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Templeton Global Balanced Fund Franklin Templeton Investment Funds Templeton Global Balanced Fund News Templeton Global Balanced comment - Mar 11 Tuesday, 14 June 2011 Fund Manager Comment Despite challenges, global economic growth and corporate profitability remained robust during the quarter and stocks rose, albeit amid heightened volatility. For the quarter ended 31 March 2011, the fund returned net 5.38% (in U.S. dollars), outperforming its benchmark, comprising the MSCI World Index (weighted at 65%) and the J.P. Morgan Global Government Bond Index (JPM GGBI; weighted at 35%), which returned 3.42% (also in U.S. dollars). In the fund’s equity portion, stock selection in financials was the largest contributor to relative performance for the quarter. In contrast, holdings in the information technology sector detracted from relative performance. The fixed income portion’s relative outperformance was attributable to interest-rate strategies followed by currency positions and then sovereign credit exposures. Tighter fiscal and monetary policy, the end of inventory rebuilding, and relatively weak demand for exports to the G-3 may result in somewhat lower growth rates in 2011 than what was seen at the height of the recovery in 2010. Performance Review and Contributors to Performance Equity Portion Dutch bank ING Groep and French bank Crédit Agricole were the top contributors among the fund's European financial holdings, both having previously reached anomalously low valuations. ING benefited from calculations that the sale of its insurance assets might be more lucrative than previously thought; Crédit Agricole combined good quarterly results with indications that an amendment to its capital structure would obviate the need to raise fresh funds to meet regulatory capital requirements. Beyond financials, Dutch offshore oil services business SBM Offshore gained ground on good results, improved sentiment over offshore drilling as the furor over the Gulf of Mexico incident died down, and news of advances in the group's liquid natural gas handling technology. The fund also benefited from an overweighting in Europe and an underweighting in Japan. On the other hand, South African furniture retailer JD Group gave back gains as an asset swap with a rival firm received a lackluster welcome from investors. U.S. software giant Microsoft slipped as weak consumer demand for laptop computers prompted speculation that new products such as smartphones and tablet computers were taking sales from more traditional devices that use the Windows operating system. Internet communications business Cisco Systems announced indifferent fourth-quarter results as costs associated with new product introductions and sluggish demand from consumers hit margins, negating solid overall sales growth. We believe both IT businesses should benefit going forward as new product introductions drive corporate IT upgrades. Fixed Income Portion In the first quarter of 2011, the fixed income portfolio's relative outperformance was led by interest-rate strategies followed by currency positions and then sovereign credit exposures. The fund maintained a defensive approach with regard to interest rates in most developed and emerging markets. Thus, it benefited from its underweighted duration exposures to the eurozone, the UK and Japan as government bond yields broadly rose. Although peripheral eurozone countries continued to depend heavily on ECB loans for refinancing, the ECB has adopted a more hawkish tone and expressed its intention to adjust its monetary policy stance to take into account brighter economic conditions in some parts of the eurozone and increasing inflationary pressures. Interest-rate-hike expectations and some progress toward agreements on European support mechanisms during the European Union (EU) summit supported the euro over the quarter. As a result, our underweighted exposure to the euro detracted from relative performance during the quarter, but this effect was partially offset by our overweighted exposures to peripheral European currencies, particularly the Norwegian krone, Polish zloty and Swedish krona. Despite ongoing waves of protest in the MENA region, our exposure to the Egyptian pound only modestly hampered relative returns. In Japan, short-term uncertainty in the aftermath of the tragedy increased volatility. We believe investors' initial expectations of Japanese yen strength due to repatriations of Japanese overseas assets to pay for the damage caused by the terrible earthquake and subsequent tsunami were largely overstated as Japanese insurance companies have mostly hedged their U.S. dollar/Japanese yen exposure. Over the quarter, the yen weakened, reflecting the nation's difficult economic fundamentals, the G7's joint interventions to limit the yen's appreciation, and the expectation of further fiscal and monetary stimulus to facilitate reconstruction. Consequently, a significantly underweighted position in the Japanese yen helped relative performance. Furthermore, strong returns from Asian ex-Japan currencies led by the Australian dollar, Indonesian rupiah, Indian rupee, South Korean won and Malaysian ringgit positively contributed to relative performance. Lastly, our Latin American currency exposures also benefited relative performance, led by our overweighted positions in the Brazilian real and Mexican peso. The fund's sovereign credit exposures benefited from strong gains led by Hungary, Lithuania, Russia and Venezuela. Strategy and Activity Global Equity Strategy The fund manager continues to identify good sources of yield and potential valuation gains in the telecoms and health care sectors, with fewer opportunities apparent in consumer staples, information technology and materials. In our view, Europe provides an above-index share of attractive situations. In trading, funds raised from positions in a U.S. manufacturing conglomerate and a European restaurant business that had reached our price targets were reinvested in two Japanese stocks, a motor company and a financial business whose longer-term prospects appeared more attractive at current prices. Global Fixed Income Strategy Although the prospect of higher interest rates is a challenge for many fixed income investors, our strategy has been cushioned from rising yields, with an average duration of less than half of the benchmark, no exposure to U.S. Treasuries or Japanese government bonds, and minimal exposure to eurozone government bonds as of the most recent quarter-end. Additionally, we believe there can be opportunities to potentially capitalize on rising yields in the U.S. by positioning long the dollar against the Japanese yen, a strategy that we believe could benefit from an increase in interest-rate differentials between the U.S. and Japan. We expect that, over the medium term, underlying economic fundamentals in Japan should reassert themselves. Consequently, we have not changed our investment positions as a result of recent events. Actively managed global fixed income investing in a rising interest-rate environment can, in our view, also offer the opportunity to pursue relatively high yields without taking what we consider much duration or credit risk. We continue to favor short maturity bonds in places like Australia, Israel and South Korea where yields between 3% and 5% are currently available on bonds with less than two years of duration and strong creditworthiness, in our assessment.   Templeton Global Balanced comment - Jun 10 Thursday, 26 August 2010 Fund Manager Comment During the period, first-quarter equity market gains were reversed as concerns mounted among investors about the European sovereign debt crisis and the sustainability of the U.S. economic recovery, and this offset relatively solid corporate results. For the quarter ended 30 June 2010, the fund returned -11.35% net (in U.S. dollars), underperforming its benchmark, comprising a 65% weighting in the MSCI World Index and 35% in the JPM Global Government Bond Index, which returned -7.73%. Among the fund's equity investments, a number of individual consumer stocks performed well. However, amid momentum and macroeconomic driven markets, disappointing returns from energy and adverse foreign exchange effects proved disadvantageous. During the period, the fund manager replaced a U.S. food retail stock with a European equivalent, disposed of a Japanese pharmaceutical business that had reached our price target, and acquired a European electrical engineer, a U.S. medical devices producer and a U.S. bank. In the fixed income portion of the fund, relative underperformance was mainly attributable to currency positions and sovereign credit exposures, while duration was largely neutral. The renewed "flight to quality" led the U.S. dollar and Japanese yen to appreciate against the euro and most developed and emerging market currencies. Thus, our underweighted exposures to the euro, British pound and New Zealand dollar benefited relative performance, while our underweighted position in the Japanese yen detracted. Market Review The southern European-inspired sovereign debt crisis caused a worldwide equity selloff while weaker-than-expected economic releases from the U.S. and China also negatively impacted investor sentiment. Corporate earnings were strong, though the momentum of forecast upgrades eased later in the quarter. The somber market mood benefited defensive stocks, with telecommunications and consumer staples outperforming. Conversely, energy, materials and financials came under pressure. Regionally, Asia (ex-Japan) performed strongly, but significant currency weakness undermined European returns. The global economic recovery has continued to gather strength, particularly in emerging economies. In the second quarter of 2010, however, markets focused largely on sovereign and financial risks in overleveraged European countries, leading to a rise in volatility across asset classes. We do not think this synchronized downturn in sentiment accurately represented the underlying fundamentals, which remain robust in many economies. Reacting to the strength of their respective economies, the central banks of Australia, China, India, Israel, Malaysia and Norway continued to tighten monetary policy during the quarter. This group was joined by the central banks of Brazil, Canada, Chile, New Zealand, Peru and Taiwan, which began to raise interest rates as robust domestic demand offset concerns stemming from international uncertainty. As the G-3 (i.e., the U.S., the eurozone and Japan) seem likely to maintain accommodative monetary policy for an extended period of time to support their economies, we believe that the strong capital inflows into emerging markets that we have been seeing recently should continue. This should support both the elevated pace of economic activity and the sustained tendency for these currencies to appreciate versus the euro, yen and U.S. dollar. Performance Review and Contributors to Performance Among the fund's equities, satellite TV company British Sky Broadcasting appreciated. Strong local economic growth data and investor enthusiasm for stocks with attractive and secure cash flows and yields supported a Singapore-based telecommunications holding's share price. U.S. soft drinks and snacks business Dr Pepper Snapple Group revealed strong first-quarter results, reiterated its full-year guidance and indicated that it may accelerate a stock buyback program. Japanese car auction business USS Co. was supported by strengthening customer activity and hopes that an end to scrapping incentives would support used car prices. However, BP's share price came under severe pressure as the company's problems in containing an oil spill in the Gulf of Mexico generated hostility from the U.S. government and threatened to unleash a deluge of compensation demands. French bank Credit Agricole lost ground on worries about its exposure to the problems of Greece and Spain and concern that regulators might require it to raise fresh capital. In information technology, software giant Microsoft was negatively impacted by concerns that corporate information technology spending might be pared back in the face of economic uncertainty and fears that its new "Kinect" hands-free gaming controller might be too expensive to revive sluggish demand for the Xbox gaming platform. A large weighting in European assets led to significant negative foreign exchange effects. In the fixed income portion of the fund, relative underperformance was mainly attributable to currency positions and sovereign credit exposures, while duration was largely neutral. The escalation of sovereign risk in Europe and concerns about the sustainability of global growth have heightened risk aversion toward European assets and dampened investor appetite for the euro. As a result, the renewed "flight to quality" led the U.S. dollar and Japanese yen to appreciate against the euro and most developed and emerging market currencies. Thus, our underweighted exposures to the euro, British pound and New Zealand dollar benefited relative performance, while our underweighted position in the Japanese yen detracted. Additionally, our overweighted exposures to peripheral European currencies such as the Norwegian krone, Polish zloty and Swedish krona, along with our overweighted exposures to Asian currencies such as the Australian dollar, Indian rupee, South Korean won and Philippine peso, negatively impacted relative performance. Among our key interest-rate strategies, the fund benefited from its overweighted exposures in Indonesia, South Korea, Brazil and Mexico but suffered from its underweighted duration positions in the eurozone, Japan and the UK. Worries about sovereign and financial risks and fears of contagion overwhelmed the underlying positive trends in emerging market fundamentals, which negatively impacted our sovereign credit exposures in Hungary, Lithuania, Russia, Poland and Indonesia.   Templeton Global Balanced comment - Jun 06 Monday, 28 August 2006 Fund Manager Comment In the three-month period ending June 30, 2006, the Templeton Global Balanced Fund returned a net +1.63% (in US dollars), outperforming its customized benchmark, the MSCI AC World index (60% of benchmark) and JP Morgan Government Bond index (40% of benchmark), which returned +1.03%. The fund's fixed-income exposure (24.6% of assets at end June) produced a positive return, counterbalancing the negative returns registered by the equity portion of the portfolio (63.9% of assets) during the quarter. The quarter can clearly be divided into three very different phases from an equity viewpoint. In April and early May markets continued to advance, while a rise in Chinese interest rates late in April caused some unease. From mid-May to mid-June, a collapse in confidence saw equity markets fall away, triggered by some poor US inflation data. A measure of stability returned to the markets in mid-June, following a series of economic releases that showed little sign of a significant deterioration in market fundamentals. During this time, investors continued to rotate into defensive areas. Utilities, energy and consumer staples were the best-performing sectors through the quarter, while cyclical areas such as consumer discretionaries and information technology were weak. In regional terms, European markets, especially those perceived as defensive, did well. By comparison, Japan preformed poorly. Despite decent performance in May, the weakness of the US dollar also acted as a drag on the US over the quarter as a whole. During the quarter, the fund increased its position in the financials sector, while reducing its position in consumer staples. The fund's overall positioning was not radically changed through the quarter. It remained heavily weighted in the UK and Europe and in consumer discretionary and telecommunications services stocks, while it remained underweight U.S., Japan, energy, financials and consumer staples. The equity portion of the fund outperformed. In spite of the weakness of the sector overall, consumer discretionary provided a strong boost to the fund. Three companies stood out. News Corp, Rupert Murdoch's media business, had a strong quarter helped by an improvement in operating costs and an increase in the scale of its share buy-back program, while Agfa Gevaert, a Belgian specialist in imaging technology, moved ahead sharply on the announcement of a major restructuring plan, splitting the business into three parts and causing investors to anticipate a lucrative break-up of the business. Additionally, Compass Group, the UK food services operation, which had been struggling with scandals, caught the attention of the market as a good defensive play and gained further ground on indications that a cost cutting program was working. Other sectors that outperformed during the quarter include information technology and financials. Mabuchi Motor, a manufacturer of small electric motors enjoyed strong demand from consumer electronics companies, especially DVD player makers. Within the financials sector, Italian bank Unicredito highlighted progress it had made with its newly acquired German arm. In market terms, the fund's exposure to Japan helped the fund, both due to the fund's weighting of that country and the success of stock picks like Mabuchi Motor and Takeda Pharmaceutical, the latter on strong quarter results. The fund also benefited from its exposure to the US on both a currency and asset allocation basis. This was reinforced by the performance of an allocation to Harley Davidson, the motorcycle maker, following exceptional improvement in the company's cash flow during the first quarter. The fund was also helped by gains made by H&R Block, the tax advisor, which is on the path to recovery following legal problems that dogged the firm during the previous quarter. Other problem sectors included energy, where the fund's underweight position and stock selection acted as a drag. An exposure to Thailand hurt the fund, as Thai mobile phone operator Advanced Info Services was affected by pricing pressure, the need for much increased network investment plus a politically motivated boycott of its services. Turning to the fixed-income portion of the portfolio, global bond markets generated positive returns over the second quarter, driven primarily by a US dollar that weakened against other major currencies. Two significant themes emerged over the quarter. First, while US interest rates have been gradually and consistently increasing for the past two years, and the European Central Bank (ECB) implemented its third rate hike in June, the addition of tightening monetary conditions in Japan during the period highlighted the decreasing global liquidity environment amid persistent inflationary pressures. In response, Treasury yield curves shifted upwards globally (over the quarter, the Japanese 10-year yield rose by 15 basis points (bps), the US 10-year moved up by 29 bps, the German 10-year by 30 bps, the UK 10-year by 31 bps and the Canadian 10-year by 32 bps). Second, concerns have grown that the lagged effect of higher global interest rates and a rise in risk aversion (on the back of tighter global liquidity and geopolitical tensions) may have implications for the global growth outlook. The combination of these concerns hurt higher yielding bond markets and equities and, consequently, their respective currencies. The fund's strong relative outperformance of the fixed-income portion of the portfolio during the second quarter continued to highlight the benefit of an active management approach to country and currency selection, short duration and diversification. During the quarter, the fund benefited from an overweight position in Canada and underweight exposure to the U.S. dollar and government bonds. In Europe, a significant overweight position in Scandinavia (Sweden, Norway) partially offset volatility in central Europe (Poland) and the relative impact of being underweight the UK bond market. Relative performance was hurt by the weakness of the Japanese yen relative to the euro. This was because the fund nearly eliminated exposure to euro and rebuilt exposure to the yen during the quarter. Most non-Japan Asian currencies produced positive returns during the quarter, but lagged the broader government bond returns. Outlook The market appears nervous but capable of sustaining current valuations in the absence of future negative news. While interest rates continue to move up, the future weakness of the US dollar is a nagging concern. However, survey data continues to paint a reasonably rosy picture for economic growth going forward and corporate profitability appears strong. Therefore, we believe our portfolio is well positioned with a blend of value and growth stocks to deliver solid returns over time. Click here for original article   Templeton Global Balanced (Eqty) comment - Sep 05 Friday, 18 November 2005 Fund Manager Comment Templeton Global Balanced Fund produced a net return of +3.01% (in US dollars) in the third quarter. This compares with a return of +7.74% for the MSCI AC World Free index over the third quarter as a whole. On the equity side, the best sectoral contribution to relative performance came the telecommunications sector, where the fund has a significant over-weighting. The industrials and health care sectors also contributed positively. Within telecommunications, the best individual contribution to relative returns came from BCE (Canada's largest telecom company), followed by Japan's NTT and Mexico's Telmex. The health care sector provided one of the best individual contributors to relative performance in the quarter, Takeda Pharmaceuticals, and Cigna also provided satisfactory returns. In Industrials, relative performance was helped by our stake in the Rolls-Royce Group. We were penalized by our under-weighting of the strong-performing energy industry, although our overweighting of Italian energy group ENI contributed positively to relative returns. Negative contributions to relative performance also came from the materials and IT sectors. In the case of IT, underperformance was largely due to our under-weighting of a strong-performing sector. In Materials, performance was hurt by individual stock selection, including an over-weighting in Mabuchi Motor Co, whose stock declined 13% (in US dollars) during the third quarter. More generally, performance over the third quarter on the equity side of the portfolio was hurt by a confluence of factors. First, a steady influx of cash over the quarter has been largely invested in a number of stocks outside the energy sector, where valuations have, in our view, become expensive. While our weighting of energy stocks remained constant throughout the quarter, our under-weighting of this sector did undercut our performance. It is also worth remembering that we had already reinforced our exposure to the oil sector in the middle of last year, but more recently have preferred to add to our holdings in other areas where high-quality stocks are trading at price-earnings ratios that are lower than those for the market as a whole. Up until recently, these have included media, chemical and pharmaceutical stocks. Outlook The Fund may be in a period of transition caused by the continued compression of valuations between 'growth' and 'value' stocks. Some of the former maybe as cheap as they have been, relative to value in 30 years, with many stocks in the technology, medical devices, telecom, and biotech sectors offering the same or lower price-earnings ratios as more defensive value stocks. This explains, for example, why and how we acquired France Telecom for the Fund during the quarter. France Telecom - before 2001 a highly expensive 'growth' stock - has steadily become undervalued on a variety of measures. The company has strong cash flow and has recently raised its dividend to provide an attractive yield to its shareholders. We believe that France Telecom is well placed to meet the challenges the telecommunications industry faces, and which are already discounted in its share price. This attractively valued company is also doing an impressive job of driving innovation and leveraging synergies across its fixed, mobile, and Internet businesses. Our largest single purchase in the third quarter was of a stake in British conglomerate Centrica, parent company of the AA, British Gas, OneTel and several energy supply companies. Leaving style considerations aside, we have seen compression in valuations between the lowest-valued stocks appearing on our in-house Bargain List and the highest-valued ones. This situation may prove challenging for managers focused on a 'top-down' strategy. By contrast, as stock pickers, we are delighted by the increase in the variety of stocks from which we can choose. It is important to note that we at Templeton are always inclined to sell stocks when they become, in our view, fully valued. Apart from energy, we believe that stocks in a number of other sectors, including the chemical and materials (metals and mining) sectors, may be reaching that stage. Click here for original article   Templeton Global Balanced (Eqty) comment - Jul 05 Wednesday, 14 September 2005 Fund Manager Comment Templeton Global Balanced Fund achieved a return of +1.82% in July. The largest three individual contributors on the equity side were Samsung Electronics, Amvescap and AXA. Although net income fell 46% in the second quarter, Samsung actually fared better than analysts were expecting. It also announced a 13% increase in net income - a sign, perhaps, of a turnaround in the group's fortunes. Samsung also remains at the forefront of product development in the area of LCDs. Amvescap, a UK-listed fund manager performed strongly on the back of bid interest from a Canadian rival. The bottom contributions were Royal Dutch Shell, Pfizer and Fuji Photo. Royal Dutch Shell was one of the few oil stocks to struggle in July. This was because it missed analysts' estimates for second-quarter earnings and because of technical issues associated with the removal of a dual share class. Pfizer's first-half results rose stongly, but its stock was hurt by probes into the side effects of some arthritis drugs produced by the firm. France Telecom and German reinsurer Muenchener Rueck were added to the portfolio in July. The latter's fall in earnings in the second quarter enabled us to buy into the world's largest reinsurer at a reasonable price. France Telecom is undervalued on a variety of measures. The company has strong cash flow and has recently raised its dividend to provide an attractive yield to its shareholders. We believe that France Telecom is well placed to meet the challenges the telecommunications industry faces, and which are already discounted in its share price. We also increased our stake in German engineering firm Siemens. During the month, we also disposed of our stake in AMR Crop (holding company for American Airlines). Outlook Stock markets have forged ahead in the past three months, as investors focus on headline numbers, mostly out of the US The macro-economic picture in Europe is more subdued, while Japan may, at last, be turning the corner. Yet, despite an upward shift, long bond yields remain low, and curve flattening remains the order of the day. Such a phenomenon may, in part, be a reflection of high liquidity around the world, but it may also indicate persistent uncertainty about the solidity of the present economic upturn. For our part, we see a number of clouds gathering. Even though it has not, as yet, had the impact one might have expected, oil prices remain worryingly high. Further causes for concern are the overheated property sector in the US and the extent of the slowdown in China, whose influence on the fortunes of many countries is by now at least as large as that of the US Skepticism about the solidity of economic growth is also fuelled by surprisingly flaccid sea- and air-freight rates.   Templeton Global Balanced (FI) comment - May 05 Tuesday, 16 August 2005 Fund Manager Comment Summary The FTIF Templeton Global Balanced Fund returned -0.12% during the month. The JP Morgan Global Government Bond Index (GGBI) returned -1.92% over the same period. Global fixed income markets performed strongly during the month in local currency terms, as international yield curves shifted downward on concerns over slowing global growth, particularly in the US. In US dollar terms, global bond markets declined on continued short term Dollar strength, which we discuss further below. Despite the rally in US treasury bonds and Dollar strength during the month, the fixed income portion of the Fund benefited from regional diversification, particularly away from the Euro Area and into Asia, as well as country and currency selection. Within Asia, relative performance to the benchmark index benefited from overweight exposure to Korea, Indonesia, Malaysia, Singapore and Australia as well as the long-standing underweight position in Japan. Conversely, the Funds' overweight positioning in Thailand and New Zealand detracted from relative performance. Within Europe, the Funds benefited from overweight exposure to Poland and Norway while benefiting from underweight exposure to the Euro Area and the U.K. Overweight exposure relative to the benchmarks in Sweden and Hungary hurt relative performance. In the Americas, overweight exposure to Canada supported relative performance during the month. Below we discuss key highlights for the period regarding global bond and currency markets and fund strategy: Americas Growth data in the US remained mixed during the month. Data indicated economic activity remained soft in the manufacturing sector for the month of April with the ISM purchasing manager index trending back towards 50 and flat production during the month. One bright spot for future activity was core capital goods orders (excludes large orders of items such as aircrafts), which rose 10.5% year-to-year in April. Data from the consumer indicated more resilience to the soft patch in the current growth cycle, with consumer confidence bouncing back in May, better retail sales data for April and out-performance in the housing sector. Providing further support to the consumer, labour market data remained strong, with headline non-farm payrolls rising 274 thousand in April. Over the month, 10 year yields on US Treasuries moved below 4% once again, and the US sub index in the GGBI rose 1.31%. Additionally, the US dollar rose 2.79% against its major trading partners during the month. We continue to view the current strength in the Dollar as short-term and technically driven, rather than reflecting a turn in the underlying fundamental drivers of Dollar weakness. Furthermore, this technical picture is becoming more stretched. For example, data from the Commodities Future Trading Commission (CFTC) indicate Dollar long positions (as measured by a basked of six major currencies) increased from just over $1 billion at the end of April to over $15 billion by the end of May. An overstretched technical position could lead to another leg of Dollar weakness on a change in sentiment. Similarly, this data also indicates technical positioning against the Euro turned quite bearish against the Euro during the month, declining from approximately $0.7 billion to -$2.8 billion by month end. Much of this positioning reflects increased political uncertainty regarding referendums on the EU constitution, which is discussed further below. Elsewhere in the Americas, Canadian bond markets were among top performing local bond markets, returning 1.81% during the month in local currency terms, and 1.87% in US dollar terms following 0.33% appreciation of the Canadian Dollar against the USD. Canadian bond and currency markets experienced a relief rally during the month following easing of political uncertainty. In Latin America, USD denominated sovereign bonds rose 3.23% led by Brazil, which gained 4.03% during the month. Additionally, Venezuelan debt markets rose 2.11%. GDP data released during the month indicated the economy grew 7.9% year-on-year in the first quarter, driven by the non-oil sector. Despite month-to month fluctuations, official unemployment rates and inflation rates have continued to decline. Europe Economic data out of Euroland during the month, combined with higher political uncertainty, particularly in France and Germany, led to local bond market gains, or 1.11% in local currency terms during the month. However, widening growth and interest rate differentials, both intra-Euro Area and relative to the US, concern over the EU constitution and economic data showing further slowing in Euro Area growth momentum during the month weighed on the Euro. The Euro fell 4.33% against the USD, bringing total returns to -3.29% in US dollar terms. While the policy fall-out from the rejection of the EU constitution in France and Netherlands is not yet clear, voters used the referendum to express discontent with current economic programs, which have resulted in high unemployment and stagnant growth in the Euro Area. Operationally, the union will continue to operate on an existing set of treaties of economic cooperation. The uncertainty over the direction of Euro Area policy also weighed on central European currencies of those countries aiming to adopt the Euro over the next few years. In addition to Dollar strength during the month, the Polish Zloty declined 1.68% during the month, the Slovakian Koruna 3.37% and the Hungarian Forint 5.01% against the US Dollar. We continue to view the impact of the EU constitution as transitory for these currencies given the EU constitution largely represented a political rather than economic treaty. Euro adoption continues to be guided by the well-known Maastrict treaty. The Polish bond market, however, rose 2.18% during the month as weaker than expected GDP estimates for the first quarter, at 2.1%, increased expectations of further rate cuts during the summer. Polish bond markets returned 0.92% in US dollar terms. Slovakia experienced broader based growth during the first quarter, as the domestic demand recovery gained traction, rising 5.1% year-onyear. Growth prospects in Slovakia remain favourable given significant foreign direct investment in the auto industry, which is expected to boost future export capacity. Scandinavian bond markets underperformed during the month on currency weakness, despite local bond strength. Norway returned -1.05% and Sweden -2.88% in US dollar terms over the month. Among US dollar denominated European sovereign debt positions, Russia returned 3.16% and Ukraine 1.29%. Asia Asian bond markets also participated in the bond market rally during the month, although Japan at much more limited extent due to already low yields. Asian currency performance was more mixed, but overall outperformed European and the global market, with the exception of Japan, Thailand and New Zealand which returned - 2.64%, -2.27% and -2.38% in US dollar terms. Bond markets in South Korea, Singapore and Australia declined less than the broader market during the month, returning -0.51%, -0.62% and -1.75%, while Indonesian and Malaysian bond markets generated positive returns of 2.53% and 1.87% in US dollar terms. In South Korea, domestic demand indicators, which are closely watched for indication of a sustained recovery, tempered slightly during the month, but remained at improved levels over 2004. Demand-pull inflation thus remained subdued resulting in stable inflation rates at 3.1%. Korean authorities continue to implement a favourable policy mix, consisting of holding interest rates unchanged and instead using tax policy to stimulate domestic growth. Continued export growth year to date has supported further reserve accumulation. In the past, we have highlighted the accumulation of international reserves in Asia as evidence of undervalued exchange rates as authorities resist currency appreciation against the US dollar, aggravating global imbalances and exerting downward pressure on the US current account deficit. While we have often addressed the unsustainability of the U.S. current account deficit in the past, there may also be an issue of unsustainability in Asian reserve accumulation, further adding to the case for appreciation of Asian exchange rates. There are generally two camps of thought on Asian reserve accumulation. The first camp argues that Asian countries can indefinitely continue to accumulate foreign reserves (typically in US dollars) because it is in their interest to do so, or keeping exchange rates competitively cheap ensures continued export growth to the US. Conversely, it is in the US's interest because those foreign reserves are recycled through purchases of US treasuries, keeping rates in the US low. There are two problems to this argument--it ignores the rebalancing between external and domestic demand drivers of growth in Asia and it ignores the cost of accumulating reserves. By intervening in the foreign exchange market, authorities have to make a choice between nonsterilized or sterilized intervention, that is, between allowing the foreign reserves acquired in the intervention to enter the monetary base as additional liquidity or sterilize that liquidity by issuing short-term treasury debt. Both have costs, the first is inflationary by increasing the money supply and the second is a fiscal cost through higher debt servicing. These costs were more manageable through lower interest rates when Asia was generally experiencing deflationary pressures. However, in a rising inflation environment, higher interest rates would also lead to higher debt service costs on sterilized reserves. Additionally, as the corporate sector has generally emerged from balance sheet restructuring, there is additional demand for liquidity, which may be going towards sterilized debt (crowding out), and therefore imposes an economic cost through growth. In this sense, allowing currency appreciation reduces the need for sterilized intervention, slows the fiscal burden and improves liquidity conditions to the corporate sector at a time when the growth structure shifts towards domestic sources, providing Asia with a source of growth to offset slowing export growth. As consumption and investment rise, the high level of national savings rates in Asia that fosters large current account surpluses and reserve accumulation, should decline. Global Bond Outlook The global fixed income portion of the Fund continues to position for anticipated US dollar depreciation due to weak US balance of payments conditions. These weak conditions stem from the combination of a historically large trade deficit, growing external debt service costs, and an increased dependence on foreign short-term bond financing to cover the current account deficit. To position for this US dollar adjustment, we have identified peripheral Europe and non-Japan Asia as providing the most optimal investment opportunities due to relative currency and bond market valuations. Within Asia, we have found the best value outside of the region's largest market, Japan. While the fixed income portion of the Fund maintains zero exposure to the Japanese yen and government bonds, it is overweight Asia through our positions in other Asian bond markets and currencies. Similarly in Europe, while overweight European bonds and currencies we are finding the best value outside of the core Euro market in peripheral Europe due to their relative interest rates, balance of payment conditions, and macroeconomic performance. Global Bond Positioning (calculated by the portfolio management team) The Templeton Global Balanced Fund, with total return as its primary investment objective, has approximately 51% of its global bond assets in Europe. This consists of 15% in Euro Area markets and 36% in peripheral European markets, with the top five peripheral European holdings including Sweden, Poland, Slovakia, Norway and Denmark. The fixed income allocation of the Fund also has 41% of assets invested in Asia, although notably, maintains zero exposure to Japanese government bonds. Similarly, the Fund has 8% allocation to the Americas with zero allocation to US treasuries. Additionally, at the end of May, the average credit rating of securities held in the global bond portion of the Fund was AA-. Click here for original article   Templeton Global Balanced (Eqty) comment - Jun 05 Tuesday, 16 August 2005 Fund Manager Comment Templeton Global Balanced Fund returned a net -1.37% (A (acc) class shares, in U.S. dollars) in the second quarter, compared with a return of -0.06% for the fund's customized benchmark, made up of the MSCI World (60%) index and the JP Morgan Government Bond index. The best equity contributions to relative returns in the second quarter came from a variety of sources, although Consumer Discretionary stocks (where the fund is overweight relative to the MSCI World) are especially well represented in the list of top 10 contributors. The top contributors over the quarter were National Australia Bank and US health insurance provider CIGNA, followed by US retailer stock Kroger. On the equity side, four new stocks were added to the fund in the second quarter. These were German carmaker BMW (our largest acquisition during the quarter), Dutch media group VNU, Japanese motor engine company Mabuchi and Siemens. Siemens has been the subject of a lot of recent criticism, primarily due to its loss-making mobile telephone unit and problems in its telecom equipment and consulting divisions. But the group's new CEO, Klaus Kleinfeld, has shown his commitment to address these issues, whilst the rest of the group is in very good shape. During the quarter, we also added to existing positions in two pharmaceutical companies - Bristol Myers Squibb and Pfizer - as well as in Fuji Photo Film and Unilever. Equity sales were restricted to the disposal of our residual stake in British IT group Novar (acquired by Honeywell). Outlook Half way through 2005, developments have confounded the predictions of observers at the start of the year who foresaw continued weakening of the dollar (it has actually strengthened) and a rise in government bond yields (they have fallen). Also, stock markets have made reasonable gains over the past two months. Despite this, we remain cautious about prospects for the rest of this year. Economic growth is fragile at best, especially in light of the steep rise in oil prices. Added to this are our mounting concerns about rampant house price growth in a number of countries, including the US. Large-caps have increasingly been finding their way into Templeton's in-house bargain list and, thus, into Templeton Global Fund. Given the hammering they have taken, valuations in the large-cap growth arena are attractive. As the world came out of near recession in 2002-2003, small caps did particularly well, as one might expect in a cyclical upswing, but with signs that global economic growth is maturing, we could well be in a transitory phase when more stable stocks come into their own.   Templeton Global Balanced (FI) comment - Mar 05 Friday, 29 April 2005 Fund Manager Comment The FTIF Templeton Global Balanced Fund returned -1.27% during the quarter. The JP Morgan Global Government Bond Index (GGBI) returned -2.44% over the same period. In local currency terms, global fixed income markets gained over the first quarter, however given U.S. dollar strength during the period, market returns in U.S. dollar terms weakened. Notably, the fixed income portion of the Fund was significantly underweight the U.S. dollar and still outperformed its respective benchmark during this period of Dollar strength, benefiting from country, currency and security selection. We have seen similar difficult periods in the past were the U.S. balance of payment fundamentals clearly deteriorated yet short-term technicals turned positive, prompting Dollar appreciation over the short-term. While the Fund has the flexibility to take advantage of favourable developments in US rates or the US dollar, we think that scenario is still some time away and further adjustment of the U.S. dollar against global currencies, particularly Asia, is still necessary. Below we discuss key highlights for the period regarding global bond and currency markets and fund strategy: Americas In the U.S., the Federal Reserve Board (the Fed) continued to raise interest rates gradually, or 25 basis points to 2.75%. However, the accompanying FOMC statement contained changes in rhetoric regarding inflationary pressures, specifically from perceived increased pricing power, prompting concern among investors that the Fed may be building an argument for an acceleration in interest rate hikes. Inflation data released during the month continued to show gradual rise in underlying inflation, with core CPI rising to 2.4% year-on-year. Despite 175 basis points in Fed tightening during the current rate cycle, monetary policy remains accommodative and real yields are still slightly negative. While short-term interest rates have been rising in step with Fed rate changes, 10- year rates had been fairly resilient to the tightening interest rate environment. During the quarter, 10-year yields rose 26 basis points to 4.22%, compared to only 10 basis point increase in the fourth quarter of last year. The U.S. Treasury curve shifted upwards during the quarter and the US sub-index of the GGBI declined -0.45%. The U.S. dollar strengthened 2.79% during the quarter as short-term capital flows into the U.S. offset weak current account developments. Data for the fourth quarter indicated the U.S. current account deficit reached a new record deficit level, or nearly $188 billion for the three-month period. Relative to the size of the US economy, the current account deficit jumped to 6.3% of GDP from 5.6% just a quarter earlier. Despite a weaker currency relative to past years and strong export growth, the relative growth rate of the US to other major trading partners, a high propensity to consume, and low national savings continues to weigh on current account developments. Considering these developments, in the event of a significant rise in risk aversion, those currencies dependent on foreign capital inflows to fund the balance of payments (such as the U.S. dollar) should be more vulnerable than those currencies with current account surpluses and significant reserve accumulation. Elsewhere in the Americas, Canadian bond markets generated positive returns in both local currency terms and U.S. dollar terms, rising 1.14% and 0.16%, respectively, benefiting relative performance. Latin American U.S. dollar denominated Eurobonds also weakened, following rise in risk premiums for emerging markets in general. Emerging markets sovereign spreads, as measured by the JP Morgan EMBIG, rose to 373 basis points over the US Treasury curve from 347 at the end of the fourth quarter, having been adversely impacted by the rise in the U.S. ten-year yield. Over the quarter, Argentina declined 5.28% in the EMBIG, Brazil 3.40% and Mexico 0.96%. Europe European currency markets generally weakened against the U.S. dollar over the quarter, offsetting positive gains in the local bond markets. Euro Area bond markets were among the stronger performing bond markets in local currency terms, rising 1.29% over the quarter. However, the 4.47% depreciation of the Euro against the USD caused Euro Area bond markets to decline 3.15% in U.S. dollar terms. Similarly, Swedish bond markets declined 3.94% and Norwegian 3.60%. The European Central Bank (ECB) left interest rates unchanged at 2.00% during the quarter amid declining growth expectations and mixed inflation data. The European Commission lowered their 2005 growth forecast to 1.6%. Additionally, while headline inflation remained slightly above the ECB's target, core inflation rates slowed significantly in the first quarter. The rise in risk premium in emerging markets spilled over into central European currencies during the quarter, despite no change in the underlying fundamentals. In U.S. dollar terms, the Polish bond market returned -1.20% and Hungarian bond market -1.29%, still outperforming the broader market for the quarter. Both Poland and Hungary generated strong bond returns in local currency terms as central banks reduced interest rates amid easing inflationary pressures. During the quarter, Poland reduced the main policy rate 50 basis points to 6.00% and Hungary 175 basis points to 7.75%. Asia Fund positioning in Asia helped offset mixed relative performance in Europe over the quarter. Thailand, Malaysia and South Korea generated positive returns, rising 2.40%, 1.12% and 0.14%, respectively, in U.S. dollar terms over the quarter. Thailand continued to experience broad based growth and the central bank tightened interest rates for the fourth time in a year. Also, consumer confidence in Korea showed notable improvement during the quarter. Both Australia and New Zealand also outperformed the index, returning -1.70% and -0.92% in U.S. dollar terms, benefiting relative performance. Economic growth has remained robust, supported by favourable terms of trade developments and improving commodity prices. Both the central bank of New Zealand and the central bank of Australia raised interest rates 25 basis points during the quarter to 6.75% and 5.50%, respectively. Despite rising interest rates in the U.S., the interest rate differential to other global assets remains attractive. Additionally, Indonesia declined 1.85% and Singapore 3.02%. In Japan, economic data continued to show mixed results with continued strength in investment growth and some signs of stabilization in deflation, however, household consumption trends remained quite tentative. Japanese bond markets underperformed the index, declined 3.37% during the quarter. Global Bond Outlook The global fixed income portion of the Fund continues to position for anticipated US dollar depreciation due to weak US balance of payments conditions. These weak conditions stem from the combination of a historically large trade deficit, growing external debt service costs, and an increased dependence on foreign short-term bond financing to cover the current account deficit. To position for this US dollar adjustment, we have identified peripheral Europe and non-Japan Asia as providing the most optimal investment opportunities due to relative currency and bond market valuations. Within Asia, we have found the best value outside of the region's largest market, Japan. While the fixed income portion of the Fund maintains zero exposure to the Japanese yen and government bonds, it is overweight Asia through our positions in other Asian bond markets and currencies. Similarly in Europe, while overweight European bonds and currencies we are finding the best value outside of the core Euro market in peripheral Europe due to their relative interest rates, balance of payment conditions, and macroeconomic performance. Global Bond Positioning The Templeton Global Balanced Fund, with total return as its primary investment objective, has approximately 51% of its global bond assets in Europe. This consists of 17% in Euro Area markets and 34% in peripheral European markets, with the top five peripheral European holdings including Sweden, Poland, Norway, Denmark and Slovakia. The fixed income allocation of the Fund also has 41% of assets invested in Asia, although notably, maintains zero exposure to Japanese government bonds. Similarly, the Fund has 8% allocation to the Americas with zero allocation to U.S. treasuries. Additionally, at the end of February, the average credit rating of securities held in the global bond portion of the Fund was AA.   Templeton Global Balanced (Eqty) comment - Mar 05 Friday, 29 April 2005 Fund Manager Comment Templeton Global Balanced Fund achieved a net return of -1.24% (A (acc class) in U.S. dollars) over the first quarter, compared with a return of -1.56% for its customized benchmark, 60% made up of the MSCI AC World Free Index and 40% made up of the JP Morgan Global Government Bond Index. On the equity side, three of the best contributors to relative returns were Samsung Electronics, French insurer AXA and British pallet specialist Brambles. Samsung launched a number of new handsets and is targeting a first quarter return to 15% operating profits in the telecom division. Additionally, LCD pricing is more stable than expected, demand is improving and the semiconductor division continues to perform well. All of the issues the street worried about three months ago are now viewed as positives. Axa's net income increased from EUR1.01 billion to EUR2.52 billion in 2004, benefiting from lower expenses such as benefits and claims and reinsurance ceded charges. Brambles also have reported flattering net profits. Two of the most disappointing contributors in the first quarter were DirecTV and Dutch media group Wolters Kluwer. The latter suffered from reductions in analysts' earnings per share estimates while stronger subscriber growth at DirecTV has depressed EBITDA and free cash flow - the primary metrics used to value the cable & satellite sector. Also, subscriber acquisition costs and churn has ticked up slightly and General Motors Pension Fund has begun to sell down its 19% stake in the DTV. Finally, the company is unable to use its balance sheet capacity to buyback its stock until this December, thereby disappointing investors expecting share repurchases to commence in the first quarter of this year. Looking out into 2006 and beyond we still believe that there is significant opportunity for operating leverage in a slowing subscriber growth environment. There was further rationalization of our equity portfolio over the first quarter, with the number of long-term positions held falling from 157 to 151. The largest single disposal was that of our entire holding in Atlas Copco, the Swedish industrial tool manufacturer. We also sold our entire stake in German chemical group Bayer, Danish cleaning and security services group ISS A/S and Lloyds TSB. The fund realized a net gain in all these transactions, which involved equities that had approached fair value. Positions in a wide variety of other positions were trimmed during the first three months of 2005. The volume of share purchases was lower, although new positions were taken in British technology and engineering firm GKN, pharmaceutical group Pfizer and Royal Bank of Scotland.   Templeton Global Balanced comment - Feb 05 Wednesday, 23 March 2005 Fund Manager Comment Templeton Global Balanced Fund (Equity Part) Templeton Global Balanced Fund returned +3.28% (in U.S. dollars), outpacing its customized benchmark (60% MSCI World and 40% JP Morgan Government Bond). The highest-contributing equity holdings in February were, in order, Sweden's Nordea Bank, French insurer AXA and U.K. restaurant services group Compass. The most disappointing contributors were Check Point Software and Australian insurer AMP, as well as two health care specialists - Mayne Group and Shire Pharmaceuticals. There was a flurry of equity purchases in February. Fuji Photo and pharmaceuticals company Pfizer were two new additions to the fund, and we also topped up existing stakes in Deutsche Post, DirecTV, GKN, National Australia Bank, Nestle, Synopsys, Takeda Pharmaceuticals, Wolters Kluwer and XL Capital. There were no equity sales during February. Outlook February was another good month on equity markets as investors became convinced that a virtuous circle of steady economic growth, low inflation and relatively low interest rates had set in. An increase in M&A activity has also been lifting market sentiment. Expectations are also running high, with an average return on equity of 16% anticipated for the world's listed companies in 2005. There were, however, some upsets that temporarily halted the market's rise, most notably linked to general nervousness about the dollar, as the U.S. continues to register near-record trade and federal deficits. In the meantime, crude oil prices have strayed over $50 per barrel again. Although long-term bond prices began to fall toward the end of the month, the apparent contradiction between low long-term bond yields and rising stocks persisted for much of February, possibly because of strong Asian purchases of U.S. Treasuries. Further widening of U.S. yield spreads, such as we saw at the end of the month, could prove a catalyst for some medium-term disruptiveness. In a word, we are not convinced that financial market conditions will remain as benign as they have been in recent months. Templeton Global Balanced Fund (Fixed Comment) Summary The FTIF Templeton Global Balanced Fund returned 3.28% during the month. The JP Morgan Global Government Bond Index (GGBI) returned 0.03% over the same period. During the month, global bond markets generated slightly positive returns as most major currencies strengthened against the U.S. dollar. Global bond performance over the past two months highlights that while January was a difficult month, Fund diversification helped protect on the downside, while in February, the same strategy helped the global bond portion of the portfolio capture significant upside and position for relative out performance. Country and currency selection in peripheral Europe and non-Japan Asia significantly benefited relative performance in addition to the contribution to relative performance of being underweight the U.S. and Japan. Below we discuss key highlights for the period regarding global bond and currency markets and fund strategy: · Americas In the U.S., data released during the month was relatively positive; non-farm payrolls for the month of January showed hiring was in-line with expectations, fourth quarter GDP estimates were revised upwards from 3.1% to 3.8% and fourth quarter productivity to 2.1% from 0.8%. The Federal Reserve Board (the Fed) hiked interest rates as expected by 25 basis points to 2.50%. Inflation data was mixed during the month with a large surprise in core producer prices, up 0.7% month-to-month to 2.7% annual rate, while core consumer prices rose in-line with expectations, or 0.2% month-to-month to 2.3% annual rate. Given better growth data and rising short-term rates, the U.S. yield curve shifted upwards during the month and the sub-index of the GGBI declined 0.86%. Elsewhere, Canadian bond markets rose 0.94% in U.S. dollar terms during the month. In Latin America, U.S. dollar sovereign debt exhibited some resilience to rising yields in the U.S. Growth indicators continued to be strong, particularly in Brazil and Peru, which returned 0.91% and 1.32% in the EMBIG. Additionally, Argentina was the top performing credit in the EMBIG following progress on the debt exchange, which benefited performing debt securities. During the month, the Argentine sub index of the EMBIG rose 4.53%. · Europe Euro Area bond markets decline in local currency terms on yield curve steepening, or 0.59% during the month. The Euro, however, rose 1.62% bringing bond returns to 1.22% in U.S. dollar terms. Fourth quarter data released during the month showed the Euro Area economy slowed further to 1.6% y/y from 1.8% in the third quarter and 2.1% in the second quarter. Weakness was particularly evident in the German economy, with real GDP growth declining 0.2% from the third quarter. Headline inflation remains moderate, hovering around the ECB's target level of 2%, while underlying inflation dropped significantly during the month to 1.6% from 1.9%. The lack of underlying inflation pickup in the Euro Area is unsurprising given the weak domestic economy along with the strength in the currency containing tradable goods prices, such as oil. While the Fund is underweight Euro Area bonds, it remains one of the Fund's longest duration positions. Peripheral European currencies once again outperformed the Euro during the month, boosting the Fund's relative performance. In comparison to the Euro's 1.62% return against the USD during the month, the Polish Zloty returned 6.09%, the Hungarian Forint 3.14%, the Norwegian Krone 2.50%, the Slovakian Koruna 2.46% and the Swedish Krona 2.19%. In conjunction with the strong performance of the Zloty during the month, Polish bond markets rose 3.32% in local currency terms. Consumer price inflation in Poland has slowed faster than the central bank anticipated as the supply side shock to prices following EU entry fades. The National Bank of Poland adopted an easing bias during the month, supporting local bond market performance, and in conjunction with strong currency appreciation, Polish bond markets returned 5.39% in U.S dollar terms. Even with the market pricing in interest rate cuts during the year, nominal yields remain attractive relative to the Eurozone. Currently, the reference rate is 6.50% relative to the Eurozone's main policy rate of 2.00%. Currency strength in central Europe over the past year in general has been beneficial for containing inflationary pressures allowed central banks more flexibility in monetary policy. In Slovakia, the rapid appreciation of the Koruna prompted the central bank to intervene in the currency markets and reduce the interest rate 100 basis points to 3.00% during the month in an attempt to slow the pace of appreciation. Similarly, central bank of Hungary reduced interest rates more than expected by 75 basis points to 8.25%. · Asia In Asia, Japan was the clear underperformer, declining 1.35% in U.S. dollar terms over the month given weakness in the bond market as well as the currency. The Yen declined 0.86% against the Dollar. Fourth quarter data indicated that economic growth declined 0.1% from the third quarter. While growth is likely slowing in Japan, statistical revisions to GDP calculations during the quarter likely understate growth conditions. Even if fourth quarter GDP data is transitory, the more important factor in our view remains the composition of growth, or evidence of a sustained pickup in household expenditures that pressures domestically driven inflation. Asia ex-Japan exhibited strong performance during the month. Australia and New Zealand rose 0.83% and 2.79% in U.S. dollar terms, as inflation pressures, particularly arising from tight labor market conditions boosted expectations for renewed monetary tightening. The Thai Baht rose 0.81% during the month and bond markets generated a strong return of 1.68% in U.S. dollar terms. The currency lagged other non-Japan Asian currencies in the last leg of the U.S. dollar adjustment over the fourth quarter and is now beginning to catch up. South Korea rose 2.81% in U.S. dollar terms led by 2.19% appreciation of the Korean Won against the U.S. dollar. Investor focus on statements regarding Asian reserve diversification on the margin away from Dollars and into Euros triggered a turn in sentiment in the currency markets, particularly benefiting the USD-KRW. While the subject of Asian reserve diversification is not a new discussion within global markets, the issue does highlight a liquidity risk to the U.S. dollar. Diversification does make sense given Euro is another important currency in magnitude and reserves should better match global trade and capital flows. Global Bond Outlook The global fixed income portion of the Fund continues to position for anticipated US dollar depreciation due to weak US balance of payments conditions. These weak conditions stem from the combination of a historically large trade deficit, growing external debt service costs, and an increased dependence on foreign short-term bond financing to cover the current account deficit. To position for this US dollar adjustment, we have identified peripheral Europe and non-Japan Asia as providing the most optimal investment opportunities due to relative currency and bond market valuations. Within Asia, we have found the best value outside of the region's largest market, Japan. While the fixed income portion of the Fund maintains zero exposure to the Japanese yen and government bonds, it is overweight Asia through our positions in other Asian bond markets and currencies. Similarly in Europe, while overweight European bonds and currencies we are finding the best value outside of the core Euro market in peripheral Europe due to their relative interest rates, balance of payment conditions, and macroeconomic performance. Global Bond Positioning* For Internal Use Only The Templeton Global Balanced Fund, with total return as its primary investment objective, has approximately 53% of its global bond assets in Europe. This consists of 17% in Euro Area markets and 36% in peripheral European markets, with the top five peripheral European holdings including Sweden, Poland, Norway, Denmark and Slovakia. The fixed income allocation of the Fund also has 38% of assets invested in Asia, although notably, maintains zero exposure to Japanese government bonds. Similarly, the Fund has 8% allocation to the Americas with zero allocation to U.S. treasuries. Additionally, at the end of February, the average credit rating of securities held in the global bond portion of the Fund was AA. Source: calculated by the portfolio management team   Templeton Global Balanced (FI) comment - Sep 04 Thursday, 18 November 2004 Fund Manager Comment The FTIF Templeton Global Balanced Fund returned 0.17% over the three-month period and 2.56% during the month of September. The JP Morgan Global Government Bond Index (GGBI) rose 3.34% during the quarter and 1.38% for the month. Global fixed income markets generated solid performance over the quarter as global treasury curves flattened and the U.S. dollar weakened. Treasury markets rallied as oil prices surged and raised concerns over the durability of the economic recovery in industrial countries. Below we discuss key highlights for the month regarding global bond and currency markets and fund strategy: Americas In the US, the Federal Reserve Board raised the Fed Funds rate 50 basis points to 1.75% over the period as the Fed continued to reduce policy accommodation at a measured rate. While economic growth emerged from a soft patch in early summer, growth expectations for the second half of the year were revised downwards. Oil prices ended the period close to $50 per barrel, raising concern once again that oil would create a drag on growth and add pressure to inflation. However, inflation measures excluding food and energy leveled off during the period, contributing to the flattening in the U.S. Treasury curve. Despite rising short-term rates, the sub index of the GGBI rose 3.49% over the quarter. In addition to lower growth expectations, further deterioration in the US trade and current account deficits weighed on the USD during the period, declining 2.37% against its major trade partners. The U.S. current account deficit reached another record level of 5.7% of GDP following a widening of the trade deficit as US imports grew faster than US exports. In Canada, the central bank began raising interest rates during the quarter, or 25 basis points to 2.25%. Canada was the fastest growing G7 economy in the second quarter, and strong growth combined with rising capacity constraints in the economy point towards upside risk to inflationary pressures. Canada was among the top performing countries in the GGBI, rising 9.08% over the quarter benefiting from strong currency gains over the period. Given strong commodity prices and rising oil prices, the Funds maintained exposure to oil producing credits over the quarter. In Latin America, Venezuela produced one of the strongest returns in the EMBIG during the quarter, rising 15.63%. In addition to the conclusion of a drawn out referendum that solidified the current administration's position within government, Moody's upgraded Venezuela's sovereign credit rating two notches to B2. Similarly, S&P upgraded Brazil's sovereign credit rating one notch to BB-. The acceleration in economic growth in Brazil became more apparent over the quarter, with the emergence of capacity concerns, prompting the central bank to raise the reference rate for the first time in over a year. However, the export led recovery has produced growth in conjunction with a current account surplus. The Brazilian sub-index of the EMBIG rose strongly, 14.86% over the quarter. Europe Rising oil prices particularly impacted Euro Area bond markets, given the fragility of the economic recovery in the context of risk to exports while domestic demand remains relatively weak. As a result, expectations for the ECB's first interest rate increase were pushed further out into 2005. While Euro Area markets overall outperformed the GGBI, peripheral European bond and currency markets generally outperformed the Euro Area, extending relative Fund performance. Euro Area bond markets rose 4.88% in USD terms, aided by a 2.21% appreciation of the euro against the USD. Stronger growth momentum relative to the Euro Area in Norway and Sweden combined with large and rising current account surpluses contributed to bond market returns of 5.88% and 6.13%, respectively, in USD terms. In central Europe, Poland and Hungary benefited from appreciating currencies over the period, with the Polish Zloty rising 5.22% on prospects for rising interest rates and strong export performance and the Hungarian Forint rose 4.02%, bringing bond market returns to 8.77% and 6.88%, respectively in USD terms. Supply-side shocks related to EU entry, particularly to food prices, generated some inflationary pressures in the central European economies. The central bank of Poland raised interest rates 125 basis points to 6.5%. In conjunction with rising rates and strong external demand, easing political pressures Poland supported currency strength over the quarter. Asia In Asia, measures implemented by the central bank of China to target overheating in certain sectors appeared to have some impact. While these measures may marginally impact growth over the near term, particularly import demand from neighboring countries, domestic demand in Asia ex-Japan overall remains quite robust. In particular, Thailand is on track to post continued strong domestic growth rates, which registered 7% in 2003, driven by overall strength in both consumption and investment. In Indonesia, consumption trends are set to remain in line with their strong showing of 4% growth in the 2003. Domestic demand is set to benefit as political noise subsides due to the peaceful conclusion of this fall's presidential election. Additionally, the election of a market friendly president increases the potential for judicial reform that could improve the foreign investment climate. In Korea, where the consumer is working through the tail end of the credit overhang, a stabilization of the employment outlook should support a gradual improvement in domestic demand (from about 1% in 2003) and provide another catalyst for overall growth, which is already sound on strong export demand. Another important consideration to Asia growth is the US. As growth in the US appears to stabilize at or above its potential growth rate, strength in the US can substitute for slowing in China. The Japanese bond market did not participate as fully in the global treasury rally during the end of the quarter, significantly underperforming the GGBI. Additionally, the Yen declined 0.88% over the period, bringing overall market returns to 0.75% in USD terms. In Australia and New Zealand, continued strength in commodity prices and rising interest rate expectations supported currency strength driving overall bond market performance. Australian and New Zealand bond markets rose 7.41% and 8.63% over the quarter in USD terms. Indonesian markets strongly rebounded from the prior quarter, rising 10.53% in USD terms (HSBC ALBI), following the conclusion of Indonesia's first peaceful and fully democratic presidential elections. While export markets remained quite competitive in Korea and drove continued balance of payment strength, sluggish domestic demand prompted the central bank to cut interest rates. Korean bond markets rose 3.32% (HSBC ALBI) over the period, positively impacting Fund performance. Quarterly Market Returns The JP Morgan Global Government Bond Index (GGBI) rose 3.34% over the quarter in U.S. dollar terms. Japan and the United States have the largest representation in the index, accounting for 28.29% and 23.87% of the index. Other significant index weightings include Germany, Italy and France, which comprise 10.31%, 9.70% and 9.12% of the GGBI respectively. During the quarter, Japan returned 0.75% in U.S. dollar terms, the United States 3.49%, Germany 4.79%, Italy 5.12% and France 4.79%. In local currency terms, the GGBI rose 2.66%. Global Bond Outlook The global fixed income portion of the Fund continues to position for anticipated US dollar depreciation due to weak US balance of payments conditions. These weak conditions stem from the combination of a historically large trade deficit, growing external debt service costs, and an increased dependence on foreign short-term bond financing to cover the current account deficit. To position for this US dollar adjustment, we have identified peripheral Europe and non-Japan Asia as providing the most optimal investment opportunities due to relative currency and bond market valuations. Within Asia, we have found the best value outside of the region's largest market, Japan. While the fixed income portion of the Fund maintains zero exposure to the Japanese yen and government bonds, it is overweight Asia through our positions in other Asian bond markets and currencies. Similarly in Europe, while overweight European bonds and currencies we are finding the best value outside of the core Euro market in peripheral Europe due to their relative interest rates, balance of payment conditions, and macroeconomic performance. Global Bond Positioning(calculated by the portfolio management team) The Templeton Global Balanced Fund, with total return as its primary investment objective, has approximately 58% of its global bond assets in Europe. This consists of 29% in Euro Area markets and 30% in peripheral European markets, with the top five peripheral European holdings including Sweden, Poland, Denmark, Norway and the United Kingdom. The fixed income allocation of the Fund also has 38% of assets invested in Asia, although notably, maintains zero exposure to Japanese government bonds. Additionally, at the end of September, the average credit rating of securities held in the global bond portion of the Fund was AA-.   Templeton Global Balanced (Eqty) comment - Oct 04 Thursday, 18 November 2004 Fund Manager Comment Templeton Global Balanced Fund returned a net +2.96% (in U.S. dollars) in October, outperforming its customised benchmark, which returned +2.63%. Templeton Global Balanced Fund also continues to outperform its benchmark since the beginning of this year. The largest equity contributions in October came from Spain's Telefonica, the U.S. retailer Target and the Israel-based software company Check Point Software Technologies. Telefonica of Spain benefited from the issuance of a number of 'buy' recommendations from analysts. In particular, these analysts noted that the group was nearing completion of its acquisition of BellSouth's Latin American wireless assets, which will benefit the Spanish group's long-term strategy on that continent. Amidst a general upturn in technology stocks, Check Point Software, which specialises in computer security programs, received increased investor attention in October. It has increased its sales and profits sequentially over the past 18 months and recently announced a share buy-back programme. The three most disappointing contributors were all U.S. based. These were insurer broker AON, healthcare company CIGNA and media group DIRECTV. Both AON and CIGNA were hurt by the prospect of lawsuits brought by the New York Attorney General, although CIGNA at least saw its share price bounce back in early November after the announcement of a 64% rise in third-quarter profits. Tenet Healthcare Corp. was the one new equity holding added to the fund in October, while existing stakes were reinforced in pharmaceutical-related stocks Abbot Laboratories, Akzo Nobel and Takeda, in insurance brokerage AON, in financial group Morgan Stanley, in Swiss Reinsurance and in Japanese telecom group NTT. Positions in Finnish pharmaceutical group Orion and in Volkswagen were entirely sold, with the fund realising a profit in both cases. Outlook Equities made some slight gains in late October in a month dominated by the closeness of the US presidential race and large increases in oil prices. Third-quarter results were largely in line with projections, providing little by way of negative or positive stimulus for the markets, but a rise in inventories began to deflate crude oil prices toward month's end, helping equities. Looking ahead, George Bush's clear win in the US presidential election may pave the way for a near-term revival in equities along the lines of that seen in the run-up to the war against Iraq, although imbalances in the global economy could ensure that the waters soon become choppier again. Trends to watch include oil price movements and the rate of decline in the value of the US dollar. According to a Merrill Lynch survey, pessimism about the outlook for global economic growth and corporate profits growth is rising among fund managers.   Templeton Global Balanced comment - Aug 04 Tuesday, 21 September 2004 Fund Manager Comment Templeton Global Balanced Fund returned +0.86% (in U.S. dollars) in August, compared with a return of a return of +1.24% for the subfund's custom benchmark (60% MSCI World and 40% JP Morgan Global Government Bond Index). Eight of the top 10 contributors to the subfund's performance in August were equity holdings, with the top contribution coming from Cheung Kong, the Hong Kong real estate conglomerate. Cheung Kong was helped by an upturn in the local economy, with Hong Kong reporting a return to inflation over the summer after 68 months of deflation and strong second-quarter economic growth. This led to greater investor confidence in the territory; with the equity market outperformed the regional average. Particularly gratifyingly for Cheung Kong are signs of a turnaround in the property market. After a long slide in prices, Hong Kong property prices rose at an annualised rate of about 29% in the second quarter. The second-largest equity contribution came from Syngenta, the seed and crop protection company. Syngenta was bought for the subfund last year, when there was considerable skepticism about its ability to grow earnings in a depressed agricultural market. But agrochemical demand has recovered since the beginning of this year, and so has Syngenta's earnings projections. Syngenta also was helped in August by the U.S. and European authorities' approval of its acquisition of rival seed company Advanta. The two most disappointing contributions came from BskyB, the British broadcaster, and the U.S. software company, Synopsys. BskyB, part of Rupert Murdoch's Newscorp group, has been actively growing subscriber numbers, but recently announced the need for increased investment and higher costs to consolidate its position as the dominant satellite broadcaster in the U.K. The market reacted badly to the resulting hit to short-term numbers. However, BskyB continues to have a very strong and cash-generative franchise. The balance sheet is solid and the valuation underpinned by the Newscorp interest in the group. Synopsys reduced its earnings per share forecast for financial year 2004 from US$1.37 to US$1. Its profit forecast for 2005 has been trimmed amid a general downshift in expectations for the chip and semiconductor industries. Outlook There has been some pick-up in investment spending in the U.S., although it is not clear whether this is a response to tax advantages for accelerated depreciation plans or whether corporations are genuinely preparing for an upswing in demand. A slew of disappointing macro-economic statistics were released in the U.S. in August, while Intel, the technology bellwether, reported that demand was weaker than expected, leading it to cut its profit forecast. With interest rates rising, slowing earnings growth and the possibility of further data weakness, investors have become less buoyant than before about global economic prospects. We also note a narrowing of the gap between market valuations and average valuations for our subfund. This may be an indication that investors are less willing to pay for some high-growth and/or over-valued stocks.   Templeton Global Balanced comment - Jun 04 Friday, 13 August 2004 Fund Manager Comment The FTIF Templeton Global Balanced Fund returned -0.19% for the second quarter. The JP Morgan Global Government Bond Index (GGBI) returned -3.40% in U.S. dollar terms over the same period and 5.35% over the past twelve months. During the quarter, international yield curves shifted upwards on rising rate expectations, particularly in the United States. Improved hiring and marked acceleration in various inflation measures prompted the Federal Reserve Board to begin to remove the excess stimulus from the U.S. economy with a 25 basis point rate hike.

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