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 811-07876
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TEMPLETON CHINA WORLD FUND
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(Exact name of registrant as specified in charter)
500 EAST BROWARD BLVD., FORT LAUDERDALE, FL 33394-3091
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(Address of principal executive offices) (Zip code)
CRAIG S. TYLE, ONE FRANKLIN PARKWAY, SAN MATEO, CA 94403-1906
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(Name and address of agent for service)
Registrant's telephone number, including area code: (954) 527-7500
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Date of fiscal year end: 8/31
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Date of reporting period: 8/31/06
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ITEM 1. REPORTS TO STOCKHOLDERS
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AUGUST 31, 2006
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ANNUAL REPORT AND SHAREHOLDER LETTER | INTERNATIONAL
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WANT TO RECEIVE
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See inside for details.
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[LOGO](R)
FRANKLIN TEMPLETON
INVESTMENTS
Franklin o TEMPLETON o 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.
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MUTUAL FUNDS | RETIREMENT PLANS | 529 COLLEGE SAVINGS PLANS | SEPARATE ACCOUNTS
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[GRAPHIC OMITTED]
Not part of the annual report
Contents
SHAREHOLDER LETTER ....................................................... 1
ANNUAL REPORT
Templeton China World Fund ............................................... 3
Performance Summary ...................................................... 8
Your Fund's Expenses ..................................................... 13
Financial Highlights and Statement of Investments ........................ 15
Financial Statements ..................................................... 23
Notes to Financial Statements ............................................ 26
Report of Independent Registered Public
Accounting Firm .......................................................... 35
Tax Designation .......................................................... 36
Board Members and Officers ............................................... 39
Shareholder Information .................................................. 45
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Annual Report
Templeton China World Fund
YOUR FUND'S GOAL AND MAIN INVESTMENTS: Templeton China World Fund seeks
long-term capital appreciation. Under normal market conditions, the Fund invests
at least 80% of its net assets in securities of "China companies," as defined in
the Fund's prospectus.
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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 1-800/342-5236 FOR
MOST RECENT MONTH-END PERFORMANCE.
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This annual report for Templeton China World Fund covers the fiscal year ended
August 31, 2006.
PERFORMANCE OVERVIEW
For the 12 months under review, Templeton China World Fund - Class A delivered a
+20.65% cumulative total return. In comparison the Fund's benchmarks, the Morgan
Stanley Capital International (MSCI) China Index and the MSCI Golden Dragon
Index, posted +36.91% and +18.64% cumulative total returns for the same
period. 1 Although both indexes are reflected in this report, the MSCI Golden
Dragon Index is replacing the MSCI China Index as the Fund's benchmark because
it better reflects the Fund's mandate. The MSCI China Index does not include
Hong Kong and Taiwan stocks, while the MSCI Golden Dragon Index does.
Also, for comparison, the Standard & Poor's/International Finance Corporation
(S&P/IFC) Investable China Index posted a +36.11% cumulative total return for
the fiscal year ended August 31, 2006. 2 In line with our long-term investment
strategy, we are pleased with our long-term results, which you will find in the
Performance Summary beginning on page 8. For example, for the 10-year period
ended August 31, 2006, the Fund's Class A shares delivered a +151.73% cumulative
total return, compared with the MSCI Golden Dragon Index's +40.47% cumulative
total return for the same period. 3 Please note that index
1. Source: Standard & Poor's Micropal. The MSCI China Index is a free
float-adjusted, market capitalization-weighted index designed to measure
equity market performance in China. The MSCI Golden Dragon Index is an
aggregate of the MSCI Hong Kong Index, the MSCI China Free Index and the
MSCI Taiwan@65% Index. The MSCI Taiwan Index has an inclusion weight at
65% of its market capitalization in the MSCI index series.
2. Source: Standard & Poor's Micropal. The S&P/IFC Investable China Index is
a free float-adjusted, market capitalization-weighted index designed to
measure the performance of equity securities in China.
3. Source: Standard & Poor's Micropal. As of 8/31/06, the Fund's 10-year
average annual total return not including sales charges was +9.67%,
compared with the +3.46% average annual total return for the MSCI Golden
Dragon Index.
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 19.
Annual Report | 3
performance information is provided for reference and that we do not attempt to
track the index, but rather undertake investments on the basis of fundamental
research. You can find more of the Fund's performance data in the Performance
Summary.
ECONOMIC AND MARKET OVERVIEW
With China growing at its fastest pace in more than 10 years, the government
implemented tightening measures to curb excessive credit growth and investment
in certain overheated sectors of the economy. Gross domestic product (GDP) grew
11.3% in second quarter 2006 compared with the same quarter one year earlier
(year-over-year) mainly due to robust export and investment growth, bringing GDP
growth for the first half of the calendar year to 10.9%. 4 Aimed at securing
energy supplies to meet China's oil and gas demand, the nation signed agreements
with South Africa, Saudi Arabia, Venezuela and Russia during the period.
Taiwan's economy grew 4.6% year-over-year in second quarter 2006, slightly
slower than the first quarter's revised 4.9% growth rate. 5 Personal consumption
declined largely due to stricter lending measures implemented by banks following
rising credit card defaults. Conversely, stronger exports supported growth.
Exports rose 21.2% year-over-year to a record high US$19.6 billion in July,
bringing the total for 2006's first seven months to US$125.4 billion. 6 GDP was
forecast to grow 4.3% in 2006. 5
In Hong Kong, rising interest rates and high oil prices dampened export demand.
This led second quarter GDP growth to decelerate to 5.2% year-over-year from
8.2% in the first quarter. 7 However, consumption and investment positively
affected GDP growth. Inflation remained steady with the consumer price index
rising 1.9% in the first seven months of 2006 while unemployment declined to
4.9% in July. 7 The government budget also registered its first surplus in eight
years for Hong Kong's fiscal year ended March 2006.
The Chinese equity market maintained an upward trend during the reporting
period. Strong economic growth coupled with high liquidity propelled stock
prices. Neighboring Taiwan and Hong Kong, however, did not fare as well. Taiwan
was plagued by political instability despite the failure of a referendum by
4. Source: National Bureau of Statistics, China.
5. Source: Directorate General of Taiwan.
6. Source: Ministry of Finance, Taiwan.
7. Source: Census and Statistics Department, The Government of Hong Kong
Special Administrative Region.
4 | Annual Report
the opposition to recall President Chen Shui-bian. Investors grew increasingly
concerned about allegations of corruption by the president's family, which
resulted in calls for his resignation. Rising interest rates negatively impacted
Hong Kong's market for most of the period, which led investors to adopt a more
cautious stance. However, the U.S. Federal Reserve Board's decision to leave
interest rates unchanged toward the end of the period provided investors with
some good news. The MSCI China Index returned +36.91%, while the MSCI Taiwan
Index and the MSCI Hong Kong Index returned +12.70% and +12.82% in U.S. dollar
terms during the year under review. 8
INVESTMENT STRATEGY
Our investment strategy employs a bottom-up, value-oriented, long-term approach.
We focus on the market price of a company's securities relative to our
evaluation of the company's long-term earnings, asset value and cash flow
potential. As we look for investments, we consider specific companies, rather
than sectors, while doing in-depth research to construct an action list from
which we make our buy decisions. Before we make a purchase, we look at the
company's potential for earnings and growth over a five-year horizon.
MANAGER'S DISCUSSION
Overweighted exposure and stock selection in the energy and telecommunication
services sectors were among the largest contributors to the Fund's performance
relative to the MSCI Golden Dragon Index. 9 In the energy sector, the Fund's
overweighted positions in PetroChina and China Petroleum and Chemical, as well
as our holding in China Shenhua Energy (not represented in the index),
contributed the most to performance. With commodity prices at high levels, these
companies could see higher revenues and stronger earnings growth. Within
telecommunication services, the Fund benefited from its overweighted exposure to
China Mobile as the stock significantly outperformed the benchmark index during
the period.
Stock selection in the industrials sector further supported performance. 10 A
position in LG Corp., which is not part of the benchmark index, and the Fund's
not holding Hutchison Whampoa contributed to relative performance,
GEOGRAPHIC BREAKDOWN
Based on Total Net Assets as of 8/31/06
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
China 55.5%
Taiwan 19.1%
Hong Kong 14.9%
U.K. 3.6%
South Korea 1.2%
Singapore 0.6%
Short-Term Investments & Other Net Assets 5.1%
8. Source: Standard & Poor's Micropal. See footnote 1 for a description of
the MSCI China Index. The MSCI Taiwan Index is a free float-adjusted,
market capitalization-weighted index designed to measure equity market
performance in Taiwan. The MSCI Hong Kong Index is a free float-adjusted,
market capitalization-weighted index designed to measure equity market
performance in Hong Kong.
9. The energy sector comprises oil, gas and consumable fuels, while the
telecommunication services sector comprises diversified telecommunication
services and wireless telecommunication services in the SOI.
10. The industrials sector comprises air freight and logistics, airlines,
electrical equipment, industrial conglomerates, machinery, and
transportation infrastructure in the SOI.
Annual Report | 5
TOP 10 EQUITY HOLDINGS
8/31/06
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COMPANY % OF TOTAL
SECTOR/INDUSTRY, COUNTRY NET ASSETS
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China Mobile Ltd. 10.1%
WIRELESS TELECOMMUNICATION SERVICES,
CHINA
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PetroChina Co. Ltd., H, ord. & 144A 8.8%
OIL, GAS & CONSUMABLE FUELS, CHINA
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China Petroleum and Chemical Corp., H 5.3%
OIL, GAS & CONSUMABLE FUELS, CHINA
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CNOOC Ltd., ord. & 144A 5.1%
OIL, GAS & CONSUMABLE FUELS, CHINA
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Dairy Farm International Holdings Ltd. 5.0%
FOOD & STAPLES RETAILING, HONG KONG
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HSBC Holdings PLC 3.6%
COMMERCIAL BANKS, U.K.
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China Shenhua Energy Co. Ltd., H 3.1%
OIL, GAS & CONSUMABLE FUELS, CHINA
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Taiwan Semiconductor Manufacturing
Co. Ltd. 3.1%
SEMICONDUCTORS & SEMICONDUCTOR
EQUIPMENT, TAIWAN
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Cheung Kong Infrastructure Holdings Ltd. 3.0%
ELECTRIC UTILITIES, HONG KONG
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China Telecom Corp. Ltd., H 2.9%
DIVERSIFIED TELECOMMUNICATION SERVICES, CHINA
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as LG's stock outperformed the MSCI Golden Dragon Index and Hutchison's stock
underperformed it.
Conversely, the Fund's overweighted exposure to certain utilities stocks
negatively impacted relative performance. 11 For example, overweighted positions
in Datang International Power Generation and Cheung Kong Infrastructure Holdings
hampered the Fund during the reporting period. An electric utility in China,
Datang is the largest independent power producer in the Beijing-Tianjin-North
Hebei region. Trading at a discount to its peers, the company looked
undervalued, based on our investment strategy. One of Cheung Kong
Infrastructure's major assets is its substantial holding in one of Hong Kong's
two electric utilities, Hongkong Electric. The company's fundamentals, which
include an experienced management team, strong financial position and stable
earnings growth, made the stock an attractive investment to us.
Some consumer discretionary sector holdings detracted from relative performance
including Hongkong and Shanghai Hotels and Cheng Shin Rubber Industry. 12
Hongkong and Shanghai Hotels operates eight hotels, including the Peninsula
Hotel in Hong Kong, and is also involved in property investment. We believe the
group could benefit from Hong Kong's robust tourism industry and property
market. Cheng Shin Rubber is Taiwan's largest tire manufacturer, which also has
manufacturing plants in China. Based on our analysis, we think its dominant
market position in Taiwan and presence in neighboring China could support
earnings.
During the year under review, the Fund continued to invest in stocks we believed
could benefit from economic developments in the greater China region. A dominant
theme was sustained high oil prices. Thus, the Fund significantly increased its
exposure to energy sector stocks as these companies should benefit from higher
revenues and greater earnings. Key purchases included adding to our holdings in
PetroChina, a dominant player in the oil and gas exploration, development and
production industry; and China Petroleum and Chemical Corporation, one of
China's largest integrated energy companies; and initiating a position in CNOOC,
China's largest offshore oil and natural gas exploration and production company.
We also made substantial investments in diversified banks and integrated
telecommunications service providers. In our assessment, the diversified banks
sector could benefit from growing demand for financial and banking services, and
restructuring within the sector could unlock value. Higher incomes and
11. The utilities sector comprises electric utilities, and independent power
producers and energy traders in the SOI.
12. The consumer discretionary sector comprises auto components; automobiles;
distributors; hotels, restaurants and leisure; household durables; media;
and textiles, apparel and luxury goods in the SOI.
6 | Annual Report
strong consumer demand should lead to greater demand for telecommunications
services and benefit the country's major service providers. New positions
included Bank of China and China Construction Bank, which are among China's
largest commercial banks. We added to our holdings in China Mobile, a dominant
wireless telecommunications operator with 278 million subscribers; and China
Telecom, a dominant broadband and fixed-line services provider in southern
China.
We undertook selective purchases in Taiwan and Hong Kong as the Fund sought to
benefit from attractive valuations resulting from lagging stock market
performance. Key purchases included adding to our positions in Taiwan
Semiconductor Manufacturing, the world's largest independent integrated circuit
manufacturer; Cheung Kong Infrastructure Holdings, a diversified infrastructure
company with businesses in Hong Kong and China; and Chinatrust Financial
Holding, a leading Taiwanese consumer bank.
During the period, the Fund realized gains by selling some selected stocks in
South Korea and Singapore. We sold all our shares of Hongkong Land Holdings, a
major property investment and management firm, and we sold about half of our
position in LG Corp. The Fund also reduced its exposure to the hotels,
restaurants and leisure; construction materials; and transportation
infrastructure sectors and realized gains on certain stocks. For example, we
sold some of our Hongkong and Shanghai Hotels and Anhui Conch Cement holdings,
and all of our China Merchants Holdings International position.
Thank you for your continued participation in Templeton China World Fund. We
look forward to serving your future investment needs.
/s/ Mark Mobius
[PHOTO OMITTED] Mark Mobius
Portfolio Manager
Templeton China World Fund
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS
AS OF AUGUST 31, 2006, 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 | 7
Performance Summary as of 8/31/06
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
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CLASS A (SYMBOL: TCWAX) CHANGE 8/31/06 8/31/05
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Net Asset Value (NAV) +$4.09 $25.76 $21.67
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DISTRIBUTIONS (9/1/05-8/31/06)
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Dividend Income $0.3168
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CLASS B (SYMBOL: TCWBX) CHANGE 8/31/06 8/31/05
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Net Asset Value (NAV) +$4.06 $25.53 $21.47
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DISTRIBUTIONS (9/1/05-8/31/06)
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Dividend Income $0.1702
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CLASS C (SYMBOL: TCWCX) CHANGE 8/31/06 8/31/05
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Net Asset Value (NAV) +$3.99 $25.48 $21.49
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DISTRIBUTIONS (9/1/05-8/31/06)
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Dividend Income $0.2381
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ADVISOR CLASS (SYMBOL: TACWX) CHANGE 8/31/06 8/31/05
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Net Asset Value (NAV) +$4.15 $25.93 $21.78
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DISTRIBUTIONS (9/1/05-8/31/06)
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Dividend Income $0.3614
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8 | Annual Report
Performance Summary (CONTINUED)
PERFORMANCE 1
CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETURNS AND
VALUE OF $10,000 INVESTMENT INCLUDE MAXIMUM SALES CHARGES. CLASS A: 5.75%
MAXIMUM INITIAL SALES CHARGE; CLASS B: CONTINGENT DEFERRED SALES CHARGE (CDSC)
DECLINING FROM 4% TO 1% OVER SIX YEARS, AND ELIMINATED THEREAFTER; CLASS C: 1%
CDSC IN FIRST YEAR ONLY; ADVISOR CLASS: NO SALES CHARGES. THE FUND MAY CHARGE A
2% FEE ON REDEMPTIONS MADE WITHIN SEVEN DAYS OF PURCHASE.
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CLASS A 1-YEAR 5-YEAR 10-YEAR
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Cumulative Total Return 2 +20.65% +195.71% +151.73%
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Average Annual Total Return 3 +13.72% +22.75% +9.02%
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Value of $10,000 Investment 4 $11,372 $ 27,871 $ 23,726
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Avg. Ann. Total Return (9/30/06) 5 +11.07% +24.59% +8.96%
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CLASS B 1-YEAR 5-YEAR 10-YEAR
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Cumulative Total Return 2 +19.87% +186.09% +136.71%
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Average Annual Total Return 3 +15.87% +23.22% +9.00%
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Value of $10,000 Investment 4 $11,587 $ 28,409 $ 23,671
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Avg. Ann. Total Return (9/30/06) 5 +13.08% +25.07% +8.94%
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CLASS C 1-YEAR 5-YEAR 10-YEAR
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Cumulative Total Return 2 +19.91% +186.29% +133.92%
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Average Annual Total Return 3 +18.91% +23.41% +8.87%
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Value of $10,000 Investment 4 $11,891 $ 28,629 $ 23,392
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Avg. Ann. Total Return (9/30/06) 5 +16.12% +25.26% +8.81%
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ADVISOR CLASS 1-YEAR 5-YEAR 10-YEAR
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Cumulative Total Return 2 +21.08% +201.15% +162.11%
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Average Annual Total Return 3 +21.08% +24.67% +10.12%
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Value of $10,000 Investment 4 $12,108 $ 30,115 $ 26,211
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Avg. Ann. Total Return (9/30/06) 5 +18.27% +26.53% +10.05%
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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 1-800/342-5236.
Annual Report | 9
Performance Summary (CONTINUED)
TOTAL RETURN INDEX COMPARISON FOR 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
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CLASS A 8/31/06
- ----------------------------------------------
1-Year +13.72%
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5-Year +22.75%
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10-Year +9.02%
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CLASS A (9/1/96-8/31/06)
[THE FOLLOWING TABLE WAS REPRESENTED AS A LINE GRAPH IN THE PRINTED MATERIAL.]
TEMPLETON CHINA MSCI GOLDEN
DATE WORLD FUND MSCI CHINA INDEX 6 DRAGON INDEX 6
- ------------ ------------------ ------------------ ----------------
9/1/1996 $ 9,425 $10,000 $10,000
9/30/1996 $ 9,680 $ 9,884 $10,521
10/31/1996 $10,114 $ 9,642 $10,737
11/30/1996 $11,371 $10,755 $11,555
12/31/1996 $11,794 $12,537 $11,593
1/31/1997 $11,678 $12,259 $11,542
2/28/1997 $11,767 $12,619 $11,729
3/31/1997 $11,366 $12,255 $11,151
4/30/1997 $11,822 $13,873 $11,514
5/31/1997 $12,365 $13,717 $12,346
6/30/1997 $12,161 $14,024 $13,259
7/31/1997 $12,849 $15,944 $14,186
8/31/1997 $12,652 $16,885 $12,753
9/30/1997 $12,485 $14,077 $12,767
10/31/1997 $ 8,772 $11,791 $ 9,366
11/30/1997 $ 8,413 $ 9,657 $ 9,273
12/31/1997 $ 8,222 $ 9,371 $ 9,411
1/31/1998 $ 6,554 $ 6,987 $ 8,331
2/28/1998 $ 8,503 $ 9,467 $10,039
3/31/1998 $ 8,378 $ 9,222 $ 9,722
4/30/1998 $ 7,699 $ 8,272 $ 8,731
5/31/1998 $ 6,500 $ 7,187 $ 7,661
6/30/1998 $ 6,024 $ 6,066 $ 7,208
7/31/1998 $ 5,676 $ 4,969 $ 6,795
8/31/1998 $ 5,040 $ 3,623 $ 6,060
9/30/1998 $ 5,582 $ 5,188 $ 6,924
10/31/1998 $ 6,833 $ 5,705 $ 8,736
11/30/1998 $ 7,109 $ 5,886 $ 8,893
12/31/1998 $ 6,605 $ 5,401 $ 8,485
1/31/1999 $ 5,935 $ 4,397 $ 7,989
2/28/1999 $ 5,924 $ 4,211 $ 8,150
3/31/1999 $ 6,463 $ 4,783 $ 9,136
4/30/1999 $ 7,989 $ 5,984 $10,812
5/31/1999 $ 7,516 $ 5,998 $10,074
6/30/1999 $ 8,654 $ 8,808 $11,525
7/31/1999 $ 8,182 $ 7,708 $10,775
8/31/1999 $ 8,062 $ 7,646 $11,277
9/30/1999 $ 7,575 $ 7,340 $10,722
10/31/1999 $ 7,500 $ 6,748 $11,186
11/30/1999 $ 8,289 $ 6,619 $12,139
12/31/1999 $ 9,224 $ 6,121 $13,279
1/31/2000 $ 9,025 $ 5,854 $13,348
2/29/2000 $ 9,340 $ 4,779 $13,555
3/31/2000 $ 9,772 $ 4,889 $13,980
4/30/2000 $ 8,701 $ 5,350 $12,588
5/31/2000 $ 8,411 $ 5,446 $11,804
6/30/2000 $ 8,935 $ 6,173 $12,139
7/31/2000 $ 9,241 $ 6,056 $12,367
8/31/2000 $ 9,487 $ 5,810 $12,057
9/30/2000 $ 8,837 $ 5,103 $10,660
10/31/2000 $ 7,987 $ 4,865 $ 9,764
11/30/2000 $ 7,850 $ 4,217 $ 9,108
12/31/2000 $ 8,173 $ 4,252 $ 9,296
1/31/2001 $ 8,600 $ 4,868 $10,527
2/28/2001 $ 8,977 $ 4,424 $ 9,971
3/31/2001 $ 8,566 $ 3,707 $ 9,140
4/30/2001 $ 8,917 $ 4,083 $ 9,039
5/31/2001 $ 9,638 $ 4,194 $ 8,812
6/30/2001 $ 9,473 $ 4,332 $ 8,551
7/31/2001 $ 8,464 $ 3,746 $ 8,014
8/31/2001 $ 8,022 $ 2,935 $ 7,526
9/30/2001 $ 7,605 $ 2,835 $ 6,330
10/31/2001 $ 8,204 $ 2,907 $ 6,692
11/30/2001 $ 8,302 $ 3,191 $ 7,547
12/31/2001 $ 8,081 $ 3,201 $ 8,303
1/31/2002 $ 8,463 $ 2,901 $ 8,261
2/28/2002 $ 8,734 $ 2,924 $ 7,967
3/31/2002 $ 9,021 $ 3,089 $ 8,538
4/30/2002 $ 9,607 $ 3,224 $ 8,731
5/31/2002 $ 9,953 $ 3,274 $ 8,453
6/30/2002 $ 9,743 $ 3,164 $ 7,904
7/31/2002 $ 9,438 $ 3,026 $ 7,515
8/31/2002 $ 9,108 $ 2,967 $ 7,188
9/30/2002 $ 8,829 $ 2,730 $ 6,455
10/31/2002 $ 8,919 $ 2,746 $ 6,818
11/30/2002 $ 9,211 $ 2,860 $ 7,116
12/31/2002 $ 9,450 $ 2,752 $ 6,668
1/31/2003 $ 9,959 $ 2,883 $ 7,036
2/28/2003 $10,189 $ 2,811 $ 6,642
3/31/2003 $10,071 $ 2,703 $ 6,403
4/30/2003 $10,118 $ 2,707 $ 6,335
5/31/2003 $10,965 $ 3,053 $ 6,971
6/30/2003 $11,325 $ 3,248 $ 7,291
7/31/2003 $12,379 $ 3,570 $ 7,969
8/31/2003 $13,033 $ 3,808 $ 8,758
9/30/2003 $13,059 $ 3,837 $ 8,999
10/31/2003 $14,200 $ 4,420 $ 9,657
11/30/2003 $14,209 $ 4,465 $ 9,442
12/31/2003 $15,857 $ 5,161 $ 9,912
1/31/2004 $16,279 $ 5,128 $10,592
2/29/2004 $17,293 $ 5,447 $11,032
3/31/2004 $16,367 $ 4,988 $10,441
4/30/2004 $14,966 $ 4,337 $ 9,666
5/31/2004 $15,487 $ 4,634 $ 9,732
6/30/2004 $15,603 $ 4,606 $ 9,623
7/31/2004 $15,405 $ 4,623 $ 9,438
8/31/2004 $16,132 $ 4,642 $ 9,958
9/30/2004 $16,662 $ 4,986 $10,216
10/31/2004 $16,537 $ 4,865 $10,129
11/30/2004 $17,734 $ 5,354 $10,987
12/31/2004 $17,924 $ 5,259 $11,327
1/31/2005 $17,515 $ 5,144 $10,955
2/28/2005 $18,613 $ 5,526 $11,532
3/31/2005 $18,241 $ 5,241 $10,982
4/30/2005 $18,359 $ 5,262 $11,110
5/31/2005 $18,705 $ 5,313 $11,316
6/30/2005 $18,976 $ 5,535 $11,709
7/31/2005 $19,964 $ 5,937 $12,197
8/31/2005 $19,657 $ 5,969 $11,840
9/30/2005 $20,555 $ 6,320 $12,168
10/31/2005 $19,234 $ 5,701 $11,261
11/30/2005 $20,366 $ 6,103 $11,986
12/31/2005 $21,085 $ 6,298 $12,490
1/31/2006 $22,365 $ 7,185 $13,292
2/28/2006 $22,596 $ 7,411 $13,374
3/31/2006 $22,569 $ 7,648 $13,550
4/30/2006 $23,884 $ 8,049 $14,552
5/31/2006 $22,926 $ 7,634 $13,683
6/30/2006 $23,231 $ 7,792 $13,679
7/31/2006 $23,406 $ 7,998 $13,612
8/31/2006 $23,726 $ 8,173 $14,047
AVERAGE ANNUAL TOTAL RETURN
- ----------------------------------------------
CLASS B 8/31/06
- ----------------------------------------------
1-Year +15.87%
- ----------------------------------------------
5-Year +23.22%
- ----------------------------------------------
10-Year +9.00%
- ----------------------------------------------
CLASS B (9/1/96-8/31/06)
[THE FOLLOWING TABLE WAS REPRESENTED AS A LINE GRAPH IN THE PRINTED MATERIAL.]
TEMPLETON CHINA MSCI CHINA MSCI GOLDEN
DATE WORLD FUND INDEX 6 DRAGON INDEX 6
- ------------ ------------------ ------------- -----------------
9/1/1996 $10,000 $10,000 $10,000
9/30/1996 $10,266 $ 9,884 $10,521
10/31/1996 $10,702 $ 9,642 $10,737
11/30/1996 $12,027 $10,755 $11,555
12/31/1996 $12,464 $12,537 $11,593
1/31/1997 $12,334 $12,259 $11,542
2/28/1997 $12,423 $12,619 $11,729
3/31/1997 $11,992 $12,255 $11,151
4/30/1997 $12,466 $13,873 $11,514
5/31/1997 $13,032 $13,717 $12,346
6/30/1997 $12,809 $14,024 $13,259
7/31/1997 $13,526 $15,944 $14,186
8/31/1997 $13,312 $16,885 $12,753
9/30/1997 $13,129 $14,077 $12,767
10/31/1997 $ 9,190 $11,791 $ 9,366
11/30/1997 $ 8,810 $ 9,657 $ 9,273
12/31/1997 $ 8,596 $ 9,371 $ 9,411
1/31/1998 $ 6,848 $ 6,987 $ 8,331
2/28/1998 $ 8,880 $ 9,467 $10,039
3/31/1998 $ 8,744 $ 9,222 $ 9,722
4/30/1998 $ 8,032 $ 8,272 $ 8,731
5/31/1998 $ 6,777 $ 7,187 $ 7,661
6/30/1998 $ 6,276 $ 6,066 $ 7,208
7/31/1998 $ 5,910 $ 4,969 $ 6,795
8/31/1998 $ 5,246 $ 3,623 $ 6,060
9/30/1998 $ 5,806 $ 5,188 $ 6,924
10/31/1998 $ 7,098 $ 5,705 $ 8,736
11/30/1998 $ 7,381 $ 5,886 $ 8,893
12/31/1998 $ 6,851 $ 5,401 $ 8,485
1/31/1999 $ 6,153 $ 4,397 $ 7,989
2/28/1999 $ 6,138 $ 4,211 $ 8,150
3/31/1999 $ 6,693 $ 4,783 $ 9,136
4/30/1999 $ 8,270 $ 5,984 $10,812
5/31/1999 $ 7,777 $ 5,998 $10,074
6/30/1999 $ 8,950 $ 8,808 $11,525
7/31/1999 $ 8,457 $ 7,708 $10,775
8/31/1999 $ 8,328 $ 7,646 $11,277
9/30/1999 $ 7,819 $ 7,340 $10,722
10/31/1999 $ 7,737 $ 6,748 $11,186
11/30/1999 $ 8,546 $ 6,619 $12,139
12/31/1999 $ 9,499 $ 6,121 $13,279
1/31/2000 $ 9,290 $ 5,854 $13,348
2/29/2000 $ 9,609 $ 4,779 $13,555
3/31/2000 $10,048 $ 4,889 $13,980
4/30/2000 $ 8,942 $ 5,350 $12,588
5/31/2000 $ 8,639 $ 5,446 $11,804
6/30/2000 $ 9,173 $ 6,173 $12,139
7/31/2000 $ 9,481 $ 6,056 $12,367
8/31/2000 $ 9,729 $ 5,810 $12,057
9/30/2000 $ 9,057 $ 5,103 $10,660
10/31/2000 $ 8,181 $ 4,865 $ 9,764
11/30/2000 $ 8,034 $ 4,217 $ 9,108
12/31/2000 $ 8,359 $ 4,252 $ 9,296
1/31/2001 $ 8,791 $ 4,868 $10,527
2/28/2001 $ 9,171 $ 4,424 $ 9,971
3/31/2001 $ 8,748 $ 3,707 $ 9,140
4/30/2001 $ 9,100 $ 4,083 $ 9,039
5/31/2001 $ 9,832 $ 4,194 $ 8,812
6/30/2001 $ 9,659 $ 4,332 $ 8,551
7/31/2001 $ 8,624 $ 3,746 $ 8,014
8/31/2001 $ 8,168 $ 2,935 $ 7,526
9/30/2001 $ 7,740 $ 2,835 $ 6,330
10/31/2001 $ 8,342 $ 2,907 $ 6,692
11/30/2001 $ 8,438 $ 3,191 $ 7,547
12/31/2001 $ 8,207 $ 3,201 $ 8,303
1/31/2002 $ 8,590 $ 2,901 $ 8,261
2/28/2002 $ 8,861 $ 2,924 $ 7,967
3/31/2002 $ 9,148 $ 3,089 $ 8,538
4/30/2002 $ 9,738 $ 3,224 $ 8,731
5/31/2002 $10,084 $ 3,274 $ 8,453
6/30/2002 $ 9,866 $ 3,164 $ 7,904
7/31/2002 $ 9,551 $ 3,026 $ 7,515
8/31/2002 $ 9,212 $ 2,967 $ 7,188
9/30/2002 $ 8,926 $ 2,730 $ 6,455
10/31/2002 $ 9,010 $ 2,746 $ 6,818
11/30/2002 $ 9,301 $ 2,860 $ 7,116
12/31/2002 $ 9,536 $ 2,752 $ 6,668
1/31/2003 $10,044 $ 2,883 $ 7,036
2/28/2003 $10,271 $ 2,811 $ 6,642
3/31/2003 $10,146 $ 2,703 $ 6,403
4/30/2003 $10,187 $ 2,707 $ 6,335
5/31/2003 $11,034 $ 3,053 $ 6,971
6/30/2003 $11,389 $ 3,248 $ 7,291
7/31/2003 $12,443 $ 3,570 $ 7,969
8/31/2003 $13,089 $ 3,808 $ 8,758
9/30/2003 $13,115 $ 3,837 $ 8,999
10/31/2003 $14,252 $ 4,420 $ 9,657
11/30/2003 $14,252 $ 4,465 $ 9,442
12/31/2003 $15,885 $ 5,161 $ 9,912
1/31/2004 $16,309 $ 5,128 $10,592
2/29/2004 $17,319 $ 5,447 $11,032
3/31/2004 $16,380 $ 4,988 $10,441
4/30/2004 $14,963 $ 4,337 $ 9,666
5/31/2004 $15,478 $ 4,634 $ 9,732
6/30/2004 $15,577 $ 4,606 $ 9,623
7/31/2004 $15,379 $ 4,623 $ 9,438
8/31/2004 $16,091 $ 4,642 $ 9,958
9/30/2004 $16,619 $ 4,986 $10,216
10/31/2004 $16,494 $ 4,865 $10,129
11/30/2004 $17,689 $ 5,354 $10,987
12/31/2004 $17,878 $ 5,259 $11,327
1/31/2005 $17,470 $ 5,144 $10,955
2/28/2005 $18,566 $ 5,526 $11,532
3/31/2005 $18,194 $ 5,241 $10,982
4/30/2005 $18,313 $ 5,262 $11,110
5/31/2005 $18,657 $ 5,313 $11,316
6/30/2005 $18,927 $ 5,535 $11,709
7/31/2005 $19,914 $ 5,937 $12,197
8/31/2005 $19,607 $ 5,969 $11,840
9/30/2005 $20,503 $ 6,320 $12,168
10/31/2005 $19,185 $ 5,701 $11,261
11/30/2005 $20,315 $ 6,103 $11,986
12/31/2005 $21,032 $ 6,298 $12,490
1/31/2006 $22,308 $ 7,185 $13,292
2/28/2006 $22,538 $ 7,411 $13,374
3/31/2006 $22,511 $ 7,648 $13,550
4/30/2006 $23,823 $ 8,049 $14,552
5/31/2006 $22,868 $ 7,634 $13,683
6/30/2006 $23,172 $ 7,792 $13,679
7/31/2006 $23,346 $ 7,998 $13,612
8/31/2006 $23,671 $ 8,173 $14,047
10 | Annual Report
Performance Summary (CONTINUED)
CLASS C (9/1/96-8/31/06)
[THE FOLLOWING TABLE WAS REPRESENTED AS A LINE GRAPH IN THE PRINTED MATERIAL.]
TEMPLETON CHINA MSCI CHINA MSCI GOLDEN
DATE WORLD FUND INDEX 6 DRAGON INDEX 6
- ------------ ----------------- ------------- ----------------
9/1/1996 $10,000 $10,000 $10,000
9/30/1996 $10,266 $ 9,884 $10,521
10/31/1996 $10,702 $ 9,642 $10,737
11/30/1996 $12,027 $10,755 $11,555
12/31/1996 $12,464 $12,537 $11,593
1/31/1997 $12,334 $12,259 $11,542
2/28/1997 $12,423 $12,619 $11,729
3/31/1997 $11,992 $12,255 $11,151
4/30/1997 $12,466 $13,873 $11,514
5/31/1997 $13,032 $13,717 $12,346
6/30/1997 $12,809 $14,024 $13,259
7/31/1997 $13,526 $15,944 $14,186
8/31/1997 $13,312 $16,885 $12,753
9/30/1997 $13,129 $14,077 $12,767
10/31/1997 $ 9,190 $11,791 $ 9,366
11/30/1997 $ 8,810 $ 9,657 $ 9,273
12/31/1997 $ 8,596 $ 9,371 $ 9,411
1/31/1998 $ 6,848 $ 6,987 $ 8,331
2/28/1998 $ 8,880 $ 9,467 $10,039
3/31/1998 $ 8,744 $ 9,222 $ 9,722
4/30/1998 $ 8,032 $ 8,272 $ 8,731
5/31/1998 $ 6,777 $ 7,187 $ 7,661
6/30/1998 $ 6,276 $ 6,066 $ 7,208
7/31/1998 $ 5,910 $ 4,969 $ 6,795
8/31/1998 $ 5,246 $ 3,623 $ 6,060
9/30/1998 $ 5,806 $ 5,188 $ 6,924
10/31/1998 $ 7,098 $ 5,705 $ 8,736
11/30/1998 $ 7,381 $ 5,886 $ 8,893
12/31/1998 $ 6,851 $ 5,401 $ 8,485
1/31/1999 $ 6,153 $ 4,397 $ 7,989
2/28/1999 $ 6,138 $ 4,211 $ 8,150
3/31/1999 $ 6,693 $ 4,783 $ 9,136
4/30/1999 $ 8,270 $ 5,984 $10,812
5/31/1999 $ 7,777 $ 5,998 $10,074
6/30/1999 $ 8,950 $ 8,808 $11,525
7/31/1999 $ 8,457 $ 7,708 $10,775
8/31/1999 $ 8,328 $ 7,646 $11,277
9/30/1999 $ 7,819 $ 7,340 $10,722
10/31/1999 $ 7,737 $ 6,748 $11,186
11/30/1999 $ 8,546 $ 6,619 $12,139
12/31/1999 $ 9,499 $ 6,121 $13,279
1/31/2000 $ 9,290 $ 5,854 $13,348
2/29/2000 $ 9,609 $ 4,779 $13,555
3/31/2000 $10,048 $ 4,889 $13,980
4/30/2000 $ 8,942 $ 5,350 $12,588
5/31/2000 $ 8,639 $ 5,446 $11,804
6/30/2000 $ 9,173 $ 6,173 $12,139
7/31/2000 $ 9,481 $ 6,056 $12,367
8/31/2000 $ 9,729 $ 5,810 $12,057
9/30/2000 $ 9,057 $ 5,103 $10,660
10/31/2000 $ 8,181 $ 4,865 $ 9,764
11/30/2000 $ 8,034 $ 4,217 $ 9,108
12/31/2000 $ 8,359 $ 4,252 $ 9,296
1/31/2001 $ 8,791 $ 4,868 $10,527
2/28/2001 $ 9,171 $ 4,424 $ 9,971
3/31/2001 $ 8,748 $ 3,707 $ 9,140
4/30/2001 $ 9,100 $ 4,083 $ 9,039
5/31/2001 $ 9,832 $ 4,194 $ 8,812
6/30/2001 $ 9,659 $ 4,332 $ 8,551
7/31/2001 $ 8,624 $ 3,746 $ 8,014
8/31/2001 $ 8,168 $ 2,935 $ 7,526
9/30/2001 $ 7,740 $ 2,835 $ 6,330
10/31/2001 $ 8,342 $ 2,907 $ 6,692
11/30/2001 $ 8,438 $ 3,191 $ 7,547
12/31/2001 $ 8,207 $ 3,201 $ 8,303
1/31/2002 $ 8,590 $ 2,901 $ 8,261
2/28/2002 $ 8,861 $ 2,924 $ 7,967
3/31/2002 $ 9,148 $ 3,089 $ 8,538
4/30/2002 $ 9,738 $ 3,224 $ 8,731
5/31/2002 $10,084 $ 3,274 $ 8,453
6/30/2002 $ 9,866 $ 3,164 $ 7,904
7/31/2002 $ 9,551 $ 3,026 $ 7,515
8/31/2002 $ 9,212 $ 2,967 $ 7,188
9/30/2002 $ 8,926 $ 2,730 $ 6,455
10/31/2002 $ 9,010 $ 2,746 $ 6,818
11/30/2002 $ 9,301 $ 2,860 $ 7,116
12/31/2002 $ 9,536 $ 2,752 $ 6,668
1/31/2003 $10,044 $ 2,883 $ 7,036
2/28/2003 $10,271 $ 2,811 $ 6,642
3/31/2003 $10,146 $ 2,703 $ 6,403
4/30/2003 $10,187 $ 2,707 $ 6,335
5/31/2003 $11,034 $ 3,053 $ 6,971
6/30/2003 $11,389 $ 3,248 $ 7,291
7/31/2003 $12,443 $ 3,570 $ 7,969
8/31/2003 $13,089 $ 3,808 $ 8,758
9/30/2003 $13,106 $ 3,837 $ 8,999
10/31/2003 $14,252 $ 4,420 $ 9,657
11/30/2003 $14,252 $ 4,465 $ 9,442
12/31/2003 $15,894 $ 5,161 $ 9,912
1/31/2004 $16,309 $ 5,128 $10,592
2/29/2004 $17,319 $ 5,447 $11,032
3/31/2004 $16,380 $ 4,988 $10,441
4/30/2004 $14,973 $ 4,337 $ 9,666
5/31/2004 $15,478 $ 4,634 $ 9,732
6/30/2004 $15,577 $ 4,606 $ 9,623
7/31/2004 $15,379 $ 4,623 $ 9,438
8/31/2004 $16,100 $ 4,642 $ 9,958
9/30/2004 $16,614 $ 4,986 $10,216
10/31/2004 $16,484 $ 4,865 $10,129
11/30/2004 $17,681 $ 5,354 $10,987
12/31/2004 $17,852 $ 5,259 $11,327
1/31/2005 $17,435 $ 5,144 $10,955
2/28/2005 $18,522 $ 5,526 $11,532
3/31/2005 $18,132 $ 5,241 $10,982
4/30/2005 $18,240 $ 5,262 $11,110
5/31/2005 $18,576 $ 5,313 $11,316
6/30/2005 $18,840 $ 5,535 $11,709
7/31/2005 $19,820 $ 5,937 $12,197
8/31/2005 $19,493 $ 5,969 $11,840
9/30/2005 $20,372 $ 6,320 $12,168
10/31/2005 $19,062 $ 5,701 $11,261
11/30/2005 $20,171 $ 6,103 $11,986
12/31/2005 $20,869 $ 6,298 $12,490
1/31/2006 $22,125 $ 7,185 $13,292
2/28/2006 $22,336 $ 7,411 $13,374
3/31/2006 $22,300 $ 7,648 $13,550
4/30/2006 $23,593 $ 8,049 $14,552
5/31/2006 $22,640 $ 7,634 $13,683
6/30/2006 $22,925 $ 7,792 $13,679
7/31/2006 $23,081 $ 7,998 $13,612
8/31/2006 $23,392 $ 8,173 $14,047
AVERAGE ANNUAL TOTAL RETURN
- ----------------------------------------------
CLASS C 8/31/06
- ----------------------------------------------
1-Year +18.91%
- ----------------------------------------------
5-Year +23.41%
- ----------------------------------------------
10-Year +8.87%
- ----------------------------------------------
ADVISOR CLASS (9/1/96-8/31/06)
[THE FOLLOWING TABLE WAS REPRESENTED AS A LINE GRAPH IN THE PRINTED MATERIAL.]
TEMPLETON CHINA MSCI CHINA MSCI GOLDEN
DATE WORLD FUND INDEX 6 DRAGON INDEX 6
- ------------ ------------------ ------------ ----------------
9/1/1996 $10,000 $10,000 $10,000
9/30/1996 $10,274 $ 9,884 $10,521
10/31/1996 $10,747 $ 9,642 $10,737
11/30/1996 $12,086 $10,755 $11,555
12/31/1996 $12,541 $12,537 $11,593
1/31/1997 $12,421 $12,259 $11,542
2/28/1997 $12,520 $12,619 $11,729
3/31/1997 $12,096 $12,255 $11,151
4/30/1997 $12,584 $13,873 $11,514
5/31/1997 $13,166 $13,717 $12,346
6/30/1997 $12,953 $14,024 $13,259
7/31/1997 $13,690 $15,944 $14,186
8/31/1997 $13,484 $16,885 $12,753
9/30/1997 $13,310 $14,077 $12,767
10/31/1997 $ 9,372 $11,791 $ 9,366
11/30/1997 $ 8,991 $ 9,657 $ 9,273
12/31/1997 $ 8,793 $ 9,371 $ 9,411
1/31/1998 $ 7,012 $ 6,987 $ 8,331
2/28/1998 $ 9,099 $ 9,467 $10,039
3/31/1998 $ 8,968 $ 9,222 $ 9,722
4/30/1998 $ 8,244 $ 8,272 $ 8,731
5/31/1998 $ 6,963 $ 7,187 $ 7,661
6/30/1998 $ 6,455 $ 6,066 $ 7,208
7/31/1998 $ 6,084 $ 4,969 $ 6,795
8/31/1998 $ 5,404 $ 3,623 $ 6,060
9/30/1998 $ 5,987 $ 5,188 $ 6,924
10/31/1998 $ 7,334 $ 5,705 $ 8,736
11/30/1998 $ 7,632 $ 5,886 $ 8,893
12/31/1998 $ 7,095 $ 5,401 $ 8,485
1/31/1999 $ 6,377 $ 4,397 $ 7,989
2/28/1999 $ 6,366 $ 4,211 $ 8,150
3/31/1999 $ 6,948 $ 4,783 $ 9,136
4/30/1999 $ 8,591 $ 5,984 $10,812
5/31/1999 $ 8,085 $ 5,998 $10,074
6/30/1999 $ 9,311 $ 8,808 $11,525
7/31/1999 $ 8,806 $ 7,708 $10,775
8/31/1999 $ 8,680 $ 7,646 $11,277
9/30/1999 $ 8,157 $ 7,340 $10,722
10/31/1999 $ 8,081 $ 6,748 $11,186
11/30/1999 $ 8,934 $ 6,619 $12,139
12/31/1999 $ 9,947 $ 6,121 $13,279
1/31/2000 $ 9,736 $ 5,854 $13,348
2/29/2000 $10,079 $ 4,779 $13,555
3/31/2000 $10,548 $ 4,889 $13,980
4/30/2000 $ 9,395 $ 5,350 $12,588
5/31/2000 $ 9,085 $ 5,446 $11,804
6/30/2000 $ 9,653 $ 6,173 $12,139
7/31/2000 $ 9,987 $ 6,056 $12,367
8/31/2000 $10,256 $ 5,810 $12,057
9/30/2000 $ 9,557 $ 5,103 $10,660
10/31/2000 $ 8,640 $ 4,865 $ 9,764
11/30/2000 $ 8,494 $ 4,217 $ 9,108
12/31/2000 $ 8,847 $ 4,252 $ 9,296
1/31/2001 $ 9,312 $ 4,868 $10,527
2/28/2001 $ 9,722 $ 4,424 $ 9,971
3/31/2001 $ 9,280 $ 3,707 $ 9,140
4/30/2001 $ 9,663 $ 4,083 $ 9,039
5/31/2001 $10,447 $ 4,194 $ 8,812
6/30/2001 $10,271 $ 4,332 $ 8,551
7/31/2001 $ 9,180 $ 3,746 $ 8,014
8/31/2001 $ 8,703 $ 2,935 $ 7,526
9/30/2001 $ 8,253 $ 2,835 $ 6,330
10/31/2001 $ 8,906 $ 2,907 $ 6,692
11/30/2001 $ 9,016 $ 3,191 $ 7,547
12/31/2001 $ 8,778 $ 3,201 $ 8,303
1/31/2002 $ 9,196 $ 2,901 $ 8,261
2/28/2002 $ 9,492 $ 2,924 $ 7,967
3/31/2002 $ 9,807 $ 3,089 $ 8,538
4/30/2002 $10,448 $ 3,224 $ 8,731
5/31/2002 $10,828 $ 3,274 $ 8,453
6/30/2002 $10,601 $ 3,164 $ 7,904
7/31/2002 $10,273 $ 3,026 $ 7,515
8/31/2002 $ 9,916 $ 2,967 $ 7,188
9/30/2002 $ 9,616 $ 2,730 $ 6,455
10/31/2002 $ 9,717 $ 2,746 $ 6,818
11/30/2002 $10,037 $ 2,860 $ 7,116
12/31/2002 $10,300 $ 2,752 $ 6,668
1/31/2003 $10,858 $ 2,883 $ 7,036
2/28/2003 $11,112 $ 2,811 $ 6,642
3/31/2003 $10,986 $ 2,703 $ 6,403
4/30/2003 $11,041 $ 2,707 $ 6,335
5/31/2003 $11,968 $ 3,053 $ 6,971
6/30/2003 $12,365 $ 3,248 $ 7,291
7/31/2003 $13,519 $ 3,570 $ 7,969
8/31/2003 $14,245 $ 3,808 $ 8,758
9/30/2003 $14,294 $ 3,837 $ 8,999
10/31/2003 $15,540 $ 4,420 $ 9,657
11/30/2003 $15,550 $ 4,465 $ 9,442
12/31/2003 $17,352 $ 5,161 $ 9,912
1/31/2004 $17,822 $ 5,128 $10,592
2/29/2004 $18,941 $ 5,447 $11,032
3/31/2004 $17,930 $ 4,988 $10,441
4/30/2004 $16,399 $ 4,337 $ 9,666
5/31/2004 $16,978 $ 4,634 $ 9,732
6/30/2004 $17,105 $ 4,606 $ 9,623
7/31/2004 $16,889 $ 4,623 $ 9,438
8/31/2004 $17,693 $ 4,642 $ 9,958
9/30/2004 $18,282 $ 4,986 $10,216
10/31/2004 $18,154 $ 4,865 $10,129
11/30/2004 $19,476 $ 5,354 $10,987
12/31/2004 $19,685 $ 5,259 $11,327
1/31/2005 $19,238 $ 5,144 $10,955
2/28/2005 $20,459 $ 5,526 $11,532
3/31/2005 $20,052 $ 5,241 $10,982
4/30/2005 $20,190 $ 5,262 $11,110
5/31/2005 $20,568 $ 5,313 $11,316
6/30/2005 $20,877 $ 5,535 $11,709
7/31/2005 $21,979 $ 5,937 $12,197
8/31/2005 $21,640 $ 5,969 $11,840
9/30/2005 $22,625 $ 6,320 $12,168
10/31/2005 $21,191 $ 5,701 $11,261
11/30/2005 $22,443 $ 6,103 $11,986
12/31/2005 $23,242 $ 6,298 $12,490
1/31/2006 $24,657 $ 7,185 $13,292
2/28/2006 $24,909 $ 7,411 $13,374
3/31/2006 $24,889 $ 7,648 $13,550
4/30/2006 $26,355 $ 8,049 $14,552
5/31/2006 $25,303 $ 7,634 $13,683
6/30/2006 $25,647 $ 7,792 $13,679
7/31/2006 $25,850 $ 7,998 $13,612
8/31/2006 $26,211 $ 8,173 $14,047
AVERAGE ANNUAL TOTAL RETURN
- ----------------------------------------------
ADVISOR CLASS 8/31/06
- ----------------------------------------------
1-Year +21.08%
- ----------------------------------------------
5-Year +24.67%
- ----------------------------------------------
10-Year +10.12%
- ----------------------------------------------
Annual Report | 11
Performance Summary (CONTINUED)
ENDNOTES
THE GOVERNMENT'S PARTICIPATION IN THE ECONOMY IS STILL HIGH AND, THEREFORE,
TEMPLETON CHINA WORLD FUND'S INVESTMENTS IN CHINA WILL BE SUBJECT TO LARGER
REGULATORY RISK LEVELS COMPARED TO MANY OTHER COUNTRIES. IN ADDITION, SPECIAL
RISKS ARE ASSOCIATED WITH INTERNATIONAL INVESTING, INCLUDING CURRENCY
FLUCTUATIONS, ECONOMIC INSTABILITY AND POLITICAL DEVELOPMENTS. INVESTMENTS IN
DEVELOPING MARKETS INVOLVE HEIGHTENED RISKS RELATED TO THE SAME FACTORS. ALSO,
AS A NONDIVERSIFIED INVESTMENT COMPANY INVESTING IN "CHINA COMPANIES," THE FUND
MAY INVEST IN A RELATIVELY SMALL NUMBER OF ISSUERS AND, AS A RESULT, BE SUBJECT
TO GREATER RISK OF LOSS WITH RESPECT TO ITS PORTFOLIO SECURITIES. THE FUND MAY
ALSO EXPERIENCE GREATER VOLATILITY THAN A FUND THAT IS MORE BROADLY DIVERSIFIED
GEOGRAPHICALLY. THE FUND'S PROSPECTUS ALSO INCLUDES A DESCRIPTION OF THE MAIN
INVESTMENT RISKS.
CLASS B: These shares have higher annual fees and expenses than Class A
shares.
CLASS C: Prior to 1/1/04, these shares were offered with an initial sales
charge; thus actual total returns would have differed. These
shares have higher annual fees and expenses than Class A shares.
ADVISOR CLASS: Shares are available to certain eligible investors as described
in the prospectus.
1. Effective after the close of business on 8/8/03, Templeton China World
Fund, Inc. (Closed-End Fund), was converted into an open-end fund in a
transaction whereby the Closed-End Fund transferred all of its assets,
subject to its liabilities, to the Fund in exchange for Advisor Class
shares. Total return information is based upon the Closed-End Fund's
performance (as calculated using net asset values, not market values),
which has been restated to reflect all charges, fees and expenses
currently applicable to the Fund and each class. The Closed-End Fund was
offered without a sales charge and Rule 12b-1 fees. On 8/11/03, the Fund
began offering Class A, B and C shares. For periods prior to 8/11/03,
performance quotations are based upon the Closed-End Fund's performance
restated to take into account all charges, fees and expenses applicable to
the Fund and each class, including that class's current, applicable,
maximum sales charge and Rule 12b-1 fees. Beginning on 8/11/03, actual
class performance is used reflecting all charges, fees and expenses
applicable to the Fund and each class.
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. In accordance with SEC rules, we provide standardized average annual total
return information through the latest calendar quarter.
6. Source: Standard & Poor's Micropal. The MSCI China Index is a free
float-adjusted, market capitalization-weighted index designed to measure
equity market performance in China. The MSCI Golden Dragon Index is an
aggregate of the MSCI Hong Kong Index, the MSCI China Free Index and the
MSCI Taiwan@65% Index. The MSCI Taiwan Index has an inclusion weight at
65% of its market capitalization in the MSCI index series.
12 | Annual Report
Your Fund's Expenses
As a Fund shareholder, you can incur two types of costs:
o Transaction costs, including sales charges (loads) on Fund purchases and
redemption fees; and
o 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 | 13
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 A VALUE 3/1/06 VALUE 8/31/06 PERIOD* 3/1/06-8/31/06
- -------------------------------------------------------------------------------------------------------
Actual $1,000 $1,049.70 $10.64
- -------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,014.82 $10.46
- -------------------------------------------------------------------------------------------------------
CLASS B
- -------------------------------------------------------------------------------------------------------
Actual $1,000 $1,046.30 $13.98
- -------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,011.54 $13.74
- -------------------------------------------------------------------------------------------------------
CLASS C
- -------------------------------------------------------------------------------------------------------
Actual $1,000 $1,046.40 $14.03
- -------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,011.49 $13.79
- -------------------------------------------------------------------------------------------------------
ADVISOR CLASS
- -------------------------------------------------------------------------------------------------------
Actual $1,000 $1,051.90 $ 8.84
- -------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,016.59 $ 8.69
- -------------------------------------------------------------------------------------------------------
* Expenses are equal to the annualized expense ratio for each class (A:
2.06%; B: 2.71%; C: 2.72%; and Advisor: 1.71%), multiplied by the average
account value over the period, multiplied by 184/365 to reflect the
one-half year period.
14 | Annual Report
Templeton China World Fund
FINANCIAL HIGHLIGHTS
------------------------------------------------------------
YEAR ENDED AUGUST 31,
CLASS A 2006 2005 2004 2003 g
------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ........................... $ 21.67 $ 17.97 $ 14.89 $ 14.30
------------------------------------------------------------
Income from investment operations a:
Net investment income b ..................................... 0.29 0.43 0.21 0.12
Net realized and unrealized gains (losses) .................. 4.12 3.46 3.24 0.40
------------------------------------------------------------
Total from investment operations ............................. 4.41 3.89 3.45 0.52
------------------------------------------------------------
Less distributions from net investment income ................ (0.32) (0.19) (0.40) --
------------------------------------------------------------
Redemption fees .............................................. -- d -- d 0.03 0.07
------------------------------------------------------------
Net asset value, end of year ................................. $ 25.76 $ 21.67 $ 17.97 $ 14.89
============================================================
Total return c ............................................... 20.65% 21.85% 23.80% 4.13%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) .............................. $ 262,346 $ 111,193 $ 43,179 $ 3,166
Ratios to average net assets:
Expenses .................................................... 2.06% e 2.08% e 2.14% e,f 3.03% h
Net investment income ....................................... 1.10% 1.86% 1.09% 38.74% h
Portfolio turnover rate ...................................... 12.96% 9.66% 30.82% 19.99%
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 repurchase 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 Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable, and is not annualized for periods less than
one year.
d Amount rounds to less than $0.01 per share.
e Benefit of expense reduction rounds to less than 0.01%.
f Ratio of expenses to average net assets, excluding payments by affiliate
were 2.30%.
g For the period August 11, 2003 (effective date) to August 31, 2003.
h Represents annualized ratios for a 21 day period and therefore are not
representative of the Fund's income and expense for the entire fiscal
year.
Annual Report |
The accompanying notes are an integral part of these financial statements. | 15
Templeton China World Fund
FINANCIAL HIGHLIGHTS (CONTINUED)
------------------------------------------------------------
YEAR ENDED AUGUST 31,
CLASS B 2006 2005 2004 2003 g
------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ........................... $ 21.47 $ 17.84 $ 14.88 $ 14.30
------------------------------------------------------------
Income from investment operations a:
Net investment income b ..................................... 0.08 0.24 0.16 0.08
Net realized and unrealized gains (losses) .................. 4.15 3.51 3.16 0.43
------------------------------------------------------------
Total from investment operations ............................. 4.23 3.75 3.32 0.51
------------------------------------------------------------
Less distributions from net investment income ................ (0.17) (0.12) (0.39) --
------------------------------------------------------------
Redemption fees .............................................. -- d -- d 0.03 0.07
------------------------------------------------------------
Net asset value, end of year ................................. $ 25.53 $ 21.47 $ 17.84 $ 14.88
============================================================
Total return c ............................................... 19.87% 21.12% 22.95% 4.06%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) .............................. $ 15,269 $ 12,264 $ 8,630 $ 362
Ratios to average net assets:
Expenses .................................................... 2.70% e 2.73% e 2.79% e,f 3.68% h
Net investment income ....................................... 0.46% 1.21% 0.44% 38.09% h
Portfolio turnover rate ...................................... 12.96% 9.66% 30.82% 19.99%
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 repurchase 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 Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable, and is not annualized for periods less than
one year.
d Amount rounds to less than $0.01 per share.
e Benefit of expense reduction rounds to less than 0.01%.
f Ratio of expenses to average net assets, excluding payments by affiliate
were 2.95%.
g For the period August 11, 2003 (effective date) to August 31, 2003.
h Represents annualized ratios for a 21 day period and therefore are not
representative of the Fund's income and expense for the entire fiscal
year.
16 | The accompanying notes are an integral part of these financial statements.
| Annual Report
Templeton China World Fund
FINANCIAL HIGHLIGHTS (CONTINUED)
------------------------------------------------------------
YEAR ENDED AUGUST 31,
CLASS C 2006 2005 2004 2003 g
------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ........................... $ 21.49 $ 17.85 $ 14.88 $ 14.30
------------------------------------------------------------
Income from investment operations a:
Net investment income b ..................................... 0.13 0.29 0.12 0.11
Net realized and unrealized gains (losses) .................. 4.10 3.46 3.21 0.40
------------------------------------------------------------
Total from investment operations ............................. 4.23 3.75 3.33 0.51
------------------------------------------------------------
Less distributions from net investment income ................ (0.24) (0.11) (0.39) --
------------------------------------------------------------
Redemption fees .............................................. -- d -- d 0.03 0.07
------------------------------------------------------------
Net asset value, end of year ................................. $ 25.48 $ 21.49 $ 17.85 $ 14.88
============================================================
Total return c ............................................... 19.91% 21.10% 23.02% 4.06%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) .............................. $ 107,886 $ 45,738 $ 20,603 $ 652
Ratios to average net assets:
Expenses .................................................... 2.71% e 2.68% e 2.75% e,f 3.68% h
Net investment income ....................................... 0.45% 1.26% 0.48% 38.09% h
Portfolio turnover rate ...................................... 12.96% 9.66% 30.82% 19.99%
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 repurchase 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 Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable, and is not annualized for periods less than
one year.
d Amount rounds to less than $0.01 per share.
e Benefit of expense reduction rounds to less than 0.01%.
f Ratio of expenses to average net assets, excluding payments by affiliate
were 2.91%.
g For the period August 11, 2003 (effective date) to August 31, 2003.
h Represents annualized ratios for a 21 day period and therefore are not
representative of the Fund's income and expense for the entire fiscal
year.
Annual Report |
The accompanying notes are an integral part of these financial statements. | 17
Templeton China World Fund
FINANCIAL HIGHLIGHTS (CONTINUED)
-------------------------------------------------------------------------
YEAR ENDED AUGUST 31,
ADVISOR CLASS 2006 2005 2004 2003 g 2002
-------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year .................... $ 21.78 $ 18.03 $ 14.90 $ 10.64 $ 9.52
-------------------------------------------------------------------------
Income from investment operations a:
Net investment income b .............................. 0.33 0.42 0.24 0.43 0.21
Net realized and unrealized gains (losses) ........... 4.18 3.56 3.27 4.08 0.98
-------------------------------------------------------------------------
Total from investment operations ...................... 4.51 3.98 3.51 4.51 1.19
-------------------------------------------------------------------------
Capital share repurchases ............................. -- -- -- -- 0.11
-------------------------------------------------------------------------
Less distributions from net investment income ......... (0.36) (0.23) (0.41) (0.32) (0.18)
-------------------------------------------------------------------------
Redemption fees ....................................... -- d -- d 0.03 0.07 --
-------------------------------------------------------------------------
Net asset value, end of year .......................... $ 25.93 $ 21.78 $ 18.03 $ 14.90 $ 10.64
=========================================================================
Market value, end of year c ........................... -- -- -- -- $ 9.10
=========================================================================
Total return (based on market value per share) ........ -- -- -- -- 20.27%
Total return (based on net asset value per share) ..... 21.08% 22.31% 24.21% 43.95% --
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ....................... $ 245,331 $ 190,844 $ 161,599 $ 181,913 $ 173,204
Ratios to average net assets:
Expenses ............................................. 1.71% e 1.73% e 1.79% e,f 2.10% f 1.66%
Net investment income ................................ 1.45% 2.21% 1.44% 3.66% 2.01%
Portfolio turnover rate ............................... 12.96% 9.66% 30.82% 19.99% 44.62%
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 repurchase 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 Based on the last sale of the New York Stock Exchange.
d Amount rounds to less than $0.01 per share.
e Benefit of expense reduction rounds to less than 0.01%.
f Ratio of expenses to average net assets, excluding payments by affiliate
for the years ended August 31, 2003 and 2004, were 2.63% and 1.95%,
respectively.
g On August 8, 2003, the Fund converted from a closed-end fund to an
open-end fund whereby the shares of the closed-end fund were exchanged for
Advisor Class shares. Based on historical information, the information
included is for operation of the Fund as a closed-end fund, and does not
reflect expenses applicable to an open-end fund.
18 | The accompanying notes are an integral part of these financial statements.
| Annual Report
Templeton China World Fund
STATEMENT OF INVESTMENTS, AUGUST 31, 2006
- ---------------------------------------------------------------------------------------------------------------------------
COUNTRY SHARES VALUE
- ---------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS 94.9%
AIR FREIGHT & LOGISTICS 0.1%
Sinotrans Ltd., H ................................................... China 1,238,000 $ 391,588
--------------
AIRLINES 0.4%
Air China Ltd., H ................................................... China 6,088,000 2,176,173
a Air China Ltd., H, 144A ............................................. China 500,000 178,726
--------------
2,354,899
--------------
AUTO COMPONENTS 1.6%
Cheng Shin Rubber Industry Co. Ltd. ................................. Taiwan 7,357,897 6,184,516
Norstar Founders Group Ltd. ......................................... Hong Kong 6,078,000 2,102,262
Weifu High-Technology Co. Ltd., B ................................... China 1,212,987 795,427
Xinyi Glass Holding Co. Ltd. ........................................ China 2,020,000 649,330
--------------
9,731,535
--------------
AUTOMOBILES 0.9%
b Brilliance China Automotive Holdings Ltd. ........................... China 3,642,000 552,581
China Motor Corp. ................................................... Taiwan 4,446,715 3,365,856
Chongqing Changan Automobile Co. Ltd., B ............................ China 4,046,380 1,951,066
--------------
5,869,503
--------------
CAPITAL MARKETS 0.4%
Yuanta Core Pacific Securities Co. .................................. Taiwan 3,784,156 2,599,767
--------------
COMMERCIAL BANKS 12.9%
a,b Bank of China Ltd., H, 144A ......................................... China 41,306,000 17,898,514
China Construction Bank Corp., H .................................... China 1,003,000 434,615
a China Construction Bank Corp., H, 144A .............................. China 35,740,000 15,486,682
Chinatrust Financial Holding Co. Ltd. ............................... Taiwan 14,035,842 9,194,808
DBS Group Holdings Ltd. ............................................. Singapore 308,000 3,522,796
HSBC Holdings PLC ................................................... United Kingdom 1,262,036 22,912,917
Mega Financial Holding Co. Ltd. ..................................... Taiwan 18,334,000 12,177,709
--------------
81,628,041
--------------
COMMUNICATIONS EQUIPMENT 0.6%
D-Link Corp. ........................................................ Taiwan 3,914,373 3,843,453
ZTE Corp., H ........................................................ China 46,000 157,331
--------------
4,000,784
--------------
COMPUTERS & PERIPHERALS 3.1%
Acer Inc. ........................................................... Taiwan 4,008,559 6,190,260
Asustek Computer Inc. ............................................... Taiwan 2,293,294 5,144,853
Lite-On IT Corp. .................................................... Taiwan 3,955,160 4,370,442
b Lite-On Technology Corp. ............................................ Taiwan 3,110,586 3,862,702
--------------
19,568,257
--------------
CONSTRUCTION MATERIALS 0.2%
Anhui Conch Cement Co. Ltd., H ...................................... China 632,000 1,194,561
--------------
Annual Report | 19
Templeton China World Fund
STATEMENT OF INVESTMENTS, AUGUST 31, 2006 (CONTINUED)
- ---------------------------------------------------------------------------------------------------------------------------
COUNTRY SHARES VALUE
- ---------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS (CONTINUED)
DISTRIBUTORS 2.2%
China Resources Enterprise Ltd. ..................................... China 5,548,000 $ 12,626,520
Test-Rite International Co. Ltd. .................................... Taiwan 2,334,468 1,348,337
--------------
13,974,857
--------------
DIVERSIFIED TELECOMMUNICATION SERVICES 2.9%
China Telecom Corp. Ltd., H ......................................... China 53,807,833 18,126,783
--------------
ELECTRIC UTILITIES 3.0%
Cheung Kong Infrastructure Holdings Ltd. ............................ Hong Kong 6,024,548 19,094,810
--------------
ELECTRICAL EQUIPMENT 1.1%
BYD Co. Ltd., H ..................................................... China 1,579,500 3,574,425
Phoenixtec Power Co. Ltd. ........................................... Taiwan 3,545,055 3,631,699
--------------
7,206,124
--------------
ELECTRONIC EQUIPMENT & INSTRUMENTS 2.6%
Delta Electronics Inc. .............................................. Taiwan 2,890,521 8,039,964
Synnex Technology International Corp. ............................... Taiwan 7,676,680 6,814,174
b Yageo Corp. ......................................................... Taiwan 4,175,000 1,440,487
--------------
16,294,625
--------------
FOOD & STAPLES RETAILING 5.9%
Dairy Farm International Holdings Ltd. .............................. Hong Kong 10,219,776 31,476,910
President Chain Store Corp. ......................................... Taiwan 2,844,088 5,792,616
--------------
37,269,526
--------------
FOOD PRODUCTS 1.5%
COFCO International Ltd. ............................................ China 4,114,000 2,771,848
People's Food Holdings Ltd. ......................................... China 2,791,000 1,915,349
Uni-President Enterprises Corp. ..................................... Taiwan 6,189,950 4,722,998
--------------
9,410,195
--------------
HOTELS, RESTAURANTS & LEISURE 0.8%
Fairwood Holdings Ltd. .............................................. Hong Kong 75,500 71,935
The Hongkong and Shanghai Hotels Ltd. ............................... Hong Kong 4,248,978 5,146,468
--------------
5,218,403
--------------
HOUSEHOLD DURABLES 0.0% c
Samson Holding Ltd. ................................................. Hong Kong 304,000 127,037
--------------
INDEPENDENT POWER PRODUCERS & ENERGY TRADERS 3.2%
Datang International Power Generation Co. Ltd., H ................... China 11,586,320 7,731,910
Guangdong Electric Power Development Co. Ltd., B .................... China 11,958,943 5,658,672
Huadian Power International Corp. Ltd., H ........................... China 16,098,000 3,994,875
Huaneng Power International, Inc., H ................................ China 3,692,776 2,454,808
--------------
19,840,265
--------------
20 | Annual Report
Templeton China World Fund
STATEMENT OF INVESTMENTS, AUGUST 31, 2006 (CONTINUED)
- ---------------------------------------------------------------------------------------------------------------------------
COUNTRY SHARES VALUE
- ---------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS (CONTINUED)
INDUSTRIAL CONGLOMERATES 2.8%
Citic Pacific Ltd. .................................................. China 1,589,092 $ 5,077,493
LG Corp. ............................................................ South Korea 121,110 3,609,489
Shanghai Industrial Holdings Ltd. ................................... China 4,627,253 9,031,689
--------------
17,718,671
--------------
INSURANCE 1.4%
China Life Insurance Co. Ltd., H .................................... China 4,945,000 8,774,438
--------------
IT SERVICES 0.1%
Travelsky Technology Ltd., H ........................................ China 435,000 508,985
--------------
MACHINERY 1.2%
China International Marine Containers (Group) Co. Ltd., B ........... China 5,001,733 6,431,236
Yungtay Engineering Co. Ltd. ........................................ Taiwan 2,524,000 1,254,481
--------------
7,685,717
--------------
MEDIA 0.0% c
Next Media Ltd. ..................................................... Hong Kong 80,000 44,232
--------------
METALS & MINING 0.2%
Aluminum Corp. of China Ltd., H ..................................... China 2,132,000 1,521,438
--------------
OFFICE ELECTRONICS 0.2%
Kinpo Electronics Inc. .............................................. Taiwan 3,103,500 1,047,205
--------------
OIL, GAS & CONSUMABLE FUELS 22.4%
China Petroleum and Chemical Corp., H ............................... China 56,549,395 33,665,331
China Shenhua Energy Co. Ltd., H .................................... China 11,031,000 19,516,739
CNOOC Ltd. .......................................................... China 36,015,000 31,489,537
a CNOOC Ltd., 144A .................................................... China 978,000 855,109
PetroChina Co. Ltd., H .............................................. China 44,791,903 50,509,498
a PetroChina Co. Ltd., H, 144A ........................................ China 4,460,000 5,029,310
--------------
141,065,524
--------------
PAPER & FOREST PRODUCTS 1.0%
b Nine Dragons Paper Holdings Ltd. .................................... China 3,607,000 3,306,813
Shandong Chenming Paper Holdings Ltd., B ............................ China 6,705,000 2,939,863
--------------
6,246,676
--------------
PHARMACEUTICALS 0.3%
Tong Ren Tang Technologies Co. Ltd., H .............................. China 1,056,000 1,914,507
--------------
REAL ESTATE 3.1%
Cheung Kong (Holdings) Ltd. ......................................... Hong Kong 1,360,690 15,028,869
Henderson Investment Ltd. ........................................... Hong Kong 2,641,756 4,762,277
--------------
19,791,146
--------------
Annual Report | 21
Templeton China World Fund
STATEMENT OF INVESTMENTS, AUGUST 31, 2006 (CONTINUED)
- ---------------------------------------------------------------------------------------------------------------------------
COUNTRY SHARES VALUE
- ---------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS (CONTINUED)
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT 4.9%
Faraday Technology Corp. ............................................ Taiwan 331,229 $ 507,476
Realtek Semiconductor Corp. ......................................... Taiwan 3,182,550 4,024,626
Samsung Electronics Co. Ltd. ........................................ South Korea 5,510 3,725,684
Sunplus Technology Co. Ltd. ......................................... Taiwan 3,528,717 3,384,333
Taiwan Semiconductor Manufacturing Co. Ltd. ......................... Taiwan 10,945,762 19,332,100
--------------
30,974,219
--------------
TEXTILES, APPAREL & LUXURY GOODS 0.1%
Tack Fat Group International Ltd. ................................... Hong Kong 6,352,000 718,732
--------------
TRANSPORTATION INFRASTRUCTURE 3.3%
Cosco Pacific Ltd. .................................................. China 1,641,449 3,680,848
Hainan Meilan International Airport Co. Ltd., H ..................... China 3,717,000 1,696,660
Hopewell Holdings Ltd. .............................................. Hong Kong 5,384,000 15,368,517
--------------
20,746,025
--------------
WIRELESS TELECOMMUNICATION SERVICES 10.5%
China Mobile Ltd. ................................................... China 9,450,770 63,553,990
Taiwan Mobile Co. Ltd. .............................................. Taiwan 2,496,930 2,322,655
--------------
65,876,645
--------------
TOTAL COMMON STOCKS (COST $443,303,391).............................. 598,535,720
--------------
----------------
PRINCIPAL AMOUNT
----------------
SHORT TERM INVESTMENTS 4.6%
GOVERNMENT AND AGENCY SECURITIES 4.6%
d Federal Home Loan Bank, 9/01/06 ..................................... United States $ 9,552,000 9,552,000
d U.S. Treasury Bills, 9/07/06 - 10/05/06 ............................. United States 19,908,000 19,851,739
--------------
TOTAL SHORT TERM INVESTMENTS (COST $29,401,918) ..................... 29,403,739
--------------
TOTAL INVESTMENTS (COST $472,705,309) 99.5% ......................... 627,939,459
OTHER ASSETS, LESS LIABILITIES 0.5% ................................. 2,892,551
--------------
NET ASSETS 100.0% ................................................... $ 630,832,010
==============
a Security was purchased pursuant to Rule 144A under the Securities Act of
1933 and may be sold in transactions exempt from registration only to
qualified institutional buyers or in a public offering registered under
the Securities Act of 1933. These securities have been deemed liquid under
the guidelines approved by the Fund's Board of Trustees. At August 31,
2006, the aggregate value of these securities was $39,448,341,
representing 6.25% of net assets.
b Non-income producing for the twelve months ended August 31, 2006.
c Rounds to less than 0.1% of net assets.
d The security is traded on a discount basis with no stated coupon rate.
22 | The accompanying notes are an integral part of these financial statements.
| Annual Report
Templeton China World Fund
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
August 31, 2006
Assets:
Investments in securities:
Cost ........................................................................... $ 472,705,309
=============
Value .......................................................................... $ 627,939,459
Cash ............................................................................ 2,954
Foreign currency, at value (cost $188,580) ...................................... 188,076
Receivables:
Investment securities sold ..................................................... 855,697
Capital shares sold ............................................................ 2,087,065
Dividends ...................................................................... 1,937,475
-------------
Total assets ............................................................... 633,010,726
-------------
Liabilities:
Payables:
Capital shares redeemed ........................................................ 939,023
Affiliates ..................................................................... 1,068,996
Accrued expenses and other liabilities .......................................... 170,697
-------------
Total liabilities .......................................................... 2,178,716
-------------
Net assets, at value ..................................................... $ 630,832,010
=============
Net assets consist of:
Paid-in capital ................................................................. $ 480,576,858
Undistributed net investment income ............................................. 5,790,063
Net unrealized appreciation (depreciation) ...................................... 155,228,662
Accumulated net realized gain (loss) ............................................ (10,763,573)
-------------
Net assets, at value ..................................................... $ 630,832,010
=============
CLASS A:
Net assets, at value ............................................................ $ 262,346,156
=============
Shares outstanding .............................................................. 10,182,832
=============
Net asset value per share a ..................................................... $ 25.76
=============
Maximum offering price per share (net asset value per share / 94.25%) .......... $ 27.33
=============
CLASS B:
Net assets, at value ............................................................ $ 15,268,611
=============
Shares outstanding .............................................................. 598,073
=============
Net asset value and maximum offering price per share a .......................... $ 25.53
=============
CLASS C:
Net assets, at value ............................................................ $ 107,886,388
=============
Shares outstanding .............................................................. 4,233,672
=============
Net asset value and maximum offering price per share a .......................... $ 25.48
=============
ADVISOR CLASS:
Net assets, at value ............................................................ $ 245,330,855
=============
Shares outstanding .............................................................. 9,461,886
=============
Net asset value and maximum offering price per share a .......................... $ 25.93
=============
a Redemption price is equal to net asset value less contingent deferred
sales charges, if applicable, and redemption fees retained by the Fund.
Annual Report |
The accompanying notes are an integral part of these financial statements. | 23
Templeton China World Fund
FINANCIAL STATEMENTS (CONTINUED)
STATEMENT OF OPERATIONS
for the year ended August 31, 2006
Investment income:
Dividends (net of foreign taxes of $1,347,640)................................... $ 14,110,871
Interest (net of foreign taxes of $114).......................................... 1,825,792
-------------
Total investment income..................................................... 15,936,663
-------------
Expenses:
Management fees (Note 3a)........................................................ 6,290,919
Administrative fees (Note 3b).................................................... 1,006,304
Distribution fees (Note 3c)
Class A......................................................................... 676,851
Class B......................................................................... 142,738
Class C......................................................................... 780,432
Transfer agent fees (Note 3e).................................................... 727,856
Custodian fees (Note 4).......................................................... 297,628
Reports to shareholders.......................................................... 81,466
Registration and filing fees..................................................... 143,945
Professional fees................................................................ 9,432
Trustees' fees and expenses...................................................... 41,374
Other............................................................................ 20,859
-------------
Total expenses.............................................................. 10,219,804
Expense reductions (Note 4)................................................. (4,032)
-------------
Net expenses.............................................................. 10,215,772
-------------
Net investment income................................................... 5,720,891
-------------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments..................................................................... 23,507,652
Foreign currency transactions................................................... 70,504
-------------
Net realized gain (loss).................................................... 23,578,156
-------------
Net change in unrealized appreciation (depreciation) on:
Investments..................................................................... 57,188,317
Translation of assets and liabilities denominated in foreign currencies......... 26,797
-------------
Net change in unrealized appreciation (depreciation)........................ 57,215,114
-------------
Net realized and unrealized gain (loss)........................................... 80,793,270
-------------
Net increase (decrease) in net assets resulting from operations................... $ 86,514,161
=============
24 | The accompanying notes are an integral part of these financial statements.
| Annual Report
Templeton China World Fund
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF CHANGES IN NET ASSETS
------------------------------
YEAR ENDED AUGUST 31,
2006 2005
------------------------------
Increase (decrease) in net assets:
Operations:
Net investment income ...................................................................... $ 5,720,891 $ 5,686,790
Net realized gain (loss) from investments and foreign currency transactions ................ 23,578,156 9,162,080
Net change in unrealized appreciation (depreciation) on investments and translation of
assets and liabilities denominated in foreign currencies .................................. 57,215,114 39,503,571
------------------------------
Net increase (decrease) in net assets resulting from operations ........................ 86,514,161 54,352,441
Distributions to shareholders from:
Net investment income:
Class A ................................................................................... (1,807,042) (489,886)
Class B ................................................................................... (97,993) (58,609)
Class C ................................................................................... (561,314) (125,851)
Advisor Class ............................................................................. (3,160,482) (1,971,461)
------------------------------
Total distributions to shareholders ......................................................... (5,626,831) (2,645,807)
==============================
Capital share transactions: (Note 2)
Class A ................................................................................... 121,293,954 55,617,034
Class B ................................................................................... 593,315 1,638,322
Class C ................................................................................... 50,823,588 19,848,842
Advisor Class ............................................................................. 17,173,947 (2,790,819)
------------------------------
Total capital share transactions ............................................................ 189,884,804 74,313,379
------------------------------
Redemption fees ............................................................................. 20,792 6,987
------------------------------
Net increase (decrease) in net assets .................................................. 270,792,926 126,027,000
Net assets:
Beginning of year ........................................................................... 360,039,084 234,012,084
------------------------------
End of year ................................................................................. $ 630,832,010 $ 360,039,084
==============================
Undistributed net investment income included in net assets:
End of year ................................................................................. $ 5,790,063 $ 5,626,297
==============================
Annual Report |
The accompanying notes are an integral part of these financial statements. | 25
Templeton China World Fund
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Templeton China World Fund (the Fund) is registered under the Investment Company
Act of 1940 (1940 Act) as a non-diversified, open-end investment company. The
Fund offers four classes of shares: Class A, Class B, Class C, and Advisor
Class. Effective March 1, 2005, Class B shares are only offered to existing
Class B shareholders in the form of reinvested distributions and certain
exchanges from other Franklin Templeton Class B shares. 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.
Government securities generally trade in the over-the-counter market rather than
on a securities exchange. The Fund may utilize independent pricing services,
quotations from bond dealers, and information with respect to bond and note
transactions, to assist in determining a current market value for each security.
The Fund's pricing services may use valuation models or matrix pricing which
considers information with respect to comparable bond and note transactions,
quotations from bond dealers, or by reference to other securities that are
considered comparable in such characteristics as rating, interest rate and
maturity date, option adjusted spread models, prepayment projections, interest
rate spreads and yield curves, to determine current value.
Foreign securities are valued as of the close of trading on the foreign stock
exchange on which the security is primarily traded, or the NYSE, whichever is
earlier. If no sale is reported at that time, the foreign security will be
valued within the range of the most recent quoted bid and ask prices. The value
is then converted into its U.S. dollar equivalent at the foreign exchange rate
in effect at the close of the NYSE on the day that the value of the foreign
security is determined.
The Fund has procedures to determine the fair value of individual securities and
other assets for which market prices are not readily available or which may not
be reliably priced. Methods for valuing these securities may include:
fundamental analysis, matrix pricing, discounts from market prices of similar
securities, or discounts applied due to the nature and duration of restrictions
on the disposition of the securities. Due to the inherent uncertainty of
valuations of such securities, the fair values may differ significantly from the
values that would have been used had a ready market for such investments
existed. Occasionally, events occur between the time at which trading in a
security is completed and the close of the NYSE that might call into
26 | Annual Report
Templeton China World Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
A. SECURITY VALUATION (CONTINUED)
question the availability (including the reliability) of the value of a
portfolio security held by the Fund. The investment manager monitors price
movements following the close of trading in foreign stock markets through a
series of country specific market proxies (such as baskets of American
Depository Receipts, futures contracts and exchange traded funds). These price
movements are measured against established trigger thresholds for each specific
market proxy to assist in determining if an event has occurred. If such an event
occurs, the securities may be valued using fair value procedures, which may
include the use of independent pricing services. All security valuation
procedures are approved by the Fund'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 Fund'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 on a specified date. Realized and unrealized gains and losses on these
contracts are included in the Statement of Operations.
Annual Report | 27
Templeton China World Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
C. FOREIGN CURRENCY CONTRACTS (CONTINUED)
The risks of these contracts include movement in the values of the foreign
currencies relative to the U.S. dollar and the possible inability of the
counterparties to fulfill their obligations under the contracts, which may be in
excess of the amount reflected in the Statement of Assets and Liabilities.
D. INCOME TAXES
No provision has been made for U.S. income taxes because the Fund intends 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.
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.
E. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS
Security transactions are accounted for on trade date. Realized gains and losses
on security transactions are determined on a specific identification basis.
Interest income and estimated expenses are accrued daily. Amortization of
premium and accretion of discount on debt securities are included in interest
income. Dividend income is recorded on the ex-dividend date except that certain
dividends from foreign securities are recognized as soon as the Fund is notified
of the ex-dividend date. Distributions to shareholders are recorded on the
ex-dividend date and are determined according to income tax regulations (tax
basis). Distributable earnings determined on a tax basis may differ from
earnings recorded in accordance with accounting principles generally accepted in
the United States. 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.
Realized and unrealized gains and losses and net investment income, other than
class specific expenses, are allocated daily to each class of shares based upon
the relative proportion of net assets of each class. Differences in class-level
expenses may result in payment of different per share distributions by class.
28 | Annual Report
Templeton China World Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
F. ACCOUNTING ESTIMATES
The preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the amounts of income
and expenses during the reporting period. Actual results could differ from those
estimates.
G. REDEMPTION FEES
A short term trading redemption fee will be imposed, with some exceptions, on
any Fund shares that are redeemed or exchanged within seven calendar days
following their purchase date. The redemption fee is 2% of the amount redeemed.
Such fees are retained by the Fund and accounted for as an addition to paid-in
capital.
H. GUARANTEES AND INDEMNIFICATIONS
Under the Fund's organizational documents, its officers and trustees are
indemnified by the Fund against certain liabilities arising out of the
performance of their duties to the Fund. Additionally, in the normal course of
business, the Fund enters into contracts with service providers that contain
general indemnification clauses. The Fund's maximum exposure under these
arrangements is unknown as this would involve future claims that may be made
against the Fund that have not yet occurred. However, based on experience, the
Fund expects the risk of loss to be remote.
2. SHARES OF BENEFICIAL INTEREST
At August 31, 2006, there were an unlimited number of shares authorized (without
par value). Transactions in the Fund's shares were as follows:
-------------------------------------------------------------
YEAR ENDED AUGUST 31,
2006 2005
-------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
-------------------------------------------------------------
CLASS A SHARES:
Shares sold ...................... 6,990,835 $ 168,972,851 3,577,879 $ 72,635,554
Shares issued in reinvestment
of distributions ................ 69,862 1,477,583 23,212 419,671
Shares redeemed .................. (2,008,744) (49,156,480) (873,377) (17,438,191)
-------------------------------------------------------------
Net increase (decrease) .......... 5,051,953 $ 121,293,954 2,727,714 $ 55,617,034
=============================================================
CLASS B SHARES:
Shares sold ...................... 149,296 $ 3,566,089 173,565 $ 3,347,695
Shares issued in reinvestment
of distributions ................ 4,065 85,646 2,789 50,234
Shares redeemed .................. (126,627) (3,058,420) (88,754) (1,759,607)
-------------------------------------------------------------
Net increase (decrease) .......... 26,734 $ 593,315 87,600 $ 1,638,322
=============================================================
Annual Report | 29
Templeton China World Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SHARES OF BENEFICIAL INTEREST (CONTINUED)
-------------------------------------------------------------
YEAR ENDED AUGUST 31,
2006 2005
-------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
-------------------------------------------------------------
CLASS C SHARES:
Shares sold ...................... 2,715,102 $ 65,435,922 1,263,454 $ 25,574,673
Shares issued in reinvestment
of distributions ................ 21,093 443,585 5,672 102,262
Shares redeemed .................. (630,397) (15,055,919) (295,678) (5,828,093)
-------------------------------------------------------------
Net increase (decrease) .......... 2,105,798 $ 50,823,588 973,448 $ 19,848,842
=============================================================
ADVISOR CLASS SHARES:
Shares sold ...................... 1,597,171 $ 38,646,324 908,097 $ 19,131,449
Shares issued in reinvestment
of distributions ................ 56,892 1,207,251 34,752 629,703
Shares redeemed .................. (955,594) (22,679,628) (1,142,027) (22,551,971)
-------------------------------------------------------------
Net increase (decrease) .......... 698,469 $ 17,173,947 (199,178) $ (2,790,819)
=============================================================
3. TRANSACTIONS WITH AFFILIATES
Franklin Resources, Inc. is the holding company for various subsidiaries that
together are referred to as Franklin Templeton Investments. Certain officers and
trustees of the Fund are also officers and/or directors of the following
subsidiaries:
- --------------------------------------------------------------------------------------
SUBSIDIARY AFFILIATION
- --------------------------------------------------------------------------------------
Templeton Asset Management Ltd. (TAML) 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 TAML based on the average weekly
net assets of the Fund as follows:
- --------------------------------------------------------------------------------
ANNUALIZED FEE RATE NET ASSETS
- --------------------------------------------------------------------------------
1.250% Up to and including $1 billion
1.200% Over $1 billion, up to and including $5 billion
1.150% Over $5 billion, up to and including $10 billion
1.100% Over $10 billion, up to and including $15 billion
1.050% Over $15 billion, up to and including $20 billion
1.000% In excess of $20 billion
B. ADMINISTRATIVE FEES
The Fund pays an administrative fee to FT Services of 0.20% per year of the
average daily net assets of the Fund.
30 | Annual Report
Templeton China World Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. TRANSACTIONS WITH AFFILIATES (CONTINUED)
C. DISTRIBUTION FEES
The Fund's Board of Trustees has adopted distribution plans for each share
class, with the exception of Advisor Class shares, pursuant to Rule 12b-1 under
the 1940 Act. Under the Fund's compensation distribution plans, the Fund pays
Distributors for costs incurred in connection with the sale and distribution of
the Fund's shares up to a certain percentage per year of its average daily net
assets of each class as follows:
Class A ........... 0.35%
Class B ........... 1.00%
Class C ........... 1.00%
D. SALES CHARGES/UNDERWRITING AGREEMENTS
Distributors has advised the Fund of the following commission transactions
related to the sales and redemptions of the Fund's shares for the year:
Sales charges retained net of commissions paid to
unaffiliated broker/dealers .......................... $625,577
Contingent deferred sales charges retained ............ $ 52,809
E. TRANSFER AGENT FEES
The Fund paid transfer agent fees of $727,856, of which $416,183 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 August 31, 2006, the
custodian fees were reduced as noted in the Statement of Operations.
5. INCOME TAXES
At August 31, 2006, the Fund had tax basis capital losses of $9,687,834 expiring
on 2009, which may be carried over to offset future capital gains, if any.
During the year ended August 31, 2006, the Fund utilized $23,494,679 of capital
loss carryforwards.
The tax character of distributions paid during the years ended August 31, 2006
and 2005, was as follows:
-----------------------
2006 2005
-----------------------
Distributions paid from - ordinary income ...... $5,626,831 $2,645,807
Annual Report | 31
Templeton China World Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. INCOME TAXES (CONTINUED)
At August 31, 2006, the cost of investments, net unrealized appreciation
(depreciation), undistributed ordinary income and undistributed long term
capital gains for income tax purposes were as follows:
Cost of investments ...................................... $473,781,048
============
Unrealized appreciation .................................. $165,328,049
Unrealized depreciation .................................. (11,169,638)
------------
Net unrealized appreciation (depreciation) ............... $154,158,411
============
Distributable earnings - undistributed ordinary income ... $ 5,790,063
============
Net investment income differs for financial statement and tax purposes primarily
due to differing treatments of foreign currency transactions and passive foreign
investment company shares.
Net realized gains (losses) differ for financial statement and tax purposes
primarily due to differing treatments of wash sales, foreign currency
transactions and passive foreign investment company shares.
6. INVESTMENT TRANSACTIONS
Purchases and sales of investments (excluding short term securities) for the
year ended August 31, 2006, aggregated $271,308,069 and $59,666,885,
respectively.
7. CONCENTRATION OF RISK
Investing in securities of "China companies" may include certain risks and
considerations not typically associated with investing in U.S. securities. In
general, China companies are those that are organized under the laws of, or with
a principal office or principal trading market in, the People's Republic of
China, Hong Kong, or Taiwan. Such risks include fluctuating currency values and
changing local and regional economic, political and social conditions, which may
result in greater market volatility. In addition, these securities may not be as
liquid as U.S. securities. At August 31, 2006, the Fund had 55.5%, 14.9%, and
19.1% of its net assets invested in China, Hong Kong, and Taiwan, respectively.
8. REGULATORY MATTERS
As part of various investigations by a number of federal, state, and foreign
regulators and governmental entities, relating to certain practices in the
mutual fund industry, including late trading, market timing and marketing
support payments to securities dealers who sell fund shares, Franklin Resources,
Inc. and certain of its subsidiaries (collectively, the "Company"), entered into
settlements with certain of those regulators.
32 | Annual Report
Templeton China World Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. REGULATORY MATTERS (CONTINUED)
Specifically, the Company entered into settlements with the Securities and
Exchange Commission ("SEC") concerning market timing (the "August 2, 2004 SEC
Order") and marketing support payments to securities dealers who sell fund
shares (the "December 13, 2004 SEC Order") and with the California Attorney
General's Office ("CAGO") concerning marketing support payments to securities
dealers who sell fund shares (the "CAGO Settlement"). Under the terms of the
settlements with the SEC and the CAGO, the Company retained an Independent
Distribution Consultant ("IDC") to develop separate plans for the distribution
of the respective settlement monies. The CAGO approved the distribution plan
pertaining to the distribution of the monies owed under the CAGO settlement
agreement, and in March 2005, the disbursement of monies to the relevant funds
in accordance with the terms and conditions of that settlement was completed.
The Fund did not participate in the CAGO Settlement.
On June 23, 2006, the SEC approved the IDC's proposed plan of distribution
arising from the December 13, 2004 SEC Order and disbursement of the settlement
monies to the designated funds in accordance with the terms and conditions of
the SEC's order and the plan was completed in September 2006. The Fund did not
participate in the December 13, 2004 SEC Order.
The IDC has also completed a proposed Plan of Distribution under the August 2,
2004 SEC Order resolving the SEC's market timing investigation and has submitted
that plan to the SEC staff, where it is under review. The SEC has announced the
following expected schedule with respect to the market timing Plan of
Distribution. The SEC anticipates that Notice of the Plan will be published on
or after November 15, 2006. After publication and comment, the proposed
Distribution Plan will be submitted to the SEC for approval. When the SEC
approves the proposed Distribution Plan, with modifications as appropriate,
distributions will begin pursuant to that Plan.
In addition, the Company, as well as most of the mutual funds within Franklin
Templeton Investments and certain current or former officers, directors, and/or
employees, have been named in private lawsuits (styled as shareholder class
actions, or as derivative actions on behalf of either the named funds or
Franklin Resources, Inc.) relating to the industry practices referenced above,
as well as to allegedly excessive advisory fees, commissions, and/or 12b-1 fees.
The lawsuits were filed in different courts throughout the country. Many of
those suits are now pending in a multi-district litigation in the United States
District Court for the District of Maryland.
The Company and fund management strongly believe that the claims made in each of
the private lawsuits referenced above are without merit and intend to defend
against them vigorously. The Company cannot predict with certainty the eventual
outcome of these lawsuits, nor whether they will have a material negative impact
on the Company. If it is determined that the Company bears responsibility for
any unlawful or inappropriate conduct that caused losses to the Fund, it is
committed to making the Fund or its shareholders whole, as appropriate.
Annual Report | 33
Templeton China World Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. NEW ACCOUNTING PRONOUNCEMENT
In July 2006, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes - an
Interpretation of FASB Statement No. 109" ("FIN 48"), which clarifies the
accounting for uncertainty in tax positions taken or expected to be taken in a
tax return. FIN 48 provides guidance on the measurement, recognition,
classification and disclosure of tax positions, along with accounting for the
related interest and penalties. FIN 48 is effective for fiscal years beginning
after December 15, 2006, and is to be applied to all open tax years as of the
date of effectiveness. The Fund is currently evaluating the impact, if any, of
applying the various provisions of FIN 48.
34 | Annual Report
Templeton China World Fund
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO THE BOARD OF TRUSTEES AND SHAREHOLDERS OF TEMPLETON CHINA WORLD FUND
In our opinion, the accompanying statement of assets and liabilities, including
the statement of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Templeton China World Fund (the
"Fund") at August 31, 2006, 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 the periods presented, in conformity
with accounting principles generally accepted in the United States of America.
These financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements 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 are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at August 31, 2006 by
correspondence with the custodian provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
San Francisco, California
October 18, 2006
Annual Report | 35
Templeton China World 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 $3,333,097 as qualified dividends
for purposes of the maximum rate under Section 1(h)(11) of the Code for the
fiscal year ended August 31, 2006. In January 2007, shareholders will receive
Form 1099-DIV which will include their share of qualified dividends distributed
during the calendar year 2006. 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 $1,825,336 as interest related dividends for purposes
of the tax imposed under Section 871(a)(1)(A) of the Code for the fiscal year
ended August 31, 2006.
At August 31, 2006, more than 50% of the Templeton China World Fund total assets
were invested in securities of foreign issuers. In most instances, foreign taxes
were withheld from dividends paid to the Fund on these investments. As shown in
the table below, the Fund designates to shareholders the foreign source income
and foreign taxes paid, pursuant to Section 853 of the Code. This designation
will allow shareholders of record on October 19, 2006, to treat their
proportionate share of foreign taxes paid by the Fund as having been paid
directly by them. The shareholder shall consider these amounts as foreign taxes
paid in the tax year in which they receive the Fund distribution.
The following tables provide a detailed analysis, by country, of foreign tax
paid, foreign source income, and foreign qualified dividends as designated by
the Fund, to Class A, Class B, Class C, and Advisor Class shareholders of
record.
RECORD DATE: 10/19/2006
- -----------------------------------------------------------------------------------------------------------
CLASS A
FOREIGN TAX FOREIGN FOREIGN
PAID SOURCE INCOME QUALIFIED DIVIDENDS
COUNTRY PER SHARE PER SHARE PER SHARE
- -----------------------------------------------------------------------------------------------------------
Bermuda ............................................... $0.0000 $0.0005 $0.0000
Cayman Islands ........................................ 0.0000 0.0005 0.0000
China ................................................. 0.0000 0.0909 0.0524
Hong Kong ............................................. 0.0000 0.0465 0.0000
Singapore ............................................. 0.0000 0.0015 0.0000
South Korea ........................................... 0.0010 0.0025 0.0025
Taiwan ................................................ 0.0531 0.0971 0.0000
United Kingdom ........................................ 0.0000 0.0153 0.0000
--------------------------------------------------
TOTAL ................................................. $0.0541 $0.2548 $0.0549
==================================================
36 | Annual Report
Templeton China World Fund
TAX DESIGNATION (UNAUDITED) (CONTINUED)
- -----------------------------------------------------------------------------------------------------------
CLASS B
FOREIGN TAX FOREIGN FOREIGN
PAID SOURCE INCOME QUALIFIED DIVIDENDS
COUNTRY PER SHARE PER SHARE PER SHARE
- -----------------------------------------------------------------------------------------------------------
Bermuda ............................................... $0.0000 $0.0002 $0.0000
Cayman Islands ........................................ 0.0000 0.0002 0.0000
China ................................................. 0.0000 0.0364 0.0210
Hong Kong ............................................. 0.0000 0.0187 0.0000
Singapore ............................................. 0.0000 0.0006 0.0000
South Korea ........................................... 0.0010 0.0010 0.0010
Taiwan ................................................ 0.0531 0.0388 0.0000
United Kingdom ........................................ 0.0000 0.0062 0.0000
--------------------------------------------------
TOTAL ................................................. $0.0541 $0.1021 $0.0220
==================================================
- -----------------------------------------------------------------------------------------------------------
CLASS C
FOREIGN TAX FOREIGN FOREIGN
PAID SOURCE INCOME QUALIFIED DIVIDENDS
COUNTRY PER SHARE PER SHARE PER SHARE
- -----------------------------------------------------------------------------------------------------------
Bermuda ............................................... $0.0000 $0.0003 $0.0000
Cayman Islands ........................................ 0.0000 0.0003 0.0000
China ................................................. 0.0000 0.0545 0.0314
Hong Kong ............................................. 0.0000 0.0279 0.0000
Singapore ............................................. 0.0000 0.0009 0.0000
South Korea ........................................... 0.0010 0.0015 0.0015
Taiwan ................................................ 0.0531 0.0581 0.0000
United Kingdom ........................................ 0.0000 0.0092 0.0000
--------------------------------------------------
TOTAL ................................................. $0.0541 $0.1527 $0.0329
==================================================
- -----------------------------------------------------------------------------------------------------------
ADVISOR CLASS
FOREIGN TAX FOREIGN FOREIGN
PAID SOURCE INCOME QUALIFIED DIVIDENDS
COUNTRY PER SHARE PER SHARE PER SHARE
- -----------------------------------------------------------------------------------------------------------
Bermuda ............................................... $0.0000 $0.0006 $0.0000
Cayman Islands ........................................ 0.0000 0.0007 0.0000
China ................................................. 0.0000 0.1114 0.0643
Hong Kong ............................................. 0.0000 0.0570 0.0000
Singapore ............................................. 0.0000 0.0019 0.0000
South Korea ........................................... 0.0010 0.0031 0.0031
Taiwan ................................................ 0.0531 0.1189 0.0000
United Kingdom ........................................ 0.0000 0.0188 0.0000
--------------------------------------------------
TOTAL ................................................. $0.0541 $0.3124 $0.0674
==================================================
Foreign Tax Paid per Share (Column 1) is the amount per share available to you,
as a tax credit (assuming you held your shares in the Fund for a minimum of 16
days during the 31-day period beginning 15 days before the ex-dividend date of
the Fund's distribution to which the foreign taxes relate), or, as a tax
deduction.
Annual Report | 37
Templeton China World Fund
TAX DESIGNATION (UNAUDITED) (CONTINUED)
Foreign Source Income per Share (Column 2) is the amount per share of income
dividends paid to you that is attributable to foreign securities held by the
Fund, plus any foreign taxes withheld on these dividends. The amounts reported
include foreign source qualified dividends that have not been adjusted for the
rate differential applicable to such dividend income. 1
Foreign Qualified Dividends per Share (Column 3) is the amount per share of
foreign source qualified dividends the Fund paid to you, plus any foreign taxes
withheld on these dividends. These amounts represent the portion of the Foreign
Source Income reported to you in column 2 that were derived from qualified
foreign securities held by the Fund. 1
In January 2007, shareholders will receive Form 1099-DIV which will include
their share of taxes paid and foreign source income distributed during the
calendar year 2006. The Foreign Source Income reported on Form 1099-DIV has not
been adjusted for the rate differential on foreign source qualified dividend
income. Shareholders are advised to check with their tax advisors for
information on the treatment of these amounts on their 2006 individual income
tax returns.
1 Qualified dividends are taxed at a maximum rate of 15% (5% for those in
the 10% and 15% income tax brackets). In determining the amount of foreign
tax credit that may be applied against the U.S. tax liability of
individuals receiving foreign source qualified dividends, adjustments may
be required to the foreign tax credit limitation calculation to reflect
the rate differential applicable to such dividend income. The rules
however permit certain individuals to elect not to apply the rate
differential adjustments for capital gains and/or dividends for any
taxable year. Please consult your tax advisor and the instructions to Form
1116 for more information.
38 | Annual Report
Templeton China World 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 U.S. registered portfolios overseen in
the Franklin Templeton Investments fund complex are shown below. Each board
member will serve 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
- ------------------------------------------------------------------------------------------------------------------------------------
HARRIS J. ASHTON (1932) Trustee Since 1993 143 Director, Bar-S Foods (meat packing
500 East Broward Blvd. company).
Suite 2100
Fort Lauderdale, FL 33394-3091
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director of various companies; and FORMERLY, Director, RBC Holdings, Inc. (bank holding company) (until 2002); and President, Chief
Executive Officer and Chairman of the Board, General Host Corporation (nursery and craft centers) (until 1998).
- ------------------------------------------------------------------------------------------------------------------------------------
FRANK J. CROTHERS (1944) Trustee Since 1999 19 None
500 East Broward Blvd.
Suite 2100
Fort Lauderdale, FL 33394-3091
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Chairman, Island Corporate Holding Ltd.; Director and Vice Chairman, Caribbean Utilities Co. Ltd; Director, Provo Power Company
Ltd.; director of various other business and nonprofit organizations; and FORMERLY, Chairman, Atlantic Equipment & Power Ltd.
(1977-2003).
- ------------------------------------------------------------------------------------------------------------------------------------
***S. JOSEPH FORTUNATO (1932) Trustee Since 1993 144 None
500 East Broward Blvd.
Suite 2100
Fort Lauderdale, FL 33394-3091
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Attorney; and FORMERLY, member of the law firm of Pitney, Hardin, Kipp & Szuch (until 2002) (Consultant (2003)).
- ------------------------------------------------------------------------------------------------------------------------------------
EDITH E. HOLIDAY (1952) Trustee Since 1996 139 Director, Hess Corporation (formerly,
500 East Broward Blvd. Amerada Hess Corporation)
Suite 2100 (exploration and refining of oil and
Fort Lauderdale, FL 33394-3091 gas), H.J. Heinz Company (processed
foods and allied products), RTI
International Metals, Inc.
(manufacture and distribution of
titanium), Canadian National Railway
(railroad) and White Mountains
Insurance Group, Ltd. (holding
company).
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director or Trustee of various companies and trusts; and FORMERLY, Assistant to the President of the United States and Secretary of
the Cabinet (1990-1993); General Counsel to the United States Treasury Department (1989-1990); and Counselor to the Secretary and
Assistant Secretary for Public Affairs and Public Liaison-United States Treasury Department (1988-1989).
- ------------------------------------------------------------------------------------------------------------------------------------
Annual Report | 39
- ------------------------------------------------------------------------------------------------------------------------------------
NUMBER OF PORTFOLIOS IN
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------------------------------------------------------------------------------------------------------------------------
***GORDON S. MACKLIN (1928) Trustee Since 1993 143 Director, MedImmune, Inc.
500 East Broward Blvd. (biotechnology) and Overstock.com
Suite 2100 (Internet services); and FORMERLY,
Fort Lauderdale, FL 33394-3091 Director, MCI Communication
Corporation (subsequently known as
MCI WorldCom, Inc. and WorldCom,
Inc.) (communications services)
(1988-2002), White Mountains
Insurance Group, Ltd. (holding
company) (1987-2004), Spacehab, Inc.
(aerospace services) (1994-2003) and
Martek Biosciences Corporation
(1998-2006).
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director of various companies; Senior Business Advisor, Martek Biosciences Corporation (research and development); and FORMERLY,
Deputy Chairman, White Mountains Insurance Group, Ltd. (holding company) (2001-2004); Chairman, White River Corporation (financial
services) (1993-1998) and Hambrecht & Quist Group (investment banking) (1987-1992); and President, National Association of
Securities Dealers, Inc. (1970-1987).
- ------------------------------------------------------------------------------------------------------------------------------------
DAVID W. NIEMIEC (1949) Trustee Since 2005 19 Director, Emeritus Corporation
500 East Broward Blvd. (assisted living) and OSI
Suite 2100 Pharmaceuticals, Inc. (pharmaceutical
Fort Lauderdale, FL 33394-3091 products).
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Advisor, Saratoga Partners (private equity fund); Director, various private companies; and FORMERLY, Managing Director, Saratoga
Partners (1998-2001) and SBC Warburg Dillon Read (investment banking) (1997-1998); Vice Chairman, Dillon Read, & Co. Inc.
(investment banking) (1991-1997); and Chief Financial Officer, Dillon, Read & Co. Inc. (1982-1997).
- ------------------------------------------------------------------------------------------------------------------------------------
FRANK A. OLSON (1932) Trustee Since 2003 102 Director, Hess Corporation (formerly,
500 East Broward Blvd. Amerada Hess Corporation)
Suite 2100 (exploration and refining of oil and
Fort Lauderdale, FL 33394-3091 gas) and Sentient Jet (private jet
service); and FORMERLY, Director,
Becton Dickinson and Company (medical
technology), Cooper Industries Inc.
(electrical products and tools and
hardware), Health Net, Inc.
(formerly, Foundation
Health)(integrated managed care), The
Hertz Corporation, Pacific Southwest
Airlines, The RCA Corporation, Unicom
(formerly, Commonwealth Edison), UAL
Corporation (airlines) and White
Mountains Insurance Group, Ltd.
(holding company).
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Chairman Emeritus, The Hertz Corporation (car rental) (since 2000) (Chairman of the Board (1980-2000) and Chief Executive Officer
(1977-1999)); and FORMERLY, Chairman of the Board, President and Chief Executive Officer, UAL Corporation (airlines).
- ------------------------------------------------------------------------------------------------------------------------------------
40 | 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
- ------------------------------------------------------------------------------------------------------------------------------------
LARRY D. THOMPSON (1945) Trustee Since 2005 19 None
500 East Broward Blvd.
Suite 2100
Fort Lauderdale, FL 33394-3091
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Vice President - Government Affairs, General Counsel and Secretary, PepsiCo, Inc. (consumer products); and FORMERLY,
Director, Delta Airlines (aviation) (2003-2005) and Providian Financial Corp. (1997-2001); Senior Fellow of The Brookings
Institution (2003-2004); Visiting Professor, University of Georgia School of Law (2004); and Deputy Attorney General, U.S.
Department of Justice (2001-2003).
- ------------------------------------------------------------------------------------------------------------------------------------
CONSTANTINE D. TSERETOPOULOS Trustee Since 1999 19 None
(1954)
500 East Broward Blvd.
Suite 2100
Fort Lauderdale, FL 33394-3091
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Physician, Lyford Cay Hospital (1987-present); director of various nonprofit organizations; and FORMERLY, Cardiology Fellow,
University of Maryland (1985-1987) and Internal Medicine Resident, Greater Baltimore Medical Center (1982-1985).
- ------------------------------------------------------------------------------------------------------------------------------------
****ROBERT E. WADE (1946) Trustee Since March 2006 29 Director, El Oro and Exploration Co.,
500 East Broward Blvd. p.l.c. (investments) and ARC Wireless
Suite 2100 Solutions, Inc. (wireless components
Fort Lauderdale, FL 33394-3091 and network products).
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
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
- ------------------------------------------------------------------------------------------------------------------------------------
**NICHOLAS F. BRADY (1930) Trustee Since 1993 10 Director, Hess Corporation (formerly,
500 East Broward Blvd. Amerada Hess Corporation)
Suite 2100 (exploration and refining of oil and
Fort Lauderdale, FL 33394-3091 gas) and Weatherford International,
Ltd. (oilfield products and
servicing) (2004-present); and
FORMERLY, Director, H.J. Heinz
Company (processed foods and allied
products) (1987-1988; 1993-2003) and
Total Logistics, Inc. (operating and
investment business) (until 2005).
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Chairman, Darby Overseas Investments, Ltd., Darby Technology Ventures Group, LLC (investment firms) and Franklin Templeton
Investment Funds (1994-present); Director, Templeton Capital Advisors Ltd.; and FORMERLY, Chairman, Darby Emerging Markets
Investments LDC (until 2004) and Templeton Emerging Markets Investment Trust PLC (until 2003); Secretary of the United States
Department of the Treasury (1988-1993); Chairman of the Board, Dillon, Read & Co. Inc. (investment banking) (until 1988); and U.S.
Senator, New Jersey (April 1982-December 1982).
- ------------------------------------------------------------------------------------------------------------------------------------
Annual Report | 41
- ------------------------------------------------------------------------------------------------------------------------------------
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 B. JOHNSON (1933) Trustee, Trustee and 143 None
One Franklin Parkway Chairman of Chairman of the
San Mateo, CA 94403-1906 the Board and Board since 1995
Vice President and Vice
President since
1993
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Chairman of the Board, Member - Office of the Chairman and Director, Franklin Resources, Inc.; Vice President, Franklin Templeton
Distributors, Inc.; and officer and/or director or trustee, as the case may be, of some of the other subsidiaries of Franklin
Resources, Inc. and of 42 of the investment companies in Franklin Templeton Investments.
- ------------------------------------------------------------------------------------------------------------------------------------
HARMON E. BURNS (1945) Vice President Since 1996 Not Applicable Not Applicable
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice Chairman, Member - Office of the Chairman and Director, Franklin Resources, Inc.; Vice President and Director, Franklin
Templeton Distributors, Inc.; Executive Vice President, Franklin Advisers, Inc.; and officer and/or director or trustee, as the
case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 45 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 since
Compliance February 2006
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director, Global Compliance, Franklin Resources, Inc.; officer of 47 of the investment companies in Franklin Templeton Investments;
and FORMERLY, Director of Compliance, Franklin Resources, Inc. (1994-2001).
- ------------------------------------------------------------------------------------------------------------------------------------
JEFFREY A. EVERETT (1964) Vice President Since 2001 Not Applicable Not Applicable
PO Box N-7759
Lyford Cay, Nassau, Bahamas
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
President and Director, Templeton Global Advisors Limited; and officer of 14 of the investment companies in Franklin Templeton
Investments.
- ------------------------------------------------------------------------------------------------------------------------------------
JIMMY D. GAMBILL (1947) Senior Vice Since 2002 Not Applicable Not Applicable
500 East Broward Blvd. President and
Suite 2100 Chief Executive
Fort Lauderdale, FL 33394-3091 Officer-
Finance and
Administration
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
President, Franklin Templeton Services, LLC; Senior Vice President, Templeton Worldwide, Inc.; and officer of 47 of the investment
companies in Franklin Templeton Investments.
- ------------------------------------------------------------------------------------------------------------------------------------
DAVID P. GOSS (1947) Vice President Since 2000 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; officer and director of one of the subsidiaries of Franklin
Resources, Inc.; and officer of 47 of the investment companies in Franklin Templeton Investments.
- ------------------------------------------------------------------------------------------------------------------------------------
42 | 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
- ------------------------------------------------------------------------------------------------------------------------------------
BARBARA J. GREEN (1947) Vice President Since 2000 Not Applicable Not Applicable
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice President, Deputy General Counsel and Secretary, Franklin Resources, Inc.; Secretary and Senior Vice President, Templeton
Worldwide, Inc.; Secretary, Franklin Advisers, Inc., Franklin Advisory Services, LLC, Franklin Investment Advisory Services, LLC,
Franklin Mutual Advisers, LLC, Franklin Templeton Alternative Strategies, Inc., Franklin Templeton Investor Services, LLC, Franklin
Templeton Services, LLC, Franklin Templeton Distributors, Inc., Templeton Investment Counsel, LLC, and Templeton/Franklin
Investment Services, Inc.; and officer of some of the other subsidiaries of Franklin Resources, Inc. and of 47 of the investment
companies in Franklin Templeton Investments; and FORMERLY, Deputy Director, Division of Investment Management, Executive Assistant
and Senior Advisor to the Chairman, Counselor to the Chairman, Special Counsel and Attorney Fellow, U.S. Securities and Exchange
Commission (1986-1995); Attorney, Rogers & Wells (until 1986); and Judicial Clerk, U.S. District Court (District of Massachusetts)
(until 1979).
- ------------------------------------------------------------------------------------------------------------------------------------
RUPERT H. JOHNSON, JR. (1940) Vice President Since 1996 Not Applicable Not Applicable
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice Chairman, Member - Office of the Chairman and Director, Franklin Resources, Inc.; Vice President and Director, Franklin
Templeton Distributors, Inc.; Director, Franklin Advisers, Inc.; Senior Vice President, Franklin Advisory Services, LLC; and
officer and/or director or trustee, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 45 of
the investment companies in Franklin Templeton Investments.
- ------------------------------------------------------------------------------------------------------------------------------------
JOHN R. KAY (1940) Vice President Since 1994 Not Applicable Not Applicable
500 East Broward Blvd.
Suite 2100
Fort Lauderdale, FL 33394-3091
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice President, Templeton Worldwide, Inc.; Assistant Vice President, Franklin Templeton Distributors, Inc.; Senior Vice President,
Franklin Templeton Services, LLC; and officer of some of the other subsidiaries of Franklin Resources, Inc. and of 32 of the
investment companies in Franklin Templeton Investments; and FORMERLY, Vice President and Controller, Keystone Group, Inc.
- ------------------------------------------------------------------------------------------------------------------------------------
MARK MOBIUS (1936) President and President since Not Applicable Not Applicable
17th Floor, The Chater House Chief 1993 and Chief
8 Connaught Road Executive Executive Officer
Central Hong Kong Officer - - Investment
Investment Management
Management since 2002
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Portfolio Manager of various Templeton advisory affiliates; Managing Director, Templeton Asset Management Ltd.; Executive Vice
President and Director, Templeton Global Advisors Limited; and officer and/or director, as the case may be, of some of the
subsidiaries of Franklin Resources, Inc. and of six of the investment companies in Franklin Templeton Investments; and FORMERLY,
President, International Investment Trust Company Limited (investment manager of Taiwan R.O.C. Fund) (1986-1987); and Director,
Vickers da Costa, Hong Kong (1983-1986).
- ------------------------------------------------------------------------------------------------------------------------------------
ROBERT C. ROSSELOT (1960) Secretary Since 2004 Not Applicable Not Applicable
500 East Broward Blvd.
Suite 2100
Fort Lauderdale,FL 33394-3091
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Associate General Counsel, Franklin Templeton Investments; Assistant Secretary, Franklin Resources, Inc.; Vice President and
Assistant Secretary, Templeton Investment Counsel, LLC; Vice President, Secretary and Trust Officer, Fiduciary Trust International
of the South; and officer of 14 of the investment companies in Franklin Templeton Investments.
- ------------------------------------------------------------------------------------------------------------------------------------
Annual Report | 43
- ------------------------------------------------------------------------------------------------------------------------------------
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 R. SEWARD (1956) Treasurer Since 2004 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 16 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 47 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).
- ------------------------------------------------------------------------------------------------------------------------------------
GALEN VETTER (1951) Chief Since 2004 Not Applicable Not Applicable
500 East Broward Blvd. Financial
Suite 2100 Officer and
Fort Lauderdale, FL 33394-3091 Chief
Accounting
Officer
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Vice President, Franklin Templeton Services, LLC; officer of 47 of the investment companies in Franklin Templeton
Investments; and FORMERLY, Managing Director, RSM McGladrey, Inc. (1999-2004); and Partner, McGladrey & Pullen, LLP (1979-1987 and
1991-2004).
- ------------------------------------------------------------------------------------------------------------------------------------
* 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.
** Charles B. Johnson is considered to be interested person of the Fund under
the federal securities laws due to his position as officer and director
and major shareholder of Franklin Resources, Inc. (Resources), which is
the parent company of the Fund's investment manager and distributor.
Nicholas F. Brady is considered to be an interested person of the Fund
under the federal securities laws due to his ownership interest in a
subsidiary of Resources, as well as his director positions with such
company and certain other related companies.
*** Subsequent to August 31, 2006, Mr. Fortunato and Mr. Macklin each ceased
to be a trustee of the Fund.
**** During the reporting period, Mr. Wade became a trustee.
Note: Charles B. Johnson and Rupert H. Johnson, Jr. are brothers. Prior to
August 31, 2006, Mr. Fred R. Millsaps ceased to be a trustee of the Fund.
THE SARBANES-OXLEY ACT OF 2002 AND RULES ADOPTED BY THE U.S. SECURITIES AND
EXCHANGE COMMISSION REQUIRE THE FUND TO DISCLOSE WHETHER THE FUND'S AUDIT
COMMITTEE INCLUDES AT LEAST ONE MEMBER WHO IS AN AUDIT COMMITTEE FINANCIAL
EXPERT WITHIN THE MEANING OF SUCH ACT AND RULES. THE FUND'S BOARD OF TRUSTEES
HAS DETERMINED THAT THERE IS AT LEAST ONE SUCH FINANCIAL EXPERT ON THE AUDIT
COMMITTEE AND HAS DESIGNATED EACH OF FRANK A. OLSON AND DAVID W. NIEMIEC AS AN
AUDIT COMMITTEE FINANCIAL EXPERT. THE BOARD BELIEVES THAT MESSRS. OLSON AND
NIEMIEC QUALIFY AS SUCH AN EXPERT IN VIEW OF THEIR EXTENSIVE BUSINESS BACKGROUND
AND EXPERIENCE. MR. OLSON HAS SERVED AS A MEMBER OF THE FUND AUDIT COMMITTEE
SINCE 2003. HE CURRENTLY SERVES AS CHAIRMAN EMERITUS OF THE HERTZ CORPORATION
AND WAS FORMERLY ITS CHAIRMAN OF THE BOARD FROM 1980 TO 2000 AND ITS CHIEF
EXECUTIVE OFFICER FROM 1977 TO 1999. MR. OLSON IS ALSO A DIRECTOR AND AUDIT
COMMITTEE MEMBER OF HESS CORPORATION (FORMERLY AMERADA HESS CORPORATION), AND A
FORMER DIRECTOR AND AUDIT COMMITTEE MEMBER OF WHITE MOUNTAINS INSURANCE GROUP,
LTD, AND FORMER CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER OF UAL
CORPORATION. MR. NIEMIEC HAS SERVED AS A MEMBER OF THE FUND AUDIT COMMITTEE
SINCE 2005, CURRENTLY SERVES AS AN ADVISOR TO SARATOGA PARTNERS AND WAS FORMERLY
ITS MANAGING DIRECTOR FROM 1998 TO 2001. MR. NIEMIEC IS A DIRECTOR OF EMERITUS
CORPORATION AND OSI PHARMACEUTICALS, INC. AND VARIOUS PRIVATE COMPANIES, AND WAS
FORMERLY MANAGING DIRECTOR OF SBC WARBURG DILLON READ FROM 1997 TO 1998, AND WAS
VICE CHAIRMAN FROM 1991 TO 1997 AND CHIEF FINANCIAL OFFICER FROM 1982 TO 1997 OF
DILLON, READ & CO. INC. AS A RESULT OF SUCH BACKGROUND AND EXPERIENCE, THE BOARD
OF TRUSTEES BELIEVES THAT MR. OLSON AND MR. NIEMIEC HAVE EACH ACQUIRED AN
UNDERSTANDING OF GENERALLY ACCEPTED ACCOUNTING PRINCIPLES AND FINANCIAL
STATEMENTS, THE GENERAL APPLICATION OF SUCH PRINCIPLES IN CONNECTION WITH THE
ACCOUNTING ESTIMATES, ACCRUALS AND RESERVES, AND ANALYZING AND EVALUATING
FINANCIAL STATEMENTS THAT PRESENT A BREADTH AND LEVEL OF COMPLEXITY OF
ACCOUNTING ISSUES GENERALLY COMPARABLE TO THOSE OF THE FUND, AS WELL AS AN
UNDERSTANDING OF INTERNAL CONTROLS AND PROCEDURES FOR FINANCIAL REPORTING AND AN
UNDERSTANDING OF AUDIT COMMITTEE FUNCTIONS. MESSRS. OLSON AND NIEMIEC ARE
INDEPENDENT TRUSTEES AS THAT TERM IS DEFINED UNDER THE APPLICABLE U.S.
SECURITIES AND EXCHANGE COMMISSION RULES AND RELEASES.
THE STATEMENT OF ADDITIONAL INFORMATION (SAI) INCLUDES ADDITIONAL INFORMATION
ABOUT THE BOARD MEMBERS AND IS AVAILABLE, WITHOUT CHARGE, UPON REQUEST.
SHAREHOLDERS MAY CALL 1-800/DIAL BEN (1-800/342-5236) TO REQUEST THE SAI.
44 | Annual Report
Templeton China World Fund
SHAREHOLDER INFORMATION
BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT
At a meeting held May 11, 2006, the Board of Trustees ("Board"), including a
majority of non-interested or independent Trustees, approved renewal of the
investment management agreement for the Fund. In reaching this decision, the
Board took into account information furnished throughout the year at regular
Board meetings, as well as information prepared specifically in connection with
the annual renewal review process. Information furnished and discussed
throughout the year included investment performance reports and related
financial information for the Fund, as well as periodic reports on shareholder
services, legal, compliance, pricing, brokerage commissions and execution and
other services provided by the Investment Manager ("Manager") and its
affiliates. Information furnished specifically in connection with the renewal
process included a report for the Fund prepared by Lipper, Inc. ("Lipper"), an
independent organization, as well as a Fund profitability analysis report
prepared by management. The Lipper report compared the Fund's investment
performance and expenses with those of other mutual funds deemed comparable to
the Fund as selected by Lipper. The Fund profitability analysis report discussed
the profitability to Franklin Templeton Investments from its overall U.S. fund
operations, as well as on an individual fund-by-fund basis. Included with such
profitability analysis report was information on a fund-by-fund basis listing
portfolio managers and other accounts they manage, as well as information on
management fees charged by the Manager and its affiliates including management's
explanation of differences where relevant and a three-year expense analysis with
an explanation for any increase in expense ratios. Additional information
accompanying such report was a memorandum prepared by management describing
enhancements to the services provided to the Fund by the Franklin Templeton
Investments organization, as well as a memorandum relating to economies of
scale.
In considering such materials, the independent Trustees received assistance and
advice from and met separately with independent counsel. In approving
continuance of the investment management agreement for the Fund, the Board,
including a majority of independent Trustees, determined that the existing
management fee structure was fair and reasonable and that continuance of the
investment management agreement was in the best interests of the Fund and its
shareholders. While attention was given to all information furnished, the
following discusses some primary factors relevant to the Board's decision.
NATURE, EXTENT AND QUALITY OF SERVICES. The Board was satisfied with the nature
and quality of the overall services provided by the Manager and its affiliates
to the Fund and its shareholders. In addition to investment performance and
expenses discussed later, the Board's opinion was based, in part, upon periodic
reports furnished them showing that the investment policies and restrictions for
the Fund were consistently complied with as well as other reports periodically
furnished the Board covering matters such as the compliance of portfolio
managers and other management personnel with the code of ethics adopted
throughout the Franklin Templeton fund complex, the adherence to fair value
pricing procedures established by the Board, and the accuracy of net asset value
calculations. The Board also noted the extent of benefits provided Fund
shareholders from being part of the Franklin Templeton family of funds,
Annual Report | 45
Templeton China World Fund
SHAREHOLDER INFORMATION (CONTINUED)
BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT (CONTINUED)
including the right to exchange investments between the same class of funds
without a sales charge, the ability to reinvest Fund dividends into other funds
and the right to combine holdings in other funds to obtain a reduced sales
charge. Favorable consideration was given to management's efforts and
expenditures in establishing back-up systems and recovery procedures to function
in the event of a natural disaster, it being noted by the Board that such
systems and procedures had functioned smoothly during the hurricanes and
blackout experienced last year in Florida. Among other factors taken into
account by the Board were the Manager's best execution trading policies,
including a favorable report by an independent portfolio trading analytical
firm. Consideration was also given to the experience of the Fund's portfolio
management team, the number of accounts managed and general method of
compensation. In this latter respect, the Board noted that a primary factor in
management's determination of a portfolio manager's bonus compensation was the
relative investment performance of the funds he or she managed so as to be
aligned with the interests of Fund shareholders. The Board also took into
account the transfer agent and shareholder services provided Fund shareholders
by an affiliate of the Manager, noting continuing expenditures by management to
increase and improve the scope of such services, periodic favorable reports on
such service conducted by third parties and the firsthand experience of the
individual Directors who deal with the shareholder services department in their
capacities as shareholders in one or more of the various Franklin Templeton
Funds.
INVESTMENT PERFORMANCE. The Board placed significant emphasis on the investment
performance of the Fund in view of its importance to shareholders. While
consideration was given to performance reports and discussions with portfolio
managers at Board meetings during the year, particular attention in assessing
performance was given to the Lipper reports furnished for the agreement
renewals. The Lipper report for this agreement renewal showed the performance of
the Fund's Class A shares for the two-year period ended February 28, 2006, in
comparison with a performance universe consisting of the Fund and all retail and
institutional China region funds as selected by Lipper. Such report showed the
Fund's total return for both the one-year period as well as the annualized
two-year period to be in the highest quintile of such universe. The Board was
satisfied with such performance, noting that the Fund had converted from a
closed-end fund to an open-end fund issuing multi-class shares in May 2003 and
that Lipper reports prior to such conversion date had also shown good relative
performance for the Fund.
COMPARATIVE EXPENSES. Consideration was given to a comparative analysis of the
management fees and total expense ratios of the Fund compared with those of a
group of 10 other funds selected by Lipper as its appropriate Lipper expense
group. Prior to making such comparison, the Board relied upon a survey showing
that the scope of management advisory services covered under the Fund's
investment management agreement was similar to those provided by fund managers
to other mutual fund groups that would be used as a basis of comparison in the
Lipper reports. In reviewing comparative costs, emphasis was given to the Fund's
management fee in comparison with the effective management fee that would have
been charged by other
46 | Annual Report
Templeton China World Fund
SHAREHOLDER INFORMATION (CONTINUED)
BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT (CONTINUED)
funds within its Lipper expense group assuming they were the same size as the
Fund, as well as the actual total expenses of the Fund in comparison with those
of its Lipper expense group. The Lipper effective management fee analysis
includes administrative charges as being part of a management fee, and actual
total expenses, for comparative consistency, are shown by Lipper for fund Class
A shares. The expense comparisons showed the Fund's effective management fee
rate to be the highest in such Lipper expense group, and its actual expenses to
be the second-highest in such expense group. The Board found such comparative
fee and expenses to be acceptable in view of the Fund's investment performance
and factors relating to its operations, such as the background and experience of
its portfolio managers and research staff, and their physical presence and
coverage in the geographical area in which the Fund invests.
MANAGEMENT PROFITABILITY. The Board also considered the level of profits
realized by the Manager and its affiliates in connection with the operation of
the Fund. In this respect, the Board reviewed the Fund profitability analysis
that addresses the overall profitability of Franklin Templeton's U.S. fund
business, as well as its profits in providing management and other services to
each of the individual funds. The Board also considered the extent to which the
Manager and its affiliates might derive ancillary benefits from fund operations,
including its interest in a joint venture entity that financed up-front
commissions paid to brokers/dealers who sold fund Class B shares, as well as
potential benefits resulting from allocation of fund brokerage and the use of
"soft" commission dollars to pay for research. Specific attention was given to
the methodology followed in allocating costs to the Fund, it being recognized
that allocation methodologies are inherently subjective and various allocation
methodologies may each be reasonable while producing different results. In this
respect, the Board noted that the cost allocation methodology was consistent
with that followed in profitability report presentations for the Fund made in
prior years and that the Fund's independent registered public accounting firm
had been engaged by the Manager to perform certain procedures on a biennial
basis, specified and approved by the Manager and the Fund's Board solely for
their purposes and use in reference to the profitability analysis. Included in
the analysis were the revenue and related costs involved in providing services
to the Fund, as well as the Fund's relative contribution to the profitability of
the Manager's parent. In reviewing and discussing such analysis, management
discussed with the Board its belief that costs incurred in establishing the
infrastructure necessary to the type of mutual fund operations conducted by the
Manager and its affiliates may not be fully reflected in the expenses allocated
to the Fund in determining its profitability, as well as the fact that the level
of profits, to a certain extent, reflected operational cost savings and
efficiencies initiated by management. The Board also took into account
management's expenditures in improving shareholder services provided the Fund,
as well as the need to meet additional regulatory and compliance requirements
resulting from the Sarbanes-Oxley Act and recent SEC requirements. In addition,
the Board considered a third-party study comparing the profitability of the
Manager's parent on an overall basis as compared to other publicly held managers
broken down to show profitability from management operations exclusive of
distribution expenses, as well as profitability including distribution expenses.
Based upon its consideration of all these
Annual Report | 47
Templeton China World Fund
SHAREHOLDER INFORMATION (CONTINUED)
BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT (CONTINUED)
factors, the Board determined that the level of profits realized by the Manager
and its affiliates from providing services to the Fund was not excessive in view
of the nature, quality and extent of services provided.
ECONOMIES OF SCALE. The Board also considered whether economies of scale are
realized by the Manager and its affiliates as the Fund grows larger and the
extent to which this is reflected in the level of management fees charged. While
recognizing that any precise determination is inherently subjective, the Board
noted that based upon the Fund profitability analysis, it appears that as some
funds get larger, at some point economies of scale do result in the Manager's
realizing a larger profit margin on management services provided such a fund. In
view of the Fund's brief operating history as an open-end fund and its asset
size, which was approximately $426 million on December 31, 2005, the Board
believed it unclear as to whether economies of scale are realized by the Manager
and its affiliates in the operation of this Fund. The Fund is charged a fee for
administrative services at the rate of 0.20% of its net assets, as well as a
separate fee for management advisory services at the rate of 1.25% of its net
assets, with additional breakpoints added on net assets exceeding $1 billion and
the Board intends to monitor the Fund's future growth with respect to possible
economies of scale.
PROXY VOTING POLICIES AND PROCEDURES
The Fund 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 1-954/527-7678 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
1-800/SEC-0330.
48 | Annual Report
Literature Request
LITERATURE REQUEST. TO RECEIVE A BROCHURE AND PROSPECTUS, PLEASE CALL US AT
1-800/DIAL BEN(R) (1-800/342-5236) 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 INVESTMENTS
INTERNATIONAL
Mutual European Fund
Templeton BRIC Fund
Templeton China World Fund
Templeton Developing Markets Trust
Templeton Foreign Fund
Templeton Foreign Smaller Companies Fund
Templeton International (Ex EM) 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
GROWTH
Franklin Aggressive Growth Fund
Franklin Capital Growth Fund
Franklin Flex Cap Growth Fund
Franklin Small-Mid Cap Growth Fund
Franklin Small Cap Growth Fund II 1
VALUE
Franklin Balance Sheet Investment Fund 2
Franklin Equity Income Fund
Franklin Large Cap Value Fund
Franklin MicroCap Value Fund 2
Franklin MidCap Value Fund
Franklin Small Cap Value Fund
Mutual Beacon Fund
Mutual Qualified Fund
Mutual Recovery Fund 3
Mutual Shares Fund
BLEND
Franklin Balanced Fund
Franklin Blue Chip Fund
Franklin Convertible Securities Fund
Franklin Growth Fund
Franklin Rising Dividends Fund
Franklin U.S. Long-Short Fund
SECTOR
Franklin Biotechnology Discovery Fund
Franklin DynaTech Fund
Franklin Global Communications Fund
Franklin Global Health Care Fund
Franklin Global Real Estate Fund
Franklin Gold and Precious Metals Fund
Franklin Natural Resources Fund
Franklin Real Estate Securities Fund
Franklin Technology Fund
Franklin Utilities Fund
Mutual Financial Services Fund
ASSET ALLOCATION
Franklin Templeton Corefolio Allocation Fund
Franklin Templeton Founding Funds Allocation Fund
Franklin Templeton Perspectives Allocation Fund
TARGET FUNDS
Franklin Templeton Conservative Target Fund
Franklin Templeton Growth Target Fund
Franklin Templeton Moderate Target Fund
RETIREMENT TARGET FUNDS
Franklin Templeton 2015 Retirement Target Fund
Franklin Templeton 2025 Retirement Target Fund
Franklin Templeton 2035 Retirement Target Fund
Franklin Templeton 2045 Retirement Target Fund
INCOME
Franklin Adjustable U.S. Government Securities Fund 4
Franklin's AGE High Income Fund
Franklin Floating Rate Daily Access Fund
Franklin Income Fund
Franklin Limited Maturity U.S. Government Securities Fund 4
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 4
Templeton Global Bond Fund
Templeton Income Fund
TAX-FREE INCOME 5
NATIONAL FUNDS
Double Tax-Free Income Fund
Federal Tax-Free Income Fund
High Yield Tax-Free Income Fund
Insured Tax-Free Income Fund 6
LIMITED-TERM FUNDS
California Limited-Term Tax-Free Income Fund
Federal Limited-Term Tax-Free Income Fund
New York Limited-Term Tax-Free Income Fund
INTERMEDIATE-TERM FUNDS
California Intermediate-Term
Tax-Free Income Fund
Federal Intermediate-Term
Tax-Free Income Fund
New York Intermediate-Term
Tax-Free Income Fund
STATE-SPECIFIC
Alabama
Arizona
California 7
Colorado
Connecticut
Florida 7
Georgia
Kentucky
Louisiana
Maryland
Massachusetts 6
Michigan 6
Minnesota 6
Missouri
New Jersey
New York 7
North Carolina
Ohio 6
Oregon
Pennsylvania
Tennessee
Virginia
INSURANCE FUNDS
Franklin Templeton Variable Insurance Products Trust 8
1. The fund is closed to new investors. Existing shareholders can continue
adding to their accounts.
2. The fund is only open to existing shareholders and select retirement
plans.
3. 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.
4. An investment in the fund is neither insured nor guaranteed by the U.S.
government or by any other entity or institution.
5. For investors subject to the alternative minimum tax, a small portion of
fund dividends may be taxable. Distributions of capital gains are
generally taxable.
6. Portfolio of insured municipal securities.
7. These funds are available in two or more variations, including long-term
portfolios, portfolios of insured securities, a high-yield portfolio (CA)
and limited-term, intermediate-term and money market portfolios (CA and
NY).
8. The funds of the Franklin Templeton Variable Insurance Products Trust are
generally available only through insurance company variable contracts.
07/06 Not part of the annual report
[LOGO](R) One Franklin Parkway
FRANKLIN TEMPLETON San Mateo, CA 94403-1906
INVESTMENTS
o WANT TO RECEIVE THIS DOCUMENT FASTER VIA EMAIL?
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ANNUAL REPORT AND SHAREHOLDER LETTER
TEMPLETON CHINA WORLD FUND
INVESTMENT MANAGER
Templeton Asset Management Ltd.
PRINCIPAL UNDERWRITER
Franklin Templeton Distributors, Inc.
1-800/DIAL BEN(R)
franklintempleton.com
SHAREHOLDER SERVICES
1-800/632-2301
Authorized for distribution only when accompanied or preceded by a prospectus.
Investors should carefully consider a fund's investment goals, risks, charges
and expenses before investing. Like any investment in securities, the value of
the Fund's portfolio will be subject to the risk of loss from market, currency,
economic, political and other factors. The Fund and its investors are not
protected from such losses by the investment manager. Therefore, investors who
cannot accept this risk should not invest in shares of the Fund. The prospectus
contains this and other information; please read it carefully before investing.
To ensure the highest quality of service, telephone calls to or from our service
departments may be monitored, recorded and accessed. These calls can be
identified by the presence of a regular beeping tone.
188 A2006 10/06
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 experts are David W. Niemiec and Frank A.
Olson, they are "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 $33,578 for the fiscal year ended August 31, 2006 and $23,376 for the
fiscal year ended August 31, 2005.
(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 $3,961 for the fiscal year ended
August 31, 2006 and $4,955 for the fiscal year ended August 31, 2005. The
services for which these fees were paid included tax compliance and advise.
(d) All Other Fees
The aggregate 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 were $286 for the fiscal year ended August 31, 2006
and $0 for the fiscal year ended August 31, 2005. The services for which these
fees were paid included review of materials provided to the fund Board in
connection with the investment management contract renewal process.
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 not reported
in paragraphs (a)-(c) of Item 4 were $175,575 for the fiscal year ended August
31, 2006 and $4,840 for the fiscal year ended August 31, 2005. The services for
which these fees were paid included review of materials provided to the fund
Board in connection with the investment management contract renewal process and
the review of the ICI transfer agent survey.
(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 $179,822 for the fiscal year ended August 31, 2006 and $9,795
for the fiscal year ended August 31, 2005.
(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
COMPANIES AND AFFILIATED PURCHASES. N/A
ITEM 10. SUBMISSION OF MATTERS OF A VOTE OF SECURITY HOLDERS.
There have been no changes to the procedures by which shareholders may recommend
nominees to the Registrant's Board of Trustees that would require disclosure
herein.
ITEM 11. CONTROLS AND PROCEDURES.
(a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. The Registrant maintains
disclosure controls and procedures that are designed to ensure that information
required to be disclosed in the Registrant's filings under the Securities
Exchange Act of 1934 and the Investment Company Act of 1940 is recorded,
processed, summarized and reported within the periods specified in the rules and
forms of the Securities and Exchange Commission. Such information is accumulated
and communicated to the Registrant's management, including its principal
executive officer and principal financial officer, as appropriate, to allow
timely decisions regarding required disclosure. The Registrant's management,
including the principal executive officer and the principal financial officer,
recognizes that any set of controls and procedures, no matter how well designed
and operated, can provide only reasonable assurance of achieving the desired
control objectives.
Within 90 days prior to the filing date of this Shareholder Report on Form
N-CSR, the Registrant had carried out an evaluation, under the supervision and
with the participation of the Registrant's management, including the
Registrant's principal executive officer and the Registrant's principal
financial officer, of the effectiveness of the design and operation of the
Registrant's disclosure controls and procedures. Based on such evaluation, the
Registrant's principal executive officer and principal financial officer
concluded that the Registrant's disclosure controls and procedures are
effective.
(b) CHANGES IN INTERNAL CONTROLS. There have been no significant changes in the
Registrant's internal controls or in other factors that could significantly
affect the internal controls subsequent to the date of their evaluation in
connection with the preparation of this Shareholder Report on Form N-CSR.
ITEM 12. EXHIBITS
(a)(1) Code of Ethics
(a)(2) Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
of Jimmy D. Gambill, Chief Executive Officer - Finance and Administration, and
Galen G. Vetter, Chief Financial Officer
(b) Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
of Jimmy D. Gambill, Chief Executive Officer - Finance and Administration, and
Galen G. Vetter, Chief Financial Officer
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
TEMPLETON CHINA WORLD FUND
By /s/JIMMY D. GAMBILL
Chief Executive Officer -
Finance and Administration
Date October 26, 2006
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/JIMMY D. GAMBILL
Chief Executive Officer -
Finance and Administration
Date October 26, 2006
By /s/GALEN G. VETTER
Chief Financial Officer
Date October 26, 2006