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CLIENT EDUCATION PROGRAM MATERIALS. NOT FOR PUBLIC DISTRIBUTION.

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Sovereign Fund & Supranational Update

David E. SmartGlobal Head of Sovereign Funds and Supranationals


Background• Franklin Templeton has a history of long term relationships with

Sovereign Funds dating back to the 1970s and with Supranationalsto the 1950s.

• We currently manage and advise on $67 Billion in assets for 19 Sovereign Funds and 7 Supranationals which includes $13 Billion in mandates for 7 Central Banks.1

1. Data as of 31 August 20121

SOVEREIGN FUND & SUPRANATIONALS


Background• In September 2010, we took over the management of Fondul

Proprietatea, the Romanian Government’s property restitution fund valued at approximately $4.4Billion.1 This closed end fund listed on the Bucharest Stock Exchange on 25 January 2011 and represents an attractive way to gain exposure to Romanian infrastructural assets.

• As a pure investment management company, Franklin Templeton is committed to building on its long experience in the sector and has a separate group dedicated to Sovereign Funds, which sits within the firm’s multi-asset strategy group. We can offer tailored advice in a number of areas, whether it be long term strategic allocation for resource rich countries’ Sovereign Funds, or working with Central Banks on seeking to optimize reserve levels.

1. Data as of 31 August 20122



Sovereign Fund: Trends• Large funds continue to shift core equity assets toward passive

strategies but are becoming increasingly imaginative in their search for higher alpha managers, drilling down even to single country emerging markets and considering frontier market allocations. Within passive management there is significant development in the use of alternative or smart beta indices.

• Opportunistic investment in distressed private equity and private real estate in 2009 moving now toward more strategic building of exposures, including Africa, Caribbean and Latin America, as well as developed markets and Asia. Choice of GP remains hugely important.

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The commentary does not provide a complete analysis of every material fact regarding any market, industry, security or fund. Portfolio holdings and opinions expressed are as of the date of the commentary and can change without notice. A manager’s assessment of a particular security or investment is not intended as an investment recommendation; it is only intended to provide insight into the fund’s portfolio selection process.


Sovereign Fund: Trends• Madoff and poor returns in 2008/2009 and 2011 have been big

challenges for hedge funds. Larger sovereign funds with sufficient research resources are shifting towards separate mandates with hedge funds but fund of hedge funds remain the preferred option.

• Commodities – given the resource-linked base of many funds, investing in commodities may not be advisable from a risk standpoint, but for those funds derived from trade surpluses diversification and inflation hedging benefits are clear.

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The commentary does not provide a complete analysis of every material fact regarding any market, industry, security or fund. Portfolio holdings and opinions expressed are as of the date of the commentary and can change without notice. A manager’s assessment of a particular security or investment is not intended as an investment recommendation; it is only intended to provide insight into the fund’s portfolio selection process.


Central Banks: Trends• Concerns about validity of Greenspan/Guidotti rule for adequacy

of reserves—the main problem appears the ability of corporates to build up opaque contingent liabilities in derivative structures via offshore structures. Just like after the Asian crisis the result will likely be a higher level of liquid reserve accumulation before greater risk is taken in seeking to generate higher returns—in some countries however where that higher level has been reached already we have noted a growing trend to invest a part of the reserves in equities and other higher risk/higher return assets, such as Emerging Market Debt.

1. For a helpful discussion see African Development Bank Economic Research Paper no. 70 and International Accounting Standards (IAS) 39 Accounting for Financial Instruments: Implementation Issues and Decision Making Dilemma by Ahmed Bahgat.

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Central Banks: Trends (continued)• Very low nominal interest rates in the US are posing twin

problems1: for those emerging countries with relatively high Treasury Bill rates, the cost of holding or accumulating excess reserves presents a serious interest rate disadvantage, and for investment guidelines designed to ensure capital preservation, the very small increase in rates needed to turn a low duration portfolio’s return negative is a big challenge.

• For the latter allowing negative duration is a potential solution or using “held to maturity” accounting.1

• Diversification of portfolios away from the US Dollar into a number of Asian currencies in particular following developing trade atterns. Most noteworthy is the growing use of onshore Renminbi by Central Banks.

1. For a helpful discussion see African Development Bank Economic Research Paper no 70 and International Accounting Standards (IAS) 39 Accounting for Financial Instruments: Implementation Issues and Decision Making Dilemma by Ahmed Bahgat.

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Presentation Title (Presenter) (Arial Bold, 30 pt)Franklin Templeton Investments

Institutional Client Program

Tactical Allocation in Practice

Samer HablManaging Director, Tactical Allocation


FTMAS Investment SolutionsGlobal Investment Platform with Over 25 Years Experience Managing Multi-Asset/Multi-Strategy Portfolios1

1 Franklin Templeton Multi-Asset Strategies (FTMAS) is a global investment management group dedicated to multi-strategy solutions and is comprised of individuals from various registered entities within FTI. FTMAS was formed in 2007 to combine the research and oversight of all multi-strategy investment solutions offered by FTI. FTMAS invests in various Franklin Templeton investment platforms; AUM for FTMAS is reported under each utilized investment platform, as well as for FTMAS. 2. As of September 30, 2012. Mandates managed by various registered entities within Franklin Templeton Investments. Certain investment professionals from those registered entities comprise FTMAS.

TACTICAL ALLOCATION IN PRACTICE

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FTMAS CapabilitiesBuilding Portfolios that Meet Client Objectives

Global Tactical Asset Allocation

Manager and Fund Research

Strategic Asset Allocation• Long term asset class research • Strategic asset allocation studies• Portfolio optimization

• Tactical asset allocation• Risk management overlay• Portable alpha solutions

• FT & third-party manager research• Fund selection• Fund-of-fund portfolio construction

Strategic Asset

Allocation


Manager and Fund Research


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FTMAS Team StructureA Total of 28 Investment Professionals

Franklin Templeton Multi-Asset Strategies (FTMAS) is a global investment management group dedicated to multi-strategy solutions and is comprised of individuals from various registered entities within Franklin Templeton Investments (FTI). FTMAS was formed in 2007 to combine the research and oversight of all multi-strategy investment solutions offered by FTI. FTMAS invests in various Franklin Templeton investment platforms. CFA® and Chartered Financial Analyst® are trademarks owned by CFA Institute.As of 30 September 2012


Chief Investment OfficerBrent Smith, CFA

Tony Coffey, CFA

Vice President


8 Team Members

Samer Habl, MS

Managing Director

Matthias Hoppe

Vice President

Manager and Asset Research

8 Team Members

Stephen Lingard, CFA

Managing Director

Steven Moeller, CFA

Managing Director

Strategic Asset Allocation

6 Team Members

Tom Nelson, CFA

Managing Director

David Smart

Global HeadSovereign Funds & Supranationals

Strategic Advisory

2 Team Members

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GTAA Investment PhilosophyTactical Asset allocation opportunities exist globally and consistent returns can be generated using:

• A systematic and disciplined process

• Forward Looking Valuations, Macro Economic Analysis, and Short-term Indicators

• Emphasis on short-term and long-term risk management


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Appendix


Important Information

This document has been prepared for circulation to persons reasonably believed to be within one of the professional orqualified investor exemptions contained in the applicable regulations of their jurisdiction or to whom this document mayotherwise lawfully be communicated to give preliminary information about the investment propositions described herein.It is a confidential communication to, and solely for the use of, such persons and is not intended for general publicdistribution.

The description in this document of our investment management service and other matters are general in nature. Theinformation contained in this document is subject to updating, completion, modification and amendment. It should notbe assumed that the approach described will necessarily be followed in a particular case. Such matters will also besubject to any specific arrangements with a particular client.

It is the responsibility of every person receiving a copy of this document to satisfy him or herself as to the fullobservance of laws of any relevant country, including obtaining any government or other consent which may berequired or observing any other formality which needs to be observed in that country. None of the services or othermatters described here should be taken as an offer or solicitation of those services or other matters in any jurisdictionwhere such an offer or solicitation is not permitted under applicable legislation.

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