Templeton Asian Fund 30 September 2017 Franklin Templeton Investment Funds

Quarterly Commentary

Investment Team KEY POINTS

• Equities in Asia advanced in the third quarter, with positive returns in nearly all individual markets. • The fund advanced during the quarter, driven largely by holdings in China, followed by South Korea, Hong Kong and Thailand. Indonesia was the only market to weigh on performance during the quarter. • From a sector perspective, information technology was the top contributor, followed by financials and energy. Industrials provided the only significant drag on absolute performance.

Mark Mobius, Ph.D. Tom Wu, MBA PORTFOLIO MANAGER INSIGHT

Market Review “We remain optimistic about Asian equities in Equities in Asia advanced in the third quarter, lagging their broad emerging-market (EM) peers but the current climate, whilst remaining mindful of potential risks. Overall, we believe the outperforming developed-market equities. Some of the main drivers of performance were investment case for Asia continues to centre generally encouraging economic data from China and a strong rebound in global commodity around demographics, a rising middle class prices based on firming demand, along with EM currency strength against the weaker US dollar. and domestic consumption.” Amidst a general in global equities and a return of confidence, China was amongst the top-performing emerging markets overall, driven in part by a robust earnings season. Inflows Fund Description from foreign also boosted the market, along with solid second-quarter economic growth, the latter supported by strength in industrial production, retail sales and fixed asset investment. The fund aims to provide current income and Equities in Thailand also performed strongly, posting a double-digit return on the back of stronger- -term capital appreciation by investing than-expected economic growth driven by exports and tourism. Most other markets advanced, led primarily in equity securities incorporated, by Hong Kong. listed or with principal business activities in Asia ex-Japan. In contrast, equity markets in Pakistan and Indonesia declined. Pakistan was amongst the worst performers in emerging markets overall, impacted by a sharp mid-quarter decline due to political Fund Details turmoil. September marked the fifth straight month of foreign outflows from Indonesia’s market. Inception Date 26/04/2013 From a sector perspective, real estate, energy and information technology (IT) all posted double- Benchmark MSCI All Country Asia digit gains in the index. Consumer staples was the only sector to decline. ex-Japan Index Performance Review The fund advanced during the quarter, driven primarily by investments based in China. Internet were key contributors within the market. Shares of Tencent, the country’s largest and most- used internet service portal, benefitted strongly from better-than-expected quarterly revenues that saw substantial growth in its online gaming division. E-commerce company Alibaba reached a record high during the quarter, supported by several positive announcements, including impressive quarterly results and plans to invest in logistics infrastructure. Outside of IT, a in ANTA Sports Products, a manufacturer of sportswear under the ANTA brand name and of Fila products under license for the Chinese market, provided additional support. The market’s overall contribution, however, was lessened by a position in one online game developer NetEase, which was amongst the largest overall detractors. Holdings based in South Korea, Hong Kong and Thailand also contributed substantially to absolute returns. In South Korea, a top contributor was consumer electronics manufacturer Samsung Electronics, which rallied sharply towards the end of the quarter on news of record-high pre-orders for its latest smartphone. Amongst Hong Kong-based holdings, Link Real Estate Investment Trust was a key contributor. Banking group Kasikornbank and state-controlled oil and gas company PTT Public were the main contributors in Thailand.

Performance Net of Management Fees as at 30/09/2017 ( Reinvested) (%) 1 Since Inception 1 Mth 3 Mths YTD 1 Yr 3 Yrs (26/04/2013) A (acc) USD 0.37 6.67 26.40 18.15 2.24 1.90 MSCI All Country -0.11 6.75 31.22 23.02 8.19 7.42 Asia ex-Japan Index

For Professional Investor Use Only / Not For Distribution To Retail Investors Templeton Asian Dividend Fund 30 September 2017

Amongst individual markets, only Indonesia was a substantial detractor from the fund’s absolute performance, due in large part to a position in vehicle manufacturer Astra International, whose shares saw a double- digit decline for the quarter. Whilst Taiwan-based holdings aided the fund’s performance overall, shares of several smartphone and related technology suppliers were amongst the largest overall detractors, including smartphone components maker Shin Zu Shing, electronic components manufacturer Hon Hai Precision Industry and mobile phone assembler Pegatron. From a sector perspective, IT provided the bulk of the fund’s progress for the quarter, followed by financials and energy. Industrials was the only sector to substantially detract from absolute performance.

Portfolio Positioning During the quarter, the fund’s largest country position was China, followed by Taiwan and Singapore. IT represented the largest sector weighting, followed by financials and energy. These weightings arose from our -by-stock fundamental investment metrics as applied to the fund’s investment universe.

Outlook & Strategy We remain optimistic about Asian equities in the current climate, whilst remaining mindful of potential risks. Tensions in the Korean peninsula have caused some investors to worry, and an outbreak of violence could have global ramifications, with a potentially strong impact on northern Asia. However, this threat has been in existence for a long time, and most investors familiar with the region have become accustomed to it. For our part, we continue to proceed with our value-oriented investment process, taking into consideration market sentiment. Overall, we believe the investment case for Asian markets continues to centre around demographics, a rising middle class and domestic consumption. The most striking development recently, though, is the dramatic transformation of many EM companies that used to depend on ‘old-economy’ models, such as commodities or infrastructure, moving into more innovative, value-added products and services. The technology space is especially interesting to us in this regard, with several Asian companies becoming leading players in the development of world-class technology.

One-Month Performance Review The fund advanced in September, driven by the IT, energy and consumer discretionary sectors. Financials, real estate and telecommunication services weighed on returns. Geographically, most markets advanced, with the strongest contributions from South Korea, Pakistan and Thailand. Taiwan, Singapore and China detracted.

For Professional Investor Use Only / Not For Distribution To Retail Investors www.franklintempletongem.com 2 Templeton Asian Dividend Fund 30 September 2017

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