Mark Mobius, Ph.D.
Executive Chairman, Templeton Asset Management Ltd.

Diversification is one of the best ways to mitigate risk, in our view. Investors who already have reasonable exposure to the major emerging markets around the world may be interested in diversifying into portfolios that invest in companies with smaller market capitalizations, usually below US$2 billion.

Emerging market small-cap stocks tend to have a relatively lower correlation to emerging markets in general, and could therefore be a good option for diversification. In addition, the smaller capitalization and relatively lower liquidity of these stocks may deliver potentially higher returns, albeit with correspondingly higher risk.

Small-cap portfolios give investors the opportunity to benefit from investing in companies that could become tomorrow's large-cap, blue-chip leaders. By investing in the initial stages of a company's development, investors may benefit from significant potential price appreciation.

Despite their high growth potential, smaller companies, in general, are relatively poorly researched, especially those based in frontier markets. We believe this promising but relatively unexplored asset class allows us at Templeton to build on our strengths-our substantial global research capabilities and worldwide on-the-ground presence.

After recent volatility, we are seeing tremendous opportunities to invest in small-cap companies across emerging market regions: Asia, eastern Europe, Africa, and central and South America. Existing large emerging markets such as China, India, Brazil, Russia, Turkey and South Africa provide environments where well-run, small-cap companies can flourish. Many of these emerging markets have robust economic growth, high foreign reserves, low inflation, strong investment and rising domestic demand.

When looking for small-cap companies, we also consider frontier markets, which, although smaller and less developed than their larger counterparts, could in the future grow into tomorrow's emerging markets. Nigeria, Kenya, Kazakhstan, Romania, Vietnam, Sri Lanka, Bangladesh and Ukraine are a few examples of frontier markets where we are currently finding opportunities.

In terms of sectors, investing in small-cap companies gives us access to industries where valuations of larger-cap companies may be too expensive for us. For example, one of our biggest investment themes is consumption: We strongly believe in the growth potential for consumer-related companies, given robust economic growth, large populations, rising per-capita income and increasing demand for consumer products and services in emerging markets. Although we have found it difficult to identify many attractively valued large-cap companies in the consumer sector, we have been coming across a number of opportunities in small-cap companies. Thus, with a small-cap portfolio, we are able to gain more direct exposure to consumer behavior in these markets.

Emerging market small-cap stocks are consistent with Templeton's time-tested philosophy of investing in overlooked and under-researched companies until their intrinsic values are reached. We continue to find interesting opportunities among small-cap stocks, both in lesser-explored frontier markets and in more well-known, larger emerging markets. In our view, valuations continue to be attractive, and we are finding companies with low price/earnings ratios, low price/book values and high dividend yields.

Please click for more information on the following funds:
FTIF - Templeton Asian Growth Fund
FTIF - Templeton Asian Smaller Companies Fund
FTIF - Templeton BRIC Fund
FTIF - Templeton China Fund
FTIF - Templeton Eastern Europe Fund
FTIF - Templeton Emerging Markets Fund
FTIF - Templeton Emerging Markets Smaller Companies Fund
FTIF - Templeton Frontier Markets Fund
FTIF - Templeton Korea Fund
FTIF - Templeton Latin America Fund
FTIF - Templeton Thailand Fund