FRANKLIN TEMPLETON INVESTMENT FUNDS SOCIÉTÉ D'INVESTISSEMENT À CAPITAL VARIABLE UNAUDITED SEMI-ANNUAL REPORT R.C.S. B35177 DECEMBER 31, 2011 FRANKLIN TEMPLETON INTERNATIONAL SERVICES S.A. 26, boulevard Royal L-2449 Luxembourg Tel: (352) 46 66 67 1 Fax: (352) 46 66 76 FTIF AR RGBR 12/11 FRANKLIN TEMPLETON INVESTMENT FUNDS société d’investissement à capital variable UNAUDITED SEMI-ANNUAL REPORT FOR THE PERIOD ENDED DECEMBER 31, 2011 This report shall not constitute an offer or a solicitation of an offer to buy shares of Franklin Templeton Investment Funds (the ‘‘Company’’). Subscriptions are to be made on the basis of the current Explanatory Memorandum and its addenda accompanied by a copy of the latest available audited report and, if published thereafter, the latest unaudited semi-annual report. 2 Unaudited Semi-Annual Report www.franklintempleton.lu www.franklintempleton.lu Unaudited Semi-Annual Report 3 Contents General Information 3 Report of the Investment Managers 5 Fund Performance 6 Statement of Net Assets 8 Statement of Operations and Changes in Net Assets 20 Statistical Information 32 Notes to the Financial Statements 45 Franklin Asian Flex Cap Fund 72 Franklin Biotechnology Discovery Fund 74 Franklin Euroland Core Fund 76 Franklin European Core Fund 78 Franklin European Dividend Fund 80 Franklin European Growth Fund 82 Franklin European Small-Mid Cap Growth Fund 83 Franklin Global Growth Fund 85 Franklin Global Real Estate Fund 87 Franklin Global Small-Mid Cap Growth Fund 89 Franklin Gold and Precious Metals Fund 91 Franklin High Yield Fund 93 Franklin Income Fund 97 Franklin India Fund 102 Franklin MENA Fund 104 Franklin Natural Resources Fund 106 Franklin Real Return Fund 109 Franklin Strategic Income Fund 111 Franklin Technology Fund 120 Franklin U.S. Dollar Liquid Reserve Fund 122 Franklin U.S. Equity Fund 123 Franklin U.S. Focus Fund 125 Franklin U.S. Government Fund 126 Franklin U.S. Low Duration Fund 127 Franklin U.S. Opportunities Fund 132 Franklin U.S. Small-Mid Cap Growth Fund 134 Franklin U.S. Total Return Fund 136 Franklin World Perspectives Fund 142 Franklin Mutual Beacon Fund 148 Franklin Mutual Euroland Fund 152 Franklin Mutual European Fund 154 Franklin Mutual Global Discovery Fund 157 Franklin Templeton Global Allocation Fund 161 Franklin Templeton Global Equity Strategies Fund 167 Franklin Templeton Global Fundamental Strategies Fund 172 Franklin Templeton Global Growth And Value Fund 180 Franklin Templeton Japan Fund 184 Templeton Asian Bond Fund 187 Templeton Asian Growth Fund 189 Templeton Asian Smaller Companies Fund 191 Templeton Bric Fund 193 Templeton China Fund 195 Templeton Eastern Europe Fund 198 Templeton Emerging Markets Fund 200 Templeton Emerging Markets Balanced Fund 203 Templeton Emerging Markets Bond Fund 205 Templeton Emerging Markets Smaller Companies Fund 209 Templeton Euro Government Bond Fund 212 Templeton Euro High Yield Fund 213 Templeton Euro Liquid Reserve Fund 216 Templeton Euro Short Term Money Market Fund 217 Templeton Euroland Fund 218 Templeton European Fund 220 Templeton European Corporate Bond Fund 223 Templeton European Total Return Fund 225 Templeton Frontier Markets Fund 227 Templeton Global Fund 230 Templeton Global (Euro) Fund 233 Templeton Global Aggregate Bond Fund 236 Templeton Global Balanced Fund 238 Templeton Global Bond Fund 242 Templeton Global Bond (Euro) Fund 246 Templeton Global Equity Income Fund 248 Templeton Global High Yield Fund 250 Templeton Global Income Fund 255 Templeton Global Smaller Companies Fund 261 Templeton Global Total Return Fund 264 Templeton Growth (Euro) Fund 272 Templeton Korea Fund 276 Templeton Latin America Fund 277 Templeton Thailand Fund 279 Templeton U.S. Value Fund 280 Franklin Templeton Investments Office Directory 282 FRANKLIN TEMPLETON INVESTMENT FUNDS All the Funds marked with “★” above are currently not authorised for public distribution in Hong Kong and are not available to Hong Kong investors. 2 Unaudited Semi-Annual Report www.franklintempleton.lu www.franklintempleton.lu Unaudited Semi-Annual Report 3 société d’investissement à capital variable 26, boulevard Royal, L-2449 Luxembourg, Grand-Duchy of Luxembourg (Registered with the registre de commerce et des sociétés, Luxembourg, under number B 35 177) G I (  D , ) BOARD OF DIRECTORS Chairman The Honorable Nicholas F. Brady Chairman and Chief Executive Ofcer CHOPTANK PARTNERS, INC. 16 North Washington Street Easton, MD 21601, U.S.A. Directors Duke of Abercorn KG Director TITANIC QUARTER Barons Court Omagh BT78 4EZ, Northern Ireland, U.K. Vijay C. Advani Executive Vice President-Global Advisory Services FRANKLIN RESOURCES, INC. One Franklin Parkway San Mateo, CA 94403-1906, U.S.A. Richard H. Frank Chief Executive Ofcer DARBY OVERSEAS INVESTMENTS, LTD 1133 Connecticut Avenue, NW, Suite 400 Washington DC 20036, U.S.A. Mark G. Holowesko President HOLOWESKO PARTNERS LTD Shipston House Box N-7776, West Bay Street, Lyford Cay, Nassau, Bahamas James J. K. Hung President and Chief Executive Officer ASIA SECURITIES GLOBAL LTD Room 63, 21st floor, New World Tower 1 18 Queen’s Road, Central Hong Kong Gregory E. Johnson President and Chief Executive Officer FRANKLIN RESOURCES, INC. One Franklin Parkway San Mateo, CA 94403-1906, U.S.A. Geoffrey A. Langlands Managing Partner LANGLANDS CONSULTORIA Ltda Avenida das Américas 500 Bloco 6, Sala 227 (Downtown) Rio de Janeiro – RJ CEP 22640-100, Brazil Gregory E. McGowan Executive Vice President and General Counsel TEMPLETON WORLDWIDE, INC. 300 S.E. 2 nd Street, 11 th Floor Fort Lauderdale, FL 33301, U.S.A. Dr J. B. Mark Mobius Executive Chairman TEMPLETON’S EMERGING MARKETS GROUP 7 Temasek Boulevard, # 38-03 Suntec Tower One Singapore 038987 David E. Smart Director and Co-Chief Executive Officer FRANKLIN TEMPLETON INVESTMENT MANAGEMENT LIMITED The Adelphi Building, 1-11 John Adam Street London WC2N 6HT, England, U.K. The Honourable Trevor G. Trefgarne Chairman ENTREPRISE GROUP LIMITED 11 High Street Accra, Ghana CONDUCTING OFFICERS: William Lockwood 26, boulevard Royal, L-2449 Luxembourg Grand-Duchy of Luxembourg Denise Voss 26, boulevard Royal, L-2449 Luxembourg Grand-Duchy of Luxembourg REGISTERED OFFICE: 26, boulevard Royal, L-2449 Luxembourg Grand-Duchy of Luxembourg PRINCIPAL DISTRIBUTOR: TEMPLETON GLOBAL ADVISORS LIMITED P.O. Box N-7759, Lyford Cay, Nassau, Bahamas INVESTMENT MANAGERS: FRANKLIN TEMPLETON INVESTMENT MANAGEMENT LIMITED 5 Morrison Street Edinburgh EH3 8BH, Scotland U.K. Franklin Templeton Investment Management Limited manages the following Funds: Franklin Euroland Core Fund; Franklin European Core Fund; Franklin European Growth Fund*; Franklin European Dividend Fund; Franklin Templeton Global Allocation Fund¶ Franklin Templeton Global Equity Strategies Fund*** Franklin Templeton Global Fundamental Strategies Fund† Franklin World Perspectives Fund****; Templeton Euro Government Bond Fund; Templeton Euro High Yield Fund**; Templeton Euro Liquid Reserve Fund; Templeton Euro Short Term Money Market Fund; Templeton Euroland Fund; Templeton European Corporate Bond Fund‡; Templeton European Fund; Templeton European Total Return Fund**; Templeton Global Aggregate Bond Fund; Templeton Global Balanced Fund**; Templeton Global Equity Income Fund; Templeton Global Fund; and Templeton Global (Euro) Fund. * Franklin Templeton Investment Management Limited has been appointed as Co- Investment Manager of this Fund, together with Franklin Templeton Institutional LLC. ** Franklin Templeton Investment Management Limited has been appointed as Co- Investment Manager of these Funds, together with Franklin Advisers, Inc. *** Franklin Templeton Investment Management Limited has been appointed as Co- Investment Manager of this Fund, together with (i) Franklin Advisers, Inc., (ii) Franklin Mutual Advisers, LLC (iii) Templeton Asset Management Limited and (iv) Templeton Global Advisors Limited. **** Franklin Templeton Investment Management Limited has been selected and appointed by the lead Investment Manager Franklin Advisers, Inc. as Co-Investment Manager of this Fund together with (i) Franklin Templeton Investments Corp., (ii) Franklin Templeton Investments Japan Limited, (iii) Franklin Templeton Investimentos (Brasil) Ltda.and (iv) Franklin Templeton Investment Trust Management Co. Limited. ‡ Franklin Templeton Investment Management Limited has been appointed as Co- Investment Manager for this Fund, together with (i) Franklin Templeton Institutional LLC and (ii) Franklin Advisers, Inc. ¶ Franklin Templeton Investments Management Limited has been appointed as Co- Investment Manager of this Fund, together with (i) Franklin Mutual Advisers LLC, (ii) Franklin Templeton Institutional LLC, (iii) Templeton Asset Management Limited, (iv) Templeton Global Advisors Limited, (v) Templeton Investment Counsel LLC and (vi) Franklin Advisers, Inc. † Franklin Templeton Investment Management Limited has been appointed as Co- Investment Manager for this Fund, together with (i) Franklin Advisers, Inc., (ii) Templeton Global Advisors Limited and (iii) Franklin Mutual Advisers, LLC. TEMPLETON ASSET MANAGEMENT LIMITED 7 Temasek Boulevard # 38-03 Suntec Tower One Singapore 038987 Templeton Asset Management Limited manages the following Funds: Franklin Templeton Global Allocation Fund* Franklin Templeton Global Equity Strategies Fund**; Templeton Asian Growth Fund; Templeton Asian Smaller Companies Fund; Templeton BRIC Fund; Templeton China Fund; Templeton Eastern Europe Fund; Templeton Emerging Markets Fund; Templeton Emerging Markets Balanced Fund†; Templeton Emerging Markets Smaller Companies Fund; Templeton Frontier Markets Fund; Templeton Korea Fund; Templeton Latin America Fund; and Templeton Thailand Fund. * Templeton Asset Management Limited has been appointed as Co-Investment Manager of this Fund, together with (i) Franklin Mutual Advisers LLC, (ii) Franklin Templeton Institutional LLC, (iii) Franklin Advisers, Inc, (iv) Templeton Global Advisors Limited, (v) Templeton Investment Counsel LLC and (vi) Franklin Templeton Investment Management Limited. ** Templeton Asset Management Limited has been appointed as Co-Investment Manager of this Fund, together with (i) Franklin Advisers, Inc., (ii) Franklin Mutual Advisers, LLC, (iii) Franklin Templeton Investment Management Limited and (iv) Templeton Global Advisors Limited. † Templeton Asset Management Limited has been appointed as Co-Investment Manager of this Fund, together with Franklin Advisers, Inc. FRANKLIN ADVISERS, INC. One Franklin Parkway San Mateo, CA 94403-1906, U.S.A. Franklin Advisers, Inc. manages the following Funds: Franklin Asian Flex Cap Fund; Franklin Biotechnology Discovery Fund; Franklin Gold and Precious Metals Fund; Franklin High Yield Fund; Franklin Income Fund; Franklin India Fund; Franklin MENA Fund; Franklin Natural Resources Fund; Franklin Real Return Fund; Franklin Strategic Income Fund; Franklin Technology Fund; Franklin Templeton Global Allocation Fund; (co-managed Ω) Franklin Templeton Global Equity Strategies Fund**; Franklin Templeton Global Fundamental Strategies Fund‡; Franklin World Perspectives Fund¶; Franklin U.S. Dollar Liquid Reserve Fund; Franklin U.S. Equity Fund; Franklin U.S. Focus Fund; Franklin U.S. Government Fund; Franklin U.S. Opportunities Fund; Franklin U.S. Small-Mid Cap Growth Fund; Franklin U.S. Total Return Fund; Franklin U.S. Low Duration Fund; Templeton Asian Bond Fund; Templeton Emerging Markets Balanced Fund**** FRANKLIN TEMPLETON INVESTMENT FUNDS FRANKLIN TEMPLETON INVESTMENT FUNDS 4 Unaudited Semi-Annual Report www.franklintempleton.lu www.franklintempleton.lu Unaudited Semi-Annual Report 5 Templeton Emerging Markets Bond Fund; Templeton Euro High Yield Fund*; Templeton European Corporate Bond Fund***; Templeton European Total Return Fund*; Templeton Global Balanced Fund*; Templeton Global Bond Fund; Templeton Global Bond (Euro) Fund; Templeton Global High Yield Fund; Templeton Global Income Fund†; and Templeton Global Total Return Fund. * Franklin Advisers, Inc. has been appointed as Co-Investment Manager of these Funds, together with Franklin Templeton Investment Management Limited. ** Franklin Advisers, Inc. has been appointed as Co-Investment Manager of this Fund, together with (i) Franklin Mutual Advisers, LLC, (ii) Templeton Asset Management Limited, (iii) Franklin Templeton Investment Management Limited and (iv) Templeton Global Advisors Limited. *** Franklin Advisers, Inc. has been appointed as Co-Investment Manager of this Fund, together with (i) Franklin Templeton Investment Management Limited and (ii) Franklin Templeton Institutional LLC. ****Franklin Advisers, Inc. has been appointed as Co-Investment Manager of this Fund, together with Templeton Asset Management Limited. ‡ Franklin Advisers, Inc. has been appointed as Co-Investment Manager of this Fund, together with (i) Franklin Mutual Advisers, LLC, (ii) Franklin Templeton Investment Management Limited and (iii) Templeton Global Advisors Limited. ¶ Franklin Advisers, Inc. has been appointed as lead Investment Manager of this Fund and has selected and appointed as Co-Investment Managers (i) Franklin Templeton Investments Corp., (ii) Franklin Templeton Investments Japan Limited, (iii) Franklin Templeton Investimentos (Brasil) Ltda., (iv) Franklin Templeton Investment Management Limited and (v) Franklin Templeton Investment Trust Management Co. Limited. † Franklin Advisers, Inc. has been appointed as Co-Investment Manager of this Fund, together with Templeton Global Advisors Limited. Ω Franklin Advisers, Inc. has been appointed as Co-Investment Manager of this Fund, together with (i) Franklin Mutual Advisers LLC, (ii) Franklin Templeton Institutional LLC, (iii) Templeton Asset Management Limited, (iv) Templeton Global Advisors Limited, (v) Templeton Investment Counsel LLC and (vi) Franklin Templeton Investment Management Limited. FRANKLIN TEMPLETON INSTITUTIONAL LLC 600 Fifth Avenue, New York, NY 10020, U.S.A. Franklin Templeton Institutional LLC manages the following Funds: Franklin European Growth Fund**; Franklin European Small-Mid Cap Growth Fund; Franklin Global Growth Fund; Franklin Global Real Estate Fund; Franklin Global Small-Mid Cap Growth Fund; Franklin Templeton Global Allocation Fund* Franklin Templeton Global Growth and Value Fund; and Templeton European Corporate Bond Fund***. * Franklin Templeton Institutional LLC has been appointed as Co-Investment Manager of this Fund, together with (i) Franklin Mutual Advisers LLC, (ii) Franklin Advisers, Inc., (iii) Templeton Asset Management Limited, (iv) Templeton Global Advisors Limited, (v) Templeton Investment Counsel LLC and (vi) Franklin Templeton Investment Management Limited. ** Franklin Templeton Institutional LLC has been appointed as Co-Investment Manager of this Fund, together with Franklin Templeton Investment Management Limited. *** Franklin Templeton Institutional LLC has been appointed as Co-Investment Manager of this Fund, together with (i) Franklin Templeton Investment Management Limited and (ii) Franklin Advisers, Inc. TEMPLETON GLOBAL ADVISORS LIMITED P.O. Box N-7759 Lyford Cay, Nassau, Bahamas Templeton Global Advisors Limited manages the following Funds: Franklin Templeton Global Equity Strategies Fund*; Franklin Templeton Global Allocation Fund**; Franklin Templeton Global Fundamental Strategies Fund†; Templeton Global Income Fund***. and Templeton Growth (Euro) Fund. * Templeton Global Advisors Limited has been appointed as Co-Investment Manager of this Fund, together with (i) Franklin Mutual Advisers, LLC, (ii) Templeton Asset Management Limited, (iii) Franklin Templeton Investment Management Limited and (iv) Franklin Advisers, Inc. ** Templeton Global Advisors Limited has been appointed as Co-Investment Manager of this Fund, together with (i) Franklin Mutual Advisers LLC, (ii) Franklin Advisers, Inc., (iii) Templeton Asset Management Limited, (iv) Franklin Templeton Institutional LLC., (v) Templeton Investment Counsel LLC and (vi) Franklin Templeton Investment Management Limited. *** Templeton Global Advisers Limited has been appointed as Co-Investment Manager of this Fund, together with Franklin Advisers Inc. † Templeton Global Advisors Limited has been appointed as Co-Investment Manager of this Fund, together with (i) Franklin Mutual Advisers, LLC, (ii) Franklin Templeton Investment Management Limited and (iii) Franklin Advisers, Inc. FRANKLIN TEMPLETON INVESTMENTS CORP. 200 King Street West, Suite 1500, Toronto Ontario M5H 3T4, Canada Franklin Templeton Investments Corp. manages the following Funds: Franklin World Perspectives Fund*; Templeton Global Smaller Companies Fund, and Templeton U.S. Value Fund. * Franklin Templeton Investments Corp. has been selected and appointed by the lead Investment Manager Franklin Advisers, Inc. as Co-Investment Manager of this Fund together with (i) Franklin Advisers, Inc., (ii) Franklin Templeton Investments Japan Limited, (iii) Franklin Templeton Investimentos (Brasil) Ltda., (iv) Franklin Templeton Investment Management Limited and (v) Franklin Templeton Investment Trust Management Co. Limited. FRANKLIN MUTUAL ADVISERS, LLC 101 John F. Kennedy Parkway Short Hills, NJ 07078-2789, U.S.A Franklin Mutual Advisers, LLC manages the following Funds: Franklin Mutual Beacon Fund; Franklin Mutual Euroland Fund; Franklin Mutual European Fund; Franklin Mutual Global Discovery Fund; Franklin Templeton Global Allocation Fund* Franklin Templeton Global Equity Strategies Fund†; and Franklin Templeton Global Fundamental Strategies Fund‡. * Franklin Mutual Advisers LLC has been appointed as Co-Investment Manager of this Fund, together with (i) Franklin Advisers, Inc., (ii) Franklin Templeton Institutional LLC, (iii) Templeton Asset Management Limited, (iv) Templeton Global Advisors Limited, (v) Templeton Investment Counsel LLC and (vi) Franklin Templeton Investment Management Limited. † Franklin Mutual Advisers, LLC has been appointed as Co-Investment Manager of this Fund, together with (i) Franklin Advisers, Inc., (ii) Templeton Asset Management Limited, (iii) Franklin Templeton Investment Management Limited and (iv) Templeton Global Advisors Limited. ‡ Franklin Mutual Advisers, LLC has been appointed as Co-Investment Manager of this Fund, together with (i) Franklin Advisers, Inc., (ii) Templeton Global Advisors Limited and (iii) Franklin Templeton Investment Management Limited. FRANKLIN TEMPLETON INVESTMENTS JAPAN LIMITED Kanematsu Building, 6th Floor 14-1, Kyobashi 2 – chome Chuo-Ku, Tokyo, Japan Franklin Templeton Investments Japan Limited manages the following Funds: Franklin World Perspectives Fund*; and Franklin Templeton Japan Fund. * Franklin Templeton Investments Japan Limited has been selected and appointed by the lead Investment Manager Franklin Advisers, Inc. as Co-Investment Manager of this Fund together with (i) Franklin Templeton Investments Corp., (ii) Franklin Templeton Investimentos (Brasil) Ltda., (iii) Franklin Templeton Investment Management Limited and (iv) Franklin Templeton Investment Trust Management Co. Limited. FRANKLIN TEMPLETON INVESTIMENTOS (Brasil) Ltda. Avenue Brigadeiro Faria Lima 3311, 5o andar, São Paulo 04538-133, Brazil Franklin Templeton Investimentos (Brasil) Ltda manages the following Fund: Franklin World Perspectives Fund*. * Franklin Templeton Investimentos (Brasil) Ltda. has been selected and appointed by the lead Investment Manager Franklin Advisers, Inc. as Co-Investment Manager of this Fund together with (i) Franklin Templeton Investments Corp., (ii) Franklin Templeton Investments Japan Limited, (iii) Franklin Templeton Investment Management Limited and (iv) Franklin Templeton Investment Trust Management Co. Limited. FRANKLIN TEMPLETON INVESTMENT TRUST MANAGEMENT CO. LIMITED 12 Youido-dong, Youngdungpo-gu, Seoul, Korea Franklin Templeton Investment Trust Management Co. Limited manages the following Fund: Franklin World Perspectives Fund*. * Franklin Templeton Investment Trust Management Co. Limited has been selected and appointed by the lead Investment Manager Franklin Advisers, Inc. as Co-Investment Manager of this Fund together with (i) Franklin Templeton Investments Corp., (ii) Franklin Templeton Investments Japan Limited, (iii) Franklin Templeton Investimentos (Brasil) Ltda. (iv) Franklin Templeton Investment Management Limited and.(v) Templeton International Counsel LLC. TEMPLETON INVESTMENT COUNSEL, LLC 300 Southeast 2nd Street Ft. Lauderdale, FL33301, U.S.A. Templeton Investment Counsel, LLC manages the following Fund: Franklin Templeton Global Allocation Fund*. * Templeton Investment Counsel LLC has been appointed as Co-Investment Manager of this Fund, together with (i) Franklin Mutual Advisers LLC, (ii) Franklin Templeton Institutional LLC, (iii) Templeton Asset Management Limited, (iv) Templeton Global Advisors Limited, (v) Franklin Advisers, Inc. and (vi) Franklin Templeton Investment Management Limited. CUSTODIAN, LISTING AGENT AND PRINCIPAL PAYING AGENT: J.P. MORGAN BANK LUXEMBOURG S.A. European Bank and Business Centre 6 Route de Trèves, L-2633 Senningerberg Grand-Duchy of Luxembourg REGISTRAR AND TRANSFER, CORPORATE, DOMICILIARY AND ADMINISTRATIVE AGENT: FRANKLIN TEMPLETON INTERNATIONAL SERVICES S.A. 26, boulevard Royal, L-2449 Luxembourg Grand-Duchy of Luxembourg AUDITOR: PRICEWATERHOUSECOOPERS S.à r.l. 400, route d’Esch, B.P. 1443, L-1014 Luxembourg Grand-Duchy of Luxembourg LEGAL ADVISERS: ELVINGER, HOSS & PRUSSEN 2, place Winston Churchill, B.P. 425, L-2014 Luxembourg Grand-Duchy of Luxembourg G I (  D , ) () FRANKLIN TEMPLETON INVESTMENT FUNDS 4 Unaudited Semi-Annual Report www.franklintempleton.lu www.franklintempleton.lu Unaudited Semi-Annual Report 5 R   I M The six months under review continued to be dominated by sovereign debt concerns in Europe. As for the European economy, growth was tepid at best, and several market participants feared that the region might tumble into recession in early 2012. Europe’s weakness and mounting domestic economic problems has led to a slowdown in growth in Asia, especially China, and in other parts of the world. Tellingly, Brazil’s economy registered no quarterly growth in gross domestic product for the third quarter of 2011. In India, as in Brazil, slowing growth together with still-elevated inflation has generated fears of a period of “stagflation”. At the same time, although the U.S. economy grew by just 1.8% in the third quarter of 2011, data indicators in the U.S. suggested some improvement in economic prospects there. Improvements in the macroeconomic picture, combined with U.S. corporations’ solid earnings and strong cash balances meant that, in a generally lackluster period for global stocks, U.S. equities tended to outperform. This outperformance reflected the U.S.’s status as a perceived safe haven in times of stress (a status that also benefited U.S. Treasuries and the U.S. dollar against the euro in the six months under review) as well as the ability of U.S. companies to wring profits from their businesses by reducing costs and boosting productivity. This U.S. outperformance broke a long spell of significant superior performance by emerging markets. In the final months of 2011, emerging-market stocks underperformed quite significantly, whereas their previous strength had brought about a marked decline in U.S. stock valuations. On the fixed-income side, in spite of some well-founded forecasts, U.S. Treasuries continued to perform relatively better than risk assets. Notwithstanding a downgrading of U.S. sovereign debt by Standard & Poor’s at the beginning of August 2011, yields stayed below 2% for 10-year paper for much of the period under review. Longer-dated Treasuries did even better as yields dropped in response to a renewed bond-buying program by the U.S. Federal Reserve, which began in August. Corporate debt issued by companies with sound fundamentals have consistently seemed to offer better medium- and long-term value, in our view, yet they were volatile in the six months under review, and yield spreads widened somewhat over benchmark government bonds, especially for noninvestment-grade debt. Financial bond issues have been rather indiscriminately hurt due to their association with European sovereign debt. Amid so much economic uncertainty, commodities and gold prices have experienced volatility. Commodity prices surged in the first half of calendar 2011, but moved broadly lower during the six months under review, although the prices of oil and agricultural products maintained part of their gains from the early part of 2011. While disappointing for commodities investors and commodity-based economies, the recent drop in prices (even if temporary) has helped boost the purchasing power of U.S. consumers. However, the drop in the euro against the U.S. dollar has neutralized the positive effect of a fall in global commodity prices for Europeans and for consumers in a number of Asian countries. Gold also started to lose some of its luster as a safe-haven asset, hitting a six-month trough at the end of December 2011, as investors seemed to prefer the much greater liquidity offered by the U.S. dollar, and as traders, including banks, sought to raise cash. One conundrum for much of the period was the continued resilience of the euro in the face of the political and fiscal crises besetting the eurozone. This conundrum seemed close to being resolved toward the end of the six months under review, as the euro lost ground to the U.S. dollar. The U.S. currency also showed signs of stabilizing against other developed-nation currencies. However, the gradual, controlled appreciation of the Chinese yuan has stalled recently as inflation pressures lessened in China and growth slowed. In addition, the Swiss central bank intervened to cap the Swiss franc’s strong rise against the euro, and next, the Bank of Japan sold the yen in large quantities in a bid to stave off the appreciation of the Japanese currency. Like the U.S. dollar, the yen has benefited from a “flight to quality”, but its strong rise against the euro and smaller rise against the U.S. dollar has been hurting Japan’s already low growth prospects. However, some chinks of light have also appeared. Toward the end of calendar 2011, the European authorities mapped out a path toward a more disciplined fiscal framework for the eurozone and the European Central Bank made available €490 billion in loans at very low interest rates for banks. This money helped ease the severe funding pressure that European banks were under, and may help to stabilize sovereign bond markets, at least for a while. Prolonged weakness of the euro could help at least the more competitive European economies to export their way to recovery. It may well turn out that so much bad news has been priced into financial markets that participants may be pleasantly surprised, especially if central banks and governments become increasingly aggressive in their attempts to stabilize economies and if the U.S. continues to recover. In these circumstances, in our view it would seem wise to expect at least some dimming of the rally in U.S. Treasuries and a rise in bond yields, especially as the inflationary consequences of “quantitative easing” become more apparent. Prices that already factor in low growth (or even recession), together with strong balance sheets and the disappearance of risky merger activity, could make corporate debt appear more attractive on both sides of the Atlantic. At the same time, we remain conscious that risks abound, not least in Europe, where a relapse into recession (however mild) currently remains a strong possibility, and where markets are expected to absorb a high volume of government debt issuance in the months ahead. Finally, while we see solid reasons to believe that the Chinese authorities have the wherewithal to manage China’s transition to slightly slower but healthier and more sustainable growth, the ongoing deflation of the property bubble and ongoing social pressures will need to be monitored. THE INVESTMENT MANAGERS January, 2012 The information stated in this report represents historical data and is not an indication of future results. FRANKLIN TEMPLETON INVESTMENT FUNDS 6 Unaudited Semi-Annual Report www.franklintempleton.lu www.franklintempleton.lu Unaudited Semi-Annual Report 7 Franklin Asian Flex Cap Fund 15 Nov 06 USD (17.5) (16.2) 55.2 10.3 – 15.8 Franklin Biotechnology Discovery Fund 3 Apr 00 USD (2.2) 9.6 42.9 27.9 25.6 11.9 Franklin Euroland Core Fund 28 Nov 08 EUR (16.1) (14.7) 14.4 – – 15.3 Franklin European Core Fund 29 Jul 11 EUR – – – – – (4.0) Franklin European Dividend Fund 29 Jul 11 EUR – – – – – (1.9) Franklin European Growth Fund 29 Dec 00 EUR (4.0) (7.3) 66.8 2.1 11.5 (7.1) Franklin European Small Mid Cap Growth Fund 3 Dec 01 EUR (11.1) (17.6) 52.6 (10.5) 76.0 77.0 Franklin Global Growth Fund 29 Dec 00 USD (16.5) (11.3) 50.2 (9.3) 31.7 (1.5) Franklin Global Real Estate Fund 29 Dec 05 USD (12.0) (7.0) 31.0 (35.8) – (20.4) Franklin Global Small Mid Cap Growth Fund 15 Apr 02 USD (13.2) (13.1) 55.7 2.1 – 93.4 Franklin Gold & Precious Metals Fund 30 Apr 10 USD (13.9) (24.6) – – – (2.0) Franklin High Yield Fund 1 Mar 96 USD (0.3) 3.7 65.6 24.6 80.8 115.6 Franklin Income Fund 1 Jul 99 USD (3.6) 1.8 52.8 10.8 80.3 97.9 Franklin India Fund 25 Oct 05 USD (28.7) (31.6) 56.8 14.8 – 92.9 Franklin MENA Fund 16 Jun 08 USD (8.5) (15.4) 2.2 – – (58.1) Franklin Mutual Beacon Fund 7 Jul 97 USD (7.3) (2.6) 37.4 (17.4) 26.6 94.0 Franklin Mutual Euroland Fund 14 Oct 08 EUR (17.9) (16.8) 11.2 – – 7.0 Franklin Mutual European Fund* 3 Apr 00 EUR (9.2) (8.2) 24.2 (17.5) 38.4 38.4 Franklin Mutual Global Discovery Fund 25 Oct 05 USD (13.6) (7.0) 21.7 0.0 – 24.3 Franklin Natural Resources Fund 12 Jul 07 USD (16.3) (12.7) 78.5 – – (5.4) Franklin Real Return Fund 30 Apr 10 USD (2.6) (0.4) – – – 3.0 Franklin Strategic Income Fund 12 Jul 07 USD (1.8) 1.6 37.5 – – 26.8 Franklin Technology Fund 3 Apr 00 USD (10.9) (5.6) 83.7 30.9 30.1 (32.2) Franklin Templeton Global Allocation Fund 29 Jul 11 USD – – – – – (8.3) Franklin Templeton Global Equity Strategies Fund 15 May 08 USD (17.4) (13.8) 29.1 – – (13.1) Franklin Templeton Global Fundamental Strategies Fund 25 Oct 07 USD (10.8) (4.9) 24.7 – – (2.6) Franklin Templeton Global Growth and Value Fund 9 Sep 02 USD (15.6) (10.9) 39.2 (13.2) – 67.5 Franklin Templeton Japan Fund 1 Sep 00 JPY (14.9) (16.9) (21.8) (64.8) (40.6) (59.4) Franklin U.S. Dollar Liquid Reserve Fund 1 Jun 94 USD (0.1) (0.2) (0.5) 5.3 14.1 59.0 Franklin U.S. Equity Fund 1 Jul 99 USD (6.0) (3.9) 37.6 (3.6) 12.6 52.9 Franklin U.S. Focus Fund 15 May 08 USD (7.7) (3.5) 64.1 – – (1.2) Franklin U.S. Government Fund 28 Feb 91 USD 3.4 6.2 16.8 31.0 55.5 160.9 Franklin U.S. Low Duration Fund 29 Aug 03 USD (0.2) 0.2 6.3 7.9 – 17.3 Franklin U.S. Opportunities Fund 3 Apr 00 USD (8.7) (3.9) 64.3 15.1 46.8 (28.2) Franklin U.S. Small-Mid Cap Growth Fund 29 Dec 00 USD (11.4) (4.4) 70.9 7.3 39.6 21.7 Franklin U.S. Total Return Fund 29 Aug 03 USD 1.2 4.9 37.6 24.9 – 44.2 Franklin World Perspectives Fund 14 Oct 08 USD (12.6) (9.6) 48.7 – – 29.5 Templeton Asian Bond Fund 25 Oct 05 USD (5.1) (0.6) 36.5 37.4 – 67.4 Templeton Asian Growth Fund 30 Jun 91 USD (16.2) (14.9) 124.6 45.0 398.9 225.1 Templeton Asian Smaller Companies Fund 14 Oct 08 USD (14.8) (15.6) 134.4 – – 145.9 Templeton BRIC Fund 25 Oct 05 USD (25.4) (26.9) 54.6 (10.6) – 46.4 F P  B C P C  D ,  FRANKLIN TEMPLETON INVESTMENT FUNDS Launch Date Base Currency 6 Months % 1 Year % 3 Years % 5 Years % 10 Years % Since Launch % 6 Unaudited Semi-Annual Report www.franklintempleton.lu www.franklintempleton.lu Unaudited Semi-Annual Report 7 F P  B C P C  D ,  () Templeton China Fund 1 Sep 94 USD (19.9) (18.3) 56.9 26.9 291.6 133.0 Templeton Eastern Europe Fund 10 Nov 97 EUR (33.1) (40.0) 48.7 (43.9) 105.5 119.8 Templeton Emerging Markets Balanced Fund 29 Apr 11 USD (13.8) – – – – (14.4) Templeton Emerging Markets Bond Fund 5 Jul 91 USD (6.7) (1.6) 64.6 45.5 161.2 609.1 Templeton Emerging Markets Fund 28 Feb 91 USD (16.5) (15.9) 67.0 0.7 199.5 211.2 Templeton Emerging Markets Smaller Companies Fund 18 Oct 07 USD (25.4) (28.1) 80.1 – – (32.1) Templeton Euro Government Bond Fund 8 Jan 99 EUR 1.9 1.6 7.3 9.1 31.9 35.0 Templeton Euro High Yield Fund 17 Apr 00 EUR (5.5) (2.8) 62.9 4.5 55.1 26.9 Templeton Euro Liquid Reserve Fund 1 Jun 94 EUR 0.2 0.7 4.2 6.7 15.5 17.9 Templeton Euro Short Term Money Market Fund 23 Oct 09 EUR 0.4 0.7 – – – 1.1 Templeton European Fund† 8 Jan 99 EUR (13.9) (9.1) 8.3 (40.5) (11.7) 13.9 Templeton European Corporate Bond Fund 30 Apr 10 EUR (2.2) (1.1) – – – (1.5) Templeton European Fund† 17 Apr 91 EUR (11.0) (7.6) 20.2 (33.6) (9.1) (6.3) Templeton European Total Return Fund 29 Aug 03 EUR (1.6) (0.9) 20.2 (3.3) – 9.8 Templeton Frontier Markets Fund 14 Oct 08 USD (20.3) (23.8) 37.7 – – 32.5 Templeton Global (Euro) Fund 26 Apr 91 EUR (7.4) (7.3) 23.2 (30.4) (14.6) 144.8 Templeton Global Aggregate Bond Fund 29 Oct 10 USD (5.1) (0.8) – – – (3.7) Templeton Global Balanced Fund 1 Jun 94 USD (12.0) (5.7) 21.1 (9.3) 57.0 137.6 Templeton Global Bond (Euro) Fund 29 Aug 03 EUR 1.2 2.1 18.4 22.5 – 35.8 Templeton Global Bond Fund 28 Feb 91 USD (7.0) (3.1) 28.5 53.0 172.4 355.7 Templeton Global Equity Income Fund 27 May 05 USD (14.4) (10.2) 19.0 (28.9) – (5.1) Templeton Global Fund 28 Feb 91 USD (18.5) (11.3) 22.6 (27.3) 31.0 165.5 Templeton Global High Yield Fund 27 Sep 07 USD (4.0) 0.2 55.2 – – 21.2 Templeton Global Income Fund 27 May 05 USD (10.4) (6.6) 31.8 9.4 – 38.9 Templeton Global Smaller Companies Fund 8 Jul 91 USD (26.3) (25.6) 52.7 (32.0) 54.8 187.4 Templeton Global Total Return Fund 29 Aug 03 USD (6.4) (1.1) 52.4 63.4 – 136.9 Templeton Growth (Euro) Fund 9 Aug 00 EUR (3.5) (3.6) 36.8 (25.2) (8.8) (6.7) Templeton Korea Fund 8 May 95 USD (28.9) (26.4) 46.9 (22.1) 70.1 (44.7) Templeton Latin America Fund‡ 28 Feb 91 USD (18.5) (22.5) 84.3 27.0 447.7 320.7 Templeton Thailand Fund 20 Jun 97 USD (7.2) (5.6) 142.4 56.7 370.0 47.1 Templeton U.S. Value Fund 29 Aug 03 USD (13.9) (11.4) 36.8 (30.5) – 4.4 Data source Performance – Franklin Templeton Investments * The inception date is for the primary class A (Acc) EUR, however the sub-fund originally launched on April 3, 2000. † The inception date is for the primary class A (Acc) EUR, however the sub-fund originally launched on April 17, 1991. ‡ Fund performance prior to Sept 1996 excluded from calculation because a different portfolio allocation strategy was in use. Apart from the above mentioned exceptions, all of the figures above are for Class A distribution “A(dis)” Shares with all income reinvested (total return) in base currency. Where Class A(dis) Shares are not in issue, Class A accumulation “A(acc)” Shares are shown. Information on other share classes is available on request. This report does not constitute or form part of any offer of shares or an invitation to apply for shares. Subscriptions are to be made on the basis of the current simplified prospectus accompanied by the current full prospectus and its addendum as the case may be, a copy of the latest available audited annual report and, if published thereafter, the latest unaudited semi-annual report. The price of shares and income from them can go down as well as up and you may not get back the full amount that you invested. Past performance is no guarantee of future performance. Currency fluctuations may affect the value of investments. FRANKLIN TEMPLETON INVESTMENT FUNDS Launch Date Base Currency 6 Months % 1 Year % 3 Years % 5 Years % 10 Years % Since Launch % All the Funds marked with “★” above are currently not authorised for public distribution in Hong Kong and are not available to Hong Kong investors. 8 Unaudited Semi-Annual Report www.franklintempleton.lu www.franklintempleton.lu Unaudited Semi-Annual Report 9 ASSETS Investment in securities at market value (note 2(b)) 122,205,680,650 15,208,747 132,265,913 23,456,272 3,357,571 Cash 4,909,029,486 183,515 25,671,918 702,691 5,846 Time deposits and repurchase agreements (note 19) 1,193,009,655 – – – – Amounts receivable on sale of investments 613,762,661 239,658 79,417 – – Amounts receivable on subscriptions 401,720,907 27,966 1,456,418 200,493 – Interest and dividends receivable, net 1,137,571,256 5,647 – 5,098 5,214 Other receivables 14,775,960 2,275 – 33,793 755 Unrealised profit on forward foreign exchange contracts (note 4) 356,653,927 – – – – Unrealised profit on futures contracts (note 7) 72,497 – – – – Unrealised profit on credit default swap contracts (note 5) 3,933,198 – – – – TOTAL ASSETS 130,836,210,197 15,667,808 159,473,666 24,398,347 3,369,386 LIABILITIES Amounts payable on purchases of investments 108,952,317 – 226,350 – – Amounts payable on redemptions 382,399,938 28,579 414,182 63,574 – Bank overdraft 6,352,091 – – – – Unrealised loss on forward foreign exchange contracts (note 4) 112,320,220 – – – – Unrealised loss on interest rate swap contracts (note 6) 631,323,695 – – – – Unrealised loss on futures contracts (note 7) 34,247 – – – – Option contracts at market value (note 8) 154,209 – – – – Investment management fees payable (note 3) 97,039,618 12,966 122,928 16,418 2,451 Taxes and expense payable 255,265,391 66,919 144,149 19,006 6,259 TOTAL LIABILITIES 1,593,841,726 108,464 907,609 98,998 8,710 TOTAL NET ASSETS 129,242,368,471 15,559,344 158,566,057 24,299,349 3,360,676 THREE YEAR ASSET SUMMARY June 30, 2011 149,396,147,607 20,687,634 134,126,169 29,083,141 – June 30, 2010 88,411,687,219 29,920,224 74,572,597 20,658,937 – June 30, 2009 47,048,939,530 29,819,379 70,628,479 17,234,474 – S  N A  D ,  TOTAL Franklin Asian Flex Cap Fund Franklin Biotechnology Discovery Fund Franklin Euroland Core Fund Franklin European Core Fund* (USD) (USD) (USD) (EUR) (EUR) The accompanying notes form an integral part of these financial statements FRANKLIN TEMPLETON INVESTMENT FUNDS *These Funds were launched on July 29, 2011 8 Unaudited Semi-Annual Report www.franklintempleton.lu www.franklintempleton.lu Unaudited Semi-Annual Report 9 The accompanying notes form an integral part of these financial statements 5,425,407 294,219,250 211,288,441 88,078,635 118,417,464 55,742,573 185,275,664 109,299 16,143,302 7,602,115 237,932 2,496,074 69,883 8,103,417 – – – 2,300,000 – 3,500,000 – – 216,276 820,201 152,374 27,087 202,620 910,000 43,853 2,154,409 1,210,132 115,606 339,606 66,781 160,832 15,706 699,771 703,849 30,351 497,338 244,895 241,332 834 68,256 80,323 15,633 2,545 11,616 – – – – – – – – – – – – – – – – – – – – – – 5,595,099 313,501,264 221,705,061 90,930,531 121,780,114 59,838,368 194,691,245 – 1,622,684 97,062 – – 9,796 1,856,421 – 1,013,001 326,850 31,379 450,250 96,490 188,802 – – – – – – – – – – 167,369 135,655 – 51,049 – – – – – – – – – – – – – – – – – – – – – 3,664 231,322 158,885 62,999 103,011 50,351 136,947 6,763 240,761 161,719 64,720 197,018 67,590 110,631 10,427 3,107,768 744,516 326,467 885,934 224,227 2,343,850 5,584,672 310,393,496 220,960,545 90,604,064 120,894,180 59,614,141 192,347,395 – 391,908,724 362,431,476 125,272,812 159,982,185 80,420,038 81,271,337 – 249,493,564 252,497,144 57,266,803 64,793,655 36,904,320 5,565,752 – 31,894,597 59,920,404 32,915,531 19,258,439 28,541,329 – S  N A  D ,  () Franklin European Dividend Fund* Franklin European Growth Fund Franklin European Small-Mid Cap Growth Fund Franklin Global Growth Fund Franklin Global Real Estate Fund Franklin Global Small-Mid Cap Growth Fund Franklin Gold and Precious Metals Fund (EUR) (EUR) (EUR) (USD) (USD) (USD) (USD) FRANKLIN TEMPLETON INVESTMENT FUNDS [...]... financial statements www.franklintempleton.lu Unaudited Semi-Annual Report 13 FRANKLIN TEMPLETON INVESTMENT FUNDS Statement of Net Assets at December 31, 2011 (continued) Franklin Templeton Global Growth and Value Fund (USD) Franklin Templeton Japan Fund (JPY) Templeton Asian Bond Fund (USD) Templeton Asian Growth Fund (USD) Templeton Asian Smaller Companies Fund (USD) ASSETS Investment in securities... Semi-Annual Report www.franklintempleton.lu FRANKLIN TEMPLETON INVESTMENT FUNDS Statement of Operations and Changes in Net Assets For the Period ended December 31, 2011 (continued) Franklin Mutual Beacon Fund (USD) Franklin Mutual Euroland Fund (EUR) Franklin Mutual European Fund (EUR) Franklin Mutual Global Discovery Fund (USD) Franklin Templeton Global Allocation Fund** (USD) Franklin Templeton Global... 30, 2011 June 30, 2010 June 30, 2009 The accompanying notes form an integral 14 Unaudited Semi-Annual Report www.franklintempleton.lu FRANKLIN TEMPLETON INVESTMENT FUNDS Statement of Net Assets at December 31, 2011 (continued) Templeton BRIC Fund Templeton China Fund (USD) (USD) Templeton Eastern Europe Fund (EUR) Templeton Emerging Markets Fund (USD) Templeton Emerging Markets Balanced Fund (USD) Templeton. .. Semi-Annual Report www.franklintempleton.lu FRANKLIN TEMPLETON INVESTMENT FUNDS Statement of Operations and Changes in Net Assets For the Period ended December 31, 2011 (continued) Templeton European Fund (EUR) Templeton European Corporate Bond Fund (EUR) Templeton European Total Return Fund (EUR) Templeton Frontier Markets Fund (USD) Templeton Global Fund (USD) Templeton Global (Euro) Fund (EUR) Templeton Global... SUMMARY June 30, 2011 June 30, 2010 June 30, 2009 The accompanying notes form an integral 18 Unaudited Semi-Annual Report www.franklintempleton.lu FRANKLIN TEMPLETON INVESTMENT FUNDS Statement of Net Assets at December 31, 2011 (continued) Templeton Global Income Fund (USD) Templeton Global Smaller Companies Fund (USD) Templeton Global Total Return Fund (USD) Templeton Growth (Euro) Fund (EUR) Templeton Korea... financial statements www.franklintempleton.lu Unaudited Semi-Annual Report 15 FRANKLIN TEMPLETON INVESTMENT FUNDS Statement of Net Assets at December 31, 2011 (continued) Templeton Euro Government Bond Fund (EUR) Templeton Euro High Yield Fund (EUR) Templeton Euro Liquid Reserve Fund (EUR) Templeton Euro Short Term Money Market Fund* (EUR) Templeton Euroland Fund (EUR) ASSETS Investment in securities... statements www.franklintempleton.lu Unaudited Semi-Annual Report 25 FRANKLIN TEMPLETON INVESTMENT FUNDS Statement of Operations and Changes in Net Assets For the Period ended December 31, 2011 (continued) Franklin Templeton Global Growth and Value Fund (USD) NET ASSETS AT THE BEGINNING OF THE PERIOD Currency translation adjustment Franklin Templeton Japan Fund (JPY) Templeton Asian Bond Fund Templeton Asian... these financial statements www.franklintempleton.lu Unaudited Semi-Annual Report 17 FRANKLIN TEMPLETON INVESTMENT FUNDS Statement of Net Assets at December 31, 2011 (continued) Templeton Global Balanced Fund (USD) Templeton Global Bond Fund (USD) Templeton Global Bond (Euro) Fund (EUR) Templeton Global Equity Income Fund (USD) Templeton Global High Yield Fund (USD) ASSETS Investment in securities at market.. .FRANKLIN TEMPLETON INVESTMENT FUNDS Statement of Net Assets at December 31, 2011 (continued) Franklin High Yield Fund (USD) Franklin Income Fund Franklin India Fund Franklin MENA Fund (USD) (USD) (USD) Franklin Natural Resources Fund (USD) ASSETS Investment in securities at market value (note 2(b)) Cash Time deposits and repurchase agreements (note 19) Amounts receivable on sale of investments... financial statements www.franklintempleton.lu Unaudited Semi-Annual Report 21 FRANKLIN TEMPLETON INVESTMENT FUNDS Statement of Operations and Changes in Net Assets For the Period ended December 31, 2011 (continued) Franklin High Yield Fund Franklin India Fund Franklin MENA Fund (USD) NET ASSETS AT THE BEGINNING OF THE PERIOD Currency translation adjustment Franklin Income Fund (USD) (USD) Franklin Natural . FRANKLIN TEMPLETON INVESTMENT FUNDS SOCIÉTÉ D'INVESTISSEMENT À CAPITAL VARIABLE UNAUDITED SEMI-ANNUAL REPORT R.C.S. B35177 DECEMBER 31, 2011 FRANKLIN. Templeton Investments Corp., (ii) Franklin Templeton Investments Japan Limited, (iii) Franklin Templeton Investimentos (Brasil) Ltda., (iv) Franklin Templeton