Update on European Growth Portfolios

Edwin Lugo, CFA¹
Vice President and Portfolio Manager
Franklin Global Advisors

Recent signs of stabilization around the world have rekindled investor confidence, and many major equity indexes rebounded with double-digit gains during April. European stocks outperformed their Asian and U.S. counterparts for the month, a hopeful sign that the economic downturn in Europe may no longer be accelerating. Although the European Union revised its forecast to indicate a deeper and longer recession for the eurozone, an early estimate of eurozone growth pointed to a decelerating contraction in April, as economic sentiment edged higher for the first time in 11 months.

We believe the positive glimmers, along with extremely attractive valuations for many quality European companies, are positioning the region's markets for a rebound. We have been managing FTIF Franklin European Growth Fund and FTIF Franklin European Small-Mid Cap Growth Fund using a bottom-up fundamental process with a long-term view to capture potential market opportunities during all market cycles. Both utilize an investment philosophy centered on companies that have long-term competitive advantages, that maintain strong balance sheets and/or generate cash flow and that are trading at attractive prices. We combine this with a focus on downside risk.

FTIF Franklin European Growth Fund is constructed with 25 to 45 European stocks across all capitalizations. The fund's all-cap mandate allows the portfolio management team the flexibility to invest where the most attractive opportunities are present. As of the end of April, more than one third of the portfolio was invested in companies in the capital goods, diversified financials and retailing industries, with the largest geographic weighting in the United Kingdom.

FTIF Franklin European Small-Mid Cap Growth Fund typically holds 25 to 45 companies in its portfolio with market capitalizations above €100 million and below €8 billion. The managers' goal is to identify overlooked and undervalued small- to medium-sized growth companies poised to become large companies over the long term. As of April, the fund was overweighted in retailers, followed by companies in the diversified financials and capital goods industries. The United Kingdom also represented the largest geographic weighting in this fund.

An example of a European company held by both portfolios is Dignity PLC², a leader in U.K. funeral services. It is the largest private operator of well-placed and profitable funeral homes and cremation facilities in Britain, and it maintains a strong reputation. Dignity has been a quality holding as it produces steady cash flows due to a stable U.K. death rate. This reliability of operating income enables the company to leverage its balance sheet to return cash to shareholders. It expects to expand its operating margins over the next five years through annual price increases and strategic acquisitions. It most recently acquired nine new funeral locations and seven crematoria.

1. CFA® and Chartered Financial Analyst® are registered trademarks owned by the CFA Institute.
   
   
2. Portfolio holdings are subject to change.

Please click for more information on the following funds:

FTIF - Franklin European Growth Fund
FTIF - Franklin European Small-Mid Cap Growth Fund
FTIF - Franklin Global Small-Mid Cap Growth Fund