Value Investing in a Low-Growth, High-Risk Environment DECEMBER 2007
Q1 2012
With the increasing likelihood of an extended period of slow economic growth, we examine where the Templeton Global Equity Group is finding investment opportunities. As is typical of Templeton, the view is contrarian and— as is also typical of Templeton—surprisingly positive in a world of negative sentiment.
THE POTENTIAL FOR LOW ECONOMIC GROWTH
As Templeton noted nearly three years ago, the process of deleveraging is a long one. A confluence of factors could keep top-line growth below trend in the intermediate term, presenting both challenges and opportunities for equity investors. With over half a century of experience navigating global equity markets, we at Templeton are confident that the potential for robust real returns continues to exist in such an environment. But, it will require patience and discipline. Companies seeking to gain a competitive advantage in his muted growth environment must effectively allocate resources to meet their changing opportunity sets. Investors must be willing to recalibrate their expectations, refocus on total returns and stay mindful of the pitfalls inherent in an increasingly politicized and globalized economy.
Investors should also keep a close eye on China, the de facto engine of the global economy and the consensus repository of growth expectations. Investment spend of roughly 50% of GDP in China seems unsustainable, and with the property market beginning to soften and wage pressures increasing, we believe future growth may not come so easily. Finally, global interest rates have limited scope for further compression after declining for nearly three decades, and potentially tighter future credit conditions could also curb growth going forward. Deleveraging Will Be a Multi-Year Process U.S. Debt by Sector, % of GDP1 200%
PEAK DEBT 1932: 166%
PEAK DEBT 4Q09: 176% Q2 2011
160%
90%
75%
120%
60%
80%
45%
Growth Constraints At the beginning of the global financial crisis in 2008, we suggested that the recovery would likely unfold over three stages: stabilization, deleveraging and the transition to a lower debt and lower growth world. We noted in particular that the deleveraging process would likely be painful and protracted given the size of the debt overhang in the developed world. The situation unfolding in Europe confirms the difficulty of this process, and the threat it now poses to the stability of the global financial system suggests that the trajectory of the recovery will be anything but linear. With the long deleveraging process underway and the global debt burden shifted from households to sovereigns, a combination of tax hikes and spending cuts has become necessary to close yawning fiscal deficits across the developed world. Though global policymakers rarely agree on anything, the call for fiscal consolidation is virtually unanimous. This is a structural change in global political affairs that increases the likelihood of slower future economic growth. As a corollary, increasing levels of state regulation and intervention into economic matters will likely also inhibit growth.
1. Source: Credit Suisse, Wolf Trahan & Co. Portfolio Strategy. As of June 30, 2011.
FOR PROFESSIONAL INVESTORS ONLY
40%
30% 1930
1946
1962
n Private Non-Financial Debt (LHS)
1978
1994
2011
n Government (RHS)
Stability Threats At Templeton, we believe policymakers are taking encouraging steps towards fiscal prudence. Europe will likely enshrine structural deficit limits in a new treaty, and U.S. politicians have at least acknowledged their problem, despite failing to adequately address it as yet. However, the risk remains that policymakers could fail to provide the guarantees and liquidity provisions necessary to maintain confidence in the day-to-day operations of the global financial system. Policymakers that overlook the importance of such necessary short-term support in their single-minded pursuit of long-term debt sustainability could significantly set back the recovery and jeopardize the stability of the global financial system. Currently, this risk appears to be highest in Europe, where, despite the region’s relatively benign overall fiscal position, the perceived inadequacy of its crisis response has become the focal point of investor concern.
FRANKLIN TEMPLETON INVESTMENTS
HOW TEMPLETON INVESTS IN THIS ENVIRONMENT If the global economy embarks on a sustained period of muted growth, the value of astute investment management will become increasingly apparent. Over the last three years, performance correlations among equities have steadily risen to their highest levels on record. Rolling 60-Month Correlation of S&P 500 and MSCI EAFE Index2 1.0 0.8 0.6 0.4 0.2 0 1975
1980
1985
1990
1995
2000
2005
12/2011
Business fundamentals have been de-emphasized and stocks have moved largely in unison as macroeconomic developments increase or curtail investor risk appetite in turns. This environment has obscured the potential benefits of disciplined value investing and judicious stock picking. However, as we have written in the past year, a market that overlooks intrinsic business value also tends to misprice it, creating unique opportunities for disciplined investors with the patience to wait for value recognition and the fortitude to stomach volatility. If the pace of global growth moderates, we expect that the market may become more discriminate about the long-term business prospects of individual stocks, and investors with a strong, bottom-up discipline and long-term focus should be well-positioned. While a rising tide may lift all ships, companies looking to rise from the morass of muted growth will have to do so by their wits. In such an environment, we would expect corporate restructurings to continue as managers aim to preserve margins and grow market share in productive business segments. Factors like management credibility, strategic execution, supply chain management, cost control, financial acumen, product development, geographic diversification and so on would assume a new significance if the tide of above-trend growth recedes. The ability of companies to generate cash and effectively allocate capital would be rewarded or punished in kind. It could be “back to basics” for global equity investors, creating significant opportunities for those with fundamental value orientations.
This is an investment style that has been out of favor in recent years as evidenced by fund flows. Historically, fund flows have been a reliable contrarian indicator, highlighting both popular asset classes that may be due for a correction as well as unpopular asset classes that may be undervalued. The record flows out of global equity products and into fixed income and commodity products in recent years are encouraging in this regard. Going against the crowd is never easy, but Templeton has a long history of disciplined contrarian investing. The relative valuation anomalies experienced in the current market environment provide another layer of confidence for equity investors buying into pessimism. For example, stocks in the developed world, as represented by the MSCI All Country World Index, offered an average earnings yield of nearly 8% and dividend yield of nearly 3%3 (and, of course, the potential for significant capital appreciation) while 10-Yr. Treasuries, Gilts, Bunds4 and Japanese Government Bonds (JGB’s)5 all yield at or below 2%.6 As the chart on the next page shows, the average bond multiple has been more than three times higher than its long-term average, while equities have been trading at a discount to their long-term average multiples.
“To buy when others are despondently selling and to sell when others are avidly buying requires the greatest fortitude and [has the potential to pay] the greatest ultimate rewards.” Sir John Templeton
In addition to refocusing on fundamentals, we believe investors attempting to navigate a low-growth market environment should alter their expectations. Annualized equity return expectations should be realistic in a below-trend growth environment. We believe investors should focus instead on the potential for total returns. Dividends have long been the primary component of total equity returns over time, and their importance over and above capital appreciation becomes increasingly apparent in growth-challenged environments. Not only are dividend-paying stocks attractive for the yield they offer, but they generally represent the market’s stronger, more financially sound enterprises, and have historically outperformed non-dividend payers over time.7 Investors concerned about muted capital appreciation in a low-growth environment should learn to love dividends. In fact, dividend income made up 71% of the total return of the MSCI World Index from December 31, 1969 to December 31, 2011.2
2. Source: FactSet. As of December 31, 2011. 3. Source: Bloomberg Finance L.P. © 2012. As of December 31, 2011. 4. As of January 5, 2012. 5. As of January 4, 2012. 6. As of December 31, 2011. 7. Source: © 2011 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved. See NDR Disclaimer at www.ndr.com/copyright.html. For data vendor disclaimers refer to www.ndr.com/vendorinfo/. 2
Value Investing in a Low-Growth, High-Risk Environment
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FRANKLIN TEMPLETON INVESTMENTS
Finally, we believe investors must learn to manage the risks inherent in a systemically unbalanced global financial system charting an uncertain path toward recovery. Government intervention via regulation, capital controls, protectionist trade policies, or in extreme cases, outright nationalization, is an increasing risk, and though not easy to forecast, it should be reflected in the analytical process. Political resistance to cost-cutting measures necessitated by lower growth levels (labor or pension cuts, for example) represents another form of government intervention. Bond Valuations Reflect High Risk Aversion and Focus on Capital Preservation Average Bond “P/E” by Decade (100/10-Year Treasury Yield)8
Average S&P 500 Trailing “P/E” by Decade8
47.4x
19.5x 20.1x
18.1x
13.6x
60s
70s
13.5x
12.5x 11.7x
23.1x
21.1x 15.5x 9.9x
80s
90s
00s 10/25/11
60s
70s
80s
90s
00s 10/25/11
We believe that companies with adequate capital cushions, or the ability to self-finance growth through sustained high cash generation, should have an advantage in an elevated credit risk environment. Operating leverage also works in reverse, and as top-line growth erodes, balance sheet quality becomes an increasingly important consideration. Finally, investors should hone their accounting proficiency, as companies experiencing revenue weakness may employ bookkeeping gimmickry to blunt the perception of slowing growth. At Templeton, we are capitalizing on these thoughts and strategies within the context of our time-tested investment process, and have confidence in our ability to find opportunity in a potentially challenging environment. Through the comments and images that follow, we present a top-down look at our bottom-up process. We will share our thoughts on Templeton’s current portfolio positioning, discussing our value findings in the context of a muted growth environment.
WHERE WE ARE INVESTING IN THIS ENVIRONMENT
Europe—contrarian opportunity or value trap? THE IMPORTANCE OF BOTTOM-UP ANALYSIS.
Given escalating economic growth headwinds and stability threats, Europe, in its current state, epitomizes a “low-growth, high-risk” environment, and consequently many investors are reluctant to invest in the region. Yet, we believe headline concerns are obscuring significant bottom-up equity opportunities for patient, contrarian, value-oriented investors. The trajectory of Europe’s sovereign debt crisis is difficult to forecast, not the least because it is largely dependent on the region’s baroque and unwieldy political process. However, recent developments suggest that European politicians are coming to terms with the severity of their situation, and the emerging regional consensus backing closer fiscal integration in the European Union seems a step in the right direction philosophically. Execution risk remains high and we believe the potential for considerable volatility in the region will persist in the intermediate term; however, we are encouraged by policymakers’ recent responses, including the amplified liquidity provisions of the European Central Bank. Recognition of the potential global severity of an escalating European debt crisis is also encouraging and has led to the stepped-up involvement of the International Monetary Fund and global central banks, as witnessed by the recent coordinated reduction of dollar funding costs for European commercial banks. Still, cheap money is not a panacea for this crisis. The European Central Bank can pump as much liquidity into the banking system as it likes, but as long as it declines to backstop European sovereigns, we believe the risk of a deflationary panic will remain elevated. Since the concerns surrounding the banking sector are a function of the banks’ exposure to potentially toxic sovereign debt, any real progress towards stabilizing Europe’s financial system should include measures that increase investor confidence in sovereign credits. Europe: Attractive Valuations European Market (MSCI Europe Index): Trend P/E9,10
US S&P 500®: Trend P/E9,11
January 31, 1980 to December 31, 2011 (monthly)
January 31, 1954 to December 31, 2011 (monthly)
35
35
30
30
25
25
20
20
15
AVERAGE 15.7
15
AVERAGE 15.8
10
DEC 2011 = 9.9X TREND
5 ’80
’85
n Trend P/E
’90
’95
n Average
’00
’05
’10
n +1 Std Dev
10
DEC 2011 = 14X TREND
5 ’54
’62
’70
’78
’86
’94
’02
’10
n -1 Std Dev
8. Source: Strategas Research Partners. As of October 25, 2011. 9. Methodology: The stock’s trend P/E is established by dividing its absolute share price history by its trend EPS line. 10. Source: FactSet. MSCI Europe Index. As of December 31, 2011. 11. Source: Bloomberg Finance L.P. Copyright © 2012. Standard & Poor’s Financial Services LLC. As of December 31, 2011.
FOR PROFESSIONAL INVESTORS ONLY
Value Investing in a Low-Growth, High-Risk Environment
3
FRANKLIN TEMPLETON INVESTMENTS
Though considerable risks to regional economic growth and financial system stability clearly persist, we believe any peripheral defaults would likely be organized and deliberate, and that policymakers will likely defend Italy, Spain and the core economies of the eurozone as necessary. From a bottom-up standpoint, we believe significant investment opportunities exist in Europe as valuations have continued to reflect extreme pessimism in the region and have made little provision for a potentially improving scenario. European earnings multiples were near 30-year lows at less than 10 times trend profits, as of December 31, 2011, despite the fact that blue-chip European companies have generated significant cash flows and profits and have been among the most operationally stable and geographically diverse of global enterprises.
With the global pharmaceuticals sector at the edge of the patent cliff, it is not an obvious source of future growth, but Templeton has found what it believes are attractive companies making the transition to a post-cliff world. THE IMPORTANCE OF FREE CASH FLOW.
Health care is a sector that we believe may offer attractive values in a low-growth economic environment. Though the sector has sustained a significant de-rating over the last several years as concerns about patent expirations, regulatory uncertainty and pipeline productivity persist, we believe the health care sector contains potential value opportunities. That said, the global sector remains very unloved at a forward earnings multiple that is roughly half its long-term average.
suggesting significant potential for cost cutting exists. Indeed, notable restructuring initiatives among a number of large pharmaceuticals companies are already underway, and we believe the paring of industry cost-bases could be a material earnings driver going forward. Another consensus concern that pharmaceuticals companies have been proactive in addressing is faltering pipeline productivity. Yet, valuations throughout the pharmaceuticals industry have remained so low that selective companies’ share prices assign no value—or even negative value—to their R&D pipelines. Nor are investors crediting pharmaceuticals firms for revenue opportunities in emerging markets, where higher GDP growth, a burgeoning middle class, aging populations and improving social safety nets are supportive of long-term health care demand. Yet, pharmaceuticals revenues generated from emerging markets by 2020 are estimated to reach the levels achieved by the United States and the top five European markets today. In the U.S., emerging market revenue alone may be enough to offset revenues lost to patent expirations. Health care is an excellent example of a lowly valued sector that historically has been uncorrelated to global GDP growth and presents what we believe are significant alternative growth catalysts.
Telecommunications stocks have also de-rated over the past decade, but as businesses transition to data providers, they offer potentially significant growth.
MSCI All Country World Pharmaceuticals Index12 Through August 31, 2011 (Monthly)
THE IMPORTANCE OF DIVIDENDS.
6%
Telecommunications is another sector with revenues that historically have been only lightly correlated to global economic growth given the increasingly non-discretionary nature of the sector’s products and services. In the developed world, mobile device penetration is often over 100% and demand for highvalue, data-intensive smartphones has remained strong. Meanwhile, mobile telephony growth in emerging markets also continues to accelerate rapidly. But, like health care, telecoms may offer investors more than just a buffer against slowing global GDP growth. From a total return standpoint, we believe telecommunications companies can be compelling, as they have been generating among the highest free cash flow yields and paying among the highest dividends of any global industry group.
5% 4% 3% 2% 1% 1995
1998
n Dividend Yield
2001
2004
2007
2010
n FCF Yield
The fact that pharmaceuticals industry revenues historically have not been closely correlated to global GDP growth is a well-known and obvious attribute in a low-growth environment. But, we believe select pharmaceuticals stocks offer other advantages as well. The companies best suited to weather top-line pressures could be those with the most scope for cost cutting and other self-help measures. Pharmaceuticals companies have some of the highest cost structures of any global industry group,
The sector may also offer attractive exposure to emerging market demand growth. Critically, many of the multinational telecommunications firms domiciled in the developed world also feature attractive businesses in the developing world, allowing investors access to higher emerging market growth potential without paying higher emerging market multiples.
12. Source: FactSet. December 29, 1995–August 31, 2011. 4
Value Investing in a Low-Growth, High-Risk Environment
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FRANKLIN TEMPLETON INVESTMENTS
Strong Potential for Cash Flow Generation
Technology companies’ managements have rationalized capital spending and increased profitability, and are now focusing their attention on capital allocation considerations given the significant cash flow generation of their businesses. Such prolific cash generation has significantly improved industry fundamentals, strengthening technology companies’ balance sheets and spurring a trend of dividend hikes and corporate buy-backs within the sector.
Pan-European Sectors 2011 Estimated FCF Yield13 15% 12% 9%
MARKET EX-FINANCIALS
6% 3%
Food Rtl
Fd Prods
Cons Dur & App
Utilities
Healthcare
Tech H/W
Retail
Comml Svs
S/W & Svs
H/H & Per Prod
Semis
Cap Goods
Tobacco
Transport
Energy
Beverages
Media
Pharma
Met & Min
Hotels & Lei
Autos
Telecoms
0%
...And Dividends Pan-European Sectors 2011 Estimated Dividend Yield13
While the pedestrian valuations now underpinning the sector’s solid fundamentals offer investors a margin of comfort, growth opportunities still abound, notably among corporate customers who deferred major tech investment over the last several years. Indeed, the recent resilience of tech revenues in the face of global economic uncertainty suggests that managements looking to cut costs and increase efficiencies are increasingly turning to productivity enhancing technology solutions to do so.
8%
Emerging market consumers are also eager to gain access to transformative technologies, and pent-up tech demand in rapidly modernizing regions of the world represents another major earnings catalyst unlikely to be thwarted by a developed world slowdown.
6%
4%
2%
80% 60% 40% 20% 0%
The technology story is similar to telecommunications in many respects. After trading like broken growth stocks for several years following the collapse of the TMT Bubble, select technology stocks have now assumed a value profile as earnings multiples have compressed and business franchises have compounded in value. Though Templeton largely avoided technology stocks around the turn of the century due to their stratospheric valuations and unproven earnings potential, we are finding considerably more attractive opportunities after a decade of de-rating.
n Global sectors net debt to market cap
Semis
Tech H/W
S/W & Svs
Cons Dur & App
Retail
Pharma
Healthcare
Hotels & Lei
Energy
H/H & Per Prod
THE IMPORTANCE OF QUALITY.
Tobacco
Fd Prods
Food Rtl
Met & Min
Beverages
Comml Svs
Media
Cap Goods
Telecoms
-20% Transport
Technology, the storybook growth sector, has fallen from lofty heights a decade ago, but can still offer strong potential returns.
100%
Autos
In general, the telecommunications sector has de-rated from a leveraged growth story in the heady days of the Technology, Media, Telecommunications (TMT) Bubble to a deep value, total return proposition in the current environment, and we remain constructive on select sector stocks in an increasingly uncertain global growth environment.
Strong Balance Sheets Provide Flexibility14
Utilities
Telecoms Utilities Pap & Forest Media Energy Pharma Tobacco Retailing Auto & Comp Fd Retail Capital Goods Hot & Lei Transportation Construction Mat. Aero & Def Chemicals Food Products Tech H/W Comml Svs H/Hold Prod Beverages Met & Min Cons Durables S/W & Svs Semis Healthcare & Eq
0%
Despite tech’s continued reputation as a “growth” sector, we believe the attractive fundamentals and counter-cyclical earnings characteristics of select companies represent compelling opportunities for value-oriented investors.
n Non-financials
Data is measured as of October 12, 2011
With the banking sector experiencing the darkest times in decades, the point of “maximum pessimism” may be upon us. While some investors have been avoiding the sector— especially in Europe—our approach is to cautiously take advantage of the low prices.
13. Source: Credit Suisse. As of September 2011. Estimates for calendar year 2011. There is no assurance that any estimates will be achieved. 14. Source: Credit Suisse. As of October 12, 2011.
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Value Investing in a Low-Growth, High-Risk Environment
5
FRANKLIN TEMPLETON INVESTMENTS
THE IMPORTANCE OF DIVERSIFICATION.
Though we have been typically underweight financials since before the credit crisis, recent weakness has created what we believe are attractive valuation opportunities among select stocks, typically increasing our sector exposure. The sector is diverse, but essentially comprises three types of companies: banks that provide savings and loan products, insurers that underwrite risk and financial services firms engaged in a variety of capital market activities. At Templeton, we have been finding what we consider attractive opportunities across all three major financials industries, notably to well-capitalized European banks and insurers with strong competitive positions trading at historic trough multiples, as well as attractively positioned banking concerns in higher-growth regions of the world. Our approach to this high risk area has been one of diversification—across regions and industries within the financials sector. In the banking sector, a tepid outlook for loan growth and concerns about regulatory interference, as well as systemic sovereign debt risks manifest in credit market stress and balance sheet concerns, have pressured companies that would normally thrive in an environment of low funding costs and steep yield curves. Particularly in Europe, the re-pricing of risk in the sector is ongoing and prospects in the intermediate term remain largely dependent on the degree to which European policymakers and politicians restore confidence in regional sovereigns. Yet, considerable pessimism is reflected in regional bank valuations at roughly 0.5x book value on average, as of December 31, 2011, and assuming Europe finds a way to muddle through without dissolving its monetary union or allowing core countries to default on their debt obligations, significant upside could materialize for long-term investors. Across the diverse industry landscape in general, many firms have delevered, recapitalized and off-loaded questionable assets—positive developments not being credited at current depressed multiples. Similarly, in the diversified financials services industry, balance sheets have been repaired and business models realigned to focus on core areas of profitability. Strategic divestitures of noncore or underperforming business units have become increasingly common, and some firms have taken advantage of attractive valuations to make foreign acquisitions within core areas of expertise. Yet, the market remains intensely focused on macroeconomic overhangs, and valuations have ignored the
growth opportunities inherent in a wave of restructuring and focused expansion in underleveraged markets serving underbanked consumers. Banks: A Long Road Ahead, but Valuations Reflect Issues U.S. Banks Have Traded Below 1x BV for Just 11% of the Last 120 Years*15
UK Banks Have Traded Below 1x BV for Just 13% of the Last 120 Years*16
4.0
4.0
3.0
3.0 LT AVERAGE
2.0
2.0
LT AVERAGE
1.0
1.0 0.68
0.60
0.0
0.0 1893
1922
1951
1980
2010
1893
1922
1951
1980
2010
Meanwhile, insurance valuations—normally discussed as priceto-book ratios—have been trading at 25-year lows on average, as of December 31, 2011, despite the sector’s relatively strong performance throughout the Global Financial Crisis. While the extraordinarily low valuations partly reflect the distortive effect of unusually low bond yields on industry book values, they have nonetheless represented recent attractive buying opportunities as companies recover from natural disasters in 2011 that recently generated the industry’s largest-ever insured loss. Similar to the banking sector, the strongest insurers have divested underpriced businesses, retained significant excess capital and steered away from risk assets, and we continue to find what we consider attractive valuation opportunities here and in the global financials sector at large.
CONCLUSION 2011 was a year of volatility as significant transformations shook the global economic and geopolitical status quo. It was a year that brought sweeping regime change across the world’s major oil-producing regions, an escalation in the magnitude and frequency of dangerous natural disasters, the downgrade of the United States’ sacred AAA credit rating and the biggest threat to European geopolitical stability since the Second World War. As 2011 has shown, the pace of human progress is rarely smooth and steady.
“People focus too little on the opportunities that problems present.” Sir John Templeton
15. Source: Anthony Saunders & Berry Wilson, Impact of consolidation and safety net support on Canadian, US and UK banks, 1892–1992 (1999). Michael Keeley, Deposit Insurance, Risk and Market Power in Banking (1990). FDIC – History of the 1980s. Datastream, Bloomberg. Autonomous Research. 16. Source: Anthony Saunders & Berry Wilson, Impact of consolidation and safety net support on Canadian, US and UK banks, 1892–1992 (1999). Datastream. Autonomous Research. * Ignores war years, and one-off years at below 1xBV. Data as of October 5, 2011. 6
Value Investing in a Low-Growth, High-Risk Environment
FOR PROFESSIONAL INVESTORS ONLY
FRANKLIN TEMPLETON INVESTMENTS
The challenges posed by potentially slower economic growth and rising threats to financial system stability are well known—you can’t open a newspaper or turn on the television without confronting them. Less understood are the opportunities such problems can present. At Templeton, we’ve managed money over more than five decades by relying on our value discipline, seeking to capitalize on the opportunities that problems present, and we are confident that this discipline will help us navigate today’s investment challenges as well. The information provided is not a complete analysis of every material fact respecting any country, industry, security or investment. Opinions expressed are those of Templeton’s Global Equity Group and are subject to change without notice. Statements of fact have been obtained from sources considered reliable, but no representation or warranty is made as to their completeness or accuracy. Because market and economic conditions are subject to rapid change, analyses are valid only as of January 2012. Investments in foreign securities involve special risks including currency fluctuations, economic instability and political developments. Investments in emerging market countries involve heightened risks related to the same factors, in addition to those associated with these markets’ smaller size, lesser liquidity and lack of established legal, political, business and social frameworks to support securities markets. Such investments could experience significant price volatility in any given year. STANDARD & POOR’S®, S&P®, and S&P 500® are registered trademarks of Standard & Poor’s Financial Services LLC. Standard & Poor’s does not sponsor, endorse, sell, or promote any S&P index-based product. Morgan Stanley Capital International (MSCI). All MSCI data is provided “as is.” In no event shall MSCI, its affiliates or any MSCI data provider have any liability of any kind in connection with the MSCI data described herein. Copying or redistributing the MSCI data is strictly prohibited.
Indexes are unmanaged and one cannot invest directly in an index.
IMPORTANT LEGAL INFORMATION Copyright © 2012 Franklin Templeton Investments. All rights reserved. This document is intended to be of general interest 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. Investments entail risks, the value of investments can go down as well as up and investors should be aware that they might not get back the full value invested.
FOR PROFESSIONAL INVESTORS ONLY
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 research and analysis contained in this document has been procured by Franklin Templeton Investments for its own purposes and although it has exercised professional care and diligence in the collection of this information, it has not independently verified, validated or audited such data. This article reflects the analysis and opinions of the authors as of January 2012, and may differ from the opinions of other portfolio managers at Franklin Templeton Investments. All market condition references are as of January 2012, unless otherwise noted. Because market and economic conditions are often subject to rapid change, the analysis and opinions provided may change without notice. The analysis and opinions are intended for general information only and are not a recommendation or individual investment advice for any particular security, strategy or investment product. References to particular securities are only for the limited purpose of illustrating general market or economic conditions, and are not recommendations to buy or sell a security, or an indication of the author’s holdings. Such securities may or may not be in one or more managed accounts from time to time. Statements about holdings are as of January 2012 and subject to change, and do not necessarily apply to the holdings of portfolios managed by other portfolio managers at Franklin Templeton Investments. The commentary does not provide a complete analysis of every material fact regarding any market, industry, security or portfolio. Statements of fact are from sources considered reliable, but no representation or warranty is made as to their completeness or accuracy. Although historical data is no guarantee of future results, these insights may help you understand our investment management philosophy. 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. Austria: Issued by Franklin Templeton Investment Management Limited (“FTIML”) or the branch of FTIML in Germany. Dubai: Issued by the branch of Franklin Templeton Investment Management Limited (“FTIML”) in Dubai. FTIML is authorised and regulated by the Dubai Financial Services Authority. This document/marketing material is directed at Professional Clients. Value Investing in a Low-Growth, High-Risk Environment
7
FRANKLIN TEMPLETON INVESTMENTS
France: Issued by Franklin Templeton France S.A. Germany: Issued by the Franklin Templeton Investment Services GmbH. Hong Kong: Issued by Franklin Templeton Investments (Asia) Limited. Italy: Issued by Franklin Templeton Italia Sim S.p.A Korea: Issued by Franklin Templeton Investment Trust Management Company Limited (FTITMC) in Korea. Profit and loss from management for the collective investment products are imputed to the investors. Investors should consider a fund’s objectives, risks, and charges and expenses before investing. This collective investment product is not insured by the Korea Deposit Insurance Corporation under the Depositor Protection Act. Luxembourg: Issued by Franklin Templeton International Services S.A. Malaysia: Issued by Franklin Templeton Asset Management (Malaysia) Sdn. Bhd. & Franklin Templeton GSC Asset Management Sdn. Bhd. Romania: Issued by the Bucharest branch of Franklin Templeton Investment Management Limited (“FTIML”) registered with CNVM under no. PJM05SSAM/400001/14.09.2009, which is regulated in Romania by the Romanian National Securities Commission (“CNVM”) and authorized and regulated in the UK by the Financial Services Authority. Singapore: Investors may wish to seek advice from a financial adviser before making a commitment to invest in shares of the Fund. In the event an investor chooses not to seek advice from a
financial adviser, he/she should consider whether the fund is suitable for him/her. Issued by Templeton Asset Management Limited. RCB No: 199205211E. Switzerland: Paying agent of Franklin Templeton Investment Funds in Switzerland is JPMorgan Chase Bank, Dreikoenigstrasse 21, 8022 Zurich. U.K. & Nordic regions: Issued by Franklin Templeton Investment Management Limited (“FTIML”), registered office: The Adelphi, 1-11 John Adam Street, London WC2N 6HT. FTIML is authorised and regulated in the United Kingdom by the Financial Services Authority and is authorised to conduct investment business in Denmark by the Finanstilsynet, in Sweden by the Finansinspektionen, in Norway with Kredittilsynet, and in Finland with Rahoitustarkastuksen. The manager’s opinions are intended for general information only and are not a recommendation or individual investment advice for any particular security, strategy or investment product nor should they be construed as the manager carrying on a business in a regulated activity in any jurisdiction. All investments are subject to certain risks. Any performance quoted is historical and, of course, past performance does not guarantee future results and results may differ over future time periods. This piece is intended for institutional investment management consultants or investors interested in institutional products and services available through Franklin Templeton and its affiliates. Various account minimums or other eligibility qualifications apply, depending on the investment strategy or vehicle.
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