K2 - An Alternative for Navigating Volatile Markets

As investors, financial markets have been kind to us in recent years. We've seen steady growth in most economies, and positive fundamentals can still be found in many markets. But this could all change in the months and years ahead - US interest rates are on the rise, populist governments are taking power and a trade war is brewing between the United States and China.

The full impact of these issues is currently unknown, so what might help to position your investments for the unpredictable financial market?

When an investment falls in value, it can take a large rise in the share price to overcome the initial loss. If a stock, for example, loses just 1%, it only needs to appreciate by 1.01% to recover all the value it has lost. That doesn't sound like much, but a loss of 20% will require a much higher return of 25%. And a 50% loss - the kind seen during the 2008 to 2009 recession - requires an eye-watering 100% just to get back to even.

One of the key aspects of the Franklin K2 Alternative Strategies Fund is that it has a record of helping manage risk during periods of market volatility. In the weeks of 4 major market events, for example, the fund achieved a lower maximum drawdown than the global equity index in those periods.

Maximum drawdowns during the weeks of major market events1:

  • Franklin K2 Alternative Strategies Fund A (acc) USD
  • MSCI World Index

Past performance is not an indicator or a guarantee of future performance.
The official benchmarks of the Fund are Bank of America ML US 3-Mo. T-Bill Index and HFRX Global Hedge Fund Index.
The MSCI World Index is not the Fund’s benchmark.

Franklin K2 Liquid Alternative Funds* provide a different source of return by investing in a variety of hedge strategies. These hedge strategies - packaged in a familiar mutual-fund format - have the potential to reduce the impact of volatility on your portfolios.

Financial markets are always changing. You may benefit from an investment strategy that can react quickly when the facts on the ground change. The Franklin K2 Alternative Strategies Fund invests in a number of different hedge strategies, which we explain in greater detail below. Using these very different approaches helps us adjust the fund's strategy to take advantage of opportunities, manage risks, and generally create what we believe is the right investment mix for the prevalent financial market conditions.

This flexibility gives investors exposure to four distinct hedge strategies:

Long Short Equity

Makes long and short investments in common stocks and indices***

Relative Value

Intended to profit from pricing inefficiencies.

Event Driven

Invests in securities of companies undergoing corporate events.

Global Macro

Focuses on macroeconomic opportunities.

Adopting to changing market conditions:

Strong Financial Market

Companies actively participate in relative value and long/short opportunities.

Global Financial Downturn

Companies may become cash conscious, resulting in fewer mergers and acquisitions and event driven opportunities.

Market Recovery

As markets stabilise, event-driven opportunities often re-emerge.

Hypothetical investment scenario only. For illustrative purposes only. Actual allocations may vary. Not representative of any Franklin Templeton product’s investment allocation, objective or performance. It is not a recommendation to purchase, sell or hold any particular security. It is neither indicative of any portfolio holdings at any one time nor reflective of current or future portfolio holdings.

An allocation to hedge strategies may reduce risk and increase the potential for higher returns. Hedge-strategy managers can manage both risk and opportunity, which has historically led to greater risk-adjusted performance when compared to a broad global equity or fixed income benchmark.

20-Year Period Ending 30 September 20182

  • Hedge Strategy
  • Equity
  • Fixed Income

Past performance is not an indicator or a guarantee of future performance.
For illustrative purposes only; not representative of any Franklin Templeton or K2 Fund performance or portfolio composition.

Historically, hedge strategy managers' ability to manage both opportunities and risks has generally led to a performance benefit when compared to a broad global equity benchmark. Over the past 10 years, if we compare the HFRI Fund Weighted Composite Index, which represents hedge strategies, and the MSCI World Index, representing global equities, we can see that hedge strategies have generated positive alpha 63% of the time.

Hedge Strategies Ability to Manage Opportunities and Risks Historically Helped Performance3

α>0 63% of the time over the past 10 years

  • Alpha (>0)
  • 10-Year Average

Past performance is not an indicator or a guarantee of future performance.
For illustrative purposes only.

Next Steps

For more information:

Fund Factsheet


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Franklin K2 Alternative Strategies Fund Details


FUND DETAILS

To invest in the fund or find out more, you can speak to a relationship manager at any of our participating distributors:

K2 Advisors4 - A Trusted, Experienced Investment Partner

Franklin K2 Alternative Strategies Fund is advised by K2 Advisors, an investment group with 24 years' experience in hedge strategy investing. Over its history, K2 has grown into one of the largest advisors of multi-manager portfolios, offering a range of alternative solutions to its client base.

  • $11.8 billion in assets under management (AUM)
  • Investments in approximately 90 managers across the full spectrum of hedge strategies
  • A pioneer in obtaining transparent holdings information from hedge strategies
  • 39 investment professionals worldwide
  • The ability to assist clients in all aspects of hedge strategy investing

*The “Franklin K2 Liquid Alternative Funds” is a collective term used to reference Franklin K2 Alternative Strategies Fund, Franklin K2 Long Short Credit Fund and Franklin K2 Global Macro Opportunities Fund, all being sub-funds of the Luxembourg-domiciled Franklin Templeton Investment Funds. For the avoidance of doubt, the Franklin K2 Liquid Alternative Funds are not hedge funds and shall not be marketed as hedge funds.

**Target Allocations reflect end of period target allocations. The Fund may shift allocations among strategies at any time. Further, K2 may determine in its sole discretion to not allocate to one or more of the strategies and/or to add new strategies. Accordingly the above target allocations are presented for illustrative purposes only, and should not be viewed as predictive of the ongoing composition of the fund’s portfolio (and its managers), which may change at any time.

Weightings as percent of invested capital into fund managers (sub-advisors or co-managers). Percentage may not total 100% due to rounding. Manager allocation includes managers that have been appointed as sub-advisors or managers of investment funds. K2 may determine in its sole discretion not to allocate to one or more of the managers and/or to add new managers. Accordingly, the manager allocation is presented for illustrative purposes only, and should not be viewed as predictive of the ongoing composition of the Fund's portfolio, which may change at any time.

***Long/short equity is an investing strategy that takes long positions in stocks that are expected to appreciate and short positions in stocks that are expected to decline. A long/short equity strategy seeks to minimize market exposure, while profiting from stock gains in the long positions, along with price declines in the short positions.

Footnotes:

  1. Source: MSCI, as of 30 September 2018. The benchmark provided for additional performance and risk comparisons are for informational purposes only; the fund manager does not intend for the portfolio to track them. MSCI World Index is provided as an equity benchmark for risk statistics comparison. © 2018 Morningstar, Inc. All rights reserved. The information contained herein:
    (1) is proprietary to Morningstar;
    (2) may not be copied or distributed; and
    (3) is not warranted to be accurate, complete or timely.
    Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information.
    The drawdowns chart represents the cumulative max drawdowns for the Fund and the index. The drawdowns are continuously calculated and represent the peak-to-trough loss attained for each particular drawdown period.
  2. Source: FactSet, Barclays, HFR, and MSCI. For the 20-year period ended 30 September 2018. Important data provider notices and terms available at www.franklintempletondatasources.com. Hedge Strategy is represented by HFRI Fund Weighted Composite Index; Equity by MSCI World Index; Fixed Income by Bloomberg Barclays Global Aggregate Index. Measures the respective HFR Benchmark Index's average rolling three-year volatilities and betas (compared against the MSCI World Index). Volatility is defined as standard deviation of monthly returns. Beta is a measure of the magnitude of the respective HFR Benchmark Index's past price fluctuations in relation to the ups and downs of the overall market (in these examples, the MSCI World Index). The overall market is assigned a beta of 1.00, so a benchmark with a beta of 1.20 when being compared to the overall market would have seen its price rise or fall by 12% when the overall market rose or fell by 10%. Past performance is not an indicator or a guarantee of future performance. Indices are unmanaged and one cannot invest directly in an index. They do not reflect any fees, expenses or sales charges. Unlike most asset class indexes, HFR Index returns reflect any fees and expenses. HFR Benchmark Index beta and volatility are for illustrative purposes only and are not representative of the funds' beta and volatility.
  3. Sources: FactSet, HFR and MSCI as of 30 September 2018. Represents rolling one year alpha of HFRI Fund Weighted Composite Index benchmarked against the MSCI World Index. Alpha, in this illustration, is the annual percentage difference between a benchmark's (HFRI Fund Weighted Composite Index) actual returns and its expected performance given its level of market risk, as measured by beta to the MSCI World Index. Past performance is not an indicator nor a guarantee of future performance. Chart is for illustrative purposes only and not representative of Franklin K2 Alternative Strategies Fund’s portfolio composition or performance. Indices are unmanaged and one cannot invest directly in an index. They do not reflect any fees, expenses or sales charges. Unlike most asset class indexes, HFR Index returns reflect any fees and expenses.
  4. As of 1 August 2018

WHAT ARE THE KEY RISKS?

Franklin K2 Alternative Strategies Fund

The value of shares in the Fund and income received from it can go down as well as up and investors may not get back the full amount invested. Performance may also be affected by currency fluctuations. Currency fluctuations may affect the value of overseas investments. The Fund seeks to achieve its targeted investment objective by allocating its assets across multiple “alternative” strategies and by investing in a wide range of assets. Such assets and investment instruments have historically been subject to price movements due to such factors as general stock market volatility, sudden changes in interest rates, or fluctuations in commodity prices. The Fund will seek to limit volatility using hedged strategies. As a result, the performance of the Fund can fluctuate moderately over time. Credit risk: the risk of loss arising from default that may occur if an issuer fails to make principal or interest payments when due. This risk is higher if the Fund holds low-rated, non-investment-grade securities. Currency risk: the risk of loss arising from exchange-rate fluctuations or due to exchange control regulations. Derivatives risk: the risk of loss in an instrument where a small change in the value of the underlying investment may have a larger impact on the value of such instrument. Derivatives may involve additional liquidity, credit and counterparty risks. Liquidity risk: the risk that arises when adverse market conditions affect the ability to sell assets when necessary. Reduced liquidity may have a negative impact on the price of the assets. Operational risk: the risk of losses resulting from errors or failures arising from the people, systems, service providers or processes upon which the Fund depends. Targeted return risk: there is no guarantee that the Fund will achieve its targeted objective. The Fund seeks to achieve its returns over a full market cycle to achieve a positive return. Capital invested in the Fund may decline in value. For full details of all of the risks applicable to this Fund, please refer to the “Risk Considerations” section of the Fund in the current prospectus of Franklin Templeton Investment Funds.

Other significant risks include: credit risk, derivatives risk, liquidity risk, operational risk, targeted return risk. For full details of all of the risks applicable to this Fund, please refer to the “Risk Considerations” section of the Fund in the current prospectus of Franklin Templeton Investment Funds.

Important Information

This advertisement or publication has not been reviewed by the Monetary Authority of Singapore.

This web page is for information only and does not constitute investment advice or a recommendation and was prepared without regard to the specific objectives, financial situation or needs of any particular person who may receive it
. Any research and analysis contained in this web page has been procured by Franklin Templeton Investments for its own purposes and may be acted upon in that connection and, as such, is provided to you incidentally. Any views expressed are the views of the fund manager and do not constitute investment advice. The underlying assumptions and these views are subject to change. Franklin Templeton Investments accepts no liability whatsoever for any direct or indirect consequential loss arising from the use of any information, opinion or estimate herein. The value of investments and the income from them can go down as well as up and you may not get back the full amount that you invested.

Any prediction, projection or forecast on the economy, stock market, bond market or the economic trends of the markets is not necessarily indicative of the future or likely performance. Past performance or any prediction or forecast is not necessarily indicative of future performance of the funds. Subscriptions may only be made on the basis of the most recent Prospectus and Product Highlights Sheet which is available at Templeton Asset Management Ltd or our authorised distributors. Potential investor should read the details of the Prospectus and Product Highlights Sheet before deciding to subscribe for or purchase the funds. This shall not be construed as the making of any offer or invitation to anyone in any jurisdiction in which such offer is not authorised or in which the person making such offer is not qualified to do so or to anyone to whom it is unlawful to make such an offer. In particular, these funds are not available to U.S. Persons and Canadian residents.

The funds may use financial derivative instruments which entail specific risks more fully described in the Fund’s Prospectus.

Investors may wish to seek advice from a financial adviser before making a commitment to invest in shares of the funds. In the event an investor chooses not to seek advice from a financial adviser, he/she should consider whether the funds are suitable for him/her.

Copyright © 2019 Franklin Templeton Investments. All rights reserved. Issued by Templeton Asset Management Ltd. Registration No. (UEN) 199205211E.