accounting period into net
income for the period after preferred stock dividends but before common stock
dividends. Return on equity tells common shareholders how effectually their
money is being employed. Comparing percentages for current and prior periods
also reveals trends, and comparison with industry composites reveals how well a
company is holding its own against its competitors.
Annual Report | 7
PORTFOLIO BREAKDOWN
Based on Total Net Assets as of 12/31/08
Insurance 24.9%
Commercial Banks 15.1%
Diversified Financial Services 8.7%
Real Estate Investment Trusts 5.3%
Thrifts & Mortgage Finance 4.6%
Commercial Services & Supplies 2.5%
Tobacco 1.6%
Corporate Bonds & Notes 1.6%
Real Estate Management & Development 1.3%
Capital Markets 1.0%
Other 1.2%
Short-Term Investments & Other Net Assets 32.2%
For many of the same reasons, Hellenic Exchanges was also a leading detractor
from the Fund as its shares fell 71% in local currency during 2008. The
company's earnings declined roughly 25% as trading volumes contracted
significantly in the relatively small Greek cash equity market. However,
Hellenic reacted quickly and was successful in cutting costs by 6% over the
course of 2008. Although this company is a somewhat different proposition than
Deutsche Boerse due to its greater focus on cash equities (as opposed to
derivatives), we continued to see significant value in this investment given
exchanges' role as part of the financial world's infrastructure. Moreover, the
company had an estimated dividend yield approaching 10% at year-end 2008, a
single-digit price-to-earnings valuation, virtually zero credit risk and a cash
balance of about 23% of its market capitalization on its balance sheet.
Fortis was the Fund's biggest detractor from performance this year despite our
having sold this position prior to interventions by the governments of Benelux
(Belgium/Netherlands/Luxembourg). During 2008, the Fund's investment declined
63% in local currency. Capital issues plagued the company since its ill-timed
acquisition of ABN AMRO's Dutch banking business amid the crash of the U.S. and
European housing markets, which only complicated matters for Belgium's largest
bank. Although capital was raised and management replaced over the course of
2008, Fortis' inability to defend its share price led to a loss of confidence
and rapid deposit withdrawals in September. Ultimately, this forced a government
rescue of the bank, setting off a marked decline in the company's equity value.
In contrast to these disappointments, some of the Fund's best-performing
investments were index put options on global financial indexes, which allow
holders to profit if the equity market declines within a preset period of time;
as well as individual equities Hudson City Bancorp, a traditional U.S. thrift
and prime mortgage lender; Lancashire Holdings, a U.K. insurer and reinsurer;
and Bermuda-based PartnerRe, a global multiline reinsurer to the insurance
industry.
The put options were initially acquired as a hedge on potential market drops, as
they generally increase in value as stock markets decline. Index puts were
inexpensive in historical terms during 2007, when we first began buying them,
and they remained relatively inexpensive into the beginning of 2008. As equity
markets fell throughout the remainder of 2008, the puts grew profitable and the
Fund gradually reduced its position. Their addition to Fund performance helped
offset some of the broad equity market's negative impact on other portfolio
securities. At period-end, the Fund held no position in index options.
8 | Annual Report
Hudson City Bancorp, which rose 9% in value for the time we held it during 2008,
is a thrift that originates and purchases prime mortgages to retain on its own
books. According to our analysis, the company boasts stable funding sources and
is also the most cost-efficient bank or thrift among publicly listed
institutions, with a 19.2% efficiency ratio. The shares had been a longstanding
position in the Fund as we saw value in the company's ability to profitably put
its excess capital to work with relatively low risk. As 2008 progressed,
investor risk appetite effectively disappeared and the markets flocked to the
relative safety of companies with low-risk balance sheets. Given the stability
of its funding base and the high quality of its underwriting and investments,
Hudson City shares became an investment safe haven in direct contrast to the
broadening U.S. credit crisis. Eventually, the shares rose beyond our estimate
of its intrinsic value. Consequently, we exited the position with a sizable
long-term gain for the Fund.
The Fund's Lancashire Holdings shares advanced nearly 36% in local currency
during the year. Lancashire benefited from strong underwriting performance,
particularly during the Gulf of Mexico hurricane season. In addition, investors
were expecting the property and casualty insurance industry to experience better
pricing conditions through 2009 and into 2010, led by energy, property
catastrophe and retrocessional (reinsurance of reinsurers) lines, areas where we
believe Lancashire is well positioned.
Similar to Lancashire, PartnerRe is a very well-managed Bermudan insurer
focusing on specialty lines in the property and casualty space as well as
reinsurance. We had been following the company for some time, and our analysis
indicated its investment portfolio showed a lower risk profile than many of its
Bermudan industry peers. We sought to take advantage of the third-quarter equity
market collapse to buy a position at historically low valuation levels.
Initially purchased in the latter half of 2008 after PartnerRe's stock had
declined significantly, the Fund's shares appreciated 31% during the time we
held them. According to our analysis, PartnerRe should continue to benefit if
insurance prices improve.
Finally, investors should note that we maintained our currency hedging posture
of being generally hedged to the U.S. dollar for most of our non-U.S. holdings.
Since the dollar was stronger compared with most foreign currencies during 2008,
the Fund benefited to the extent it was hedged.
TOP 10 HOLDINGS
12/31/08
COMPANY % OF TOTAL
SECTOR/INDUSTRY, COUNTRY NET ASSETS
- ------------------------------------------ ----------
Symetra Financial
INSURANCE, U.S. 2.9%
Deutsche Boerse AG
DIVERSIFIED FINANCIAL SERVICES, GERMANY 2.6%
Banque Cantonale Vaudoise
COMMERCIAL BANKS, SWITZERLAND 2.4%
White Mountains Insurance Group Ltd.
INSURANCE, U.S. 2.2%
Intrum Justitia AB
COMMERCIAL SERVICES & SUPPLIES, SWEDEN 2.1%
Oslo Bors VPS Holding ASA
DIVERSIFIED FINANCIAL SERVICES, NORWAY 2.1%
AmTrust Financial Services Inc.
INSURANCE, U.S. 2.1%
Intesa Sanpaolo SpA, ord. & di Risp
COMMERCIAL BANKS, ITALY 2.1%
Annaly Capital Management Inc.
REAL ESTATE INVESTMENT TRUSTS, U.S. 2.0%
Lancashire Holdings Ltd.
INSURANCE, U.K. 1.9%
Annual Report | 9
Thank you for your continued participation in Mutual Financial Services Fund. We
look forward to serving your future investment needs.
(PHOTO OF CHARLES M. LAHR)
/s/ Charles M. Lahr
Charles M. Lahr, CFA
Portfolio
Manager
Mutual Financial Services Fund
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS
AS OF DECEMBER 31, 2008, 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.
CHARLES LAHR has been a portfolio manager for Mutual Financial Services Fund
since 2004. He is also portfolio manager for Mutual Discovery Fund. He joined
Franklin Templeton Investments in 2003. Previously, he was a senior analyst for
the State of Wisconsin Investment Board and also worked for U.S. Bancorp and the
Principal Financial Group.
10 | Annual Report
Performance Summary as of 12/31/08
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 and graphs do 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 Z (SYMBOL: TEFAX) CHANGE 12/31/08 12/31/07
- ----------------------- ------ -------- --------
Net Asset Value (NAV) -$7.88 $10.80 $18.68
DISTRIBUTIONS (1/1/08-12/31/08)
Dividend Income $0.4015
CLASS A (SYMBOL: TFSIX) CHANGE 12/31/08 12/31/07
- ----------------------- ------ -------- --------
Net Asset Value (NAV) -$7.87 $10.83 $18.70
DISTRIBUTIONS (1/1/08-12/31/08)
Dividend Income $0.3553
CLASS B (SYMBOL: TBFSX) CHANGE 12/31/08 12/31/07
- ----------------------- ------ -------- --------
Net Asset Value (NAV) -$7.65 $10.61 $18.26
DISTRIBUTIONS (1/1/08-12/31/08)
Dividend Income $0.2375
CLASS C (SYMBOL: TMFSX) CHANGE 12/31/08 12/31/07
- ----------------------- ------ -------- --------
Net Asset Value (NAV) -$7.79 $10.80 $18.59
DISTRIBUTIONS (1/1/08-12/31/08)
Dividend Income $0.2491
Annual Report | 11
Performance Summary (CONTINUED)
PERFORMANCE(1)
CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETURN AND
VALUE OF $10,000 INVESTMENT INCLUDE MAXIMUM SALES CHARGES. CLASS Z: NO 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 Z 1-YEAR 5-YEAR 10-YEAR
- ------- ------- ------- -------
Cumulative Total Return(2) -40.08% -13.57% +74.63%
Average Annual Total Return(3) -40.08% -2.87% +5.73%
Value of $10,000 Investment(4) $ 5,992 $ 8,643 $17,463
Total Annual Operating Expenses(5) 1.11%
CLASS A 1-YEAR 5-YEAR 10-YEAR
- ------- ------- ------- -------
Cumulative Total Return(2) -40.23% -14.89% +69.09%
Average Annual Total Return(3) -43.66% -4.32% +4.77%
Value of $10,000 Investment(4) $ 5,634 $ 8,020 $15,931
Total Annual Operating Expenses(5) 1.40%
CLASS B 1-YEAR 5-YEAR 10-YEAR
- ------- ------- ------- -------
Cumulative Total Return(2) -40.66% -17.69% +60.43%
Average Annual Total Return(3) -42.98% -4.07% +4.84%
Value of $10,000 Investment(4) $ 5,702 $ 8,123 $16,043
Total Annual Operating Expenses(5) 2.11%
CLASS C 1-YEAR 5-YEAR 10-YEAR
- ------- ------- ------- -------
Cumulative Total Return(2) -40.63% -17.70% +58.28%
Average Annual Total Return(3) -41.21% -3.82% +4.70%
Value of $10,000 Investment(4) $ 5,879 $ 8,230 $15,828
Total Annual Operating Expenses(5) 2.11%
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.
12 | Annual Report
Performance Summary (CONTINUED)
TOTAL RETURN INDEX COMPARISON FOR A HYPOTHETICAL $10,000 INVESTMENT(1)
Total return represents the change in value of an investment over the periods
shown. It includes any current, applicable, maximum sales charge, Fund expenses,
account fees and reinvested distributions. The unmanaged indexes include
reinvestment of any income or distributions. They differ from the Fund in
composition and do not pay management fees or expenses. One cannot invest
directly in an index.
AVERAGE ANNUAL TOTAL RETURN
CLASS Z 12/31/08
- ------- --------
1-Year -40.08%
5-Year -2.87%
10-Year +5.73%
CLASS Z (1/1/99-12/31/08)
(PERFORMANCE GRAPH)
MUTUAL FINANCIAL S&P 500
DATE SERVICES FUND - CLASS Z S&P 500 Index Financials Index
- ---------- ----------------------- ------------- -----------------
1/1/1999 $10,000 $10,000 $10,000
1/31/1999 $ 9,969 $10,418 $10,212
2/28/1999 $ 9,767 $10,094 $10,349
3/31/1999 $10,008 $10,498 $10,745
4/30/1999 $10,645 $10,905 $11,473
5/31/1999 $10,778 $10,647 $10,836
6/30/1999 $11,268 $11,238 $11,284
7/31/1999 $11,151 $10,887 $10,583
8/31/1999 $10,627 $10,833 $10,097
9/30/1999 $10,495 $10,536 $ 9,572
10/31/1999 $11,260 $11,203 $11,170
11/30/1999 $11,026 $11,431 $10,622
12/31/1999 $10,470 $12,104 $10,412
1/31/2000 $ 9,820 $11,496 $10,082
2/29/2000 $ 9,002 $11,278 $ 8,991
3/31/2000 $10,285 $12,382 $10,659
4/30/2000 $10,205 $12,009 $10,324
5/31/2000 $10,855 $11,763 $11,016
6/30/2000 $10,580 $12,053 $10,348
7/31/2000 $11,261 $11,864 $11,417
8/31/2000 $12,123 $12,601 $12,514
9/30/2000 $12,936 $11,936 $12,811
10/31/2000 $12,829 $11,886 $12,755
11/30/2000 $12,451 $10,949 $12,003
12/31/2000 $13,851 $11,002 $13,088
1/31/2001 $14,029 $11,392 $13,051
2/28/2001 $14,071 $10,354 $12,194
3/31/2001 $14,165 $ 9,698 $11,827
4/30/2001 $14,759 $10,451 $12,267
5/31/2001 $15,404 $10,521 $12,761
6/30/2001 $15,798 $10,265 $12,757
7/31/2001 $15,997 $10,164 $12,550
8/31/2001 $15,876 $ 9,528 $11,785
9/30/2001 $14,622 $ 8,759 $11,090
10/31/2001 $14,475 $ 8,926 $10,884
11/30/2001 $15,107 $ 9,610 $11,661
12/31/2001 $15,556 $ 9,694 $11,916
1/31/2002 $15,855 $ 9,553 $11,730
2/28/2002 $15,958 $ 9,369 $11,559
3/31/2002 $16,874 $ 9,721 $12,328
4/30/2002 $17,379 $ 9,132 $11,999
5/31/2002 $17,510 $ 9,064 $11,979
6/30/2002 $16,850 $ 8,419 $11,410
7/31/2002 $16,018 $ 7,763 $10,505
8/31/2002 $16,343 $ 7,813 $10,720
9/30/2002 $15,014 $ 6,964 $ 9,467
10/31/2002 $15,416 $ 7,577 $10,323
11/30/2002 $15,569 $ 8,023 $10,747
12/31/2002 $15,514 $ 7,552 $10,172
1/31/2003 $15,339 $ 7,354 $10,002
2/28/2003 $15,017 $ 7,244 $ 9,689
3/31/2003 $15,154 $ 7,314 $ 9,652
4/30/2003 $16,197 $ 7,917 $10,834
5/31/2003 $17,113 $ 8,334 $11,406
6/30/2003 $17,172 $ 8,440 $11,435
7/31/2003 $17,699 $ 8,589 $11,969
8/31/2003 $18,001 $ 8,756 $11,848
9/30/2003 $17,962 $ 8,663 $11,927
10/31/2003 $19,036 $ 9,153 $12,749
11/30/2003 $19,427 $ 9,234 $12,714
12/31/2003 $20,204 $ 9,718 $13,338
1/31/2004 $20,839 $ 9,897 $13,763
2/29/2004 $21,141 $10,034 $14,129
3/31/2004 $21,222 $ 9,883 $13,990
4/30/2004 $20,426 $ 9,728 $13,344
5/31/2004 $20,547 $ 9,861 $13,590
6/30/2004 $20,811 $10,053 $13,658
7/31/2004 $20,533 $ 9,720 $13,378
8/31/2004 $20,800 $ 9,759 $13,828
9/30/2004 $21,406 $ 9,865 $13,709
10/31/2004 $21,447 $10,016 $13,779
11/30/2004 $22,647 $10,421 $14,187
12/31/2004 $23,361 $10,776 $14,793
1/31/2005 $23,018 $10,513 $14,474
2/28/2005 $23,429 $10,734 $14,397
3/31/2005 $23,018 $10,544 $13,850
4/30/2005 $22,710 $10,344 $13,865
5/31/2005 $23,395 $10,673 $14,245
6/30/2005 $24,008 $10,689 $14,449
7/31/2005 $25,040 $11,086 $14,677
8/31/2005 $24,723 $10,985 $14,420
9/30/2005 $24,817 $11,074 $14,553
10/31/2005 $24,477 $10,889 $15,013
11/30/2005 $25,685 $11,301 $15,717
12/31/2005 $26,663 $11,305 $15,751
1/31/2006 $27,799 $11,604 $15,893
2/28/2006 $28,762 $11,636 $16,214
3/31/2006 $29,503 $11,781 $16,262
4/30/2006 $29,837 $11,939 $16,967
5/31/2006 $28,417 $11,595 $16,342
6/30/2006 $28,079 $11,611 $16,241
7/31/2006 $28,243 $11,683 $16,644
8/31/2006 $29,025 $11,961 $16,837
9/30/2006 $29,719 $12,269 $17,539
10/31/2006 $30,349 $12,669 $17,964
11/30/2006 $30,639 $12,909 $18,076
12/31/2006 $31,924 $13,091 $18,774
1/31/2007 $32,984 $13,289 $18,940
2/28/2007 $32,758 $13,029 $18,376
3/31/2007 $33,055 $13,174 $18,240
4/30/2007 $33,973 $13,758 $18,995
5/31/2007 $34,962 $14,238 $19,432
6/30/2007 $33,725 $14,001 $18,626
7/31/2007 $31,776 $13,567 $17,174
8/31/2007 $31,199 $13,771 $17,439
9/30/2007 $30,924 $14,286 $17,833
10/31/2007 $30,809 $14,513 $17,510
11/30/2007 $29,365 $13,906 $16,155
12/31/2007 $29,144 $13,810 $15,277
1/31/2008 $27,132 $12,981 $15,224
2/29/2008 $26,273 $12,560 $13,512
3/31/2008 $25,337 $12,505 $13,144
4/30/2008 $25,821 $13,115 $14,003
5/31/2008 $25,696 $13,284 $13,151
6/30/2008 $22,669 $12,164 $10,736
7/31/2008 $22,732 $12,062 $11,503
8/31/2008 $22,857 $12,237 $11,379
9/30/2008 $20,903 $11,146 $10,822
10/31/2008 $18,147 $ 9,274 $ 8,389
11/30/2008 $17,474 $ 8,609 $ 6,846
12/31/2008 $17,463 $ 8,700 $ 6,826
------- ------- -------
Total Returns 74.63% -13.00% -31.74%
======= ======= =======
AVERAGE ANNUAL TOTAL RETURN
CLASS A 12/31/08
- ------- --------
1-Year -43.66%
5-Year -4.32%
10-Year +4.77%
CLASS A (1/1/99-12/31/08)
(PERFORMANCE GRAPH)
MUTUAL FINANCIAL S&P 500 S&P 500
DATE SERVICES FUND - CLASS A INDEX FINANCIALS INDEX
- ---------- ----------------------- ---------- ----------------
1/1/1999 $ 9,422 $10,000 $10,000
1/31/1999 $ 9,392 $10,418 $10,212
2/28/1999 $ 9,202 $10,094 $10,349
3/31/1999 $ 9,422 $10,498 $10,745
4/30/1999 $10,022 $10,905 $11,473
5/31/1999 $10,146 $10,647 $10,836
6/30/1999 $10,599 $11,238 $11,284
7/31/1999 $10,488 $10,887 $10,583
8/31/1999 $ 9,996 $10,833 $10,097
9/30/1999 $ 9,864 $10,536 $ 9,572
10/31/1999 $10,576 $11,203 $11,170
11/30/1999 $10,356 $11,431 $10,622
12/31/1999 $ 9,832 $12,104 $10,412
1/31/2000 $ 9,222 $11,496 $10,082
2/29/2000 $ 8,448 $11,278 $ 8,991
3/31/2000 $ 9,651 $12,382 $10,659
4/30/2000 $ 9,576 $12,009 $10,324
5/31/2000 $10,178 $11,763 $11,016
6/30/2000 $ 9,919 $12,053 $10,348
7/31/2000 $10,558 $11,864 $11,417
8/31/2000 $11,357 $12,601 $12,514
9/30/2000 $12,111 $11,936 $12,811
10/31/2000 $12,011 $11,886 $12,755
11/30/2000 $11,650 $10,949 $12,003
12/31/2000 $12,968 $11,002 $13,088
1/31/2001 $13,126 $11,392 $13,051
2/28/2001 $13,158 $10,354 $12,194
3/31/2001 $13,245 $ 9,698 $11,827
4/30/2001 $13,793 $10,451 $12,267
5/31/2001 $14,395 $10,521 $12,761
6/30/2001 $14,752 $10,265 $12,757
7/31/2001 $14,938 $10,164 $12,550
8/31/2001 $14,817 $ 9,528 $11,785
9/30/2001 $13,645 $ 8,759 $11,090
10/31/2001 $13,508 $ 8,926 $10,884
11/30/2001 $14,090 $ 9,610 $11,661
12/31/2001 $14,504 $ 9,694 $11,916
1/31/2002 $14,783 $ 9,553 $11,730
2/28/2002 $14,878 $ 9,369 $11,559
3/31/2002 $15,723 $ 9,721 $12,328
4/30/2002 $16,184 $ 9,132 $11,999
5/31/2002 $16,306 $ 9,064 $11,979
6/30/2002 $15,688 $ 8,419 $11,410
7/31/2002 $14,913 $ 7,763 $10,505
8/31/2002 $15,207 $ 7,813 $10,720
9/30/2002 $13,970 $ 6,964 $ 9,467
10/31/2002 $14,335 $ 7,577 $10,323
11/30/2002 $14,477 $ 8,023 $10,747
12/31/2002 $14,422 $ 7,552 $10,172
1/31/2003 $14,250 $ 7,354 $10,002
2/28/2003 $13,951 $ 7,244 $ 9,689
3/31/2003 $14,069 $ 7,314 $ 9,652
4/30/2003 $15,037 $ 7,917 $10,834
5/31/2003 $15,877 $ 8,334 $11,406
6/30/2003 $15,937 $ 8,440 $11,435
7/31/2003 $16,417 $ 8,589 $11,969
8/31/2003 $16,698 $ 8,756 $11,848
9/30/2003 $16,652 $ 8,663 $11,927
10/31/2003 $17,639 $ 9,153 $12,749
11/30/2003 $17,993 $ 9,234 $12,714
12/31/2003 $18,718 $ 9,718 $13,338
1/31/2004 $19,296 $ 9,897 $13,763
2/29/2004 $19,567 $10,034 $14,129
3/31/2004 $19,641 $ 9,883 $13,990
4/30/2004 $18,896 $ 9,728 $13,344
5/31/2004 $18,998 $ 9,861 $13,590
6/30/2004 $19,236 $10,053 $13,658
7/31/2004 $18,980 $ 9,720 $13,378
8/31/2004 $19,217 $ 9,759 $13,828
9/30/2004 $19,777 $ 9,865 $13,709
10/31/2004 $19,805 $10,016 $13,779
11/30/2004 $20,906 $10,421 $14,187
12/31/2004 $21,559 $10,776 $14,793
1/31/2005 $21,243 $10,513 $14,474
2/28/2005 $21,622 $10,734 $14,397
3/31/2005 $21,232 $10,544 $13,850
4/30/2005 $20,937 $10,344 $13,865
5/31/2005 $21,569 $10,673 $14,245
6/30/2005 $22,128 $10,689 $14,449
7/31/2005 $23,079 $11,086 $14,677
8/31/2005 $22,776 $10,985 $14,420
9/30/2005 $22,852 $11,074 $14,553
10/31/2005 $22,538 $10,889 $15,013
11/30/2005 $23,641 $11,301 $15,717
12/31/2005 $24,538 $11,305 $15,751
1/31/2006 $25,571 $11,604 $15,893
2/28/2006 $26,457 $11,636 $16,214
3/31/2006 $27,138 $11,781 $16,262
4/30/2006 $27,433 $11,939 $16,967
5/31/2006 $26,116 $11,595 $16,342
6/30/2006 $25,800 $11,611 $16,241
7/31/2006 $25,939 $11,683 $16,644
8/31/2006 $26,658 $11,961 $16,837
9/30/2006 $27,284 $12,269 $17,539
10/31/2006 $27,852 $12,669 $17,964
11/30/2006 $28,118 $12,909 $18,076
12/31/2006 $29,286 $13,091 $18,774
1/31/2007 $30,257 $13,289 $18,940
2/28/2007 $30,037 $13,029 $18,376
3/31/2007 $30,296 $13,174 $18,240
4/30/2007 $31,126 $13,758 $18,995
5/31/2007 $32,033 $14,238 $19,432
6/30/2007 $30,903 $14,001 $18,626
7/31/2007 $29,090 $13,567 $17,174
8/31/2007 $28,561 $13,771 $17,439
9/30/2007 $28,309 $14,286 $17,833
10/31/2007 $28,190 $14,513 $17,510
11/30/2007 $26,867 $13,906 $16,155
12/31/2007 $26,654 $13,810 $15,277
1/31/2008 $24,815 $12,981 $15,224
2/29/2008 $24,017 $12,560 $13,512
3/31/2008 $23,162 $12,505 $13,144
4/30/2008 $23,604 $13,115 $14,003
5/31/2008 $23,475 $13,284 $13,151
6/30/2008 $20,710 $12,164 $10,736
7/31/2008 $20,767 $12,062 $11,503
8/31/2008 $20,867 $12,237 $11,379
9/30/2008 $19,077 $11,146 $10,822
10/31/2008 $16,560 $ 9,274 $ 8,389
11/30/2008 $15,945 $ 8,609 $ 6,846
12/31/2008 $15,931 $ 8,700 $ 6,826
------- ------- -------
Total Returns 59.31% -13.00% -31.74%
======= ======= =======
Annual Report | 13
Performance Summary (CONTINUED)
AVERAGE ANNUAL TOTAL RETURN
CLASS B 12/31/08
- ------- --------
1-Year -42.98%
5-Year -4.07%
10-Year +4.84%
CLASS B (1/1/99-12/31/08)
(PERFORMANCE GRAPH)
MUTUAL FINANCIAL S&P 500
DATE SERVICES FUND - CLASS B S&P 500 INDEX FINANCIALS INDEX
- ---------- ----------------------- ------------- -----------------
1/1/1999 $10,000 $10,000 $10,000
1/31/1999 $ 9,961 $10,418 $10,212
2/28/1999 $ 9,759 $10,094 $10,349
3/31/1999 $ 9,984 $10,498 $10,745
4/30/1999 $10,614 $10,905 $11,473
5/31/1999 $10,738 $10,647 $10,836
6/30/1999 $11,215 $11,238 $11,284
7/31/1999 $11,090 $10,887 $10,583
8/31/1999 $10,559 $10,833 $10,097
9/30/1999 $10,419 $10,536 $ 9,572
10/31/1999 $11,168 $11,203 $11,170
11/30/1999 $10,926 $11,431 $10,622
12/31/1999 $10,369 $12,104 $10,412
1/31/2000 $ 9,722 $11,496 $10,082
2/29/2000 $ 8,901 $11,278 $ 8,991
3/31/2000 $10,161 $12,382 $10,659
4/30/2000 $10,073 $12,009 $10,324
5/31/2000 $10,711 $11,763 $11,016
6/30/2000 $10,424 $12,053 $10,348
7/31/2000 $11,092 $11,864 $11,417
8/31/2000 $11,924 $12,601 $12,514
9/30/2000 $12,714 $11,936 $12,811
10/31/2000 $12,600 $11,886 $12,755
11/30/2000 $12,217 $10,949 $12,003
12/31/2000 $13,583 $11,002 $13,088
1/31/2001 $13,751 $11,392 $13,051
2/28/2001 $13,776 $10,354 $12,194
3/31/2001 $13,851 $ 9,698 $11,827
4/30/2001 $14,421 $10,451 $12,267
5/31/2001 $15,041 $10,521 $12,761
6/30/2001 $15,414 $10,265 $12,757
7/31/2001 $15,593 $10,164 $12,550
8/31/2001 $15,457 $ 9,528 $11,785
9/30/2001 $14,228 $ 8,759 $11,090
10/31/2001 $14,074 $ 8,926 $10,884
11/30/2001 $14,672 $ 9,610 $11,661
12/31/2001 $15,099 $ 9,694 $11,916
1/31/2002 $15,384 $ 9,553 $11,730
2/28/2002 $15,466 $ 9,369 $11,559
3/31/2002 $16,346 $ 9,721 $12,328
4/30/2002 $16,814 $ 9,132 $11,999
5/31/2002 $16,924 $ 9,064 $11,979
6/30/2002 $16,277 $ 8,419 $11,410
7/31/2002 $15,461 $ 7,763 $10,505
8/31/2002 $15,761 $ 7,813 $10,720
9/30/2002 $14,467 $ 6,964 $ 9,467
10/31/2002 $14,833 $ 7,577 $10,323
11/30/2002 $14,974 $ 8,023 $10,747
12/31/2002 $14,917 $ 7,552 $10,172
1/31/2003 $14,727 $ 7,354 $10,002
2/28/2003 $14,414 $ 7,244 $ 9,689
3/31/2003 $14,528 $ 7,314 $ 9,652
4/30/2003 $15,524 $ 7,917 $10,834
5/31/2003 $16,377 $ 8,334 $11,406
6/30/2003 $16,423 $ 8,440 $11,435
7/31/2003 $16,916 $ 8,589 $11,969
8/31/2003 $17,192 $ 8,756 $11,848
9/30/2003 $17,135 $ 8,663 $11,927
10/31/2003 $18,151 $ 9,153 $12,749
11/30/2003 $18,502 $ 9,234 $12,714
12/31/2003 $19,225 $ 9,718 $13,338
1/31/2004 $19,819 $ 9,897 $13,763
2/29/2004 $20,082 $10,034 $14,129
3/31/2004 $20,150 $ 9,883 $13,990
4/30/2004 $19,381 $ 9,728 $13,344
5/31/2004 $19,478 $ 9,861 $13,590
6/30/2004 $19,707 $10,053 $13,658
7/31/2004 $19,430 $ 9,720 $13,378
8/31/2004 $19,667 $ 9,759 $13,828
9/30/2004 $20,222 $ 9,865 $13,709
10/31/2004 $20,242 $10,016 $13,779
11/30/2004 $21,362 $10,421 $14,187
12/31/2004 $22,015 $10,776 $14,793
1/31/2005 $21,675 $10,513 $14,474
2/28/2005 $22,048 $10,734 $14,397
3/31/2005 $21,631 $10,544 $13,850
4/30/2005 $21,324 $10,344 $13,865
5/31/2005 $21,960 $10,673 $14,245
6/30/2005 $22,516 $10,689 $14,449
7/31/2005 $23,472 $11,086 $14,677
8/31/2005 $23,146 $10,985 $14,420
9/30/2005 $23,213 $11,074 $14,553
10/31/2005 $22,876 $10,889 $15,013
11/30/2005 $23,989 $11,301 $15,717
12/31/2005 $24,884 $11,305 $15,751
1/31/2006 $25,918 $11,604 $15,893
2/28/2006 $26,800 $11,636 $16,214
3/31/2006 $27,458 $11,781 $16,262
4/30/2006 $27,752 $11,939 $16,967
5/31/2006 $26,400 $11,595 $16,342
6/30/2006 $26,067 $11,611 $16,241
7/31/2006 $26,199 $11,683 $16,644
8/31/2006 $26,907 $11,961 $16,837
9/30/2006 $27,518 $12,269 $17,539
10/31/2006 $28,082 $12,669 $17,964
11/30/2006 $28,334 $12,909 $18,076
12/31/2006 $29,491 $13,091 $18,774
1/31/2007 $30,470 $13,289 $18,940
2/28/2007 $30,248 $13,029 $18,376
3/31/2007 $30,508 $13,174 $18,240
4/30/2007 $31,344 $13,758 $18,995
5/31/2007 $32,256 $14,238 $19,432
6/30/2007 $31,117 $14,001 $18,626
7/31/2007 $29,291 $13,567 $17,174
8/31/2007 $28,758 $13,771 $17,439
9/30/2007 $28,504 $14,286 $17,833
10/31/2007 $28,385 $14,513 $17,510
11/30/2007 $27,053 $13,906 $16,155
12/31/2007 $26,840 $13,810 $15,277
1/31/2008 $24,988 $12,981 $15,224
2/29/2008 $24,183 $12,560 $13,512
3/31/2008 $23,322 $12,505 $13,144
4/30/2008 $23,768 $13,115 $14,003
5/31/2008 $23,639 $13,284 $13,151
6/30/2008 $20,855 $12,164 $10,736
7/31/2008 $20,913 $12,062 $11,503
8/31/2008 $21,013 $12,237 $11,379
9/30/2008 $19,211 $11,146 $10,822
10/31/2008 $16,677 $ 9,274 $ 8,389
11/30/2008 $16,058 $ 8,609 $ 6,846
12/31/2008 $16,043 $ 8,700 $ 6,826
------- ------- -------
Total Returns 60.43% -13.00% -31.74%
======= ======= =======
AVERAGE ANNUAL TOTAL RETURN
CLASS C 12/31/08
- ------- --------
1-Year -41.21%
5-Year -3.82%
10-Year +4.70%
CLASS C (1/1/99-12/31/08)
(PERFORMANCE GRAPH)
MUTUAL FINANCIAL S&P 500
DATE SERVICES FUND - CLASS C S&P 500 INDEX FINANCIALS INDEX
- ---------- ----------------------- ------------- -----------------
1/1/1999 $10,000 $10,000 $10,000
1/31/1999 $ 9,961 $10,418 $10,212
2/28/1999 $ 9,759 $10,094 $10,349
3/31/1999 $ 9,984 $10,498 $10,745
4/30/1999 $10,607 $10,905 $11,473
5/31/1999 $10,740 $10,647 $10,836
6/30/1999 $11,218 $11,238 $11,284
7/31/1999 $11,086 $10,887 $10,583
8/31/1999 $10,563 $10,833 $10,097
9/30/1999 $10,414 $10,536 $ 9,572
10/31/1999 $11,172 $11,203 $11,170
11/30/1999 $10,930 $11,431 $10,622
12/31/1999 $10,367 $12,104 $10,412
1/31/2000 $ 9,716 $11,496 $10,082
2/29/2000 $ 8,898 $11,278 $ 8,991
3/31/2000 $10,161 $12,382 $10,659
4/30/2000 $10,073 $12,009 $10,324
5/31/2000 $10,709 $11,763 $11,016
6/30/2000 $10,428 $12,053 $10,348
7/31/2000 $11,093 $11,864 $11,417
8/31/2000 $11,928 $12,601 $12,514
9/30/2000 $12,714 $11,936 $12,811
10/31/2000 $12,601 $11,886 $12,755
11/30/2000 $12,220 $10,949 $12,003
12/31/2000 $13,589 $11,002 $13,088
1/31/2001 $13,748 $11,392 $13,051
2/28/2001 $13,781 $10,354 $12,194
3/31/2001 $13,856 $ 9,698 $11,827
4/30/2001 $14,422 $10,451 $12,267
5/31/2001 $15,047 $10,521 $12,761
6/30/2001 $15,412 $10,265 $12,757
7/31/2001 $15,599 $10,164 $12,550
8/31/2001 $15,463 $ 9,528 $11,785
9/30/2001 $14,234 $ 8,759 $11,090
10/31/2001 $14,081 $ 8,926 $10,884
11/30/2001 $14,683 $ 9,610 $11,661
12/31/2001 $15,105 $ 9,694 $11,916
1/31/2002 $15,386 $ 9,553 $11,730
2/28/2002 $15,468 $ 9,369 $11,559
3/31/2002 $16,349 $ 9,721 $12,328
4/30/2002 $16,821 $ 9,132 $11,999
5/31/2002 $16,930 $ 9,064 $11,979
6/30/2002 $16,288 $ 8,419 $11,410
7/31/2002 $15,470 $ 7,763 $10,505
8/31/2002 $15,768 $ 7,813 $10,720
9/30/2002 $14,477 $ 6,964 $ 9,467
10/31/2002 $14,839 $ 7,577 $10,323
11/30/2002 $14,978 $ 8,023 $10,747
12/31/2002 $14,923 $ 7,552 $10,172
1/31/2003 $14,735 $ 7,354 $10,002
2/28/2003 $14,417 $ 7,244 $ 9,689
3/31/2003 $14,538 $ 7,314 $ 9,652
4/30/2003 $15,523 $ 7,917 $10,834
5/31/2003 $16,385 $ 8,334 $11,406
6/30/2003 $16,429 $ 8,440 $11,435
7/31/2003 $16,917 $ 8,589 $11,969
8/31/2003 $17,199 $ 8,756 $11,848
9/30/2003 $17,142 $ 8,663 $11,927
10/31/2003 $18,156 $ 9,153 $12,749
11/30/2003 $18,512 $ 9,234 $12,714
12/31/2003 $19,232 $ 9,718 $13,338
1/31/2004 $19,828 $ 9,897 $13,763
2/29/2004 $20,087 $10,034 $14,129
3/31/2004 $20,154 $ 9,883 $13,990
4/30/2004 $19,376 $ 9,728 $13,344
5/31/2004 $19,472 $ 9,861 $13,590
6/30/2004 $19,706 $10,053 $13,658
7/31/2004 $19,432 $ 9,720 $13,378
8/31/2004 $19,667 $ 9,759 $13,828
9/30/2004 $20,224 $ 9,865 $13,709
10/31/2004 $20,244 $10,016 $13,779
11/30/2004 $21,359 $10,421 $14,187
12/31/2004 $22,012 $10,776 $14,793
1/31/2005 $21,677 $10,513 $14,474
2/28/2005 $22,055 $10,734 $14,397
3/31/2005 $21,634 $10,544 $13,850
4/30/2005 $21,332 $10,344 $13,865
5/31/2005 $21,969 $10,673 $14,245
6/30/2005 $22,517 $10,689 $14,449
7/31/2005 $23,470 $11,086 $14,677
8/31/2005 $23,149 $10,985 $14,420
9/30/2005 $23,215 $11,074 $14,553
10/31/2005 $22,883 $10,889 $15,013
11/30/2005 $23,990 $11,301 $15,717
12/31/2005 $24,886 $11,305 $15,751
1/31/2006 $25,915 $11,604 $15,893
2/28/2006 $26,806 $11,636 $16,214
3/31/2006 $27,466 $11,781 $16,262
4/30/2006 $27,755 $11,939 $16,967
5/31/2006 $26,401 $11,595 $16,342
6/30/2006 $26,076 $11,611 $16,241
7/31/2006 $26,206 $11,683 $16,644
8/31/2006 $26,902 $11,961 $16,837
9/30/2006 $27,528 $12,269 $17,539
10/31/2006 $28,083 $12,669 $17,964
11/30/2006 $28,342 $12,909 $18,076
12/31/2006 $29,494 $13,091 $18,774
1/31/2007 $30,453 $13,289 $18,940
2/28/2007 $30,216 $13,029 $18,376
3/31/2007 $30,466 $13,174 $18,240
4/30/2007 $31,280 $13,758 $18,995
5/31/2007 $32,173 $14,238 $19,432
6/30/2007 $31,012 $14,001 $18,626
7/31/2007 $29,175 $13,567 $17,174
8/31/2007 $28,625 $13,771 $17,439
9/30/2007 $28,357 $14,286 $17,833
10/31/2007 $28,223 $14,513 $17,510
11/30/2007 $26,882 $13,906 $16,155
12/31/2007 $26,662 $13,810 $15,277
1/31/2008 $24,798 $12,981 $15,224
2/29/2008 $23,995 $12,560 $13,512
3/31/2008 $23,121 $12,505 $13,144
4/30/2008 $23,551 $13,115 $14,003
5/31/2008 $23,408 $13,284 $13,151
6/30/2008 $20,641 $12,164 $10,736
7/31/2008 $20,684 $12,062 $11,503
8/31/2008 $20,770 $12,237 $11,379
9/30/2008 $18,971 $11,146 $10,822
10/31/2008 $16,456 $ 9,274 $ 8,389
11/30/2008 $15,853 $ 8,609 $ 6,846
12/31/2008 $15,828 $ 8,700 $ 6,826
------- ------- -------
Total Returns 58.28% -13.00% -31.74%
======= ======= =======
14 | Annual Report
Performance Summary (CONTINUED)
ENDNOTES
VALUE SECURITIES MAY NOT INCREASE IN PRICE AS ANTICIPATED OR MAY DECLINE FURTHER
IN VALUE. INVESTING IN A SINGLE-SECTOR FUND INVOLVES SPECIAL RISKS, INCLUDING
GREATER SENSITIVITY TO ECONOMIC, POLITICAL OR REGULATORY DEVELOPMENTS IMPACTING
THE SECTOR. IN ADDITION, THE FUND INVESTS IN FOREIGN SECURITIES WHOSE RISKS
INCLUDE CURRENCY FLUCTUATIONS AND ECONOMIC AND POLITICAL UNCERTAINTIES. THE
FUND'S INVESTMENTS IN SMALLER-COMPANY STOCKS CARRY AN INCREASED RISK OF PRICE
FLUCTUATION, PARTICULARLY OVER THE SHORT TERM. THE FUND MAY ALSO INVEST IN
COMPANIES ENGAGED IN MERGERS, REORGANIZATIONS OR LIQUIDATIONS, WHICH INVOLVE
SPECIAL RISKS, AS PENDING DEALS MAY NOT BE COMPLETED ON TIME OR ON FAVORABLE
TERMS, AS WELL AS LOWER-RATED BONDS, WHICH ENTAIL HIGHER CREDIT RISK. THE FUND'S
PROSPECTUS ALSO INCLUDES A DESCRIPTION OF THE MAIN INVESTMENT RISKS.
CLASS Z: Shares are available to certain eligible investors as described in the
prospectus.
CLASS 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.
(1.) Past expense reductions by the Fund's manager increased the Fund's total
returns. If the manager had not taken this action, the Fund's total returns
would have been lower.
(2.) Cumulative total return represents the change in value of an investment
over the periods indicated.
(3.) Average annual total return represents the average annual change in value
of an investment over the periods indicated.
(4.) These figures represent the value of a hypothetical $10,000 investment in
the Fund over the periods indicated.
(5.) Figures are as stated in the Fund's prospectus current as of the date of
this report.
(6.) Source: (C) 2009 Morningstar. The S&P 500 consists of 500 stocks chosen for
market size, liquidity and industry group representation. Each stock's
weight in the index is proportionate to its market value. The S&P 500 is
one of the most widely used benchmarks of U.S. equity performance. The S&P
500 Financials Index is market value weighted and includes all the
financial stocks in the S&P 500.
Annual Report | 15
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
redemption fees; 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.
16 | Annual Report
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 OR
REDEMPTION FEES. 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
VALUE 7/1/08 VALUE 12/31/08 PERIOD* 7/1/08-12/31/08
----------------- -------------- -----------------------
CLASS Z
Actual $1,000 $ 770.30 $ 5.52
Hypothetical (5% return before expenses) $1,000 $1,018.90 $ 6.29
CLASS A
Actual $1,000 $ 769.20 $ 6.89
Hypothetical (5% return before expenses) $1,000 $1,017.34 $ 7.86
CLASS B
Actual $1,000 $ 766.70 $ 9.95
Hypothetical (5% return before expenses) $1,000 $1,013.88 $11.34
CLASS C
Actual $1,000 $ 766.80 $ 9.95
Hypothetical (5% return before expenses) $1,000 $1,013.88 $11.34
* Expenses are calculated using the most recent six-month expense ratio,
annualized for each class (Z: 1.24%; A: 1.55%; B: 2.24%; and C: 2.24%),
multiplied by the average account value over the period, multiplied by
184/366 to reflect the one-half year period.
Annual Report | 17
Mutual Financial Services Fund
FINANCIAL HIGHLIGHTS
YEAR ENDED DECEMBER 31,
---------------------------------------------------
CLASS Z 2008 2007 2006 2005 2004
- ------- ------- -------- -------- -------- --------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............... $ 18.68 $ 22.59 $ 21.59 $ 20.45 $ 20.06
------- -------- -------- -------- --------
Income from investment operations(a):
Net investment income(b) ...................... 0.46 0.51 0.40 0.44 0.34
Net realized and unrealized gains (losses) .... (7.94) (2.41) 3.76 2.40 2.70
------- -------- -------- -------- --------
Total from investment operations ................. (7.48) (1.90) 4.16 2.84 3.04
------- -------- -------- -------- --------
Less distributions from:
Net investment income ......................... (0.40) (0.61) (0.57) (0.49) (0.32)
Net realized gains ............................ -- (1.40) (2.59) (1.21) (2.33)
------- -------- -------- -------- --------
Total distributions .............................. (0.40) (2.01) (3.16) (1.70) (2.65)
------- -------- -------- -------- --------
Redemption fees(c, d)............................. -- -- -- -- --
------- -------- -------- -------- --------
Net asset value, end of year ..................... $ 10.80 $ 18.68 $ 22.59 $ 21.59 $ 20.45
------- -------- -------- -------- --------
Total return ..................................... (40.08)% (8.71)% 19.73% 14.14% 15.62%
RATIOS TO AVERAGE NET ASSETS
Expenses(e, f) ................................... 1.19% 1.11% 1.08% 1.12% 1.10%
Expenses - excluding dividend expense on
securities sold short(e) ...................... 1.18% 1.11% 1.08% 1.11% 1.09%
Net investment income ............................ 3.15% 2.25% 1.71% 2.10% 1.65%
SUPPLEMENTAL DATA
Net assets, end of year (000's) .................. $91,691 $164,890 $213,874 $174,864 $166,175
Portfolio turnover rate .......................... 41.98% 49.87% 62.65% 31.71% 38.40%
(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) Amount rounds to less than $0.01 per share.
(d) Effective September 1, 2008, the redemption fee was eliminated.
(e) Benefit of expense reduction rounds to less than 0.01%.
(f) Includes dividend expense on securities sold short which varies from period
to period. See below for expense ratios that reflect only operating
expenses.
The accompanying notes are an integral part of these financial statements.
18 | Annual Report
Mutual Financial Services Fund
FINANCIAL HIGHLIGHTS (CONTINUED)
YEAR ENDED DECEMBER 31,
----------------------------------------------------
CLASS A 2008 2007 2006 2005 2004
- ------- -------- -------- -------- -------- --------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............... $ 18.70 $ 22.60 $ 21.61 $ 20.47 $ 20.08
-------- -------- -------- -------- --------
Income from investment operations(a):
Net investment income(b) ...................... 0.42 0.44 0.33 0.37 0.27
Net realized and unrealized gains (losses) .... (7.93) (2.40) 3.76 2.41 2.70
-------- -------- -------- -------- --------
Total from investment operations ................. (7.51) (1.96) 4.09 2.78 2.97
-------- -------- -------- -------- --------
Less distributions from:
Net investment income ......................... (0.36) (0.54) (0.51) (0.43) (0.25)
Net realized gains ............................ -- (1.40) (2.59) (1.21) (2.33)
-------- -------- -------- -------- --------
Total distributions .............................. (0.36) (1.94) (3.10) (1.64) (2.58)
-------- -------- -------- -------- --------
Redemption fees(c, d) ............................ -- -- -- -- --
-------- -------- -------- -------- --------
Net asset value, end of year ..................... $ 10.83 $ 18.70 $ 22.60 $ 21.61 $ 20.47
-------- -------- -------- -------- --------
Total return(e) .................................. (40.23)% (8.99)% 19.35% 13.82% 15.17%
RATIOS TO AVERAGE NET ASSETS
Expenses(f, g) ................................... 1.49% 1.40% 1.39% 1.42% 1.44%
Expenses - excluding dividend expense on
securities sold short(f) ...................... 1.48% 1.40% 1.39% 1.41% 1.43%
Net investment income ............................ 2.85% 1.96% 1.40% 1.80% 1.31%
SUPPLEMENTAL DATA
Net assets, end of year (000's) .................. $260,479 $441,180 $557,768 $359,058 $296,778
Portfolio turnover rate .......................... 41.98% 49.87% 62.65% 31.71% 38.40%
(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) Amount rounds to less than $0.01 per share.
(d) Effective September 1, 2008, the redemption fee was eliminated.
(e) Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
(f) Benefit of expense reduction rounds to less than 0.01%.
(g) Includes dividend expense on securities sold short which varies from period
to period. See below for expense ratios that reflect only operating
expenses.
The accompanying notes are an integral part of these financial statements.
Annual Report | 19
Mutual Financial Services Fund
FINANCIAL HIGHLIGHTS (CONTINUED)
YEAR ENDED DECEMBER 31,
-----------------------------------------------
CLASS B 2008 2007 2006 2005 2004
- ------- ------- ------- -------- ------- -------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............... $ 18.26 $ 22.08 $ 21.17 $ 20.09 $ 19.76
------- ------- ------- ------- -------
Income from investment operations(a):
Net investment income(b) ...................... 0.31 0.27 0.16 0.23 0.14
Net realized and unrealized gains (losses) .... (7.72) (2.33) 3.68 2.34 2.64
------- ------- ------- ------- -------
Total from investment operations ................. (7.41) (2.06) 3.84 2.57 2.78
------- ------- ------- ------- -------
Less distributions from:
Net investment income ......................... (0.24) (0.36) (0.34) (0.28) (0.12)
Net realized gains ............................ -- (1.40) (2.59) (1.21) (2.33)
------- ------- ------- ------- -------
Total distributions .............................. (0.24) (1.76) (2.93) (1.49) (2.45)
------- ------- ------- ------- -------
Redemption fees(c, d) ............................ -- -- -- -- --
------- ------- ------- ------- -------
Net asset value, end of year ..................... $ 10.61 $ 18.26 $ 22.08 $ 21.17 $ 20.09
------- ------- ------- ------- -------
Total return(e) .................................. (40.66)% (9.58)% 18.51% 13.03% 14.51%
RATIOS TO AVERAGE NET ASSETS
Expenses(f, g) ................................... 2.19% 2.11% 2.08% 2.12% 2.10%
Expenses - excluding dividend expense on .........
securities sold short(f) ...................... 2.18% 2.11% 2.08% 2.11% 2.09%
Net investment income ............................ 2.15% 1.25% 0.71% 1.10% 0.65%
SUPPLEMENTAL DATA
Net assets, end of year (000's) .................. $13,185 $30,756 $46,085 $42,526 $42,614
Portfolio turnover rate .......................... 41.98% 49.87% 62.65% 31.71% 38.40%
(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) Amount rounds to less than $0.01 per share.
(d) Effective September 1, 2008, the redemption fee was eliminated.
(e) Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
(f) Benefit of expense reduction rounds to less than 0.01%.
(g) Includes dividend expense on securities sold short which varies from period
to period. See below for expense ratios that reflect only operating
expenses.
The accompanying notes are an integral part of these financial statements.
20 | Annual Report
Mutual Financial Services Fund
FINANCIAL HIGHLIGHTS (CONTINUED)
YEAR ENDED DECEMBER 31,
----------------------------------------------------
CLASS C 2008 2007 2006 2005 2004
- ------- -------- -------- -------- -------- --------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............... $ 18.59 $ 22.46 $ 21.51 $ 20.39 $ 20.02
-------- -------- -------- -------- --------
Income from investment operations(a):
Net investment income(b) ...................... 0.31 0.28 0.16 0.23 0.13
Net realized and unrealized gains (losses) .... (7.85) (2.37) 3.73 2.38 2.68
-------- -------- -------- -------- --------
Total from investment operations ................. (7.54) (2.09) 3.89 2.61 2.81
-------- -------- -------- -------- --------
Less distributions from:
Net investment income ......................... (0.25) (0.38) (0.35) (0.28) (0.11)
Net realized gains ............................ -- (1.40) (2.59) (1.21) (2.33)
-------- -------- -------- -------- --------
Total distributions .............................. (0.25) (1.78) (2.94) (1.49) (2.44)
-------- -------- -------- -------- --------
Redemption fees(c, d) ............................ -- -- -- -- --
-------- -------- -------- -------- --------
Net asset value, end of year ..................... $ 10.80 $ 18.59 $ 22.46 $ 21.51 $ 20.39
-------- -------- -------- -------- --------
Total return(e) .................................. (40.63)% (9.60)% 18.52% 13.06% 14.46%
RATIOS TO AVERAGE NET ASSETS
Expenses(f, g) ................................... 2.19% 2.11% 2.08% 2.12% 2.10%
Expenses - excluding dividend expense on
securities sold short(f) ...................... 2.18% 2.11% 2.08% 2.11% 2.09%
Net investment income ............................ 2.15% 1.25% 0.71% 1.10% 0.65%
SUPPLEMENTAL DATA
Net assets, end of year (000's) .................. $103,509 $183,684 $225,305 $169,000 $155,698
Portfolio turnover rate .......................... 41.98% 49.87% 62.65% 31.71% 38.40%
(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) Amount rounds to less than $0.01 per share.
(d) Effective September 1, 2008, the redemption fee was eliminated.
(e) Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
(f) Benefit of expense reduction rounds to less than 0.01%.
(g) Includes dividend expense on securities sold short which varies from period
to period. See below for expense ratios that reflect only operating
expenses.
The accompanying notes are an integral part of these financial statements.
Annual Report | 21
Mutual Financial Services Fund
STATEMENT OF INVESTMENTS, DECEMBER 31, 2008
COUNTRY SHARES/RIGHTS VALUE
------------------------ ---------------- ---------------
COMMON STOCKS AND OTHER EQUITY INTERESTS 66.0%
CAPITAL MARKETS 1.0%
The Goldman Sachs Group Inc. ......................... United States 13,880 $ 1,171,333
Marfin Investment Group Holdings SA .................. Greece 319,130 1,294,095
Tullett Prebon PLC ................................... United Kingdom 1,188,419 2,369,292
---------------
4,834,720
---------------
COMMERCIAL BANKS 15.1%
(a,b) AB&T Financial Corp. ................................. United States 226,100 1,300,075
(a,b,c) Atlantic Banc Holdings Inc. .......................... United States 350,000 3,562,728
Bank of Cyprus Public Co. Ltd. ....................... Cyprus 30,036 112,138
(a,c) The Bankshares Inc. .................................. United States 456,903 2,949,052
Banque Cantonale Vaudoise ............................ Switzerland 37,071 11,030,349
BNP Paribas SA ....................................... France 157,284 6,652,889
(a) Cape Bancorp Inc. .................................... United States 251,648 2,307,612
(a) Chicopee Bancorp Inc. ................................ United States 248,614 2,958,507
Danske Bank AS ....................................... Denmark 90,616 885,238
(a,c) Elephant Capital Holdings Ltd. ....................... Japan 5,268 --
Fifth Third Bancorp .................................. United States 478,260 3,950,427
(a,c) First Chicago Bancorp ................................ United States 496,868 3,768,365
First Horizon National Corp. ......................... United States 844,525 8,926,630
(a) Guaranty Bancorp ..................................... United States 1,333,807 2,667,614
Intesa Sanpaolo SpA .................................. Italy 2,516,158 8,927,797
Intesa Sanpaolo SpA, di Risp ......................... Italy 308,685 779,100
(a,c) NCB Warrant Holdings Ltd., A ......................... Japan 25,741 --
PacWest Bancorp ...................................... United States 269,290 7,243,901
Royal Bank of Scotland Group PLC, ADR ................ United Kingdom 72,440 1,107,608
(a) Southern National Bancorp of Virginia Inc. ........... United States 290,840 1,614,162
---------------
70,744,192
---------------
COMMERCIAL SERVICES & SUPPLIES 2.5%
(a) Comdisco Holding Co. Inc. ............................ United States 103 803
(a,d) Comdisco Holding Co. Inc., Contingent Distribution ... United States 4,195,000 --
Intrum Justitia AB ................................... Sweden 989,310 9,932,323
(a,e) Protection One Inc. .................................. United States 370,533 1,771,148
---------------
11,704,274
---------------
CONSUMER FINANCE 0.6%
(a,c) Cerberus CG Investor I LLC ........................... United States 1,139,363 227,873
(a,c) Cerberus CG Investor II LLC .......................... United States 1,139,363 227,873
(a,c) Cerberus CG Investor III LLC ......................... United States 569,682 113,936
(a,c) Cerberus FIM Investors Holdco LLC .................... United States 4,299,250 910,572
(a) White River Capital Inc. ............................. United States 172,799 1,131,833
---------------
2,612,087
---------------
DIVERSIFIED FINANCIAL SERVICES 8.7%
Bolsas Y Mercados Espanoles .......................... Spain 200,687 5,160,614
(f) Deutsche Boerse AG ................................... Germany 170,502 12,111,378
Fortis ............................................... Belgium 422,790 548,622
(a) Fortis, rts., 7/01/14 ................................ Belgium 422,790 --
(a) Geneva Acquisition Corp. ............................. United States 32,200 189,980
(a) Global Consumer Acquisition .......................... United States 700 6,387
22 | Annual Report
Mutual Financial Services Fund
STATEMENT OF INVESTMENTS, DECEMBER 31, 2008 (CONTINUED)
COUNTRY SHARES/RIGHTS VALUE
------------------------ ---------------- ---------------
COMMON STOCKS AND OTHER EQUITY INTERESTS (CONTINUED)
DIVERSIFIED FINANCIAL SERVICES (CONTINUED)
Guinness Peat Group PLC .............................. United Kingdom 6,083,077 $ 3,554,342
Hellenic Exchanges SA Holding ........................ Greece 615,070 4,816,293
Osaka Securities Exchange Co. Ltd. ................... Japan 1,023 4,562,170
Oslo Bors VPS Holding ASA ............................ Norway 911,000 9,824,080
---------------
40,773,866
---------------
INSURANCE 24.9%
ACE Ltd. ............................................. United States 135,350 7,162,722
AmTrust Financial Services Inc. ...................... United States 840,831 9,753,640
(a) Argo Group International Holdings Ltd. ............... United States 240,760 8,166,579
(a) Berkshire Hathaway Inc., A ........................... United States 37 3,574,200
(a) Berkshire Hathaway Inc., B ........................... United States 216 694,224
Brit Insurance Holdings PLC .......................... United Kingdom 746,484 2,406,787
(a) CNinsure Inc., ADR ................................... China 784,678 6,803,158
(a) Enstar Group Ltd. .................................... United States 77,503 4,583,527
(a) Hilltop Holdings Inc. ................................ United States 381,500 3,715,810
(a,c) Imagine Group Holdings Ltd. .......................... Bermuda 551,589 4,517,514
Lancashire Holdings Ltd. ............................. United Kingdom 1,464,166 8,960,263
Maiden Holdings Ltd. ................................. United States 564,590 1,767,167
(g) Maiden Holdings Ltd., 144A ........................... United States 1,500,000 4,695,000
(a,c) Olympus Re Holdings Ltd. ............................. United States 7,480 17,560
Partnerre Ltd. ....................................... Bermuda 85,330 6,081,469
(a,b) Protector Forsikring ASA ............................. Norway 4,479,410 3,020,688
Prudential Financial Inc. ............................ United States 113,270 3,427,550
(a,c) Symetra Financial .................................... United States 1,020,510 13,562,578
Tower Australia Group Ltd. ........................... Australia 3,126,817 5,514,664
The Travelers Cos. Inc. .............................. United States 175,143 7,916,464
White Mountains Insurance Group Ltd. ................. United States 38,048 10,163,001
Zurich Financial Services AG ......................... Switzerland 2,160 459,144
---------------
116,963,709
---------------
MULTILINE RETAIL 0.4%
Jelmoli Holding AG ................................... Switzerland 1,039 1,916,687
---------------
REAL ESTATE INVESTMENT TRUSTS (REITS) 5.3%
Annaly Capital Management Inc. ....................... United States 596,670 9,469,153
Hatteras Financial Corp. ............................. United States 55,000 1,463,000
(g) Hatteras Financial Corp., 144A ....................... United States 182,500 4,854,500
Link REIT ............................................ Hong Kong 3,290,090 5,433,815
Redwood Trust Inc. ................................... United States 230,656 3,439,081
---------------
24,659,549
---------------
REAL ESTATE MANAGEMENT & DEVELOPMENT 1.3%
(a) Conwert Immobilien Invest SE ......................... Austria 298,133 1,334,014
(a) Dolphin Capital Investors Ltd. ....................... Virgin Islands (British) 5,486,000 3,445,408
Eurocastle Investment Ltd. ........................... Guernsey Islands 815,719 250,936
Franconofurt AG ...................................... Germany 201,927 872,476
(c) Star Asia Finance Ltd., 144A ......................... Japan 96,850 413,550
---------------
6,316,384
---------------
Annual Report | 23
Mutual Financial Services Fund
STATEMENT OF INVESTMENTS, DECEMBER 31, 2008 (CONTINUED)
COUNTRY SHARES/RIGHTS VALUE
------------------------ ---------------- ---------------
COMMON STOCKS AND OTHER EQUITY INTERESTS (CONTINUED)
THRIFTS & MORTGAGE FINANCE 4.6%
Abington Bancorp Inc. ................................ United States 600,084 $ 5,550,777
Danvers Bancorp Inc. ................................. United States 52,901 707,286
ESSA Bancorp Inc. .................................... United States 13,160 186,477
First Clover Leaf Financial Corp. .................... United States 436,070 3,006,703
(a) Oritani Financial Corp. .............................. United States 223,380 3,763,953
Viewpoint Financial Group ............................ United States 214,669 3,445,437
Westfield Financial Inc. ............................. United States 474,380 4,895,602
---------------
21,556,235
---------------
TOBACCO 1.6%
UST Inc. ............................................. United States 109,700 7,610,986
---------------
TOTAL COMMON STOCKS AND OTHER EQUITY INTERESTS
(COST $450,636,381) ............................... 309,692,689
---------------
PREFERRED STOCKS (COST $1,165,231) 0.2%
DIVERSIFIED FINANCIAL SERVICES 0.2%
(a,c) Hightower Holding LLC, pfd. .......................... United States 1,165,231 855,396
---------------
PRINCIPAL AMOUNT
----------------
CORPORATE BONDS & NOTES 1.6%
(c) Cerberus CG Investor I LLC, 12.00%, 7/31/14 .......... United States $ 1,000,000 200,000
(c) Cerberus CG Investor II LLC, 12.00%, 7/31/14 ......... United States 1,000,000 200,000
(c) Cerberus CG Investor III LLC, 12.00%, 7/31/14 ........ United States 500,000 100,000
(c) Cerberus FIM Investors Holdco LLC, 12.00%, 11/22/13 .. United States 12,895,188 2,731,172
(c,h,i,j) Pontus I LLC, junior note, 144A, FRN, 5.689%,
7/24/09 ........................................... United States 2,728,648 3,079,011
(c,h,i,j) Pontus II Trust, junior profit-participating note,
144A, FRN, 7.516%, 6/25/09 ........................ United States 431,721 100,730
(i) Prudential Financial Inc., cvt., senior bond,
FRN, 0.366%, 12/15/37 ............................. United States 1,250,000 1,189,375
---------------
TOTAL CORPORATE BONDS & NOTES (COST $ 22,044,220) .... 7,600,288
---------------
TOTAL INVESTMENTS BEFORE SHORT TERM INVESTMENTS
(COST $473,845,832) ............................... 318,148,373
---------------
SHORT TERM INVESTMENTS 21.5%
U.S. GOVERNMENT AND AGENCY SECURITIES 21.4%
(k) FHLB,
1/05/09 ........................................... United States 15,700,000 15,700,031
1/07/09 - 12/01/09 ................................ United States 73,520,000 73,353,464
(k) U.S. Treasury Bills, 4/02/09 - 5/21/09 ............... United States 11,000,000 10,997,195
---------------
TOTAL U.S. GOVERNMENT AND AGENCY SECURITIES
(COST $ 99,293,938) ............................... 100,050,690
---------------
24 | Annual Report
Mutual Financial Services Fund
STATEMENT OF INVESTMENTS, DECEMBER 31, 2008 (CONTINUED)
COUNTRY SHARES VALUE
------------------------ ---------------- ---------------
SHORT TERM INVESTMENTS (CONTINUED)
TOTAL INVESTMENTS BEFORE MONEY MARKET FUND
(COST $573,139,770) ............................... $ 418,199,063
---------------
(l) INVESTMENTS FROM CASH COLLATERAL RECEIVED FOR LOANED
SECURITIES 0.1%
MONEY MARKET FUNDS (COST $599,881) 0.1%
(m) Bank of New York Institutional Cash .................. United States 599,881 593,882
---------------
Reserve Fund, 0.09%
TOTAL INVESTMENTS (COST $573,739,651) 89.3% .......... 418,792,945
OPTIONS WRITTEN 0.0%(n) .............................. (18,645)
NET UNREALIZED APPRECIATION ON FORWARD EXCHANGE
CONTRACTS 1.9% .................................... 8,892,058
OTHER ASSETS, LESS LIABILITIES 8.8% .................. 41,197,270
---------------
NET ASSETS 100.0% .................................... $ 468,863,628
===============
CONTRACTS
----------------
(o) OPTIONS WRITTEN (PREMIUMS RECEIVED $77,594) 0.0%(n)
DIVERSIFIED FINANCIAL SERVICES 0.0%(n)
Deutsche Boerse AG, Mar. 64 Calls, 3/20/09 ........... Germany 113 $ 18,645
---------------
See Abbreviations on page 44.
(a) Non-income producing for the twelve months ended December 31, 2008.
(b) See Note 11 regarding holdings of 5% voting securities.
(c) See Note 9 regarding restricted and illiquid securities.
(d) Contingent distributions represent the right to receive additional
distributions, if any, during the reorganization of the underlying company.
Shares represent total underlying principal of debt securities.
(e) A portion or all of the security is on loan at December 31, 2008. See Note
1(h).
(f) A portion or all of the security is held in connection with written option
contracts open at year end.
(g) 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. These securities have been deemed liquid under
guidelines approved by the Trust's Board of Trustees. At December 31, 2008,
the aggregate value of these securities was $9,549,500, representing 2.04%
of net assets.
(h) See Note 12 regarding other considerations.
(i) The coupon rate shown represents the rate at period end.
(j) See Note 1(g) regarding investments in special purpose entities.
(k) The security is traded on a discount basis with no stated coupon rate.
(l) See Note 1(h) regarding securities on loan.
(m) The rate shown is the annualized seven-day yield at period end.
(n) Rounds to less than 0.1% of net assets.
(o) See Note 1(e) regarding written options.
The accompanying notes are an integral part of these financial statements.
Annual Report | 25
Mutual Financial Services Fund
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
December 31, 2008
Assets:
Investments in securities:
Cost - Unaffiliated issuers .............................................. $ 557,963,729
Cost - Non-controlled affiliated issuers (Note 11) ....................... 15,775,922
-------------
Total cost of investments ................................................ $ 573,739,651
-------------
Value - Unaffiliated issuers ............................................. $ 410,909,454
Value - Non-controlled affiliated issuers (Note 11) ...................... 7,883,491
-------------
Total value of investments (includes securities loaned
in the amount of $573,017) ........................................... 418,792,945
Cash ........................................................................ 26,786,117
Cash on deposit with brokers ................................................ 5,612,978
Foreign currency, at value (cost $ 10,971,888) .............................. 10,952,662
Receivables:
Investment securities sold ............................................... 876,014
Capital shares sold ...................................................... 1,773,348
Dividends and interest ................................................... 5,357,639
Unrealized appreciation on forward exchange contracts (Note 8) .............. 15,826,266
-------------
Total assets .......................................................... 485,977,969
-------------
Liabilities:
Payables:
Investment securities purchased .......................................... 5,427,300
Capital shares redeemed .................................................. 3,051,653
Affiliates ............................................................... 738,955
Options written, at value (premiums received $77,594) ....................... 18,645
Payable upon return of securities loaned .................................... 599,881
Unrealized depreciation on forward exchange contracts (Note 8) .............. 6,934,208
Accrued expenses and other liabilities ...................................... 343,699
-------------
Total liabilities ..................................................... 17,114,341
-------------
Net assets, at value ............................................... $ 468,863,628
-------------
Net assets consist of:
Paid-in capital ............................................................. $ 777,173,586
Undistributed net investment income ......................................... 1,346,889
Net unrealized appreciation (depreciation) .................................. (145,568,798)
Accumulated net realized gain (loss) ........................................ (164,088,049)
-------------
Net assets, at value ............................................... $ 468,863,628
-------------
The accompanying notes are an integral part of these financial statements.
26 | Annual Report
Mutual Financial Services Fund
FINANCIAL STATEMENTS (CONTINUED)
STATEMENT OF ASSETS AND LIABILITIES (CONTINUED)
December 31, 2008
CLASS Z:
Net assets, at value ........................................................ $ 91,691,351
-------------
Shares outstanding .......................................................... 8,487,118
-------------
Net asset value and maximum offering price per share ........................ $ 10.80
-------------
CLASS A:
Net assets, at value ........................................................ $ 260,478,586
-------------
Shares outstanding .......................................................... 24,048,611
-------------
Net asset value per share(a) ................................................ $ 10.83
-------------
Maximum offering price per share (net asset value per share / 94.25%) ....... $ 11.49
-------------
CLASS B:
Net assets, at value ........................................................ $ 13,184,583
-------------
Shares outstanding .......................................................... 1,242,752
-------------
Net asset value and maximum offering price per share(a) ..................... $ 10.61
-------------
CLASS C:
Net assets, at value ........................................................ $ 103,509,108
-------------
Shares outstanding .......................................................... 9,587,262
-------------
Net asset value and maximum offering price per share(a) ..................... $ 10.80
-------------
(a) Redemption price is equal to net asset value less contingent deferred
sales, if applicable.
The accompanying notes are an integral part of these financial statements.
Annual Report | 27
Mutual Financial Services Fund
FINANCIAL STATEMENTS (CONTINUED)
STATEMENT OF OPERATIONS
for the year ended December 31, 2008
Investment income:
Dividends (net of foreign taxes of $2,058,004) .............................. $ 24,039,794
Interest .................................................................... 4,208,314
Income from securities loaned ............................................... 378,553
-------------
Total investment income ............................................ 28,626,661
-------------
Expenses:
Management fees (Note 3a) ................................................... 5,281,998
Administrative fees (Note 3b) ............................................... 502,058
Distribution fees: (Note 3c)
Class A .................................................................. 1,099,685
Class B .................................................................. 207,251
Class C .................................................................. 1,463,652
Transfer agent fees (Note 3e) ............................................... 1,432,412
Custodian fees (Note 4) ..................................................... 142,842
Reports to shareholders ..................................................... 121,094
Registration and filing fees ................................................ 103,527
Professional fees ........................................................... 121,740
Trustees' fees and expenses ................................................. 34,035
Dividends on securities sold short .......................................... 63,580
Other ....................................................................... 52,998
-------------
Total expenses ..................................................... 10,626,872
Expense reductions (Note 4) ........................................ (6,502)
-------------
Net expenses .................................................... 10,620,370
-------------
Net investment income ........................................ 18,006,291
-------------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments:
Unaffiliated issuers .................................................. (169,527,421)
Non-controlled affiliated issuers (Note 11) ........................... (2,322,352)
Written options .......................................................... 254,384
Foreign currency transactions ............................................ 6,002,920
Securities sold short .................................................... 304,935
-------------
Net realized gain (loss) ..................................... (165,287,534)
-------------
Net change in unrealized appreciation (depreciation) on:
Investments ................................................................. (209,436,677)
Translation of other assets and liabilities denominated in foreign
currencies ............................................................... 14,304,049
-------------
Net change in unrealized appreciation (depreciation) ......... (195,132,628)
-------------
Net realized and unrealized gain (loss) ........................................ (360,420,162)
-------------
Net increase (decrease) in net assets resulting from operations ................ $(342,413,871)
-------------
The accompanying notes are an integral part of these financial statements.
28 | Annual Report
Mutual Financial Services Fund
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF CHANGES IN NET ASSETS
YEAR ENDED DECEMBER 31,
------------------------------
2008 2007
------------- --------------
Increase (decrease) in net assets:
Operations:
Net investment income .................................................... $ 18,006,291 $ 19,077,293
Net realized gain (loss) from investments, written options, synthetic
equity swaps, and foreign currency transactions ....................... (165,287,534) 48,246,026
Net change in unrealized appreciation (depreciation) on investments and
translation of assets and liabilities denominated in foreign
currencies ............................................................ (195,132,628) (158,541,852)
------------- --------------
Net increase (decrease) in net assets resulting from operations .... (342,413,871) (91,218,533)
------------- --------------
Distributions to shareholders from:
Net investment income:
Class Z ............................................................... (3,377,037) (5,237,527)
Class A ............................................................... (8,457,768) (12,467,378)
Class B ............................................................... (299,698) (613,237)
Class C ............................................................... (2,396,773) (3,628,332)
Net realized gains:
Class Z ............................................................... -- (12,010,868)
Class A ............................................................... -- (32,373,433)
Class B ............................................................... -- (2,369,277)
Class C ............................................................... -- (13,398,613)
------------- --------------
Total distributions to shareholders ......................................... (14,531,276) (82,098,665)
------------- --------------
Capital share transactions: (Note 2)
Class Z ............................................................... (3,195,319) (14,311,619)
Class A ............................................................... 15,415,528 (23,031,413)
Class B ............................................................... (6,375,808) (8,804,710)
Class C ............................................................... (554,166) (3,068,654)
------------- --------------
Total capital share transactions ............................................ 5,290,235 (49,216,396)
------------- --------------
Redemption fees ............................................................. 9,462 10,203
------------- --------------
Net increase (decrease) in net assets .............................. (351,645,450) (222,523,391)
Net assets:
Beginning of year ........................................................... 820,509,078 1,043,032,469
------------- --------------
End of year ................................................................. $ 468,863,628 $ 820,509,078
------------- --------------
Undistributed net investment income (distributions in excess of net investment
income) included in net assets:
End of year ................................................................. $ 1,346,889 $ (1,283,860)
------------- --------------
The accompanying notes are an integral part of these financial statements.
Annual Report | 29
Mutual Financial Services Fund
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Franklin Mutual Series Funds (Trust) is registered under the Investment Company
Act of 1940, as amended, (1940 Act) as an open-end investment company,
consisting of six separate funds. The Mutual Financial Services Fund (Fund) is
included in this report. The financial statements of the remaining funds in the
Trust are presented separately. The Fund offers four classes of shares: Class Z,
Class A, Class B, and Class C. 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. Investments in open-end mutual funds are valued at the closing net asset
value.
Corporate debt securities and government securities generally trade in the
over-the-counter market rather than on a securities exchange. The Trust 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 Trust'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 Trust 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
30 | Annual Report
Mutual Financial Services Fund
NOTES TO FINANCIAL STATEMENTS (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. At December 31, 2008,
a portion of the securities held by the Fund were fair valued. 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.
Annual Report | 31
Mutual Financial Services Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
C. FOREIGN CURRENCY CONTRACTS (CONTINUED)
The Fund may also enter into forward exchange contracts to hedge against
fluctuations in foreign exchange rates. These contracts are valued daily by the
Fund and the unrealized appreciation or depreciation on the contracts, as
measured by the difference between the contractual forward foreign exchange
rates and the forward rates at the reporting date, are included in the Statement
of Assets and Liabilities. 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. SYNTHETIC EQUITY SWAPS
The Fund may engage in synthetic equity swaps. Synthetic equity swaps are
contracts entered into between a broker and the Fund under which the parties
agree to make payments to each other so as to replicate the economic
consequences that would apply had a purchase or short sale of the underlying
security taken place. Upon entering into synthetic equity swaps, the Fund is
required to pledge to the broker an amount of cash and/or other assets equal to
a certain percentage of the contract amount (margin account). Periodically,
payments are made to recognize changes in value of the contract resulting from
interest on the notional value of the contract, market value changes in the
underlying security, and/or dividends paid by the issuer of the underlying
security. The Fund recognizes a realized gain or loss when cash is received
from, or paid to, the broker. Synthetic equity swaps are valued daily by the
Fund and the unrealized appreciation or depreciation on the contracts (as
measured by the difference between the contract amount plus or minus cash
received or paid and the market value of the underlying securities) are recorded
in the Statement of Operations. The margin account and any net unrealized
appreciation or depreciation on open synthetic equity swaps are included in the
Statement of Assets and Liabilities. The risks of entering into synthetic equity
swaps include unfavorable price movements in the underlying securities or the
inability of the counterparties to fulfill their obligations under the contract.
E. OPTIONS
The Fund may purchase or write options. Options are contracts entitling the
holder to purchase or sell securities or other financial instruments at a
specified price, or, in the case of index options, to receive or pay the
difference between the index value and the strike price of the index option.
Options purchased are recorded as investments; options written (sold) are
recorded as liabilities. Upon closing of an option which results in a cash
settlement, the difference between the premium (original option value) and the
settlement proceeds is realized as a gain or loss. When securities are acquired
or delivered upon exercise of an option, the acquisition cost or sale proceeds
are adjusted by the amount of the premium. When an option expires,
32 | Annual Report
Mutual Financial Services Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
E. OPTIONS (CONTINUED)
the premium is realized as a gain for options written or as a loss for options
purchased. The risks include the possibility there may be an illiquid options
market or the inability of the counterparties to fulfill their obligations
under the contract. Writing options involves, to varying degrees, elements of
market risk in excess of the amount recognized in the Statement of Assets and
Liabilities.
F. SECURITIES SOLD SHORT
The Fund is engaged in selling securities short, which obligates the Fund to
replace a borrowed security with the same security at current market value. The
Fund incurs a loss if the price of the security increases between the date of
the short sale and the date on which the Fund replaces the borrowed security.
The Fund realizes a gain if the price of the security declines between those
dates. Gains are limited to the price at which the Fund sold the security short,
while losses are potentially unlimited in size.
The Fund is required to establish a margin account with the broker lending the
security sold short. While the short sale is outstanding, the broker retains the
proceeds of the short sale and the Fund must maintain a deposit with broker
consisting of cash and securities having a value equal to a specified percentage
of the value of the securities sold short. The Fund is obligated to pay the
counterparty any dividends or interest due on securities sold short. Such
dividends and interest are recorded as an expense to the Fund.
G. INVESTMENTS IN SPECIAL PURPOSE ENTITIES
At December 31, 2008, the Fund had contributed an additional $2,354,287 as a
subordinated note holder of certain special purpose entities ("SPEs"). Such
contributions, while made at the discretion of the Fund, represent additional
capital contributions to the SPE in support of its underlying investments and
are subject first to the claims of the senior note holders of the SPE. These
contributions are recorded as an addition to the Fund's cost basis in the SPE
and are subject to the risk of loss in the event of continued unfavorable market
conditions related to the SPE's underlying investments.
H. SECURITIES LENDING
The Fund participates in an agency based security lending program. The Fund
receives cash collateral against the loaned securities in an amount equal to at
least 102% of the market value of the loaned securities. Collateral is
maintained over the life of the loan in an amount not less than 100% of the
market value of loaned securities, as determined at the close of Fund business
each day; any additional collateral required is delivered to the Fund on the
next business day. The collateral is invested in a non-registered money market
fund managed by the Fund's custodian on the Fund's behalf. The Fund receives
income from the investment of cash collateral, in
Annual Report | 33
Mutual Financial Services Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
H. SECURITIES LENDING (CONTINUED)
addition to lending fees and rebates paid by the borrower. The Fund bears the
market risk with respect to the collateral investment, securities loaned, and
the risk that the agent may default on its obligations to the Fund. The
securities lending agent has agreed to indemnify the Fund in the event of
default by a third party borrower.
I. 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 December 31, 2008, 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.
J. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS
Security transactions are accounted for on trade date. Realized gains and losses
on security transactions are determined on a specific identification basis.
Interest income and estimated expenses are accrued daily. Amortization of
premium and accretion of discount on debt securities are included in interest
income. Dividend income and dividends declared on securities sold short are
recorded on the ex-dividend date except 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.
34 | Annual Report
Mutual Financial Services Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
K. 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.
L. 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.
M. GUARANTEES AND INDEMNIFICATIONS
Under the Trust's organizational documents, its officers and trustees are
indemnified by the Trust against certain liabilities arising out of the
performance of their duties to the Trust. Additionally, in the normal course of
business, the Trust, on behalf of the Fund, enters into contracts with service
providers that contain general indemnification clauses. The Trust's maximum
exposure under these arrangements is unknown as this would involve future claims
that may be made against the Trust that have not yet occurred. Currently, the
Trust expects the risk of loss to be remote.
2. SHARES OF BENEFICIAL INTEREST
At December 31, 2008, there were an unlimited number of shares authorized
(without par value). Transactions in the Fund's shares were as follows:
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------
2008 2007
----------------------------- -----------------------------
SHARES AMOUNT SHARES AMOUNT
------------ -------------- ------------ --------------
CLASS Z SHARES
Shares sold ...................................... 1,804,326 $ 26,949,928 1,142,965 $ 25,747,515
Shares issued in reinvestment of distributions ... 277,927 3,087,103 798,044 15,799,592
Shares redeemed .................................. (2,423,622) (33,232,350) (2,578,954) (55,858,726)
----------- ------------- ----------- -------------
Net increase (decrease) .......................... (341,369) $ (3,195,319) (637,945) $ (14,311,619)
=========== ============= =========== =============
CLASS A SHARES:
Shares sold ...................................... 12,037,190 $ 182,417,278 8,273,263 $ 185,555,532
Shares issued in reinvestment of distributions ... 681,749 7,602,265 2,082,149 41,350,983
Shares redeemed .................................. (12,261,409) (174,604,015) (11,440,654) (249,937,928)
----------- ------------- ----------- -------------
Net increase (decrease) .......................... 457,530 $ 15,415,528 (1,085,242) $ (23,031,413)
=========== ============= =========== =============
Annual Report | 35
Mutual Financial Services Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SHARES OF BENEFICIAL INTEREST (CONTINUED)
YEAR ENDED DECEMBER 31,
---------------------------------------------------------
2008 2007
--------------------------- ---------------------------
SHARES AMOUNT SHARES AMOUNT
----------- ------------- ----------- -------------
CLASS B SHARES:
Shares sold ...................................... 154,390 $ 2,269,646 91,173 $ 1,940,538
Shares issued in reinvestment of distributions ... 24,414 267,402 141,355 2,759,025
Shares redeemed .................................. (619,982) (8,912,856) (636,193) (13,504,273)
---------- ------------ ---------- ------------
Net increase (decrease) .......................... (441,178) $ (6,375,808) (403,665) $ (8,804,710)
========== ============ ========== ============
CLASS C SHARES:
Shares sold ...................................... 3,312,956 $ 50,459,766 2,125,234 $ 47,085,730
Shares issued in reinvestment of distributions ... 192,049 2,143,797 769,413 15,205,291
Shares redeemed .................................. (3,795,954) (53,157,729) (3,045,901) (65,359,675)
---------- ------------ ---------- ------------
Net increase (decrease) .......................... (290,949) $ (554,166) (151,254) $ (3,068,654)
========== ============ ========== ============
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
- ---------- ----------------------
Franklin Mutual Advisers, LLC (Franklin Mutual) Investment manager
Franklin Templeton Services, LLC (FT Services) Administrative manager
Franklin Templeton Distributors, Inc. (Distributors) Principal underwriter
Franklin Templeton Investor Services, LLC (Investor Services) Transfer agent
A. MANAGEMENT FEES
The Fund pays an investment management fee to Franklin Mutual based on the
average daily net assets of the Fund as follows:
ANNUALIZED FEE RATE NET ASSETS
- ------------------- -----------------------------------------------
0.800% Up to and including $1 billion
0.770% Over $1 billion, up to and including $2 billion
0.750% Over $2 billion, up to and including $5 billion
0.730% In excess of $5 billion
36 | Annual Report
Mutual Financial Services Fund
NOTES TO FINANCIAL STATEMENTS (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 Fund's Board of Trustees has adopted distribution plans for each share
class, with the exception of Class Z 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 ..... 0.35%
Class B ..... 1.00%
Class C ..... 1.00%
Effective February 1, 2009, the Board of Trustees has set the current rate at
0.30% per year for Class A shares until further notice and approval by the
Board.
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 year:
Sales charges retained net of commissions paid to
unaffiliated broker/dealers ................... $318,724
Contingent deferred sales charges retained ....... $ 50,157
E. TRANSFER AGENT FEES
For the year ended December 31, 2008, the Fund paid transfer agent fees of
$1,432,412, of which $914,518 was retained by Investor Services.
Annual Report | 37
Mutual Financial Services Fund
NOTES TO FINANCIAL STATEMENTS (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 year ended December 31, 2008, the
custodian fees were reduced as noted in the Statement of Operations.
5. INDEPENDENT TRUSTEES RETIREMENT PLAN
On January 1, 1993, the Trust adopted an Independent Trustees' Retirement Plan
("Plan"). The Plan is an unfunded defined benefit plan that provides benefit
payments to Trustees whose length of service and retirement age meets the
eligibility requirements of the Plan. Benefits under the plan are based on years
of service and fees paid to each trustee at the time of retirement. Effective in
December 1996 the Plan was closed to new participants.
During the year ended December 31, 2008 the Fund's projected benefit obligation
and benefit payments under the plan were as follows:
(a) Projected benefit obligation at December 31, 2008 .. $17,219
(b) Increase in projected benefit obligation ........... $ 1,572
Benefit payments made to retired trustees .............. $ 320
(a) The projected benefit obligation is included in accrued expenses and other
liabilities in the Statement of Assets and Liabilities.
(b) The increase in projected benefit obligation is included in trustees' fees
and expenses in the Statement of Operations.
6. INCOME TAXES
For tax purposes, capital losses may be carried over to offset future capital
gains, if any. At December 31, 2008, the Fund had tax basis capital losses of
$105,853,047 expiring in 2016.
For tax purposes, realized capital losses occurring subsequent to October 31,
may be deferred and treated as occurring on the first day of the following
fiscal year. At December 31, 2008, the Fund deferred realized capital losses of
$35,488,912.
The tax character of distributions paid during the years ended December 31, 2008
and 2007, was as follows:
2008 2007
----------- -----------
Distributions paid from:
Ordinary income .................. $14,531,276 $25,584,387
Long term capital gain ........... -- 56,514,278
----------- -----------
$14,531,276 $82,098,665
=========== ===========
38 | Annual Report
Mutual Financial Services Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. INCOME TAXES (CONTINUED)
At December 31, 2008, the cost of investments, net unrealized appreciation
(depreciation), and undistributed ordinary income for income tax purposes were
as follows:
Cost of investments ............................................ $ 586,853,295
=============
Unrealized appreciation ........................................ $ 17,316,075
Unrealized depreciation ........................................ (185,376,425)
-------------
Net unrealized appreciation (depreciation) ..................... $(168,060,350)
=============
Distributable earnings - undistributed ordinary income ......... $ 536,955
=============
Net investment income differs for financial statement and tax purposes primarily
due to differing treatments of foreign currency transactions, passive foreign
investment company shares, pass-through entity income, and certain dividends on
securities sold short.
Net realized gains (losses) differ for financial statement and tax purposes
primarily due to differing treatments of wash sales, foreign currency
transactions, passive foreign investment company shares, pass-through entity
income, and certain dividends on securities sold short.
7. INVESTMENT TRANSACTIONS
Purchases and sales of investments (excluding short term securities and
securities sold short) for the year ended December 31, 2008, aggregated
$240,307,268 and $324,472,753, respectively.
Transactions in options written during the year ended December 31, 2008, were as
follows:
NUMBER OF PREMIUMS
CONTRACTS RECEIVED
--------- ---------
Options outstanding at December 31, 2007.......... 304 $ 34,696
Options written................................... 2,653 297,282
Options expired................................... (2,844) (254,384)
Options exercised................................. -- --
Options closed.................................... -- --
------ ---------
Options outstanding at December 31, 2008.......... 113 $ 77,594
====== =========
Annual Report | 39
Mutual Financial Services Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. FORWARD EXCHANGE CONTRACTS
At December 31, 2008, the Fund had the following forward exchange contracts
outstanding:
CONTRACT SETTLEMENT UNREALIZED UNREALIZED
AMOUNT DATE APPRECIATION DEPRECIATION
----------- ---------- ------------ ------------
CONTRACTS TO BUY
5,043,184 British Pound Sterling ... $ 8,127,780 1/12/09 $ -- $ (766,495)
3,275,594 Danish Krone ............. 620,651 1/23/09 -- (7,821)
36,797,923 Danish Krone ............. 6,333,765 1/23/09 567,393 --
13,138,951 Swiss Franc .............. 11,450,923 2/09/09 858,869 --
2,156,672 Euro ..................... 3,098,275 2/13/09 -- (87,844)
14,599,434 Euro ..................... 18,784,716 2/13/09 1,594,179 --
780,000 British Pound Sterling ... 1,331,668 3/10/09 -- (194,090)
103,430,361 Swedish Krona ............ 14,524,897 3/16/09 -- (1,308,965)
29,596,491 Swedish Krona ............ 3,670,432 3/16/09 111,294 --
800,000 Australian Dollar ........ 538,400 3/17/09 24,276 --
10,147,231 Euro ..................... 12,782,196 5/13/09 1,353,750 --
CONTRACTS TO SELL
16,999,066 British Pound Sterling ... 29,510,252 1/12/09 4,690,511 --
44,054,650 Danish Krone ............. 7,770,739 1/23/09 -- (491,359)
10,000,000 Euro ..................... 14,628,500 1/26/09 662,212 --
5,404,854 Swiss Franc .............. 4,810,000 2/09/09 -- (253,770)
20,270,566 Swiss Franc .............. 19,272,096 2/09/09 287,348 --
17,000,000 Euro ..................... 25,267,100 2/13/09 1,537,330 --
288,683,663 Japanese Yen ............. 3,007,606 2/19/09 -- (177,560)
5,180,000 Euro ..................... 6,748,677 2/27/09 -- (479,318)
920,000 Euro ..................... 1,219,267 3/13/09 -- (64,043)
7,453,595 Swedish Krona ............ 925,000 3/16/09 -- (27,392)
187,600,000 Swedish Krona ............ 27,562,648 3/16/09 3,591,845 --
6,491,423 Australian Dollar ........ 5,112,970 3/17/09 547,259 --
7,125,000 Euro ..................... 9,275,703 4/30/09 -- (652,669)
11,859,705 Euro ..................... 14,860,210 5/13/09 -- (1,661,355)
83,418,191 Norwegian Krone .......... 11,824,092 5/19/09 -- (97,219)
5,000,000 Euro ..................... 6,511,000 5/29/09 -- (452,134)
5,534,477 New Zealand Dollar ....... 2,949,876 9/10/09 -- (212,174)
----------- -----------
Unrealized appreciation (depreciation) on forward exchange contracts .... 15,826,266 (6,934,208)
----------- -----------
NET UNREALIZED APPRECIATION ON FORWARD EXCHANGE CONTRACTS ............ $ 8,892,058
===========
40 | Annual Report
Mutual Financial Services Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. RESTRICTED SECURITIES
The Fund may invest in securities that are restricted under the Securities Act
of 1933 (1933 Act) or which are subject to legal, contractual, or other agreed
upon restrictions on resale. Restricted securities are often purchased in
private placement transactions, and cannot be sold without prior registration
unless the sale is pursuant to an exemption under the 1933 Act. Disposal of
these securities may require greater effort and expense, and prompt sale at an
acceptable price may be difficult. The Fund may have registration rights for
restricted securities. The issuer generally incurs all registration costs.
At December 31, 2008, the Fund held investments in restricted securities,
excluding 144A securities deemed to be liquid, valued in accordance with
procedures approved by the Trust's Board of Trustees as reflecting fair value,
as follows:
PRINCIPAL AMOUNT/ ACQUISITION
SHARES ISSUER DATES COST VALUE
- ----------------- ----------------------------------------- ------------------ ----------- -----------
350,000 Atlantic Banc Holdings Inc. ............. 2/01/07 $ 3,500,000 $ 3,562,728
456,903 The Bankshares Inc. ..................... 3/22/07 4,569,030 2,949,052
1,139,363 Cerberus CG Investor I LLC .............. 7/26/07 - 6/17/08 1,139,363 227,873
1,000,000 Cerberus CG Investor I LLC, 12.00%,
7/31/14 .............................. 7/26/07 1,000,000 200,000
1,139,363 Cerberus CG Investor II LLC ............. 7/26/07 - 6/17/08 1,139,363 227,873
1,000,000 Cerberus CG Investor II LLC, 12.00%,
7/31/14 .............................. 7/26/07 1,000,000 200,000
569,682 Cerberus CG Investor III LLC ............ 7/26/07 - 6/17/08 569,682 113,936
500,000 Cerberus CG Investor III LLC, 12.00%,
7/31/14 .............................. 7/26/07 500,000 100,000
4,299,250 Cerberus FIM Investors Holdco LLC ....... 11/20/06 4,299,250 910,572
12,895,188 Cerberus FIM Investors Holdco LLC,
12.00%, 11/22/13 ..................... 11/20/06 12,895,188 2,731,172
5,268 Elephant Capital Holdings Ltd ........... 8/29/03 - 3/10/08 612,722 --
496,868 First Chicago Bancorp ................... 11/16/06 6,956,152 3,768,365
1,165,231 Hightower Holding LLC, pfd. ............. 3/31/08 - 11/18/08 1,165,231 855,396
551,589 Imagine Group Holdings Ltd. ............. 8/31/04 5,649,099 4,517,514
25,741 NCB Warrant Holdings Ltd., A ............ 12/16/05 - 3/10/08 271,013 --
7,480 Olympus Re Holdings Ltd. ................ 12/19/01 723,329 17,560
2,728,648 Pontus I LLC, junior note, 144A, FRN,
5.689%, 7/24/09 ...................... 1/22/08 - 2/25/08 5,019,287 3,079,011
431,721 Pontus II Trust, junior profit-
participating note, 144A, FRN,
7.516%, 6/25/09 ...................... 2/29/08 495,369 100,730
96,850 Star Asia Finance Ltd., 144A ............ 2/22/07 - 5/18/07 9,836,925 413,550
1,020,510 Symetra Financial ....................... 7/27/04 11,730,000 13,562,578
-----------
TOTAL RESTRICTED SECURITIES (8.01% of Net Assets) .......................... $37,537,910
===========
Annual Report | 41
Mutual Financial Services Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. UNFUNDED CAPITAL COMMITMENTS
At December 31, 2008, the Fund had aggregate unfunded capital commitments to
investments of $2,236,360.
11. HOLDINGS OF 5% VOTING SECURITIES OF PORTFOLIO COMPANIES
The 1940 Act defines "affiliated companies" to include investments in portfolio
companies in which a fund owns 5% or more of the outstanding voting securities.
Investments in "affiliated companies" for the Fund for the year ended December
31, 2008, were as shown below.
NUMBER OF SHARES
HELD AT NUMBER OF SHARES VALUE AT REALIZED
BEGINNING GROSS GROSS HELD AT END END OF INVESTMENT CAPITAL
NAME OF ISSUER OF YEAR ADDITIONS REDUCTIONS OF YEAR YEAR INCOME GAIN (LOSS)
- -------------- ---------------- --------- ----------- ---------------- ---------- ---------- -----------
NON-CONTROLLED AFFILIATES
AB&T Financial Corp. .............. 226,100 -- -- 226,100 $1,3$0,075 $-- $ --
Atlantic Banc Holdings Inc. ....... 350,000 -- -- 350,000 3,562,728 -- --
Franconofurt AG ................... 499,260 201,927 499,260 201,927 --(a) -- (2,322,352)
Protector Forsikring ASA .......... 4,360,410 119,000 -- 4,479,410 3,020,688 -- --
---------- --- -----------
TOTAL AFFILIATED SECURITIES
(1.68% of Net Assets) ....... $7,883,491 $-- $(2,322,352)
========== === ===========
(a) As of December 31, 2008, no longer an affiliate.
12. OTHER CONSIDERATIONS
Officers, directors or employees of the Fund's Investment Manager, may serve
from time to time as members of boards of directors of companies in which the
Fund invests. Such participation may result in the possession by the Investment
Manager of material non-public information which, pursuant to the Fund's
policies and the requirements of applicable securities laws, could prevent the
Fund from trading in the securities of such companies for limited or extended
periods of time.
Franklin Mutual serves as investment manager to certain special purpose entities
that issue securities held by the Fund. Franklin Mutual is not compensated for
such services and does not invest in or exercise control over such entities. As
investment manager, Franklin Mutual is primarily responsible for recommending
investments in unaffiliated issuers to be held by the special purpose entities.
Securities issued by these special purpose entities are restricted under the
Securities Act of 1933 and are deemed to be illiquid.
13. REORGANIZATION TO A DELAWARE STATUTORY TRUST
On April 11, 2007, the Board and shareholders approved an Agreement and Plan of
Reorganization whereby the investment company would be reorganized and its
domicile changed from a Maryland corporation to a Delaware statutory trust. In
connection with these changes, the Trust's name was also changed to Franklin
Mutual Series Funds, formerly known as the Franklin Mutual Series Funds, Inc.
The reorganization became effective on May 1, 2008.
42 | Annual Report
Mutual Financial Services Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
14. FAIR VALUE MEASUREMENTS
The Fund adopted Financial Accounting Standards Board (FASB) Statement No. 157,
"Fair Value Measurement" (SFAS 157), on January 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 December 31, 2008, in
valuing the Fund's assets and liabilities carried at fair value:
LEVEL 1 LEVEL 2 LEVEL 3 TOTAL
------------ ------------ ----------- ------------
ASSETS:
Investments in Securities ........ $285,856,113 $95,398,925 $37,537,907 $418,792,945
Other Financial Instruments(a) ... -- 15,826,266 -- 15,826,266
LIABILITIES:
Options Written .................. -- 18,645 -- 18,645
Other Financial Instruments(a) ... -- 6,934,208 -- 6,934,208
(a) Other financial instruments includes net unrealized appreciation
(depreciation) on forward exchange contracts.
At December 31, 2008, the reconciliation of assets in which significant
unobservable inputs (Level 3) were used in determining the Fund's fair value, is
as follows:
INVESTMENTS IN
SECURITIES
--------------
Beginning Balance - January 1, 2008 ....................... $ 65,170,199
Net realized gain (loss) ............................... (104,510)
Net change in unrealized appreciation (depreciation) ... (32,456,931)
Net purchases (sales) .................................. 7,780,333
Transfers in and/or out of Level 3 ..................... (2,851,184)
------------
Ending Balance ............................................ $ 37,537,907
------------
Net change in unrealized appreciation (depreciation)
attributable to assets still held at end of period ..... $(32,432,113)
============
Annual Report | 43
Mutual Financial Services Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
15. 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 Fund is currently evaluating the impact, if any, of
applying the various provisions of SFAS 161.
16. SUBSEQUENT EVENTS
On January 23, 2009, the Fund entered into, along with certain other funds
managed by Franklin Templeton Investments (individually, "Borrower";
collectively "Borrowers"), a $725 million senior unsecured syndicated global
line of credit ("Global Credit Facility") to provide a source of funds to the
Borrowers for temporary and emergency purposes and to meet future unanticipated
or unusually large redemption requests.
Under the terms of the Global Credit Facility, each Borrower has agreed to pay
its proportionate share of fees and expenses incurred in connection with the
implementation and maintenance of the Global Credit Facility.
ABBREVIATIONS
SELECTED PORTFOLIO
ADR - American Depository Receipt
FHLB - Federal Home Loan Bank
FRN - Floating Rate Note
44 | Annual Report
Mutual Financial Services Fund
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO THE BOARD OF TRUSTEES OF FRANKLIN MUTUAL SERIES FUNDS AND SHAREHOLDERS OF THE
MUTUAL FINANCIAL SERVICES FUND:
We have audited the accompanying statement of assets and liabilities of the
Mutual Financial Services Fund (one of the Funds constituting the Franklin
Mutual Series Funds) (the "Fund"), including the statement of investments, as of
December 31, 2008, and the related statement of operations for the year then
ended, the statements of changes in net assets for each of the two years in the
period then ended, and the financial highlights for each of the five years in
the period then ended. These financial statements and financial highlights are
the responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. We were
not engaged to perform an audit of the Fund's internal control over financial
reporting. Our audits included consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Fund's internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements and financial highlights, assessing the accounting principles used
and significant estimates made by management, and evaluating the overall
financial statement presentation. Our procedures included confirmation of
securities owned as of December 31, 2008, by correspondence with the custodian
and brokers or by other appropriate auditing procedures where replies from the
brokers were not received. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
Mutual Financial Services Fund of the Franklin Mutual Series Funds at December
31, 2008, the results of its operations for the year then ended, the changes in
its net assets for each of the two years in the period then ended, and the
financial highlights for each of the five years in the period then ended, in
conformity with U.S. generally accepted accounting principles.
(ERNST & YOUNG LLP)
Boston, Massachusetts
February 17, 2009
Annual Report | 45
Mutual Financial Services Fund
TAX DESIGNATION (UNAUDITED)
Under Section 854(b)(2) of the Internal Revenue Code (Code), the Fund designates
the maximum amount allowable but no less than $18,340,640 as qualified dividends
for purposes of the maximum rate under Section 1(h)(11) of the Code for the
fiscal year ended December 31, 2008. Distributions, including qualified dividend
income, paid during calendar year 2008 will be reported to shareholders on Form
1099-DIV in January 2009. Shareholders are advised to check with their tax
advisors for information on the treatment of these amounts on their individual
income tax returns.
Under Section 854(b)(2) of the Code, the Fund designates 14.13% of the ordinary
income dividends as income qualifying for the dividends received deduction for
the fiscal year ended December 31, 2008.
Under Section 871(k)(1)(C) of the Code, the Fund designates the maximum amount
allowable but no less than $2,018,207 as interest related dividends for purposes
of the tax imposed under Section 871(a)(1)(A) of the Code for the fiscal year
ended December 31, 2008.
46 | Annual Report
Mutual Financial Services Fund
BOARD MEMBERS AND OFFICERS
The name, year of birth and address of the officers and board members, as well
as their affiliations, positions held with the Fund, principal occupations
during the past five years and number of portfolios overseen in the Franklin
Templeton Investments fund complex are shown below. Generally, each board member
serves until that person's successor is elected and qualified.
INDEPENDENT BOARD MEMBERS
NUMBER OF PORTFOLIOS IN
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- --------------------------------- -------------- --------------- ----------------------- -----------------------------------
EDWARD I. ALTMAN, PH.D. (1941) Trustee Since 1987 7 None
c/o Franklin Mutual Advisers, LLC
101 John F. Kennedy Parkway
Short Hills, NJ 07078-2789
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Max L. Heine Professor of Finance and Director of The Credit and Debt Markets Research Program, Salomon Center, Stern School of
Business, New York University; editor and author of numerous financial publications; financial consultant; a director to numerous
financial publishing organizations; and FORMERLY, Vice Director, Salomon Center, Stern School of Business, New York University.
ANN TORRE BATES (1958) Trustee Since 1994 30 SLM Corporation (Sallie Mae) and
c/o Franklin Mutual Advisers, LLC Allied Capital Corporation
101 John F. Kennedy Parkway (financial services).
Short Hills, NJ 07078-2789
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Independent strategic and financial consultant; and FORMERLY, Executive Vice President and Chief Financial Officer, NHP Incorporated
(manager of multifamily housing) (1995-1997); and Vice President and Treasurer, US Airways, Inc. (until 1995).
BURTON J. GREENWALD (1929) Trustee Since 2002 14 Franklin Templeton Emerging Markets
c/o Franklin Mutual Advisers, LLC Debt Opportunities Fund PLC and
101 John F. Kennedy Parkway Fiduciary International Ireland
Short Hills, NJ 07078-2789 Limited.
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Managing Director, B.J. Greenwald Associates (management consultants to the financial services industry); and FORMERLY, Chairman,
Fiduciary Trust International Funds; Executive Vice President, L.F Rothschild Fund Management, Inc.; President and Director, Merit
Mutual Funds; President, Underwriting Division and Director, National Securities & Research Corporation; Governor, Investment
Company Institute and Chairman, ICI Public Information Committee.
BRUCE A. MACPHERSON (1930) Trustee Since 1974 7 None
c/o Franklin Mutual Advisers, LLC
101 John F. Kennedy Parkway
Short Hills, NJ 07078-2789
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Retired, former Chairman, A.A. MacPherson, Inc., Canton, MA (representative for electrical manufacturers).
Annual Report | 47
NUMBER OF PORTFOLIOS IN
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- --------------------------------- -------------- --------------- ----------------------- -----------------------------------
CHARLES RUBENS II (1930) Trustee Since 1998 14 None
c/o Franklin Mutual Advisers, LLC
101 John F. Kennedy Parkway
Short Hills, NJ 07078-2789
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Private investor.
ROBERT E. WADE (1946) Trustee and Trustee 37 El Oro and Exploration Co., p.l.c.
c/o Franklin Mutual Advisers, LLC Chairman since 1991 and (investments).
101 John F. Kennedy Parkway of the Board Chairman of the
Short Hills, NJ 07078-2789 Board since
2005
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Retired, former practicing attorney.
INTERESTED BOARD MEMBERS AND OFFICERS
NUMBER OF PORTFOLIOS IN
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- --------------------------------- -------------- --------------- ----------------------- -----------------------------------
**GREGORY E. JOHNSON (1961) Trustee Since 2007 92 None
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director, President and Chief Executive Officer, Franklin Resources, Inc.; President, Templeton Worldwide, Inc.; Director, Templeton
Asset Management Ltd.; and officer and/or director or trustee, as the case may be, of some of the other subsidiaries of Franklin
Resources, Inc. and of 33 of the investment companies in Franklin Templeton Investments.
**PETER A. LANGERMAN (1955) Trustee, Trustee 7 None
c/o Franklin Mutual Advisers, LLC President since 2007,
101 John F. Kennedy Parkway and Chief President and
Short Hills, NJ 07078-2702 Executive Chief Executive
Officer - Officer -
Investment Investment
Management Management
since 2005
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Chairman of the Board, Chief Executive Officer and President, Franklin Mutual Advisers, LLC; officer and/or director, as the case
may be, of three of the investment companies in Franklin Templeton Investments; and FORMERLY, Director, New Jersey's Division of
Investment.
JENNIFER J. BOLT (1964) Chief Since Not Applicable Not Applicable
One Franklin Parkway Executive December 2008
San Mateo, CA 94403-1906 Officer -
Finance and
Administration
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Executive Vice President - Operations and Technology, Franklin Resources, Inc.; Director, Templeton Global Advisors Limited; officer
and/or director, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 46 of the investment
companies in Franklin Templeton Investments.
48 | Annual Report
NUMBER OF PORTFOLIOS IN
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- --------------------------------- -------------- --------------- ----------------------- -----------------------------------
PHILIPPE BRUGERE-TRELAT (1949) Vice President Since 2005 Not Applicable Not Applicable
101 John F. Kennedy Parkway
Short Hills, NJ 07078-2789
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice President, Franklin Mutual Advisers, LLC; Portfolio Manager of Eurovest SA (French registered Investment Company, Sicav); and
officer of two of the investment companies in Franklin Templeton Investments.
JAMES M. DAVIS (1952) Chief Chief Not Applicable Not Applicable
One Franklin Parkway Compliance Compliance
San Mateo, CA 94403-1906 Officer and Officer since
Vice President 2004 and Vice
- AML President - AML
Compliance Compliance
since 2006
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director, Global Compliance, Franklin Resources, Inc.; officer of some of the other subsidiaries of Franklin Resources, Inc. and of
46 of the investment companies in Franklin Templeton Investments; and FORMERLY, Director of Compliance, Franklin Resources, Inc.
(1994-2001).
MICHAEL J. EMBLER (1964) Senior Vice Since 2005 Not Applicable Not Applicable
101 John F. Kennedy Parkway President
Short Hills, NJ 07078-2789 and Chief
Investment
Officer
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Vice President and Chief Investment Officer, Franklin Mutual Advisers, LLC; and officer of two of the investment companies in
Franklin Templeton Investments.
LAURA F. FERGERSON (1962) Chief Since Not Applicable Not Applicable
One Franklin Parkway Financial February 2008
San Mateo, CA 94403-1906 Officer and
Chief
Accounting
Officer
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice President, Franklin Templeton Services, LLC; officer of 46 of the investment companies in Franklin Templeton Investments; and
FORMERLY, Director and member of Audit and Valuation Committees, Runkel Funds, Inc. (2003-2004); Assistant Treasurer of most of the
investment companies in Franklin Templeton Investments (1997-2003); and Vice President, Franklin Templeton Services, LLC
(1997-2003).
JIMMY D. GAMBILL (1947) Vice President Since Not Applicable Not Applicable
500 East Broward Blvd. February 2008
Suite 2100
Fort Lauderdale, FL 33394-3091
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
President, Franklin Templeton Services, LLC; Senior Vice President, Templeton Worldwide, Inc.; and officer of some of the other
subsidiaries of Franklin Resources, Inc. and of 46 of the investment companies in Franklin Templeton Investments.
Annual Report | 49
NUMBER OF PORTFOLIOS IN
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- --------------------------------- -------------- --------------- ----------------------- -----------------------------------
STEVEN J. GRAY (1955) Secretary Since 2005 Not Applicable Not Applicable
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Associate General Counsel, Franklin Templeton Investments; Secretary, Franklin Advisory Services, LLC, Franklin Mutual
Advisers, LLC and Franklin Templeton Distributors, Inc.; and officer of 41 of the investment companies in Franklin Templeton
Investments.
GREGORY R. SEWARD (1956) Treasurer Since 2005 Not Applicable Not Applicable
500 East Broward Blvd.
Suite 2100
Fort Lauderdale, FL 33394-3091
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice President, Franklin Templeton Services, LLC; officer of 18 of the investment companies in Franklin Templeton Investments; and
FORMERLY, Vice President, JPMorgan Chase (2000-2004) and American General Financial Group (1991-2000).
CRAIG S. TYLE (1960) Vice President Since 2005 Not Applicable Not Applicable
Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
General Counsel and Executive Vice President, Franklin Resources, Inc.; officer of some of the other subsidiaries of Franklin
Resources, Inc. and of 46 of the investment companies in Franklin Templeton Investments; and FORMERLY, Partner, Shearman & Sterling,
LLP (2004-2005); and General Counsel, Investment Company Institute (ICI) (1997-2004).
* We base the number of portfolios on each separate series of the U.S.
registered investment companies within the Franklin Templeton Investments
fund complex. These portfolios have a common investment manager or
affiliated investment managers.
** Gregory E. Johnson is considered to be an interested person of the Fund
under the federal securities laws due to his position as an officer and
director of Franklin Resources, Inc., which is the parent company of the
Fund's investment manager and distributor. Peter A. Langerman is considered
to be an interested person of the Fund under the federal securities laws
due to his position as an officer of Franklin Mutual Advisers, LLC, which
is the parent company of the Fund's investment manager.
Note 1: Officer information is current as of the date of this report. It is
possible that after this date, information about officers may change.
Note 2: Gregory E. Johnson is the brother of Jennifer J. Bolt.
THE FUND'S BOARD OF DIRECTORS HAS DETERMINED THAT CERTAIN OF THE MEMBERS OF THE
AUDIT COMMITTEE, INCLUDING ANN TORRE BATES, ARE AUDIT COMMITTEE FINANCIAL
EXPERTS, AND "INDEPENDENT," UNDER THOSE PROVISIONS OF THE SARBANES-OXLEY ACT OF
2002, AND THE RULES AND FORM AMENDMENTS ADOPTED BY THE SECURITIES AND EXCHANGE
COMMISSION, RELATING TO AUDIT COMMITTEE FINANCIAL EXPERTS.
THE STATEMENT OF ADDITIONAL INFORMATION (SAI) INCLUDES ADDITIONAL INFORMATION
ABOUT THE BOARD MEMBERS AND IS AVAILABLE, WITHOUT CHARGE, UPON REQUEST.
SHAREHOLDERS MAY CALL (800) DIAL BEN/(800) 342-5236 TO REQUEST THE SAI.
50 | Annual Report
Mutual Financial Services 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.
Annual Report | 51
This page intentionally left blank.
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 annual report
(FRANKLIN TEMPLETON INVESTMENTS(R) LOGO)
One Franklin Parkway
San Mateo, CA 94403-1906
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ANNUAL REPORT AND SHAREHOLDER LETTER
MUTUAL FINANCIAL SERVICES FUND
INVESTMENT MANAGER
Franklin Mutual Advisers, LLC
101 John F. Kennedy Parkway
Short Hills, NJ 07078
DISTRIBUTOR
Franklin Templeton Distributors, Inc.
(800) DIAL BEN(R)
franklintempleton.com
SHAREHOLDER SERVICES
(800) 632-2301 - (Class A, B & C)
(800) 448-FUND - (Class Z)
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. 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.
479 A2008 02/09
(GRAPHIC)
DECEMBER 31, 2008
ANNUAL REPORT AND SHAREHOLDER LETTER VALUE
MUTUAL BEACON FUND
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sign up for eDelivery at
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(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 annual report
Contents
ANNUAL REPORT
SHAREHOLDER LETTER ........................................................ 1
Mutual Beacon Fund ........................................................ 5
Performance Summary ....................................................... 11
Your Fund's Expenses ...................................................... 16
Financial Highlights and Statement of Investments ......................... 18
Financial Statements ...................................................... 30
Notes to Financial Statements ............................................. 34
Report of Independent Registered Public Accounting Firm ................... 51
Tax Designation ........................................................... 52
Board Members and Officers ................................................ 53
Shareholder Information ................................................... 57
Shareholder Letter
Dear Mutual Beacon Fund Shareholder:
As we write this letter, 2008 has just drawn to a close. Like many other
investors, we are not sorry to see it pass. From a purely financial perspective,
it was a painful year, bringing stock market declines ranging from 40% to 50%
across most of the developed world (with greater losses in many emerging
markets) as well as a credit crisis and climate of fear that prompted a global
recession. These events have effectively wiped out the shareholders of such
institutions as Fannie Mae, Freddie Mac, AIG, Bear Stearns, Lehman Brothers,
Fortis, Washington Mutual and Wachovia, and have led to extraordinary government
intervention in the financial markets. Policy makers have no definitive playbook
for guidance, and the world of finance is being remade before our eyes.
As stewards of our investors' capital, we have always followed an investment
approach that places a premium on limiting our portfolio's downside exposure.
This is inherent in our focus on buying companies cheaply -- when their
securities are trading at a meaningful discount to our analysis of intrinsic
value --and selling them as they trade close to that value. We are particularly
attracted to stocks where an identifiable catalyst exists to unlock the
valuation discount. We also buy distressed securities and participate in merger
arbitrage and privately negotiated transactions when we feel we can generate
attractive risk-adjusted returns for Fund investors.
With markets down as much as they were in 2008, and given that we are
essentially "long only" investors, it would be unrealistic to expect positive
returns in this environment. Nevertheless, we clearly are disappointed with the
Fund's loss
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NOT FDIC INSURED | MAY LOSE VALUE | NO BANK GUARANTEE
Not part of the annual report | 1
for the year. Several factors contributed to this, some market related and
others self-inflicted.
First, and perhaps most important, was the generally indiscriminate devaluation
of stocks across industries, geographies and market capitalizations. In short,
there were few safe havens as even some companies in the less cyclical, more
defensive industries that make up the Fund's core, including consumer staples,
health care, utilities and telecommunications companies, were down at least 18%
in 2008, and in some cases significantly more.
Second, we underestimated the ferocity of the economic downturn and its impact
on the valuations of some of the more economically sensitive companies owned,
including those in the industrials, consumer discretionary and information
technology sectors.
Third, while we did not buy into the oil and commodity bubble that burst in July
2008, we did own or had established over the past several months positions in a
number of companies directly or indirectly exposed to oil or other commodities.
Such companies' share prices plunged in the latter half of the year.
Fourth, entering 2008 the Fund owned shares of several large European banks that
we believed had very limited exposure to the difficulties that roiled the U.S.
financial system. Subsequent events proved the contagion had spread to these
institutions as well.
Fifth, due to the repricing of corporate credit risk and paralysis in the credit
markets, the stocks of leveraged companies, i.e., companies with substantial
debt, were disproportionately punished by the markets.
Finally, our focus on merger arbitrage, private transactions and
catalyst-oriented investments, all of which have tended to protect the Fund
during periods of extended downward volatility, failed in this mission in 2008.
Several merger arbitrage positions declined sharply after deals failed to close.
We also substantially wrote down several private transactions in which we were
invested. Catalyst-oriented positions were doubly affected when the catalysts
were postponed due to capital market constraints and the hedge funds that
typically owned large positions in these stocks were forced to liquidate their
positions due to investor redemptions.
In a year of few highlights, we did get some things right. A portion of the
Fund's assets were held as cash during the year, with about 12% of total net
assets in cash at year-end, reflecting our caution about valuations in general.
2 | Not part of the annual report
We selectively used market puts at various points during the year to protect
against large downward market movements. We did have our share of positive stock
stories as noted in the following shareholder report. And we increased our
foreign currency hedges over the year, which mitigated the drag caused by an
appreciating dollar.
Looking forward, we are focused on a number of factors. Rather than try to be
macroeconomists or market strategists, we instead focus on our discipline of
buying securities at what we believe are very attractive prices and investing
for the long term. However, one cannot ignore the macroeconomic backdrop
entering 2009, and we are proceeding with a fairly high degree of caution.
Although the actions of central banks across the globe may have temporarily
stabilized the financial system, we are not convinced that the worst of the
economic news is behind us. Nevertheless, given the indiscriminate nature of the
market carnage, such an environment creates opportunities -- and we are focused
on four particular areas:
- Stocks of companies in economically defensive industries, with strong
market positions, high barriers to entry, reasonably predictable
earnings and cash flows, many of which we consider as attractively
valued today as they have been in years;
- Stocks disproportionately punished by the market, perhaps because they
were owned heavily by hedge funds or have a higher degree of leverage
but have no need to access the credit markets for a number of years;
- Stocks of market-leading global companies, sometimes in more
economically sensitive industries, that are extremely attractive for
long-term investors, including a number of commodity-oriented
companies; and
- Distressed debt, a quiet area for the past several years due to robust
economic and capital market conditions. The leveraged buyout boom from
2005 through mid-2007 is likely to result in defaults by many good
companies with bad balance sheets in the coming years. We consider
this an area of particular opportunity although it is still early.
Most of the distressed opportunities through year-end 2008 have been
in bad companies with bad balance sheets, which interest us little. In
the meantime, we have sought to take advantage of credit market
dislocation and technical pressure to add positions in a number of
senior secured corporate loans that are trading at levels we think
will generate equity-like returns with, in our view, a low risk of
principal loss.
Not part of the annual report | 3
As a final note, periods of economic and market instability historically have
created favorable opportunities for long-term, patient and disciplined
investors. We believe the basic institutions that underlie our economic and
political system have proven their ability to adapt to changing conditions and
emerge stronger from severe dislocations. We are excited about the prospects of
participating in this chapter, albeit a difficult one, of our economic history
and believe our approach should serve our shareholders well over the long term.
We certainly appreciate your support over the past year and look forward to a
more prosperous year ahead.
Sincerely,
/s/ Peter A. Langerman
- -----------------------------------
Peter A. Langerman
Chairman, President and
Chief Executive Officer
Franklin Mutual Advisers, LLC
/s/ Michael J. Embler
- -----------------------------------
Michael J. Embler
Senior Vice President and
Chief Investment Officer
Franklin Mutual Advisers, LLC
THIS LETTER REFLECTS OUR ANALYSIS AND OPINIONS AS OF DECEMBER 31, 2008. 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.
4 | Not part of the annual report
Annual Report
Mutual Beacon Fund
YOUR FUND'S GOALS AND MAIN INVESTMENTS: Mutual Beacon Fund seeks capital
appreciation, with income as a secondary goal, by investing primarily in equity
securities of companies the Fund's managers believe are at prices below their
intrinsic value. The Fund may invest up to 35% of its assets in foreign
securities.
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 annual report for Mutual Beacon Fund covers the fiscal year ended December
31, 2008.
PERFORMANCE OVERVIEW
Mutual Beacon Fund - Class Z had a -40.37% cumulative total return for the 12
months ended December 31, 2008. The Fund underperformed its benchmark, the
Standard & Poor's 500 Index (S&P 500), which had a -37.00% total return for the
same period.(1) You can find the Fund's long-term performance data in the
Performance Summary beginning on page 11.
ECONOMIC AND MARKET OVERVIEW
In 2008, the U.S. economy faltered and The Conference Board's Consumer
Confidence Index fell to an all-time low since it began in 1967. The
government's abrupt conservatorship of Fannie Mae and Freddie Mac and the
failure of several blue-chip banks and financial institutions roiled the equity
markets. Despite government interventions and massive emergency funding, rapidly
weakening manufacturing activity and falling home prices exacerbated the
nation's economic troubles. Jobless claims mounted and the unemployment rate
rose to 7.2% by period-end.(2) In early December, the National Bureau of
Economic Research officially declared the U.S. economy has been in recession
since December 2007.
(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 S&P 500 consists of 500 stocks chosen for market size, liquidity and
industry group representation. Each stock's weight in the index is proportionate
to its market value. The S&P 500 is one of the most widely used benchmarks of
U.S. equity performance. 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.
(2.) Source: Bureau of Labor Statistics.
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.
Annual Report | 5
GEOGRAPHIC BREAKDOWN
Based on Total Assets as of 12/31/08
(BAR CHART)
U.S. 65.0%
U.K. 6.3%
Germany 3.4%
Switzerland 3.1%
Denmark 1.8%
Norway 1.6%
France 1.5%
Netherlands 1.4%
Spain 1.3%
Sweden 1.2%
Japan 1.0%
Other 1.0%
Short-Term Investments & Other Net Assets 11.4%
The weakening U.S. economy negatively impacted growth prospects around the
world. Although growth in the first half of the year was robust in developing
economies, particularly in Asia, signs of a global slowdown surfaced in the
latter half. In an environment of extremely high commodity prices that increased
inflationary pressure, the world's monetary authorities faced the choice of
lowering short-term interest rates to stimulate growth or raising them to fight
rising inflation. Stimulus provided through fiscal and monetary policies
implemented around the globe sought to restore financial market stability and
reignite economic growth.
The U.S. Treasury and the Federal Reserve Board took unprecedented steps,
including lowering short-term rates to near 0% from 4.25%. The European Central
Bank and many of the world's other central banks had raised rates due to
inflationary pressures. Later in the year, the potential for global recession
trumped inflationary concerns, and the world's monetary authorities cut interest
rates aggressively. The U.S. dollar, which had declined earlier in the period
versus many of the world's currencies, regained ground quickly toward period-end
as a flight to the relative safety of U.S. Treasuries prevailed.
In this challenging economic time, volatility came to define global equity
markets. Virtually all local indexes ended the 12-month period with marked
losses. Despite negative economic data and an outlook for decelerating corporate
earnings and profit margins globally, many companies outside the financials
sector retained relatively strong balance sheets.
INVESTMENT STRATEGY
At Mutual Series, we are committed to our distinctive value approach to
investing, which we believe can generate above-average risk-adjusted returns
over time for our shareholders. Our major investment strategy is investing in
undervalued stocks. When selecting undervalued equities, we are always attracted
to fundamentally strong companies with healthy balance sheets, high-quality
assets, substantial free cash flow and shareholder-oriented management teams and
whose stocks are trading at discounts to our assessment of the companies'
intrinsic or business value. We also look for asset rich companies whose shares
may be trading at depressed levels due to concerns over short-term earnings
disappointments, litigation, management strategy or other perceived negatives.
This strict value approach is not only intended to improve the likelihood of
upside potential, but it is also intended to reduce the risk of substantial
declines. While the vast majority of our undervalued equity investments are made
in publicly traded companies globally, we may invest occasionally in privately
held companies as well.
6 | Annual Report
We complement this more traditional investment strategy with two others. One is
distressed investing, a highly specialized field that has proven quite
profitable during certain periods over the years. Distressed investing is
complex and can take many forms. The most common distressed investment the Fund
undertakes is the purchase of financially troubled or bankrupt companies' debt
at a substantial discount to face value. After the financially distressed
company is reorganized, often in bankruptcy court, the old debt is typically
replaced with new securities issued by the financially stronger company.
The other piece of our investment strategy is participating in arbitrage
situations, another highly specialized field. When companies announce proposed
mergers or takeovers, commonly referred to as "deals," the target company may
trade at a discount to the bid it ultimately accepts. One form of arbitrage
involves purchasing the target company's stock when it is trading below the
value it would receive in a deal. In keeping with our commitment to a relatively
conservative investment approach, we typically focus our arbitrage efforts on
announced deals, and eschew rumored deals or other situations we consider
relatively risky.
In addition, we will generally seek to hedge the Fund's currency exposure when
we deem it advantageous for our shareholders.
MANAGER'S DISCUSSION
In 2008, all market sectors suffered double-digit declines, and we had our share
of poor-performing securities. Among the Fund's largest detractors from
performance were Fortis, a Belgian bank; Weyerhaueser, a paper and forest
products company; and Carlsberg, a Denmark-based beer company.
Fortis was the Fund's biggest detractor from performance this year. For the time
we held it during 2008, the stock declined 81% in local currency. Capital issues
plagued the company since its ill-timed acquisition of ABN AMRO's Dutch banking
business amid the crash of the U.S. and European housing markets, which only
complicated matters for Belgium's largest bank. Although capital was raised and
management replaced over the course of 2008, Fortis' inability to defend its
share price led to a loss of confidence and rapid deposit withdrawals in
September. Ultimately, this forced a government rescue of the bank, setting off
a marked decline in the company's equity value.
TOP 10 SECTORS/INDUSTRIES
Based on Equity Securities as of 12/31/08
% OF TOTAL
NET ASSETS
----------
Media 9.6%
Insurance 9.3%
Tobacco 8.7%
Diversified Telecommunication Services 4.9%
Food Products 4.3%
Paper & Forest Products 4.1%
Industrial Conglomerates 3.8%
Software 2.8%
Electric Utilities 2.8%
Energy Equipment & Services 2.7%
Annual Report | 7
TOP 10 HOLDINGS
12/31/08
COMPANY % OF TOTAL
SECTOR/INDUSTRY, COUNTRY NET ASSETS
- ------------------------ ----------
Comcast Corp., A 3.2%
MEDIA, U.S.
Microsoft Corp. 2.8%
SOFTWARE, U.S.
Berkshire Hathaway Inc., A & B 2.6%
INSURANCE, U.S.
White Mountains Insurance Group Ltd. 2.5%
INSURANCE, U.S.
Imperial Tobacco Group PLC 2.3%
TOBACCO, U.K.
News Corp., A 2.0%
MEDIA, U.S.
Weyerhaeuser Co. 1.9%
PAPER & FOREST PRODUCTS, U.S.
CVS Caremark Corp. 1.8%
FOOD & STAPLES RETAILING, U.S.
British American Tobacco PLC 1.7%
TOBACCO, U.K.
Nestle SA 1.6%
FOOD PRODUCTS, SWITZERLAND
The Fund's Weyerhaueser shares declined 56% during 2008 as housing and general
economic weakness weighed on demand at each of the company's timber, wood
products and real estate divisions. Although Weyerhaueser has extremely
attractive timber assets in North America and successfully completed the sale of
its containerboard division to International Paper during the reporting period,
the recession outweighed these positive aspects and adversely affected the
company's ongoing business activities.
Denmark-based brewer Carlsberg became the fourth-largest beer company after the
acquisition of some of U.K. beer and cider maker Scottish & Newcastle's assets.
Carlsberg's share price, which fell 65% in local currency during 2008, was
penalized by the equity issue to finance that acquisition and by its leveraged
balance sheet, despite the fact that the company produced resilient cash flows.
Investors were also concerned about ruble devaluation and a weakening Russian
beer market following cooler weather in the summer of 2008 when compared to
2007, making for difficult year-over-year comparisons. For the long term, we
believe Carlsberg continues to have attractive characteristics: a focus on cost
reduction as its margins still lagged those of its peers at year-end, and a
leading position in Russia, the third-largest profit pool in the beer industry
with some structural growth drivers. Russia is a market where per-capita beer
consumption has increased because of the country's growing preference for beer
rather than vodka. Carlsberg expanded its market share at the expense of the
industry's number-two player, InBev, which in our opinion was more focused on
its 2008 acquisition of U.S. brewer Anheuser-Busch.
For the year, several holdings had successful outcomes. Among the Fund's
top-performing stock investments were several broad equity market index put
options, which allow holders to profit if the equity market declines within a
preset period of time; shares of Chicago-based steel company Esmark; and Qwest
Communications International, a provider of phone and broadband Internet
services over its high-capacity global fiber-optic network.
We initially acquired equity index puts as a hedge on potential market
deterioration, as these instruments generally increase in value as the U.S.
stock market declines. Index puts are normally priced relative to volatility, a
measure of the probability of significant moves in prices. Index puts were
inexpensive in historical terms in 2007, when we first began buying them,
8 | Annual Report
and they remained relatively inexpensive into the beginning of 2008. As equity
markets fell, we profitably reduced the Fund's position. Their addition to Fund
performance helped offset some of the broad equity market's negative impact on
other portfolio securities. At period-end, the Fund held no position in index
options.
Esmark (sold by period-end) was started to consolidate the highly fragmented
steel service center industry that was ultimately merged with Wheeling
Pittsburgh Steel Company (WPSC) in September of 2007. During 2008, the newly
combined company received several competing acquisition proposals before
ultimately being sold in an all-cash transaction to Russian steelmaker Severstal
for $19.25 per share. Overall, the Fund's Esmark shares rose approximately 51%
while we held them in 2008.
Qwest also contributed positively to performance in 2008. We acquired shares in
the latter part of the year as concerns around telecommunications demand and the
company's relatively high debt load caused the shares to trade at a level we
deemed attractive given the risks. Late in the year, the shares appreciated as
the market grew increasingly comfortable that Qwest would maintain its
substantial dividend and the company would be able to refinance its debt
obligations as they become due. Our investment in Qwest rose nearly 37% in value
during 2008.
Finally, investors should note that we maintained our currency hedging posture
of being generally hedged to the U.S. dollar for most of our non-U.S. holdings.
Since the dollar was stronger compared with most foreign currencies during 2008,
the Fund benefited to the extent it was hedged.
Annual Report | 9
Thank you for your continued participation in Mutual Beacon Fund. We look
forward to serving your future investment needs.
(PHOTO OF MICHAEL J. EMBLER)
/s/ Michael J. Embler
- ----------------------------------------
Michael J. Embler
Co-Portfolio Manager
(PHOTO OF CHRISTIAN CORREA)
/s/ Christian Correa
- ----------------------------------------
Christian Correa, CFA
Co-Portfolio Manager
Mutual Beacon Fund
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS
AS OF DECEMBER 31, 2008, 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.
MICHAEL EMBLER, Chief Investment Officer for Franklin Mutual Advisers, LLC, has
been portfolio manager for Mutual Beacon Fund since 2005. He also manages
another fund for Franklin Mutual Advisers, and has been a member of the
management team of the Mutual Series Funds since 2001. Before joining Franklin
Templeton Investments in 2001, he was Managing Director and portfolio manager at
Nomura Holding America Inc.
CHRISTIAN CORREA has been co-portfolio manager for Mutual Beacon Fund since
2007. He has been an analyst for Franklin Mutual Advisers since 2003, when he
joined Franklin Templeton Investments. Previously, he covered U.S. risk
arbitrage and special situations at Lehman Brothers Holdings Inc.
10 | Annual Report
Performance Summary as of 12/31/08
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 and graphs do 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 Z (SYMBOL: BEGRX) CHANGE 12/31/08 12/31/07
- ----------------------- ------ -------- --------
Net Asset Value (NAV) -$6.66 $9.07 $15.73
DISTRIBUTIONS (1/1/08-12/31/08)
Dividend Income $0.0286
Short-Term Capital Gain $0.0640
Long-Term Capital Gain $0.3580
TOTAL $0.4506
CLASS A (SYMBOL: TEBIX) CHANGE 12/31/08 12/31/07
- ----------------------- ------ -------- --------
Net Asset Value (NAV) -$6.63 $8.99 $15.62
DISTRIBUTIONS (1/1/08-12/31/08)
Dividend Income $0.0247
Short-Term Capital Gain $0.0640
Long-Term Capital Gain $0.3580
TOTAL $0.4467
CLASS B (SYMBOL: TEBBX) CHANGE 12/31/08 12/31/07
- ----------------------- ------ -------- --------
Net Asset Value (NAV) -$6.51 $8.68 $15.19
DISTRIBUTIONS (1/1/08-12/31/08)
Dividend Income $0.0146
Short-Term Capital Gain $0.0640
Long-Term Capital Gain $0.3580
TOTAL $0.4366
CLASS C (SYMBOL: TEMEX) CHANGE 12/31/08 12/31/07
- ----------------------- ------ -------- --------
Net Asset Value (NAV) -$6.63 $8.84 $15.47
DISTRIBUTIONS (1/1/08-12/31/08)
Dividend Income $0.0152
Short-Term Capital Gain $0.0640
Long-Term Capital Gain $0.3580
TOTAL $0.4372
Annual Report | 11
Performance Summary (CONTINUED)
PERFORMANCE(1)
CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETURN AND
VALUE OF $10,000 INVESTMENT INCLUDE MAXIMUM SALES CHARGES. CLASS Z: NO 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 Z 1-YEAR 5-YEAR 10-YEAR
- ------- ------- ------- -------
Cumulative Total Return(2) -40.37% -7.00% +51.73%
Average Annual Total Return(3) -40.37% -1.44% +4.26%
Value of $10,000 Investment(4) $5,963 $9,300 $15,173
Total Annual Operating Expenses(5) 0.82%
CLASS A 1-YEAR 5-YEAR 10-YEAR
- ------- ------- ------- -------
Cumulative Total Return(2) -40.48% -8.37% +46.83%
Average Annual Total Return(3) -43.89% -2.88% +3.30%
Value of $10,000 Investment(4) $5,611 $8,639 $13,838
Total Annual Operating Expenses(5) 1.14%
CLASS B 1-YEAR 5-YEAR 10-YEAR
- ------- ------- ------- -------
Cumulative Total Return(2) -40.88% -11.45% +39.08%
Average Annual Total Return(3) -43.17% -2.68% +3.35%
Value of $10,000 Investment(4) $5,683 $8,731 $13,908
Total Annual Operating Expenses(5) 1.81%
CLASS C 1-YEAR 5-YEAR 10-YEAR
- ------- ------- ------- -------
Cumulative Total Return(2) -40.92% -11.47% +37.44%
Average Annual Total Return(3) -41.49% -2.41% +3.23%
Value of $10,000 Investment(4) $5,851 $8,853 $13,744
Total Annual Operating Expenses(5) 1.81%
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.
12 | Annual Report
Performance Summary (CONTINUED)
TOTAL RETURN INDEX COMPARISON FOR A HYPOTHETICAL $10,000 INVESTMENT(1)
Total return represents the change in value of an investment over the periods
shown. It includes any current, applicable, maximum sales charge, Fund expenses,
account fees and reinvested distributions. The unmanaged index includes
reinvestment of any income or distributions. It differs from the Fund in
composition and does not pay management fees or expenses. One cannot invest
directly in an index.
CLASS Z (1/1/99-12/31/08)
(PERFORMANCE GRAPH)
DATE MUTUAL BEACON FUND - CLASS Z S&P 500 INDEX
- ------------- ---------------------------- -------------
1/1/1999 $10,000 $10,000
1/31/1999 $10,175 $10,418
2/28/1999 $10,061 $10,094
3/31/1999 $10,526 $10,498
4/30/1999 $11,357 $10,905
5/31/1999 $11,463 $10,647
6/30/1999 $11,778 $11,238
7/31/1999 $11,529 $10,887
8/31/1999 $11,117 $10,833
9/30/1999 $10,829 $10,536
10/31/1999 $11,132 $11,203
11/30/1999 $11,397 $11,431
12/31/1999 $11,679 $12,104
1/31/2000 $11,392 $11,496
2/29/2000 $11,072 $11,278
3/31/2000 $12,177 $12,382
4/30/2000 $12,034 $12,009
5/31/2000 $12,186 $11,763
6/30/2000 $12,043 $12,053
7/31/2000 $12,350 $11,864
8/31/2000 $12,863 $12,601
9/30/2000 $12,890 $11,936
10/31/2000 $13,107 $11,886
11/30/2000 $12,764 $10,949
12/31/2000 $13,353 $11,002
1/31/2001 $14,221 $11,392
2/28/2001 $14,141 $10,354
3/31/2001 $13,732 $ 9,698
4/30/2001 $14,301 $10,451
5/31/2001 $14,780 $10,521
6/30/2001 $14,893 $10,265
7/31/2001 $14,985 $10,164
8/31/2001 $14,669 $ 9,528
9/30/2001 $13,374 $ 8,759
10/31/2001 $13,364 $ 8,926
11/30/2001 $13,843 $ 9,610
12/31/2001 $14,169 $ 9,694
1/31/2002 $14,115 $ 9,553
2/28/2002 $14,201 $ 9,369
3/31/2002 $14,592 $ 9,721
4/30/2002 $14,723 $ 9,132
5/31/2002 $14,777 $ 9,064
6/30/2002 $13,756 $ 8,419
7/31/2002 $12,856 $ 7,763
8/31/2002 $12,977 $ 7,813
9/30/2002 $12,274 $ 6,964
10/31/2002 $12,439 $ 7,577
11/30/2002 $12,680 $ 8,023
12/31/2002 $12,604 $ 7,552
1/31/2003 $12,470 $ 7,354
2/28/2003 $12,192 $ 7,244
3/31/2003 $12,225 $ 7,314
4/30/2003 $13,016 $ 7,917
5/31/2003 $13,718 $ 8,334
6/30/2003 $13,958 $ 8,440
7/31/2003 $14,115 $ 8,589
8/31/2003 $14,519 $ 8,756
9/30/2003 $14,496 $ 8,663
10/31/2003 $15,092 $ 9,153
11/30/2003 $15,631 $ 9,234
12/31/2003 $16,314 $ 9,718
1/31/2004 $16,382 $ 9,897
2/29/2004 $16,938 $10,034
3/31/2004 $16,915 $ 9,883
4/30/2004 $16,462 $ 9,728
5/31/2004 $16,552 $ 9,861
6/30/2004 $16,831 $10,053
7/31/2004 $16,614 $ 9,720
8/31/2004 $16,751 $ 9,759
9/30/2004 $17,048 $ 9,865
10/31/2004 $17,276 $10,016
11/30/2004 $18,177 $10,421
12/31/2004 $18,684 $10,776
1/31/2005 $18,297 $10,513
2/28/2005 $18,871 $10,734
3/31/2005 $18,754 $10,544
4/30/2005 $18,602 $10,344
5/31/2005 $18,988 $10,673
6/30/2005 $19,229 $10,689
7/31/2005 $19,738 $11,086
8/31/2005 $19,833 $10,985
9/30/2005 $20,081 $11,074
10/31/2005 $19,513 $10,889
11/30/2005 $20,046 $11,301
12/31/2005 $20,413 $11,305
1/31/2006 $20,899 $11,604
2/28/2006 $21,163 $11,636
3/31/2006 $21,912 $11,781
4/30/2006 $22,031 $11,939
5/31/2006 $21,873 $11,595
6/30/2006 $21,788 $11,611
7/31/2006 $21,842 $11,683
8/31/2006 $22,599 $11,961
9/30/2006 $22,788 $12,269
10/31/2006 $23,654 $12,669
11/30/2006 $24,060 $12,909
12/31/2006 $24,695 $13,091
1/31/2007 $25,316 $13,289
2/28/2007 $25,242 $13,029
3/31/2007 $25,715 $13,174
4/30/2007 $26,380 $13,758
5/31/2007 $27,326 $14,238
6/30/2007 $27,068 $14,001
7/31/2007 $26,024 $13,567
8/31/2007 $25,860 $13,771
9/30/2007 $26,218 $14,286
10/31/2007 $26,785 $14,513
11/30/2007 $25,875 $13,906
12/31/2007 $25,444 $13,810
1/31/2008 $24,102 $12,981
2/29/2008 $23,488 $12,560
3/31/2008 $23,132 $12,505
4/30/2008 $23,956 $13,115
5/31/2008 $24,312 $13,284
6/30/2008 $21,693 $12,164
7/31/2008 $21,887 $12,062
8/31/2008 $22,098 $12,237
9/30/2008 $20,057 $11,146
10/31/2008 $16,126 $ 9,274
11/30/2008 $14,788 $ 8,609
12/31/2008 $15,173 $ 8,700
Total Returns 51.73% -13.00%
AVERAGE ANNUAL TOTAL RETURN
CLASS Z 12/31/08
- ------- --------
1-Year -40.37%
5-Year -1.44%
10-Year +4.26%
CLASS A (1/1/99-12/31/08)
(PERFORMANCE GRAPH)
DATE MUTUAL BEACON FUND - CLASS A S&P 500 INDEX
- ------------- ---------------------------- -------------
1/1/1999 $ 9,424 $10,000
1/31/1999 $ 9,590 $10,418
2/28/1999 $ 9,474 $10,094
3/31/1999 $ 9,906 $10,498
4/30/1999 $10,684 $10,905
5/31/1999 $10,792 $10,647
6/30/1999 $11,081 $11,238
7/31/1999 $10,846 $10,887
8/31/1999 $10,449 $10,833
9/30/1999 $10,178 $10,536
10/31/1999 $10,457 $11,203
11/30/1999 $10,706 $11,431
12/31/1999 $10,969 $12,104
1/31/2000 $10,699 $11,496
2/29/2000 $10,389 $11,278
3/31/2000 $11,422 $12,382
4/30/2000 $11,287 $12,009
5/31/2000 $11,430 $11,763
6/30/2000 $11,286 $12,053
7/31/2000 $11,574 $11,864
8/31/2000 $12,049 $12,601
9/30/2000 $12,074 $11,936
10/31/2000 $12,278 $11,886
11/30/2000 $11,955 $10,949
12/31/2000 $12,493 $11,002
1/31/2001 $13,308 $11,392
2/28/2001 $13,224 $10,354
3/31/2001 $12,840 $ 9,698
4/30/2001 $13,364 $10,451
5/31/2001 $13,814 $10,521
6/30/2001 $13,908 $10,265
7/31/2001 $13,994 $10,164
8/31/2001 $13,688 $ 9,528
9/30/2001 $12,492 $ 8,759
10/31/2001 $12,473 $ 8,926
11/30/2001 $12,913 $ 9,610
12/31/2001 $13,216 $ 9,694
1/31/2002 $13,165 $ 9,553
2/28/2002 $13,236 $ 9,369
3/31/2002 $13,602 $ 9,721
4/30/2002 $13,724 $ 9,132
5/31/2002 $13,765 $ 9,064
6/30/2002 $12,806 $ 8,419
7/31/2002 $11,964 $ 7,763
8/31/2002 $12,077 $ 7,813
9/30/2002 $11,419 $ 6,964
10/31/2002 $11,563 $ 7,577
11/30/2002 $11,779 $ 8,023
12/31/2002 $11,708 $ 7,552
1/31/2003 $11,583 $ 7,354
2/28/2003 $11,323 $ 7,244
3/31/2003 $11,344 $ 7,314
4/30/2003 $12,082 $ 7,917
5/31/2003 $12,736 $ 8,334
6/30/2003 $12,956 $ 8,440
7/31/2003 $13,092 $ 8,589
8/31/2003 $13,458 $ 8,756
9/30/2003 $13,437 $ 8,663
10/31/2003 $13,992 $ 9,153
11/30/2003 $14,483 $ 9,234
12/31/2003 $15,101 $ 9,718
1/31/2004 $15,175 $ 9,897
2/29/2004 $15,670 $10,034
3/31/2004 $15,649 $ 9,883
4/30/2004 $15,217 $ 9,728
5/31/2004 $15,301 $ 9,861
6/30/2004 $15,566 $10,053
7/31/2004 $15,354 $ 9,720
8/31/2004 $15,471 $ 9,759
9/30/2004 $15,746 $ 9,865
10/31/2004 $15,948 $10,016
11/30/2004 $16,775 $10,421
12/31/2004 $17,235 $10,776
1/31/2005 $16,877 $10,513
2/28/2005 $17,409 $10,734
3/31/2005 $17,290 $10,544
4/30/2005 $17,138 $10,344
5/31/2005 $17,496 $10,673
6/30/2005 $17,725 $10,689
7/31/2005 $18,185 $11,086
8/31/2005 $18,262 $10,985
9/30/2005 $18,482 $11,074
10/31/2005 $17,966 $10,889
11/30/2005 $18,449 $11,301
12/31/2005 $18,768 $11,305
1/31/2006 $19,218 $11,604
2/28/2006 $19,461 $11,636
3/31/2006 $20,130 $11,781
4/30/2006 $20,239 $11,939
5/31/2006 $20,093 $11,595
6/30/2006 $20,010 $11,611
7/31/2006 $20,060 $11,683
8/31/2006 $20,747 $11,961
9/30/2006 $20,922 $12,269
10/31/2006 $21,697 $12,669
11/30/2006 $22,072 $12,909
12/31/2006 $22,643 $13,091
1/31/2007 $23,216 $13,289
2/28/2007 $23,134 $13,029
3/31/2007 $23,570 $13,174
4/30/2007 $24,157 $13,758
5/31/2007 $25,029 $14,238
6/30/2007 $24,787 $14,001
7/31/2007 $23,824 $13,567
8/31/2007 $23,659 $13,771
9/30/2007 $23,975 $14,286
10/31/2007 $24,498 $14,513
11/30/2007 $23,659 $13,906
12/31/2007 $23,248 $13,810
1/31/2008 $22,028 $12,981
2/29/2008 $21,463 $12,560
3/31/2008 $21,121 $12,505
4/30/2008 $21,865 $13,115
5/31/2008 $22,207 $13,284
6/30/2008 $19,797 $12,164
7/31/2008 $19,976 $12,062
8/31/2008 $20,154 $12,237
9/30/2008 $18,286 $11,146
10/31/2008 $14,700 $ 9,274
11/30/2008 $13,484 $ 8,609
12/31/2008 $13,838 $ 8,700
Total Returns 38.38% -13.00%
AVERAGE ANNUAL TOTAL RETURN
CLASS A 12/31/08
- ------- --------
1-Year -43.89%
5-Year -2.88%
10-Year +3.30%
Annual Report | 13
Performance Summary (CONTINUED)
AVERAGE ANNUAL TOTAL RETURN
CLASS B 12/31/08
- ------- --------
1-Year -43.17%
5-Year -2.68%
10-Year +3.35%
CLASS B (1/1/99-12/31/08)
(PERFORMANCE GRAPH)
DATE MUTUAL BEACON FUND - CLASS B S&P 500 INDEX
- ------------- ---------------------------- -------------
1/1/1999 $10,000 $10,000
1/31/1999 $10,160 $10,418
2/28/1999 $10,031 $10,094
3/31/1999 $10,481 $10,498
4/30/1999 $11,291 $10,905
5/31/1999 $11,398 $10,647
6/30/1999 $11,693 $11,238
7/31/1999 $11,436 $10,887
8/31/1999 $11,015 $10,833
9/30/1999 $10,719 $10,536
10/31/1999 $11,007 $11,203
11/30/1999 $11,265 $11,431
12/31/1999 $11,533 $12,104
1/31/2000 $11,247 $11,496
2/29/2000 $10,918 $11,278
3/31/2000 $11,996 $12,382
4/30/2000 $11,845 $12,009
5/31/2000 $11,988 $11,763
6/30/2000 $11,840 $12,053
7/31/2000 $12,127 $11,864
8/31/2000 $12,622 $12,601
9/30/2000 $12,631 $11,936
10/31/2000 $12,846 $11,886
11/30/2000 $12,496 $10,949
12/31/2000 $13,054 $11,002
1/31/2001 $13,896 $11,392
2/28/2001 $13,806 $10,354
3/31/2001 $13,390 $ 9,698
4/30/2001 $13,935 $10,451
5/31/2001 $14,401 $10,521
6/30/2001 $14,487 $10,265
7/31/2001 $14,568 $10,164
8/31/2001 $14,244 $ 9,528
9/30/2001 $12,990 $ 8,759
10/31/2001 $12,959 $ 8,926
11/30/2001 $13,415 $ 9,610
12/31/2001 $13,722 $ 9,694
1/31/2002 $13,658 $ 9,553
2/28/2002 $13,722 $ 9,369
3/31/2002 $14,097 $ 9,721
4/30/2002 $14,215 $ 9,132
5/31/2002 $14,258 $ 9,064
6/30/2002 $13,253 $ 8,419
7/31/2002 $12,375 $ 7,763
8/31/2002 $12,483 $ 7,813
9/30/2002 $11,801 $ 6,964
10/31/2002 $11,942 $ 7,577
11/30/2002 $12,169 $ 8,023
12/31/2002 $12,081 $ 7,552
1/31/2003 $11,950 $ 7,354
2/28/2003 $11,677 $ 7,244
3/31/2003 $11,688 $ 7,314
4/30/2003 $12,441 $ 7,917
5/31/2003 $13,107 $ 8,334
6/30/2003 $13,320 $ 8,440
7/31/2003 $13,463 $ 8,589
8/31/2003 $13,825 $ 8,756
9/30/2003 $13,793 $ 8,663
10/31/2003 $14,353 $ 9,153
11/30/2003 $14,848 $ 9,234
12/31/2003 $15,491 $ 9,718
1/31/2004 $15,546 $ 9,897
2/29/2004 $16,052 $10,034
3/31/2004 $16,019 $ 9,883
4/30/2004 $15,568 $ 9,728
5/31/2004 $15,645 $ 9,861
6/30/2004 $15,903 $10,053
7/31/2004 $15,681 $ 9,720
8/31/2004 $15,792 $ 9,759
9/30/2004 $16,069 $ 9,865
10/31/2004 $16,268 $10,016
11/30/2004 $17,099 $10,421
12/31/2004 $17,554 $10,776
1/31/2005 $17,181 $10,513
2/28/2005 $17,712 $10,734
3/31/2005 $17,588 $10,544
4/30/2005 $17,430 $10,344
5/31/2005 $17,769 $10,673
6/30/2005 $17,985 $10,689
7/31/2005 $18,453 $11,086
8/31/2005 $18,510 $10,985
9/30/2005 $18,738 $11,074
10/31/2005 $18,190 $10,889
11/30/2005 $18,681 $11,301
12/31/2005 $18,987 $11,305
1/31/2006 $19,441 $11,604
2/28/2006 $19,667 $11,636
3/31/2006 $20,334 $11,781
4/30/2006 $20,435 $11,939
5/31/2006 $20,272 $11,595
6/30/2006 $20,185 $11,611
7/31/2006 $20,211 $11,683
8/31/2006 $20,897 $11,961
9/30/2006 $21,053 $12,269
10/31/2006 $21,829 $12,669
11/30/2006 $22,192 $12,909
12/31/2006 $22,758 $13,091
1/31/2007 $23,334 $13,289
2/28/2007 $23,252 $13,029
3/31/2007 $23,692 $13,174
4/30/2007 $24,281 $13,758
5/31/2007 $25,158 $14,238
6/30/2007 $24,914 $14,001
7/31/2007 $23,947 $13,567
8/31/2007 $23,782 $13,771
9/30/2007 $24,101 $14,286
10/31/2007 $24,626 $14,513
11/30/2007 $23,782 $13,906
12/31/2007 $23,368 $13,810
1/31/2008 $22,141 $12,981
2/29/2008 $21,572 $12,560
3/31/2008 $21,229 $12,505
4/30/2008 $21,976 $13,115
5/31/2008 $22,319 $13,284
6/30/2008 $19,897 $12,164
7/31/2008 $20,076 $12,062
8/31/2008 $20,255 $12,237
9/30/2008 $18,377 $11,146
10/31/2008 $14,774 $ 9,274
11/30/2008 $13,552 $ 8,609
12/31/2008 $13,908 $ 8,700
Total Returns 39.08% -13.00%
AVERAGE ANNUAL TOTAL RETURN
CLASS C 12/31/08
- ------- --------
1-Year -41.49%
5-Year -2.41%
10-Year +3.23%
CLASS C (1/1/99-12/31/08)
DATE MUTUAL BEACON FUND - CLASS C S&P 500 INDEX
- ------------- ---------------------------- -------------
1/1/1999 $10,000 $10,000
1/31/1999 $10,169 $10,418
2/28/1999 $10,038 $10,094
3/31/1999 $10,498 $10,498
4/30/1999 $11,319 $10,905
5/31/1999 $11,419 $10,647
6/30/1999 $11,723 $11,238
7/31/1999 $11,466 $10,887
8/31/1999 $11,044 $10,833
9/30/1999 $10,747 $10,536
10/31/1999 $11,036 $11,203
11/30/1999 $11,294 $11,431
12/31/1999 $11,565 $12,104
1/31/2000 $11,270 $11,496
2/29/2000 $10,942 $11,278
3/31/2000 $12,027 $12,382
4/30/2000 $11,876 $12,009
5/31/2000 $12,019 $11,763
6/30/2000 $11,862 $12,053
7/31/2000 $12,158 $11,864
8/31/2000 $12,651 $12,601
9/30/2000 $12,669 $11,936
10/31/2000 $12,875 $11,886
11/30/2000 $12,526 $10,949
12/31/2000 $13,093 $11,002
1/31/2001 $13,931 $11,392
2/28/2001 $13,842 $10,354
3/31/2001 $13,428 $ 9,698
4/30/2001 $13,970 $10,451
5/31/2001 $14,433 $10,521
6/30/2001 $14,524 $10,265
7/31/2001 $14,605 $10,164
8/31/2001 $14,283 $ 9,528
9/30/2001 $13,025 $ 8,759
10/31/2001 $12,994 $ 8,926
11/30/2001 $13,447 $ 9,610
12/31/2001 $13,755 $ 9,694
1/31/2002 $13,691 $ 9,553
2/28/2002 $13,765 $ 9,369
3/31/2002 $14,137 $ 9,721
4/30/2002 $14,254 $ 9,132
5/31/2002 $14,286 $ 9,064
6/30/2002 $13,287 $ 8,419
7/31/2002 $12,406 $ 7,763
8/31/2002 $12,513 $ 7,813
9/30/2002 $11,826 $ 6,964
10/31/2002 $11,976 $ 7,577
11/30/2002 $12,191 $ 8,023
12/31/2002 $12,105 $ 7,552
1/31/2003 $11,976 $ 7,354
2/28/2003 $11,695 $ 7,244
3/31/2003 $11,716 $ 7,314
4/30/2003 $12,472 $ 7,917
5/31/2003 $13,131 $ 8,334
6/30/2003 $13,352 $ 8,440
7/31/2003 $13,494 $ 8,589
8/31/2003 $13,863 $ 8,756
9/30/2003 $13,831 $ 8,663
10/31/2003 $14,385 $ 9,153
11/30/2003 $14,885 $ 9,234
12/31/2003 $15,524 $ 9,718
1/31/2004 $15,579 $ 9,897
2/29/2004 $16,091 $10,034
3/31/2004 $16,058 $ 9,883
4/30/2004 $15,611 $ 9,728
5/31/2004 $15,687 $ 9,861
6/30/2004 $15,942 $10,053
7/31/2004 $15,723 $ 9,720
8/31/2004 $15,832 $ 9,759
9/30/2004 $16,106 $ 9,865
10/31/2004 $16,303 $10,016
11/30/2004 $17,147 $10,421
12/31/2004 $17,603 $10,776
1/31/2005 $17,223 $10,513
2/28/2005 $17,759 $10,734
3/31/2005 $17,625 $10,544
4/30/2005 $17,469 $10,344
5/31/2005 $17,815 $10,673
6/30/2005 $18,029 $10,689
7/31/2005 $18,491 $11,086
8/31/2005 $18,558 $10,985
9/30/2005 $18,784 $11,074
10/31/2005 $18,243 $10,889
11/30/2005 $18,716 $11,301
12/31/2005 $19,032 $11,305
1/31/2006 $19,480 $11,604
2/28/2006 $19,716 $11,636
3/31/2006 $20,386 $11,781
4/30/2006 $20,486 $11,939
5/31/2006 $20,324 $11,595
6/30/2006 $20,227 $11,611
7/31/2006 $20,252 $11,683
8/31/2006 $20,942 $11,961
9/30/2006 $21,108 $12,269
10/31/2006 $21,887 $12,669
11/30/2006 $22,244 $12,909
12/31/2006 $22,808 $13,091
1/31/2007 $23,363 $13,289
2/28/2007 $23,266 $13,029
3/31/2007 $23,695 $13,174
4/30/2007 $24,277 $13,758
5/31/2007 $25,136 $14,238
6/30/2007 $24,890 $14,001
7/31/2007 $23,898 $13,567
8/31/2007 $23,730 $13,771
9/30/2007 $24,038 $14,286
10/31/2007 $24,527 $14,513
11/30/2007 $23,674 $13,906
12/31/2007 $23,262 $13,810
1/31/2008 $22,015 $12,981
2/29/2008 $21,444 $12,560
3/31/2008 $21,098 $12,505
4/30/2008 $21,820 $13,115
5/31/2008 $22,150 $13,284
6/30/2008 $19,731 $12,164
7/31/2008 $19,896 $12,062
8/31/2008 $20,077 $12,237
9/30/2008 $18,206 $11,146
10/31/2008 $14,630 $ 9,274
11/30/2008 $13,402 $ 8,609
12/31/2008 $13,744 $ 8,700
Total Returns 37.44% -13.00%
14 | Annual Report
Performance Summary (CONTINUED)
ENDNOTES
VALUE SECURITIES MAY NOT INCREASE IN PRICE AS ANTICIPATED OR MAY DECLINE FURTHER
IN VALUE. FOREIGN SECURITIES RISKS INCLUDE CURRENCY FLUCTUATIONS AND ECONOMIC
AND POLITICAL UNCERTAINTIES. THE FUND MAY ALSO INVEST IN COMPANIES ENGAGED IN
MERGERS, REORGANIZATIONS OR LIQUIDATIONS, WHICH INVOLVE SPECIAL RISKS AS PENDING
DEALS MAY NOT BE COMPLETED ON TIME OR ON FAVORABLE TERMS, AS WELL AS LOWER-RATED
BONDS, WHICH ENTAIL HIGHER CREDIT RISK. THE FUND'S PROSPECTUS ALSO INCLUDES A
DESCRIPTION OF THE MAIN INVESTMENT RISKS.
CLASS Z: Shares are available to certain eligible investors as described in the
prospectus.
CLASS 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.
(1.) Past expense reductions by the Fund's manager increased the Fund's total
returns. If the manager had not taken this action, the Fund's total returns
would have been lower.
(2.) Cumulative total return represents the change in value of an investment
over the periods indicated.
(3.) Average annual total return represents the average annual change in value
of an investment over the periods indicated.
(4.) These figures represent the value of a hypothetical $10,000 investment in
the Fund over the periods indicated.
(5.) Figures are as stated in the Fund's prospectus current as of the date of
this report.
(6.) Source: (C) 2009 Morningstar. The S&P 500 consists of 500 stocks chosen for
market size, liquidity and industry group representation. Each stock's
weight in the index is proportionate to its market value. The S&P 500 is
one of the most widely used benchmarks of U.S. equity performance.
Annual Report | 15
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
redemption fees; 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.
16 | Annual Report
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 OR
REDEMPTION FEES. 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
VALUE 7/1/08 VALUE 12/31/08 PERIOD* 7/1/08-12/31/08
----------------- -------------- -----------------------
CLASS Z
Actual $1,000 $ 699.40 $3.72
Hypothetical (5% return before expenses) $1,000 $1,020.76 $4.42
CLASS A
Actual $1,000 $ 699.00 $5.00
Hypothetical (5% return before expenses) $1,000 $1,019.25 $5.94
CLASS B
Actual $1,000 $ 696.60 $7.97
Hypothetical (5% return before expenses) $1,000 $1,015.74 $9.48
CLASS C
Actual $1,000 $ 696.60 $7.89
Hypothetical (5% return before expenses) $1,000 $1,015.84 $9.37
* Expenses are calculated using the most recent six-month expense ratio,
annualized for each class (Z: 0.87%; A: 1.17%; B: 1.87%; and C: 1.85%)
multiplied by the average account value over the period, multiplied by
184/366 to reflect the one-half year period.
Annual Report | 17
Mutual Beacon Fund
FINANCIAL HIGHLIGHTS
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------
CLASS Z 2008 2007 2006 2005 2004
- ------- ---------- ---------- ---------- ---------- ----------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............. $ 15.73 $ 16.71 $ 15.52 $ 15.94 $ 14.40
---------- ---------- ---------- ---------- ----------
Income from investment operations(a):
Net investment income(b) .................... 0.25 0.51 0.26 0.31 0.30
Net realized and unrealized gains (losses) .. (6.46) -- 2.91 1.16 1.76
---------- ---------- ---------- ---------- ----------
Total from investment operations ............... (6.21) 0.51 3.17 1.47 2.06
---------- ---------- ---------- ---------- ----------
Less distributions from:
Net investment income ....................... (0.03) (0.57) (0.28) (0.30) (0.37)
Net realized gains .......................... (0.42) (0.92) (1.70) (1.59) (0.15)
---------- ---------- ---------- ---------- ----------
Total distributions ............................ (0.45) (1.49) (1.98) (1.89) (0.52)
---------- ---------- ---------- ---------- ----------
Redemption fees(c, d) .......................... -- -- -- -- --
---------- ---------- ---------- ---------- ----------
Net asset value, end of year ................... $ 9.07 $ 15.73 $ 16.71 $ 15.52 $ 15.94
========== ========== ========== ========== ==========
Total return ................................... (40.37)% 3.03% 20.98% 9.25% 14.52%
RATIOS TO AVERAGE NET ASSETS
Expenses(e, f) ................................. 0.84% 0.82% 0.85% 0.89% 0.83%
Expenses - excluding dividend expense on
securities sold short(e) .................... 0.84% 0.81% 0.82% 0.84% 0.82%
Net investment income .......................... 1.90% 2.89% 1.59% 1.91% 1.99%
SUPPLEMENTAL DATA
Net assets, end of year (000's) ................ $2,002,361 $3,883,935 $3,925,029 $3,433,665 $3,359,389
Portfolio turnover rate ........................ 56.87% 49.84% 40.72% 35.36% 29.17%
(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) Amount rounds to less than $0.01 per share.
(d) Effective September 1, 2008, the redemption fee was eliminated.
(e) Benefit of expense reduction rounds to less than 0.01%.
(f) Includes dividend expense on securities sold short which varies from period
to period. See below for expense ratios that reflect only operating
expenses.
The accompanying notes are an integral part of these financial statements.
18 | Annual Report
Mutual Beacon Fund
FINANCIAL HIGHLIGHTS (CONTINUED)
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------
CLASS A 2008 2007 2006 2005 2004
- ------- ---------- ---------- ---------- ---------- ----------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............. $ 15.62 $ 16.61 $ 15.44 $ 15.87 $ 14.34
---------- ---------- ---------- ---------- ----------
Income from investment operations(a):
Net investment income(b) .................... 0.20 0.45 0.21 0.26 0.25
Net realized and unrealized gains (losses) .. (6.38) -- 2.90 1.15 1.75
---------- ---------- ---------- ---------- ----------
Total from investment operations ............... (6.18) 0.45 3.11 1.41 2.00
---------- ---------- ---------- ---------- ----------
Less distributions from:
Net investment income ....................... (0.03) (0.52) (0.24) (0.25) (0.32)
Net realized gains .......................... (0.42) (0.92) (1.70) (1.59) (0.15)
---------- ---------- ---------- ---------- ----------
Total distributions ............................ (0.45) (1.44) (1.94) (1.84) (0.47)
---------- ---------- ---------- ---------- ----------
Redemption fees(c, d) .......................... -- -- -- -- --
---------- ---------- ---------- ---------- ----------
Net asset value, end of year ................... $ 8.99 $ 15.62 $ 16.61 $ 15.44 $ 15.87
========== ========== ========== ========== ==========
Total return(e) ................................ (40.48)% 2.67% 20.65% 8.89% 14.13%
RATIOS TO AVERAGE NET ASSETS
Expenses(f, g) ................................. 1.13% 1.14% 1.15% 1.22% 1.18%
Expenses - excluding dividend expense on
securities sold short(f) .................... 1.13% 1.13% 1.12% 1.17% 1.17%
Net investment income .......................... 1.61% 2.57% 1.29% 1.58% 1.64%
SUPPLEMENTAL DATA
Net assets, end of year (000's) ................ $1,659,062 $2,654,731 $2,176,658 $1,633,022 $1,462,133
Portfolio turnover rate ........................ 56.87% 49.84% 40.72% 35.36% 29.17%
(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) Amount rounds to less than $0.01 per share.
(d) Effective September 1, 2008, the redemption fee was eliminated.
(e) Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
(f) Benefit of expense reduction rounds to less than 0.01%.
(g) Includes dividend expense on securities sold short which varies from period
to period. See below for expense ratios that reflect only operating
expenses.
The accompanying notes are an integral part of these financial statements.
Annual Report | 19
Mutual Beacon Fund
FINANCIAL HIGHLIGHTS (CONTINUED)
YEAR ENDED DECEMBER 31,
----------------------------------------------------
CLASS B 2008 2007 2006 2005 2004
- ------- ------- -------- -------- -------- --------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............. $ 15.19 $ 16.17 $ 15.09 $ 15.54 $ 14.06
------- -------- -------- -------- --------
Income from investment operations(a):
Net investment income(b) .................... 0.12 0.32 0.10 0.14 0.15
Net realized and unrealized gains (losses) .. (6.19) 0.01 2.80 1.14 1.71
------- -------- -------- -------- --------
Total from investment operations ............... (6.07) 0.33 2.90 1.28 1.86
------- -------- -------- -------- --------
Less distributions from:
Net investment income ....................... (0.02) (0.39) (0.12) (0.14) (0.23)
Net realized gains .......................... (0.42) (0.92) (1.70) (1.59) (0.15)
------- -------- -------- -------- --------
Total distributions ............................ (0.44) (1.31) (1.82) (1.73) (0.38)
------- -------- -------- -------- --------
Redemption fees(c, d) .......................... -- -- -- -- --
------- -------- -------- -------- --------
Net asset value, end of year ................... $ 8.68 $ 15.19 $ 16.17 $ 15.09 $ 15.54
======= ======== ======== ======== ========
Total return(e) ................................ (40.88)% 1.95% 19.86% 8.17% 13.32%
RATIOS TO AVERAGE NET ASSETS
Expenses(f, g) ................................. 1.84% 1.81% 1.85% 1.89% 1.83%
Expenses - excluding dividend expense on
securities sold short(f) .................... 1.84% 1.80% 1.82% 1.84% 1.82%
Net investment income .......................... 0.90% 1.90% 0.59% 0.91% 0.99%
SUPPLEMENTAL DATA
Net assets, end of year (000's) ................ $73,168 $171,628 $199,461 $186,169 $186,840
Portfolio turnover rate ........................ 56.87% 49.84% 40.72% 35.36% 29.17%
(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) Amount rounds to less than $0.01 per share.
(d) Effective September 1, 2008, the redemption fee was eliminated.
(e) Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
(f) Benefit of expense reduction rounds to less than 0.01%.
(g) Includes dividend expense on securities sold short which varies from period
to period. See below for expense ratios that reflect only operating
expenses.
The accompanying notes are an integral part of these financial statements.
20 | Annual Report
Mutual Beacon Fund
FINANCIAL HIGHLIGHTS (CONTINUED)
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
CLASS C 2008 2007 2006 2005 2004
- ------- -------- -------- -------- -------- --------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............. $ 15.47 $ 16.46 $ 15.33 $ 15.77 $ 14.26
-------- -------- -------- -------- --------
Income from investment operations(a):
Net investment income(b) .................... 0.12 0.33 0.10 0.15 0.14
Net realized and unrealized gains (losses) .. (6.31) -- 2.85 1.14 1.74
-------- -------- -------- -------- --------
Total from investment operations ............... (6.19) 0.33 2.95 1.29 1.88
-------- -------- -------- -------- --------
Less distributions from:
Net investment income ....................... (0.02) (0.40) (0.12) (0.14) (0.23)
Net realized gains .......................... (0.42) (0.92) (1.70) (1.59) (0.14)
-------- -------- -------- -------- --------
Total distributions ............................ (0.44) (1.32) (1.82) (1.73) (0.37)
-------- -------- -------- -------- --------
Redemption fees(c, d) .......................... -- -- -- -- --
-------- -------- -------- -------- --------
Net asset value, end of year ................... $ 8.84 $ 15.47 $ 16.46 $ 15.33 $ 15.77
======== ======== ======== ======== ========
Total return(e) ................................ (40.92)% 1.99% 19.84% 8.12% 13.39%
RATIOS TO AVERAGE NET ASSETS
Expenses(f, g) ................................. 1.84% 1.81% 1.85% 1.89% 1.83%
Expenses - excluding dividend expense on
securities sold short(f) .................... 1.84% 1.80% 1.82% 1.84% 1.82%
Net investment income .......................... 0.90% 1.90% 0.59% 0.91% 0.99%
SUPPLEMENTAL DATA
Net assets, end of year (000's) ................ $417,549 $875,060 $825,234 $697,400 $658,813
Portfolio turnover rate ........................ 56.87% 49.84% 40.72% 35.36% 29.17%
(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) Amount rounds to less than $0.01 per share.
(d) Effective September 1, 2008, the redemption fee was eliminated.
(e) Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
(f) Benefit of expense reduction rounds to less than 0.01%.
(g) Includes dividend expense on securities sold short which varies from period
to period. See below for expense ratios that reflect only operating
expenses.
The accompanying notes are an integral part of these financial statements.
Annual Report | 21
Mutual Beacon Fund
STATEMENT OF INVESTMENTS, DECEMBER 31, 2008
SHARES/WARRANTS/
COUNTRY CONTRACTS/RIGHTS VALUE
-------------- ---------------- ---------------
COMMON STOCKS AND OTHER EQUITY INTERESTS 83.7%
AEROSPACE & DEFENSE 1.1%
United Technologies Corp. ............................ United States 860,930 $ 46,145,848
---------------
AIRLINES 0.6%
(a) ACE Aviation Holdings Inc., A ........................ Canada 967,371 5,366,333
(a) Continental Airlines Inc., B ......................... United States 674,210 12,176,232
(a) Delta Air Lines Inc. ................................. United States 583,660 6,688,744
(a,b) Northwest Airlines Corp., Contingent Distribution .... United States 35,952,000 22,650
---------------
24,253,959
---------------
AUTO COMPONENTS 0.1%
(a,b,c) Collins & Aikman Products Co., Contingent
Distribution ...................................... United States 1,506,491 15,065
(a) Dana Holding Corp. ................................... United States 714,631 528,826
(a,b) Dana Holding Corp., Contingent Distribution .......... United States 16,890,000 5,278
(a) Goodyear Tire & Rubber Co. ........................... United States 673,549 4,021,088
---------------
4,570,257
---------------
AUTOMOBILES 0.5%
Daimler AG ........................................... Germany 444,830 16,420,953
(a,d) IACNA Investor LLC ................................... United States 225,943 2,260
(a,d,e) International Automotive Components Group Brazil
LLC ............................................... Brazil 2,846,329 2,264,597
(a,d,e) International Automotive Components Group Japan LLC .. Japan 378,194 408,729
(a,d,e) International Automotive Components Group LLC ........ Luxembourg 10,149,082 1,726,359
(a,d,e) International Automotive Components Group NA LLC, A .. United States 6,469,827 1,053,288
---------------
21,876,186
---------------
BEVERAGES 2.6%
Brown-Forman Corp., A ................................ United States 308,260 15,604,121
Brown-Forman Corp., B ................................ United States 530,337 27,307,052
Carlsberg AS, A ...................................... Denmark 74,900 2,701,685
Carlsberg AS, B ...................................... Denmark 1,134,006 36,483,595
(a) Dr. Pepper Snapple Group Inc. ........................ United States 1,544,830 25,103,488
---------------
107,199,941
---------------
BIOTECHNOLOGY 0.9%
(a) Genentech Inc. ....................................... United States 451,543 37,437,430
---------------
BUILDING PRODUCTS 0.0%(f)
Armstrong World Industries Inc. ...................... United States 757 16,366
---------------
CHEMICALS 0.4%
(a,b,c) Dow Corning Corp., Contingent Distribution ........... United States 23,723,548 3,149,637
Koninklijke DSM NV ................................... Netherlands 553,600 14,185,362
---------------
17,334,999
---------------
COMMERCIAL BANKS 1.0%
Danske Bank AS ....................................... Denmark 756,501 7,390,342
(a,d,g) FE Capital Holdings Ltd. ............................. Japan 35,242 --
(a,d,g) First Chicago Bancorp ................................ United States 1,157,143 8,776,047
Intesa Sanpaolo SpA .................................. Italy 7,552,024 26,795,988
(a,d) NCB Warrant Holdings Ltd., A ......................... Japan 163,895 --
---------------
42,962,377
---------------
22 | Annual Report
Mutual Beacon Fund
STATEMENT OF INVESTMENTS, DECEMBER 31, 2008 (CONTINUED)
SHARES/WARRANTS/
COUNTRY CONTRACTS/RIGHTS VALUE
-------------- ---------------- ---------------
COMMON STOCKS AND OTHER EQUITY INTERESTS (CONTINUED)
COMMERCIAL SERVICES & SUPPLIES 0.0%(f)
(a) Comdisco Holding Co. Inc. ............................ United States 1,223 $ 9,539
(a,b) Comdisco Holding Co. Inc., Contingent Distribution ... United States 49,575,000 --
---------------
9,539
---------------
COMMUNICATIONS EQUIPMENT 1.2%
(h) Telefonaktiebolaget LM Ericsson, B ................... Sweden 4,881,885 36,712,475
Telefonaktiebolaget LM Ericsson, B, ADR .............. Sweden 1,448,000 11,308,880
---------------
48,021,355
---------------
COMPUTERS & PERIPHERALS 1.0%
(a,d,g) DecisionOne Corp. .................................... United States 1,142,353 --
(a,d,g) DecisionOne Corp., wts., 6/08/17 ..................... United States 627,237 --
(a) Dell Inc. ............................................ United States 4,243,550 43,453,952
---------------
43,453,952
---------------
CONSUMER FINANCE 0.8%
(a,d) Cerberus CG Investor I LLC ........................... United States 20,610,629 4,122,126
(a,d) Cerberus CG Investor II LLC .......................... United States 20,610,629 4,122,126
(a,d) Cerberus CG Investor III LLC ......................... United States 10,305,315 2,061,063
(a,d) Cerberus FIM Investors Holdco LLC .................... United States 19,542,250 4,139,005
(a) SLM Corp. ............................................ United States 2,069,577 18,419,235
---------------
32,863,555
---------------
CONTAINERS & PACKAGING 0.4%
Temple-Inland Inc. ................................... United States 3,818,307 18,327,874
---------------
DIVERSIFIED CONSUMER SERVICES 0.4%
Hillenbrand Inc. ..................................... United States 889,128 14,830,655
---------------
DIVERSIFIED FINANCIAL SERVICES 0.6%
CIT Group Inc. ....................................... United States 5,017,725 22,780,472
(a) Fortis, rts., 7/01/14 ................................ Belgium 2,978,030 --
(a,b) Marconi Corp., Contingent Distribution ............... United Kingdom 42,651,300 --
---------------
22,780,472
---------------
DIVERSIFIED TELECOMMUNICATION SERVICES 4.9%
(a,d,e) AboveNet Inc. ........................................ United States 484,720 24,236,000
(a,d,e) AboveNet Inc., stock grant, grant price $20.95,
expiration date 9/09/13 ........................... United States 613 1,379
(a,d,e) AboveNet Inc., wts., 9/08/10 ......................... United States 19,829 79,316
(a,b,c) Global Crossing Holdings Ltd., Contingent
Distribution ...................................... United States 60,632,757 --
Qwest Communications International Inc. .............. United States 17,916,610 65,216,460
Telefonica SA ........................................ Spain 2,524,533 55,951,365
(a) tw telecom Inc., A ................................... United States 6,867,340 58,166,370
---------------
203,650,890
---------------
ELECTRIC UTILITIES 2.8%
E.ON AG .............................................. Germany 1,698,600 66,551,771
Exelon Corp. ......................................... United States 863,150 47,999,772
---------------
114,551,543
---------------
Annual Report | 23
Mutual Beacon Fund
STATEMENT OF INVESTMENTS, DECEMBER 31, 2008 (CONTINUED)
SHARES/WARRANTS/
COUNTRY CONTRACTS/RIGHTS VALUE
-------------- ---------------- ---------------
COMMON STOCKS AND OTHER EQUITY INTERESTS (CONTINUED)
ELECTRONIC EQUIPMENT, INSTRUMENTS & COMPONENT 0.7%
Tyco Electronics Ltd. ................................ United States 1,705,745 $ 27,650,126
---------------
ENERGY EQUIPMENT & SERVICES 2.7%
Baker Hughes Inc. .................................... United States 332,810 10,673,217
(a) Exterran Holding Inc. ................................ United States 2,848,874 60,681,016
(a) Transocean Ltd. ...................................... United States 882,985 41,721,041
---------------
113,075,274
---------------
FOOD & STAPLES RETAILING 1.8%
CVS Caremark Corp. ................................... United States 2,557,604 73,505,539
---------------
FOOD PRODUCTS 4.3%
(h) Cadbury PLC .......................................... United Kingdom 2,878,407 25,455,567
(g) Farmer Brothers Co. .................................. United States 1,033,896 25,785,366
(h) Groupe Danone ........................................ France 764,690 46,170,908
(a,i) Marine Harvest ....................................... Norway 72,384,735 10,928,197
(h) Nestle SA ............................................ Switzerland 1,752,350 68,262,721
---------------
176,602,759
---------------
HEALTH CARE PROVIDERS & SERVICES 1.4%
(a) Community Health Systems Inc. ........................ United States 1,692,360 24,674,609
(a,d) Kindred Healthcare Inc. .............................. United States 1,652,279 20,437,039
(a) Tenet Healthcare Corp. ............................... United States 9,752,777 11,215,693
---------------
56,327,341
---------------
HOTELS, RESTAURANTS & LEISURE 0.1%
Enterprise Inns PLC .................................. United Kingdom 4,232,485 3,477,238
(a) Trump Entertainment Resorts Inc. ..................... United States 611,433 104,188
---------------
3,581,426
---------------
INDEPENDENT POWER PRODUCERS & ENERGY TRADERS 1.2%
Constellation Energy Group ........................... United States 2,063,866 51,782,398
---------------
INDUSTRIAL CONGLOMERATES 3.8%
Koninklijke Philips Electronics NV ................... Netherlands 1,452,820 28,095,344
(e) Orkla ASA ............................................ Norway 8,348,283 54,556,096
Siemens AG ........................................... Germany 738,980 54,548,739
Tyco International Ltd. .............................. United States 935,315 20,202,804
---------------
157,402,983
---------------
INSURANCE 9.3%
ACE Ltd. ............................................. United States 869,890 46,034,579
(a) Alleghany Corp. ...................................... United States 173,003 48,786,846
(a) Berkshire Hathaway Inc., A ........................... United States 741 71,580,600
(a) Berkshire Hathaway Inc., B ........................... United States 10,755 34,566,570
(a,d) Olympus Re Holdings Ltd. ............................. United States 106,700 250,489
Prudential Financial Inc. ............................ United States 828,050 25,056,793
(a,d) Symetra Financial .................................... United States 4,450,920 59,152,727
White Mountains Insurance Group Ltd. ................. United States 383,121 102,335,450
---------------
387,764,054
---------------
24 | Annual Report
Mutual Beacon Fund
STATEMENT OF INVESTMENTS, DECEMBER 31, 2008 (CONTINUED)
SHARES/WARRANTS/
COUNTRY CONTRACTS/RIGHTS VALUE
-------------- ---------------- ---------------
COMMON STOCKS AND OTHER EQUITY INTERESTS (CONTINUED)
INTERNET SOFTWARE & SERVICES 0.4%
(a,h) Yahoo! Inc. .......................................... United States 1,390,650 $ 16,965,930
---------------
IT SERVICES 1.6%
(a) Alliance Data Systems Corp. .......................... United States 1,115,230 51,891,652
(a) DST Systems Inc. ..................................... United States 403,219 15,314,258
---------------
67,205,910
---------------
LEISURE EQUIPMENT & PRODUCTS 1.8%
Eastman Kodak Co. .................................... United States 4,062,175 26,729,112
Mattel Inc. .......................................... United States 2,930,472 46,887,552
---------------
73,616,664
---------------
MACHINERY 0.3%
(a,d) Motor Coach Industries International Inc., wts.,
5/27/09 ........................................... United States 6 --
Parker Hannifin Corp. ................................ United States 284,510 12,103,055
---------------
12,103,055
---------------
MARINE 0.7%
A.P. Moller - Maersk AS .............................. Denmark 5,611 29,620,902
---------------
MEDIA 9.6%
(a) Adelphia Recovery Trust .............................. United States 48,268,724 482,687
(a,b) Adelphia Recovery Trust, Arahova Contingent Value
Vehicle, Contingent Distribution .................. United States 6,161,087 924,163
(a,b) Century Communications Corp., Contingent
Distribution ...................................... United States 16,986,000 --
Comcast Corp., A ..................................... United States 8,218,025 132,721,104
News Corp., A ........................................ United States 9,236,927 83,963,667
(a) Time Warner Cable Inc., A ............................ United States 2,418,844 51,884,204
Time Warner Inc. ..................................... United States 6,436,540 64,751,592
(a,c) TVMAX Holdings Inc. .................................. United States 133,855 --
(a) Viacom Inc., B ....................................... United States 1,837,340 35,019,700
Virgin Media Inc. .................................... United Kingdom 5,915,097 29,516,334
---------------
399,263,451
---------------
METALS & MINING 1.7%
AK Steel Holding Corp. ............................... United States 1,184,150 11,036,278
Alcoa Inc. ........................................... United States 1,991,180 22,420,687
ArcelorMittal, N.Y. shs., A .......................... Netherlands 721,890 17,751,275
Cliffs Natural Resources Inc. ........................ United States 708,280 18,139,051
(a,d,g) PMG LLC .............................................. United States 29,737 2,825,019
---------------
72,172,310
---------------
MULTI-UTILITIES 0.9%
(a,b) NorthWestern Corp., Contingent Distribution .......... United States 11,805,000 --
Puget Energy Inc. .................................... United States 1,322,270 36,058,303
---------------
36,058,303
---------------
OIL, GAS & CONSUMABLE FUELS 0.4%
Noble Energy Inc. .................................... United States 363,660 17,899,345
---------------
Annual Report | 25
Mutual Beacon Fund
STATEMENT OF INVESTMENTS, DECEMBER 31, 2008 (CONTINUED)
SHARES/WARRANTS/
COUNTRY CONTRACTS/RIGHTS VALUE
-------------- ---------------- ---------------
COMMON STOCKS AND OTHER EQUITY INTERESTS (CONTINUED)
PAPER & FOREST PRODUCTS 4.1%
(a) Domtar Corp. ......................................... United States 21,549,115 $ 35,987,022
International Paper Co. .............................. United States 3,048,340 35,970,412
MeadWestvaco Corp. ................................... United States 1,560,233 17,459,007
Weyerhaeuser Co. ..................................... United States 2,583,085 79,068,232
---------------
168,484,673
---------------
PHARMACEUTICALS 2.5%
(a,h) Mylan Inc. ........................................... United States 4,485,888 44,365,432
Novartis AG .......................................... Switzerland 1,185,468 58,501,886
---------------
102,867,318
---------------
REAL ESTATE INVESTMENT TRUSTS (REITS) 0.7%
Alexander's Inc. ..................................... United States 38,800 9,890,120
Ventas Inc. .......................................... United States 608,900 20,440,773
---------------
30,330,893
---------------
REAL ESTATE MANAGEMENT & DEVELOPMENT 1.4%
(c) Canary Wharf Group PLC ............................... United Kingdom 10,069,634 38,815,143
(a) The St. Joe Co. ...................................... United States 726,998 17,680,591
---------------
56,495,734
---------------
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT 0.8%
(a) LSI Corp. ............................................ United States 10,548,673 34,705,134
---------------
SOFTWARE 2.8%
Microsoft Corp. ...................................... United States 5,940,840 115,489,930
---------------
THRIFTS & MORTGAGE FINANCE 0.7%
People's United Financial Inc. ....................... United States 1,692,640 30,179,771
---------------
TOBACCO 8.7%
Altria Group Inc. .................................... United States 1,619,908 24,395,815
British American Tobacco PLC ......................... United Kingdom 2,620,106 68,882,323
Imperial Tobacco Group PLC ........................... United Kingdom 3,583,024 96,813,933
Japan Tobacco Inc. ................................... Japan 12,406 41,058,928
KT&G Corp. ........................................... South Korea 82,358 5,157,971
Lorillard Inc. ....................................... United States 652,700 36,779,645
Reynolds American Inc. ............................... United States 1,458,314 58,784,637
UST Inc. ............................................. United States 442,800 30,721,464
---------------
362,594,716
---------------
TRANSPORTATION INFRASTRUCTURE 0.0%(f)
(a) Groupe Eurotunnel SA ................................. France 14,883 80,122
(a) Groupe Eurotunnel SA, wts., 12/30/11 ................. France 1,570,655 180,092
---------------
260,214
---------------
TOTAL COMMON STOCKS AND OTHER EQUITY INTERESTS
(COST $4,595,852,092) ............................. 3,474,293,351
---------------
PREFERRED STOCKS 0.0%(f)
AUTO COMPONENTS 0.0%f
(d) Dana Holding Corp., 4.00%, cvt. pfd., B .............. United States 60,625 545,625
---------------
26 | Annual Report
Mutual Beacon Fund
STATEMENT OF INVESTMENTS, DECEMBER 31, 2008 (CONTINUED)
SHARES/WARRANTS/
COUNTRY CONTRACTS/RIGHTS VALUE
-------------- ---------------- ---------------
PREFERRED STOCKS (CONTINUED)
DIVERSIFIED TELECOMMUNICATION SERVICES 0.0%(f)
(a,d) PTV Inc., 10.00%, pfd., A ............................ United Kingdom 114,246 $ 102,821
---------------
TOTAL PREFERRED STOCKS (COST $6,222,444) ............. 648,446
---------------
OPTIONS PURCHASED (COST $3,117,569) 0.0%(f)
PUT OPTIONS 0.0%(f)
(a) Volkswagen AG, exercise price 170 EUR, 3/20/09 ....... Germany 2,400 1,691,384
---------------
PRINCIPAL
AMOUNT(j)
----------------
CORPORATE BONDS & NOTES 3.4%
(k) ACE Aviation Holdings Inc., cvt., 144A, 4.25%,
6/01/35 ........................................... Canada 1,993,000 CAD 1,452,165
(l) Calpine Corp., Exit Term Loan, FRN, 6.645%, 3/29/14 .. United States 31,766,943 23,564,273
(d) Cerberus CG Investor I LLC, 12.00%, 7/31/14 .......... United States 18,089,600 3,617,920
(d) Cerberus CG Investor II LLC, 12.00%, 7/31/14 ......... United States 18,089,600 3,617,920
(d) Cerberus CG Investor III LLC, 12.00%, 7/31/14 ........ United States 9,044,800 1,808,960
(d) Cerberus FIM Investors Holdco LLC, 12.00%, 11/22/13 .. United States 58,615,106 12,414,548
(l,m) Charter Communications Operating LLC, Term Loan B,
FRN, 3.63%, 3/06/14 ............................... United States 6,192,700 4,183,479
(g) DecisionOne Corp.,
(d) 12.00%, 4/15/10 ................................... United States 1,470,406 1,470,406
(c,l) FRN, 5.50%, 5/12/09 ............................... United States 263,440 263,440
(l) First Data Corp., Term Loan, FRN, 3.211%, 9/24/14
B-1 ............................................... United States 6,984,717 4,267,872
B-2 ............................................... United States 1,751,665 1,070,320
B-3 ............................................... United States 1,729,721 1,058,555
Groupe Eurotunnel SA, cvt., sub. bond, NRS I,
T2, 3.00%, 7/28/09 ................................ France 21,700 EUR 25,792
T2, 3.00%, 7/28/09 ................................ France 24,211 GBP 35,361
T3, 3.00%, 7/28/10 ................................ France 5,574,500 EUR 6,625,600
T3, 3.00%, 7/28/10 ................................ France 5,182,586 GBP 7,569,426
(k) Indianapolis Downs LLC, 144A,
senior secured note, 11.00%, 11/01/12 ............. United States 6,400,000 3,520,000
(n) senior secured sub. note, PIK, 15.50%, 11/01/13 ... United States 25,087,755 9,909,663
(d,e) International Automotive Components Group NA LLC,
9.00%, 4/01/17 .................................... United States 1,947,800 938,997
(d,e,l,o) Pontus I LLC, junior note, 144A, FRN, 5.689%,
7/24/09 ........................................... United States 22,571,683 25,469,965
(d,e,l,o) Pontus II Trust, junior profit-participating note,
144A, FRN, 7.516%, 6/25/09 ........................ United States 3,570,881 833,157
(l) Realogy Corp., FRN,
(p) 4.596%, 4/10/13 ................................... United States 9,434,319 5,389,355
Delayed Draw Term B Loan, 5.706%, 10/10/13 ........ United States 858,160 541,355
Initial Term Loan B, 5.706%, 10/10/13 ............. United States 4,732,716 2,985,553
Synthetic Letter of Credit, 1.52%, 10/10/13 ....... United States 1,274,151 803,776
(l) Texas Competitive Electric Holdings Co. LLC, FRN,
5.368%, 10/10/14 .................................. United States 18,599,604 12,980,980
Term Loan B3, 5.368%, 10/10/14 .................... United States 1,716,854 1,198,221
Annual Report | 27
Mutual Beacon Fund
STATEMENT OF INVESTMENTS, DECEMBER 31, 2008 (CONTINUED)
PRINCIPAL
AMOUNT(j)/
COUNTRY SHARES VALUE
-------------- ---------------- ---------------
CORPORATE BONDS & NOTES (CONTINUED)
(c,n) TVMAX Holdings Inc., PIK,
11.50%, 3/31/09 ................................... United States 563,848 $ 394,694
14.00%, 3/31/09 ................................... United States 988,271 691,790
---------------
TOTAL CORPORATE BONDS & NOTES (COST $289,858,315) .... 138,703,543
---------------
CORPORATE BONDS & NOTES IN REORGANIZATION 0.3%
(l,q) Motor Coach Industries International Inc., FRN,
(p) First Lien DIP Revolver, 7.75%, 9/19/09 ........... United States 2,417,398 2,360,807
(m) Second Lien DIP Trust A Term Loan, 12.75%,
9/19/09 ........................................ United States 3,545,151 2,907,024
Second Lien DIP Trust B Term Loan, 15.25%,
9/19/09 ........................................ United States 2,162,085 1,837,772
(m) Second Lien, Senior Secured Term Loan, 11.00%,
12/01/08 ....................................... United States 2,921,456 2,322,557
(c) Third Lien, Senior Secured Term Loan, 15.649%,
12/01/08 ....................................... United States 33,683,621 919,563
(c,q) Safety Kleen Services, senior sub. note, 9.25%,
6/01/08 ........................................... United States 50,000 250
(q) Trump Entertainment Resorts Inc., 8.50%, 5/20/15 ..... United States 17,380,260 2,389,786
---------------
TOTAL CORPORATE BONDS & NOTES IN REORGANIZATION
(COST $61,491,298) ................................ 12,737,759
---------------
TOTAL INVESTMENTS BEFORE SHORT TERM INVESTMENTS
(COST $4,956,541,718) ............................. 3,628,074,483
---------------
SHORT TERM INVESTMENTS 10.0%
U.S. GOVERNMENT AND AGENCY SECURITIES 10.0%
(r) FHLB, 1/05/09 - 12/01/09 ............................. United States 348,800,000 348,404,993
(r) U.S. Treasury Bills, 3/26/09 - 6/18/09 ............... United States 65,000,000 64,976,405
---------------
TOTAL U.S. GOVERNMENT AND AGENCY SECURITIES
(COST $410,969,830) ............................... 413,381,398
---------------
TOTAL INVESTMENTS BEFORE MONEY MARKET FUNDS
(COST $5,367,511,548) ............................. 4,041,455,881
---------------
(s) INVESTMENTS FROM CASH COLLATERAL RECEIVED FOR LOANED SECURITIES 0.0%(f)
MONEY MARKET FUNDS (COST $578,700) 0.0%(f)
(t) Bank of New York Institutional Cash Reserve Fund,
0.09% ............................................. United States 578,700 572,913
---------------
TOTAL INVESTMENTS (COST $5,368,090,248) 97.4% ........ 4,042,028,794
OPTIONS WRITTEN (0.1)% ............................... (2,548,169)
NET UNREALIZED APPRECIATION ON FORWARD EXCHANGE
CONTRACTS 1.3% .................................... 54,601,207
OTHER ASSETS, LESS LIABILITIES 1.4% .................. 58,058,365
---------------
NET ASSETS 100.0% .................................... $ 4,152,140,197
---------------
28 | Annual Report
Mutual Beacon Fund
STATEMENT OF INVESTMENTS, DECEMBER 31, 2008 (CONTINUED)
COUNTRY CONTRACTS VALUE
-------------- ---------------- ---------------
(u) OPTIONS WRITTEN 0.1%
CALL OPTIONS 0.1%
COMMUNICATIONS EQUIPMENT 0.0%(f)
Telefonaktiebolaget LM Ericsson, Jun. 70 Calls,
6/18/09 ........................................... Sweden 15,823 $ 829,701
Telefonaktiebolaget LM Ericsson, Mar. 70 Calls,
3/20/09 ........................................... Sweden 79,100 515,936
---------------
1,345,637
---------------
FOOD PRODUCTS 0.0%(f)
Cadbury PLC, Mar. 6 Calls, 3/20/09.................... United Kingdom 720 473,218
Cadbury PLC, Mar. 6.4 Calls, 3/20/09.................. United Kingdom 720 262,899
Groupe Danone, Mar. 50 Calls, 3/20/09................. France 1,900 286,931
Nestle SA, Mar. 48 Calls, 3/20/09..................... Switzerland 2,000 54,312
---------------
1,077,360
---------------
INTERNET SOFTWARE & SERVICES 0.0%(f)
Yahoo! Inc., Jan. 12.5 Calls, 1/17/09................. United States 719 55,363
Yahoo! Inc., Jan. 14 Calls, 1/17/09................... United States 1,493 46,283
Yahoo! Inc., Jan. 15 Calls, 1/17/09................... United States 57 1,026
---------------
102,672
---------------
PHARMACEUTICALS 0.0%(f)
Mylan Inc., Apr. 12.5 Calls, 4/18/09 ................. United States 500 22,500
---------------
TOTAL OPTIONS WRITTEN
(PREMIUMS RECEIVED $3,770,958) .................... $ 2,548,169
===============
See Abbreviations on page 50.
(a) Non-income producing for the twelve months ended December 31, 2008.
(b) Contingent distributions represent the right to receive additional
distributions, if any, during the reorganization of the underlying company.
Shares represent total underlying principal of debt securities.
(c) Security has been deemed illiquid because it may not be able to be sold
within seven days. At December 31, 2008, the aggregate value of these
securities was $44,249,582, representing 1.07% of net assets.
(d) See Note 10 regarding restricted and illiquid securities.
(e) See Note 14 regarding other considerations.
(f) Rounds to less than 0.1% of net assets.
(g) See Note 13 regarding holdings of 5% voting securities.
(h) A portion or all of the security is held in connection with written option
contracts open at year end.
(i) A portion or all of the security is on loan as of December 31, 2008. See
Note 1(i).
(j) The principal amount is stated in U.S. dollars unless otherwise indicated.
(k) 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. These securities have been deemed liquid under
guidelines approved by the Trust's Board of Trustees. At December 31, 2008,
the aggregate value of these securities was $14,881,828, representing 0.36%
of net assets.
(l) The coupon rate shown represents the rate at period end.
(m) A portion or all of the securities purchased on a delayed delivery basis.
See Note 1(c).
(n) Income may be received in additional securities and/or cash.
(o) See Note 1(h) regarding investments in special purpose entities.
(p) See Note 11 regarding unfunded loan commitments.
(q) See Note 9 regarding defaulted securities.
(r) The security is traded on a discount basis with no stated coupon rate.
(s) See Note 1(i) regarding securities on loan.
(t) The rate shown is the annualized seven-day yield at period end.
(u) See Note 1(f) regarding written options.
The accompanying notes are an integral part of these financial statements.
Annual Report | 29
Mutual Beacon Fund
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
December 31, 2008
Assets:
Investments in securities:
Cost - Unaffiliated issuers ........................................................ $ 5,327,157,455
Cost - Controlled affiliated issuers (Note 13) ..................................... 2,081,593
Cost - Non-controlled affiliated issuers (Note 13) ................................. 38,851,200
---------------
Total cost of investments .......................................................... $ 5,368,090,248
---------------
Value - Unaffiliated issuers ....................................................... $ 4,002,908,516
Value - Controlled affiliated issuers (Note 13) .................................... 2,825,019
Value - Non-controlled affiliated issuers (Note 13) ................................ 36,295,259
---------------
Total value of investments (includes securities loaned in the amount of $873,857) .. 4,042,028,794
Cash .................................................................................. 42,326,140
Cash on deposit with brokers .......................................................... 7,511,576
Foreign currency, at value (cost $9,954,784) .......................................... 9,915,656
Receivables:
Investment securities sold ......................................................... 22,063,058
Capital shares sold ................................................................ 7,146,605
Dividends and interest ............................................................. 29,565,048
Unrealized appreciation on forward exchange contracts (Note 8) ........................ 76,719,317
---------------
Total assets .................................................................... 4,237,276,194
---------------
Liabilities:
Payables:
Investment securities purchased .................................................... 24,579,375
Capital shares redeemed ............................................................ 27,632,802
Affiliates ......................................................................... 4,352,654
Options written, at value (premiums received $3,770,958) .............................. 2,548,169
Payable upon return of securities loaned .............................................. 578,700
Unrealized depreciation on forward exchange contracts (Note 8) ........................ 22,118,110
Unrealized depreciation on unfunded loan commitments (Note 11) ........................ 869,741
Accrued expenses and other liabilities ................................................ 2,456,446
---------------
Total liabilities ............................................................... 85,135,997
---------------
Net assets, at value ......................................................... $ 4,152,140,197
---------------
Net assets consist of:
Paid-in capital ....................................................................... $ 5,712,656,030
Undistributed net investment income ................................................... 90,197,978
Net unrealized appreciation (depreciation) ............................................ (1,271,146,910)
Accumulated net realized gain (loss) .................................................. (379,566,901)
---------------
Net assets, at value ......................................................... $ 4,152,140,197
===============
The accompanying notes are an integral part of these financial statements.
30 | Annual Report
Mutual Beacon Fund
FINANCIAL STATEMENTS (CONTINUED)
STATEMENT OF ASSETS AND LIABILITIES (CONTINUED)
December 31, 2008
CLASS Z:
Net assets, at value ................................................... $2,002,360,620
--------------
Shares outstanding ..................................................... 220,675,278
--------------
Net asset value and maximum offering price per share ................... $ 9.07
--------------
CLASS A:
Net assets, at value ................................................... $1,659,062,286
--------------
Shares outstanding ..................................................... 184,598,514
--------------
Net asset value per share(a) ........................................... $ 8.99
--------------
Maximum offering price per share (net asset value per share / 94.25%) .. $ 9.54
--------------
CLASS B:
Net assets, at value ................................................... $ 73,168,046
--------------
Shares outstanding ..................................................... 8,433,874
--------------
Net asset value and maximum offering price per share(a) ................ $ 8.68
--------------
CLASS C:
Net assets, at value ................................................... $ 417,549,245
--------------
Shares outstanding ..................................................... 47,236,992
--------------
Net asset value and maximum offering price per share(a) ................ $ 8.84
==============
(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.
Annual Report | 31
Mutual Beacon Fund
FINANCIAL STATEMENTS (CONTINUED)
STATEMENT OF OPERATIONS
for the year ended December 31, 2008
Investment income:
Dividends: (net of foreign taxes of $8,225,890)
Unaffiliated issuers ........................................................... $ 126,256,605
Non-controlled affiliated issuers (Note 13) .................................... 475,592
Interest:
Unaffiliated issuers ........................................................... 39,333,201
Non-controlled affiliated issuers (Note 13) .................................... 192,504
Income from securities loaned ........................................................ 666,496
---------------
Total investment income .................................................. 166,924,398
---------------
Expenses:
Management fees (Note 3a) ......................................................... 36,109,417
Administrative fees (Note 3b) ..................................................... 4,624,901
Distribution fees: (Note 3c)
Class A ........................................................................ 6,491,926
Class B ........................................................................ 1,252,568
Class C ........................................................................ 6,661,661
Transfer agent fees (Note 3e) ..................................................... 6,948,092
Custodian fees (Note 4) ........................................................... 625,843
Reports to shareholders ........................................................... 458,481
Registration and filing fees ...................................................... 337,467
Professional fees ................................................................. 1,374,843
Trustees' fees and expenses ....................................................... 270,604
Dividends on securities sold short ................................................ 291,585
Other ............................................................................. 269,247
---------------
Total expenses ........................................................... 65,716,635
Expense reductions (Note 4) .............................................. (35,322)
---------------
Net expenses .......................................................... 65,681,313
---------------
Net investment income .............................................. 101,243,085
---------------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments:
Unaffiliated issuers ........................................................ (431,563,804)
Non-controlled affiliated issuers (Note 13) ................................. 2,879,013
Written options ................................................................ 4,020,286
Foreign currency transactions .................................................. 63,786,891
Securities sold short .......................................................... 8,107,318
---------------
Net realized gain (loss) .............................................. (352,770,296)
---------------
Net change in unrealized appreciation (depreciation) on:
Investments .................................................................... (2,738,456,767)
Translation of other assets and liabilities denominated in foreign currencies .. 67,272,097
---------------
Net change in unrealized appreciation (depreciation) .................. (2,671,184,670)
---------------
Net realized and unrealized gain (loss) .............................................. (3,023,954,966)
---------------
Net increase (decrease) in net assets resulting from operations ...................... $(2,922,711,881)
===============
The accompanying notes are an integral part of these financial statements.
32 | Annual Report
Mutual Beacon Fund
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF CHANGES IN NET ASSETS
YEAR ENDED DECEMBER 31,
--------------------------------
2008 2007
--------------- --------------
Increase (decrease) in net assets:
Operations:
Net investment income ............................................................. $ 101,243,085 $ 207,076,836
Net realized gain (loss) from investments, written options, securities
sold short, synthetic equity swaps, and foreign currency transactions .......... (352,770,296) 562,437,203
Net change in unrealized appreciation (depreciation) on investments and
translation of other assets and liabilities denominated in foreign currencies .. (2,671,184,670) (587,191,848)
--------------- --------------
Net increase (decrease) in net assets resulting from operations ............. (2,922,711,881) 182,322,191
--------------- --------------
Distributions to shareholders from:
Net investment income:
Class Z ........................................................................ (6,619,057) (130,125,357)
Class A ........................................................................ (4,290,717) (80,817,727)
Class B ........................................................................ (137,348) (4,105,340)
Class C ........................................................................ (771,400) (20,964,655)
Net realized gains:
Class Z ........................................................................ (97,668,819) (213,170,126)
Class A ........................................................................ (73,463,233) (145,346,463)
Class B ........................................................................ (3,969,920) (9,918,571)
Class C ........................................................................ (21,432,695) (48,866,936)
--------------- --------------
Total distributions to shareholders .................................................. (208,353,189) (653,315,175)
--------------- --------------
Capital share transactions: (Note 2)
Class Z ........................................................................ (299,359,816) 183,737,378
Class A ........................................................................ 142,074,388 659,455,776
Class B ........................................................................ (34,340,619) (18,583,161)
Class C ........................................................................ (110,542,023) 105,335,071
--------------- --------------
Total capital share transactions ..................................................... (302,168,070) 929,945,064
--------------- --------------
Redemption fees ...................................................................... 19,698 19,015
--------------- --------------
Net increase (decrease) in net assets ....................................... (3,433,213,442) 458,971,095
Net assets:
Beginning of year .................................................................... 7,585,353,639 7,126,382,544
--------------- --------------
End of year .......................................................................... $ 4,152,140,197 $7,585,353,639
--------------- --------------
Undistributed net investment income included in net assets:
End of year .......................................................................... $ 90,197,978 $ 8,966,151
=============== ==============
The accompanying notes are an integral part of these financial statements.
Annual Report | 33
Mutual Beacon Fund
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Franklin Mutual Series Funds (Trust) is registered under the Investment Company
Act of 1940, as amended, (1940 Act) as an open-end investment company,
consisting of six separate funds. The Mutual Beacon Fund (Fund) is included in
this report. The financial statements of the remaining funds in the Trust are
presented separately. The Fund offers four classes of shares: Class Z, Class A,
Class B, and Class C. 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. Investments in open-end mutual funds are valued at the closing net asset
value.
Corporate debt securities and government securities generally trade in the
over-the-counter market rather than on a securities exchange. The Trust 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 Trust'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 Trust 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
34 | Annual Report
Mutual Beacon Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
A. SECURITY VALUATION (CONTINUED)
(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. At December 31, 2008, a portion of the securities held by the Fund
were fair valued. 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. SECURITIES PURCHASED ON A DELAYED DELIVERY BASIS
The Fund may purchase securities on a delayed delivery basis, with payment and
delivery scheduled for a future date. These transactions are subject to market
fluctuations and are subject to the risk that the value at delivery may be more
or less than the trade date purchase price. Although the Fund will generally
purchase these securities with the intention of holding the securities, it may
sell the securities before the settlement date. Sufficient assets have been
segregated for these securities.
Annual Report | 35
Mutual Beacon Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
D. 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 Fund may also enter into forward exchange contracts to hedge against
fluctuations in foreign exchange rates. These contracts are valued daily by the
Fund and the unrealized appreciation or depreciation on the contracts, as
measured by the difference between the contractual forward foreign exchange
rates and the forward rates at the reporting date, are included in the Statement
of Assets and Liabilities. 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.
E. SYNTHETIC EQUITY SWAPS
The Fund may engage in synthetic equity swaps. Synthetic equity swaps are
contracts entered into between a broker and the Fund under which the parties
agree to make payments to each other so as to replicate the economic
consequences that would apply had a purchase or short sale of the underlying
security taken place. Upon entering into synthetic equity swaps, the Fund is
required to pledge to the broker an amount of cash and/or other assets equal to
a certain percentage of the contract amount (margin account). Periodically,
payments are made to recognize changes in value of the contract resulting from
interest on the notional value of the contract, market value changes in the
underlying security, and/or dividends paid by the issuer of the underlying
security. The Fund recognizes a realized gain or loss when cash is received
from, or paid to, the broker. Synthetic equity swaps are valued daily by the
Fund and the unrealized appreciation or depreciation on the contracts (as
measured by the difference between the contract amount plus or minus cash
received or paid and the market value of the underlying securities) are recorded
in the Statement of Operations. The margin account and any net unrealized
appreciation or depreciation on open synthetic equity swaps are included in the
Statement of Assets and Liabilities. The risks of entering into synthetic equity
swaps include unfavorable price movements in the underlying securities or the
inability of the counterparties to fulfill their obligations under the contract.
36 | Annual Report
Mutual Beacon Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
F. OPTIONS
The Fund may purchase or write options. Options are contracts entitling the
holder to purchase or sell securities or other financial instruments at a
specified price, or, in the case of index options, to receive or pay the
difference between the index value and the strike price of the index option.
Options purchased are recorded as investments; options written (sold) are
recorded as liabilities. Upon closing of an option which results in a cash
settlement, the difference between the premium (original option value) and the
settlement proceeds is realized as a gain or loss. When securities are acquired
or delivered upon exercise of an option, the acquisition cost or sale proceeds
are adjusted by the amount of the premium. When an option expires, the premium
is realized as a gain for options written or as a loss for options purchased.
The risks include the possibility there may be an illiquid options market or the
inability of the counterparties to fulfill their obligations under the contract.
Writing options involves, to varying degrees, elements of market risk in excess
of the amount recognized in the Statement of Assets and Liabilities.
G. SECURITIES SOLD SHORT
The Fund is engaged in selling securities short, which obligates the Fund to
replace a borrowed security with the same security at current market value. The
Fund incurs a loss if the price of the security increases between the date of
the short sale and the date on which the Fund replaces the borrowed security.
The Fund realizes a gain if the price of the security declines between those
dates. Gains are limited to the price at which the Fund sold the security short,
while losses are potentially unlimited in size.
The Fund is required to establish a margin account with the broker lending the
security sold short. While the short sale is outstanding, the broker retains the
proceeds of the short sale and the Fund must maintain a deposit with broker
consisting of cash and securities having a value equal to a specified percentage
of the value of the securities sold short. The Fund is obligated to pay the
counterparty any dividends or interest due on securities sold short. Such
dividends and interest are recorded as an expense to the Fund.
H. INVESTMENTS IN SPECIAL PURPOSE ENTITIES
At December 31, 2008, the Fund had contributed an additional $19,474,844 as a
subordinated note holder of certain special purpose entities ("SPEs"). Such
contributions, while made at the discretion of the Fund, represent additional
capital contributions to the SPE in support of its underlying investments and
are subject first to the claims of the senior note holders of the SPE. These
contributions are recorded as an addition to the Fund's cost basis in the SPE
and are subject to the risk of loss in the event of continued unfavorable market
conditions related to the SPE's underlying investments.
Annual Report | 37
Mutual Beacon Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
I. SECURITIES LENDING
The Fund participates in an agency based security lending program. The Fund
receives cash collateral against the loaned securities in an amount equal to at
least 102% of the market value of the loaned securities. Collateral is
maintained over the life of the loan in an amount not less than 100% of the
market value of loaned securities, as determined at the close of Fund business
each day; any additional collateral required is delivered to the Fund on the
next business day. The collateral is invested in a non-registered money market
fund managed by the Fund's custodian on the Fund's behalf. The Fund receives
income from the investment of cash collateral, in addition to lending fees and
rebates paid by the borrower. The Fund bears the market risk with respect to the
collateral investment, securities loaned, and the risk that the agent may
default on its obligations to the Fund. The securities lending agent has agreed
to indemnify the Fund in the event of default by a third party borrower.
J. 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 December 31, 2008, 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.
K. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS
Security transactions are accounted for on trade date. Realized gains and losses
on security transactions are determined on a specific identification basis.
Interest income and estimated expenses are accrued daily. Amortization of
premium and accretion of discount on debt securities are included in interest
income. Dividend income and dividends declared on securities sold short are
recorded on the ex-dividend date except 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.
38 | Annual Report
Mutual Beacon Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
K. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS
(CONTINUED)
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.
L. 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.
M. 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.
N. GUARANTEES AND INDEMNIFICATIONS
Under the Trust's organizational documents, its officers and trustees are
indemnified by the Trust against certain liabilities arising out of the
performance of their duties to the Trust. Additionally, in the normal course of
business, the Trust, on behalf of the Fund, enters into contracts with service
providers that contain general indemnification clauses. The Trust's maximum
exposure under these arrangements is unknown as this would involve future claims
that may be made against the Trust that have not yet occurred. Currently, the
Trust expects the risk of loss to be remote.
Annual Report | 39
Mutual Beacon Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SHARES OF BENEFICIAL INTEREST
At December 31, 2008, there were an unlimited number of shares authorized
(without par value). Transactions in the Fund's shares were as follows:
YEAR ENDED DECEMBER 31,
---------------------------------------------------------
2008 2007
--------------------------- ---------------------------
SHARES AMOUNT SHARES AMOUNT
----------- ------------- ----------- -------------
CLASS Z SHARES:
Shares sold .................... 11,250,144 $ 136,618,769 14,093,045 $ 246,409,474
Shares issued in reinvestment of
distributions ............... 7,467,999 96,562,887 19,675,347 314,926,373
Shares redeemed ................ (45,025,975) (532,541,472) (21,723,780) (377,598,469)
----------- ------------- ----------- -------------
Net increase (decrease) ........ (26,307,832) $(299,359,816) 12,044,612 $ 183,737,378
=========== ============= ========= ===============
CLASS A SHARES:
Shares sold .................... 83,093,593 $ 933,681,282 53,732,297 $ 934,047,432
Shares issued in reinvestment of
distributions ............... 5,456,844 69,956,428 13,427,605 213,312,929
Shares redeemed ................ (73,885,362) (861,563,322) (28,289,809) (487,904,585)
----------- ------------- ----------- -------------
Net increase (decrease) ........ 14,665,075 $ 142,074,388 38,870,093 $ 659,455,776
=========== ============= =========== =============
CLASS B SHARES:
Shares sold .................... 253,906 $ 3,096,427 337,672 $ 5,656,771
Shares issued in reinvestment of
distributions ............... 305,496 3,788,152 826,541 12,800,173
Shares redeemed ................ (3,422,951) (41,225,198) (2,198,565) (37,040,105)
----------- ------------- ----------- -------------
Net increase (decrease) (2,863,549) $ (34,340,619) (1,034,352) $ (18,583,161)
=========== ============= =========== =============
CLASS C SHARES:
Shares sold .................... 5,583,255 $ 66,138,537 9,340,352 $ 160,272,572
Shares issued in reinvestment of
distributions ............... 1,572,454 19,859,013 3,919,913 61,710,344
Shares redeemed ................ (16,485,614) (196,539,573) (6,837,573) (116,647,845)
----------- ------------- ----------- -------------
Net increase (decrease) ........ (9,329,905) $(110,542,023) 6,422,692 $ 105,335,071
=========== ============= =========== =============
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
- ------------------------------------------------------ ----------------------
Franklin Mutual Advisers, LLC (Franklin Mutual) Investment manager
Franklin Templeton Services, LLC (FT Services) Administrative manager
Franklin Templeton Distributors, Inc. (Distributors) Principal underwriter
Franklin Templeton Investor Services,
LLC (Investor Services) Transfer agent
40 | Annual Report
Mutual Beacon Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. TRANSACTIONS WITH AFFILIATES (CONTINUED)
A. MANAGEMENT FEES
The Fund pays an investment management fee to Franklin Mutual based on the
average daily net assets of the Fund as follows:
ANNUALIZED FEE RATE NET ASSETS
- ------------------- ------------------------------------------------
0.600% Up to and including $5 billion
0.570% Over $5 billion, up to and including $7 billion
0.550% Over $7 billion, up to and including $10 billion
0.540% In excess of $10 billion
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 Fund's Board of Trustees has adopted distribution plans for each share
class, with the exception of Class Z 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 ........... 0.35%
Class B ........... 1.00%
Class C ........... 1.00%
Effective February 1, 2009, the Board of Trustees has set the current rate at
0.30% per year for Class A shares until further notice and approval by the
Board.
Annual Report | 41
Mutual Beacon Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. TRANSACTIONS WITH AFFILIATES (CONTINUED)
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 year:
Sales charges retained net of commissions paid to
unaffiliated broker/dealers ..................................... $819,347
Contingent deferred sales charges retained ......................... $112,564
E. TRANSFER AGENT FEES
For the year ended December 31, 2008, the Fund paid transfer agent fees of
$6,948,092, of which $3,937,320 was retained by Investor Services.
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 year ended December 31, 2008, the
custodian fees were reduced as noted in the Statement of Operations.
5. INDEPENDENT TRUSTEES' RETIREMENT PLAN
On January 1, 1993, the Trust adopted an Independent Trustees' Retirement Plan
("Plan"). The Plan is an unfunded defined benefit plan that provides benefit
payments to Trustees whose length of service and retirement age meets the
eligibility requirements of the Plan. Benefits under the plan are based on years
of service and fees paid to each trustee at the time of retirement. Effective in
December 1996 the Plan was closed to new participants.
During the year ended December 31, 2008, the Fund's projected benefit obligation
and benefit payments under the plan were as follows:
(a) Projected benefit obligation at December 31, 2008 ............... $146,293
(b) Increase in projected benefit obligation ........................ $ 13,359
Benefit payments made to retired trustees ....................... $ 2,972
(a) The projected benefit obligation is included in accrued expenses and other
liabilities in the Statement of Assets and Liabilities.
(b) The increase in projected benefit obligation is included in trustees' fees
and expenses in the Statement of Operations.
6. INCOME TAXES
For tax purposes, capital losses may be carried over to offset future capital
gains, if any. At December 31, 2008, the Fund had tax basis capital losses of
$100,024,292 expiring in 2016.
42 | Annual Report
Mutual Beacon Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. INCOME TAXES (CONTINUED)
For tax purposes, realized capital losses and realized currency losses occurring
subsequent to October 31, may be deferred and treated as occurring on the first
day of the following fiscal year. At December 31, 2008, the Fund deferred
realized capital losses and realized currency losses of $101,600,195 and
$24,314,235, respectively.
The tax character of distributions paid during the years ended December 31, 2008
and 2007, was as follows:
2008 2007
------------ ------------
Distributions paid from:
Ordinary income ........... $ 47,998,121 $236,780,922
Long term capital gain .... 160,355,068 416,534,253
------------ ------------
$208,353,189 $653,315,175
============ ============
At December 31, 2008, the cost of investments, net unrealized appreciation
(depreciation), and undistributed ordinary income for income tax purposes were
as follows:
Cost of investments ...................................... $ 5,478,857,021
===============
Unrealized appreciation .................................. $ 478,465,629
Unrealized depreciation .................................. (1,915,293,856)
---------------
Net unrealized appreciation (depreciation) ............... $(1,436,828,227)
===============
Distributable earnings - undistributed ordinary income ... $ 90,720,252
===============
Net investment income (loss) differs for financial statement and tax purposes
primarily due to differing treatments of defaulted securities, foreign currency
transactions, pass-through entity income, bond discounts and premiums, and
certain dividends on securities sold short.
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, pass-through entity income, and
certain dividends on securities sold short.
7. INVESTMENT TRANSACTIONS
Purchases and sales of investments (excluding short term securities and
securities sold short) for the year ended December 31, 2008, aggregated
$2,959,453,269 and $3,076,747,355, respectively.
Annual Report | 43
Mutual Beacon Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. INVESTMENT TRANSACTIONS (CONTINUED)
Transactions in options written during the year ended December 31, 2008, were as
follows:
NUMBER OF PREMIUMS
CONTRACTS RECEIVED
--------- -----------
Options outstanding at December 31, 2007 ... 3,364 $ 2,764,825
Options written ............................ 112,721 7,083,766
Options expired ............................ -- --
Options exercised .......................... -- --
Options closed ............................. (13,053) (6,077,633)
------- -----------
Options outstanding at December 31, 2008 ... 103,032 $ 3,770,958
======= ===========
8. FORWARD EXCHANGE CONTRACTS
At December 31, 2008, the Fund had the following forward exchange contracts
outstanding:
CONTRACT SETTLEMENT UNREALIZED UNREALIZED
AMOUNT DATE APPRECIATION DEPRECIATION
------------ ---------- ------------ ------------
CONTRACTS TO BUY
12,480,000 British Pound Sterling .. $ 21,628,700 1/12/09 $ -- $(3,407,089)
6,865,365 Norwegian Krone ......... 1,090,000 1/12/09 -- (103,795)
110,009,012 Norwegian Krone ......... 15,380,791 1/12/09 421,922 --
260,884,089 Danish Krone ............ 44,890,585 1/23/09 4,036,144 --
30,143,643 Danish Krone ............ 5,708,033 1/23/09 -- (67,197)
10,975,749 Swiss Franc ............. 9,220,000 2/09/09 1,063,103 --
39,062,896 Euro .................... 50,637,540 2/13/09 3,889,138 --
2,048,268 Canadian Dollar ......... 1,630,224 2/27/09 52,214 --
2,271,400 Swiss Franc ............. 2,049,630 3/09/09 79,163 --
13,920,000 British Pound Sterling .. 23,775,921 3/10/09 -- (3,474,527)
12,623,289 Euro .................... 17,576,667 3/13/09 31,583 --
110,979,528 Swedish Krona ........... 15,510,000 3/16/09 -- (1,329,465)
61,437,052 Norwegian Krone ......... 8,520,000 5/19/09 259,982 --
CONTRACTS TO SELL
21,264,392 British Pound Sterling .. 37,055,019 1/12/09 6,007,626 --
529,300,000 Norwegian Krone ......... 85,347,476 1/12/09 9,313,920 --
19,333,080 Norwegian Krone ......... 2,740,000 1/12/09 -- (37,183)
491,481,600 Danish Krone ............ 100,813,764 1/23/09 8,640,312 --
26,100,127 Danish Krone ............ 4,538,000 1/23/09 -- (356,871)
88,000,000 Euro .................... 128,730,800 1/26/09 5,827,462 --
5,622,350 Swiss Franc ............. 4,860,000 2/09/09 -- (407,541)
40,268,509 Swiss Franc ............. 38,296,252 2/09/09 568,965 --
58,000,000 Euro .................... 86,205,400 2/13/09 5,245,010 --
1,120,080,125 Japanese Yen ............ 11,649,216 2/19/09 -- (709,089)
8,915,283 Canadian Dollar ......... 7,108,890 2/27/09 -- (214,084)
23,640,000 Euro .................... 30,796,543 2/27/09 -- (2,189,907)
48,700,000 Swiss Franc ............. 43,978,844 3/09/09 -- (1,663,590)
44 | Annual Report
Mutual Beacon Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. FORWARD EXCHANGE CONTRACTS (CONTINUED)
CONTRACT SETTLEMENT UNREALIZED UNREALIZED
AMOUNT DATE APPRECIATION DEPRECIATION
----------- ---------- ------------ ------------
CONTRACTS TO SELL (CONTINUED)
70,000,000 British Pound Sterling ...... 121,390,740 3/10/09 $19,300,395 $ --
41,493,900 Euro ........................ 54,856,482 3/13/09 -- (3,023,439)
385,521,457 Swedish Krona ............... 56,693,912 3/16/09 7,433,469 --
75,954,526 Swedish Krona ............... 9,385,000 3/16/09 -- (320,176)
1,998,831,250 South Korean Won ............ 1,675,000 4/06/09 86,861 --
1,584,000,000 South Korean Won ............ 1,200,000 4/06/09 -- (58,541)
1,517,000,000 Japanese Yen ................ 17,277,904 4/20/09 515,874 --
30,575,290 Euro ........................ 39,766,063 4/30/09 -- (2,839,249)
30,560,000 British Pound Sterling ...... 47,529,968 5/12/09 2,968,443 --
8,378,708 Norwegian Krone ............. 1,180,000 5/19/09 -- (17,403)
21,000,000 Euro ........................ 27,346,200 5/29/09 -- (1,898,964)
39,457,831 British Pound Sterling ...... 58,517,040 9/14/09 977,731 --
----------- ------------
Unrealized appreciation (depreciation) on forward exchange contracts ... 76,719,317 (22,118,110)
----------- ------------
NET UNREALIZED APPRECIATION ON FORWARD EXCHANGE CONTRACTS ........... $54,601,207
===========
9. CREDIT RISK AND DEFAULTED SECURITIES
The Fund may purchase the pre-default or defaulted debt of distressed companies.
Distressed companies are financially troubled and are about to be/or are already
involved in financial restructuring or bankruptcy. The Fund does not accrue
income on these securities, if it becomes probable that the income will not be
collected. Risks associated with purchasing these securities include the
possibility that the bankruptcy or other restructuring process takes longer than
expected, or that distributions in restructuring are less than anticipated,
either or both of which may result in unfavorable consequences to the Fund. At
December 31, 2008, the aggregate value of these securities was $12,737,759,
representing 0.31% of the Fund's net assets. For information as to specific
securities, see the accompanying Statement of Investments.
10. RESTRICTED SECURITIES
The Fund may invest in securities that are restricted under the Securities Act
of 1933 (1933 Act) or which are subject to legal, contractual, or other agreed
upon restrictions on resale. Restricted securities are often purchased in
private placement transactions, and cannot be sold without prior registration
unless the sale is pursuant to an exemption under the 1933 Act. Disposal of
these securities may require greater effort and expense, and prompt sale at an
acceptable price may be difficult. The Fund may have registration rights for
restricted securities. The issuer generally incurs all registration costs.
Annual Report | 45
Mutual Beacon Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. RESTRICTED SECURITIES (CONTINUED)
At December 31, 2008, the Fund held investments in restricted securities,
excluding 144A securities deemed to be liquid, valued in accordance with
procedures approved by the Trust's Board of Trustees as reflecting fair value,
as follows:
PRINCIPAL AMOUNT/
SHARES/WARRANTS/ ACQUISITION
CONTRACTS ISSUER DATES COST VALUE
- ----------------- ------------------------------------- ------------------ ----------- ------------
484,720 AboveNet Inc. ................... 10/02/01 - 8/08/08 $25,693,460 $ 24,236,000
613 AboveNet Inc., stock grant,
grant price $20.95, expiration
date 9/09/13 ................. 4/17/06 - 9/08/06 -- 1,379
19,829 AboveNet Inc., wts., 9/08/10 .... 10/02/01 - 9/07/07 2,071,196 79,316
20,610,629 Cerberus CG Investor I LLC ...... 7/26/07 - 6/17/08 20,610,629 4,122,126
18,089,600 Cerberus CG Investor I LLC,
12.00%, 7/31/14 .............. 7/26/07 18,089,600 3,617,920
20,610,629 Cerberus CG Investor II LLC ..... 7/26/07 - 6/17/08 20,610,629 4,122,126
18,089,600 Cerberus CG Investor II LLC,
12.00%, 7/31/14 .............. 7/26/07 18,089,600 3,617,920
10,305,315 Cerberus CG Investor III LLC .... 7/26/07 - 6/17/08 10,305,315 2,061,063
9,044,800 Cerberus CG Investor III LLC,
12.00%, 7/31/14 .............. 7/26/07 9,044,800 1,808,960
19,542,250 Cerberus FIM Investors Holdco
LLC .......................... 11/20/06 19,542,250 4,139,005
58,615,106 Cerberus FIM Investors Holdco
LLC, 12.00%, 11/22/13 ........ 11/20/06 58,615,106 12,414,548
60,625 (a) Dana Holding Corp., 4.00%, cvt.
pfd., B ...................... 12/27/07 6,062,500 545,625
1,142,353 (b) DecisionOne Corp. ............... 3/12/99 - 7/18/00 793,798 --
1,470,406 (b) DecisionOne Corp., 12.00%,
4/15/10 ...................... 3/12/99 - 10/16/08 2,064,804 1,470,406
627,237 (b) DecisionOne Corp., wts.,
6/08/17 ...................... 7/09/07 -- --
35,242 FE Capital Holdings Ltd. ........ 8/29/03 - 3/11/08 4,098,788 --
1,157,143 First Chicago Bancorp ........... 11/16/06 16,200,002 8,776,047
225,943 IACNA Investor LLC .............. 7/24/08 231,388 2,260
2,846,329 International Automotive
Components Group Brazil LLC .. 4/13/06 - 12/26/08 1,909,386 2,264,597
378,194 International Automotive
Components Group Japan LLC ... 9/26/06 - 3/27/07 3,283,337 408,729
10,149,082 International Automotive
Components Group LLC ......... 1/12/06 - 10/16/06 10,151,710 1,726,359
1,947,800 International Automotive
Components Group NA LLC,
9.00%, 4/01/17 ............... 3/30/07 1,977,017 938,997
6,469,827 International Automotive
Components Group NA LLC, A ... 3/30/07 - 10/10/07 6,404,397 1,053,288
1,652,279 Kindred Healthcare Inc. ......... 4/28/99 - 7/08/08 15,239,975 20,437,039
6 (c) Motor Coach Industries
International Inc., wts.,
5/27/09 ...................... 3/30/07 -- --
46 | Annual Report
Mutual Beacon Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. RESTRICTED SECURITIES (CONTINUED)
PRINCIPAL AMOUNT/
SHARES/WARRANTS/ ACQUISITION
CONTRACTS ISSUER DATES COST VALUE
- ----------------- ------------------------------------- ------------------ ----------- ------------
163,895 NCB Warrant Holdings Ltd., A .... 12/16/05 - 3/11/08 $ 1,725,660 $ --
106,700 Olympus Re Holdings Ltd. ........ 12/19/01 10,318,072 250,489
29,737 PMG LLC ......................... 3/22/04 2,081,593 2,825,019
22,571,683 Pontus I LLC, junior note, 144A,
FRN, 5.689%, 7/24/09 ......... 1/22/08 - 2/25/08 42,046,527 25,469,965
3,570,881 Pontus II Trust, junior
profit-participating note,
144A, FRN, 7.516%, 6/25/09 ... 2/29/08 4,097,326 833,157
114,246 PTV Inc., 10.00%, pfd., A ....... 12/07/01 - 3/06/02 159,944 102,821
4,450,920 Symetra Financial ............... 7/27/04 51,160,000 59,152,727
------------
TOTAL RESTRICTED SECURITIES (4.49% of Net Assets) ............... $186,477,888
============
(a) The Fund also invests in unrestricted securities of the issuer, valued at
$534,104 as of December 31, 2008.
(b) The Fund also invests in unrestricted securities of the issuer, valued at
$263,440 as of December 31, 2008.
(c) The Fund also invests in unrestricted securities of the issuer, valued at
$10,347,723 as of December 31, 2008.
11. UNFUNDED LOAN COMMITMENTS
The Fund may enter into certain credit agreements, all or a portion of which may
be unfunded. The Fund is obligated to fund these loan commitments at the
borrowers' discretion. Funded portions of credit agreements are presented on the
Statement of Investments.
At December 31, 2008, unfunded commitments were as follows:
UNFUNDED
COMMITMENT
----------
BORROWER
Motor Coach Industries International Inc., First Lien DIP
Revolver, FRN, 7.75%, 9/19/09 ........................ $1,373,522
Realogy Corp., FRN, 4.596%, 4/10/13 ..................... 4,304,981
----------
$5,678,503
==========
Unfunded loan commitments and funded portions of credit agreements are marked to
market daily and any unrealized appreciation or depreciation is included in the
Statement of Assets and Liabilities and Statement of Operations.
12. UNFUNDED CAPITAL COMMITMENTS
At December 31, 2008, the Fund had aggregate unfunded capital commitments to
investments of $94,023,900.
Annual Report | 47
Mutual Beacon Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
13. 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 year ended December
31, 2008, were as shown below.
NUMBER OF NUMBER OF
SHARES/ SHARES/
WARRANTS/ WARRANTS/
PRINCIPAL PRINCIPAL
AMOUNT AMOUNT REALIZED
HELD AT HELD AT VALUE AT CAPITAL
BEGINNING GROSS GROSS END END OF INVESTMENT GAIN
NAME OF ISSUER OF YEAR ADDITIONS REDUCTIONS OF YEAR YEAR INCOME (LOSS)
- -------------- --------- --------- ---------- --------- ----------- ---------- ----------
CONTROLLED AFFILIATES(a)
PMG, LLC ...................... 29,737 -- -- 29,737 $ 2,825,019 $ -- $ --
NON-CONTROLLED AFFILIATES
DecisionOne Corp. ............. 1,142,353 -- -- 1,142,353 -- -- --
DecisionOne Corp., 12.00%,
4/15/10 .................... 1,412,099 58,307 -- 1,470,406 1,470,406 172,054 --
DecisionOne Corp., FRN, 5.50%,
5/12/09 .................... 263,440 -- -- 263,440 263,440 20,450 --
DecisionOne Corp., wts.,
6/08/17 .................... 627,237 -- -- 627,237 -- -- --
Esmark Inc. ................... 3,954,729 -- 3,954,729 -- -- -- 2,879,013
Farmer Brothers Co. ........... 1,033,896 -- -- 1,033,896 25,785,366 475,592 --
FE Capital Holdings Ltd. ...... 14,498 20,744 -- 35,242 -- -- --
First Chicago Bancorp ......... 1,157,143 -- -- 1,157,143 8,776,047 -- --
----------- -------- ----------
TOTAL NON-CONTROLLED AFFILIATES ................................................ $36,295,259 $668,096 $2,879,013
----------- -------- ----------
TOTAL AFFILIATED SECURITIES (0.94% of Net Assets) ........................... $39,120,278 $668,096 $2,879,013
=========== ======== ==========
(a) Issuer in which the Fund owns 25% or more of the outstanding voting
securities.
14. OTHER CONSIDERATIONS
Officers, directors or employees of the Fund's Investment Manager, may serve
from time to time as members of bondholders' steering committees, official
creditors' committees, or boards of directors of companies in which the Fund
invests. Such participation may result in the possession by the Investment
Manager of material non-public information which, pursuant to the Fund's
policies and the requirements of applicable securities laws, could prevent the
Fund from trading in the securities of such companies for limited or extended
periods of time.
Franklin Mutual serves as investment manager to certain special purpose entities
that issue securities held by the Fund. Franklin Mutual is not compensated for
such services and does not invest in or exercise control over such entities. As
investment manager, Franklin Mutual is primarily responsible for recommending
investments in unaffiliated issuers to be held by the special purpose entities.
Securities issued by these special purpose entities are restricted under the
Securities Act of 1933 and are deemed to be illiquid.
48 | Annual Report
Mutual Beacon Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
15. REORGANIZATION TO A DELAWARE STATUTORY TRUST
On April 11, 2007, the Board and shareholders approved an Agreement and Plan of
Reorganization whereby the investment company would be reorganized and its
domicile changed from a Maryland corporation to a Delaware statutory trust. In
connection with these changes, the Trust's name was also changed to Franklin
Mutual Series Funds, formerly known as the Franklin Mutual Series Funds, Inc.
The reorganization became effective on May 1, 2008.
16. FAIR VALUE MEASUREMENTS
The Fund adopted Financial Accounting Standards Board (FASB) Statement No. 157,
"Fair Value Measurement" (SFAS 157), on January 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 December 31, 2008 in valuing
the Fund's assets and liabilities carried at fair value:
LEVEL 1 LEVEL 2 LEVEL 3 TOTAL
-------------- ------------ ------------ --------------
ASSETS:
Investments in Securities ........ $3,320,932,843 $491,016,929 $230,079,022 $4,042,028,794
Other Financial Instruments (a) .. -- 76,719,317 -- 76,719,317
LIABILITIES:
Options Written .................. -- 2,548,169 -- 2,548,169
Other Financial Instruments (a) .. -- 22,987,851 -- 22,987,851
(a) Other financial instruments includes net unrealized appreciation
(depreciation) on forward exchange contracts and unfunded loan commitments.
Annual Report | 49
Mutual Beacon Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
16. FAIR VALUE MEASUREMENTS (CONTINUED)
At December 31, 2008, the reconciliation of assets in which significant
unobservable inputs (Level 3) were used in determining the Fund's fair value, is
as follows:
INVESTMENTS IN
SECURITIES
--------------
Beginning Balance - January 1, 2008 ...................... $ 528,497,600
Net realized gain (loss) .............................. 3,093,661
Net change in unrealized appreciation (depreciation) .. (284,088,942)
Net purchases (sales) ................................. (16,830,743)
Transfers in and/or out of Level 3 .................... (592,554)
--------------
Ending Balance ........................................... $ 230,079,022
--------------
Net change in unrealized appreciation (depreciation)
attributable to assets still held at end of period .... $(305,862,111)
==============
17. 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 Fund is currently evaluating the impact, if any, of
applying the various provisions of SFAS 161.
18. SUBSEQUENT EVENTS
On January 23, 2009, the Fund entered into, along with certain other funds
managed by Franklin Templeton Investments (individually, "Borrower";
collectively "Borrowers"), a $725 million senior unsecured syndicated global
line of credit ("Global Credit Facility") to provide a source of funds to the
Borrowers for temporary and emergency purposes and to meet future unanticipated
or unusually large redemption requests.
Under the terms of the Global Credit Facility, each Borrower has agreed to pay
its proportionate share of fees and expenses incurred in connection with the
implementation and maintenance of the Global Credit Facility.
ABBREVIATIONS
CURRENCY
CAD - Canadian Dollar
EUR - Euro
GBP - British Pound Sterling
SELECTED PORTFOLIO
ADR - American Depository Receipt
DIP - Debtor-In-Possession
FHLB - Federal Home Loan Bank
FRN - Floating Rate Note
PIK - Payment-In-Kind
50 | Annual Report
Mutual Beacon Fund
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO THE BOARD OF TRUSTEES OF FRANKLIN MUTUAL SERIES FUNDS AND SHAREHOLDERS OF THE
MUTUAL BEACON FUND:
We have audited the accompanying statement of assets and liabilities of the
Mutual Beacon Fund (one of the Funds constituting the Franklin Mutual Series
Funds) (the "Fund"), including the statement of investments, as of December 31,
2008, and the related statement of operations for the year then ended, the
statements of changes in net assets for each of the two years in the period then
ended, and the financial highlights for each of the five years in the period
then ended. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. We were
not engaged to perform an audit of the Fund's internal control over financial
reporting. Our audits included consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Fund's internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements and financial highlights, assessing the accounting principles used
and significant estimates made by management, and evaluating the overall
financial statement presentation. Our procedures included confirmation of
securities owned as of December 31, 2008, by correspondence with the custodian
and brokers or by other appropriate auditing procedures where replies from the
brokers were not received. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
Mutual Beacon Fund of the Franklin Mutual Series Funds at December 31, 2008, the
results of its operations for the year then ended, the changes in its net assets
for each of the two years in the period then ended, and the financial highlights
for each of the five years in the period then ended, in conformity with U.S.
generally accepted accounting principles.
/s/ Ernst & Young LLP
Boston, Massachusetts
February 17, 2009
Annual Report | 51
Mutual Beacon Fund
TAX DESIGNATION (UNAUDITED)
Under Section 852(b)(3)(C) of the Internal Revenue Code (Code), the Fund
designates the maximum amount allowable but no less than $160,355,068 as a long
term capital gain dividend for the fiscal year ended December 31, 2008.
Under Section 871(k)(2)(C) of the Code, the Fund designates the maximum amount
allowable but no less than $25,568,326 as a short term capital gain dividend for
purposes of the tax imposed under Section 871(a)(1)(A) of the Code for the
fiscal year ended December 31, 2008.
Under Section 854(b)(2) of the Code, the Fund designates 100% of the ordinary
income dividends as income qualifying for the dividends received deduction for
the fiscal year ended December 31, 2008.
Under Section 854(b)(2) of the Code, the Fund designates the maximum amount
allowable but no less than $122,983,985 as qualified dividends for purposes of
the maximum rate under Section 1(h)(11) of the Code for the fiscal year ended
December 31, 2008. Distributions, including qualified dividend income, paid
during calendar year 2008 will be reported to shareholders on Form 1099-DIV in
January 2009. Shareholders are advised to check with their tax advisors for
information on the treatment of these amounts on their individual income tax
returns.
Under Section 871(k)(1)(C) of the Code, the Fund designates the maximum amount
allowable but no less than $21,721,200 as interest related dividends for
purposes of the tax imposed under Section 871(a)(1)(A) of the Code for the
fiscal year ended December 31, 2008.
52 | Annual Report
Mutual Beacon Fund
BOARD MEMBERS AND OFFICERS
The name, year of birth and address of the officers and board members, as well
as their affiliations, positions held with the Fund, principal occupations
during the past five years and number of portfolios overseen in the Franklin
Templeton Investments fund complex are shown below. Generally, each board member
serves until that person's successor is elected and qualified.
INDEPENDENT BOARD MEMBERS
NUMBER OF
PORTFOLIOS IN
FUND COMPLEX
NAME, YEAR OF BIRTH LENGTH OF OVERSEEN BY
AND ADDRESS POSITION TIME SERVED BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------- --------------- ------------------ -------------- -----------------------------------
EDWARD I. ALTMAN, PH.D. (1941) Trustee Since 1987 7 None
c/o Franklin Mutual Advisers, LLC
101 John F. Kennedy Parkway
Short Hills, NJ 07078-2789
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Max L. Heine Professor of Finance and Director of The Credit and Debt Markets Research Program, Salomon Center, Stern School of
Business, New York University; editor and author of numerous financial publications; financial consultant; a director to
numerous financial publishing organizations; and FORMERLY, Vice Director, Salomon Center, Stern School of Business, New York
University.
ANN TORRE BATES (1958) Trustee Since 1994 30 SLM Corporation (Sallie Mae) and
c/o Franklin Mutual Advisers, LLC Allied Capital Corporation
101 John F. Kennedy Parkway (financial services).
Short Hills, NJ 07078-2789
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Independent strategic and financial consultant; and FORMERLY, Executive Vice President and Chief Financial Officer, NHP
Incorporated (manager of multifamily housing) (1995-1997); and Vice President and Treasurer, US Airways, Inc. (until 1995).
BURTON J. GREENWALD (1929) Trustee Since 2002 14 Franklin Templeton Emerging Markets
c/o Franklin Mutual Advisers, LLC Debt Opportunities Fund PLC and
101 John F. Kennedy Parkway Fiduciary International Ireland
Short Hills, NJ 07078-2789 Limited.
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Managing Director, B.J. Greenwald Associates (management consultants to the financial services industry); and FORMERLY,
Chairman, Fiduciary Trust International Funds; Executive Vice President, L.F Rothschild Fund Management, Inc.; President and
Director, Merit Mutual Funds; President, Underwriting Division and Director, National Securities & Research Corporation;
Governor, Investment Company Institute and Chairman, ICI Public Information Committee.
BRUCE A. MACPHERSON (1930) Trustee Since 1974 7 None
c/o Franklin Mutual Advisers, LLC
101 John F. Kennedy Parkway
Short Hills, NJ 07078-2789
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Retired, former Chairman, A.A. MacPherson, Inc., Canton, MA (representative for electrical manufacturers).
Annual Report | 53
NUMBER OF
PORTFOLIOS IN
FUND COMPLEX
NAME, YEAR OF BIRTH LENGTH OF OVERSEEN BY
AND ADDRESS POSITION TIME SERVED BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------- --------------- ------------------ -------------- -----------------------------------
CHARLES RUBENS II (1930) Trustee Since 1998 14 None
c/o Franklin Mutual Advisers, LLC
101 John F. Kennedy Parkway
Short Hills, NJ 07078-2789
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Private investor.
ROBERT E. WADE (1946) Trustee and Trustee 37 El Oro and Exploration Co., p.l.c.
c/o Franklin Mutual Advisers, LLC Chairman since 1991 and (investments).
101 John F. Kennedy Parkway of the Board Chairman of the
Short Hills, NJ 07078-2789 Board since 2005
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Retired, former practicing attorney.
INTERESTED BOARD MEMBERS AND OFFICERS
NUMBER OF
PORTFOLIOS IN
FUND COMPLEX
NAME, YEAR OF BIRTH LENGTH OF OVERSEEN BY
AND ADDRESS POSITION TIME SERVED BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------- --------------- ------------------ -------------- -----------------------------------
**GREGORY E. JOHNSON (1961) Trustee Since 2007 92 None
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director, President and Chief Executive Officer, Franklin Resources, Inc.; President, Templeton Worldwide, Inc.; Director,
Templeton Asset Management Ltd.; and officer and/or director or trustee, as the case may be, of some of the other subsidiaries
of Franklin Resources, Inc. and of 33 of the investment companies in Franklin Templeton Investments.
**PETER A. LANGERMAN (1955) Trustee, Trustee 7 None
c/o Franklin Mutual Advisers, LLC President since 2007,
101 John F. Kennedy Parkway and Chief President and
Short Hills, NJ 07078-2702 Executive Chief Executive
Officer - Officer -
Investment Investment
Management Management
since 2005
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Chairman of the Board, Chief Executive Officer and President, Franklin Mutual Advisers, LLC; officer and/or director, as the
case may be, of three of the investment companies in Franklin Templeton Investments; and FORMERLY, Director, New Jersey's
Division of Investment.
JENNIFER J. BOLT (1964) Chief Since Not Applicable Not Applicable
One Franklin Parkway Executive December 2008
San Mateo, CA 94403-1906 Officer -
Finance and
Administration
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Executive Vice President - Operations and Technology, Franklin Resources, Inc.; Director, Templeton Global Advisors Limited;
officer and/or director, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 46 of the
investment companies in Franklin Templeton Investments.
54 | Annual Report
NUMBER OF
PORTFOLIOS IN
FUND COMPLEX
NAME, YEAR OF BIRTH LENGTH OF OVERSEEN BY
AND ADDRESS POSITION TIME SERVED BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------- --------------- ------------------ -------------- -----------------------------------
PHILIPPE BRUGERE-TRELAT (1949) Vice President Since 2005 Not Applicable Not Applicable
101 John F. Kennedy Parkway
Short Hills, NJ 07078-2789
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice President, Franklin Mutual Advisers, LLC; Portfolio Manager of Eurovest SA (French registered Investment Company, Sicav);
and officer of two of the investment companies in Franklin Templeton Investments.
JAMES M. DAVIS (1952) Chief Chief Compliance Not Applicable Not Applicable
One Franklin Parkway Compliance Officer since 2004
San Mateo, CA 94403-1906 Officer and and Vice President
Vice President - AML Compliance
- AML since 2006
Compliance
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director, Global Compliance, Franklin Resources, Inc.; officer of some of the other subsidiaries of Franklin Resources, Inc.
and of 46 of the investment companies in Franklin Templeton Investments; and FORMERLY, Director of Compliance, Franklin
Resources, Inc. (1994-2001).
MICHAEL J. EMBLER (1964) Senior Vice Since 2005 Not Applicable Not Applicable
101 John F. Kennedy Parkway President
Short Hills, NJ 07078-2789 and Chief
Investment
Officer
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Vice President and Chief Investment Officer, Franklin Mutual Advisers, LLC; and officer of two of the investment
companies in Franklin Templeton Investments.
LAURA F. FERGERSON (1962) Chief Financial Since Not Applicable Not Applicable
One Franklin Parkway Officer and February 2008
San Mateo, CA 94403-1906 Chief
Accounting
Officer
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice President, Franklin Templeton Services, LLC; officer of 46 of the investment companies in Franklin Templeton Investments;
and FORMERLY, Director and member of Audit and Valuation Committees, Runkel Funds, Inc. (2003-2004); Assistant Treasurer of
most of the investment companies in Franklin Templeton Investments (1997-2003); and Vice President, Franklin Templeton
Services, LLC (1997-2003).
JIMMY D. GAMBILL (1947) Vice President Since Not Applicable Not Applicable
500 East Broward Blvd. February 2008
Suite 2100
Fort Lauderdale, FL 33394-3091
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
President, Franklin Templeton Services, LLC; Senior Vice President, Templeton Worldwide, Inc.; and officer of some of the other
subsidiaries of Franklin Resources, Inc. and of 46 of the investment companies in Franklin Templeton Investments.
Annual Report | 55
NUMBER OF
PORTFOLIOS IN
FUND COMPLEX
NAME, YEAR OF BIRTH LENGTH OF OVERSEEN BY
AND ADDRESS POSITION TIME SERVED BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------- --------------- ------------------ -------------- -----------------------------------
STEVEN J. GRAY (1955) Secretary Since 2005 Not Applicable Not Applicable
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Associate General Counsel, Franklin Templeton Investments; Secretary, Franklin Advisory Services, LLC, Franklin Mutual
Advisers, LLC and Franklin Templeton Distributors, Inc.; and officer of 41 of the investment companies in Franklin Templeton
Investments.
GREGORY R. SEWARD (1956) Treasurer Since 2005 Not Applicable Not Applicable
500 East Broward Blvd.
Suite 2100
Fort Lauderdale, FL 33394-3091
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice President, Franklin Templeton Services, LLC; officer of 18 of the investment companies in Franklin Templeton Investments;
and FORMERLY, Vice President, JPMorgan Chase (2000-2004) and American General Financial Group (1991-2000).
CRAIG S. TYLE (1960) Vice President Since 2005 Not Applicable Not Applicable
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
General Counsel and Executive Vice President, Franklin Resources, Inc.; officer of some of the other subsidiaries of Franklin
Resources, Inc. and of 46 of the investment companies in Franklin Templeton Investments; and FORMERLY, Partner, Shearman &
Sterling, LLP (2004-2005); and General Counsel, Investment Company Institute (ICI) (1997-2004).
* We base the number of portfolios on each separate series of the U.S.
registered investment companies within the Franklin Templeton Investments
fund complex. These portfolios have a common investment manager or
affiliated investment managers.
** Gregory E. Johnson is considered to be an interested person of the Fund
under the federal securities laws due to his position as an officer and
director of Franklin Resources, Inc., which is the parent company of the
Fund's investment manager and distributor. Peter A. Langerman is considered
to be an interested person of the Fund under the federal securities laws
due to his position as an officer of Franklin Mutual Advisers, LLC, which
is the parent company of the Fund's investment manager.
Note 1: Officer information is current as of the date of this report. It is
possible that after this date, information about officers may change.
Note 2: Gregory E. Johnson is the brother of Jennifer J. Bolt.
THE FUND'S BOARD OF DIRECTORS HAS DETERMINED THAT CERTAIN OF THE MEMBERS OF THE
AUDIT COMMITTEE, INCLUDING ANN TORRE BATES, ARE AUDIT COMMITTEE FINANCIAL
EXPERTS, AND "INDEPENDENT," UNDER THOSE PROVISIONS OF THE SARBANES-OXLEY ACT OF
2002, AND THE RULES AND FORM AMENDMENTS ADOPTED BY THE SECURITIES AND EXCHANGE
COMMISSION, RELATING TO AUDIT COMMITTEE FINANCIAL EXPERTS.
THE STATEMENT OF ADDITIONAL INFORMATION (SAI) INCLUDES ADDITIONAL INFORMATION
ABOUT THE BOARD MEMBERS AND IS AVAILABLE, WITHOUT CHARGE, UPON REQUEST.
SHAREHOLDERS MAY CALL (800) DIAL BEN/(800) 342-5236 TO REQUEST THE SAI.
56 | Annual Report
Mutual Beacon 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.
Annual Report | 57
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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 annual report
(FRANKLIN TEMPLETON INVESTMENTS(R) LOGO) One Franklin Parkway
San Mateo, CA 94403-1906
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ANNUAL REPORT AND SHAREHOLDER LETTER
MUTUAL BEACON FUND
INVESTMENT MANAGER
Franklin Mutual Advisers, LLC
101 John F. Kennedy Parkway
Short Hills, NJ 07078
DISTRIBUTOR
Franklin Templeton Distributors, Inc.
(800) DIAL BEN(R)
franklintempleton.com
SHAREHOLDER SERVICES
(800) 632-2301 - (Class A, B & C)
(800) 448-FUND - (Class Z)
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. 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.
476 A2008 02/09
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 Ann Torre Bates she is "independent"
as defined under the relevant Securities and Exchange Commission Rules and
Releases.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
(a) Audit Fees
The aggregate fees paid to the principal accountant for professional services
rendered by the principal accountant for the audit of the registrant's annual
financial statements or for services that are normally provided by the principal
accountant in connection with statutory and regulatory filings or engagements
were $446,650 for the fiscal year ended December 31, 2008 and $401,224 for the
fiscal year ended December 31, 2007.
(b) Audit-Related Fees
There were no fees paid to the principal accountant for assurance and related
services rendered by the principal accountant to the registrant that are
reasonably related to the performance of the audit of the registrant's financial
statements and are not reported under paragraph (a) of Item 4.
There were no fees paid to the principal accountant for assurance and related
services rendered by the principal accountant to the registrant's investment
adviser and any entity controlling, controlled by or under common control with
the investment adviser that provides ongoing services to the registrant that are
reasonably related to the performance of the audit of their financial
statements.
(c) Tax Fees
There were no fees paid to the principal accountant for professional services
rendered by the principal accountant to the registrant for tax compliance, tax
advice and tax planning.
The aggregate fees paid to the principal accountant for professional services
rendered by the principal accountant to the registrant's investment adviser and
any entity controlling, controlled by or under common control with the
investment adviser that provides ongoing services to the registrant for tax
compliance, tax advice and tax planning were $16,000 for the fiscal year ended
December 31, 2008 and $0 for the fiscal year ended December 31, 2007. The
services for which these fees were paid included tax compliance and advice.
(d) All Other Fees
There were no fees paid to the principal accountant for products and services
rendered by the principal accountant to the registrant not reported in
paragraphs (a)-(c) of Item 4.
The aggregate fees paid to the principal accountant for products and services
rendered by the principal accountant to the registrant's investment adviser and
any entity controlling, controlled by or under common control with the
investment adviser that provides ongoing services to the registrant other than
services reported in paragraphs (a)-(c) of Item 4 were $0 for the fiscal year
ended December 31, 2008 and $109,538 for the fiscal year ended December 31,
2007. The services for which these fees were paid included compiling a gap
analysis for the implementation of Markets in Financial Instruments Directive.
(e) (1) The registrant's audit committee is directly responsible for approving
the services to be provided by the auditors, including:
(i) pre-approval of all audit and audit related services;
(ii) pre-approval of all non-audit related services to be provided to
the Fund by the auditors;
(iii) pre-approval of all non-audit related services to be provided to
the registrant by the auditors to the registrant's investment adviser or to any
entity that controls, is controlled by or is under common control with the
registrant's investment adviser and that provides ongoing services to the
registrant where the non-audit services relate directly to the operations or
financial reporting of the registrant; and
(iv) establishment by the audit committee, if deemed necessary or
appropriate, as an alternative to committee pre-approval of services to be
provided by the auditors, as required by paragraphs (ii) and (iii) above, of
policies and procedures to permit such services to be pre-approved by other
means, such as through establishment of guidelines or by action of a designated
member or members of the committee; provided the policies and procedures are
detailed as to the particular service and the committee is informed of each
service and such policies and procedures do not include delegation of audit
committee responsibilities, as contemplated under the Securities Exchange Act of
1934, to management; subject, in the case of (ii) through (iv), to any waivers,
exceptions or exemptions that may be available under applicable law or rules.
(e) (2) None of the services provided to the registrant described in paragraphs
(b)-(d) of Item 4 were approved by the audit committee pursuant to paragraph
(c)(7)(i)(C) of Rule 2-01 of regulation S-X.
(f) No disclosures are required by this Item 4(f).
(g) The aggregate non-audit fees paid to the principal accountant for services
rendered by the principal accountant to the registrant and the registrant's
investment adviser and any entity controlling, controlled by or under common
control with the investment adviser that provides ongoing services to the
registrant were $16,000 for the fiscal year ended December 31, 2008 and $109,538
for the fiscal year ended December 31, 2007.
(h) The registrant's audit committee of the board has considered whether the
provision of non-audit services that were rendered to the registrant's
investment adviser (not including any sub-adviser whose role is primarily
portfolio management and is subcontracted with or overseen by another investment
adviser), and any entity controlling, controlled by, or under common control
with the investment adviser that provides ongoing services to the registrant
that were not pre-approved pursuant to paragraph (c)(7)(ii) of Rule 2-01 of
Regulation S-X is compatible with maintaining the principal accountant's
independence.
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 Directors 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 Jennifer J. Bolt, Chief Executive Officer - Finance and Administration, and
Laura F. Fergerson, Chief Financial Officer and Chief Accounting Officer
(B) Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of
Jennifer J. Bolt, Chief Executive Officer - Finance and Administration, and
Laura F. Fergerson, Chief Financial Officer and Chief Accounting Officer
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
FRANKLIN MUTUAL SERIES FUNDS
By /s/JENNIFER J. BOLT
- -----------------------------------
Jennifer J. Bolt
Chief Executive Officer -
Finance and Administration
Date February 25, 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/JENNIFER J. BOLT
- -----------------------------------
Jennifer J. Bolt
Chief Executive Officer -
Finance and Administration
Date February 25, 2009
By /s/LAURA F. FERGERSON
- ----------------------------------
Laura F. Fergerson
Chief Financial Officer and
Chief Accounting Officer
Date February 25, 2009