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Annual Report and Shareholder Letter September 30, 2017 Custodian Funds DynaTech Fund Growth Fund Income Fund U.S. Government Securities Fund Utilities Fund Sign up for electronic delivery at franklintempleton.com/edelivery
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Annual Report and Shareholder Letter September 30, 2017 Custodian Funds DynaTech Fund Growth Fund Income Fund U.S. Government Securities Fund Utilities Fund Sign up for electronic delivery at franklintempleton.com/edelivery Templeton Investments Gain From Our Perspective At Templeton Investments, we re dedicated to one goal: delivering exceptional asset management for our clients. By bringing together multiple, world-class investment teams in a single firm, we re able to offer specialized expertise across styles and asset classes, all supported by the strength and resources of one of the world s largest asset managers. This has helped us to become a trusted partner to individual and institutional investors across the globe. Dear Fellow Shareholder: During the 12 months ended September 30, 2017, the US economy expanded due to growth in consumer spending, business investment, exports and federal government spending. The US Federal Reserve increased its target range by 0.25% three times during the period, noting improved employment and business spending. Within this environment, US stocks, as measured by the Standard & Poor s 500 Index, generated a % total return for the 12-month period. 1 Investmentgrade bonds, as measured by the Bloomberg Barclays US Aggregate Bond Index, posted a +0.07% total return. 1 The 10-year US Treasury yield began the period at 1.60% and ended the period at 2.33%. We are committed to our long-term perspective and disciplined investment approach as we conduct rigorous, fundamental analysis of securities with a regular emphasis on investment risk management. We believe active, professional investment management serves investors well. We also recognize the important role of financial advisors in today s markets and encourage investors to continue to seek their advice. Amid changing markets and economic conditions, we are confident investors with a well-diversified portfolio and a patient, long-term outlook will be well positioned for the years ahead. Custodian Funds annual report includes more detail about prevailing conditions and a discussion about investment decisions during the period. Please remember all securities markets fluctuate, as do mutual fund share prices. We thank you for investing with Templeton, welcome your questions and comments, and look forward to serving your future investment needs. Sincerely, Rupert H. Johnson, Jr. Chairman Custodian Funds This letter reflects our analysis and opinions as of September 30, 2017, unless otherwise indicated. The information is not a complete analysis of every aspect of any market, country, industry, security or fund. Statements of fact are from sources considered reliable. 1. Source: Morningstar. See: for additional data provider information. Not FDIC Insured May Lose Value No Bank Guarantee franklintempleton.com Not part of the annual report 1 Contents Annual Report Economic and Market Overview... 3 DynaTech Fund... 4 Growth Fund Income Fund U.S. Government Securities Fund Utilities Fund Financial Highlights and Statements of Investments Financial Statements Notes to Financial Statements Report of Independent Registered Public Accounting Firm Tax Information Board Members and Officers Shareholder Information Visit franklintempleton.com for fund updates, to access your account, or to find helpful financial planning tools. 2 Annual Report franklintempleton.com Annual Report Economic and Market Overview The US economy expanded during the 12-month period ended September 30, The economy strengthened in 2017 s second and third quarters after moderating in the previous two quarters, largely due to growth in consumer spending, business investment, exports and federal government spending. The manufacturing and services sectors expanded during the period. The unemployment rate decreased from 4.9% in September 2016 to 4.2% at period-end. 1 Monthly retail sales were volatile, but were positive during most of the period. Annual inflation, as measured by the Consumer Price Index, increased from 1.5% in September 2016 to 2.2% at period-end. 1 The US Federal Reserve (Fed) raised its target range for the federal funds rate by 0.25% three times during the period, amid signs of a growing US economy, strengthening labor market and improving business spending. At its July and September 2017 meetings, the Fed kept its target range unchanged. Furthermore in September, the Fed mentioned that it would begin implementing its balance sheet reduction in October. US equity markets rose during the 12-month period, benefiting from mostly upbeat economic data, better US corporate earnings, and signs of improvement in the Chinese and European economies. The markets were also supported by investor optimism arising from pro-growth and pro-business policy plans in the US; Emmanuel Macron s victory in France s presidential election; comments from the US Fed chair indicating optimism about the US economy and the likelihood of gradual rate hikes; and the Republican tax reform plan. However, concerns about the terms of the UK s exit from the European Union (also known as Brexit ), uncertainty about President Trump s ability to implement reforms, and geopolitical tensions in the Middle East and the Korean Peninsula curbed market sentiment. The broad US stock market, as measured by the Standard & Poor s 500 Index, generated a % total return for the period. 2 The foregoing information reflects our analysis and opinions as of September 30, The information is not a complete analysis of every aspect of any market, country, industry, security or fund. Statements of fact are from sources considered reliable. 1. Source: Bureau of Labor Statistics. 2. Source: Morningstar. See for additional data provider information. franklintempleton.com Annual Report 3 DynaTech Fund We are pleased to bring you DynaTech Fund s annual report for the fiscal year ended September 30, Your Fund s Goal and Main Investments The Fund seeks capital appreciation by investing primarily in equity securities of companies that emphasize innovation and new technologies, have superior management and that benefit from new industry conditions in the dynamically changing global economy. Performance Overview The Fund s Class A shares delivered a % cumulative total return for the 12 months under review. In comparison, the Russell 1000 Growth Index, which measures performance of the largest companies in the Russell 3000 Index with higher price-to-book ratios and higher forecasted growth values, generated a total return of %. 1 Also for comparison, the broad US stock market, as measured by the Standard & Poor s 500 Index (S&P 500 ), produced a % return. 1 You can find the Fund s long-term performance data in the Performance Summary beginning on page 7. Performance data represent past performance, which does not guarantee future results. Investment return and principal value will fluctuate, and you may have a gain or loss when you sell your shares. Current performance may differ from figures shown. For most recent month-end performance, go to franklintempleton.com or call (800) Investment Strategy We use fundamental, bottom-up research to seek companies meeting our criteria of growth potential, quality and valuation. In seeking sustainable growth characteristics, we look for companies we believe can produce sustainable earnings and cash flow growth, evaluating the long-term market opportunity and competitive structure of an industry to target leaders and emerging leaders. We define quality companies as those with strong and improving competitive positions in attractive markets. We also believe important attributes of quality are experienced and talented management teams as well as financial strength reflected in the capital structure, gross and operating margins, free cash flow generation and returns on capital employed. Our valuation analysis includes a range of potential outcomes based on an assessment of multiple scenarios. In assessing value, we consider whether security prices fully reflect the balance of the sustainable growth opportunities relative to business and financial risks. We may invest in companies in any economic sector or of any market capitalization and may invest in companies both inside and outside of the US. Although we search for investments across a large number of sectors, we expect to have significant positions in particular sectors including, for example, technology and health care. Manager s Discussion Several of the Fund s information technology (IT) holdings contributed significantly to absolute performance during the reporting period. 2 The Fund s position in social media company Facebook helped IT results. Facebook s user base and engagement continued to grow, thanks in part to the site s use of video. Advertisers also responded well to the company s ad format innovations, which improved targeting capabilities. Revenue and user engagement growth for Instagram, which is owned by Facebook, also helped the company s stock performance. The growth of Alphabet, Google s parent company, was due to a number of factors. Alphabet increased its share of the global advertising market due to strong performance in mobile search and YouTube, while Android s status as a leading mobile operating system helped the company gain mobile users. The company continued to invest in potential new product lines such as self-driving car technology Waymo. Google continues to face regulatory scrutiny in Europe, but we believe the complaints will not have a meaningful negative impact on the business. Mastercard benefited from accelerating revenue growth, which was the result of better cross-border volumes. The weakness in the British pound has led to increased inbound travel to the UK, which is benefiting cross-border payments. The company continued to generate significant operating leverage over its 1. Source: Morningstar. The indexes are unmanaged and include reinvestment of any income or distributions. They do not reflect any fees, expenses or sales charges. One cannot invest directly in an index, and an index is not representative of the Fund s portfolio. Russell Investment Group is the source and owner of the trademarks, service marks and copyrights related to the Russell Indexes. Russell is a trademark of Russell Investment Group. 2. The IT sector comprises communications equipment; electronic equipment, instruments and components; internet software and services; IT services; semiconductors and semiconductor equipment; software; and technology hardware, storage and peripherals in the SOI. The dollar value, number of shares or principal amount, and names of all portfolio holdings are listed in the Fund s Statement of Investments (SOI). The SOI begins on page Annual Report franklintempleton.com FRANKLIN DYNATECH FUND Portfolio Composition Based on Total Net Assets as of 9/30/17 Internet Software & Services Software Internet & Direct Marketing Retail Semiconductors & Semiconductor Equipment IT Services Biotechnology Health Care Equipment & Supplies Equity Real Estate Investment Trusts (REITs) Capital Markets Electronic Equipment, Instruments & Components Aerospace & Defense Other Short-Term Investments & Other Net Assets 9.3% 8.7% 7.5% 6.2% 5.6% 4.9% 4.4% 3.1% 2.8% 2.3% 12.8% 17.0% 15.4% fixed-cost infrastructure. At its most recent investor day, it increased its long-term outlook. Management expects earnings per share to grow significantly over the next few years, up from the previous guidance. NVIDIA is the market leader in semiconductor graphics processors. Due to the increasing demand for this functionality, the company has been able to generate strong revenue growth and profitability. In its recently ended fiscal year in January 2017, NVIDIA s revenues grew significantly. The company s most recent quarterly operating profit margin was quite high. NVIDIA s growth, increasing profitability and scarcity of parallel processing IP enabled the company s shares to perform well during the period. The health care sector also contributed to the Fund s absolute results. 3 Celgene is a fully integrated biotechnology company with a broad pipeline across hematology/oncology and inflammation/immunology. The stock performed well during the period due to steady and positive changes in fundamentals. Revenues and earnings were up, with its Revlimid product s sales growing significantly due to label expansions in the US and Europe. With its late-stage pipeline producing positive data, and the company s early stage pipeline progressing well, the company has been enjoying steady execution across all fronts. UnitedHealth Group also performed well during the period. In managed care, the company was successful in growing its membership base, while executing on medical management. Its Optum Care business continued to grow, and its Optum Rx offering continued to gain traction with a combined medical and pharmacy benefit management offering. In the consumer discretionary sector, global e-commerce company Amazon.com s rapid growth was driven by its Prime member benefit program, which creates more loyal shoppers who increase their spending on the platform. 4 Amazon also made many investments that, in our view, should benefit the company in the long term. The company aggressively increased its logistical capabilities to shorten delivery times and meet user demands, while its acquisition of Whole Foods Market dramatically increased its presence in the grocery category. Amazon also benefited from strong sales of the company s smart home Echo device as well as the continued success of Amazon Web Services, its highly-profitable cloud computing platform. In contrast, the energy sector was a detractor from the Fund s performance during the period. 5 Schlumberger, a company that provides project management solutions to the international oil and gas exploration and production industries, detracted from performance. Although the health care sector as a whole contributed to Fund performance, several stocks in that sector detracted. Edwards Lifesciences stock declined as its sales growth rate matured during the reporting period. This trend followed what had been an acceleration of sales growth in the wake of the release of results from Edwards PARTNER 2A trial in April The health care sector comprises biotechnology, health care equipment and supplies, health care providers and services, health care technology, life sciences tools and services, and pharmaceuticals in the SOI. 4. The consumer discretionary sector comprises automobiles; internet and direct marketing retail; media; and textiles, apparel and luxury goods in the SOI. 5. The energy sector comprises energy equipment and services in the SOI. franklintempleton.com Annual Report 5 FRANKLIN DYNATECH FUND Dexcom s stock suffered as its sales growth rate matured during the period. 6 This deceleration followed what had been a three-year period of high sales growth that began with the October 2012 launch of Dexcom s G4 Platinum system and the September 2015 launch of Dexcom s G5 Mobile system. Illumina, which develops, manufactures and markets integrated systems for the analysis of genetic variation and function, also detracted from performance. Top 10 Holdings 9/30/17 Company Sector/Industry % of Total Net Assets Amazon.com Inc. 5.4% Internet & Direct Marketing Retail Alphabet Inc. 5.0% Internet Software & Services Facebook Inc. 4.6% Internet Software & Services Mastercard Inc. 3.4% IT Services Tencent Holdings Ltd. 2.6% Internet Software & Services Visa Inc. 2.6% IT Services Celgene Corp. 2.3% Biotechnology Equinix Inc. 2.2% Equity Real Estate Investment Trusts (REITs) Salesforce.com Inc. 1.9% Software Adobe Systems Inc. 1.8% Software Palo Alto Networks, in the IT sector, is another example of a firm that detracted from a sector that had positive overall performance. 6 The company, a provider of enterprise cloud applications for finance and human resources, struggled over the past year partly due to increased competition and a poorly executed reorganization of its sales force. Thank you for your continued participation in DynaTech Fund. We look forward to serving your future investment needs. Matthew J. Moberg, CPA Rupert H. Johnson, Jr. Portfolio Management Team The foregoing information reflects our analysis, opinions and portfolio holdings as of September 30, 2017, the end of the reporting period. The way we implement our main investment strategies and the resulting portfolio holdings may change depending on factors such as market and economic conditions. These opinions may not be relied upon as investment advice or an offer for a particular security. The information is not a complete analysis of every aspect of any market, country, industry, security or the Fund. Statements of fact are from sources considered reliable, but the investment manager makes no representation or warranty as to their completeness or accuracy. Although historical performance is no guarantee of future results, these insights may help you understand our investment management philosophy. In industrials, 7 LED lighting manufacturer Acuity Brands missed earnings for two quarters due to slower revenue growth. 6 Additionally, investors seemed to be concerned that the nonresidential market may be slowing, leading to reduced estimates and a compressed valuation multiple. 6. No longer held by period-end. 7. The industrials sector comprises aerospace and defense, air freight and logistics, commercial services and supplies, electrical equipment and machinery in the SOI. See for additional data provider information. 6 Annual Report franklintempleton.com FRANKLIN DYNATECH FUND Performance Summary as of September 30, 2017 The performance table and graphs do not reflect any taxes that a shareholder would pay on Fund dividends, capital gain distributions, if any, or any realized gains on the sale of Fund shares. Total return reflects reinvestment of the Fund s dividends and capital gain distributions, if any, and any unrealized gains or losses. Your dividend income will vary depending on dividends or interest paid by securities in the Fund s portfolio, adjusted for operating expenses of each class. Capital gain distributions are net profits realized from the sale of portfolio securities. Performance as of 9/30/17 1 Cumulative total return excludes sales charges. Average annual total return includes maximum sales charges. Sales charges will vary depending on the size of the investment and the class of share purchased. The maximum is 5.75% and the minimum is 0%. Class A: 5.75% maximum initial sales charge; Advisor Class: no sales charges. For other share classes, visit franklintempleton.com. Share Class Cumulative Total Return 2 Average Annual Total Return 3 A 1-Year % % 5-Year % % 10-Year % +9.24% Advisor 4 1-Year % % 5-Year % % 10-Year % % Performance data represent past performance, which does not guarantee future results. Investment return and principal value will fluctuate, and you may have a gain or loss when you sell your shares. Current performance may differ from figures shown. For most recent month-end performance, go to franklintempleton.com or call (800) See page 9 for Performance Summary footnotes. franklintempleton.com Annual Report 7 FRANKLIN DYNATECH FUND PERFORMANCE SUMMARY Total Return Index Comparison for a Hypothetical $10,000 Investment 1 Total return represents the change in value of an investment over the periods shown. It includes any applicable maximum sales charge, Fund expenses, account fees and reinvested distributions. The unmanaged indexes include reinvestment of any income or distributions. They differ from the Fund in composition and do not pay management fees or expenses. One cannot invest directly in an index. Class A (10/1/07 9/30/17) $25,000 $20,000 $24,209 $23,855 $20,488 $15,000 $10,000 $5,000 $0 10/07 9/09 9/11 9/13 9/15 9/17 DynaTech Fund Russell 1000 Growth Index 5 S&P Advisor Class (10/1/07 9/30/17) $
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