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January 11, 2013 Portfolio Update 27 January 2015 Winners and Losers from Oil Price Decline PERSPECTIVE FROM THE FRANKLIN TEMPLETON GLOBAL BOND GROUP Michael Hasenstab, Ph.D. Executive Vice President, Portfolio Manager, Chief Investment Officer, Global Bonds Franklin Templeton Fixed Income Group® Sonal Desai, Ph.D. Senior Vice President, Portfolio Manager, Director of Research, Global Bonds Franklin Templeton Fixed Income Group® Global oil prices sharply declined by 50 percentage points over Chart 1: Brent Crude Price per Barrel (US$) the course of 2014. The fall from a 2014-peak of over 3 January 2014–31 December 2014 US$110/barrel in June to around US$56/barrel by end- 120 December has triggered a broad-based selloff of emergingmarket assets, including currencies. A variety of different reasons appear to have contributed to the downward pressure 110 100 on oil prices on both the supply and demand side. On the supply side, technological innovations in drilling techniques have led to 90 an increase in output from non-OPEC nations and added inventory. At the same time, OPEC has not yet taken steps to reduce member country production. On the demand side, concerns regarding a slowdown in global growth may have negatively influenced demand for crude. If we look at the 80 70 60 reduction in prices, we have seen both clear winners and losers emerge. Commodity producers in which oil is the main revenue source could face greater vulnerabilities and budgetary stress. However, as most major economies are oil importers, this price 50 40 decline, in our view, is likely to add rather than subtract from global growth; the effect of the decline in oil prices is Source: Bloomberg comparable to a tax cut for these economies. Nonetheless, the sharp decline has led to volatility in asset prices and triggered broad-based fear across nearly all emerging markets. For Institutional/Professional Investors Only. Not For Distribution To Retail Investors. Bifurcated Impact – Winners/Losers We believe select countries that lack reserve funds and that rely heavily on oil to support state budgets and current account balances will likely suffer from lost revenue and lower growth. Oil related revenues for the major oil-producing countries of Russia and Venezuela represent a significant portion of their respective total fiscal revenue. These countries have already been facing deep economic problems and are likely to experience more strains should depressed oil prices persist, with meaningful cuts to GDP (gross domestic product) possible. On the other hand, we believe the decline in oil prices is potentially favorable for a host of net-energy importers ranging from developed nations such as Japan and certain European Union members to emerging markets such as India and South Korea. The drop in prices also has the potential to bolster economic reform in certain economies. Recently, many emerging-market countries, such as Malaysia and Indonesia, have moved toward cutting fuel subsidies while others, such as India and Egypt, have made similar policy commitments to improve their public finances. Commodity and Currency Volatility In times of uncertainty and volatility, short-term panic and contagion have the potential to trigger broad-based selloffs across emerging markets and risky assets, including currencies. The decline in oil price has placed downward pressure on foreign exchange markets, particularly those of countries dependent on oil sales such as Russia (see chart below). We expect that currencies with strong ties to commodity prices will likely remain under pressure if softer oil prices persist. However, we believe currencies of countries that have a diverse export base and a fiscal budget supported by multiple revenue sources are likely to be more resilient and could potentially outperform those of countries highly reliant on a single sector when volatility subsides and fundamental factors drive valuations. Portfolio Update In the short term, the broad strengthening of the US dollar along with depreciating emerging-market currency movements from lower energy prices and renewed concerns over global growth have weighed on the Templeton Global Bond Plus strategy’s performance. However, the fundamental outlook underpinning our currency positions has not changed; we expect the currencies of economies with relatively strong growth and with more prudent policies to likely appreciate against the currencies of the G3 (i.e., the United States, the eurozone and Japan) over the longer term. As part of the fundamental research process, our investment team assesses a country’s oil price exposure and whether a country has multiple levers to deal with an oil price shock. We seek to avoid countries that we believe do not have the ability to deal with declining oil prices, such as Venezuela, and have generally favored countries with strong fundamentals and a broad mix of industries like Malaysia and Mexico. Moreover, a handful of Asian countries, from South Korea to India, are large oil importers: A decline in oil prices would likely be favorable to their economies and current account dynamics. Chart 2: Russian Ruble Performance Indexed As at 31 December 2014 110 100 90 80 70 60 50 40 3/1/14 3/3/14 1/5/14 29/6/14 27/8/14 25/10/14 23/12/14 31/12/14 (Index) RUB/USD – Price Source: FactSet. See www.franklintempletondatasources.com for additional data provider information. For Institutional/Professional Investors Only. Not For Distribution To Retail Investors. Winners and Losers from Oil Price Decline 2 Strong Long-Term Performance Despite the recent negative performance, as at 31 December Amid the headline news and market noise, we encourage investors to be patient and maintain a longer-term focus. We believe the ability to weather short-term volatility enables investors to achieve strong risk-adjusted performance that is based on underlying fundamentals. 2014, the Templeton Global Bond Plus Composite outperformed its benchmark over the one-, three-, five- and 10-year periods. Table 1: Composite Performance Data Total Returns (USD %) As at 31 December 2014 Inception Date 3 Mo 1 Yr 3 Yr* 5 Yr* 10 Yr* Templeton Global Bond Plus – Gross of Fees 31/12/1993 -1.55 2.50 7.32 6.72 8.51 Templeton Global Bond Plus – Net of Fees 31/12/1993 -1.66 2.04 6.84 5.98 7.53 JP Morgan Global Government Bond Index (JPM GGBI) -0.91 0.67 -0.88 2.13 3.36 Excess return (gross of fees) vs. JPM GGBI -0.64 1.83 8.20 4.59 5.15 Excess return (net of fees) vs. JPM GGBI -0.75 1.37 7.72 3.85 4.17 *Periods greater than one year are shown as average annual total returns. Performance data represents past performance, which does not guarantee future results. Current performance may differ from figures shown. Total returns are presented in USD both gross and net of investment advisory fees, are inclusive of commission and transaction costs, and assume reinvestment of any dividends, interest income, capital gains or other earnings. An index is unmanaged and one cannot invest directly in an index. The benchmark is used for comparative purposes only and is provided to represent the investment environment existing during the time periods shown. The Templeton Global Bond Plus strategy is managed independent of any benchmark. The differences between the strategy and its benchmark may include but are not limited to such differences as level of risk, holdings, duration, average credit quality and geographic allocation. For Institutional/Professional Investors Only. Not For Distribution To Retail Investors. Winners and Losers from Oil Price Decline 3 WHAT ARE THE RISKS? All investments involve risks, including possible loss of principal. Currency rates may fluctuate significantly over short periods of time, and can reduce returns. Derivatives, including currency management strategies, involve costs and can create economic leverage in the portfolio which may result in significant volatility and cause the portfolio to participate in losses (as well as enable gains) on an amount that exceeds its initial investment. The portfolio may not achieve the anticipated benefits, and may realize losses when a counterparty fails to perform as promised. Foreign securities involve special risks, including currency fluctuations and economic and political uncertainties. Investments in emerging markets involve heightened risks related to the same factors, in addition to those associated with these markets’ smaller size and lesser liquidity. Investments in lower-rated bonds include higher risk of default and loss of principal. Changes in interest rates will affect the value of the portfolio. Bond prices generally move in the opposite direction of interest rates. As the prices of bonds in the portfolios adjust to a rise in interest rates, the value of the portfolio may decline. Changes in the financial strength of a bond issuer or in a bond’s credit rating may affect its value. COMPLIANCE STATEMENT AND OTHER INFORMATION Franklin claims compliance with the Global Investment Performance Standards (GIPS®). Franklin (the “firm”) encompasses the equity, fixed income and balanced accounts managed by Franklin Advisers, Inc., and related Franklin affiliates, including, effective 1 January 2007, the equity accounts managed by the institutional investment teams of Franklin Templeton Institutional, LLC under the former firm name of Fiduciary Global Advisors. The combined equity assets of Franklin and Fiduciary Global Advisors form the Franklin Equity Group (formerly Franklin Global Advisers prior to 30 June 2010) unit of Franklin. Effective 1 January 2006, the fixed income assets managed from that date forward by Franklin Templeton Institutional, LLC (“FTI”) or its related affiliates (managed previously by Fiduciary Trust Company International - Institutional Division or “FTCI’s Institutional Division”) that went through the institutional portfolio review process were combined with the fixed income assets of Franklin to form the Franklin Templeton Fixed Income unit of Franklin. Total returns are presented in U.S. dollars both gross and net of investment advisory fees, are inclusive of commissions and transaction costs, and assume reinvestment of any dividends, interest income, capital gains, or other earnings. For pooled investment vehicles, gross of fee returns are based on the primary share class (typically Class A) and are calculated by adding 1⁄12 of the funds’ annual expense ratio, which includes management fees and all other fund expenses, to the 12 monthly returns for each fiscal year. Net of fee returns for separate accounts are net of actual management fees. For pooled investment vehicles or non-fee paying accounts, net of fee returns are calculated by applying the highest breakpoint from the standard institutional fee schedule to the gross performance. Returns for periods of less than one year are not annualized. Performance data is shown rounded to the nearest hundredth. The performance presented for Franklin is in compliance with GIPS® from 1 January 2000 to the present. Past performance does not guarantee future results and results may differ over future time periods. To receive a complete list and description of Franklin composites (including any single account mutual fund composite) and/or a presentation that adheres to the GIPS® standards for any composite, contact your Franklin Templeton representative at the following address: Franklin Templeton Investments One Franklin Parkway Attention: Performance Analysis and Investment Risk SM-910-1 San Mateo, CA 94403 USA Templeton Global Bond Plus Composite: Templeton Global Bond Plus Composite consists of all portfolios managed on a fully discretionary basis with an investment objective that seeks to achieve above average total return by investing principally in a portfolio of fixed or floating rate debt securities and debt obligations issued by government or government-related entities worldwide. The strategy may also purchase debt obligations issued by supranational entities organised or supported by several national governments, such as the International Bank for Reconstruction and Development or the European Investment Bank. The portfolio may invest a portion in below investment grade bonds (rated below BBB-). The strategy may also utilise financial derivative instruments dealt in either regulated or over-the-counter markets for investment purposes. These financial derivative instruments which are used on a less frequent basis may include, inter alia, swaps (such as credit default swaps or total return swaps), forwards and cross forwards, futures contracts (including those on government securities), as well as options. The strategy regularly takes tactical exposure to various foreign currencies, including through the frequent use of foreign currency forward contracts and cross forwards, and, to a lesser degree, futures contracts and currency options. Effective 31 March 2014, Franklin Templeton Global Bond Plus Composite was renamed as Templeton Global Bond Plus Composite. The JP Morgan Global Government Bond Index is used as a benchmark. The benchmark is used for comparative purposes only and is provided to represent the investment environment existing during the time periods shown. The JP Morgan Global Government Bond Index is a market value weighted fixed income index comprised of government bonds in developed countries. For Institutional/Professional Investors Only. Not For Distribution To Retail Investors. Winners and Losers from Oil Price Decline 4 IMPORTANT LEGAL INFORMATION This document is intended for the use of qualified and institutional/professional investors only. It is a confidential communication to, and solely for the use of, such persons and is not intended for general public distribution. It is intended to provide general information only, and does not constitute legal or tax advice nor is it an offer of any investment fund or service. Nothing in this document should be construed as investment advice or a recommendation, and it was prepared without regard to the specific objectives, financial situation or needs of any particular person who may receive it. The descriptions in this document are intended to provide a general overview of our investment philosophy, strategies, services and other related matters. Any research and analysis contained in this presentation has been procured by Franklin Templeton Investments for its own purposes and may be acted upon in that connection and, as such, is provided to you incidentally. Franklin Templeton Investments shall not be held liable for any inaccuracy of information contained in this document or for any errors or omissions in its contents, regardless of the cause of such inaccuracy, error or omission. Any views expressed are the views of the fund manager and do not constitute investment advice. The underlying assumptions and these views are subject to change. Franklin Templeton Investments accepts no liability whatsoever for any direct or indirect consequential loss arising from the use of this commentary or any information, opinion or estimate herein. Any performance quoted is historical. Past performance is not an indicator nor a guarantee of future performance. Investments entail risks. The value of investments and the income from them can go down as well as up and you may not get back the full amount that you invested. Any prediction, projection or forecast on the economy, stock market, bond market or the economic trends of the markets is not necessarily indicative of the future or likely performance. Franklin Templeton Investments has exercised professional care and diligence in the collection of information in this document. However, data from third party sources may have been used in its preparation and Franklin Templeton Investments has not independently verified, validated or audited such data. Opinions expressed are the authors’ at publication date and they are subject to change without prior notice. Given the rapidly changing market environment, we disclaim responsibility for updating this document. Australia: Issued by Franklin Templeton Investments Australia Limited (ABN 87 006 972 247) (Australian Financial Services License Holder No. 225328) to persons who are wholesale investors within the meaning of the Corporations Act 2001 (Cwlth) and/or to whom this document may otherwise lawfully be communicated to give preliminary information about the investment propositions described herein. This document is a confidential communication to, and solely for the use of, and may only be acted on by, such persons. The document is not addressed to any other persons and may not be used by them for any purpose whatsoever. It expresses no views as to the suitability of the services or other matters described herein to the individual circumstances, objectives, financial situation or needs of any recipient. Hong Kong: Issued by Franklin Templeton Investments (Asia) Limited. Malaysia: Issued by Franklin Templeton Asset Management (Malaysia) Sdn. Bhd. & Franklin Templeton GSC Asset Management Sdn. Bhd. Singapore: Issued by Templeton Asset Management Ltd. Registration No. (UEN) 199205211E. franklintempletoninstitutonal.com For Institutional/Professional Investors Only. Not For Distribution To Retail Investors. Copyright © 2015 Franklin Templeton Investments. All rights reserved. 1/15