mutual beacon fund annual report · 2017-06-24 · not part of the annual report | 3 in 2011 mutual...

Mutual Beacon Fund

DECEMBER 31, 2011

ANNUAL REPORTAND SHAREHOLDER LETTER

VALUE

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Franklin Templeton’s distinct multi-manager structure combines thespecialized expertise of three world-class investment management groups—Franklin, Templeton and Mutual Series.

Each of our portfolio management groups operates autonomously, relying on its own research and staying true to the unique investment disciplines that underlie its success.

Franklin. Founded in 1947, Franklin is a recognized leader in fixed income investingand also brings expertise in growth- and value-style U.S. equity investing.

Templeton. Founded in 1940, Templeton pioneered international investing and, in 1954, launched what has become the industry’s oldest global fund. Today, withoffices in over 25 countries, Templeton offers investors a truly global perspective.

Mutual Series. Founded in 1949, Mutual Series is dedicated to a unique style of value investing, searching aggressively for opportunity among what it believes are undervalued stocks, as well as arbitrage situations and distressed securities.

Because our management groups work independently and adhere to differentinvestment approaches, Franklin, Templeton and Mutual Series funds typicallyhave distinct portfolios. That’s why our funds can be used to build trulydiversified allocation plans covering every major asset class.

At Franklin Templeton Investments, we seek to consistently provide investors with exceptional risk-adjusted returns over the long term, as well as the reliable,accurate and personal service that has helped us become one of the most trustednames in financial services.

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MUTUAL FUNDS | RETIREMENT PLANS | 529 COLLEGE SAVINGS PLANS | SEPARATE ACCOUNTS

Not part of the annual report

Not part of the annual report | 1

ContentsAnnual Report

Mutual Beacon Fund . . . . . . . . 6

Performance Summary . . . . . . 12

Your Fund’s Expenses . . . . . . . 17

Financial Highlights and Statement of Investments . . . . 19

Financial Statements . . . . . . . 33

Notes to Financial Statements . . . . . . . . . . . . . . . 37

Report of Independent Registered Public Accounting Firm . . . . . . . . . . . 55

Tax Information . . . . . . . . . . . . 56

Board Members and Officers . . . . . . . . . . . . . 57

Shareholder Information . . . . . 62

Shareholder Letter . . . . . . . . 1

Shareholder LetterDear Mutual Beacon Fund Shareholder:

In 2011, volatility and uncertainty were dominant themes for investors.Concerns over sovereign credit and a pervasive political stalemate — largelyfocused on Europe but also in the U.S. — stifled the anemic economic recoveryin developed markets. A preference for perceived safety over uncertainty led tobetter relative performance in U.S. equity markets than those in Europe or Asia,albeit at low absolute levels. The 2.11% gain for the Standard & Poor’s® 500Index (S&P 500®) over the calendar year just matched its dividend yield, whilethe MSCI Europe Index in local currency was down 9.34%.1 These uninspiringabsolute returns also belie the underlying market volatility reflected by theapproximate 20 percentage point price swing in the S&P 500 and 35 percentagepoint price swing in the MSCI Europe Index in local currency over the sameperiod.2 By contrast, one of the best performing assets in 2011 was the 10-yearU.S. Treasury note, which returned 16.14% as a result of its yield falling from3.36% to 1.89% — although one might question how “safe” it was to own 10-year bonds yielding less than 2% at year-end. Over the course of 2011,Mutual Beacon Fund – Class Z lost 2.15%.

The threat of the eurozone’s collapse and potential ramifications for the globaleconomy highlighted a shift in focus from corporate to sovereign balancesheets. Going back 12 years, the creation of the euro as a common currency

NOT FDIC INSURED | MAY LOSE VALUE | NO BANK GUARANTEE

1. Source: © 2012 Morningstar. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstarand/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete ortimely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use ofthis information. The S&P 500 is a market capitalization-weighted index of 500 stocks designed to measure total U.S.equity market performance. The index is unmanaged and includes reinvested dividends. STANDARD & POOR’S®, S&P®

and S&P 500® are registered trademarks of Standard & Poor’s Financial Services LLC. Standard & Poor’s does not spon-sor, endorse, sell or promote any S&P index-based product. The MSCI Europe Index is a free float-adjusted, marketcapitalization-weighted index designed to measure equity market performance of developed countries in Europe. Theindex includes reinvested daily net dividends. One cannot invest directly in an index, and an index is not representative ofthe Fund’s portfolio.

2. Sources: S&P; MSCI, Inc.

Average Annual Total Return

Class Z 12/31/11

1-Year -2.15%

5-Year -2.81%

10-Year +4.21%

Performance data represent past

performance, which does not

guarantee future results.

Investment return and principal

value will fluctuate, and you may

have a gain or loss when you sell

your shares. Current performance

may differ from figures shown.

Please visit franklintempleton.com

or call (800) 342-5236 for most

recent month-end performance.

2 | Not part of the annual report

for a significant portion of Europe was in theory the key to a more unifiedand stronger economic area. A collateral effect was the convergence of inter-est rates among the euro members, usually through a lowering of borrowingcosts in less competitive countries such as Greece, Ireland and Portugal (ver-sus Germany, economically the strongest of the group). Those “peripheral”countries responded by borrowing more and engaging in a boom of construc-tion and consumption. After the global slowdown in 2008-2009, the boomtimes ended. Now these countries are struggling with significant national debtand severe economic slowdowns. Credit markets have concluded that thesecountries might have unsustainable debt levels, and borrowing costs rose dra-matically in 2011. As borrowing costs rise, concerns about solvency maybecome self-fulfilling and require a coordinated response — a bailout or debtrestructuring — to avoid a potentially uncontrolled collapse of a major finan-cial market participant, similar to Lehman Brothers in 2008, or worse.

The year became a painful exercise in watching European leaders attempt toimplement a structure for countries with debt problems to receive assistancewithout rewarding profligate spenders and unduly penalizing those who hadlived within their means. The process was understandably quite messy, withnational leaders engaging in multiple negotiations and operating within andaround the institutional structures of the European Union and their ownnational political constraints. This slow political process added to the market’snervousness and heightened uncertainty. The overall environment also discour-aged business activity and companies became reluctant to invest in the face of apotential eurozone meltdown. Even assuming a favorable outcome to the“European problem,” Europe stood on the brink of a recession and threatenedother markets with potential contagion.

The U.S. was not a model of economic clarity or decisiveness either. The U.S.budget deficit remains significant, and political conflict over the best timeframeand approach to address this deficit led to a showdown in mid-2011 betweenthe Democratic administration and the Republican majority in the House ofRepresentatives. The resulting uncertainty about the U.S. government’s abilityand commitment to cut the structural deficit and restore its balance sheet togood order led to a much publicized U.S. long-term debt downgrade by a majorratings agency.

Markets also seemed to reflect fear and uncertainty surrounding the continuingdebate over China’s economy. China’s growth eventually will slow, it will haveto address its own bank solvency concerns and it must address increasingdemands for an improved standard of living from its average citizen. The coun-try is trying to address these longer term challenges, but in the short term thekey questions are whether the economic landing will be “hard” or “soft,” andwhat global ramifications may result.


In 2011 Mutual Beacon Fund found value in some new places, includingbiotechnology pioneer Amgen and Internet search giant Google.3 In the pastwe might not have invested in either company: both historically have beenvalued as high growth companies and, in Amgen’s case, reliant on just one ortwo products for the vast majority of revenues and profits. However, in 2011we invested in both.

Amgen’s valuation has declined steadily over the past few years while profitshave been relatively unchanged. The decline in valuation was largely due tobiotech investors being less interested in a slower growth company followingthe negative regulatory action limiting the market size of Amgen’s anemiafranchises. We, however, found several things very interesting about the com-pany. First, the stagnation in aggregate financial performance seemed toreflect one franchise’s decline while masking growth in others. Our analysisindicated this change in the business mix combined with new product intro-ductions from Amgen’s significant research and development investmentsmay position the firm for future growth. Second, its pharmaceutical businessis largely biologics. Revenues typically collapse for traditional pharmaceuti-cals after patents expire, but we believe Amgen’s biologics have the potentialto generate profits for a long time to come because biologics are much morecomplex than traditional pharmaceuticals. Third, in our view, managementcorrectly assessed that a lower level of investment is needed to sustain thebusiness over time and focused on driving efficiencies through the organiza-tion and improving operating profitability. Last, the company historicallygenerated significant free cash flow and management has been committed topaying a substantial portion to shareholders in the form of dividends andshare buybacks. Subsequent to our investment the company initiated its first-ever dividend and also accelerated buybacks by tendering for about 10% ofits shares. We believed we were buying a strong and diverse biopharmaceuti-cal organization whose research investments have positioned it for revenuegrowth, with management focused on improving operating profits andreturning excess free cash flows to benefit shareholders through buybacksand dividends, and a stock trading at a price materially below our estimate ofits intrinsic value.

Google’s valuation also declined as profits grew and cash accumulated on thebalance sheet, reflecting market skepticism about future growth and spendingdiscipline. We thought the shares in mid-2011 reached absolute valuation levelswe found interesting, with free cash flow yield comparable to that of otherfirms in which we invest. This low absolute valuation was inconsistent with thestrengths and opportunities we saw in Google. The company’s balance sheet

3. Mutual Beacon Fund’s holdings are based on total net assets as of 12/31/11: Amgen 1.7% and Google 1.1%.

had almost $40 billion of net cash. Growth remained strong and resilient, withrevenues growing well over 20% per year recently and 10% even in therecession of 2009. The firm remained well-positioned competitively, withdominant market share in Internet search despite competition from Yahoo!and Microsoft. And the firm retained interesting options in video withYouTube, and mobile with the Android operating system becoming the mostused smartphone operating system. Our analysis showed these growing areashave the potential to be very significant profit sources for the firm. As a result,we viewed the shares as trading below the intrinsic value of the firm today, evenif we assign little value to the huge opportunities that in our view remain infront of the company.

Distressed debt opportunities in 2011 were unexpectedly limited. Quantitativeeasing and risk aversion have pushed investors into corporate credit markets intheir search for yield. As a result, companies with high leverage, many of themparticipants in the leveraged buyout wave of 2005-2007, were successful inobtaining credit and restructuring their debts to avoid near-term maturities. Wefound some interesting opportunities but fewer than we would have expected atthe start of the year. Looking into 2012, we anticipate credit to remain availableand opportunities to be idiosyncratic rather than widespread.

Merger and acquisition (M&A) activity remained muted. Economic uncer-tainty reduced many buyers’ willingness to commit to transactions, anddampened valuations reduced many companies’ willingness to sell. A globalrevitalization of regulation, exemplified by the Canadian government’s blockof BHP Billiton’s proposed acquisition of Potash and the U.S. Department ofJustice’s lawsuit to prevent AT&T from acquiring T-Mobile, also increased therisks of major transactions. The year 2011 ended with less M&A activity thananticipated, and 2012 looks to be similarly muted. We anticipate an increasein corporate restructurings via spin-offs or asset sales as alternatives to M&A.

We remain in the thick of the aftermath of the post-financial crisis recession.In the U.S., persistently high unemployment, significant budget deficits atevery level of government, and a potential rise in interest rates following theend of quantitative easing are troubling. In Europe, the sovereign debt crisis,inextricably linked to the survival of the euro as a currency and the need forongoing austerity and fiscal contraction, remains the focus of concern. In Asia,growth continues but at an uncertain pace. Chinese authorities are attemptingto keep growth on track while coping with the issues of their major tradingpartners. Beyond China, the implications of changes in developed world mon-etary policy and exchange rates ripple through Asian markets. In the midst ofthese cross-currents, we continue to look for the company-specific opportuni-ties that can provide attractive returns in a variety of economic scenarios.

4 | Not part of the annual report


We thank you for your trust and your support.

Sincerely,

Peter A. LangermanChairman, President and Chief Executive OfficerFranklin Mutual Advisers, LLC

This letter reflects our analysis, opinions and portfolio holdings as of December 31, 2011, the end of the reportingperiod. The way we implement our main investment strategies and the resulting portfolio holdings may changedepending on factors such as market and economic conditions. These opinions may not be relied upon as invest-ment advice or an offer for a particular security. The information is not a complete analysis of every aspect of anymarket, country, industry, security or the Fund. Statements of fact are from sources considered reliable, but theinvestment manager makes no representation or warranty as to their completeness or accuracy. Although histori-cal performance is no guarantee of future results, these insights may help you understand our investmentmanagement philosophy.

6 | Annual Report

Annual Report

Mutual Beacon FundYour Fund’s Goals and Main Investments: Mutual Beacon Fund seeks capital appreci-

ation, with income as a secondary goal, by investing primarily in equity securities of companies the

Fund’s managers believe are at prices below their intrinsic value. The Fund may invest up to 35% of

its assets in foreign securities.

This annual report for Mutual Beacon Fund covers the fiscal year endedDecember 31, 2011.

Performance Overview

Mutual Beacon Fund – Class Z had a -2.15% cumulative total return for the 12 months ended December 31, 2011. The Fund underperformed the+2.11% total return of its benchmark, the Standard & Poor’s 500 Index(S&P 500), which is a broad measure of U.S. stock performance.1 You canfind the Fund’s long-term performance data in the Performance Summarybeginning on page 12.

Economic and Market Overview

The U.S. economy improved steadily but modestly in 2011 despite geopolitical,employment and housing pressures. In contrast, growth outside the U.S. beganto slow, which some attributed partly to the effects of Japan’s earthquake onthe global supply chain and populist uprisings across the oil-and-gas-producingregions of the Middle East and North Africa. Although manufacturing growthslowed in the second half of the year as high commodity prices reduced pur-chasing power and demand ebbed, the trend began to reverse near year-end.The U.S. manufacturing sector helped power the domestic economy and ledglobal manufacturing output heading into 2012. European and Asian manufac-turing, however, generally weakened throughout 2011 as parts of Europe werein danger of falling back into recession.

1. Source: © 2012 Morningstar. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstarand/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete ortimely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use ofthis information. The index is unmanaged and includes reinvested dividends. One cannot invest directly in an index, andan index is not representative of the Fund’s portfolio.

The dollar value, number of shares or principal amount, and names of all portfolio holdings are listed in the Fund’sStatement of Investments (SOI). The SOI begins on page 24.

Performance data represent past

performance, which does not

guarantee future results. Investment

return and principal value will

fluctuate, and you may have a gain

or loss when you sell your shares.

Current performance may differ

from figures shown. Please visit

franklintempleton.com or call

(800) 342-5236 for most recent

month-end performance.

Annual Report | 7

Geographic BreakdownBased on Total Net Assets as of 12/31/11

U.S.

U.K.

Norway

Switzerland

Denmark

Germany

France

Canada

64.5%

13.3%

2.6%

2.0%

1.1%

1.1%

1.0%

1.0%

3.1%

10.3%

Other

Short-Term Investments & Other Net Assets

The U.S. financial system and household balance sheets continued to improve,but the country still faced persistently high unemployment, a prolonged hous-ing market slump and massive national debt. Inflation rose across much of theworld but stayed relatively contained in the U.S., even slowing toward year-end amid declining energy and food prices. The Federal Reserve Board (Fed)sought to boost economic growth by maintaining its accommodative monetarypolicy and undertook a second round of quantitative easing that ended onJune 30. Subsequently, the Fed continued to purchase U.S. Treasuries withproceeds from maturing debt in an effort to support economic growth.Outside the U.S., European policymakers ultimately stepped up their responseto their sovereign debt and banking crisis. The European Central Bank cutshort-term interest rates and expanded bank lending facilities, and six keyglobal central banks agreed to lower dollar funding costs for Europe’s dis-tressed commercial banks. Chinese policymakers lowered commercial bankreserve requirements and the International Monetary Fund revamped its creditline and eased its lending terms.

Although U.S. stock markets rallied in the spring, worrisome global events andslowing global growth dampened investor sentiment and market volatilitysurged. Risk-averse investors sought perceived safe havens and seemed toignore that many companies generated record profits. Despite large swings,U.S. stocks, as measured by the S&P 500, gained 2.11% in 2011.1 The DowJones Industrial Average rose 8.38%, reflecting investors’ general preferencefor large, established U.S. companies.1 In contrast, developed and emergingworld stocks as measured by the MSCI All Country World Index fell 6.86%.1

Amid general global market declines, perceived safe-haven currencies such asthe Japanese yen and Swiss franc rallied strongly, and U.S. Treasuries postedtheir best one-year return since 2008.

Investment Strategy

At Mutual Series, we are committed to our distinctive value approach toinvesting, which we believe can generate above-average risk-adjusted returnsover time for our shareholders. Our major investment strategy is investing inundervalued stocks. When selecting undervalued equities, we are alwaysattracted to fundamentally strong companies with healthy balance sheets,high-quality assets, substantial free cash flow and shareholder-oriented man-agement teams and whose stocks are trading at discounts to our assessmentof the companies’ intrinsic or business value. We also look for asset rich com-panies whose shares may be trading at depressed levels due to concerns overshort-term earnings disappointments, litigation, management strategy orother perceived negatives. This strict value approach is not only intended toimprove the likelihood of upside potential, but it is also intended to reduce

8 | Annual Report

the risk of substantial declines. While the vast majority of our undervaluedequity investments are made in publicly traded companies globally, we mayinvest occasionally in privately held companies as well.

We complement this more traditional investment strategy with two others.One is distressed investing, a highly specialized, complex field that can takemany forms. The most common distressed investment the Fund undertakesis the purchase of financially troubled or bankrupt companies’ debt at asubstantial discount to face value. After the financially distressed companyis reorganized, often in bankruptcy court, the old debt is typically replacedwith new securities issued by the financially stronger company.

The other piece of our investment strategy is participating in arbitrage situ-ations, another highly specialized field. When companies announceproposed mergers or takeovers, commonly referred to as “deals,” the targetcompany may trade at a discount to the bid it ultimately accepts. One formof arbitrage involves purchasing the target company’s stock when it is trad-ing below the value we believe it would receive in a deal. In keeping withour commitment to a relatively conservative investment approach, we typi-cally focus our arbitrage efforts on announced deals, and eschew rumoreddeals or other situations we consider relatively risky.

In addition, it is our practice to hedge the Fund’s currency exposure whenwe deem it advantageous for our shareholders.

Manager’s Discussion

Despite the weak performance of global stock markets in 2011, several Fundinvestments increased in value. Three particularly strong performers were U.K.cigarette maker Imperial Tobacco; UnitedHealth Group, a U.S. managedhealth care provider; and Bermuda-based White Mountains Insurance Group,which provides insurance products and services through its subsidiaries andU.S. operating offices.

During the year, Imperial Tobacco reported sufficient progress in deleveragingits balance sheet, and announced a dividend increase and share buyback pro-gram. In light of Imperial’s year-end 2011 stock valuation, we believed theshare buyback was an attractive way for the company to return cash to share-holders while simultaneously enhancing earnings growth. In addition, thecompany announced it intends to increase the dividend payout ratio and moveit closer to that of its competitors. In our analysis, the stock’s attractive valua-tion and the potential for future dividend growth to exceed the pace of itspeers could enable Imperial management to generate meaningful total share-holder returns in the medium term.

Top 10 Sectors/IndustriesBased on Equity Securities as of 12/31/11

% of TotalNet Assets

Tobacco 8.7%

Media 8.1%

Insurance 6.7%

Oil, Gas & Consumable Fuels 6.5%

Pharmaceuticals 5.2%

Software 4.5%

Beverages 3.9%

Diversified Telecommunication Services 3.4%

Health Care Providers & Services 2.9%

Health Care Equipment & Supplies 2.8%

Annual Report | 9

UnitedHealth’s shares rose during the year as its earnings beat management’sinitial guidance in part due to lower-than-expected utilization of medical serv-ices by its members in addition to strong membership growth. The companyincreased its dividend in 2011, while its board of directors re-authorized thecompany’s share repurchase plan. At a UnitedHealth investor day conveningin late November, management reaffirmed its 13% to 15% long-term earningsgrowth rate goal, which it seeks to achieve primarily via high, single-digittopline growth and productivity enhancements.

We had long thought that the market had underappreciated the value of long-time Fund holding White Mountains, and in particular its Esurance andAnswer Financial subsidiaries. In 2011, White Mountains sold those busi-nesses to Allstate at a significant premium to book value, driving WhiteMountains’ share price higher. At period-end, we believed the stock was stilltrading at a significant discount to its tangible book value, of which almosttwo-thirds is excess capital. We expect White Mountains to use this excesscapital to generate shareholder value in 2012.

During a highly volatile year for global stock markets in general, several hold-ings had a negative effect on the Fund. These included large U.S. financialinstitutions Bank of America and Morgan Stanley; and Community HealthSystems, which operates more than 130 hospitals mostly in rural areas orsmall cities in 30 U.S. states.

Bank of America shares declined in 2011 as investors reacted to the com-pany’s potential exposure to large mortgage-related losses. There was also agrowing concern that related losses might force the company into a dilutive,capital-raising scenario. Bank of America also faced a very difficult generaloperating environment in 2011. Low interest rates, weak lending, the impactof new consumer rules on fees, and a drop-off in capital markets activity allpressured earnings and the stock price. Like many other financial stocks,Bank of America was also impacted by contagion fears from Europe, changesin capital requirements and uncertainty over the impact of new regulations,such as Dodd-Frank. Although we still believed this holding held value, weexited our position in Bank of America and reallocated the capital proceedsto companies where we thought better risk-reward characteristics existed.

Community Health Systems was involved in a lawsuit filed by TenetHealthcare alleging that Community Health Systems had engaged in inappro-priate patient-admissions practices and made false statements in their proxydocuments related to a purchase offer for Tenet. The lawsuit and ensuinginvestigation caused a significant drop in Community Health’s share price.

Top 10 Equity Holdings12/31/11

Company % of TotalSector/Industry, Country Net Assets

Imperial Tobacco Group PLC 3.1%Tobacco, U.K.

Microsoft Corp. 3.0%Software, U.S.

British American Tobacco PLC 3.0%Tobacco, U.K.

White Mountains Insurance Group Ltd. 2.8%Insurance, U.S.

Vodafone Group PLC 2.7%Wireless Telecommunication Services, U.K.

CVS Caremark Corp. 2.4%Food & Staples Retailing, U.S.

Time Warner Cable Inc. 2.3%Media, U.S.

Marathon Oil Corp. 2.2%Oil, Gas & Consumable Fuels, U.S.

Medco Health Solutions Inc. 2.2%Health Care Providers & Services, U.S.

Xerox Inc. 2.0%Office Electronics, U.S.

10 | Annual Report

Furthermore, uncertainty over future reimbursement rates for hospitals fromgovernment programs have weighed on the hospital industry. In particular, aCongressional budgetary “supercommittee” appointed to reach a grand deficitreduction plan for the heavily indebted U.S. government failed amid ongoingpartisan bickering in Washington, DC. The lack of a comprehensive budgetdeal could trigger automatic spending cuts in 2013 to many federally fundedprograms, including Medicare. Because Medicare is a significant source ofpayments for hospitals, the fear surrounding potential payment cuts contin-ued to depress hospital valuations. However, we believed the risk inreimbursement cuts was more than adequately priced in at year-end 2011,and that Community Health shares represented a good value at those levels.

Morgan Stanley’s stock price decline was driven largely by negative sentimenttoward global investment banks, given economic and regulatory uncertainty,particularly in the U.S. and Europe. Additional fears surfaced during the sec-ond half of 2011 that Morgan Stanley held excessive sovereign exposure tocertain highly leveraged European countries in its accounts, although thisturned out to be false. Morgan Stanley also faced operating challenges in itstwo main business segments, wealth management and institutional securities,due to client risk aversion and weak capital markets activity levels. At year-end, we continued to view Morgan Stanley as an attractive investment givenits low stock valuation and strong earnings potential. We also think the com-pany has made great strides over the past few years in terms of strengtheningits balance sheet while improving funding and capital positions.

During the year, the Fund held currency forwards to hedge a significant por-tion of the currency risk of the portfolio’s non-U.S. dollar investments. Thehedges had a minor positive impact on the Fund’s performance during theperiod.

Annual Report | 11

Thank you for your continued participation in Mutual Beacon Fund. We lookforward to serving your future investment needs.

Christian Correa, CFACo-Portfolio Manager

Mandana Hormozi Co-Portfolio Manager

Mutual Beacon Fund

CFA® is a trademark owned by CFA Institute.

The foregoing information reflects our analysis, opinions and portfolio holdings as of December 31, 2011, the endof the reporting period. The way we implement our main investment strategies and the resulting portfolio holdingsmay change depending on factors such as market and economic conditions. These opinions may not be reliedupon as investment advice or an offer for a particular security. The information is not a complete analysis ofevery aspect of any market, country, industry, security or the Fund. Statements of fact are from sources consid-ered reliable, but the investment manager makes no representation or warranty as to their completeness oraccuracy. Although historical performance is no guarantee of future results, these insights may help you under-stand our investment management philosophy.

Mandana Hormozi has been a co-portfolio manager for Mutual Beacon Fund since 2010 and

was assistant portfolio manager for the Fund since 2009. Before that, she was assistant port-

folio manager for Mutual Global Discovery Fund since 2007. She has been an analyst for

Franklin Mutual Advisers since 2003, when she joined Franklin Templeton Investments.

Previously, she was a senior vice president in the equity research department at Lazard

Freres. Also, she was an economic research analyst at Mitsubishi Bank.

Christian Correa has been portfolio manager for Mutual Beacon Fund since 2007 and a co-

portfolio manager since 2010. He joined Franklin Templeton Investments in 2003 and serves

as Director of Research for Franklin Mutual Advisers. Previously, he covered merger arbitrage

and special situations at Lehman Brothers Holdings Inc.

12 | Annual Report

Performance Summary as of 12/31/11

Price and Distribution Information

Class Z (Symbol: BEGRX) Change 12/31/11 12/31/10

Net Asset Value (NAV) -$0.64 $11.68 $12.32

Distributions (1/1/11–12/31/11)

Dividend Income $0.3522

Class A (Symbol: TEBIX) Change 12/31/11 12/31/10




Class B (Symbol: TEBBX) Change 12/31/11 12/31/10




Class C (Symbol: TEMEX) Change 12/31/11 12/31/10




Class R (Symbol: n/a) Change 12/31/11 12/31/10




Your dividend income will vary depending on dividends or interest paid by securities in the Fund’sportfolio, adjusted for operating expenses of each class. Capital gain distributions are net profitsrealized from the sale of portfolio securities. The performance table and graphs do not reflect anytaxes that a shareholder would pay on Fund dividends, capital gain distributions, if any, or anyrealized gains on the sale of Fund shares. Total return reflects reinvestment of the Fund’s dividendsand capital gain distributions, if any, and any unrealized gains or losses.

Annual Report | 13

Performance Summary (continued)

Performance

Cumulative total return excludes sales charges. Average annual total return and value of $10,000 investment include maximumsales charges. Class Z/R: no sales charges; Class A: 5.75% maximum initial sales charge; Class B: contingent deferred salescharge (CDSC) declining from 4% to 1% over six years, and eliminated thereafter; Class C: 1% CDSC in first year only.

Class Z 1-Year 5-Year 10-Year

Cumulative Total Return1 -2.15% -13.30% +51.11%

Average Annual Total Return2 -2.15% -2.81% +4.21%

Value of $10,000 Investment3 $9,785 $8,670 $15,111

Total Annual Operating Expenses4 0.88%

Class A 1-Year 5-Year 10-Year





Class B 1-Year 5-Year 10-Year





Class C 1-Year 5-Year 10-Year





Class R 1-Year Inception (10/30/09)

Cumulative Total Return1 -2.69% +14.36%

Average Annual Total Return2 -2.69% +6.38%

Value of $10,000 Investment3 $9,731 $11,436


Performance data represent past performance, which does not guarantee future results. Investment return and principal valuewill fluctuate, and you may have a gain or loss when you sell your shares. Current performance may differ from figures shown.For most recent month-end performance, go to franklintempleton.com or call (800) 342-5236.

14 | Annual Report



Class Z 12/31/11

1-Year -2.15%

5-Year -2.81%

10-Year +4.21%

Class Z (1/1/02–12/31/11)

$13,335

$15,111

Mutual Beacon Fund S&P 5005

$5,000

$10,000

$15,000

$20,000

12/1112/0912/0712/0512/031/02

Total Return Index Comparison for a Hypothetical $10,000 Investment

Total return represents the change in value of an investment over the periods shown. It includesany current, applicable, maximum sales charge, Fund expenses, account fees and reinvested distri-butions. The unmanaged index includes reinvestment of any income or distributions. It differsfrom the Fund in composition and does not pay management fees or expenses. One cannot investdirectly in an index.


Class A 12/31/11

1-Year -8.13%

5-Year -4.25%

10-Year +3.27%

$5,000

$10,000

$15,000

$20,000

Class A (1/1/02–12/31/11)

$13,335$13,790


12/1112/0912/0712/0512/031/02

Annual Report | 15


Class B (1/1/02–12/31/11)

$13,335$13,879


12/31/1111/30/1110/31/119/30/118/31/117/31/116/30/115/31/114/30/113/31/112/28/111/31/1112/31/1011/30/1010/31/109/30/108/31/107/31/106/30/105/31/104/30/103/31/102/28/101/31/1012/31/0911/30/0910/31/099/30/098/31/097/31/096/30/095/31/094/30/093/31/092/28/091/31/0912/31/0811/30/0810/31/089/30/088/31/087/31/086/30/085/31/084/30/083/31/082/29/081/31/0812/31/0711/30/0710/31/079/30/078/31/077/31/076/30/075/31/074/30/073/31/072/28/071/31/0712/31/0611/30/0610/31/069/30/068/31/067/31/066/30/065/31/064/30/063/31/062/28/061/31/0612/31/0511/30/0510/31/059/30/058/31/057/31/056/30/055/31/054/30/053/31/052/28/051/31/0512/31/0411/30/0410/31/049/30/048/31/047/31/046/30/045/31/044/30/043/31/042/29/041/31/0412/31/0311/30/0310/31/039/30/038/31/037/31/036/30/035/31/034/30/033/31/032/28/031/31/0312/31/0211/30/0210/31/029/30/028/31/027/31/026/30/025/31/024/30/023/31/022/28/021/31/021/1/02

$5,000

$10,000

$15,000

$20,000

12/1112/0712/0512/03 1/02 12/09

Class C (1/1/02–12/31/11)

$13,335$13,676


12/1112/0912/0712/03 12/051/02

$5,000

$10,000

$15,000

$20,000


Class B 12/31/11

1-Year -6.98%

5-Year -4.12%

10-Year +3.33%


Class C 12/31/11

1-Year -4.10%

5-Year -3.78%

10-Year +3.18%

16 | Annual Report


Endnotes

All investments involve risks. Value securities may not increase in price as anticipated or may decline further invalue. The Fund’s investments in smaller company stocks and foreign securities involve special risks. Smallercompany stocks have exhibited greater price volatility than larger company stocks, particularly over the shortterm. Foreign securities risks include currency fluctuations, and economic and political uncertainties. The Fundmay also invest in companies engaged in mergers, reorganizations or liquidations, which involve special risksas pending deals may not be completed on time or on favorable terms, as well as lower rated bonds, whichentail higher credit risk. The Fund is actively managed but there is no guarantee that the manager’s investmentdecisions will produce the desired results. The Fund’s prospectus also includes a description of the main invest-ment risks.

Class Z: Shares are available to certain eligible investors as described in the prospectus.

Class B: These shares have higher annual fees and expenses than Class A shares.

Class C: Prior to 1/1/04, these shares were offered with an initial sales charge; thus actual total returns wouldhave differed. These shares have higher annual fees and expenses than Class A shares.

Class R: Shares are available to certain eligible investors as described in the prospectus. These shares have higherannual fees and expenses than Class A shares.

1. Cumulative total return represents the change in value of an investment over the periods indicated.

2. Average annual total return represents the average annual change in value of an investment over the periodsindicated.

3. These figures represent the value of a hypothetical $10,000 investment in the Fund over the periods indicated.

4. Figures are as stated in the Fund’s prospectus current as of the date of this report. In periods of market volatility,assets may decline significantly, causing total annual Fund operating expenses to become higher than the figuresshown.

5. Source: © 2012 Morningstar. The S&P 500 is a market capitalization-weighted index of 500 stocks designed tomeasure total U.S. equity market performance.

$10,000

$15,000

Class R (10/30/09–12/31/11)

$12,687

$11,436


12/1110/09 12/10

$5,000


Class R 12/31/11

1-Year -2.69%

Since Inception (10/30/09) +6.38%

Annual Report | 17

Your Fund’s Expenses

As a Fund shareholder, you can incur two types of costs:

• Transaction costs, including sales charges (loads) on Fund purchases; and

• Ongoing Fund costs, including management fees, distribution and service (12b-1) fees, and otherFund expenses. All mutual funds have ongoing costs, sometimes referred to as operating expenses.

The following table shows ongoing costs of investing in the Fund and can help you understand thesecosts and compare them with those of other mutual funds. The table assumes a $1,000 investmentheld for the six months indicated.

Actual Fund Expenses

The first line (Actual) for each share class listed in the table provides actual account values andexpenses. The “Ending Account Value” is derived from the Fund’s actual return, which includesthe effect of Fund expenses.

You can estimate the expenses you paid during the period by following these steps. Of course,your account value and expenses will differ from those in this illustration:

1. Divide your account value by $1,000.If an account had an $8,600 value, then $8,600 ÷ $1,000 = 8.6.

2. Multiply the result by the number under the heading “Expenses Paid During Period.”If Expenses Paid During Period were $7.50, then 8.6 x $7.50 = $64.50.

In this illustration, the estimated expenses paid this period are $64.50.

Hypothetical Example for Comparison with Other Funds

Information in the second line (Hypothetical) for each class in the table can help you compare ongoingcosts of investing in the Fund with those of other mutual funds. This information may not be usedto estimate the actual ending account balance or expenses you paid during the period. The hypothetical“Ending Account Value” is based on the actual expense ratio for each class and an assumed 5%annual rate of return before expenses, which does not represent the Fund’s actual return. The figureunder the heading “Expenses Paid During Period” shows the hypothetical expenses your accountwould have incurred under this scenario. You can compare this figure with the 5% hypotheticalexamples that appear in shareholder reports of other funds.

18 | Annual Report

Your Fund’s Expenses (continued)

Please note that expenses shown in the table are meant to highlight ongoing costs and do not reflectany transaction costs, such as sales charges. Therefore, the second line for each class is useful incomparing ongoing costs only, and will not help you compare total costs of owning different funds.In addition, if transaction costs were included, your total costs would have been higher. Please referto the Fund prospectus for additional information on operating expenses.

Beginning Account Ending Account Expenses Paid During Class Z Value 7/1/11 Value 12/31/11 Period* 7/1/11–12/31/11

Actual $1,000 $ 924.40 $4.07

Hypothetical (5% return before expenses) $1,000 $1,020.97 $4.28

Class A

Actual $1,000 $ 923.00 $5.53


Class B

Actual $1,000 $ 919.60 $8.90


Class C

Actual $1,000 $ 919.30 $8.90


Class R

Actual $1,000 $ 921.50 $6.49


*Expenses are calculated using the most recent six-month expense ratio, annualized for each class (Z: 0.84%; A: 1.14%; B: 1.84%; C: 1.84%; andR: 1.34%), multiplied by the average account value over the period, multiplied by 184/365 to reflect the one-half year period.

Mutual Beacon FundFinancial Highlights

Annual Report | The accompanying notes are an integral part of these financial statements. | 19

Year Ended December 31,Class Z 2011 2010 2009 2008 2007

Per share operating performance(for a share outstanding throughout the year)

Net asset value, beginning of year . . . . . . . . . . . . . . . . . . . . $12.32 $11.49 $ 9.07 $15.73 $16.71

Income from investment operationsa:

Net investment incomeb . . . . . . . . . . . . . . . . . . . . . . . . . . 0.28 0.36c 0.08d 0.25 0.51

Net realized and unrealized gains (losses) . . . . . . . . . . . . . . (0.57) 0.91 2.61 (6.46) —e

Total from investment operations . . . . . . . . . . . . . . . . . . . . . (0.29) 1.27 2.69 (6.21) 0.51

Less distributions from:

Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . (0.35) (0.44) (0.27) (0.03) (0.57)

Net realized gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — — (0.42) (0.92)

Total distributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (0.35) (0.44) (0.27) (0.45) (1.49)

Redemption feesf . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — — —e —e

Net asset value, end of year . . . . . . . . . . . . . . . . . . . . . . . . . $11.68 $12.32 $11.49 $ 9.07 $15.73

Total return . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2.15)% 11.10% 29.81% (40.37)% 3.03%

Ratios to average net assets

Expensesg . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.84% 0.88% 1.41%h,i 0.84%h 0.82%h

Expenses incurred in connection with securities sold short . . . —%j 0.02% 0.55% —%j 0.01%

Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.24% 3.06%c 0.79%d 1.90% 2.89%

Supplemental data

Net assets, end of year (000’s) . . . . . . . . . . . . . . . . . . . . . . . $2,423,177 $2,860,233 $2,833,233 $2,002,361 $3,883,935

Portfolio turnover rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51.38% 34.54% 54.36% 56.87% 49.84%

aThe amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases ofthe Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund.bBased on average daily shares outstanding.cNet investment income per share includes approximately $0.18 per share received in the form of a special dividend paid in connection with a corporate real estate investment trust(REIT) conversion. Excluding this non-recurring amount, the ratio of net investment income to average net assets would have been 1.53%.dNet investment income per share includes approximately $(0.06) per share related to an adjustment for uncollectible interest. Excluding the effect of this adjustment, the ratio ofnet investment income to average net assets would have been 1.35%. eAmount rounds to less than $0.01 per share.f Effective September 1, 2008, the redemption fee was eliminated.gIncludes dividend and interest expenses on securities sold short and borrowing fees, if any. See below for the ratios of such expenses to average net assets for the periods presented. See Note 1(e).hBenefit of expense reduction rounds to less than 0.01%.iTotal expenses net of a one-time unaffiliated fee reimbursement are 1.30%. jRounds to less than 0.01%.

Mutual Beacon FundFinancial Highlights (continued)

20 | The accompanying notes are an integral part of these financial statements. | Annual Report

Year Ended December 31,Class A 2011 2010 2009 2008 2007


Net asset value, beginning of year . . . . . . . . . . . . . . . . . . . . $12.24 $11.40 $ 8.99 $15.62 $16.61


Net investment incomeb . . . . . . . . . . . . . . . . . . . . . . . . . . 0.24 0.32c 0.04d 0.20 0.45

Net realized and unrealized gains (losses) . . . . . . . . . . . . . . (0.56) 0.90 2.58 (6.38) (—)e

Total from investment operations . . . . . . . . . . . . . . . . . . . . . (0.32) 1.22 2.62 (6.18) 0.45


Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . (0.31) (0.38) (0.21) (0.03) (0.52)

Net realized gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — — (0.42) (0.92)

Total distributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (0.31) (0.38) (0.21) (0.45) (1.44)

Redemption feesf . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — — —e —e

Net asset value, end of year . . . . . . . . . . . . . . . . . . . . . . . . $11.61 $12.24 $11.40 $ 8.99 $15.62

Total returng . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2.50)% 10.82% 29.30% (40.48)% 2.67%


Expensesh . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.14% 1.18% 1.72%i,j 1.13%i 1.14%i

Expenses incurred in connection with securities sold short . . . —%k 0.02% 0.55% —%k 0.01%

Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.94% 2.76%c 0.48%d 1.61% 2.57%

Supplemental data

Net assets, end of year (000’s) . . . . . . . . . . . . . . . . . . . . . . $1,062,477 $1,327,189 $1,361,152 $1,659,062 $2,654,731

Portfolio turnover rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51.38% 34.54% 54.36% 56.87% 49.84%

aThe amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases ofthe Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund.bBased on average daily shares outstanding.cNet investment income per share includes approximately $0.18 per share received in the form of a special dividend paid in connection with a corporate REIT conversion. Excludingthis non-recurring amount, the ratio of net investment income to average net assets would have been 1.23%.dNet investment income per share includes approximately $(0.06) per share related to an adjustment for uncollectible interest. Excluding the effect of this adjustment, the ratio ofnet investment income to average net assets would have been 1.04%. eAmount rounds to less than $0.01 per share.fEffective September 1, 2008, the redemption fee was eliminated.gTotal return does not reflect sales commissions or contingent deferred sales charges, if applicable.hIncludes dividend and interest expenses on securities sold short and borrowing fees, if any. See below for the ratios of such expenses to average net assets for the periods presented. See Note 1(e).iBenefit of expense reduction rounds to less than 0.01%.jTotal expenses net of a one-time unaffiliated fee reimbursement are 1.61%. kRounds to less than 0.01%.



Year Ended December 31,Class B 2011 2010 2009 2008 2007


Net asset value, beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . $12.07 $11.13 $ 8.68 $15.19 $16.17


Net investment income (loss)b . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.15 0.24c (0.02)d 0.12 0.32

Net realized and unrealized gains (losses) . . . . . . . . . . . . . . . . . . . (0.55) 0.87 2.49 (6.19) 0.01

Total from investment operations . . . . . . . . . . . . . . . . . . . . . . . . . . (0.40) 1.11 2.47 (6.07) 0.33


Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (0.15) (0.17) (0.02) (0.02) (0.39)

Net realized gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — — (0.42) (0.92)

Total distributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (0.15) (0.17) (0.02) (0.44) (1.31)

Redemption feese . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — — —f —f

Net asset value, end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $11.52 $12.07 $11.13 $ 8.68 $15.19

Total returng . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3.16)% 9.92% 28.51% (40.88)% 1.95%


Expensesh . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.84% 1.88% 2.40%i,j 1.84%i 1.81%i

Expenses incurred in connection with securities sold short . . . . . . . . —%k 0.02% 0.55% —%k 0.01%

Net investment income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.24% 2.06%c (0.20)%d 0.90% 1.90%

Supplemental data

Net assets, end of year (000’s) . . . . . . . . . . . . . . . . . . . . . . . . . . . . $10,205 $28,552 $58,121 $73,168 $171,628

Portfolio turnover rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51.38% 34.54% 54.36% 56.87% 49.84%

aThe amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases ofthe Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund.bBased on average daily shares outstanding.cNet investment income per share includes approximately $0.18 per share received in the form of a special dividend paid in connection with a corporate REIT conversion. Excludingthis non-recurring amount, the ratio of net investment income to average net assets would have been 0.53%.dNet investment income per share includes approximately $(0.06) per share related to an adjustment for uncollectible interest. Excluding the effect of this adjustment, the ratio ofnet investment income to average net assets would have been 0.36%. eEffective September 1, 2008, the redemption fee was eliminated.fAmount rounds to less than $0.01 per share.gTotal return does not reflect sales commissions or contingent deferred sales charges, if applicable.hIncludes dividend and interest expenses on securities sold short and borrowing fees, if any. See below for the ratios of such expenses to average net assets for the periods presented. See Note 1(e).iBenefit of expense reduction rounds to less than 0.01%.jTotal expenses net of a one-time unaffiliated fee reimbursement are 2.29%. kRounds to less than 0.01%.



Year Ended December 31,Class C 2011 2010 2009 2008 2007


Net asset value, beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . $12.16 $11.29 $ 8.84 $15.47 $16.46


Net investment income (loss)b . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.15 0.24c (0.02)d 0.12 0.33

Net realized and unrealized gains (losses) . . . . . . . . . . . . . . . . . . . (0.55) 0.88 2.54 (6.31) —e

Total from investment operations . . . . . . . . . . . . . . . . . . . . . . . . . . (0.40) 1.12 2.52 (6.19) 0.33


Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (0.22) (0.25) (0.07) (0.02) (0.40)

Net realized gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — — (0.42) (0.92)

Total distributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (0.22) (0.25) (0.07) (0.44) (1.32)

Redemption feesf . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — — —e —e

Net asset value, end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $11.54 $12.16 $11.29 $ 8.84 $15.47

Total returng . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3.15)% 9.96% 28.51% (40.92)% 1.99%


Expensesh . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.84% 1.88% 2.41%i,j 1.84%i 1.81%i

Expenses incurred in connection with securities sold short . . . . . . . . —%k 0.02% 0.55% —%k 0.01%

Net investment income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.24% 2.06%c (0.21)%d 0.90% 1.90%

Supplemental data

Net assets, end of year (000’s) . . . . . . . . . . . . . . . . . . . . . . . . . . . . $315,390 $400,949 $437,340 $417,549 $875,060

Portfolio turnover rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51.38% 34.54% 54.36% 56.87% 49.84%

aThe amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases ofthe Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund.bBased on average daily shares outstanding.cNet investment income per share includes approximately $0.18 per share received in the form of a special dividend paid in connection with a corporate REIT conversion. Excludingthis non-recurring amount, the ratio of net investment income to average net assets would have been 0.53%.dNet investment income per share includes approximately $(0.06) per share related to an adjustment for uncollectible interest. Excluding the effect of this adjustment, the ratio ofnet investment income to average net assets would have been 0.35%. eAmount rounds to less than $0.01 per share.fEffective September 1, 2008, the redemption fee was eliminated.gTotal return does not reflect sales commissions or contingent deferred sales charges, if applicable.hIncludes dividend and interest expenses on securities sold short and borrowing fees, if any. See below for the ratios of such expenses to average net assets for the periods presented. See Note 1(e).iBenefit of expense reduction rounds to less than 0.01%.jTotal expenses net of a one-time unaffiliated fee reimbursement are 2.30%. kRounds to less than 0.01%.



Year Ended December 31,Class R 2011 2010 2009a

Per share operating performance(for a share outstanding throughout the period)

Net asset value, beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $12.16 $11.38 $10.78

Income from investment operationsb:

Net investment incomec . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.21 0.26d 0.01

Net realized and unrealized gains (losses) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (0.55) 0.93 0.66

Total from investment operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (0.34) 1.19 0.67

Less distributions from net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (0.30) (0.41) (0.07)

Net asset value, end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $11.52 $12.16 $11.38

Total returne . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2.69)% 10.63% 6.23%

Ratios to average net assetsf

Expensesg . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.34% 1.38% 1.91%h,i

Expenses incurred in connection with securities sold short . . . . . . . . . . . . . . . . . . . . . . . . . . . . . —%j 0.02% 0.55%

Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.74% 2.56%d 0.29%

Supplemental data

Net assets, end of period (000’s) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,039 $976 $34

Portfolio turnover rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51.38% 34.54% 54.36%

aFor the period October 30, 2009 (effective date) to December 31, 2009.bThe amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases ofthe Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund.cBased on average daily shares outstanding.dNet investment income per share includes approximately $0.18 per share received in the form of a special dividend paid in connection with a corporate REIT conversion. Excludingthis non-recurring amount, the ratio of net investment income to average net assets would have been 1.03%.eTotal return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year.fRatios are annualized for periods less than one year.gIncludes dividend and interest expenses on securities sold short and borrowing fees, if any. See below for the ratios of such expenses to average net assets for the periods presented. See Note 1(e).hBenefit of expense reduction rounds to less than 0.01%.iTotal expenses net of a one-time unaffiliated fee reimbursement are 1.80%. jRounds to less than 0.01%.

24 | Annual Report

Mutual Beacon FundStatement of Investments, December 31, 2011

Country Shares Value

Common Stocks and Other Equity Interests 85.8%Aerospace & Defense 1.8%Goodrich Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 152,990 $ 18,924,863Raytheon Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 1,054,870 51,034,611

69,959,474

Auto Components 0.2%a,b,cCollins & Aikman Products Co., Contingent Distribution . . . . . . . . . . . United States 1,506,491 5,017

a,d International Automotive Components Group Brazil LLC . . . . . . . . . . . Brazil 2,846,329 2,310,166d,e International Automotive Components Group North America, LLC . . . . . United States 16,905,297 7,166,155

9,481,338

Automobiles 0.0%†

Daimler AG . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Germany 34,193 1,494,437

Beverages 3.9%Coca-Cola Enterprises Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United Kingdom 1,528,110 39,394,676PepsiCo Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 598,878 39,735,555Pernod Ricard SA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . France 735,770 68,242,328

147,372,559

Biotechnology 1.8%Amgen Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 1,035,620 66,497,160

aGrifols SA, ADR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Spain 619,686 3,426,864

69,924,024

Capital Markets 2.0%Morgan Stanley . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 2,348,672 35,535,407

aUBS AG . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Switzerland 3,309,489 39,431,009

74,966,416

Chemicals 0.1%a,b,cDow Corning Corp., Contingent Distribution . . . . . . . . . . . . . . . . . . . . United States 12,598,548 3,149,637

Commercial Banks 2.5%a,dFE Capital Holdings Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Japan 35,242 —

a,d,f First Southern Bancorp Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 1,065,450 10,356,174Korea Exchange Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . South Korea 3,928,134 24,905,573

a,dNCB Warrant Holdings Ltd., A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Japan 163,895 —Wells Fargo & Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 2,188,070 60,303,209

95,564,956

Communications Equipment 2.0%Cisco Systems Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 3,138,900 56,751,312

aMotorola Mobility Holdings Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 490,300 19,023,640

75,774,952

Construction & Engineering 0.5%Boart Longyear Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Australia 6,098,577 17,344,835

Consumer Finance 0.4%a,dAlly Financial Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 2,583 13,430,196

aComdisco Holding Co. Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 1,223 7,216

13,437,412

Annual Report | 25

Mutual Beacon FundStatement of Investments, December 31, 2011 (continued)


Common Stocks and Other Equity Interests (continued)Diversified Financial Services 2.3%Citigroup Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 1,361,748 $ 35,827,590

aDeutsche Boerse AG . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Germany 354,201 18,571,500NYSE Euronext . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 1,241,648 32,407,012

86,806,102

Diversified Telecommunication Services 3.4%aAboveNet Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 870,871 56,615,324Cable & Wireless Communication PLC . . . . . . . . . . . . . . . . . . . . . . . . United Kingdom 28,230,271 16,701,957

a,b,cGlobal Crossing Holdings Ltd., Contingent Distribution . . . . . . . . . . . . United States 60,632,757 —a,b,cMarconi Corp., Contingent Distribution . . . . . . . . . . . . . . . . . . . . . . . United Kingdom 42,651,300 794,299

Telecom Italia SpA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Italy 17,714,521 15,866,110Telenor ASA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Norway 2,482,150 40,714,456

130,692,146

Electric Utilities 0.0%a,dAET&D Holdings No. 1 Pty. Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . Australia 4,353,435 —

Energy Equipment & Services 2.1%Ensco PLC, ADR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 781,065 36,647,570Transocean Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 1,173,675 45,057,383

81,704,953

Food & Staples Retailing 2.4%g,hCVS Caremark Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 2,218,369 90,465,088

Food Products 1.2%f Farmer Brothers Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 885,710 6,766,824Kraft Foods Inc., A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 1,087,669 40,635,314

47,402,138

Health Care Equipment & Supplies 2.8%aBoston Scientific Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 7,183,550 38,360,157Medtronic Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 1,650,770 63,141,953

aZimmer Holdings Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 74,800 3,995,816

105,497,926

Health Care Providers & Services 4.3%aCommunity Health Systems Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 1,761,580 30,739,571aMedco Health Solutions Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 1,474,293 82,412,979UnitedHealth Group Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 1,035,935 52,501,186

165,653,736

Household Durables 0.8%aToll Brothers Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 1,488,081 30,386,614

Insurance 6.7%ACE Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 545,580 38,256,070Ageas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Belgium 14,109,160 21,913,783American International Group Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 1,335,310 30,979,192

a,dOlympus Re Holdings Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 106,700 —RenaissanceRe Holdings Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 543,314 40,406,262

26 | Annual Report



Common Stocks and Other Equity Interests (continued)Insurance (continued)Symetra Financial Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 1,765,834 $ 16,016,115White Mountains Insurance Group Ltd. . . . . . . . . . . . . . . . . . . . . . . . United States 239,181 108,459,016

256,030,438

Internet Software & Services 2.2%a,g,hGoogle Inc., A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 63,960 41,311,764

aOpen Text Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Canada 824,324 42,155,929

83,467,693

IT Services 0.0%†

Glodyne Technoserve Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . India 91,839 413,678

Marine 1.0%A.P. Moller-Maersk AS, B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Denmark 5,590 36,910,411

Media 8.1%British Sky Broadcasting Group PLC . . . . . . . . . . . . . . . . . . . . . . . . . United Kingdom 3,264,627 37,168,829Comcast Corp., Special A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 696,809 16,416,820News Corp., A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 3,984,278 71,079,520News Corp., B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 196,951 3,580,569Reed Elsevier PLC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United Kingdom 5,032,343 40,508,940Time Warner Cable Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 1,398,966 88,932,269Viacom Inc., B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 1,093,820 49,670,366

307,357,313

Metals & Mining 0.8%a,d,fPMG LLC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 26,731 2,793,393

ThyssenKrupp AG . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Germany 1,174,823 26,993,219

29,786,612

Multi-Utilities 0.8%GDF Suez . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . France 1,111,075 30,371,920

Office Electronics 2.0%Xerox Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 9,705,146 77,252,962

Oil, Gas & Consumable Fuels 6.5%Apache Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 653,870 59,227,545El Paso Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 1,004,274 26,683,560Marathon Oil Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 2,922,456 85,540,287Marathon Petroleum Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 618,926 20,604,047The Williams Cos. Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 1,697,273 56,043,954

248,099,393

Paper & Forest Products 1.1%Domtar Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 183,275 14,654,669International Paper Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 936,369 27,716,522

42,371,191

Pharmaceuticals 5.2%Eli Lilly & Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 927,680 38,554,381

aHospira Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 625,750 19,004,027

Annual Report | 27



Common Stocks and Other Equity Interests (continued)Pharmaceuticals (continued)Merck & Co. Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 2,005,510 $ 75,607,727

g,hPfizer Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 3,048,145 65,961,858

199,127,993

Real Estate Management & Development 1.0%cCanary Wharf Group PLC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United Kingdom 10,069,634 36,967,321

Software 4.5%Microsoft Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 4,391,970 114,015,541Nintendo Co. Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Japan 136,230 18,762,269Polaris Financial Technology Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . India 4,506,423 10,523,346

aSymantec Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 1,842,567 28,836,173

172,137,329

Tobacco 8.7%Altria Group Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 1,246,520 36,959,318British American Tobacco PLC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United Kingdom 2,393,998 113,729,625Imperial Tobacco Group PLC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United Kingdom 3,134,424 118,646,412

g,hLorillard Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 543,688 61,980,432

331,315,787

Wireless Telecommunication Services 2.7%Vodafone Group PLC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United Kingdom 36,811,287 102,318,471

Total Common Stocks and Other Equity Interests (Cost $2,951,219,250) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,271,007,255

Convertible Preferred Stocks (Cost $1,821,000) 0.2%Commercial Banks 0.2%

a,d,f First Southern Bancorp Inc., cvt. pfd., C . . . . . . . . . . . . . . . . . . . . . . United States 1,821 6,707,398

Preferred Stocks (Cost $38,198,556) 0.8%Automobiles 0.8%Porsche Automobile Holding SE, pfd. . . . . . . . . . . . . . . . . . . . . . . . . Germany 568,537 30,269,496

Principal Amount*

Corporate Bonds, Notes and Senior Floating Rate Interests 3.9%

Clear Channel Communications Inc.,i,j Delayed Draw 2 Term Loan, 3.946%, 1/29/16 . . . . . . . . . . . . . . . . United States 3,422,000 2,483,089

senior note, 9.00%, 3/01/21 . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 5,339,000 4,524,803k senior note, PIK, 11.00%, 8/01/16 . . . . . . . . . . . . . . . . . . . . . . . . United States 7,227,000 4,589,145

i,j Tranche B Term Loan, 3.946%, 1/29/16 . . . . . . . . . . . . . . . . . . . . United States 19,549,000 14,504,263i,j Tranche C Term Loan, 3.946%, 1/29/16 . . . . . . . . . . . . . . . . . . . . United States 4,987,652 3,622,282

i,j iStar Financial Inc.,Tranche A1 Term Loan, 5.00%, 6/28/13 . . . . . . . . . . . . . . . . . . . . United States 1,989,128 1,978,826Tranche A2 Term Loan, 7.00%, 6/30/14 . . . . . . . . . . . . . . . . . . . . United States 1,480,000 1,439,300

NRG Energy Inc., senior note, 7.375%, 1/15/17 . . . . . . . . . . . . . . . . United States 6,975,000 7,254,000

28 | Annual Report


Country Principal Amount* Value

Corporate Bonds, Notes and Senior Floating Rate Interests (continued)

Realogy Corp.,i,j Extended First Lien Term Loan, 4.691%, 10/10/16 . . . . . . . . . . . . United States 35,175,197 $ 31,563,443

i,j,l Extended Revolver, 7.278%, 4/10/16 . . . . . . . . . . . . . . . . . . . . . . United States 2,674,199 2,121,977i,j Extended Synthetic Letter of Credit, 4.545%, 10/10/16 . . . . . . . . . United States 2,663,359 2,389,888

Second Lien Term Loan, 13.50%, 10/15/17 . . . . . . . . . . . . . . . . . United States 3,505,000 3,518,144senior note, 11.50%, 4/15/17 . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 1,872,000 1,469,520

m senior secured note, 144A, 7.875%, 2/15/19 . . . . . . . . . . . . . . . . United States 3,080,000 2,695,000Rite Aid Corp., senior note,

8.625%, 3/01/15 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 4,998,000 4,848,0609.375%, 12/15/15 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 6,437,000 6,243,890

i,j Texas Competitive Electric Holdings Co. LLC, Extended Term Loan, 4.776%, 10/10/17 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 46,282,735 29,466,690

mTexas Competitive Electric Holdings Co. LLC/Texas Competitive Electric Holdings Finance Inc., senior secured note, 144A, 11.50%,

10/01/20 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 28,306,000 24,166,247

Total Corporate Bonds, Notes and Senior Floating Rate Interests (Cost $163,329,397) . . . . . . . . . . . . . . . . . . . . . . 148,878,567

Corporate Notes and Senior Floating Rate Interests in Reorganization 0.6%

d,nBroadband Ventures III LLC, secured promissory note, 5.00%, 2/01/12 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 13,163 —

i,j,nTribune Co., 6/04/14,Incremental Term Loan, 7.25% . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 2,320,000 1,320,950

o Initial Tranche B Term Loan, 5.25% . . . . . . . . . . . . . . . . . . . . . . . United States 39,659,000 23,277,612

Total Corporate Notes and Senior Floating Rate Interests in Reorganization (Cost $25,789,646) . . . . . . . . . . . . . . . . . . 24,598,562

Shares

Companies in Liquidation 0.0%†

aAdelphia Recovery Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 48,268,724 48,269a,bAdelphia Recovery Trust, Arahova Contingent Value Vehicle, Contingent

Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 6,161,087 252,604a,d,e,fCB FIM Coinvestors LLC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 15,831,950 —

a,b,cCentury Communications Corp., Contingent Distribution . . . . . . . . . . . United States 16,986,000 —a,dFIM Coinvestor Holdings I, LLC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 19,805,560 —

Total Companies in Liquidation (Cost $5,687,631) . . . . . . 300,873

Total Investments before Short Term Investments (Cost $3,186,045,480) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,481,762,151

Annual Report | 29


Country Principal Amount* Value

Short Term Investments 7.2%Convertible Notes (Cost $4,897,531) 0.1%

i iStar Financial Inc., cvt., senior note, FRN, 0.872%, 10/01/12 . . . . . . United States 5,264,000 $ 4,737,600

U.S. Government and Agency Securities 7.1%pFHLB, 1/03/12 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 500,000 500,000pU.S. Treasury Bills,

h 3/15/12 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 50,000,000 49,998,5001/05/12 - 7/26/12 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 222,000,000 221,973,771

Total U.S. Government and Agency Securities(Cost $272,468,564) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 272,472,271

Total Investments (Cost $3,463,411,575) 98.5% . . . . . . . . 3,758,972,022

Options Written (0.0)%† . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,514,682)

Securities Sold Short (1.6)% . . . . . . . . . . . . . . . . . . . . . . . . . (61,903,764)

Other Assets, less Liabilities 3.1% . . . . . . . . . . . . . . . . . . . . . 118,733,339

Net Assets 100.0% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,813,286,915

Number of Contracts

qOptions Written (0.0)%†

Calls – Exchange-TradedFood & Staples Retailing (0.0)%†

CVS Caremark Corp., January Strike Price $39, Expires 1/21/12 . . . . . United States 1,500 $ (333,000)CVS Caremark Corp., February Strike Price $40, Expires 2/18/12 . . . . United States 2,500 (473,750)

(806,750)

Internet Software & Services (0.0)%†

Google Inc., A, February Strike Price $645, Expires 2/18/12 . . . . . . . . United States 64 (180,480)

Pharmaceuticals (0.0)%†

Pfizer Inc., February Strike Price $21, Expires 2/18/12 . . . . . . . . . . . United States 3,048 (323,088)

Tobacco (0.0)%†

Lorillard Inc., February Strike Price $115, Expires 2/18/12 . . . . . . . . . United States 544 (239,904)

Puts – Exchange-TradedCommunications Equipment (0.0)%†

Research In Motion Ltd., February Strike Price $11, Expires 2/18/12 . . . Canada 8,536 (213,400)Research In Motion Ltd., February Strike Price $12, Expires 2/18/12 . . . Canada 8,500 (416,500)Research In Motion Ltd., February Strike Price $14, Expires 2/18/12 . . . Canada 2,720 (334,560)

(964,460)

Total Options Written (Premiums Received $2,646,952) . . . $ (2,514,682)

30 | Annual Report



rSecurities Sold Short (1.6)%Common Stocks (Proceeds $59,315,808) (1.4)%Health Care Providers & Services (1.4)%Express Scripts Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 1,194,198 $ (53,368,709)

Principal Amount*

Corporate Notes (0.2)%Vulcan Materials Co., senior note,

6.50%, 12/01/16 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 5,146,000 (5,338,975)7.00%, 6/15/18 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 3,088,000 (3,196,080)

Total Corporate Notes Sold Short (Proceeds $7,987,938) . . . . . . . (8,535,055)

Total Securities Sold Short (Proceeds $67,303,746) . . . . . $ (61,903,764)

†Rounds to less than 0.1% of net assets.*The principal amount is stated in U.S. dollars unless otherwise indicated.aNon-income producing.bContingent distributions represent the right to receive additional distributions, if any, during the reorganization of the underlying company. Shares represent total underlying principal of debt securities.cSecurity has been deemed illiquid because it may not be able to be sold within seven days. At December 31, 2011, the aggregate value of these securities was $40,916,274, representing 1.07% of net assets.dSee Note 9 regarding restricted securities.eAt December 31, 2011, pursuant to the Fund’s policies and the requirements of applicable securities law, the Fund may be restricted from trading these securities for a limited orextended period of time due to ownership limits and/or potential possession of material non-public information.fSee Note 12 regarding holdings of 5% voting securities.gA portion or all of the security is held in connection with written option contracts open at year end.hSecurity or a portion of the security has been pledged as collateral for securities sold short, open futures, forward and written options contracts. At December 31, 2011, the aggregate value of these securities and/or cash pledged as collateral was $131,040,453, representing 3.44% of net assets.iThe coupon rate shown represents the rate at period end.jSee Note 1(g) regarding senior floating rate interests.kIncome may be received in additional securities and/or cash.lSee Note 10 regarding unfunded loan commitments.mSecurity was purchased pursuant to Rule 144A under the Securities Act of 1933 and may be sold in transactions exempt from registration only to qualified institutional buyers or in a public offering registered under the Securities Act of 1933. These securities have been deemed liquid under guidelines approved by the Trust’s Board of Trustees. AtDecember 31, 2011, the aggregate value of these securities was $26,861,247, representing 0.70% of net assets.nSee Note 8 regarding credit risk and defaulted securities.oA portion or all of the security purchased on a delayed delivery basis. See Note 1(c)pThe security is traded on a discount basis with no stated coupon rate.qSee Note 1(d) regarding written options.rSee Note 1(e) regarding securities sold short.


Annual Report | 31


At December 31, 2011, the Fund had the following futures contracts outstanding. See Note 1(d).

Futures Contracts

Number of Expiration Unrealized UnrealizedDescription Type Contracts Notional Value Date Appreciation Depreciation

EUR/USD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Short 248 $40,200,800 3/19/12 $301,066 $ —GBP/USD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Short 314 30,418,750 3/19/12 — (1,381)

Unrealized appreciation (depreciation) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 301,066 (1,381)

Net unrealized appreciation (depreciation) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $299,685

At December 31, 2011, the Fund had the following forward exchange contracts outstanding. See Note 1(d).

Forward Exchange Contracts

Contract Settlement Unrealized UnrealizedCurrency Counterparty Type Quantity Amount Date Appreciation Depreciation

British Pound . . . . . . . . . . . . . BANT Buy 7,430,000 $11,796,432 1/17/12 $ — $ (257,747)British Pound . . . . . . . . . . . . . DBFX Buy 1,330,390 2,131,864 1/17/12 — (65,787)British Pound . . . . . . . . . . . . . BBU Buy 1,780,061 2,780,348 1/17/12 — (15,939)British Pound . . . . . . . . . . . . . BBU Buy 1,462,161 2,265,619 1/17/12 5,097 — British Pound . . . . . . . . . . . . . HAND Buy 1,462,161 2,266,335 1/17/12 4,381 — British Pound . . . . . . . . . . . . . HSBC Sell 38,894,931 60,945,591 1/17/12 542,310 — British Pound . . . . . . . . . . . . . BBU Sell 40,226,392 63,081,537 1/17/12 610,517 — British Pound . . . . . . . . . . . . . DBFX Sell 13,293,003 21,049,154 1/17/12 405,308 — British Pound . . . . . . . . . . . . . BANT Sell 1,112,842 1,793,134 1/17/12 64,906 — Euro . . . . . . . . . . . . . . . . . . . BANT Buy 8,494,818 11,071,974 1/18/12 — (75,712)Euro . . . . . . . . . . . . . . . . . . . BBU Buy 1,994,818 2,589,613 1/18/12 — (7,387)Euro . . . . . . . . . . . . . . . . . . . SSBT Buy 2,599,662 3,359,180 1/18/12 5,997 — Euro . . . . . . . . . . . . . . . . . . . BANT Sell 19,224,519 26,686,237 1/18/12 1,800,734 — Euro . . . . . . . . . . . . . . . . . . . SSBT Sell 14,802,565 20,531,158 1/18/12 1,369,727 — Euro . . . . . . . . . . . . . . . . . . . DBFX Sell 421,003 597,193 1/18/12 52,218 — Euro . . . . . . . . . . . . . . . . . . . HSBC Sell 915,362 1,297,454 1/18/12 112,548 — Euro . . . . . . . . . . . . . . . . . . . BBU Sell 915,362 1,296,025 1/18/12 111,119 — Japanese Yen . . . . . . . . . . . . . DBFX Sell 147,932,800 1,897,742 1/20/12 — (24,963)Japanese Yen . . . . . . . . . . . . . HSBC Sell 27,600,000 356,359 1/20/12 — (2,362)Japanese Yen . . . . . . . . . . . . . BANT Buy 43,736,350 569,020 1/20/12 — (572)Japanese Yen . . . . . . . . . . . . . DBFX Buy 18,365,100 235,774 1/20/12 2,920 — Japanese Yen . . . . . . . . . . . . . BANT Buy 19,445,400 249,973 1/20/12 2,762 — Japanese Yen . . . . . . . . . . . . . SSBT Buy 19,445,400 249,951 1/20/12 2,784 — Japanese Yen . . . . . . . . . . . . . DBFX Sell 642,710,350 8,386,041 1/20/12 32,637 — Swiss Franc . . . . . . . . . . . . . . DBFX Buy 12,623,187 15,131,609 2/10/12 — (1,668,088)Swiss Franc . . . . . . . . . . . . . . BANT Buy 10,231,235 11,354,724 2/10/12 — (442,390)Swiss Franc . . . . . . . . . . . . . . BBU Buy 9,854,700 10,877,119 2/10/12 — (366,385)Swiss Franc . . . . . . . . . . . . . . HSBC Buy 2,320,000 2,628,270 2/10/12 — (153,826)Swiss Franc . . . . . . . . . . . . . . HAND Buy 344,465 388,919 2/10/12 — (21,522)Swiss Franc . . . . . . . . . . . . . . SSBT Buy 714,800 764,926 2/10/12 — (2,541)Swiss Franc . . . . . . . . . . . . . . BBU Sell 27,406,200 35,111,224 2/10/12 5,880,576 — Swiss Franc . . . . . . . . . . . . . . DBFX Sell 35,541,577 46,249,663 2/10/12 8,342,060 — Swiss Franc . . . . . . . . . . . . . . HSBC Sell 1,285,264 1,414,103 2/10/12 43,278 — Swiss Franc . . . . . . . . . . . . . . BANT Sell 1,614,216 1,736,457 2/10/12 14,782 — British Pound . . . . . . . . . . . . . HSBC Sell 18,047,677 27,883,660 2/21/12 — (134,705)



Forward Exchange Contracts (continued)

Contract Settlement Unrealized UnrealizedCurrency Counterparty Type Quantity Amount Date Appreciation Depreciation

British Pound . . . . . . . . . . . . . BANT Sell 39,376,426 $ 62,096,624 2/21/12 $ 966,147 $ — British Pound . . . . . . . . . . . . . DBFX Sell 1,184,733 1,862,066 2/21/12 22,811 — British Pound . . . . . . . . . . . . . SSBT Sell 699,756 1,098,023 2/21/12 11,676 — British Pound . . . . . . . . . . . . . HSBC Sell 699,756 1,098,281 2/21/12 11,935 — British Pound . . . . . . . . . . . . . BBU Sell 699,756 1,097,457 2/21/12 11,111 — Australian Dollar . . . . . . . . . . . BBU Buy 2,497,099 2,574,806 2/23/12 — (36,417)Australian Dollar . . . . . . . . . . . SSBT Buy 1,078,683 1,063,421 2/23/12 33,528 — Australian Dollar . . . . . . . . . . . BBU Buy 17,867,705 17,867,705 2/23/12 295,448 — Australian Dollar . . . . . . . . . . . BANT Sell 29,920,453 30,608,623 2/23/12 193,427 — Euro . . . . . . . . . . . . . . . . . . . DBFX Buy 3,200,000 4,453,280 2/29/12 — (309,423)Euro . . . . . . . . . . . . . . . . . . . BBU Sell 26,600,883 37,746,904 2/29/12 3,299,950 — Euro . . . . . . . . . . . . . . . . . . . DBFX Sell 14,545,297 19,784,513 2/29/12 949,004 — Euro . . . . . . . . . . . . . . . . . . . DBFX Buy 6,487,544 8,997,757 3/15/12 — (595,197)Euro . . . . . . . . . . . . . . . . . . . BBU Buy 5,984,998 7,935,568 3/15/12 — (183,898)Euro . . . . . . . . . . . . . . . . . . . SSBT Buy 1,062,600 1,379,680 3/15/12 7,923 — Euro . . . . . . . . . . . . . . . . . . . BBU Sell 14,377,131 19,582,694 3/15/12 961,672 — Euro . . . . . . . . . . . . . . . . . . . SSBT Sell 9,786,614 13,402,665 3/15/12 727,203 — Euro . . . . . . . . . . . . . . . . . . . BANT Sell 2,195,920 2,872,436 3/15/12 28,316 — Euro . . . . . . . . . . . . . . . . . . . DBFX Sell 388,799 510,636 3/15/12 7,071 — British Pound . . . . . . . . . . . . . BBU Sell 35,387,601 54,638,456 3/19/12 — (284,203)British Pound . . . . . . . . . . . . . BANT Sell 31,747,731 50,034,425 3/19/12 760,957 — British Pound . . . . . . . . . . . . . BANT Sell 18,639,131 28,730,448 4/16/12 — (189,398)British Pound . . . . . . . . . . . . . DBFX Sell 904,977 1,402,552 4/16/12 — (1,580)Euro . . . . . . . . . . . . . . . . . . . BBU Sell 39,182,973 52,405,878 4/16/12 1,633,647 — Euro . . . . . . . . . . . . . . . . . . . HSBC Sell 3,044,619 4,108,940 4/16/12 163,806 — Euro . . . . . . . . . . . . . . . . . . . SSBT Sell 2,259,284 3,031,713 4/16/12 104,195 — Euro . . . . . . . . . . . . . . . . . . . DBFX Sell 6,621,219 8,889,696 4/16/12 310,100 — Euro . . . . . . . . . . . . . . . . . . . HAND Sell 3,339,894 4,495,585 4/16/12 167,842 — Euro . . . . . . . . . . . . . . . . . . . BANT Sell 5,667,928 7,620,391 4/16/12 276,045 — Norwegian Krone . . . . . . . . . . HAND Sell 115,916,400 19,271,222 6/19/12 — (186)Norwegian Krone . . . . . . . . . . HAND Sell 4,095,000 682,443 6/19/12 1,639 —

Unrealized appreciation (depreciation) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30,352,114 (4,840,228)

Net unrealized appreciation (depreciation) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $25,511,886

See Abbreviations on page 54.


Mutual Beacon FundFinancial Statements

Statement of Assets and LiabilitiesDecember 31, 2011

Assets:Investments in securities:

Cost - Unaffiliated issuers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,425,528,962Cost - Controlled affiliated issuers (Note 12) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,871,172Cost - Non-controlled affiliated issuers (Note 12) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36,011,441

Total cost of investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,463,411,575

Value - Unaffiliated issuers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,732,348,233Value - Controlled affiliated issuers (Note 12) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,793,393Value - Non-controlled affiliated issuers (Note 12) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23,830,396

Total value of investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,758,972,022Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,680,838Restricted Cash (Note 1h) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,495,490Foreign currency, at value (cost $28,527,403) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28,517,674Receivables:

Investment securities sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,328,269Capital shares sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,731,086Dividends and interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,512,472

Due from brokers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59,975,534Unrealized appreciation on forward exchange contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30,352,114Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115

Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,946,565,614

Liabilities:Payables:

Investment securities purchased . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28,636,861Capital shares redeemed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,243,417Affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,483,506Variation margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 296,675

Options written, at value (premiums received $2,646,952) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,514,682Securities sold short, at value (proceeds $67,303,746) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61,903,764Due to brokers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,495,490Unrealized depreciation on forward exchange contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,840,228Unrealized depreciation on unfunded loan commitments (Note 10) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,365,956Accrued expenses and other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,498,120

Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 133,278,699

Net assets, at value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,813,286,915

Net assets consist of:Paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $4,262,693,403Undistributed net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34,365,402Net unrealized appreciation (depreciation) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 325,467,609Accumulated net realized gain (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (809,239,499)

Net assets, at value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,813,286,915


Mutual Beacon FundFinancial Statements (continued)

Statement of Assets and Liabilities (continued)December 31, 2011

Class Z:Net assets, at value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,423,176,570

Shares outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 207,506,393

Net asset value and maximum offering price per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $11.68

Class A:Net assets, at value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,062,476,828


Net asset value per sharea . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $11.61

Maximum offering price per share (net asset value per share ÷ 94.25%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $12.32

Class B:Net assets, at value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 10,204,850

Shares outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 885,796

Net asset value and maximum offering price per sharea . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $11.52

Class C:Net assets, at value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 315,389,826


Net asset value and maximum offering price per sharea . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $11.54

Class R:Net assets, at value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,038,841

Shares outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 176,959

Net asset value and maximum offering price per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $11.52

aRedemption price is equal to net asset value less contingent deferred sales charges, if applicable.



Statement of Operationsfor the year ended December 31, 2011

Investment income:Dividends:

Unaffiliated issuers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 111,231,852Non-controlled affiliated issuers (Note 12) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60,465

Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,593,988Income from securities loaned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23,806

Total investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 131,910,111

Expenses:Management fees (Note 3a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,720,991Administrative fees (Note 3b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,267,336Distribution fees: (Note 3c)

Class A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,664,097Class B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 187,907Class C . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,637,762Class R . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,868

Transfer agent fees (Note 3e) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,497,157Custodian fees (Note 4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 331,318Reports to shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 292,152Registration and filing fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100,385Professional fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 294,378Trustees’ fees and expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 132,937Interest on securities sold short . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 116,276Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 173,801

Total expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43,425,365

Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88,484,746

Realized and unrealized gains (losses):Net realized gain (loss) from:

Investments:Unaffiliated issuers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 121,852,056Non-controlled affiliated issuers (Note 12) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (24,808,700)

Written options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,477,587Foreign currency transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (38,301,857)Futures contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,626,348Securities sold short . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (942,639)

Net realized gain (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65,902,795

Net change in unrealized appreciation (depreciation) on:Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (276,858,862)Translation of other assets and liabilities denominated in foreign currencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29,555,040

Net change in unrealized appreciation (depreciation) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (247,303,822)

Net realized and unrealized gain (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (181,401,027)

Net increase (decrease) in net assets resulting from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (92,916,281)



Statements of Changes in Net Assets

Year Ended December 31,

2011 2010Increase (decrease) in net assets:

Operations:Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 88,484,746 $ 131,032,259Net realized gain (loss) from investments, written options, foreign currency transactions,

futures contracts and securities sold short . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65,902,795 43,264,805Net change in unrealized appreciation (depreciation) on investments and translation of other assets and liabilities denominated in foreign currencies . . . . . . . . . . . . . . . . . . . (247,303,822) 293,046,008

Net increase (decrease) in net assets resulting from operations . . . . . . . . . . . . . . . (92,916,281) 467,343,072

Distributions to shareholders from:Net investment income:

Class Z . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (73,329,921) (100,644,042)Class A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (29,265,787) (40,868,906)Class B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (189,940) (445,317)Class C . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (6,212,531) (8,503,891)Class R . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (53,085) (30,476)

Total distributions to shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (109,051,264) (150,492,632)

Capital share transactions: (Note 2)Class Z . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (309,868,634) (166,073,554)Class A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (207,466,467) (125,431,541)Class B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (17,856,752) (32,346,481)Class C . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (68,679,531) (65,847,160)Class R . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,226,946 867,764

Total capital share transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (602,644,438) (388,830,972)

Net increase (decrease) in net assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (804,611,983) (71,980,532)Net assets:Beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,617,898,898 4,689,879,430

End of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,813,286,915 $4,617,898,898

Undistributed net investment income included in net assets:End of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 34,365,402 $ 45,518,703

Annual Report | 37

Mutual Beacon FundNotes to Financial Statements

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

Franklin Mutual Series Funds (Trust) is registered under the Investment Company Act of 1940,as amended, (1940 Act) as an open-end investment company, consisting of seven separate funds.The Mutual Beacon Fund (Fund) is included in this report. The financial statements of theremaining funds in the Trust are presented separately. The Fund offers five classes of shares:Class Z, Class A, Class B, Class C, and Class R. Each class of shares differs by its initial salesload, contingent deferred sales charges, distribution fees, voting rights on matters affecting a single class and its exchange privilege.

The following summarizes the Fund’s significant accounting policies.

a. Financial Instrument Valuation

The Fund’s investments in securities and other financial instruments are carried at fair value daily.Fair value is the price that would be received to sell an asset or paid to transfer a liability in anorderly transaction between market participants on the measurement date. Under proceduresapproved by the Trust’s Board of Trustees, the Fund may utilize independent pricing services,quotations from securities and financial instrument dealers, and other market sources to deter-mine fair value.

Equity securities and derivative financial instruments (derivatives) listed on an exchange or on theNASDAQ National Market System are valued at the last quoted sale price or the official closingprice of the day, respectively. Foreign equity securities are valued as of the close of trading on theforeign stock exchange on which the security is primarily traded, or the NYSE, whichever is earlier.The value is then converted into its U.S. dollar equivalent at the foreign exchange rate in effect atthe close of the NYSE on the day that the value of the security is determined. Over-the-countersecurities are valued within the range of the most recent quoted bid and ask prices. Securities thattrade in multiple markets or on multiple exchanges are valued according to the broadest and mostrepresentative market. Certain equity securities are valued based upon fundamental characteristicsor relationships to similar securities.

Debt securities generally trade in the over-the-counter market rather than on a securities exchange.The Fund’s pricing services use multiple valuation techniques to determine fair value. In instanceswhere sufficient market activity exists, the pricing services may utilize a market-based approachthrough which quotes from market makers are used to determine fair value. In instances wheresufficient market activity may not exist or is limited, the pricing services also utilize proprietaryvaluation models which may consider market characteristics such as benchmark yield curves,option-adjusted spreads, credit spreads, estimated default rates, coupon rates, anticipated timing ofprincipal repayments, underlying collateral, and other unique security features in order to estimatethe relevant cash flows, which are then discounted to calculate the fair value. Securities denomi-nated in a foreign currency are converted into their U.S. dollar equivalent at the foreign exchangerate in effect at the close of the NYSE on the date that the values of the foreign debt securities aredetermined.

38 | Annual Report

Mutual Beacon FundNotes to Financial Statements (continued)

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)

a. Financial Instrument Valuation (continued)

Certain derivatives trade in the over-the-counter market. The Fund’s pricing services use varioustechniques including industry standard option pricing models and proprietary discounted cashflow models to determine the fair value of those instruments. The Fund’s net benefit or obligationunder the derivative contract, as measured by the fair market value of the contract, is included innet assets.

The Fund has procedures to determine the fair value of securities and other financial instrumentsfor which market prices are not readily available or which may not be reliably priced. Under theseprocedures, the Fund primarily employs a market-based approach which may use related or com-parable assets or liabilities, recent transactions, market multiples, book values, and other relevantinformation for the investment to determine the fair value of the investment. The Fund may alsouse an income-based valuation approach in which the anticipated future cash flows of the invest-ment are discounted to calculate fair value. Discounts may also be applied due to the nature orduration of any restrictions on the disposition of the investments. Due to the inherent uncertaintyof valuations of such investments, the fair values may differ significantly from the values thatwould have been used had an active market existed.

Trading in securities on foreign securities stock exchanges and over-the-counter markets may becompleted before the daily close of business on the NYSE. Occasionally, events occur between thetime at which trading in a foreign security is completed and the close of the NYSE that might callinto question the reliability of the value of a portfolio security held by the Fund. As a result, differ-ences may arise between the value of the Fund’s portfolio securities as determined at the foreignmarket close and the latest indications of value at the close of the NYSE. In order to minimize thepotential for these differences, the investment manager monitors price movements following theclose of trading in foreign stock markets through a series of country specific market proxies (suchas baskets of American Depositary Receipts, futures contracts and exchange traded funds). Theseprice movements are measured against established trigger thresholds for each specific marketproxy to assist in determining if an event has occurred that may call into question the reliability ofthe values of the foreign securities held by the Fund. If such an event occurs, the securities may bevalued using fair value procedures, which may include the use of independent pricing services.

b. Foreign Currency Translation

Portfolio securities and other assets and liabilities denominated in foreign currencies are trans-lated into U.S. dollars based on the exchange rate of such currencies against U.S. dollars on thedate of valuation. The Fund may enter into foreign currency exchange contracts to facilitatetransactions denominated in a foreign currency. Purchases and sales of securities, income andexpense items denominated in foreign currencies are translated into U.S. dollars at the exchangerate in effect on the transaction date. Portfolio securities and assets and liabilities denominatedin foreign currencies contain risks that those currencies will decline in value relative to the U.S.dollar. Occasionally, events may impact the availability or reliability of foreign exchange rates

Annual Report | 39



b. Foreign Currency Translation (continued)

used to convert the U.S. dollar equivalent value. If such an event occurs, the foreign exchangerate will be valued at fair value using procedures established and approved by the Trust’s Boardof Trustees.

The Fund does not separately report the effect of changes in foreign exchange rates from changesin market prices on securities held. Such changes are included in net realized and unrealized gainor loss from investments on the Statement of Operations.

Realized foreign exchange gains or losses arise from sales of foreign currencies, currency gainsor losses realized between the trade and settlement dates on securities transactions and the dif-ference between the recorded amounts of dividends, interest, and foreign withholding taxes andthe U.S. dollar equivalent of the amounts actually received or paid. Net unrealized foreignexchange gains and losses arise from changes in foreign exchange rates on foreign denominatedassets and liabilities other than investments in securities held at the end of the reporting period.

c. Securities Purchased on a Delayed Delivery Basis

The Fund purchases securities on a delayed delivery basis, with payment and delivery scheduledfor a future date. These transactions are subject to market fluctuations and are subject to the riskthat the value at delivery may be more or less than the trade date purchase price. Although theFund will generally purchase these securities with the intention of holding the securities, it may sellthe securities before the settlement date. Sufficient assets have been segregated for these securities.

d. Derivative Financial Instruments

The Fund invested in derivatives in order to manage risk or gain exposure to various other invest-ments or markets. Derivatives are financial contracts based on an underlying or notional amount,require no initial investment or an initial net investment that is smaller than would normally berequired to have a similar response to changes in market factors, and require or permit net settle-ment. Derivatives contain various risks including the potential inability of the counterparty tofulfill their obligations under the terms of the contract, the potential for an illiquid secondary mar-ket, and/or the potential for market movements which expose the Fund to gains or losses in excessof the amounts shown on the Statement of Assets and Liabilities. Realized gain and loss and unre-alized appreciation and depreciation on these contracts for the period are included in theStatement of Operations.

The Fund entered into futures contracts primarily to manage exposure to certain foreign curren-cies. A futures contract is an agreement between the Fund and a counterparty to buy or sell anasset for a specified price on a future date. Required initial margin deposits of cash or securitiesare pledged by the Fund. Subsequent payments, known as variation margin, are made or receivedby the Fund, depending on fluctuations in the value of the underlying security. Such variationmargin is accounted for as unrealized appreciation or depreciation until the contract is closed, atwhich time the gains or losses are realized.

40 | Annual Report



d. Derivative Financial Instruments (continued)

The Fund entered into forward exchange contracts primarily to manage exposure to certain foreigncurrencies. A forward exchange contract is an agreement between the Fund and a counterparty tobuy or sell a foreign currency for a specific exchange rate on a future date. Pursuant to the terms ofthe forward exchange contracts, cash or securities may be required to be deposited as collateral.Unrestricted cash may be invested according to the Fund’s investment objectives.

The Fund purchased or wrote option contracts primarily to manage exposure to equity price risk.An option is a contract entitling the holder to purchase or sell a specific amount of shares or unitsof an asset or notional amount of a swap (swaption), at a specified price. Options purchased arerecorded as an asset while options written are recorded as a liability. Upon exercise of an option,the acquisition cost or sales proceeds of the underlying investment is adjusted by any premiumreceived or paid. Upon expiration of an option, any premium received or paid is recorded as arealized gain or loss. Upon closing an option other than through expiration or exercise, the differ-ence between the premium and the cost to close the position is recorded as a realized gain or loss.Pursuant to the terms of the written option contract, cash or securities may be required to bedeposited as collateral.

At December 31, 2011, the Fund holds $5,714,831 in U.S. Treasury Bills and Notes as collateralfor derivatives.

See Notes 7 and 11 regarding investment transactions and other derivative information, respectively.

e. Securities Sold Short

The Fund is engaged in selling securities short, which obligates the Fund to replace a borrowedsecurity with the same security at current market value. The Fund incurs a loss if the price of thesecurity increases between the date of the short sale and the date on which the Fund replaces theborrowed security. The Fund realizes a gain if the price of the security declines between thosedates. Gains are limited to the price at which the Fund sold the security short, while losses arepotentially unlimited in size.

The Fund is required to establish a margin account with the broker lending the security soldshort. While the short sale is outstanding, the broker retains the proceeds of the short sale andthe Fund must maintain a deposit with the broker consisting of cash and/or securities having avalue equal to a specified percentage of the value of the securities sold short. The Fund is obli-gated to pay fees for borrowing the securities sold short and is required to pay the counterpartyany dividends or interest due on securities sold short. Such dividends or interest and any securityborrowing fees are recorded as an expense to the Fund.

Annual Report | 41



f. Securities Lending

The Fund participates in an agency based security lending program. The Fund receives cash col-lateral against the loaned securities in an amount equal to at least 102% of the market value ofthe loaned securities. Collateral is maintained over the life of the loan in an amount not less than100% of the market value of loaned securities, as determined at the close of Fund business eachday; any additional collateral required due to changes in security values is delivered to the Fundon the next business day. The collateral is invested in a non-registered money fund managed bythe Fund’s custodian on the Fund’s behalf. The Fund receives income from the investment of cashcollateral, in addition to lending fees and rebates paid by the borrower. The Fund bears the mar-ket risk with respect to the collateral investment, securities loaned, and the risk that the agentmay default on its obligations to the Fund. The securities lending agent has agreed to indemnifythe Fund in the event of default by a third party borrower. At December 31, 2011, the Fund hadno securities on loan.

g. Senior Floating Rate Interests

The Fund invests in senior secured corporate loans that pay interest at rates which are periodicallyreset by reference to a base lending rate plus a spread. These base lending rates are generally theprime rate offered by a designated U.S. bank or the London InterBank Offered Rate (LIBOR).Senior secured corporate loans often require prepayment of principal from excess cash flows or atthe discretion of the borrower. As a result, actual maturity may be substantially less than the statedmaturity.

Senior secured corporate loans in which the Fund invests are generally readily marketable, but maybe subject to some restrictions on resale.

h. Restricted Cash

At December 31, 2011, the Fund held restricted cash in connection with investments in certain derivative securities. Restricted cash is held in a segregated account with the Fund’s custodian/counterparty broker and is reflected in the Statement of Assets and Liabilities.

i. Income Taxes

It is the Fund’s policy to qualify as a regulated investment company under the Internal RevenueCode. The Fund intends to distribute to shareholders substantially all of its taxable income andnet realized gains to relieve it from federal income and excise taxes. As a result, no provision forU.S. federal income taxes is required.

The Fund may be subject to foreign taxation related to income received, capital gains on the saleof securities and certain foreign currency transactions in the foreign jurisdictions in which itinvests. Foreign taxes, if any, are recorded based on the tax regulations and rates that exist inthe foreign markets in which the Fund invests. When a capital gain tax is determined to applythe Fund records an estimated deferred tax liability in an amount that would be payable if thesecurities were disposed of on the valuation date.

42 | Annual Report



i. Income Taxes (continued)

The Fund recognizes the tax benefits of uncertain tax positions only when the position is “morelikely than not” to be sustained upon examination by the tax authorities based on the technicalmerits of the tax position. As of December 31, 2011, and for all open tax years, the Fund hasdetermined that no liability for unrecognized tax benefits is required in the Fund’s financialstatements related to uncertain tax positions taken on a tax return (or expected to be taken onfuture tax returns). Open tax years are those that remain subject to examination and are basedon each tax jurisdiction statute of limitation.

j. Security Transactions, Investment Income, Expenses and Distributions

Security transactions are accounted for on trade date. Realized gains and losses on securitytransactions are determined on a specific identification basis. Interest income and estimatedexpenses are accrued daily. Amortization of premium and accretion of discount on debt securi-ties are included in interest income. Dividend income and dividends declared on securities soldshort are recorded on the ex-dividend date except that certain dividends from foreign securitiesare recognized as soon as the Fund is notified of the ex-dividend date. Distributions to share-holders are recorded on the ex-dividend date and are determined according to income taxregulations (tax basis). Distributable earnings determined on a tax basis may differ from earn-ings recorded in accordance with accounting principles generally accepted in the United States ofAmerica. These differences may be permanent or temporary. Permanent differences are reclassi-fied among capital accounts to reflect their tax character. These reclassifications have no impacton net assets or the results of operations. Temporary differences are not reclassified, as they mayreverse in subsequent periods.

Common expenses incurred by the Trust are allocated among the funds based on the ratio of netassets of each fund to the combined net assets of the Trust. Fund specific expenses are chargeddirectly to the fund that incurred the expense.

Realized and unrealized gains and losses and net investment income, not including class specificexpenses, are allocated daily to each class of shares based upon the relative proportion of netassets of each class. Differences in per share distributions, by class, are generally due to differ-ences in class specific expenses.

k. Accounting Estimates

The preparation of financial statements in accordance with accounting principles generallyaccepted in the United States of America requires management to make estimates and assump-tions that affect the reported amounts of assets and liabilities at the date of the financialstatements and the amounts of income and expenses during the reporting period. Actual results could differ from those estimates.

Annual Report | 43



l. Guarantees and Indemnifications

Under the Trust’s organizational documents, its officers and trustees are indemnified by the Trustagainst certain liabilities arising out of the performance of their duties to the Trust. Additionally,in the normal course of business, the Trust, on behalf of the Fund, enters into contracts with serv-ice providers that contain general indemnification clauses. The Trust’s maximum exposure underthese arrangements is unknown as this would involve future claims that may be made against theTrust that have not yet occurred. Currently, the Trust expects the risk of loss to be remote.

2. SHARES OF BENEFICIAL INTEREST

At December 31, 2011, there were an unlimited number of shares authorized (without parvalue). Transactions in the Fund’s shares were as follows:

Year Ended December 31,2011 2010

Shares Amount Shares AmountClass Z Shares:

Shares sold . . . . . . . . . . . . . . . . . . . 7,715,345 $ 95,703,006 10,062,702 $ 118,661,720Shares issued in reinvestment of

distributions . . . . . . . . . . . . . . . . . . 6,012,311 68,213,590 7,810,138 93,103,942Shares redeemed . . . . . . . . . . . . . . . (38,458,953) (473,785,230) (32,118,685) (377,839,216)

Net increase (decrease) . . . . . . . . . . . (24,731,297) $(309,868,634) (14,245,845) $(166,073,554)

Class A Shares:Shares sold . . . . . . . . . . . . . . . . . . . 10,649,564 $ 129,822,396 14,452,627 $ 168,087,678Shares issued in reinvestment of

distributions . . . . . . . . . . . . . . . . . . 2,513,780 28,318,130 3,140,255 37,178,890Shares redeemed . . . . . . . . . . . . . . . (30,077,600) (365,606,993) (28,497,572) (330,698,109)

Net increase (decrease) . . . . . . . . . . . (16,914,256) $(207,466,467) (10,904,690) $(125,431,541)

Class B Shares:Shares sold . . . . . . . . . . . . . . . . . . . 27,119 $ 331,735 68,826 $ 784,051Shares issued in reinvestment of

distributions . . . . . . . . . . . . . . . . . . 16,013 176,644 35,185 410,054Shares redeemed . . . . . . . . . . . . . . . (1,523,795) (18,365,131) (2,960,614) (33,540,586)

Net increase (decrease) . . . . . . . . . . . (1,480,663) $ (17,856,752) (2,856,603) $ (32,346,481)

Class C Shares:Shares sold . . . . . . . . . . . . . . . . . . . 1,223,268 $ 14,811,113 1,670,812 $ 19,254,068Shares issued in reinvestment of

distributions . . . . . . . . . . . . . . . . . . 518,968 5,782,746 657,380 7,705,335Shares redeemed . . . . . . . . . . . . . . . (7,397,424) (89,273,390) (8,077,623) (92,806,563)

Net increase (decrease) . . . . . . . . . . . (5,655,188) $ (68,679,531) (5,749,431) $ (65,847,160)

Class R Shares:Shares sold . . . . . . . . . . . . . . . . . . . 131,499 $ 1,654,234 78,720 $ 882,989Shares issued in reinvestment of

distributions . . . . . . . . . . . . . . . . . . 4,748 53,085 2,566 30,285Shares redeemed . . . . . . . . . . . . . . . (39,572) (480,373) (3,962) (45,510)

Net increase (decrease) . . . . . . . . . . . 96,675 $ 1,226,946 77,324 $ 867,764

44 | Annual Report


3. TRANSACTIONS WITH AFFILIATES

Franklin Resources, Inc. is the holding company for various subsidiaries that together arereferred to as Franklin Templeton Investments. Certain officers and trustees of the Fund are alsoofficers and/or directors of the following subsidiaries:

Subsidiary Affiliation

Franklin Mutual Advisers, LLC (Franklin Mutual) Investment managerFranklin Templeton Services, LLC (FT Services) Administrative managerFranklin Templeton Distributors, Inc. (Distributors) Principal underwriterFranklin Templeton Investor Services, LLC (Investor Services) Transfer agent

a. Management Fees

The Fund pays an investment management fee to Franklin Mutual based on the average dailynet assets of the Fund as follows:

Annualized Fee Rate Net Assets

0.600% Up to and including $5 billion0.570% Over $5 billion, up to and including $7 billion0.550% Over $7 billion, up to and including $10 billion0.540% In excess of $10 billion

b. Administrative Fees

The Fund pays its allocated share of an administrative fee to FT Services based on the Trust’saggregate average daily net assets as follows:

Annualized Fee Rate Net Assets

0.150% Up to and including $200 million0.135% Over $200 million, up to and including $700 million0.100% Over $700 million, up to and including $1.2 billion0.075% In excess of $1.2 billion

c. Distribution Fees

The Trust’s Board of Trustees has adopted distribution plans for each share class, with the excep-tion of Class Z shares, pursuant to Rule 12b-1 under the 1940 Act. Under the Fund’s Class Areimbursement distribution plan, the Fund reimburses Distributors for costs incurred in connec-tion with the servicing, sale and distribution of the Fund’s shares up to the maximum annual planrate. Under the Class A reimbursement distribution plan, costs exceeding the maximum for thecurrent plan year cannot be reimbursed in subsequent periods.

In addition, under the Fund’s Class B, C, and R compensation distribution plans, the Fund paysDistributors for costs incurred in connection with the servicing, sale and distribution of theFund’s shares up to the maximum annual plan rate for each class.

Annual Report | 45


3. TRANSACTIONS WITH AFFILIATES (continued)

c. Distribution Fees (continued)

The maximum annual plan rates, based on the average daily net assets, for each class, are as follows:

Class A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.35%Class B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.00%Class C . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.00%Class R . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.50%

The Board of Trustees has set the current rate at 0.30% per year for Class A shares until furthernotice and approval by the Board.

d. Sales Charges/Underwriting Agreements

Front-end sales charges and contingent deferred sales charges (CDSC) do not represent expensesof the Fund. These charges are deducted from the proceeds of sales of Fund shares prior to invest-ment or from redemption proceeds prior to remittance, as applicable. Distributors has advised theFund of the following commission transactions related to the sales and redemptions of the Fund’sshares for the year:

Sales charges retained net of commissions paid to unaffiliated broker/dealers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $286,290

CDSC retained . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 26,053

e. Transfer Agent Fees

For the year ended December 31, 2011, the Fund paid transfer agent fees of $5,497,157, ofwhich $2,728,475 was retained by Investor Services.

4. EXPENSE OFFSET ARRANGEMENT

The Fund has entered into an arrangement with its custodian whereby credits realized as a result ofuninvested cash balances are used to reduce a portion of the Fund’s custodian expenses. During theyear ended December 31, 2011, there were no credits earned.

5. INDEPENDENT TRUSTEES’ RETIREMENT PLAN

On January 1, 1993, the Trust adopted an Independent Trustees’ Retirement Plan (Plan). ThePlan is an unfunded defined benefit plan that provides benefit payments to Trustees whose lengthof service and retirement age meets the eligibility requirements of the Plan. Benefits under thePlan are based on years of service and fees paid to each trustee at the time of retirement. Effectivein December 1996, the Plan was closed to new participants.

46 | Annual Report


5. INDEPENDENT TRUSTEES’ RETIREMENT PLAN (continued)

During the year ended December 31, 2011, the Fund’s projected benefit obligation and benefitpayments under the Plan were as follows:

aProjected benefit obligation at December 31, 2011 . . . . . . . . . . . $174,417bIncrease in projected benefit obligation . . . . . . . . . . . . . . . . . . . . $ 22,947

Benefit payments made to retired trustees . . . . . . . . . . . . . . . . . . $ 7,704

aThe projected benefit obligation is included in accrued expenses and other liabilities in the Statement of Assets and Liabilities.bThe increase in projected benefit obligation is included in trustees’ fees and expenses in the Statement of Operations.

6. INCOME TAXES

For tax purposes, capital losses may be carried over to offset future capital gains, if any. Underthe Regulated Investment Company Modernization Act of 2010, capital losses incurred by theFund in taxable years beginning after December 22, 2010 are not subject to expiration and suchlosses retain their character as either short-term or long-term, rather than being consideredshort-term as under previous law. Post-enactment capital losses must be fully utilized prior toutilizing any losses incurred in pre-enactment tax years.

At December 31, 2011, capital loss carryforwards were as follows:

Capital loss carryforwards subject to expiration:2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 34,142,1602017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 716,027,486

$750,169,646

During the year ended December 31, 2011, the Fund utilized $13,365,599 of capital loss carryforwards.

For tax purposes, the Fund may elect to defer any portion of a post-October capital loss to thefirst day of the following fiscal year. At December 31, 2011, the Fund deferred post-Octobercapital losses of $26,125,880.

The tax character of distributions paid during the years ended December 31, 2011 and 2010,was as follows:

2011 2010

Distributions paid from ordinary income . . $109,051,264 $150,492,632

Annual Report | 47


6. INCOME TAXES (continued)

At December 31, 2011, the cost of investments, net unrealized appreciation (depreciation) andundistributed ordinary income for income tax purposes were as follows:

Cost of investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,463,621,717

Unrealized appreciation . . . . . . . . . . . . . . . . . . . . . . . . . . $ 650,584,991Unrealized depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . (355,234,686)

Net unrealized appreciation (depreciation) . . . . . . . . . . . . . $ 295,350,305

Distributable earnings - undistributed ordinary income . . . . $ 27,614,580

Differences between income and/or capital gains as determined on a book basis and a tax basisare primarily due to differing treatments of foreign currency transactions and corporate actions.

7. INVESTMENT TRANSACTIONS

Purchases and sales of investments (excluding short term securities and securities sold short) forthe year ended December 31, 2011, aggregated $2,042,917,666 and $2,529,056,748, respectively.

Transactions in options written during the year ended December 31, 2011, were as follows:

Number of PremiumsContracts Received

Options outstanding at December 31, 2010 . . . 4,044 $ 628,665Options written . . . . . . . . . . . . . . . . . . . . . . . . 59,803 7,379,646Options expired . . . . . . . . . . . . . . . . . . . . . . . . (6,617) (1,138,239)Options exercised . . . . . . . . . . . . . . . . . . . . . . (2,483) (588,757)Options closed . . . . . . . . . . . . . . . . . . . . . . . . (27,335) (3,634,363)

Options outstanding at December 31, 2011 . . . 27,412 $ 2,646,952

See Notes 1(d) and 11 regarding derivative financial instruments and other derivative information,respectively.

8. CREDIT RISK AND DEFAULTED SECURITIES

The Fund may purchase the pre-default or defaulted debt of distressed companies. Distressedcompanies are financially troubled and are about to be or are already involved in financialrestructuring or bankruptcy. Risks associated with purchasing these securities include the possi-bility that the bankruptcy or other restructuring process takes longer than expected, or thatdistributions in restructuring are less than anticipated, either or both of which may result inunfavorable consequences to the Fund. If it becomes probable that the income on debt securi-ties, including those of distressed companies, will not be collected, the Fund discontinuesaccruing income and recognizes an adjustment for uncollectible interest.

48 | Annual Report


8. CREDIT RISK AND DEFAULTED SECURITIES (continued)

At December 31, 2011, the aggregate value of distressed company securities for which interestrecognition has been discontinued was $24,598,562, representing 0.64% of the Fund’s netassets. For information as to specific securities, see the accompanying Statement of Investments.

9. RESTRICTED SECURITIES

The Fund invests in securities that are restricted under the Securities Act of 1933 (1933 Act) orwhich are subject to legal, contractual, or other agreed upon restrictions on resale. Restrictedsecurities are often purchased in private placement transactions, and cannot be sold withoutprior registration unless the sale is pursuant to an exemption under the 1933 Act. Disposal ofthese securities may require greater effort and expense, and prompt sale at an acceptable pricemay be difficult. The Fund may have registration rights for restricted securities. The issuer gen-erally incurs all registration costs.

At December 31, 2011, the Fund held investments in restricted securities, excluding certain secu-rities exempt from registration under the 1933 Act deemed to be liquid, as follows:

PrincipalAmount/ AcquisitionShares Issuer Dates Cost Value

4,353,435 AET&D Holdings No. 1 Pty. Ltd. . . . . . 10/13/10 $ — $ — 2,583 Ally Financial Inc. . . . . . . . . . . . . . . . 1/15/09 12,022,314 13,430,196

13,163 Broadband Ventures III LLC, secured promissory note, 5.00%, 2/01/12 . . . 7/01/10 13,163 —

15,831,950 CB FIM Coinvestors LLC . . . . . . . . . . 1/15/09 - 6/02/09 — — 35,242 FE Capital Holdings Ltd. . . . . . . . . . . 8/29/03 - 3/10/08 5,438,813 —

19,805,560 FIM Coinvestor Holdings I, LLC . . . . . 11/20/06 - 6/02/09 — — 1,065,450 First Southern Bancorp Inc. . . . . . . . . 1/27/10 - 7/07/10 22,480,995 10,356,174

1,821 First Southern Bancorp Inc., cvt. pfd., C . . . . . . . . . . . . . . . . . . . . . . 1/27/10 - 7/07/10 1,821,000 6,707,398

2,846,329 International Automotive Components Group Brazil LLC . . . . . . . . . . . . . . . 4/13/06 - 12/26/08 1,890,264 2,310,166

16,905,297 International Automotive Components Group North America, LLC . . . . . . . . 1/12/06 - 10/10/07 20,674,103 7,166,155

163,895 NCB Warrant Holdings Ltd., A . . . . . . 12/16/05 - 3/11/08 1,543,383 — 106,700 Olympus Re Holdings Ltd. . . . . . . . . . 12/19/01 10,058,756 —

26,731 PMG LLC . . . . . . . . . . . . . . . . . . . . . 3/22/04 1,871,172 2,793,393

Total Restricted Securities (1.12% of Net Assets) . . . . . . . $77,813,963 $42,763,482

10. UNFUNDED LOAN COMMITMENTS

The Fund enters into certain credit agreements, all or a portion of which may be unfunded. TheFund is obligated to fund these loan commitments at the borrowers’ discretion. Funded portionsof credit agreements are presented on the Statement of Investments.

Annual Report | 49


10. UNFUNDED LOAN COMMITMENTS (continued)

At December 31, 2011, unfunded commitments were as follows:

Unfunded Borrower Commitment

Realogy Corp., Extended Revolver, 7.278%, 4/10/16 . . . . . . . $7,286,793

Unfunded loan commitments and funded portions of credit agreements are marked to marketdaily and any unrealized appreciation or depreciation is included in the Statement of Assets andLiabilities and the Statement of Operations.

11. OTHER DERIVATIVE INFORMATION

At December 31, 2011, the Fund has invested in derivative contracts which are reflected on theStatement of Assets and Liabilities as follows:

Asset Derivatives Liability Derivatives

Derivative ContractsNot Accounted for as Statement of Assets and Fair Value Statement of Assets and Fair ValueHedging Instruments Liabilities Location Amount Liabilities Location Amount

Foreign exchange contracts . . . . . . . Unrealized appreciation $30,653,180a Unrealized depreciation $4,841,609a

on forward exchange on forward exchange contracts / Net assets contracts / Net assets consist of – net consist of – net unrealizedunrealized appreciation appreciation (depreciation)(depreciation)

Equity contracts . . . . Options written, at value 2,514,682

aIncludes cumulative appreciation (depreciation) of futures contracts as reported in the Statement of Investments. Only current day’s variation margin is separately reported within the Statement of Assets and Liabilities.

For the year ended December 31, 2011, the effect of derivative contracts on the Fund’sStatement of Operations was as follows:

Change inUnrealized

Derivative Contracts Realized Gain AppreciationNot Accounted for as Statement of (Loss) for (Depreciation) Hedging Instruments Operations Locations the Year for the Year

Foreign exchange contracts . . . . . Net realized gain (loss) from foreign currency $(31,477,739) $29,913,691 transactions and futures contracts / Net change in unrealized appreciation (depreciation) on translation of other assets and liabilities denominated in foreign currencies

Equity contracts . . . . . . . . . . . . . Net realized gain (loss) from written options / 3,477,587 (18,887)Net change in unrealized appreciation (depreciation) on investments

50 | Annual Report


11. OTHER DERIVATIVE INFORMATION (continued)

For the year ended December 31, 2011, the average month end market value of derivatives represented 0.65% of average month end net assets. The average month end number of openderivative contracts for the year was 125.

See Notes 1(d) and 7 regarding derivative financial instruments and investment transactions,respectively.

12. HOLDINGS OF 5% VOTING SECURITIES OF PORTFOLIO COMPANIES

The 1940 Act defines “affiliated companies” to include investments in portfolio companies inwhich a fund owns 5% or more of the outstanding voting securities. Investments in “affiliatedcompanies” for the Fund for the year ended December 31, 2011, were as shown below.

Number of Number of Shares Held Shares Held Value at Realizedat Beginning Gross Gross at End End of Investment Capital

Name of Issuer of Year Additions Reductions of Year Year Income Gain (Loss)

Controlled Affiliatesa

PMG LLC . . . . . . . . . . . . . . . . . . . . . . . 26,731 — — 26,731 $ 2,793,393 $ — $ —

Non-Controlled AffiliatesCB FIM Coinvestors LLC . . . . . . . . . . . 15,831,950 — — 15,831,950 $ — $ — $ —

Farmer Brothers Co. . . . . . . . . . . . . . . 1,007,746 — 122,036 885,710 6,766,824 60,465 (1,488,823)

First Chicago Bancorp . . . . . . . . . . . . 6,853,043 — 6,853,043 — — — (23,319,877)

First Southern Bancorp Inc. . . . . . . . . 1,065,450 — — 1,065,450 10,356,174 — —

First Southern Bancorp Inc., cvt. pfd., C . . . . . . . . . . . . . . . . . . . . . . . 1,821 — — 1,821 6,707,398 — —

Total Non-Controlled Affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $23,830,396 $60,465 $(24,808,700)

Total Affiliated Securities (0.70% of Net Assets) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $26,623,789 $60,465 $(24,808,700)

aIssuer in which the Fund owns 25% or more of the outstanding voting securities.

13. CREDIT FACILITY

The Fund, together with other U.S. registered and foreign investment funds (collectively,Borrowers), managed by Franklin Templeton Investments, are borrowers in a joint syndicatedsenior unsecured credit facility totaling $750 million (Global Credit Facility) which matured onJanuary 20, 2012. This Global Credit Facility provides a source of funds to the Borrowers fortemporary and emergency purposes, including the ability to meet future unanticipated or unusu-ally large redemption requests. Effective January 20, 2012, the Borrowers renewed the GlobalCredit Facility for a total of $1.5 billion, maturing January 18, 2013.

Annual Report | 51


13. CREDIT FACILITY (continued)

Under the terms of the Global Credit Facility, the Fund shall, in addition to interest charged onany borrowings made by the Fund and other costs incurred by the Fund, pay its share of feesand expenses incurred in connection with the implementation and maintenance of the GlobalCredit Facility, based upon its relative share of the aggregate net assets of all of the Borrowers,including an annual commitment fee of 0.08% based upon the unused portion of the GlobalCredit Facility, which is reflected in other expenses on the Statement of Operations. During theyear ended December 31, 2011, the Fund did not use the Global Credit Facility.

14. FAIR VALUE MEASUREMENTS

The Fund follows a fair value hierarchy that distinguishes between market data obtained fromindependent sources (observable inputs) and the Fund’s own market assumptions (unobservableinputs). These inputs are used in determining the value of the Fund’s investments and are sum-marized in the following fair value hierarchy:

• Level 1 – quoted prices in active markets for identical securities

• Level 2 – other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speed, credit risk, etc.)

• Level 3 – significant unobservable inputs (including the Fund’s own assumptions in determining the fair value of investments)

The inputs or methodology used for valuing securities are not an indication of the risk associatedwith investing in those securities.

For movements between the levels within the fair value hierarchy, the Fund has adopted a policyof recognizing the transfers as of the date of the underlying event which caused the movement.

The following is a summary of the inputs used as of December 31, 2011, in valuing the Fund’sassets and liabilities carried at fair value:

Level 1 Level 2 Level 3 Total

Assets:

Investments in Securities:

Equity Investments:a

Auto Components . . . . . . . . $ — $ — $ 9,481,338 $ 9,481,338

Chemicals . . . . . . . . . . . . . — — 3,149,637 3,149,637

Commercial Banks . . . . . . . 85,208,782 — 17,063,572b 102,272,354

Consumer Finance . . . . . . . — 7,216 13,430,196 13,437,412

Diversified TelecommunicationServices . . . . . . . . . . . . . 129,897,847 — 794,299b 130,692,146

Metals & Mining . . . . . . . . . 26,993,219 — 2,793,393 29,786,612

Real Estate Management & Development . . . . . . . . . . — — 36,967,321 36,967,321

All Other Equity Investmentsc . . . . . . . . . . 2,982,197,329 — —b 2,982,197,329

52 | Annual Report


14. FAIR VALUE MEASUREMENTS (continued)

Level 1 Level 2 Level 3 Total

Assets: (continued)

Investments in Securities: (continued)

Corporate Bonds, Notes and Senior Floating Rate

Interests . . . . . . . . . . . . . $ — $148,878,567 $ — $ 148,878,567

Corporate Notes and SeniorFloating Rate Interests in

Reorganization . . . . . . . . . — 24,598,562 —b 24,598,562

Companies in Liquidation . . . — 300,873 —b 300,873

Short Term Investments . . . . . 271,972,271 5,237,600 — 277,209,871

Total Investments in Securities . . . . . . . . . . . $3,496,269,448 $179,022,818 $ 83,679,756 $3,758,972,022

Futures Contracts . . . . . . . . . . $ 301,066 $ — $ — $ 301,066

Forward Exchange Contracts . . . — 30,352,114 — 30,352,114

Liabilities:Options Written . . . . . . . . . . . . 2,514,682 — — 2,514,682

Securities Sold Short . . . . . . . . 53,368,709 8,535,055 — 61,903,764

Futures Contracts . . . . . . . . . . 1,381 — — 1,381

Forward Exchange Contracts . . . — 4,840,228 — 4,840,228

Unfunded Loan Commitments . . — 1,365,956 — 1,365,956

aIncludes common, convertible preferred and preferred stocks as well as other equity investments.bIncludes securities determined to have no value at December 31, 2011.cFor detailed categories, see the accompanying Statement of Investments.

At December 31, 2011, the reconciliation of assets in which significant unobservable inputs(Level 3) were used in determining fair value, is as follows:

Net Changein Unrealized

Balance Net Net Balance Appreciationat Transfers Transfers Realized Unrealized at (Depreciation)

Beginning Into Out of Cost Basis Gain Gain End of on Assets Heldof Year Purchases Sales Level 3 Level 3a Adjustmentsb (Loss) (Loss) Year at Year End

Assets:Investments in Securities:

Equity Investments:c

Airlines . . . . . . . . . . . . . . . . . $ —d $ — $ — $ — $ — $ (26,229) $ (1,143,074) $ 1,169,303 $ — $ —

Auto Components . . . . . . . . . 26,479,328d — (28,561) — — (609,490) (9,586) (16,350,353) 9,481,338 (16,995,731)

Chemicals . . . . . . . . . . . . . . 3,149,637 — — — — — — — 3,149,637 —

Commercial Banks . . . . . . . . 24,090,082d — — — — — (23,319,878) 16,293,368 17,063,572d (3,257,061)

Computers & Peripherals . . . —d — — — — (192,550) (114,791) 307,341 — —

Consumer Finance . . . . . . . . 71,120,686 — (54,376,939) — — — (7,466,016) 4,152,465 13,430,196 (4,907,187)

Diversified TelecommunicationServices . . . . . . . . . . . . . . . —d — — — — (1,339) 1,339 794,299 794,299d 794,299

Electric Utilities . . . . . . . . . . 21,993,554d — (20,704,981) — — — — (1,288,573) —d —

Insurance . . . . . . . . . . . . . . . 40,546 — — — — (37,045) — (3,501) —d (3,501)

Annual Report | 53


15. NEW ACCOUNTING PRONOUNCEMENTS

In May 2011, the Financial Accounting Standards Board (FASB) issued Accounting StandardsUpdate (ASU) No. 2011-04, Fair Value Measurement (Topic 820): Amendments to AchieveCommon Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. Theamendments in the ASU will improve the comparability of fair value measurements presented anddisclosed in financial statements prepared in accordance with U.S. GAAP (Generally AcceptedAccounting Principles) and IFRS (International Financial Reporting Standards) and include newguidance for certain fair value measurement principles and disclosure requirements. The ASU iseffective for interim and annual periods beginning after December 15, 2011. The Fund believesthe adoption of this ASU will not have a material impact on its financial statements.

16. SUBSEQUENT EVENTS

The Fund has evaluated subsequent events through the issuance of the financial statements anddetermined that no events have occurred that require disclosure other than those already dis-closed in the financial statements.

14. FAIR VALUE MEASUREMENTS (continued)

Net Changein Unrealized

Balance Net Net Balance Appreciationat Transfers Transfers Realized Unrealized at (Depreciation)

Beginning Into Out of Cost Basis Gain Gain End of on Assets Heldof Year Purchases Sales Level 3 Level 3a Adjustmentsb (Loss) (Loss) Year at Year End

Assets: (continued)

Investments in Securities: (continued)

Equity Investments:c (continued)

IT Services . . . . . . . . . . . . . . $ 1,007,695 $ — $ — $ — $ (901,506) $ — $ — $ (106,189) $ — $ —

Metals & Mining . . . . . . . . . . 4,571,007 — — — — — — (1,777,614) 2,793,393 (1,777,614)

Real Estate Management & Development . . . . . . . . . . . 43,658,950 — — — — — — (6,691,629) 36,967,321 (6,691,629)

Corporate Bonds, Notes and Senior Floating Rate Interests . . . . . . . . . . . . . . . . 38,579,240 — (38,676,256) — — — (8,495,544) 8,592,560 — —

Corporate Notes and SeniorFloating Rate Interests inReorganization . . . . . . . . . . . 26,326 — (13,163) — — — — (13,163) —d (13,163)

Companies in Liquidation . . . . —d — — — — (66,953) 66,953 — —d —

Total . . . . . . . . . . . . . . . . . $234,717,051 $ — $(113,799,900) $ — $ (901,506) $ (933,606) $ (40,480,597) $ 5,078,314 $ 83,679,756 $ (32,851,587)

aThe investment was transferred out of Level 3 as a result of the availability of a quoted price in an active market for identical securities.bMay include accretion, amortization, partnership adjustments, and/or other cost basis adjustments.cIncludes common and convertible preferred stocks as well as other equity investments.dIncludes securities determined to have no value.

54 | Annual Report


Counterparty

BANT - Bank of America N.A.BBU - Barclays Bank PLCDBFX - Deutsche Bank AGHAND - Svenska HandelsbankenHSBC - HSBC Bank USA, N.A.SSBT - State Street Bank and Trust Co.,

N.A.

Currency

EUR - EuroGBP - British PoundUSD - United States Dollar

Selected Portfolio

ADR - American Depositary ReceiptFHLB - Federal Home Loan BankFRN - Floating Rate NotePIK - Payment-In-Kind

ABBREVIATIONS

Annual Report | 55

Mutual Beacon FundReport of Independent Registered Public Accounting Firm

To the Board of Trustees of Franklin Mutual Series Funds and Shareholders of theMutual Beacon Fund:

We have audited the accompanying statement of assets and liabilities of the Mutual BeaconFund (one of the Funds constituting the Franklin Mutual Series Funds) (the “Fund”), includingthe statement of investments, as of December 31, 2011, and the related statement of operationsfor the year then ended, the statements of changes in net assets for each of the two years in theperiod then ended, and the financial highlights for each of the periods indicated therein. Thesefinancial statements and financial highlights are the responsibility of the Fund’s management.Our responsibility is to express an opinion on these financial statements and financial highlightsbased on our audits.

We conducted our audits in accordance with the standards of the Public Company AccountingOversight Board (United States). Those standards require that we plan and perform the audit toobtain reasonable assurance about whether the financial statements and financial highlights arefree of material misstatement. We were not engaged to perform an audit of the Fund’s internal con-trol over financial reporting. Our audits included consideration of internal control over financialreporting as a basis for designing audit procedures that are appropriate in the circumstances, butnot for the purpose of expressing an opinion on the effectiveness of the Fund’s internal controlover financial reporting. Accordingly, we express no such opinion. An audit also includes examin-ing, on a test basis, evidence supporting the amounts and disclosures in the financial statementsand financial highlights, assessing the accounting principles used and significant estimates made bymanagement, and evaluating the overall financial statement presentation. Our procedures includedconfirmation of securities owned as of December 31, 2011, by correspondence with the custodianand brokers, or by other appropriate auditing procedures where replies from the brokers were notreceived. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements and financial highlights referred to above present fairly,in all material respects, the financial position of the Mutual Beacon Fund of the FranklinMutual Series Funds at December 31, 2011, the results of its operations for the year then ended,the changes in its net assets for each of the two years in the period then ended, and the financialhighlights for each of the periods indicated therein, in conformity with U.S. generally acceptedaccounting principles.

Boston, MassachusettsFebruary 21, 2012

56 | Annual Report

Mutual Beacon FundTax Information (unaudited)

Under Section 854(b)(1)(A) of the Internal Revenue Code (Code), the Fund hereby reports40.94% of the ordinary income dividends as income qualifying for the dividends receiveddeduction for the fiscal year ended December 31, 2011.

Under Section 854(b)(1)(B) of the Code, the Fund hereby reports the maximum amount allow-able but no less than $102,914,156 as qualified dividends for purposes of the maximum rateunder Section 1(h)(11) of the Code for the fiscal year ended December 31, 2011. Distributions,including qualified dividend income, paid during calendar year 2011 will be reported to share-holders on Form 1099-DIV by mid-February 2012. Shareholders are advised to check with theirtax advisors for information on the treatment of these amounts on their individual income taxreturns.

Under Section 871(k)(1)(C) of the Code, the Fund hereby reports the maximum amount allow-able but no less than $9,742,575 as interest related dividends for purposes of the tax imposedunder Section 871(a)(1)(A) of the Code for the fiscal year ended December 31, 2011.

Annual Report | 57

Number of Portfolios inName, Year of Birth Length of Fund Complex Overseen Other Directorships Heldand Address Position Time Served by Board Member* During at Least the Past 5 Years

Mutual Beacon FundBoard Members and Officers

Independent Board Members

The name, year of birth and address of the officers and board members, as well as their affiliations, positions held withthe Fund, principal occupations during at least the past five years and number of portfolios overseen in the FranklinTempleton Investments fund complex are shown below. Generally, each board member serves until that person’s succes-sor is elected and qualified.

NoneEdward I. Altman, Ph.D. (1941)c/o Franklin Mutual Advisers, LLC101 John F. Kennedy ParkwayShort Hills, NJ 07078-2789

Trustee Since 1987 10

Principal Occupation During at Least the Past 5 Years:Max L. Heine Professor of Finance and Director of The Credit and Debt Markets Research Program, Salomon Center, Stern School ofBusiness, New York University; editor and author of numerous financial publications; financial consultant; an adviser to numerous financialpublishing organizations; and formerly, Vice Director, Salomon Center, Stern School of Business, New York University.

SLM Corporation (Sallie Mae), AresCapital Corporation (specialty financecompany) and Allied CapitalCorporation (financial services) (2003-2010).

Ann Torre Bates (1958)c/o Franklin Mutual Advisers, LLC101 John F. Kennedy ParkwayShort Hills, NJ 07078-2789


Principal Occupation During at Least the Past 5 Years:Independent strategic and financial consultant; and formerly, Executive Vice President and Chief Financial Officer, NHP Incorporated (manager of multifamily housing) (1995-1997); and Vice President and Treasurer, US Airways, Inc. (until 1995).

Franklin Templeton Emerging MarketsDebt Opportunities Fund PLC andFiduciary International IrelandLimited.

Burton J. Greenwald (1929)c/o Franklin Mutual Advisers, LLC101 John F. Kennedy ParkwayShort Hills, NJ 07078-2789


Principal Occupation During at Least the Past 5 Years:Managing Director, B.J. Greenwald Associates (management consultants to the financial services industry); and formerly, Chairman,Fiduciary Trust International Funds; Executive Vice President, L.F Rothschild Fund Management, Inc.; President and Director, Merit MutualFunds; President, Underwriting Division and Director, National Securities & Research Corporation; Governor, Investment Company Instituteand Chairman, ICI Public Information Committee.


NoneKeith E. Mitchell (1954)c/o Franklin Mutual Advisers, LLC101 John F. Kennedy ParkwayShort Hills, NJ 07078-2789


Principal Occupation During at Least the Past 5 Years:Managing Member, Mitchell Hartley Advisers, LLC (formerly, Mitchell Advisers, LLC) (advisory firm); director of various boards of asset management firms; and formerly, Managing Director, Putman Lovell NBF.

NoneCharles Rubens II (1930) c/o Franklin Mutual Advisers, LLC101 John F. Kennedy ParkwayShort Hills, NJ 07078-2789


Principal Occupation During at Least the Past 5 Years:Private investor and president of non-profit organizations; and formerly, an executive of Time, Inc.; and Trustee of Colorado College.

Cbeyond, Inc. (business communica-tions provider), The SouthernCompany (energy company) and TheWashington Post Company (educationand media organization).

Larry D. Thompson (1945)c/o Franklin Mutual Advisers, LLC101 John F. Kennedy ParkwayShort Hills, NJ 07078-2789


Principal Occupation During at Least the Past 5 Years:John A. Sibley Professor of Corporate and Business Law, University of Georgia School of Law (2011); and formerly, Senior Vice President –Government Affairs, General Counsel and Secretary, PepsiCo, Inc. (consumer products) (2004-May 2011); Senior Fellow of The BrookingsInstitution (2003-2004); Visiting Professor, University of Georgia School of Law (2004); and Deputy Attorney General, U.S. Department ofJustice (2001-2003).

NoneJan Hopkins Trachtman (1947)c/o Franklin Mutual Advisers, LLC101 John F. Kennedy ParkwayShort Hills, NJ 07078-2789


Principal Occupation During at Least the Past 5 Years:President and Founder, The Jan Hopkins Group (communications consulting firm); President, Economic Club of New York; serves onAdvisory Board of Knight Bagehot Fellowship; and formerly, Anchor/Correspondent, CNN Financial News (until 2003); Managing Directorand Head of Client Communications, Citigroup Private Bank (until 2005); Off-Air Reporter, ABC News’ World News Tonight and Editor, CBSNetwork News.

El Oro Ltd (investments).Robert E. Wade (1946)c/o Franklin Mutual Advisers, LLC101 John F. Kennedy ParkwayShort Hills, NJ 07078-2789

Trustee andChairman ofthe Board

Trustee since1993 andChairman of theBoard since 2005

42

Principal Occupation During at Least the Past 5 Years:Attorney at law engaged in private practice (1973-2009) and member of various boards.

58 | Annual Report

Annual Report | 59


Interested Board Members and Officers

None**Gregory E. Johnson (1961)One Franklin Parkway San Mateo, CA 94403-1906


Principal Occupation During at Least the Past 5 Years:Director, President and Chief Executive Officer, Franklin Resources, Inc.; officer and/or director or trustee, as the case may be, of some ofthe other subsidiaries of Franklin Resources, Inc. and of 34 of the investment companies in Franklin Templeton Investments; and Chairman,Investment Company Institute.

American International Group, Inc.(AIG) Credit Facility Trust(2010–2011).

**Peter A. Langerman (1955)c/o Franklin Mutual Advisers, LLC101 John F. Kennedy Parkway Short Hills, NJ 07078-2702

Trustee,President andChief ExecutiveOfficer –InvestmentManagement

Trustee since2007, Presidentand ChiefExecutive Officer –InvestmentManagementsince 2005

10

Principal Occupation During at Least the Past 5 Years:Chairman of the Board, Chief Executive Officer and President, Franklin Mutual Advisers, LLC; officer and/or director, as the case may be, offour of the investment companies in Franklin Templeton Investments.

Not ApplicablePhilippe Brugere-Trelat (1949)101 John F. Kennedy ParkwayShort Hills, NJ 07078-2789

Vice President Since 2005 Not Applicable

Principal Occupation During at Least the Past 5 Years:Executive Vice President, Franklin Mutual Advisers, LLC; officer of three of the investment companies in Franklin Templeton Investments;and formerly, Portfolio Manager of Eurovest SA (French registered Investment Company, Sicav).

Not ApplicableJames M. Davis (1952)One Franklin Parkway San Mateo, CA 94403-1906

ChiefComplianceOfficer andVice President– AMLCompliance

Chief ComplianceOfficer since 2004and VicePresident – AMLCompliance since2006

Not Applicable

Principal Occupation During at Least the Past 5 Years:Director, Global Compliance, Franklin Resources, Inc.; and officer of 46 of the investment companies in Franklin Templeton Investments.

Not ApplicableLaura F. Fergerson (1962)One Franklin ParkwaySan Mateo, CA 94403-1906

Chief ExecutiveOfficer –Finance andAdministration

Since 2009 Not Applicable

Principal Occupation During at Least the Past 5 Years:Senior Vice President, Franklin Templeton Services, LLC; officer of 46 of the investment companies in Franklin Templeton Investments; andformerly, Director and member of Audit and Valuation Committees, Runkel Funds, Inc. (2003-2004); Assistant Treasurer of most of theinvestment companies in Franklin Templeton Investments (1997-2003); and Vice President, Franklin Templeton Services, LLC (1997-2003).

60 | Annual Report


Not ApplicableAliya S. Gordon (1973)One Franklin ParkwaySan Mateo, CA 94403-1906


Principal Occupation During at Least the Past 5 Years:Senior Associate General Counsel, Franklin Templeton Investments; officer of 46 of the investment companies in Franklin TempletonInvestments; and formerly, Litigation Associate, Steefel, Levitt & Weiss, LLP (2000-2004).

Not ApplicableDavid P. Goss (1947)One Franklin Parkway San Mateo, CA 94403-1906


Principal Occupation During at Least the Past 5 Years:Senior Associate General Counsel, Franklin Templeton Investments; and officer and/or director, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 46 of the investment companies in Franklin Templeton Investments.

Not ApplicableSteven J. Gray (1955)One Franklin Parkway San Mateo, CA 94403-1906

Secretary andVice President

Secretary since2005 and VicePresident since2009

Not Applicable

Principal Occupation During at Least the Past 5 Years:Senior Associate General Counsel, Franklin Templeton Investments; Vice President, Franklin Templeton Distributors, Inc.; and officer of 46 ofthe investment companies in Franklin Templeton Investments.

Not ApplicableMatthew T. Hinkle (1971)One Franklin ParkwaySan Mateo, CA 94403-1906

Treasurer,Chief FinancialOfficer andChiefAccountingOfficer

Since 2009 Not Applicable

Principal Occupation During at Least the Past 5 Years:Director, Fund Accounting, Franklin Templeton Investments; and officer of five of the investment companies in Franklin TempletonInvestments.

Not ApplicableRobert C. Rosselot (1960)300 S.E. 2nd StreetFort Lauderdale, FL 33301-1923


Principal Occupation During at Least the Past 5 Years:Senior Associate General Counsel, Franklin Templeton Investments; Assistant Secretary, Franklin Resources, Inc.; Vice President andSecretary, Templeton Investment Counsel, LLC; Vice President, Secretary and Trust Officer, Fiduciary Trust International of the South; andofficer of 46 of the investment companies in Franklin Templeton Investments.

Not ApplicableKaren L. Skidmore (1952)One Franklin ParkwaySan Mateo, CA 94403-1906


Principal Occupation During at Least the Past 5 Years:Senior Associate General Counsel, Franklin Templeton Investments; and officer of 46 of the investment companies in Franklin TempletonInvestments.

Annual Report | 61


Not ApplicableCraig S. Tyle (1960)One Franklin Parkway San Mateo, CA 94403-1906


Principal Occupation During at Least the Past 5 Years:General Counsel and Executive Vice President, Franklin Resources, Inc.; officer of some of the other subsidiaries of Franklin Resources, Inc.and of 46 of the investment companies in Franklin Templeton Investments; and formerly, Partner, Shearman & Sterling, LLP (2004-2005);and General Counsel, Investment Company Institute (ICI) (1997-2004).

Not ApplicableLori A. Weber (1964)300 S.E. 2nd StreetFort Lauderdale, FL 33301-1923

Vice President Since June 2011 Not Applicable

Principal Occupation During at Least the Past 5 Years:Associate General Counsel, Franklin Templeton Investments; Assistant Secretary, Franklin Resources, Inc.; Vice President and AssistantSecretary, Templeton Investment Counsel, LLC; and officer of 45 of the investment companies in Franklin Templeton Investments.

*We base the number of portfolios on each separate series of the U.S. registered investment companies within the Franklin Templeton Investments fund complex. These portfolioshave a common investment manager or affiliated investment managers.

**Gregory E. Johnson is considered to be an interested person of the Fund under the federal securities laws due to his position as an officer and director of Franklin Resources, Inc.,which is the parent company of the Fund’s investment manager and distributor. Peter A. Langerman is considered to be an interested person of the Fund under the federal securitieslaws due to his position as an officer of Franklin Mutual Advisers, LLC, the Fund’s investment manager.

Note 1: Officer information is current as of the date of this report. It is possible that after this date, information about officers may change.

The Fund’s Board has determined that certain of the members of the Audit Committee, including Ann Torre Bates, are audit committee financial experts, and “independent,”under those provisions of the Sarbanes-Oxley Act of 2002, and the rules and form amendments adopted by the Securities and Exchange Commission, relating to audit com-mittee financial experts.

The Statement of Additional Information (SAI) includes additional information about the board members and is available, without charge, upon request. Shareholders maycall (800) DIAL BEN/342-5236 to request the SAI.

62 | Annual Report

Mutual Beacon FundShareholder Information

Proxy Voting Policies and Procedures

The Fund’s investment manager has established Proxy Voting Policies and Procedures (Policies) thatthe Fund uses to determine how to vote proxies relating to portfolio securities. Shareholders mayview the Fund’s complete Policies online at franklintempleton.com. Alternatively, shareholders mayrequest copies of the Policies free of charge by calling the Proxy Group collect at (954) 527-7678 orby sending a written request to: Franklin Templeton Companies, LLC, 300 S.E. 2nd Street, FortLauderdale, FL 33301, Attention: Proxy Group. Copies of the Fund’s proxy voting records are alsomade available online at franklintempleton.com and posted on the U.S. Securities and ExchangeCommission’s website at sec.gov and reflect the most recent 12-month period ended June 30.

Quarterly Statement of Investments

The Fund files a complete statement of investments with the U.S. Securities and Exchange Commissionfor the first and third quarters for each fiscal year on Form N-Q. Shareholders may view the filedForm N-Q by visiting the Commission’s website at sec.gov. The filed form may also be viewed andcopied at the Commission’s Public Reference Room in Washington, DC. Information regarding theoperations of the Public Reference Room may be obtained by calling (800) SEC-0330.

Householding of Reports and Prospectuses

You will receive the Fund’s financial reports every six months as well as an annual updated sum-mary prospectus (prospectus available upon request). To reduce Fund expenses, we try to identifyrelated shareholders in a household and send only one copy of the financial reports and summaryprospectus. This process, called “householding,” will continue indefinitely unless you instruct usotherwise. If you prefer not to have these documents householded, please call us at (800) 632-2301.At any time you may view current prospectuses/summary prospectuses and financial reports on ourwebsite. If you choose, you may receive these documents through electronic delivery.


GOF P-1 01/12

SUPPLEMENT DATED JANUARY 3, 2012TO THE CURRENTLY EFFECTIVE PROSPECTUS

OF EACH OF THE LISTED FUNDS

Franklin California Tax-Free Income FundFranklin California Tax-Free TrustFranklin California Insured Tax-FreeIncome FundFranklin California Intermediate-TermTax-Free Income FundFranklin California Tax-Exempt Money FundFranklin Custodian FundsFranklin DynaTech FundFranklin Growth FundFranklin Income FundFranklin U.S. Government Securities FundFranklin Utilities FundFranklin Federal Tax-Free Income FundFranklin Global TrustFranklin Global Real Estate FundFranklin International Growth FundFranklin International Small CapGrowth FundFranklin Large Cap Equity FundFranklin Templeton Emerging Market DebtOpportunities FundFranklin Gold and Precious Metals FundFranklin High Income TrustFranklin High Income FundFranklin Investors Securities TrustFranklin Adjustable U.S. GovernmentSecurities FundFranklin Balanced FundFranklin Convertible Securities FundFranklin Equity Income FundFranklin Floating Rate Daily Access FundFranklin Limited Maturity U.S. GovernmentSecurities FundFranklin Low Duration Total Return FundFranklin Real Return FundFranklin Total Return FundFranklin Managed TrustFranklin Rising Dividends FundFranklin Money FundFranklin Municipal Securities TrustFranklin California High Yield Municipal FundFranklin Tennessee Municipal Bond FundFranklin Mutual Recovery FundFranklin Mutual Series FundsMutual Beacon FundMutual Discovery FundMutual European FundMutual Financial Services FundMutual International FundMutual Quest FundMutual Shares Fund

Franklin New York Tax-Free Income FundFranklin New York Tax-Free TrustFranklin New York Intermediate-TermTax-Free IncomeFranklin Real Estate Securities TrustFranklin Real Estate Securities FundFranklin Strategic Mortgage PortfolioFranklin Strategic SeriesFranklin Biotechnology Discovery FundFranklin Flex Cap Growth FundFranklin Focused Core Equity FundFranklin Growth Opportunities FundFranklin Natural Resources FundFranklin Small-Mid Cap Growth FundFranklin Small Cap Growth FundFranklin Strategic Income FundFranklin Tax-Exempt Money FundFranklin Tax-Free TrustFranklin Alabama Tax-Free Income FundFranklin Arizona Tax-Free Income FundFranklin Colorado Tax-Free Income FundFranklin Connecticut Tax-FreeIncome FundFranklin Double Tax-Free Income FundFranklin Federal Intermediate-TermTax-Free Income FundFranklin Federal Limited-Term Tax-FreeIncome FundFranklin Florida Tax-Free Income FundFranklin Georgia Tax-Free Income FundFranklin High Yield Tax-Free Income FundFranklin Insured Tax-Free Income FundFranklin Kentucky Tax-Free Income FundFranklin Louisiana Tax-Free Income FundFranklin Maryland Tax-Free Income FundFranklin Massachusetts Tax-FreeIncome FundFranklin Michigan Tax-Free Income FundFranklin Minnesota Tax-Free Income FundFranklin Missouri Tax-Free Income FundFranklin New Jersey Tax-Free Income FundFranklin North Carolina Tax-FreeIncome FundFranklin Ohio Tax-Free Income FundFranklin Oregon Tax-Free Income FundFranklin Pennsylvania Tax-FreeIncome FundFranklin Virginia Tax-Free Income Fund

Franklin Templeton Fund Allocator SeriesFranklin Templeton 2015 RetirementTarget FundFranklin Templeton 2025 RetirementTarget FundFranklin Templeton 2035 RetirementTarget FundFranklin Templeton 2045 RetirementTarget FundFranklin Templeton ConservativeAllocation FundFranklin Templeton CorefolioAllocation FundFranklin Templeton Founding FundsAllocation FundFranklin Templeton GrowthAllocation FundFranklin Templeton ModerateAllocation FundFranklin Templeton Global TrustFranklin Templeton Hard Currency FundFranklin Templeton International TrustFranklin India Growth FundFranklin Templeton Global Allocation FundFranklin World Perspectives FundTempleton Foreign Smaller Companies FundFranklin Value Investors TrustFranklin All Cap Value FundFranklin Balance Sheet Investment FundFranklin Large Cap Value FundFranklin MicroCap Value FundFranklin MidCap Value FundFranklin Small Cap Value FundInstitutional Fiduciary TrustMoney Market PortfolioTempleton Developing Markets TrustTempleton Global Investment TrustTempleton Asian Growth FundTempleton BRIC FundTempleton Emerging MarketsBalanced FundTempleton Emerging MarketsSmall Cap FundTempleton Frontier Markets FundTempleton Global Balanced FundTempleton Global Opportunities TrustTempleton Institutional FundsEmerging Markets SeriesForeign Equity SeriesForeign Smaller Companies SeriesGlobal Equity Series

The Prospectus is amended as follows:

I. The paragraph beginning “In considering an investor’s trading patterns…” in the “Exchanging Shares – FrequentTrading Policy” section of the Fund Details is revised as follows:

In considering an investor’s trading patterns, the Fund may consider, among other factors, the investor’s trading historyboth directly and, if known, through financial intermediaries, in the Fund, in other Franklin Templeton funds, in


non-Franklin Templeton mutual funds, or in accounts under common control or ownership (see, for example, “Investmentby asset allocators” in the SAI). The transfer agent may also reject any purchase or redemption request, whether or not itrepresents part of any ongoing trading pattern, if the Fund investment manager or transfer agent reasonably concludesthat the amount of the requested transaction may disrupt or otherwise interfere with the efficient management of theFund’s portfolio. In determining what actions should be taken, the Fund’s transfer agent may consider a variety offactors, including the potential impact of such remedial actions on the Fund and its shareholders. If the Fund is a “fundof funds,” the Fund’s transfer agent may take into account the impact of the trading activity and of any proposed remedialaction on both the Fund and the underlying funds in which the Fund invests.

II. The following replaces the second paragraph of the “Selling Shares – Selling Shares in Writing” section of the Fund Details:

We also may require a signature guarantee when we receive instructions from an agent, not the registered owners; whenyou want to send your proceeds to a bank account that was added or changed on your account within the last 15 days andthe bank and fund accounts have at least one common owner; or when we believe it would protect the Fund againstpotential claims based on the instructions received.

III. The following is added to the “SELLING SHARES” table of the “Selling Shares” section as a third paragraph under “ByElectronic Funds Transfer (ACH)” in the “Selling Shares” table of the Fund Details:

If the bank and Fund accounts have at least one common owner and the bank account was added or changed within thelast 15 days, you may be required to provide written instructions signed by all fund account owners, with a signatureguarantee for each fund account owner.

IV. The paragraph beginning “If you believe there are cumulative quantity discount…” in the “Choosing a Share Class –Sales Charge Reductions and Waivers” section of the Fund Details is replaced with the following:

If you believe there are cumulative quantity discount eligible shares that can be combined with your current purchase toachieve a sales charge breakpoint (for example, shares held in a different broker-dealer’s brokerage account or with a bank or an investment advisor), it is your responsibility to specifically identify those shares to your financial advisor atthe time of your purchase (including at the time of any future purchase). It may be necessary for you to provide yourfinancial advisor with information and records (including account statements) of all relevant accounts invested in theFranklin Templeton Funds. If you have not designated a financial advisor associated with your Franklin Templeton fundshares, it is your responsibility to specifically identify any cumulative quantity discount eligible shares to the Fund’stransfer agent at the time of any purchase.

Please keep this supplement for future reference.

Franklin Templeton FundsLiterature Request. To receive a summary prospectus and/or prospectus, please call us at (800) DIAL BEN/342-5236 or

visit franklintempleton.com. Investors should carefully consider a fund’s investment goals, risks, charges and expenses

before investing. The prospectus contains this and other information. Please carefully read a prospectus before investing.

To ensure the highest quality of service, we may monitor, record and access telephone calls to or from our service

departments. These calls can be identified by the presence of a regular beeping tone.

VALUEFranklin All Cap Value FundFranklin Balance Sheet Investment FundFranklin Large Cap Value FundFranklin MicroCap Value Fund1

Franklin MidCap Value FundFranklin Small Cap Value FundMutual Beacon FundMutual Quest FundMutual Recovery Fund2

Mutual Shares Fund

BLENDFranklin Focused Core Equity FundFranklin Large Cap Equity FundFranklin Rising Dividends Fund

GROWTHFranklin DynaTech FundFranklin Flex Cap Growth FundFranklin Growth FundFranklin Growth Opportunities FundFranklin Small Cap Growth FundFranklin Small-Mid Cap Growth Fund

SECTORFranklin Biotechnology Discovery FundFranklin Global Real Estate FundFranklin Gold & Precious Metals FundFranklin Natural Resources FundFranklin Real Estate Securities FundFranklin Utilities FundMutual Financial Services Fund

GLOBALFranklin World Perspectives FundMutual Global Discovery FundTempleton Global Opportunities TrustTempleton Global Smaller Companies FundTempleton Growth FundTempleton World Fund

1. The fund is closed to new investors. Existing shareholders and select retirement plans cancontinue adding to their accounts.2. The fund is a continuously offered, closed-end fund. Shares may be purchased daily; thereis no daily redemption. However, each quarter, pending board approval, the fund will authorizethe repurchase of 5%–25% of the outstanding number of shares. Investors may tender all ora portion of their shares during the tender period.3. Effective 7/1/11, Templeton Income Fund changed its name to Templeton Global BalancedFund. Additionally, the fund changed its goal and pricing structure. Under normalcircumstances, the fund will invest: at least 25% of its assets in fixed income senior securities

and at least 25% of its assets in equity securities; at least 40% of its assets in non-U.S.investments; and in issuers located in at least three different countries (including the U.S.).4. An investment in the fund is neither insured nor guaranteed by the U.S. government or byany other entity or institution.5. For investors subject to the alternative minimum tax, a small portion of fund dividends maybe taxable. Distributions of capital gains are generally taxable.6. The fund invests primarily in insured municipal securities.7. The funds of the Franklin Templeton Variable Insurance Products Trust are generally availableonly through insurance company variable contracts.

AlabamaArizonaCalifornia (4 funds)ColoradoConnecticutFloridaGeorgiaKentuckyLouisianaMarylandMassachusettsMichigan

MinnesotaMissouriNew JerseyNew York (2 funds)North CarolinaOhioOregonPennsylvaniaTennesseeVirginia

INSURANCE FUNDSFranklin Templeton Variable Insurance Products Trust7

12/11 Not part of the annual report

INTERNATIONALFranklin India Growth FundFranklin International Growth FundFranklin International Small Cap Growth FundMutual European FundMutual International FundTempleton Asian Growth FundTempleton BRIC FundTempleton China World FundTempleton Developing Markets TrustTempleton Emerging Markets Small Cap FundTempleton Foreign FundTempleton Foreign Smaller Companies FundTempleton Frontier Markets Fund

HYBRIDFranklin Balanced FundFranklin Convertible Securities FundFranklin Equity Income FundFranklin Income FundTempleton Emerging Markets Balanced FundTempleton Global Balanced Fund3

ASSET ALLOCATIONFranklin Templeton Corefolio® Allocation FundFranklin Templeton Founding Funds Allocation FundFranklin Templeton Conservative Allocation FundFranklin Templeton Growth Allocation FundFranklin Templeton Moderate Allocation FundFranklin Templeton 2015 Retirement Target FundFranklin Templeton 2025 Retirement Target FundFranklin Templeton 2035 Retirement Target FundFranklin Templeton 2045 Retirement Target FundFranklin Templeton Global Allocation FundFranklin Templeton Multi-Asset Real Return Fund

FIXED INCOMEFranklin Adjustable U.S. Government Securities Fund4

Franklin Floating Rate Daily Access FundFranklin High Income Fund

Franklin Limited Maturity U.S. GovernmentSecurities Fund4

Franklin Low Duration Total Return FundFranklin Real Return FundFranklin Strategic Income FundFranklin Strategic Mortgage PortfolioFranklin Templeton Hard Currency FundFranklin Total Return FundFranklin U.S. Government Securities Fund4

Templeton Global Bond FundTempleton Global Total Return FundTempleton International Bond Fund

TAX-FREE INCOME5

NationalDouble Tax-Free Income FundFederal Tax-Free Income FundHigh Yield Tax-Free Income FundInsured Tax-Free Income Fund6

Limited-/ Intermediate-TermCalifornia Intermediate-Term Tax-Free Income FundFederal Intermediate-Term Tax-Free Income FundFederal Limited-Term Tax-Free Income FundNew York Intermediate-Term Tax-Free Income Fund

State-Specific

< GAIN FROM OUR PERSPECTIVE® >

VALUE BLEND GROWTH SECTOR GLOBAL INTERNAT IONAL HYBRID ASSET ALLOCAT ION F IXED INCOME TAX-FREE INCOME

© 2012 Franklin Templeton Investments. All rights reserved. 476 A 02/12

Annual Report and Shareholder Letter

Mutual Beacon Fund

Investment ManagerFranklin Advisory Services, LLC101 John F. Kennedy ParkwayShort Hills, NJ 07078

DistributorFranklin Templeton Distributors, Inc.(800) DIAL BEN®/342-5236franklintempleton.com

Shareholder Services(800) 632-2301 - (Class A, B, C & R)(800) 448-FUND - (Class Z)

Authorized for distribution only when accompanied or preceded by a summary prospectus and/or prospectus.Investors should carefully consider a fund’s investment goals, risks, charges and expenses before investing. A prospectus contains this and other information; please read it carefully before investing.

To ensure the highest quality of service, telephone calls to or from our service departments may be monitored, recorded and accessed. These calls can be identified by the presence of a regular beeping tone.

mutual beacon fund annual report · 2017-06-24 · not part of the annual report | 3 in 2011 mutual...

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