Download - Franklin Templeton Investments

Franklin Income Fund–Advisor Class
Income
Multi Asset
March 31, 2017
Product Profile
Product Details1
Fund Assets
$82,940,436,396.05
Fund Inception Date
08/31/1948
Number of Issuers
231
NASDAQ Symbol
FRIAX
Investment Style
Income
Maximum Sales Charge
Benchmark
S&P 500
Index;Bloomberg
Barclays US Aggregate
Index
Mixed-Asset Target
Allocation Moderate
Funds
Allocation—30% to 50%
Equity
Monthly, on the 3rd
business day
Lipper Classification
Morningstar Category
Dividend Frequency
Asset Allocation
Percent of Total
0.00
2
Fund Description
The fund seeks to maximize income, while maintaining prospects for capital appreciation, by
investing in a diversified portfolio of stocks and bonds.
Performance Data4,5
Average Annual Total Returns6 (%)
3 Mths
Advisor Class
S&P 500 Index
10.37
13.30
7.51
7.86
-
0.44
3.66
7.51
2.68
5.38
2.34
4.27
7.72
10.31
5.36
-
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Total Annual Operating Expenses—With Waiver: 0.46% Without Waiver: 0.46%
30-Day Standardized Yield7—With Waiver: 3.70% Without Waiver: 3.70%
17.17
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Since Inception
(08/31/1948)
0.82
20 Yrs
0.82
6.07
10 Yrs
17.77
#$
5 Yrs
3.54
3 Yrs
1 Yr
3.54
6.07
Bloomberg
Barclays US
Aggregate Index
YTD
Third-Party Fund Data
Overall Morningstar RatingTM 3
Traditional
As of 03/31/2017 the fund’s Advisor Class
shares received a 4 star overall Morningstar
Rating™, measuring risk-adjusted returns
against 408, 350 and 243 U.S.-domiciled
Allocation—30% to 50% Equity mutual funds
and exchange traded funds over the 3-, 5- and
10- year periods, respectively. A fund’s overall
rating is derived from a weighted average of the
performance figures associated with its 3-, 5and 10-year (if applicable) rating metrics.
Performance data represents past performance, which does not guarantee future results. Current
performance may differ from figures shown. The fund’s investment return and principal value will
change with market conditions, and you may have a gain or a loss when you sell your shares. Please
call Franklin Templeton Investments at (800) DIAL BEN/342-5236 or visit franklintempleton.com for
the most recent month-end performance.
Advisor Class shares are offered only to certain eligible investors as stated in the prospectus. They
are offered without sales charges or Rule 12b-1 fees. The fund offers other share classes subject to
different fees and expenses, which will affect their performance. Please see the prospectus for
details.
The fund has a fee waiver associated with any investment it makes in a Franklin Templeton money
fund and/or other Franklin Templeton fund, contractually guaranteed through 1/31/18. Fund
investment results reflect the fee waiver; without this waiver, the results would have been lower.
1. All holdings are subject to change. Holdings of the same issuers have been combined.
2. Information is historical and may not reflect current or future portfolio characteristics. Percentage may not equal 100% due to
rounding. All holdings are subject to change.
5. Source for Index: FactSet. Indexes are unmanaged, and one cannot invest directly in an index. They do not reflect any fees,
expenses or sales charges.
6. Periods shorter than one year are shown as cumulative total returns.
7. The fund’s 30-day standardized yield is calculated over a trailing 30-day period using the yield to maturity on bonds and/or the
dividends accrued on stocks. It may not equal the fund’s actual income distribution rate, which reflects the fund’s past dividends
paid to shareholders.
Not FDIC Insured | May Lose Value | No Bank Guarantee
Franklin Income Fund–Advisor Class
Calendar Year Returns (%)
Advisor Class
S&P 500 Index
Bloomberg Barclays US
Aggregate Index
2016
2015
2014
1.38
13.69
16.61
-7.75
2.65
0.55
11.96
March 31, 2017
2013
2012
3.86
14.50
14.48
5.95
-2.02
4.21
32.39
16.00
2011
2010
2009
2008
2007
-37.00
5.49
2.51
13.15
35.43
-30.27
7.84
6.54
5.93
5.24
2.11
15.06
26.46
5.08
6.97
Portfolio Manager Insight8
Market Review
US equity gauges marched through a series of record highs and posted their largest quarterly gain since 2015 as optimism surrounding President Donald
Trump’s policy initiatives joined with brightening domestic economic data to drive equity markets higher. An improving corporate earnings outlook and
increased confidence among businesses and consumers were also supportive. The first-quarter 2017 rally was further backed by signs of synchronized
developed- and emerging-market growth underpinned by stronger leading indicators in China, Europe and Japan. Major US equity indexes eventually
saw their upward trend lines break to the downside in March. At that point, growing skepticism surrounding the Trump administration’s ability to enact a
pro-business agenda weighed on sectors that had previously benefited from the “Trump trade,” namely financials and industrials. Technology companies
led the market higher for the quarter, followed by smaller gains in the consumer discretionary, health care and six other sectors, along with contrasting
declines in the energy and telecommunication services sectors. Large- and mid-capitalization stocks enjoyed solid average gains, while small caps were
notable laggards. In terms of investment style, growth-oriented stocks generally outperformed their value counterparts regardless of company size.
Across the globe, developed equity markets produced solid returns that generally outpaced the United States, as did most emerging and frontier markets.
Incoming US economic data reflected a tight labor market amid low unemployment, gradually accelerating inflation, stronger housing demand, and
resilient spending across most consumer segments. A key consumer sentiment gauge reached its highest level since late 2000 as more Americans
thought jobs were plentiful than at any point since 2001. Manufacturing activity continued to improve, while ongoing expansion in the US services sector
cooled off somewhat near quarter-end but remained near cyclical peak levels. The US Federal Reserve (Fed) offered a broadly positive economic
assessment in March and raised benchmark short-term interest rates for just the third time in a decade.
Performance Review
Absolute contributions to the fund’s first-quarter 2017 returns came from a wide variety of holdings as most of them advanced on both the equity and
fixed income sides of the portfolio. Much of the equity gains came from the health care, information technology (IT), materials, utilities and consumer
staples sectors. Energy and consumer discretionary equities saw widespread declines, while the fund’s fixed income portion contained few detractors.
Equity Analysis
After underperforming in 2016, health care stocks rallied and made the largest overall sector contribution to returns for the January–March span. Within
the group, our pharmaceutical industry holdings had a significant positive impact. Shares of top contributor Eli Lilly rebounded after a disappointing
clinical trial result in the fall of 2016, as its latest quarterly results demonstrated an increasingly attractive product portfolio across several categories.
AstraZeneca also posted better-than-expected earnings, and the company continued to be a highly sought-after partner for several of its pharmaceutical
industry peers due to its focused development pipeline. Meanwhile, Sanofi’s returns were led higher by impressive profit margin performance as the
company continued to pursue several products addressing large therapeutic areas of unmet need.
Most IT-related equity holdings rallied, including Apple, Microsoft and Oracle, as many technology companies reported stronger-than-expected sales and
earnings metrics for the final quarter of 2016. In general, the fund’s IT holdings have benefited from accelerating earnings growth and a more optimistic
tone from tech company executives. In particular, Apple and Microsoft were rewarded for their high profitability levels as they revealed fourth quarter
2016 earnings results that topped consensus estimates by a wide margin. Apple’s common stock displayed new momentum and surged to an all-time
high after it reported strong demand for the iPhone 7. Improved sales in China and surging sales of apps and streaming music subscriptions also buoyed
Apple’s stock. Apple Chief Executive Officer Tim Cook also expressed optimism that tax legislation under the Trump administration anticipated later this
year could enable Apple to bring home—or repatriate—cash held overseas, which could in turn be used for stock buybacks, dividends or acquisitions. At
the same time, Microsoft’s Azure cloud-computing platforms and services have become a major revenue generator for the company.
All of our materials sector investments advanced on signs of stronger global demand that has helped diminish inventory overhangs and supply surpluses
in key commodity markets, and on expectations of increased infrastructure spending under the new US presidential administration. The sector was
further supported by the inverse pricing correlation of a weaker trade-weighted US dollar (which makes commodities less expensive for non-US buyers),
strengthening copper demand in the US and China, and ongoing cost-containment efforts among major mining conglomerates. All of the fund’s equity
positions in the materials sector—a mix of chemical manufacturers, fertilizer producers, and diversified metals and mining firms—traded higher, led by
Dow Chemical and BASF. The potential for eventual approval of Dow’s intended merger with DuPont (not a fund holding) grew more likely in early 2017.
Investor optimism that the combination should drive additional value creation over time underpinned the rally in Dow’s common stock. BASF continued to
show healthy cash flow generation, and its diversified portfolio across products and geographies enabled favorable product development.
Following overall declines in the latter half of 2016, utility equities rebounded and nearly all of our related holdings increased in value. Until recently, utility
stocks had been languishing on the view that fixed income instruments had become more attractive on a relative basis and bond-like equities such as
utilities had become less enticing. In our analysis, no equity sector appears to be as negatively correlated to rising interest rates as utilities. Nonetheless,
higher-yielding utilities remained a compelling destination for many yield-hungry investors as benchmark Treasury yields declined. In the consumer
staples sector, all holdings advanced, including global tobacco producer Philip Morris International, which reported strong sales with favorable pricing in
their legacy products, in addition to incremental returns from newer product platforms. Financials and industrials holdings also fared well overall.
Financials sector results were lifted foremost by broad contributions from our bank holdings. Expectations for rising real interest rates continued to move
higher, and the notion that higher rates typically lead to improving lending profitability underpinned the sector’s gains. Speculation about the prospect of
lower taxes and lighter bank regulations under the Trump administration also boosted the stocks of large global banks. Finally, a notable contributor to
performance within the energy sector was oilfield services company Weatherford International, which appointed a new chief executive officer and
embarked on a joint venture with Schlumberger (also a fund holding) that was well received by investors.
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Franklin Income Fund–Advisor Class
March 31, 2017
Conversely, energy and consumer discretionary equities had a negative impact on the fund’s overall results. After a strong rebound in 2016, energy
holdings detracted from performance in January and February as rising US onshore oil-rig counts and elevated global crude oil inventory levels
pressured energy commodities and numerous related equities outside of the oilfield services industry. Chevron, BP, Occidental Petroleum, Halćon
Resources and Royal Dutch Shell were among the key detractors. Chevron, in particular, reported a fourth quarter that was weaker than consensus
expectations, driven in part by significant maintenance downtime at one of its refineries. The major point of weakness in the consumer discretionary
space was US-based general merchandise retailer Target, which was also the fund’s leading detractor for the quarter. Target announced that strong
holiday season results, which started off with solid Black Friday sales, did not continue through year-end 2016. It also offered weak guidance for 2017
that was emblematic of many brick-and-mortar retailers’ struggles versus their online competitors. The softness was store traffic-related, with weakness
in food, essentials and electronics sales. Furthermore, heavier promotions throughout the quarter and the more meaningful consumer shift to Internet
retailers hurt its margins. In seeking to improve the trajectory of the business, the company has vowed to lower prices and remodel hundreds of stores
while enhancing its online and supply chain capabilities. Beyond these two allocations, there were only a handful of other detractors across the equity
portion. General Electric trimmed the overall contribution from industrials holdings; Verizon (telecommunication services) reported weaker-thananticipated results driven by increased competition within their wireless business; and Teva Pharmaceutical Industries reduced our overall advance in
health care amid disappointing quarterly earnings and negative outcomes in regard to drug patent challenges.
Fixed Income Analysis
What many investors at the outset of 2017 thought was supposed to be the year of the bear market in bonds has thus far turned out to be just the
opposite. The decline in longer-term yields was largely a tailwind for corporate fixed income securities, which ended the period in positive territory despite
flat results in March. Investors continued to migrate into higher-yielding corporate bonds even as their yield spreads versus Treasuries have narrowed as
prices reached recent highs. A strong quarter for equities also helped encourage a strong run-up for lower-quality, more economically sensitive securities
such as high-yield corporate debt, which generally outperformed investment-grade counterparts. According to our analysis, high-yield corporate debt
default rates continued to decline during the period as liquidity and access to capital remained favorable amid robust new issuance, particularly in March
as issuers rushed to get ahead of the Fed’s latest interest-rate hike. Loan default rates declined overall during the period.
Given the stable fundamentals outlined above, the fund benefited from the increased buying and issuance within the high-yield corporate bond space,
and all of our related sector/industry allocations helped propel absolute returns higher. Furthermore, all credit-quality tranches represented in the portfolio
were supportive, with the highest average returns generally pertaining to non-investment grade credits rated CCC+ and below. This sub-category
outperformed as overall yield spread compression during the period helped lower-rated bonds most of all. The small portion of the fund dedicated to
investment-grade bonds rated BBB and above also performed well, but to a lesser degree.
In terms of corporate bond sectors and industries, the overall gain was led by consumer non-cyclicals, in particular hospital and health care center
operators such as Community Health Systems and Tenet Healthcare; communications, in which iHeart Communications and Sprint were the strongest of
numerous contributors; energy, led by Weatherford International and W&T Offshore; and banking, as Citigroup, JPMorgan Chase and all other related
positions advanced. Notably, most of the fund’s energy bonds fared better than related equities as many investors maintained confidence in these
companies’ ability to pay down their long-term debt despite a lack of crude oil and natural gas pricing power so far in 2017. Moreover, green shoots of
pricing power have emerged on the services side of the energy value chain, which has benefited Weatherford in particular. Among health care-focused
bonds, Community Health and Tenet outperformed as concerns about the potential repeal of the Affordable Care Act receded. Hospitals were the biggest
beneficiaries of this change in sentiment. In addition, Community Health reported much better-than-expected fourth-quarter earnings and announced
several asset sales at robust deleveraging multiples, leading to significant outperformance relative to the broader market.
There were few individual detractors across the fund’s 13 fixed income sector/industry allocations. Academy, a sporting goods retailer, had a modestly
negative impact in the consumer cyclical sector.
Portfolio Positioning
While equities have continued to represent a larger weighting in the portfolio than fixed income, much as they did in 2016, the fund’s allocations shifted
incrementally out of equities and into bonds thus far in 2017. Our equity allocation at the end of March was 55.6% of total holdings versus 41.0% for fixed
income securities, compared to 59.4% and 37.7% at the end of 2016. Meanwhile, the cash position increased from 3.0% to 3.3%. The largest quarterend equity allocations were energy, financials and health care. Our largest exposures in fixed income were consumer non-cyclical, communications and
energy. The equity weighting included 16.0% in convertible securities and equity-linked notes (ELNs) that we believe offer attractive yield and total return
potential. Corporate bonds comprised 37.1% of the fund’s fixed income portion, with the remainder (3.9%) in bank loans. Non-US holdings, meanwhile,
represented approximately 15.6% of the combined portfolio at the end of March (down from 17.6% at year-end 2016).
Outlook & Strategy
We continue to hold the view that US interest rates may be poised to rise further in the quarters and years ahead as economic indicators, including
inflation, gradually recover from the unusually low levels that persisted after the 2008-2009 global financial crisis. The portfolio’s positioning reflects our
efforts to navigate this scenario. That said, while real yields have risen recently, corporate bond spreads have narrowed as investor demand for high-yield
fixed income securities has remained strong. We believe this trend, along with what recently have been rising stocks and commodities and a relatively
flat US dollar, point to continued optimism about the global economy. Interest rates have remained low by historical standards, but the Fed has moved to
a new and more aggressive phase of withdrawing “easy money” from the financial system as the economy improves. In addition, we are seeing early
evidence of a synchronized global upturn year-to-date in 2017. In our view, central banks in the world’s other major economies are not yet feeling as
compelled as the United States to tighten their monetary policies given the earlier stages of their economic recoveries. However, we anticipate directional
moves towards tightening in the future by other global central banks as their economic data continue to gradually improve. Quantitative easing and other
unconventional monetary policy tools appear to have served their intended purpose during the depths of the global financial crisis—loosening financial
conditions by incrementally lowering market interest rates. At this point, it appears that the US and global financial markets have returned to levels of
stability that no longer warrant such aggressive monetary tools.
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3
Franklin Income Fund–Advisor Class
March 31, 2017
In the United States, we anticipate faster growth potential for earnings, cash flow and dividends. We think this environment is well suited for active
managers like us. One thing that clearly stands out to us is that within the last four or five months, we have seen more differentiation and lower
correlation among sectors and individual stocks than we have over the past few years. Certain drivers that previously existed—including a generally
strong investor preference for yield and stability—drove specific sectors. Real estate investment trusts, utilities, consumer staples and telecommunication
services stocks all were good examples; these areas were very strong performers and saw some elevated valuations. In 2017, attention has pivoted
somewhat to stocks and sectors that have a little more of a cyclical component—financials, industrials, technology, and to some extent energy.
Financials, in particular, tend to do better when rates rise and the yield curve steepens, because these firms can charge more for loans while more slowly
adjusting deposit rates. The steepening of the yield curve (in which yields on long-term bonds rise faster than on short-term issues) and the narrowing of
credit spreads (the difference in yield between bonds of similar duration but of different credit quality) are certainly positive developments for financials.
So are the prospects of fewer regulations and the reduced costs of compliance. Ultimately, we think the current environment represents an attractive time
for active management and for us to be able to leverage our fundamental research.
On the policy front, there clearly has been a learning curve for President Trump and his advisors, which is likely true of every new administration. We
have not yet seen any of the policies that may lead to better economic growth meaningfully derailed, but Trump’s first 50 or so days in office likewise did
little to allay concerns about a potential policy mistake. Nevertheless, we continue to see a positive overall backdrop for 2017 that is apt to be sustainable
into 2018 as policy proposals become more concrete and move towards enactment.
Globally, on the equity side, there has been underperformance in a number of regions versus the United States, and valuations at quarter-end were
generally a bit lower, which we regard as interesting. We continue to find compelling opportunities amongst some leading multinational companies that
provide exposure to investment themes in both the United States and emerging-market economies. As always, there are risks we must take into careful
consideration. Reflation can be positive, but there is another side to that coin: Inflation, rising input costs and wage pressures all can be problematic and
offset some of the positive aspects. We think stocks on a relative basis still held fairly strong appeal as we entered 2017’s second quarter. We also
believe there is potential for further upside in the months ahead, but not without risks we need to monitor.
Dividends remain a core focus of the portfolio’s equity portion. To be sure, the pace of dividend growth has been decelerating but is still ample, as
evidenced by elevated payout ratios. We believe the strong growth in dividends achieved over the last five years pulled forward some future growth and
therefore earnings-per-share (EPS) need to catch up, meaning an estimate that modestly lags projected EPS growth might be appropriate. We expect
US banks may be well positioned to generate some of the strongest dividend growth going forward, while other sectors, including real estate and
automobile manufacturers, may see reduced aggregate dividends payouts.
In line with a positive assessment of broader economic fundamentals, credit conditions have remained broadly favorable, in our view, with still-low
interest rates, generally strong corporate balance sheets, manageable debt service costs, and markets that still have appeared receptive to debt
offerings. We hold a constructive view on corporate credit, including investment grade and high-yield issues, even though it has had a healthy run. We
still think these sectors could broadly benefit from economic tailwinds despite the increased risks posed by tightening credit spreads. Amongst corporate
bonds rated below investment grade, we are cognizant of the risk of distress and defaults when we are so far into the US economic cycle. We monitor
the situation closely, but we have not seen early signs of broad credit deterioration, at least for the near- to-intermediate term. Default rates have
remained low, particularly outside of the energy sector, and we believe an improving economy should help continue that trend. In other words, one can
find challenging conditions in some isolated portions of US credit markets—including energy, materials and increasingly in traditional brick-and-mortar
retailers—but we think the overall outlook remains constructive. We expect the Fed to continue raising short-term interest rates as it seeks a more neutral
level of interest rates across the yield curve, and that it will do so in a more consistent fashion over time. Given the strength of the US economy, we view
Fed tightening with a positive lens and believe there are still plenty of potential opportunities within the fixed income universe for investors.
The recent narrowing of high yield bond spreads (relative to comparable Treasury yields) suggests that the high-yield asset class’s valuations have
grown incrementally more rich in tandem with the general direction of equity market valuations. Of course, broad-based asset class gauges such as
these provide some insight on general market trends, but they do not accurately represent the fund’s individual holdings that are constructed with an
active, research-driven process. We view the market fundamentals—for investment grade and below—as healthy, and the corporate outlook looks good
to us. Notably, ratings agency Moody’s recently updated its forecast for defaults in 2017, in which it saw default rates coming down over the course of the
year for non-investment-grade corporate debt securities. Additionally, high yield corporate bonds have historically tended to trade a bit rich later in the
economic cycle, and we do not see an end to this current economic cycle in the near term. US high-yield bond issuance reached a multi-year high in
March (due partially to a wave of refinancing) as investor demand has remained strong, which suggests that financial markets remain receptive to
credit investments.
If US interest rates continue to rise, we suspect companies will continue to evaluate their capital structures, and that may create new investment
opportunities. However, we are also cognizant that lower-quality, high-yield debt is more sensitive to prospective monetary policy hikes because the firms
issuing such securities generally have more debt on their balance sheets and often hold other debt that is subject to floating rates. Even if these
companies’ free cash flow is positive, higher interest rates may quickly push their interest cost burden up and weigh down their free cash flow. Though
unlikely, there is also a chance that spreads might rise even as better economic growth boosts free cash flow, since better economic growth may also
shift the Treasury rate structure and their interest costs to a larger degree. That said, we think spread tightening is the more likely scenario. We see how
higher-quality, investment-grade companies—in contrast to those who issue lower-rated debt—generally have more stable balance sheets that are not as
sensitive to policy rates. The bottom line is that the upward shift in the rate outlook from faster economic growth does not cut across the credit spectrum
uniformly. Potential risks going forward include weaker investor demand for fixed income securities in response to rising interest rates, which in turn could
drive outflows from bond funds and put downward pressure on market prices. Additionally, worries about credit trends amongst the financially weakest
high-yield issuers on the lower end of the credit spectrum (CCC and below, generally) could trigger market volatility. President Trump’s proposed
regulatory reforms and corporate income tax relief may also fall short of investor expectations, which could further destabilize debt financing markets.
We have also noticed an incremental movement by some investors away from high-yield corporate bonds and into bank loans, which are syndicated
loans issued by below-investment-grade companies. Bank loans are ranked higher in the capital structure than bonds and have rates that adjust upwards
as interest rates rise. Increased investor demand for loans versus bonds could indicate a growing market preference for less credit risk and desire for
greater protection from rising interest rates.
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Franklin Income Fund–Advisor Class
March 31, 2017
Consistent with our cautiously optimistic view, the fund’s fixed income holdings continue to emphasize corporate debt in the middle to upper range of the
below-investment-grade ratings spectrum, with a bias towards shorter maturities as a means to manage interest-rate risk. The most recent phase of the
US fixed income market rally, which has included record-high quantities of new bonds issued across the credit quality spectrum, has provided ample
access to credit for riskier borrowers at favorable terms. In this environment, we are staying focused on the potential for downside fundamental and
political risks, including the broader outlook for high-yield fixed income as warnings mount over a looming “maturity wall” facing lower-rated companies
over the next five years. In sum, while we believe attractive value exists in some portions of the US high-yield bond universe in the months ahead, we
remain selective and highly cognizant of the risks that inevitably come with such buoyant market conditions.
8. The information provided is not a complete analysis of every material fact regarding any country, market, industry, security or fund. Because market and economic conditions are subject to change,
comments, opinions and analyses are rendered as of the date of this posting and may change without notice. A portfolio manager’s assessment of a particular security, investment or strategy is not
intended as individual investment advice or a recommendation or solicitation to buy, sell or hold any security or to adopt any investment strategy; it is intended only to provide insight into the fund’s
portfolio selection process. Holdings are subject to change.
Portfolio Characteristics9,10,11
Portfolio
Price to Earnings (12 Month Trailing)
Price to Book Value
141,962.87
Average Duration
%
4.44
8.17
Percent of Total
2.64
CHESAPEAKE ENERGY CORP
2.51
2.21
2.16
2.09
2.02
1.82
ROYAL DUTCH SHELL PLC
TENET HEALTHCARE CORP
BANK OF AMERICA CORP
MICROSOFT CORP
WELLS FARGO & CO
SPRINT CORP
GENERAL ELECTRIC CO
2.07
1.86
1.72
6.00
Geographic Allocation13
JPMORGAN CHASE & CO
COMMUNITY HEALTH SYSTEMS INC
163,919.22
Bloomberg Barclays US Aggregate Index
3.24
Portfolio Diversification
12.78
Portfolio
Average Weighted Maturity
Top Holdings
3.09
8.57
Market Capitalization (Millions in USD)
Percent of Total
22.75
2.08
Price to Cash Flow
Top Ten Holdings12
S&P 500 Index
19.87
9. The portfolio characteristics listed are based on the fund’s underlying holdings, and do not necessarily reflect the fund’s characteristics. Due to data limitations all equity holdings are assumed to be
the primary equity issue (usually the ordinary or common shares) of each security’s issuing company. This methodology may cause small differences between the portfolio’s reported characteristics
and the portfolio’s actual characteristics. In practice, Franklin Templeton’s portfolio managers invest in the class or type of security which they believe is most appropriate at the time of purchase. The
market capitalization figures for both the portfolio and the benchmark are at the security level, not aggregated up to the main issuer. Average Weighted Maturity and Average Duration data points
pertain to the fixed income component of the fund. Information is historical and may not reflect current or future portfolio characteristics. All holdings are subject to change.
10. Source: FactSet. Price ratio calculations for weighted average use harmonic means. Any exception to this are noted.
11. Source for Index: FactSet. Indexes are unmanaged, and one cannot invest directly in an index. They do not reflect any fees, expenses or sales charges.
12. Holdings of the same issuers have been combined. Top ten holdings information is historical and may not reflect current or future portfolio characteristics. All holdings are subject to change. The
information provided is not a recommendation to purchase, sell, or hold any particular security. The portfolio manager for the fund reserves the right to withhold release of information with respect to
holdings that would otherwise be included.
13. Information is historical and may not reflect current or future portfolio characteristics. Percentage may not equal 100% due to rounding. All holdings are subject to change.
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Franklin Income Fund–Advisor Class
March 31, 2017
Sector Weightings vs. S&P 500 Index14
Sector Weightings vs. Bloomberg Barclays US Aggregate Index15
Equity as a Percent of Total
Fixed Income as a Percent of Total
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14,15. Information is historical and may not reflect current or future portfolio characteristics. All holdings are subject to change.
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Franklin Income Fund–Advisor Class
March 31, 2017
Credit Quality Ratings16
Fixed Income as a Percent of Total
Supplemental Performance Statistics
Supplemental Risk Statistics17,18
Standard Deviation
Franklin Income Fund
Tracking Error
Information Ratio
Beta
Sharpe Ratio
Franklin Income Fund
3 Yrs
5 Yrs
10 Yrs
8.63
7.97
12.05
5.49
5.47
7.28
-1.22
-1.06
-0.29
0.41
0.93
0.40
0.71
0.66
0.70
Performance data represents past performance, which does not guarantee future results. Current performance may differ from figures shown. The fund’s
investment return and principal value will change with market conditions, and you may have a gain or a loss when you sell your shares. Please call
Franklin Templeton Investments at (800) DIAL BEN/342-5236 or visit franklintempleton.com for the most recent month-end performance.
16. Ratings shown are assigned by one or more Nationally Recognized Statistical Rating Organizations (‘NRSRO’), such as Standard & Poor’s, Moody’s and Fitch. The ratings are an indication of an
issuer’s creditworthiness and typically range from AAA or Aaa (highest) to D (lowest). When ratings from all three agencies are available, the middle rating is used; when two are available, the lowest
rating is used; and when only one is available, that rating is used. Foreign government bonds without a specific rating are assigned the country rating provided by an NRSRO, if available. The NR
category consists of rateable securities that have not been rated by an NRSRO. The N/A category consists of nonrateable securities (e.g., equities). Cash and equivalents as well as derivatives are
excluded from this breakdown. As a result, the chart does not reflect the fund’s total net assets. Information is historical and may not reflect current or future portfolio characteristics. All holdings are
subject to change.
17. Beta, Information Ratio and Tracking Error information are displayed for the product versus the S&P 500 Index.
18. Information ratio is a way to evaluate a manager’s ability to outperform a benchmark in relation to the risk that manager is assuming, with risk defined as deviation from the benchmark. This
measure is calculated by dividing the portfolio’s excess return (portfolio return less the benchmark return) by the tracking error (derived by taking the standard deviation of the monthly differences
between the portfolio return and the benchmark return over time).
franklintempleton.com
7
Franklin Income Fund–Advisor Class
March 31, 2017
Investment Philosophy and Process
Investment Philosophy
To maximize income while maintaining prospects for capital appreciation.
Investment Approach
Investment Process: Fundamental Research Drives Portfolio
Construction
g Monitorin
g&
goin
On
R
Broad Opportunity Set
Seek relative value opportunities across the capital structure including equities,
fixed income and convertible securities.
Investment Team
Edward D. Perks, CFA
Matt Quinlan
Todd Brighton, CFA
Richard Hsu, CFA
k
Collaborative
Idea Generation
Portfolio
Construction
with a Focus
on Income
In-Depth
Fundamental
Research
en t
em
ag
Focus on Income & Relative Value
Search for undervalued or out-of-favor securities that offer attractive income and
strong long-term capital appreciation potential.
is
an
M
Opportunistic Across Capital Structure
Seek to take advantage of investment opportunities where our fundamental views
may differ from the market consensus.
Search for
Relative Value
Across Capital
Structure
Years with Firm
Years Experience
11
22
24
16
20
24
17
21
Glossary
Average Duration: A measure of the sensitivity of the price (the value of principal) of a fixed-income investment to a change in interest rates. Duration is
expressed as a number of years.
Average Weighted Maturity: An estimate of the number of terms to maturity, taking the possibility of early payments into account, for the underlying
holdings. Maturity is expressed as a number of years.
Beta: A measure of the magnitude of a portfolio’s past share-price fluctuations in relation to the ups and downs of the overall market (or appropriate
market index). The market (or index) is assigned a beta of 1.00, so a portfolio with a beta of 1.20 would have seen its share price rise or fall by 12% when
the overall market rose or fell by 10%.
Information Ratio: In investing terminology, the ratio of expected return to risk. Usually, this statistical technique is used to measure a manager’s
performance against a benchmark. This measure explicitly relates the degree by which an investment has beaten the benchmark to the consistency by
which the investment has beaten the benchmark.
Market Capitalization: A determination of a company’s value, calculated by multiplying the total number of company stock shares outstanding by the
price per share. Market capitalization is expressed in millions of USD.
Price to Book Value: The price per share of a stock divided by its book value (i.e., net worth) per share. For a portfolio, the value represents a weighted
average of the stocks it holds.
Price to Cash Flow: Supplements price/earnings ratio as a measure of relative value for a stock. For a portfolio, the value represents a weighted
average of the stocks it holds.
Price to Earnings (12-mo Trailing): The share price of a stock, divided by its per-share earnings over the past year. For a portfolio, the value represents
a weighted average of the stocks it holds.
Sharpe Ratio: To calculate a Sharpe ratio, an asset’s excess returns (its return in excess of the return generated by risk-free assets such as Treasury
bills) are divided by the asset’s standard deviation.
Standard Deviation: A measure of the degree to which a fund’s returns varies from the average of its previous returns. The larger the standard
deviation, the greater the likelihood (and risk) that a fund’s performance will fluctuate from the average return.
Tracking Error: Measure of the deviation of the return of a fund compared to the return of a benchmark over a fixed period of time. Expressed as a
percentage. The more passively the investment fund is managed, the smaller the tracking error.
franklintempleton.com
8
Franklin Income Fund–Advisor Class
March 31, 2017
What Are The Risks?
All investments involve risks, including possible loss of principal. The fund’s share price and yield will be affected by interest rate movements. Bond prices generally move in the opposite direction of
interest rates. Thus, as the prices of bonds in the fund adjust to a rise in interest rates, the fund’s share price may decline. Changes in the financial strength of a bond issuer or in a bond’s credit rating
may affect its value. The fund’s portfolio includes a substantial portion of higher-yielding, lower-rated corporate bonds because of the relatively higher yields they offer. Floating-rate loans are lowerrated, higher-yielding instruments, which are subject to increased risk of default and can potentially result in loss of principal. These securities carry a greater degree of credit risk relative to
investment-grade securities. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions.
These and other risk considerations are discussed in the fund’s prospectus.
Important Legal Information
Investors should carefully consider a fund’s investment goals, risks, charges and expenses before investing. To obtain a summary prospectus and/or prospectus, which contains this and other
information, talk to your financial advisor, call us at (800) DIAL BEN/342-5236 or visit franklintempleton.com. Please carefully read a prospectus before you invest or send money.
CFA® and Chartered Financial Analyst® are trademarks owned by CFA Institute.
Standard & Poor’s®, S&P® and S&P 500® are registered trademarks of Standard & Poor’s Financial Services LLC. S&P does not sponsor, endorse, sell or promote and S&P index-based product.
Important data provider notices and terms available at: www.franklintempletondatasources.com
3. Source: Morningstar®, 03/31/2017. For each mutual fund and exchange traded fund with at least a 3-year history, Morningstar calculates a Morningstar Rating™ based on how a fund ranks on a
Morningstar Risk-Adjusted Return measure against other funds in the same category. This measure takes into account variations in a fund’s monthly performance, and does not take into account the
effects of sales charges, placing more emphasis on downward variations and rewarding consistent performance. The top 10% of funds in each category receive 5 stars, the next 22.5% receive 4
stars, the next 35% receive 3 stars, the next 22.5% receive 2 stars and the bottom 10% receive 1 star. The weights are: 100% 3-year rating for 36-59 months of total returns, 60% 5-year rating/40% 3year rating for 60-119 months of total returns, and 50% 10-year rating/30% 5-year rating/20% 3-year rating for 120 or more months of total returns. While the 10-year overall star rating formula seems
to give the most weight to the 10-year period, the most recent 3-year period actually has the greatest impact because it is included in all three rating periods. The Fund’s Advisor Class shares
received a Morningstar Rating of 3, 5 and 3 star(s) for the 3-, 5- and 10-year periods, respectively. Morningstar Rating™ is for the named share class only; other classes may have different
performance characteristics. Past performance is not an indicator or a guarantee of future performance.
4. Effective 12/31/1996, the fund began offering Advisor Class Shares. For periods prior to the fund’s Advisor Class inception date, a restated figure is used based on the fund’s oldest share class,
Class A performance, excluding the effect of Class A’s maximum initial sales charge but reflecting the effect of the Class A Rule 12b-1 fees; and b) for periods after the fund’s Advisor Class inception
date, actual Advisor Class performance is used, reflecting all charges and fees applicable to that class.
Franklin Templeton Distributors, Inc.
One Franklin Parkway
San Mateo, CA 94403-1906
(800) DIAL BEN/342-5236
franklintempleton.com
© 2017 Franklin Templeton Investments. All rights reserved.
609 PP 03/17