-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NNblLSm2aIcKxM12SxXxIia9nf1X+M5eYq2jJ7yyvJluVjx0bvjZ2CZcyp8ZWaQf gCnjGeHSsd4w0lxSD6NWpw== 0001022804-09-000019.txt : 20090831 0001022804-09-000019.hdr.sgml : 20090831 20090831144434 ACCESSION NUMBER: 0001022804-09-000019 CONFORMED SUBMISSION TYPE: N-CSRS PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20090630 FILED AS OF DATE: 20090831 DATE AS OF CHANGE: 20090831 EFFECTIVENESS DATE: 20090831 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FRANKLIN TEMPLETON FUND ALLOCATOR SERIES CENTRAL INDEX KEY: 0001022804 IRS NUMBER: 000000000 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: N-CSRS SEC ACT: 1940 Act SEC FILE NUMBER: 811-07851 FILM NUMBER: 091045606 BUSINESS ADDRESS: STREET 1: ONE FRANKLIN PARKWAY CITY: SAN MATEO STATE: CA ZIP: 94403-1906 BUSINESS PHONE: 650-312-4018 MAIL ADDRESS: STREET 1: FRANKLIN TEMPLETON FUND ALLOCATOR SERIES STREET 2: ONE FRANKLIN PARKWAY CITY: SAN MATEO STATE: CA ZIP: 94403-1906 0001022804 S000007239 FRANKLIN TEMPLETON CONSERVATIVE TARGET FUND C000019839 CLASS B C000019840 ADVISOR CLASS C000019841 CLASS A FTCIX C000019842 CLASS C FTCCX C000019843 CLASS R FTCRX 0001022804 S000007240 FRANKLIN TEMPLETON COREFOLIO ALLOCATION FUND C000019844 CLASS A C000019845 CLASS B C000019846 CLASS C FTCOX C000019847 CLASS R FBCOX C000019848 ADVISOR CLASS FTCLX 0001022804 S000007241 FRANKLIN TEMPLETON FOUNDING FUNDS ALLOCATION FUND C000019849 CLASS A C000019850 CLASS B C000019851 CLASS C FFALX C000019852 CLASS R FFABX C000019853 ADVISOR CLASS FFACX 0001022804 S000007242 FRANKLIN TEMPLETON GROWTH TARGET FUND C000019854 CLASS B C000019855 ADVISOR CLASS C000019856 CLASS A FGTIX C000019857 CLASS C FTGTX C000019858 CLASS R FGTRX 0001022804 S000007243 FRANKLIN TEMPLETON MODERATE TARGET FUND C000019859 CLASS B C000019860 ADVISOR CLASS C000019861 CLASS A FMTIX C000019862 CLASS C FTMTX C000019863 CLASS R FTMRX 0001022804 S000007244 FRANKLIN TEMPLETON PERSPECTIVES ALLOCATION FUND C000019864 CLASS R C000019865 ADVISOR CLASS C000019866 CLASS A FPAAX C000019867 CLASS C FPCAX 0001022804 S000012937 Franklin Templeton 2015 Retirement Target Fund C000034925 A C000034926 C C000034927 R C000034928 ADVISOR 0001022804 S000012938 Franklin Templeton 2025 Retirement Target Fund C000034929 A C000034930 C C000034931 R C000034932 ADVISOR 0001022804 S000012939 Franklin Templeton 2035 Retirement Target Fund C000034933 C C000034934 R C000034935 ADVISOR C000034936 A 0001022804 S000012940 Franklin Templeton 2045 Retirement Target Fund C000034937 A C000034938 C C000034939 R C000034940 ADVISOR N-CSRS 1 ftfassrpt809.txt FTFAS SEMIANNUAL PE6/30/09 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM N-CSRS CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES Investment Company Act file number 811-07851 FRANKLIN TEMPLETON FUND ALLOCATOR SERIES ------------------------------------------ (Exact name of registrant as specified in charter) ONE FRANKLIN PARKWAY, SAN MATEO, CA 94403-1906 ---------------------------------------------- (Address of principal executive offices)(Zip code) CRAIG S. TYLE, ONE FRANKLIN PARKWAY, SAN MATEO, CA 94403-1906 -------------------------------------------------------------- (Name and address of agent for service) Registrant's telephone number, including area code:(650) 312-2000 Date of fiscal year end: 12/31 ---------- Date of reporting period: 6/30/09 ---------- ITEM 1. REPORTS TO STOCKHOLDERS. JUNE 30, 2009 SEMIANNUAL REPORT AND SHAREHOLDER LETTER Franklin Templeton Conservative Target Fund Franklin Templeton Moderate Target Fund Franklin Templeton Growth Target Fund SIGN UP FOR EDELIVERY Log onto franklintempleton.com and click "My Profile" (GRAPHIC) ASSET ALLOCATION FRANKLIN TEMPLETON FUND ALLOCATOR SERIES (FRANKLIN TEMPLETON INVESTMENTS(R) LOGO) FRANKLIN - TEMPLETON - MUTUAL SERIES Franklin Templeton Investments GAIN FROM OUR PERSPECTIVE(R) Franklin Templeton's distinct multi-manager structure combines the specialized expertise of three world-class investment management groups-- Franklin, Templeton and Mutual Series. SPECIALIZED EXPERTISE Each of our portfolio management groups operates autonomously, relying on its own research and staying true to the unique investment disciplines that underlie its success. FRANKLIN. Founded in 1947, Franklin is a recognized leader in fixed income investing and also brings expertise in growth- and value-style U.S. equity investing. TEMPLETON. Founded in 1940, Templeton pioneered international investing and, in 1954, launched what has become the industry's oldest global fund. Today, with offices in over 25 countries, Templeton offers investors a truly global perspective. MUTUAL SERIES. Founded in 1949, Mutual Series is dedicated to a unique style of value investing, searching aggressively for opportunity among what it believes are undervalued stocks, as well as arbitrage situations and distressed securities. TRUE DIVERSIFICATION Because our management groups work independently and adhere to different investment approaches, Franklin, Templeton and Mutual Series funds typically have distinct portfolios. That's why our funds can be used to build truly diversified allocation plans covering every major asset class. RELIABILITY YOU CAN TRUST At Franklin Templeton Investments, we seek to consistently provide investors with exceptional risk-adjusted returns over the long term, as well as the reliable, accurate and personal service that has helped us become one of the most trusted names in financial services.
MUTUAL FUNDS | RETIREMENT PLANS | 529 COLLEGE SAVINGS PLANS | SEPARATE ACCOUNTS (GRAPHIC) Not part of the semiannual report Contents SHAREHOLDER LETTER ........................................................ 1 SEMIANNUAL REPORT Economic and Market Overview .............................................. 3 Franklin Templeton Conservative Target Fund ............................... 5 Franklin Templeton Moderate Target Fund ................................... 13 Franklin Templeton Growth Target Fund ..................................... 21 Financial Highlights and Statements of Investments ........................ 29 Financial Statements ...................................................... 47 Notes to Financial Statements ............................................. 52 Shareholder Information ................................................... 62
Shareholder Letter Dear Shareholder: The six months ended June 30, 2009, offered some relief from the financial shocks of 2008. The U.S. economy, while still in a downturn, became marginally "less worse" as the recession seemed to loosen its grip. The federal stimulus package and interventions by the Federal Reserve appeared to gain some traction, and household spending began to stabilize. Many investors reentered the stock market, which started a rally in March that brought the major indexes off this cycle's lows. U.S. Treasury yields rose as investor risk aversion waned. Amid recent events, we think it is important to put short-term market developments in perspective. Keep in mind that we have navigated through past periods of high market volatility by remaining committed to our long-term perspective and disciplined investment philosophy. During such times, we search for bargains that we believe may be well positioned to become eventual winners. Although conditions remain challenging, our experience gives us ample reason to be optimistic about future market stabilization and recovery. In the enclosed semiannual report for Franklin Templeton Fund Allocator Series, the portfolio manager discusses market conditions, investment management decisions and Fund performance during the period under review. You will also find performance data and financial information. Please remember that all securities markets fluctuate, as do mutual fund share prices. If you would like more frequent updates, franklintempleton.com provides daily prices, monthly performance figures, portfolio holdings and other information. You can also access your account, buy and sell shares, read timely articles, and find helpful financial planning tools. We hope you will take advantage of these online services. NOT FDIC INSURED | MAY LOSE VALUE | NO BANK GUARANTEE Not part of the semiannual report | 1 As always, we recommend investors consult their financial advisors and review their portfolios to design a long-term strategy and portfolio allocation that meet their individual needs, goals and risk tolerance. We firmly believe that most people benefit from professional advice, and that advice is invaluable as investors navigate changing market environments. We thank you for investing with Franklin Templeton, welcome your questions and comments, and look forward to serving your investment needs in the years ahead. Sincerely, /s/ Charles B. Johnson Charles B. Johnson Chairman Franklin Templeton Fund Allocator Series THIS LETTER REFLECTS OUR ANALYSIS AND OPINIONS AS OF JUNE 30, 2009. 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. 2 | Not part of the semiannual report Semiannual Report Economic and Market Overview During the six-month period ended June 30, 2009, the U.S. economy and stock markets seemed to stabilize after signs appeared that the recession's severity had eased. Strains on the banking system and credit markets that surfaced in 2008 improved in 2009's first half with the help of federal aid and tighter regulations. Despite rising unemployment, near period-end home sales edged higher, the decline in manufacturing activity slowed and consumer confidence started to pick up. Economic growth as measured by gross domestic product (GDP) fell at annualized rates of 6.4% and an estimated 1.0% in the first and second quarters of 2009. Although the price of oil rose from $44 per barrel at the beginning of the period to $70 by period-end on speculation that the downturn was abating, it was still off more than 50% from its July 2008 record high.(1) June's inflation rate, as measured by the Consumer Price Index, was an annualized -1.4%, representing the steepest yearly decline in the cost of living in nearly six decades.(2) Core inflation, which excludes food and energy costs, rose at a 1.7% annualized rate, which was within the Federal Reserve Board's (Fed's) informal target range of 1.5%-2.0%.(2) A deepening recession and decelerating inflation prompted Washington policy-makers to keep interest rates low and enact stimulus plans -- including income tax cuts, aid to ailing state governments and funding for transportation infrastructure, school construction and high-tech projects. During the period under review, the Fed kept the federal funds target rate in a range of 0% to 0.25% and said the "pace of economic contraction is slowing" but the financial system had not yet returned to normal. Most U.S. stocks suffered major losses through early March as investors worried about an uncertain future. Stocks then recovered somewhat from 12-year lows as investors perceived many bargains among the bear market fallout and data indicated the economy's pace of contraction was moderating. By June, however, fresh investor concerns about the economy and stock valuations reemerged and dampened the rally's momentum. For the six months under review, the blue chip stocks of the Dow Jones Industrial Average had a total return of -2.01%, while the broader Standard & Poor's 500 Index (S&P 500) (1.) Source: New York Mercantile Exchange. (2.) Source: Bureau of Labor Statistics. Semiannual Report | 3 posted a +3.16% total return and the technology-heavy NASDAQ Composite Index returned +16.99%.(3) Global equities followed the same trend. At the beginning of the period, with investor sentiment depressed and risk aversion elevated, defensive, non-cyclical sectors like utilities, consumer staples and health care were market leaders. As data emerged suggesting a fledgling recovery in the financials sector and a moderating pace of global economic contraction, investors regained some risk appetite, rotating capital back into cyclical sectors such as financials, materials and consumer discretionary. Resurgent risk appetite also buoyed emerging markets stocks, which delivered their best three-month returns on record from March through May 2009. Emerging market optimism in turn supported higher commodity prices, which gained the most since the bubble in hard assets burst in the summer of 2008. Also supporting commodity prices was a weaker U.S. dollar. Although systemic risk aversion and the consensus belief that the U.S. could lead the global economy out of recession helped strengthen the dollar at the beginning of the period, investors soon began to worry about the currency's ongoing stability in the face of aggressive and unconventional monetary policy, and the greenback lost value relative to most currencies for the six-month period. In the reporting period's final weeks, global equity markets moderated as investors appeared to contemplate the rally's merits and reassess their new positions. Although sentiment had improved and most seemed to believe the global economy had exited the worst stage of this recessionary cycle, indicators remained mixed and lacked the sustainable upward trajectory investors had hoped for. In Europe, policymakers committed to an easier monetary regime, but the eurozone's industrial production declined, capacity utilization continued to shrink, and price deflation was recorded for the first time since data began in 1997.(4) In China, a stimulative monetary campaign spurred lending and fueled an annualized money growth rate of 26%, a powerful measure against near-term economic headwinds but a potentially dangerous catalyst for longer-term inflation and asset bubble formation.(5) THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS AND OPINIONS AS OF JUNE 30, 2009. 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. (3.) Source: (C) 2009 Morningstar. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (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. Past performance is no guarantee of future results. The Dow Jones Industrial Average is price weighted based on the average market price of 30 blue chip stocks of companies that are generally industry leaders. The S&P 500 consists of 500 stocks chosen for market size, liquidity and industry group representation. Each stock's weight in the index is proportionate to its market value. The S&P 500 is one of the most widely used benchmarks of U.S. equity performance. The NASDAQ Composite Index measures all NASDAQ domestic and international based common type stocks listed on The NASDAQ Stock Market. The index is market value weighted and includes more than 3,000 companies. (4.) Source: European Communities Eurostat. (5.) Source: People's Bank of China. 4 | Semiannual Report Franklin Templeton Conservative Target Fund YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin Templeton Conservative Target Fund seeks the highest level of long-term total return consistent with a lower level of risk.(1) ASSET ALLOCATION* Franklin Templeton Conservative Target Fund Based on Total Net Assets as of 6/30/09 (PIE CHART) Domestic Equity 28.4% Domestic Fixed Income 24.1% Foreign Fixed Income 14.4% Foreign Equity 12.8% Short-Term Investments & Other Net Assets 20.3%
* The asset allocation is based on the Statement of Investments (SOI), which classifies each underlying fund into a broad asset class. This semiannual report for Franklin Templeton Conservative Target Fund covers the period ended June 30, 2009. 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. PLEASE VISIT franklintempleton.com OR CALL (800) 342-5236 FOR MOST RECENT MONTH-END PERFORMANCE. PERFORMANCE OVERVIEW Franklin Templeton Conservative Target Fund - Class A delivered a +6.80% cumulative total return for the six months under review. In comparison, the Fund's benchmarks, the Standard & Poor's 500 Index (S&P 500) and Morgan Stanley Capital International (MSCI) Europe, Australasia, Far East (EAFE) Index for equities, the Barclays Capital (BC) U.S. Aggregate Index for fixed income, and the Payden & Rygel (P&R) 90 Day U.S. T-Bill Index for short-term investments and other net assets, had total returns of +3.16%, +8.42%, (1.) The risk/reward potential is based on the Fund's goal and level of risk. It is not indicative of the Fund's actual or implied performance or portfolio composition, which may change on a continuous basis. THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND NAMES OF ALL PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S SOI, WHICH BEGINS ON PAGE 34. Semiannual Report | 5 +1.90% and +0.08%, respectively, during the same time.(2) You can find the Fund's long-term performance data in the Performance Summary beginning on page 8. TOP 10 FUND HOLDINGS Franklin Templeton Conservative Target Fund 6/30/09
% OF TOTAL NET ASSETS ---------- Templeton Global Bond Fund - - Advisor Class 13.5% Franklin U.S. Government Securities Fund - Advisor Class 13.2% Franklin Total Return Fund - - Advisor Class 10.9% Franklin Flex Cap Growth Fund - - Advisor Class 10.3% Mutual Shares Fund - Class Z 8.4% Mutual European Fund - Class Z 4.4% Franklin Growth Opportunities Fund - - Advisor Class 4.2% Templeton Foreign Fund - - Advisor Class 2.9% Templeton China World Fund - - Advisor Class 2.5% Franklin Gold and Precious Metals Fund - - Advisor Class 2.2%
INVESTMENT STRATEGY Whenever possible, we attempt to hold the same underlying Franklin Templeton funds in each Target Fund's portfolio and will vary the underlying funds' allocation percentages based upon each Target Fund's risk/return level. We generally diversify the Target Funds' broad equity allocations across investment styles, market capitalization sizes and countries of origin. Maintaining similarity of the underlying Franklin Templeton fund investments across the Conservative, Moderate and Growth Target Funds is intended to increase the consistency of their results relative to one another. For your reference, Franklin Templeton Conservative Target Fund seeks to maintain the following asset class allocations: 40% equity funds, 40% fixed income funds, and 20% short-term investments and other net assets. MANAGER'S DISCUSSION The Fund's performance can be attributed largely to maintaining a static allocation among equities, fixed income securities, and short-term investments and other net assets, and by the actual performance of the selected underlying funds. At period-end, Franklin Templeton Conservative Target Fund's domestic equity exposure was 68.9% of its total equity weighting, and foreign equity made up the balance. The portfolio was diversified across capitalization sizes and investment styles, and on June 30, 2009, we held shares in large-, mid- and small-capitalization equity funds, representing both growth and value styles. Franklin Flex Cap Growth Fund - Advisor Class, at 10.3% of the Fund's total net assets, (2.) Source: (C) 2009 Morningstar. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (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 S&P 500 consists of 500 stocks chosen for market size, liquidity and industry group representation. Each stock's weight in the index is proportionate to its market value. The S&P 500 is one of the most widely used benchmarks of U.S. equity performance. The MSCI EAFE Index is a free float-adjusted, market capitalization-weighted index designed to measure equity market performance in global developed markets excluding the U.S. and Canada. The BC U.S. Aggregate Index is a market capitalization-weighted index representing the U.S. investment-grade, fixed-rate, taxable bond market with index components for government and corporate, mortgage pass-through and asset-backed securities. All issues included are SEC registered, taxable, dollar denominated and nonconvertible, must have at least one year to final maturity and must be rated investment grade (Baa3/BBB-/BBB- or higher) by Moody's, Standard & Poor's or Fitch, respectively. The P&R 90 Day U.S. T-Bill Index is a total return index based on a constant maturity instrument. Payden & Rygel includes both accrued interest and change in market price in its monthly total return calculations. The value of Treasuries, if held to maturity, is fixed; principal is guaranteed and interest is fixed. The indexes are unmanaged and include reinvested distributions. One cannot invest directly in an index, nor is an index representative of the Fund's portfolio. 6 | Semiannual Report was our largest equity fund weighting at period-end. On the fixed income side, domestic exposure was 62.6% of the Fund's total income weighting, with the balance in foreign fixed income. Templeton Global Bond Fund - Advisor Class was our largest fixed income fund weighting at 13.5% of total net assets. Our largest domestic growth fund holding, Franklin Flex Cap Growth Fund - Advisor Class, and our largest domestic value fund holding, Mutual Shares Fund - Class Z, outperformed the S&P 500 during the six-month reporting period. Our largest foreign equity fund holding, Mutual European Fund - Class Z, underperformed the MSCI EAFE Index. On the fixed income side, Templeton Global Bond Fund - Advisor Class and Franklin U.S. Government Securities Fund - Advisor Class outperformed the BC U.S. Aggregate Index. Thank you for your continued participation in Franklin Templeton Conservative Target Fund. We look forward to serving your future investment needs. (PHOTO OF T. ANTHONY COFFEY) /s/ T. Anthony Coffey T. Anthony Coffey, CFA Portfolio Manager Franklin Templeton Conservative Target Fund THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS AS OF JUNE 30, 2009, 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. Semiannual Report | 7 Performance Summary as of 6/30/09 FRANKLIN TEMPLETON CONSERVATIVE TARGET FUND 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. The performance table does 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. PRICE AND DISTRIBUTION INFORMATION
CLASS A (SYMBOL: FTCIX) CHANGE 6/30/09 12/31/08 - ----------------------- ------ ------- -------- Net Asset Value (NAV) +$0.57 $11.49 $10.92 DISTRIBUTIONS (1/1/09-6/30/09) Dividend Income $0.0878 Long-Term Capital Gain $0.0800 TOTAL $0.1678
CLASS B (SYMBOL: N/A) CHANGE 6/30/09 12/31/08 - --------------------- ------ ------- -------- Net Asset Value (NAV) +$0.58 $11.46 $10.88 DISTRIBUTIONS (1/1/09-6/30/09) Dividend Income $0.0463 Long-Term Capital Gain $0.0800 TOTAL $0.1263
CLASS C (SYMBOL: FTCCX) CHANGE 6/30/09 12/31/08 - ----------------------- ------ ------- -------- Net Asset Value (NAV) +$0.56 $11.33 $10.77 DISTRIBUTIONS (1/1/09-6/30/09) Dividend Income $0.0503 Long-Term Capital Gain $0.0800 TOTAL $0.1303
CLASS R (SYMBOL: FTCRX) CHANGE 6/30/09 12/31/08 - ----------------------- ------ ------- -------- Net Asset Value (NAV) +$0.57 $11.46 $10.89 DISTRIBUTIONS (1/1/09-6/30/09) Dividend Income $0.0757 Long-Term Capital Gain $0.0800 TOTAL $0.1557
ADVISOR CLASS (SYMBOL: N/A) CHANGE 6/30/09 12/31/08 - --------------------------- ------ ------- -------- Net Asset Value (NAV) +$0.57 $11.48 $10.91 DISTRIBUTIONS (1/1/09-6/30/09) Dividend Income $0.1009 Long-Term Capital Gain $0.0800 TOTAL $0.1809
8 | Semiannual Report Performance Summary (CONTINUED) PERFORMANCE(1) CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETURN AND VALUE OF $10,000 INVESTMENT INCLUDE MAXIMUM SALES CHARGES. CLASS A: 5.75% MAXIMUM INITIAL SALES CHARGE; CLASS B: CONTINGENT DEFERRED SALES CHARGE (CDSC) DECLINING FROM 4% TO 1% OVER SIX YEARS, AND ELIMINATED THEREAFTER; CLASS C: 1% CDSC IN FIRST YEAR ONLY; CLASS R/ADVISOR CLASS: NO SALES CHARGES.
CLASS A 6-MONTH 1-YEAR 5-YEAR 10-YEAR - ------- ------- ------ ------- --------- Cumulative Total Return(2) +6.80% -6.24% +20.28% +61.87% Average Annual Total Return(3) +0.62% 11.66% +2.54% +4.31% Value of $10,000 Investment(4) $10,062 $8,834 $11,337 $15,255 Total Annual Operating Expenses(5) Without Waiver 1.37% With Waiver 1.17%
INCEPTION CLASS B 6-MONTH 1-YEAR 5-YEAR (12/1/03) - ------- ------- ------ ------- --------- Cumulative Total Return(2) +6.52% -6.88% +15.96% +18.71% Average Annual Total Return(3) +2.52% 10.49% +2.66% +2.97% Value of $10,000 Investment(4) $10,252 $8,951 $11,402 $11,773 Total Annual Operating Expenses(5) Without Waiver 2.12% With Waiver 1.92%
CLASS C 6-MONTH 1-YEAR 5-YEAR 10-YEAR - ------- ------- ------ ------- --------- Cumulative Total Return(2) +6.44% -6.90% +15.98% +50.31% Average Annual Total Return(3) +5.44% -7.81% +3.01% +4.16% Value of $10,000 Investment(4) $10,544 $9,219 $11,598 $15,031 Total Annual Operating Expenses(5) Without Waiver 2.12% With Waiver 1.92%
INCEPTION CLASS R 6-MONTH 1-YEAR 5-YEAR (1/1/02) - ------- ------- ------ ------- --------- Cumulative Total Return(2) +6.70% -6.47% +18.89% +34.67% Average Annual Total Return(3) +6.70% -6.47% +3.52% +4.05% Value of $10,000 Investment(4) $10,670 $9,353 $11,889 $13,467 Total Annual Operating Expenses(5) Without Waiver 1.62% With Waiver 1.42%
ADVISOR CLASS(6) 6-MONTH 1-YEAR 5-YEAR 10-YEAR - ------- ------- ------ ------- --------- Cumulative Total Return(2) +6.93% -6.02% +21.31% +63.27% Average Annual Total Return(3) +6.93% -6.02% +3.94% +5.02% Value of $10,000 Investment(4) $10,693 $9,398 $12,131 $16,327 Total Annual Operating Expenses(5) Without Waiver 1.12% With Waiver 0.92%
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, SEE "FUNDS AND PERFORMANCE" AT franklintempleton.com OR CALL (800) 342-5236. THE INVESTMENT MANAGER HAS CONTRACTUALLY AGREED TO WAIVE OR LIMIT ITS FEES AND TO ASSUME AS ITS OWN EXPENSE CERTAIN EXPENSES OTHERWISE PAYABLE BY THE FUND SO THAT COMMON EXPENSES (I.E., A COMBINATION OF ASSET ALLOCATION FEES AND OTHER EXPENSES, BUT EXCLUDING RULE 12B-1 FEES AND ACQUIRED FUND FEES AND EXPENSES) FOR EACH CLASS OF THE FUND DO NOT EXCEED 0.25% (OTHER THAN CERTAIN NON-ROUTINE EXPENSES OR COSTS, INCLUDING THOSE RELATING TO LITIGATION, INDEMNIFICATION, REORGANIZATIONS AND LIQUIDATIONS) UNTIL 4/30/10. Semiannual Report | 9 Performance Summary (CONTINUED) ENDNOTES WHILE AN ASSET ALLOCATION PLAN CAN BE A VALUABLE TOOL TO HELP REDUCE OVERALL VOLATILITY, ALL INVESTMENTS INVOLVE SOME DEGREE OF RISK. TYPICALLY, THE MORE AGGRESSIVE THE INVESTMENT, OR THE GREATER THE POTENTIAL RETURN, THE MORE RISK INVOLVED. GENERALLY, INVESTORS SHOULD BE COMFORTABLE WITH SOME FLUCTUATION IN THE VALUE OF THEIR INVESTMENTS, ESPECIALLY OVER THE SHORT TERM. STOCKS HAVE HISTORICALLY OUTPERFORMED OTHER ASSET CLASSES OVER THE LONG TERM, BUT THEY TEND TO FLUCTUATE MORE DRAMATICALLY OVER THE SHORTER TERM. BOND PRICES GENERALLY MOVE IN THE OPPOSITE DIRECTION OF INTEREST RATES. THUS, AS PRICES OF BONDS IN A FUND ADJUST TO A RISE IN INTEREST RATES, THAT FUND'S SHARE PRICE MAY DECLINE. BECAUSE THIS FUND INVESTS IN UNDERLYING FUNDS, WHICH MAY ENGAGE IN A VARIETY OF INVESTMENT STRATEGIES INVOLVING CERTAIN RISKS, THE FUND MAY BE SUBJECT TO THOSE SAME RISKS. THE FUND'S PROSPECTUS ALSO INCLUDES A DESCRIPTION OF THE MAIN INVESTMENT RISKS. CLASS B: These shares have higher annual fees and expenses than Class A shares. CLASS C: Prior to 1/1/04, these shares were offered with an initial sales charge; thus actual total returns would have differed. These shares have higher annual fees and expenses than Class A shares. CLASS R: Shares are available to certain eligible investors as described in the prospectus. These shares have higher annual fees and expenses than Class A shares. ADVISOR CLASS: Shares are available to certain eligible investors as described in the prospectus. (1.) If the manager had not waived fees, the Fund's total returns would have been lower. (2.) Cumulative total return represents the change in value of an investment over the periods indicated. (3.) Average annual total return represents the average annual change in value of an investment over the periods indicated. Six-month return has not been annualized. (4.) These figures represent the value of a hypothetical $10,000 investment in the Fund over the periods indicated. (5.) Figures are as stated in the Fund's prospectus current as of the date of this report. In periods of market volatility, assets may decline significantly, causing total annual Fund operating expenses to become higher than the figures shown. (6.) Effective 12/1/05, the Fund began offering Advisor Class shares, which do not have sales charges or a Rule 12b-1 plan. Performance quotations for this class reflect the following methods of calculation: (a) For periods prior to 12/1/05, a restated figure is used based upon the Fund's Class A performance, excluding the effect of Class A's maximum initial sales charge, but reflecting the effect of the Class A Rule 12b-1 fees; and (b) for periods after 11/30/05, actual Advisor Class performance is used reflecting all charges and fees applicable to that class. Since 12/1/05 (commencement of sales), the cumulative and average annual total returns of Advisor Class shares were +9.27% and +2.51%. 10 | Semiannual Report Your Fund's Expenses FRANKLIN TEMPLETON CONSERVATIVE TARGET FUND As a Fund shareholder, you can incur two types of costs: - - Transaction costs, including sales charges (loads) on Fund purchases; and - - Ongoing Fund costs, including management fees, distribution and service (12b-1) fees, and other Fund expenses. All mutual funds have ongoing costs, sometimes referred to as operating expenses. The following table shows ongoing costs of investing in the Fund and can help you understand these costs and compare them with those of other mutual funds. The table assumes a $1,000 investment held for the six months indicated. ACTUAL FUND EXPENSES The first line (Actual) for each share class listed in the table provides actual account values and expenses. The "Ending Account Value" is derived from the Fund's actual return, which includes the effect of Fund expenses. You can estimate the expenses you paid during the period by following these steps. OF COURSE, YOUR ACCOUNT VALUE AND EXPENSES WILL DIFFER FROM THOSE IN THIS ILLUSTRATION: 1. Divide your account value by $1,000. IF AN ACCOUNT HAD AN $8,600 VALUE, THEN $8,600 / $1,000 = 8.6. 2. Multiply the result by the number under the heading "Expenses Paid During Period." IF EXPENSES PAID DURING PERIOD WERE $7.50, THEN 8.6 X $7.50 = $64.50. In this illustration, the estimated expenses paid this period are $64.50. HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS Information in the second line (Hypothetical) for each class in the table can help you compare ongoing costs of investing in the Fund with those of other mutual funds. This information may not be used to estimate the actual ending account balance or expenses you paid during the period. The hypothetical "Ending Account Value" is based on the actual expense ratio for each class and an assumed 5% annual rate of return before expenses, which does not represent the Fund's actual return. The figure under the heading "Expenses Paid During Period" shows the hypothetical expenses your account would have incurred under this scenario. You can compare this figure with the 5% hypothetical examples that appear in shareholder reports of other funds. Semiannual Report | 11 Your Fund's Expenses (CONTINUED) PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES. Therefore, the second line for each class is useful in comparing ongoing costs only, and will not help you compare total costs of owning different funds. In addition, if transaction costs were included, your total costs would have been higher. Please refer to the Fund prospectus for additional information on operating expenses.
BEGINNING ENDING EXPENSES PAID EXPENSES PAID ACCOUNT VALUE ACCOUNT VALUE DURING PERIOD* DURING PERIOD** 1/1/09 6/30/09 1/1/09-6/30/09 1/1/09-6/30/09 ------------- ------------- -------------- --------------- CLASS A Actual $1,000 $1,068.00 $2.56 $6.10 Hypothetical (5% return before expenses) $1,000 $1,022.32 $2.51 $5.96 CLASS B Actual $1,000 $1,065.20 $6.40 $9.93 Hypothetical (5% return before expenses) $1,000 $1,018.60 $6.26 $9.69 CLASS C Actual $1,000 $1,064.40 $6.35 $9.88 Hypothetical (5% return before expenses) $1,000 $1,018.65 $6.21 $9.64 CLASS R Actual $1,000 $1,067.00 $3.84 $7.38 Hypothetical (5% return before expenses) $1,000 $1,021.08 $3.76 $7.20 ADVISOR CLASS Actual $1,000 $1,069.30 $1.28 $4.82 Hypothetical (5% return before expenses) $1,000 $1,023.55 $1.25 $4.71
* Expenses are calculated using the most recent six-month expense ratio excluding expenses of the underlying funds, net of expense waivers, annualized for each class (A: 0.50%; B: 1.25%; C: 1.24%; R: 0.75%; and Advisor: 0.25%), multiplied by the average account value over the period, multiplied by 181/365 to reflect the one-half year period. A portion of the Fund's expenses have been paid by the underlying funds in which the Fund invests. ** Expenses are calculated using the most recent six-month expense ratio including expenses of the underlying funds, net of expense waivers, annualized for each class (A: 1.19%; B: 1.94%; C: 1.93%; R: 1.44%; and Advisor: 0.94%), multiplied by the average account value over the period, multiplied by 181/365 to reflect the one-half year period. A portion of the Fund's expenses have been paid by the underlying funds in which the Fund invests. 12 | Semiannual Report Franklin Templeton Moderate Target Fund YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin Templeton Moderate Target Fund seeks the highest level of long-term total return consistent with a moderate level of risk.(1) ASSET ALLOCATION* Franklin Templeton Moderate Target Fund Based on Total Net Assets as of 6/30/09 (PIE CHART) Domestic Equity 38.8% Domestic Fixed Income 20.8% Foreign Equity 17.5% Foreign Fixed Income 12.5% Short-Term Investments & Other Net Assets 10.4%
* The asset allocation is based on the Statement of Investments (SOI), which classifies each underlying fund into a broad asset class. This semiannual report for Franklin Templeton Moderate Target Fund covers the period ended June 30, 2009. 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. PLEASE VISIT franklintempleton.com OR CALL (800) 342-5236 FOR MOST RECENT MONTH-END PERFORMANCE. PERFORMANCE OVERVIEW Franklin Templeton Moderate Target Fund - Class A delivered a cumulative total return of +8.22% for the six months under review. In comparison, the Fund's benchmarks, the Standard & Poor's 500 Index (S&P 500) and Morgan Stanley Capital International (MSCI) Europe, Australasia, Far East (EAFE) Index for equities, the Barclays Capital (BC) U.S. Aggregate Index for fixed income, and the Payden & Rygel (P&R) 90 Day U.S. T-Bill Index for short-term investments and other net assets, had total returns of +3.16%, +8.42%, (1.) The risk/reward potential is based on the Fund's goal and level of risk. It is not indicative of the Fund's actual or implied performance or portfolio composition, which may change on a continuous basis. THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND NAMES OF ALL PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S SOI, WHICH BEGINS ON PAGE 40. Semiannual Report | 13 +1.90% and +0.08%, respectively, during the same time.(2) You can find the Fund's long-term performance data in the Performance Summary beginning on page 16. TOP 10 FUND HOLDINGS Franklin Templeton Moderate Target Fund 6/30/09
% OF TOTAL NET ASSETS ---------- Franklin Flex Cap Growth Fund - - Advisor Class 13.9% Templeton Global Bond Fund - - Advisor Class 11.8% Mutual Shares Fund - Class Z 11.2% Franklin U.S. Government Securities Fund - Advisor Class 11.2% Franklin Total Return Fund - - Advisor Class 9.5% Mutual European Fund - Class Z 6.2% Franklin Growth Opportunities Fund - - Advisor Class 6.1% Templeton Foreign Fund - - Advisor Class 3.7% Templeton China World Fund - - Advisor Class 3.4% Franklin Gold and Precious Metals Fund - - Advisor Class 3.1%
INVESTMENT STRATEGY Whenever possible, we attempt to hold the same underlying Franklin Templeton funds in each Target Fund's portfolio and will vary the underlying funds' allocation percentages based upon each Target Fund's risk/return level. We generally diversify the Target Funds' broad equity allocations across investment styles, market capitalization sizes and countries of origin. Maintaining similarity of the underlying Franklin Templeton fund investments across the Conservative, Moderate and Growth Target Funds is intended to increase the consistency of their results relative to one another. For your reference, Franklin Templeton Moderate Target Fund seeks to maintain the following asset class allocations: 55% equity funds, 35% fixed income funds, and 10% short-term investments and other net assets. MANAGER'S DISCUSSION The Fund's performance can be attributed largely to maintaining a static allocation among equities, fixed income securities, and short-term investments and other net assets, and by the actual performance of the selected underlying funds. At period-end, Franklin Templeton Moderate Target Fund's domestic equity exposure was 68.8% of its total equity weighting, and foreign equity made up the balance. The portfolio was diversified across capitalization sizes and investment styles, and on June 30, 2009, we held shares in large-, mid- and small-capitalization equity funds, representing both growth and value styles. (2.) Source: (C) 2009 Morningstar. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (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 S&P 500 consists of 500 stocks chosen for market size, liquidity and industry group representation. Each stock's weight in the index is proportionate to its market value. The S&P 500 is one of the most widely used benchmarks of U.S. equity performance. The MSCI EAFE Index is a free float-adjusted, market capitalization-weighted index designed to measure equity market performance in global developed markets excluding the U.S. and Canada. The BC U.S. Aggregate Index is a market capitalization-weighted index representing the U.S. investment-grade, fixed-rate, taxable bond market with index components for government and corporate, mortgage pass-through and asset-backed securities. All issues included are SEC registered, taxable, dollar denominated and nonconvertible, must have at least one year to final maturity and must be rated investment grade (Baa3/BBB-/BBB- or higher) by Moody's, Standard & Poor's or Fitch, respectively. The P&R 90 Day U.S. T-Bill Index is a total return index based on a constant maturity instrument. Payden & Rygel includes both accrued interest and change in market price in its monthly total return calculations. The value of Treasuries, if held to maturity, is fixed; principal is guaranteed and interest is fixed. The indexes are unmanaged and include reinvested distributions. One cannot invest directly in an index, nor is an index representative of the Fund's portfolio. 14 | Semiannual Report Franklin Flex Cap Growth Fund - Advisor Class, at 13.9% of the Fund's total net assets, was our largest equity fund weighting at period-end. On the fixed income side, domestic exposure was 62.3% of the Fund's total income weighting, with the balance in foreign fixed income. Templeton Global Bond Fund -Advisor Class was our largest fixed income fund weighting at 11.8% of total net assets. Our largest domestic growth fund holding, Franklin Flex Cap Growth Fund - Advisor Class, and our largest domestic value fund holding, Mutual Shares Fund - Class Z, outperformed the S&P 500 during the six-month reporting period. Our largest foreign equity fund holding, Mutual European Fund - Class Z, underperformed the MSCI EAFE Index. On the fixed income side, Templeton Global Bond Fund - Advisor Class and Franklin U.S. Government Securities Fund - Advisor Class outperformed the BC U.S. Aggregate Index. Thank you for your continued participation in Franklin Templeton Moderate Target Fund. We look forward to serving your future investment needs. (PHOTO OF T. ANTHONY COFFEY) /s/ T. Anthony Coffey T. Anthony Coffey, CFA Portfolio Manager Franklin Templeton Moderate Target Fund THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS AS OF JUNE 30, 2009, 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. Semiannual Report | 15 Performance Summary as of 6/30/09 FRANKLIN TEMPLETON MODERATE TARGET FUND 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. The performance table does 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. PRICE AND DISTRIBUTION INFORMATION
CLASS A (SYMBOL: FMTIX) CHANGE 6/30/09 12/31/08 - ----------------------- ------ ------- -------- Net Asset Value (NAV) +$0.70 $11.37 $10.67 DISTRIBUTIONS (1/1/09-6/30/09) Dividend Income $0.0765 Long-Term Capital Gain $0.0952 TOTAL $0.1717
CLASS B (SYMBOL: FBMTX) CHANGE 6/30/09 12/31/08 - ----------------------- ------ ------- -------- Net Asset Value (NAV) +$0.69 $11.33 $10.64 DISTRIBUTIONS (1/1/09-6/30/09) Dividend Income $0.0364 Long-Term Capital Gain $0.0952 TOTAL $0.1316
CLASS C (SYMBOL: FTMTX) CHANGE 6/30/09 12/31/08 - ----------------------- ------ ------- -------- Net Asset Value (NAV) +$0.69 $11.16 $10.47 DISTRIBUTIONS (1/1/09-6/30/09) Dividend Income $0.0395 Long-Term Capital Gain $0.0952 TOTAL $0.1347
CLASS R (SYMBOL: FTMRX) CHANGE 6/30/09 12/31/08 - ----------------------- ------ ------- -------- Net Asset Value (NAV) +$0.70 $11.34 $10.64 DISTRIBUTIONS (1/1/09-6/30/09) Dividend Income $0.0637 Long-Term Capital Gain $0.0952 TOTAL $0.1589
ADVISOR CLASS (SYMBOL: FMTZX) CHANGE 6/30/09 12/31/08 - ----------------------------- ------ ------- -------- Net Asset Value (NAV) +$0.70 $11.37 $10.67 DISTRIBUTIONS (1/1/09-6/30/09) Dividend Income $0.0894 Long-Term Capital Gain $0.0952 TOTAL $0.1846
16 | Semiannual Report Performance Summary (CONTINUED) PERFORMANCE(1) CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETURN AND VALUE OF $10,000 INVESTMENT INCLUDE MAXIMUM SALES CHARGES. CLASS A: 5.75% MAXIMUM INITIAL SALES CHARGE; CLASS B: CONTINGENT DEFERRED SALES CHARGE (CDSC) DECLINING FROM 4% TO 1% OVER SIX YEARS, AND ELIMINATED THEREAFTER; CLASS C: 1% CDSC IN FIRST YEAR ONLY; CLASS R/ADVISOR CLASS: NO SALES CHARGES.
CLASS A 6-MONTH 1-YEAR 5-YEAR 10-YEAR - ------- ------- ------- ------- --------- Cumulative Total Return(2) +8.22% -10.07% +18.97% +56.77% Average Annual Total Return(3) +2.01% -15.24% +2.32% +3.98% Value of $10,000 Investment(4) $10,201 $ 8,476 $11,217 $14,780 Total Annual Operating Expenses(5) Without Waiver 1.43% With Waiver 1.23%
INCEPTION CLASS B 6-MONTH 1-YEAR 5-YEAR (12/1/03) - ------- ------- ------- ------- --------- Cumulative Total Return(2) +7.75% -10.71% +14.51% +18.26% Average Annual Total Return(3) +3.75% -14.18% +2.40% +2.90% Value of $10,000 Investment(4) $10,375 $ 8,582 $11,260 $11,729 Total Annual Operating Expenses(5) Without Waiver 2.18% With Waiver 1.98%
CLASS C 6-MONTH 1-YEAR 5-YEAR 10-YEAR - ------- ------- ------- ------- --------- Cumulative Total Return(2) +7.91% -10.67% +14.61% +45.64% Average Annual Total Return(3) +6.91% -11.54% +2.76% +3.83% Value of $10,000 Investment(4) $10,691 $ 8,846 $11,461 $14,564 Total Annual Operating Expenses(5) Without Waiver 2.18% With Waiver 1.98%
INCEPTION CLASS R 6-MONTH 1-YEAR 5-YEAR (1/1/02) - ------- ------- ------- ------- --------- Cumulative Total Return(2) +8.12% -10.25% +17.45% +34.17% Average Annual Total Return(3) +8.12% -10.25% +3.27% +4.00% Value of $10,000 Investment(4) $10,812 $ 8,975 $11,745 $13,417 Total Annual Operating Expenses(5) Without Waiver 1.68% With Waiver 1.48%
ADVISOR CLASS(6) 6-MONTH 1-YEAR 5-YEAR 10-YEAR - ---------------- ------- ------- ------- --------- Cumulative Total Return(2) +8.35% -9.85% +20.09% +58.24% Average Annual Total Return(3) +8.35% -9.85% +3.73% +4.70% Value of $10,000 Investment(4) $10,835 $ 9,015 $12,009 $15,824 Total Annual Operating Expenses(5) Without Waiver 1.18% With Waiver 0.98%
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, SEE "FUNDS AND PERFORMANCE" AT franklintempleton.com OR CALL (800) 342-5236. THE INVESTMENT MANAGER HAS CONTRACTUALLY AGREED TO WAIVE OR LIMIT ITS FEES AND TO ASSUME AS ITS OWN EXPENSE CERTAIN EXPENSES OTHERWISE PAYABLE BY THE FUND SO THAT COMMON EXPENSES (I.E., A COMBINATION OF ASSET ALLOCATION FEES AND OTHER EXPENSES, BUT EXCLUDING RULE 12B-1 FEES AND ACQUIRED FUND FEES AND EXPENSES) FOR EACH CLASS OF THE FUND DO NOT EXCEED 0.25% (OTHER THAN CERTAIN NON-ROUTINE EXPENSES OR COSTS, INCLUDING THOSE RELATING TO LITIGATION, INDEMNIFICATION, REORGANIZATIONS AND LIQUIDATIONS) UNTIL 4/30/10. Semiannual Report | 17 Performance Summary (CONTINUED) ENDNOTES WHILE AN ASSET ALLOCATION PLAN CAN BE A VALUABLE TOOL TO HELP REDUCE OVERALL VOLATILITY, ALL INVESTMENTS INVOLVE SOME DEGREE OF RISK. TYPICALLY, THE MORE AGGRESSIVE THE INVESTMENT, OR THE GREATER THE POTENTIAL RETURN, THE MORE RISK INVOLVED. GENERALLY, INVESTORS SHOULD BE COMFORTABLE WITH SOME FLUCTUATION IN THE VALUE OF THEIR INVESTMENTS, ESPECIALLY OVER THE SHORT TERM. STOCKS HAVE HISTORICALLY OUTPERFORMED OTHER ASSET CLASSES OVER THE LONG TERM, BUT THEY TEND TO FLUCTUATE MORE DRAMATICALLY OVER THE SHORTER TERM. BOND PRICES GENERALLY MOVE IN THE OPPOSITE DIRECTION OF INTEREST RATES. THUS, AS PRICES OF BONDS IN A FUND ADJUST TO A RISE IN INTEREST RATES, THAT FUND'S SHARE PRICE MAY DECLINE. BECAUSE THIS FUND INVESTS IN UNDERLYING FUNDS, WHICH MAY ENGAGE IN A VARIETY OF INVESTMENT STRATEGIES INVOLVING CERTAIN RISKS, THE FUND MAY BE SUBJECT TO THOSE SAME RISKS. THE FUND'S PROSPECTUS ALSO INCLUDES A DESCRIPTION OF THE MAIN INVESTMENT RISKS. CLASS B: These shares have higher annual fees and expenses than Class A shares. CLASS C: Prior to 1/1/04, these shares were offered with an initial sales charge; thus actual total returns would have differed. These shares have higher annual fees and expenses than Class A shares. CLASS R: Shares are available to certain eligible investors as described in the prospectus. These shares have higher annual fees and expenses than Class A shares. ADVISOR CLASS: Shares are available to certain eligible investors as described in the prospectus. (1.) If the manager had not waived fees, the Fund's total returns would have been lower. (2.) Cumulative total return represents the change in value of an investment over the periods indicated. (3.) Average annual total return represents the average annual change in value of an investment over the periods indicated. Six-month return has not been annualized. (4.) These figures represent the value of a hypothetical $10,000 investment in the Fund over the periods indicated. (5.) Figures are as stated in the Fund's prospectus current as of the date of this report. In periods of market volatility, assets may decline significantly, causing total annual Fund operating expenses to become higher than the figures shown. (6.) Effective 12/1/05, the Fund began offering Advisor Class shares, which do not have sales charges or a Rule 12b-1 plan. Performance quotations for this class reflect the following methods of calculation: (a) For periods prior to 12/1/05, a restated figure is used based upon the Fund's Class A performance, excluding the effect of Class A's maximum initial sales charge, but reflecting the effect of the Class A Rule 12b-1 fees; and (b) for periods after 11/30/05, actual Advisor Class performance is used reflecting all charges and fees applicable to that class. Since 12/1/05 (commencement of sales), the cumulative and average annual total returns of Advisor Class shares were +5.69% and +1.56%. 18 | Semiannual Report Your Fund's Expenses FRANKLIN TEMPLETON MODERATE TARGET FUND As a Fund shareholder, you can incur two types of costs: - - Transaction costs, including sales charges (loads) on Fund purchases; and - - Ongoing Fund costs, including management fees, distribution and service (12b-1) fees, and other Fund expenses. All mutual funds have ongoing costs, sometimes referred to as operating expenses. The following table shows ongoing costs of investing in the Fund and can help you understand these costs and compare them with those of other mutual funds. The table assumes a $1,000 investment held for the six months indicated. ACTUAL FUND EXPENSES The first line (Actual) for each share class listed in the table provides actual account values and expenses. The "Ending Account Value" is derived from the Fund's actual return, which includes the effect of Fund expenses. You can estimate the expenses you paid during the period by following these steps. OF COURSE, YOUR ACCOUNT VALUE AND EXPENSES WILL DIFFER FROM THOSE IN THIS ILLUSTRATION: 1. Divide your account value by $1,000. IF AN ACCOUNT HAD AN $8,600 VALUE, THEN $8,600 / $1,000 = 8.6. 2. Multiply the result by the number under the heading "Expenses Paid During Period." IF EXPENSES PAID DURING PERIOD WERE $7.50, THEN 8.6 X $7.50 = $64.50. In this illustration, the estimated expenses paid this period are $64.50. HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS Information in the second line (Hypothetical) for each class in the table can help you compare ongoing costs of investing in the Fund with those of other mutual funds. This information may not be used to estimate the actual ending account balance or expenses you paid during the period. The hypothetical "Ending Account Value" is based on the actual expense ratio for each class and an assumed 5% annual rate of return before expenses, which does not represent the Fund's actual return. The figure under the heading "Expenses Paid During Period" shows the hypothetical expenses your account would have incurred under this scenario. You can compare this figure with the 5% hypothetical examples that appear in shareholder reports of other funds. Semiannual Report | 19 Your Fund's Expenses (CONTINUED) PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES. Therefore, the second line for each class is useful in comparing ongoing costs only, and will not help you compare total costs of owning different funds. In addition, if transaction costs were included, your total costs would have been higher. Please refer to the Fund prospectus for additional information on operating expenses.
BEGINNING ENDING EXPENSES PAID EXPENSES PAID ACCOUNT VALUE ACCOUNT VALUE DURING PERIOD* DURING PERIOD** 1/1/09 6/30/09 1/1/09-6/30/09 1/1/09-6/30/09 ------------- ------------- -------------- --------------- CLASS A Actual $1,000 $1,082.20 $2.58 $ 6.56 Hypothetical (5% return before expenses) $1,000 $1,022.32 $2.51 $ 6.36 CLASS B Actual $1,000 $1,077.50 $6.44 $10.41 Hypothetical (5% return before expenses) $1,000 $1,018.60 $6.26 $10.09 CLASS C Actual $1,000 $1,079.10 $6.44 $10.41 Hypothetical (5% return before expenses) $1,000 $1,018.60 $6.26 $10.09 CLASS R Actual $1,000 $1,081.20 $3.87 $ 7.84 Hypothetical (5% return before expenses) $1,000 $1,021.08 $3.76 $ 7.60 ADVISOR CLASS Actual $1,000 $1,083.50 $1.29 $ 5.27 Hypothetical (5% return before expenses) $1,000 $1,023.55 $1.25 $ 5.11
* Expenses are calculated using the most recent six-month expense ratio excluding expenses of the underlying funds, net of expense waivers, annualized for each class (A: 0.50%; B: 1.25%; C: 1.25%; R: 0.75%; and Advisor: 0.25%), multiplied by the average account value over the period, multiplied by 181/365 to reflect the one-half year period. A portion of the Fund's expenses have been paid by the underlying funds in which the Fund invests. ** Expenses are calculated using the most recent six-month expense ratio including expenses of the underlying funds, net of expense waivers, annualized for each class (A: 1.27%; B: 2.02%; C: 2.02%; R: 1.52%; and Advisor: 1.02%), multiplied by the average account value over the period, multiplied by 181/365 to reflect the one-half year period. A portion of the Fund's expenses have been paid by the underlying funds in which the Fund invests. 20 | Semiannual Report Franklin Templeton Growth Target Fund YOUR FUND'S GOALS AND MAIN INVESTMENTS: Franklin Templeton Growth Target Fund seeks the highest level of long-term total return consistent with a higher level of risk.(1) ASSET ALLOCATION* Franklin Templeton Growth Target Fund Based on Total Net Assets as of 6/30/09 (PIE CHART) Domestic Equity 54.9% Foreign Equity 24.9% Domestic Fixed Income 9.5% Foreign Fixed Income 5.7% Short-Term Investments & Other Net Assets 5.0%
* The asset allocation is based on the Statement of Investments (SOI), which classifies each underlying fund into a broad asset class. We are pleased to bring you Franklin Templeton Growth Target Fund's semi-annual report for the period ended June 30, 2009. 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. PLEASE VISIT franklintempleton.com OR CALL (800) 342-5236 FOR MOST RECENT MONTH-END PERFORMANCE. PERFORMANCE OVERVIEW Franklin Templeton Growth Target Fund - Class A delivered a +9.55% cumulative total return for the six months under review. In comparison, the Fund's benchmarks, the Standard & Poor's 500 Index (S&P 500) and Morgan Stanley Capital International (MSCI) Europe, Australasia, Far East (EAFE) Index for equities, the Barclays Capital (BC) U.S. Aggregate Index for fixed income, and the Payden & Rygel (P&R) 90 Day U.S. T-Bill Index for short-term investments (1.) The risk/reward potential is based on the Fund's goal and level of risk. It is not indicative of the Fund's actual or implied performance or portfolio composition, which may change on a continuous basis. THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND NAMES OF ALL PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S SOI, WHICH BEGINS ON PAGE 46. Semiannual Report | 21 TOP 10 FUND HOLDINGS Franklin Templeton Growth Target Fund 6/30/09 and other net assets, had total returns of +3.16%, +8.42%, +1.90% and +0.08%, respectively, during the same time.(2) You can find the Fund's long-term performance data in the Performance Summary beginning on page 24.
% OF TOTAL NET ASSETS Franklin Flex Cap Growth Fund - - Advisor Class 19.7% Mutual Shares Fund - Class Z 16.0% Mutual European Fund - Class Z 8.6% Franklin Growth Opportunities Fund - - Advisor Class 8.4% Templeton Foreign Fund - - Advisor Class 5.4% Templeton Global Bond Fund - - Advisor Class 5.3% Franklin U.S. Government Securities Fund - Advisor Class 5.2% Franklin Gold and Precious Metals Fund - - Advisor Class 4.8% Templeton China World Fund - - Advisor Class 4.7% Franklin Total Return Fund - - Advisor Class 4.3%
INVESTMENT STRATEGY Whenever possible, we attempt to hold the same underlying Franklin Templeton funds in each Target Fund's portfolio and will vary the underlying funds' allocation percentages based upon each Target Fund's risk/return level. We generally diversify the Target Funds' broad equity allocations across investment styles, market capitalization sizes and countries of origin. Maintaining similarity of the underlying Franklin Templeton fund investments across the Conservative, Moderate and Growth Target Funds is intended to increase the consistency of their results relative to one another. For your reference, Franklin Templeton Growth Target Fund seeks to maintain the following asset class allocations: 80% equity funds, 15% fixed income funds, and 5% short-term investments and other net assets. MANAGER'S DISCUSSION The Fund's performance can be attributed largely to maintaining a static allocation among equities, fixed income securities, and short-term investments and other net assets, and by the actual performance of the selected underlying funds. At period-end, Franklin Templeton Growth Target Fund's domestic equity exposure was 68.8% of its total equity weighting, and foreign equity made up the balance. The portfolio was diversified across capitalization sizes and investment styles, and on June 30, 2009, we held shares in large-, mid- and small-capitalization equity funds, representing both growth and value styles. Franklin Flex Cap Growth Fund - Advisor Class, at 19.7% of the Fund's total net assets, (2.) Source: (C) 2009 Morningstar. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (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 S&P 500 consists of 500 stocks chosen for market size, liquidity and industry group representation. Each stock's weight in the index is proportionate to its market value. The S&P 500 is one of the most widely used benchmarks of U.S. equity performance. The MSCI EAFE Index is a free float-adjusted, market capitalization-weighted index designed to measure equity market performance in global developed markets excluding the U.S. and Canada. The BC U.S. Aggregate Index is a market capitalization-weighted index representing the U.S. investment-grade, fixed-rate, taxable bond market with index components for government and corporate, mortgage pass-through and asset-backed securities. All issues included are SEC registered, taxable, dollar denominated and nonconvertible, must have at least one year to final maturity and must be rated investment grade (Baa3/BBB-/BBB- or higher) by Moody's, Standard & Poor's or Fitch, respectively. The P&R 90 Day U.S. T-Bill Index is a total return index based on a constant maturity instrument. Payden & Rygel includes both accrued interest and change in market price in its monthly total return calculations. The value of Treasuries, if held to maturity, is fixed; principal is guaranteed and interest is fixed. The indexes are unmanaged and include reinvested distributions. One cannot invest directly in an index, nor is an index representative of the Fund's portfolio. 22 | Semiannual Report was our largest equity fund weighting at period-end. On the fixed income side, domestic exposure was 62.4% of the Fund's total income weighting, with the balance in foreign fixed income. Templeton Global Bond Fund - Advisor Class was our largest fixed income fund weighting at 5.3% of total net assets. Our largest domestic growth fund holding, Franklin Flex Cap Growth Fund - Advisor Class, and our largest domestic value fund holding, Mutual Shares Fund - Class Z, outperformed the S&P 500 during the six-month reporting period. Our largest foreign equity fund holding, Mutual European Fund -Class Z, underperformed the MSCI EAFE Index. On the fixed income side, Templeton Global Bond Fund - Advisor Class and Franklin U.S. Government Securities Fund - Advisor Class outperformed the BC U.S. Aggregate Index. Thank you for your continued participation in Franklin Templeton Growth Target Fund. We look forward to serving your future investment needs. (PHOTO OF T. ANTHONY COFFEY) /s/ T. Anthony Coffey T. Anthony Coffey, CFA Portfolio Manager Franklin Templeton Growth Target Fund THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS AS OF JUNE 30, 2009, 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. Semiannual Report | 23 Performance Summary as of 6/30/09 FRANKLIN TEMPLETON GROWTH TARGET FUND 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. The performance table does 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. PRICE AND DISTRIBUTION INFORMATION
CLASS A (SYMBOL: FGTIX) CHANGE 6/30/09 12/31/08 - ----------------------- ------ ------- -------- Net Asset Value (NAV) +$0.97 $11.45 $10.48 DISTRIBUTIONS (1/1/09-6/30/09) Dividend Income $0.0231 Long-Term Capital Gain $0.0048 TOTAL $0.0279
CLASS B (SYMBOL: N/A) CHANGE 6/30/09 12/31/08 - --------------------- ------ ------- -------- Net Asset Value (NAV) +$0.91 $11.23 $10.32 DISTRIBUTIONS (1/1/09-6/30/09) Dividend Income $0.0231 Long-Term Capital Gain $0.0048 TOTAL $0.0279
CLASS C (SYMBOL: FTGTX) CHANGE 6/30/09 12/31/08 - ----------------------- ------ ------- -------- Net Asset Value (NAV) +$0.91 $11.22 $10.31 DISTRIBUTIONS (1/1/09-6/30/09) Dividend Income $0.0231 Long-Term Capital Gain $0.0048 TOTAL $0.0279
CLASS R (SYMBOL: FGTRX) CHANGE 6/30/09 12/31/08 - ----------------------- ------ ------- -------- Net Asset Value (NAV) +$0.95 $11.33 $10.38 DISTRIBUTIONS (1/1/09-6/30/09) Dividend Income $0.0231 Long-Term Capital Gain $0.0048 TOTAL $0.0279
ADVISOR CLASS (SYMBOL: FGTZX) CHANGE 6/30/09 12/31/08 - ----------------------------- ------ ------- -------- Net Asset Value (NAV) +$0.98 $11.47 $10.49 DISTRIBUTIONS (1/1/09-6/30/09) Dividend Income $0.0231 Long-Term Capital Gain $0.0048 TOTAL $0.0279
24 | Semiannual Report Performance Summary (CONTINUED) PERFORMANCE(1) CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETURN AND VALUE OF $10,000 INVESTMENT INCLUDE MAXIMUM SALES CHARGES. CLASS A: 5.75% MAXIMUM INITIAL SALES CHARGE; CLASS B: CONTINGENT DEFERRED SALES CHARGE (CDSC) DECLINING FROM 4% TO 1% OVER SIX YEARS, AND ELIMINATED THEREAFTER; CLASS C: 1% CDSC IN FIRST YEAR ONLY; CLASS R/ADVISOR CLASS: NO SALES CHARGES.
CLASS A 6-MONTH 1-YEAR 5-YEAR 10-YEAR - ------- ------- ------ ------- --------- Cumulative Total Return(2) +9.55% -17.43% +12.51% +40.50% Average Annual Total Return(3) +3.25% -22.20% +1.19% +2.85% Value of $10,000 Investment(4) $10,325 $7,780 $10,608 $13,241 Total Annual Operating Expenses(5) Without Waiver 1.58% With Waiver 1.31%
INCEPTION CLASS B 6-MONTH 1-YEAR 5-YEAR (12/1/03) - ------- ------- ------ ------- --------- Cumulative Total Return(2) +9.02% -18.13% +8.31% +12.52% Average Annual Total Return(3) +5.02% -21.36% +1.26% +1.98% Value of $10,000 Investment(4) $10,502 $7,864 $10,646 $11,157 Total Annual Operating Expenses(5) Without Waiver 2.33% With Waiver 2.06%
CLASS C 6-MONTH 1-YEAR 5-YEAR 10-YEAR - ------- ------- ------ ------- --------- Cumulative Total Return(2) +9.13% -18.07% +8.36% +30.37% Average Annual Total Return(3) +8.13% -18.88% +1.62% +2.69% Value of $10,000 Investment(4) $10,813 $8,112 $10,836 $13,037 Total Annual Operating Expenses(5) Without Waiver 2.33% With Waiver 2.06%
INCEPTION CLASS R 6-MONTH 1-YEAR 5-YEAR (1/1/02) - ------- ------- ------ ------- --------- Cumulative Total Return(2) +9.45% -17.65% +11.16% +25.57% Average Annual Total Return(3) +9.45% -17.65% +2.14% +3.09% Value of $10,000 Investment(4) $10,945 $8,235 $11,116 $12,557 Total Annual Operating Expenses(5) Without Waiver 1.83% With Waiver 1.56%
ADVISOR CLASS(6) 6-MONTH 1-YEAR 5-YEAR 10-YEAR - ---------------- ------- ------ ------- --------- Cumulative Total Return(2) +9.64% -17.26% +13.49% +41.72% Average Annual Total Return(3) +9.64% -17.26% +2.56% +3.55% Value of $10,000 Investment(4) $10,964 $8,274 $11,349 $14,172 Total Annual Operating Expenses(5) Without Waiver 1.33% With Waiver 1.06%
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, SEE "FUNDS AND PERFORMANCE" AT franklintempleton.com OR CALL (800) 342-5236. THE INVESTMENT MANAGER HAS CONTRACTUALLY AGREED TO WAIVE OR LIMIT ITS FEES AND TO ASSUME AS ITS OWN EXPENSE CERTAIN EXPENSES OTHERWISE PAYABLE BY THE FUND SO THAT COMMON EXPENSES (I.E., A COMBINATION OF ASSET ALLOCATION FEES AND OTHER EXPENSES, BUT EXCLUDING RULE 12B-1 FEES AND ACQUIRED FUND FEES AND EXPENSES) FOR EACH CLASS OF THE FUND DO NOT EXCEED 0.25% (OTHER THAN CERTAIN NON-ROUTINE EXPENSES OR COSTS, INCLUDING THOSE RELATING TO LITIGATION, INDEMNIFICATION, REORGANIZATIONS AND LIQUIDATIONS) UNTIL 4/30/10. Semiannual Report | 25 Performance Summary (CONTINUED) ENDNOTES WHILE AN ASSET ALLOCATION PLAN CAN BE A VALUABLE TOOL TO HELP REDUCE OVERALL VOLATILITY, ALL INVESTMENTS INVOLVE SOME DEGREE OF RISK. TYPICALLY, THE MORE AGGRESSIVE THE INVESTMENT, OR THE GREATER THE POTENTIAL RETURN, THE MORE RISK INVOLVED. GENERALLY, INVESTORS SHOULD BE COMFORTABLE WITH SOME FLUCTUATION IN THE VALUE OF THEIR INVESTMENTS, ESPECIALLY OVER THE SHORT TERM. STOCKS HAVE HISTORICALLY OUTPERFORMED OTHER ASSET CLASSES OVER THE LONG TERM, BUT THEY TEND TO FLUCTUATE MORE DRAMATICALLY OVER THE SHORTER TERM. BOND PRICES GENERALLY MOVE IN THE OPPOSITE DIRECTION OF INTEREST RATES. THUS, AS PRICES OF BONDS IN A FUND ADJUST TO A RISE IN INTEREST RATES, THAT FUND'S SHARE PRICE MAY DECLINE. BECAUSE THIS FUND INVESTS IN UNDERLYING FUNDS, WHICH MAY ENGAGE IN A VARIETY OF INVESTMENT STRATEGIES INVOLVING CERTAIN RISKS, THE FUND MAY BE SUBJECT TO THOSE SAME RISKS. THE FUND'S PROSPECTUS ALSO INCLUDES A DESCRIPTION OF THE MAIN INVESTMENT RISKS. CLASS B: These shares have higher annual fees and expenses than Class A shares. CLASS C: Prior to 1/1/04, these shares were offered with an initial sales charge; thus actual total returns would have differed. These shares have higher annual fees and expenses than Class A shares. CLASS R: Shares are available to certain eligible investors as described in the prospectus. These shares have higher annual fees and expenses than Class A shares. ADVISOR CLASS: Shares are available to certain eligible investors as described in the prospectus. (1.) If the manager had not waived fees, the Fund's total returns would have been lower. (2.) Cumulative total return represents the change in value of an investment over the periods indicated. (3.) Average annual total return represents the average annual change in value of an investment over the periods indicated. Six-month return has not been annualized. (4.) These figures represent the value of a hypothetical $10,000 investment in the Fund over the periods indicated. (5.) Figures are as stated in the Fund's prospectus current as of the date of this report. In periods of market volatility, assets may decline significantly, causing total annual Fund operating expenses to become higher than the figures shown. (6.) Effective 12/1/05, the Fund began offering Advisor Class shares, which do not have sales charges or a Rule 12b-1 plan. Performance quotations for this class reflect the following methods of calculation: (a) For periods prior to 12/1/05, a restated figure is used based upon the Fund's Class A performance, excluding the effect of Class A's maximum initial sales charge, but reflecting the effect of the Class A Rule 12b-1 fees; and (b) for periods after 11/30/05, actual Advisor Class performance is used reflecting all charges and fees applicable to that class. Since 12/1/05 (commencement of sales), the cumulative and average annual total returns of Advisor Class shares were -3.10% and -0.88%. 26 | Semiannual Report Your Fund's Expenses FRANKLIN TEMPLETON GROWTH TARGET FUND As a Fund shareholder, you can incur two types of costs: - - Transaction costs, including sales charges (loads) on Fund purchases; and - - Ongoing Fund costs, including management fees, distribution and service (12b-1) fees, and other Fund expenses. All mutual funds have ongoing costs, sometimes referred to as operating expenses. The following table shows ongoing costs of investing in the Fund and can help you understand these costs and compare them with those of other mutual funds. The table assumes a $1,000 investment held for the six months indicated. ACTUAL FUND EXPENSES The first line (Actual) for each share class listed in the table provides actual account values and expenses. The "Ending Account Value" is derived from the Fund's actual return, which includes the effect of Fund expenses. You can estimate the expenses you paid during the period by following these steps. OF COURSE, YOUR ACCOUNT VALUE AND EXPENSES WILL DIFFER FROM THOSE IN THIS ILLUSTRATION: 1. Divide your account value by $1,000. IF AN ACCOUNT HAD AN $8,600 VALUE, THEN $8,600 / $1,000 = 8.6. 2. Multiply the result by the number under the heading "Expenses Paid During Period." IF EXPENSES PAID DURING PERIOD WERE $7.50, THEN 8.6 X $7.50 = $64.50. In this illustration, the estimated expenses paid this period are $64.50. HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS Information in the second line (Hypothetical) for each class in the table can help you compare ongoing costs of investing in the Fund with those of other mutual funds. This information may not be used to estimate the actual ending account balance or expenses you paid during the period. The hypothetical "Ending Account Value" is based on the actual expense ratio for each class and an assumed 5% annual rate of return before expenses, which does not represent the Fund's actual return. The figure under the heading "Expenses Paid During Period" shows the hypothetical expenses your account would have incurred under this scenario. You can compare this figure with the 5% hypothetical examples that appear in shareholder reports of other funds. Semiannual Report | 27 Your Fund's Expenses (CONTINUED) PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES. Therefore, the second line for each class is useful in comparing ongoing costs only, and will not help you compare total costs of owning different funds. In addition, if transaction costs were included, your total costs would have been higher. Please refer to the Fund prospectus for additional information on operating expenses.
BEGINNING ENDING EXPENSES PAID EXPENSES PAID ACCOUNT VALUE ACCOUNT VALUE DURING PERIOD* DURING PERIOD** 1/1/09 6/30/09 1/1/09-6/30/09 1/1/09-6/30/09 ------------- ------------- --------------- --------------- CLASS A Actual $1,000 $1,095.50 $2.55 $ 6.96 Hypothetical (5% return before expenses) $1,000 $1,022.36 $2.46 $ 6.71 CLASS B Actual $1,000 $1,090.20 $6.43 $10.83 Hypothetical (5% return before expenses) $1,000 $1,018.65 $6.21 $10.44 CLASS C Actual $1,000 $1,091.30 $6.43 $10.84 Hypothetical (5% return before expenses) $1,000 $1,018.65 $6.21 $10.44 CLASS R Actual $1,000 $1,094.50 $3.84 $ 8.26 Hypothetical (5% return before expenses) $1,000 $1,021.12 $3.71 $ 7.95 ADVISOR CLASS Actual $1,000 $1,096.40 $1.25 $ 5.67 Hypothetical (5% return before expenses) $1,000 $1,023.60 $1.20 $ 5.46
* Expenses are calculated using the most recent six-month expense ratio excluding expenses of the underlying funds, net of expense waivers, annualized for each class (A: 0.49%; B: 1.24%; C: 1.24%; R: 0.74%; and Advisor: 0.24%), multiplied by the average account value over the period, multiplied by 181/365 to reflect the one-half year period. A portion of the Fund's expenses have been paid by the underlying funds in which the Fund invests. ** Expenses are calculated using the most recent six-month expense ratio including expenses of the underlying funds, net of expense waivers, annualized for each class (A: 1.34%; B: 2.09%; C: 2.09%; R: 1.59%; and Advisor: 1.09%), multiplied by the average account value over the period, multiplied by 181/365 to reflect the one-half year period. A portion of the Fund's expenses have been paid by the underlying funds in which the Fund invests. 28 | Semiannual Report Franklin Templeton Fund Allocator Series FINANCIAL HIGHLIGHTS FRANKLIN TEMPLETON CONSERVATIVE TARGET FUND
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, YEAR ENDED JUNE 30, 2009 -------------------------------------------------------- JULY 31, CLASS A (UNAUDITED) 2008 2007 2006 2005 2004(a) 2004 - ------- ---------------- -------- -------- -------- -------- -------- ---------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ........................ $ 10.92 $ 13.59 $ 13.33 $ 12.74 $ 12.48 $ 11.66 $ 10.91 -------- -------- -------- -------- -------- -------- -------- Income from investment operations(b): Net investment income(c, d) ...... 0.08 0.39 0.48 0.41 0.29 0.12 0.23 Net realized and unrealized gains (losses) ...................... 0.66 (2.44) 0.60 0.84 0.29 0.84 0.74 -------- -------- -------- -------- -------- -------- -------- Total from investment operations ....................... 0.74 (2.05) 1.08 1.25 0.58 0.96 0.97 -------- -------- -------- -------- -------- -------- -------- Less distributions from: Net investment income ............ (0.09) (0.38) (0.47) (0.42) (0.32) (0.14) (0.22) Net realized gains ............... (0.08) (0.24) (0.35) (0.24) -- -- -- -------- -------- -------- -------- -------- -------- -------- Total distributions ................. (0.17) (0.62) (0.82) (0.66) (0.32) (0.14) (0.22) -------- -------- -------- -------- -------- -------- -------- Redemption fees(e) .................. -- --(f) --(f) --(f) --(f) --(f) --(f) -------- -------- -------- -------- -------- -------- -------- Net asset value, end of period ...... $ 11.49 $ 10.92 $ 13.59 $ 13.33 $ 12.74 $ 12.48 $ 11.66 ======== ======== ======== ======== ======== ======== ======== Total return(g) ..................... 6.80% (15.41)% 8.29% 9.92% 4.70% 8.30% 8.89% RATIOS TO AVERAGE NET ASSETS(h) Expenses before waiver and payments by affiliates(i) ........ 0.60% 0.65% 0.68% 0.69% 0.73% 0.82% 0.85% Expenses net of waiver and payments by affiliates(i) ........ 0.50% 0.51% 0.49% 0.50% 0.69% 0.82% 0.85% Net investment income(d) ............ 1.50% 3.18% 3.52% 3.09% 2.31% 2.40% 2.00% SUPPLEMENTAL DATA Net assets, end of period (000's) ... $336,974 $282,769 $251,570 $194,477 $162,079 $139,153 $117,013 Portfolio turnover rate ............. 7.72% 4.84% 8.11% 11.08% 8.16% 2.63% 3.71%
(a) For the period August 1, 2004 to December 31, 2004. (b) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (c) Based on average daily shares outstanding. (d) Recognition of net investment income by the Fund is affected by the timing of declaration of dividends by the Underlying Funds in which the Fund invests. (e) Effective September 1, 2008, the redemption fee was eliminated. (f) Amount rounds to less than $0.01 per share. (g) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. (h) Ratios are annualized for periods less than one year. (i) Does not include expenses of the Underlying Funds in which the Fund invests. The annualized weighted average expense ratio of the Underlying Funds was 0.69% for the period ended June 30, 2009. The accompanying notes are an integral part of these financial statements. Semiannual Report | 29 Franklin Templeton Fund Allocator Series FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN TEMPLETON CONSERVATIVE TARGET FUND
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, PERIOD ENDED JUNE 30, 2009 ------------------------------------------------ JULY 31, CLASS B (UNAUDITED) 2008 2007 2006 2005 2004(a) 2004(b) - ------- ---------------- ------- ------ ------ ------ ------- ------------ PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ........................ $10.88 $ 13.55 $13.29 $12.71 $12.46 $11.63 $11.67 ------ ------- ------ ------ ------ ------ ------ Income from investment operations(c): Net investment income(d, e) ...... 0.04 0.30 0.36 0.30 0.19 0.09 0.07 Net realized and unrealized gains (losses) ...................... 0.67 (2.44) 0.61 0.84 0.29 0.84 0.04 ------ ------- ------ ------ ------ ------ ------ Total from investment operations ....................... 0.71 (2.14) 0.97 1.14 0.48 0.93 0.11 ------ ------- ------ ------ ------ ------ ------ Less distributions from: Net investment income ............ (0.05) (0.29) (0.36) (0.32) (0.23) (0.10) (0.15) Net realized gains ............... (0.08) (0.24) (0.35) (0.24) -- -- -- ------ ------- ------ ------ ------ ------ ------ Total distributions ................. (0.13) (0.53) (0.71) (0.56) (0.23) (0.10) (0.15) ------ ------- ------ ------ ------ ------ ------ Redemption fees(f) .................. -- --(g) --(g) --(g) --(g) --(g) --(g) ------ ------- ------ ------ ------ ------ ------ Net asset value, end of period ...... $11.46 $ 10.88 $13.55 $13.29 $12.71 $12.46 $11.63 ====== ======= ====== ====== ====== ====== ====== Total return(h) ..................... 6.52% (16.02)% 7.42% 9.05% 3.87% 8.02% 0.98% RATIOS TO AVERAGE NET ASSETS(i) Expenses before waiver and payments by affiliates(j) ........ 1.35% 1.40% 1.43% 1.44% 1.48% 1.57% 1.60% Expenses net of waiver and payments by affiliates(j) ........ 1.25% 1.26% 1.24% 1.25% 1.44% 1.57% 1.60% Net investment income(e) ............ 0.75% 2.43% 2.77% 2.34% 1.56% 1.65% 1.25% SUPPLEMENTAL DATA Net assets, end of period (000's) ... $7,369 $ 7,150 $6,497 $6,422 $6,202 $5,223 $3,567 Portfolio turnover rate ............. 7.72% 4.84% 8.11% 11.08% 8.16% 2.63% 3.71%
(a) For the period August 1, 2004 to December 31, 2004. (b) For the period December 1, 2003 (effective date) to July 31, 2004. (c) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (d) Based on average daily shares outstanding. (e) Recognition of net investment income by the Fund is affected by the timing of declaration of dividends by the Underlying Funds in which the Fund invests. (f) Effective September 1, 2008, the redemption fee was eliminated. (g) Amount rounds to less than $0.01 per share. (h) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. (i) Ratios are annualized for periods less than one year. (j) Does not include expenses of the Underlying Funds in which the Fund invests. The annualized weighted average expense ratio of the Underlying Funds was 0.69% for the period ended June 30, 2009. The accompanying notes are an integral part of these financial statements. 30 | Semiannual Report Franklin Templeton Fund Allocator Series FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN TEMPLETON CONSERVATIVE TARGET FUND
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, YEAR ENDED JUNE 30, 2009 ----------------------------------------------------- JULY 31, CLASS C (UNAUDITED) 2008 2007 2006 2005 2004(a) 2004 - ------- ---------------- -------- -------- ------- ------- ------- ---------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ........................ $ 10.77 $ 13.42 $ 13.18 $ 12.60 $ 12.36 $ 11.53 $ 10.80 -------- -------- -------- ------- ------- ------- ------- Income from investment operations(b): Net investment income(c, d) ...... 0.04 0.30 0.38 0.30 0.19 0.08 0.14 Net realized and unrealized gains (losses) ...................... 0.65 (2.41) 0.58 0.85 0.28 0.84 0.73 -------- -------- -------- ------- ------- ------- ------- Total from investment operations ....................... 0.69 (2.11) 0.96 1.15 0.47 0.92 0.87 -------- -------- -------- ------- ------- ------- ------- Less distributions from: Net investment income ............ (0.05) (0.30) (0.37) (0.33) (0.23) (0.09) (0.14) Net realized gains ............... (0.08) (0.24) (0.35) (0.24) -- -- -- -------- -------- -------- ------- ------- ------- ------- Total distributions ................. (0.13) (0.54) (0.72) (0.57) (0.23) (0.09) (0.14) -------- -------- -------- ------- ------- ------- ------- Redemption fees(e) .................. -- --(f) --(f) --(f) --(f) --(f) --(f) -------- -------- -------- ------- ------- ------- ------- Net asset value, end of period ...... $ 11.33 $ 10.77 $ 13.42 $ 13.18 $ 12.60 $ 12.36 $ 11.53 ======== ======== ======== ======= ======= ======= ======= Total return(g) ..................... 6.44% (16.04)% 7.48% 9.16% 3.83% 8.03% 8.04% RATIOS TO AVERAGE NET ASSETS(h) Expenses before waiver and payments by affiliates(i) ........ 1.34% 1.39% 1.43% 1.43% 1.47% 1.57% 1.60% Expenses net of waiver and payments by affiliates(i) ........ 1.24% 1.25% 1.24% 1.24% 1.43% 1.57% 1.60% Net investment income(d) ............ 0.76% 2.44% 2.77% 2.35% 1.57% 1.65% 1.25% SUPPLEMENTAL DATA Net assets, end of period (000's) ... $187,974 $152,773 $110,914 $76,018 $63,298 $59,803 $52,881 Portfolio turnover rate ............. 7.72% 4.84% 8.11% 11.08% 8.16% 2.63% 3.71%
(a) For the period August 1, 2004 to December 31, 2004. (b) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (c) Based on average daily shares outstanding. (d) Recognition of net investment income by the Fund is affected by the timing of declaration of dividends by the Underlying Funds in which the Fund invests. (e) Effective September 1, 2008, the redemption fee was eliminated. (f) Amount rounds to less than $0.01 per share. (g) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. (h) Ratios are annualized for periods less than one year. (i) Does not include expenses of the Underlying Funds in which the Fund invests. The annualized weighted average expense ratio of the Underlying Funds was 0.69% for the period ended June 30, 2009. The accompanying notes are an integral part of these financial statements. Semiannual Report | 31 Franklin Templeton Fund Allocator Series FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN TEMPLETON CONSERVATIVE TARGET FUND
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, YEAR ENDED JUNE 30, 2009 --------------------------------------------------- JULY 31, CLASS R (UNAUDITED) 2008 2007 2006 2005 2004(a) 2004 - ------- ---------------- ------- ------- ------- ------- ------- ---------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ........................ $ 10.89 $ 13.55 $ 13.30 $ 12.71 $ 12.46 $ 11.63 $10.89 ------- ------- ------- ------- ------- ------- ------ Income from investment operations(b): Net investment income(c, d) ...... 0.07 0.37 0.47 0.37 0.26 0.11 0.21 Net realized and unrealized gains (losses) ...................... 0.66 (2.44) 0.57 0.85 0.28 0.85 0.72 ------- ------- ------- ------- ------- ------- ------ Total from investment operations ....................... 0.73 (2.07) 1.04 1.22 0.54 0.96 0.93 ------- ------- ------- ------- ------- ------- ------ Less distributions from: Net investment income ............ (0.08) (0.35) (0.44) (0.39) (0.29) (0.13) (0.19) Net realized gains ............... (0.08) (0.24) (0.35) (0.24) -- -- -- ------- ------- ------- ------- ------- ------- ------ Total distributions ................. (0.16) (0.59) (0.79) (0.63) (0.29) (0.13) (0.19) ------- ------- ------- ------- ------- ------- ------ Redemption fees(e) .................. -- --(f) --(f) --(f) --(f) --(f) --(f) ------- ------- ------- ------- ------- ------- ------ Net asset value, end of period ...... $ 11.46 $ 10.89 $ 13.55 $ 13.30 $ 12.71 $ 12.46 $11.63 ======= ======= ======= ======= ======= ======= ====== Total return(g) ..................... 6.70% (15.58)% 7.91% 9.73% 4.37% 8.27% 8.56% RATIOS TO AVERAGE NET ASSETS(h) Expenses before waiver and payments by affiliates(i) ........ 0.85% 0.90% 0.93% 0.94% 0.98% 1.07% 1.10% Expenses net of waiver and payments by affiliates(i) ........ 0.75% 0.76% 0.74% 0.75% 0.94% 1.07% 1.10% Net investment income(d) ............ 1.25% 2.93% 3.27% 2.84% 2.06% 2.15% 1.75% SUPPLEMENTAL DATA Net assets, end of period (000's) ... $40,527 $29,466 $25,476 $14,490 $14,112 $12,199 $8,370 Portfolio turnover rate ............. 7.72% 4.84% 8.11% 11.08% 8.16% 2.63% 3.71%
(a) For the period August 1, 2004 to December 31, 2004. (b) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (c) Based on average daily shares outstanding. (d) Recognition of net investment income by the Fund is affected by the timing of declaration of dividends by the Underlying Funds in which the Fund invests. (e) Effective September 1, 2008, the redemption fee was eliminated. (f) Amount rounds to less than $0.01 per share. (g) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. (h) Ratios are annualized for periods less than one year. (i) Does not include expenses of the Underlying Funds in which the Fund invests. The annualized weighted average expense ratio of the Underlying Funds was 0.69% for the period ended June 30, 2009. The accompanying notes are an integral part of these financial statements. 32 | Semiannual Report Franklin Templeton Fund Allocator Series FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN TEMPLETON CONSERVATIVE TARGET FUND
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, PERIOD ENDED JUNE 30, 2009 --------------------------- DECEMBER 31, ADVISOR CLASS (UNAUDITED) 2008 2007 2006 2005(a) - ------------- ---------------- ------- ------ ------ ------------ PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ................... $10.91 $ 13.57 $13.31 $12.72 $12.81 ------ ------- ------ ------ ------ Income from investment operations(b): Net investment income(c, d) ......................... 0.10 0.45 0.53 0.45 0.07 Net realized and unrealized gains (losses) .......... 0.65 (2.46) 0.58 0.83 0.02 ------ ------- ------ ------ ------ Total from investment operations ....................... 0.75 (2.01) 1.11 1.28 0.09 ------ ------- ------ ------ ------ Less distributions from: Net investment income ............................... (0.10) (0.41) (0.50) (0.45) (0.18) Net realized gains .................................. (0.08) (0.24) (0.35) (0.24) -- ------ ------- ------ ------ ------ Total distributions .................................... (0.18) (0.65) (0.85) (0.69) (0.18) ------ ------- ------ ------ ------ Redemption fees(e) ..................................... -- --(f) --(f) --(f) --(f) ------ ------- ------ ------ ------ Net asset value, end of period ......................... $11.48 $ 10.91 $13.57 $13.31 $12.72 ====== ======= ====== ====== ====== Total return(g) ........................................ 6.93% (15.15)% 8.48% 10.28% 0.68% RATIOS TO AVERAGE NET ASSETS(h) Expenses before waiver and payments by affiliates(i) ... 0.35% 0.40% 0.43% 0.44% 0.48% Expenses net of waiver and payments by affiliates(i) ... 0.25% 0.26% 0.24% 0.25% 0.44% Net investment income(d) ............................... 1.75% 3.43% 3.77% 3.34% 2.56% SUPPLEMENTAL DATA Net assets, end of period (000's) ...................... $5,817 $ 4,307 $3,536 $1,726 $ 753 Portfolio turnover rate ................................ 7.72% 4.84% 8.11% 11.08% 8.16%
(a) For the period December 1, 2005 (effective date) to December 31, 2005. (b) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (c) Based on average daily shares outstanding. (d) Recognition of net investment income by the Fund is affected by the timing of declaration of dividends by the Underlying Funds in which the Fund invests. (e) Effective September 1, 2008, the redemption fee was eliminated. (f) Amount rounds to less than $0.01 per share. (g) Total return is not annualized for periods less than one year. (h) Ratios are annualized for periods less than one year. (i) Does not include expenses of the Underlying Funds in which the Fund invests. The annualized weighted average expense ratio of the Underlying Funds was 0.69% for the period ended June 30, 2009. The accompanying notes are an integral part of these financial statements. Semiannual Report | 33 Franklin Templeton Fund Allocator Series STATEMENT OF INVESTMENTS, JUNE 30, 2009 (UNAUDITED)
FRANKLIN TEMPLETON CONSERVATIVE TARGET FUND SHARES VALUE ------------------------------------------- ----------- ------------ INVESTMENTS IN UNDERLYING FUNDS(a) DOMESTIC EQUITY 28.4% (b) Franklin Flex Cap Growth Fund, Advisor Class .......................... 1,750,057 $ 59,466,924 (b) Franklin Growth Opportunities Fund, Advisor Class ..................... 1,601,212 24,194,314 Franklin MicroCap Value Fund, Advisor Class ........................... 497,986 11,508,449 (b) Franklin Natural Resources Fund, Advisor Class ........................ 395,334 10,341,928 (b) Franklin Small Cap Growth Fund, Advisor Class ......................... 1,390,809 10,125,087 Mutual Shares Fund, Class Z ........................................... 3,007,827 48,576,413 ------------ 164,213,115 ------------ DOMESTIC FIXED INCOME 24.1% Franklin Total Return Fund, Advisor Class ............................. 6,913,071 63,185,468 Franklin U.S. Government Securities Fund, Advisor Class ............... 11,554,174 76,604,176 ------------ 139,789,644 ------------ FOREIGN EQUITY 12.8% Franklin Global Real Estate Fund, Advisor Class ....................... 904,380 4,250,585 (b) Franklin Gold and Precious Metals Fund, Advisor Class ................. 394,106 12,808,431 Mutual European Fund, Class Z ......................................... 1,438,371 25,559,861 Templeton China World Fund, Advisor Class ............................. 500,181 14,335,176 Templeton Foreign Fund, Advisor Class ................................. 3,255,351 16,895,273 ------------ 73,849,326 ------------ FOREIGN FIXED INCOME 14.4% Franklin Templeton Emerging Market Debt Opportunities Fund ............ 583,251 5,412,570 Templeton Global Bond Fund, Advisor Class ............................. 6,608,740 77,917,045 ------------ 83,329,615 ------------ TOTAL INVESTMENTS IN UNDERLYING FUNDS BEFORE SHORT TERM INVESTMENTS (COST $477,599,388) 79.7% .......................................... 461,181,700 ------------ SHORT TERM INVESTMENTS (COST $117,927,504) 20.4% MONEY MARKET FUNDS 20.4% (c) Institutional Fiduciary Trust Money Market Portfolio, 0.00% ........... 117,927,504 117,927,504 ------------ TOTAL INVESTMENTS IN UNDERLYING FUNDS (COST $595,526,892) 100.1% ...... 579,109,204 OTHER ASSETS, LESS LIABILITIES (0.1)% ................................. (447,467) ------------ NET ASSETS 100.0% ..................................................... $578,661,737 ============
(a) See Note 6 regarding investments in Underlying Funds. (b) Non-income producing. (c) The rate shown is the annualized seven-day yield at period end. The accompanying notes are an integral part of these financial statements. 34 | Semiannual Report Franklin Templeton Fund Allocator Series FINANCIAL HIGHLIGHTS FRANKLIN TEMPLETON MODERATE TARGET FUND
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, YEAR ENDED JUNE 30, 2009 -------------------------------------------------------- JULY 31, CLASS A (UNAUDITED) 2008 2007 2006 2005 2004(a) 2004 - ------- ------------- -------- -------- -------- -------- -------- ---------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ........................... $ 10.67 $ 14.35 $ 14.03 $ 13.14 $ 12.69 $ 11.65 $ 10.64 -------- -------- -------- -------- -------- -------- -------- Income from investment operations(b): Net investment income(c, d) ......... 0.07 0.35 0.43 0.35 0.25 0.12 0.20 Net realized and unrealized gains (losses) ......................... 0.81 (3.31) 0.87 1.15 0.50 1.05 1.00 -------- -------- -------- -------- -------- -------- -------- Total from investment operations ....... 0.88 (2.96) 1.30 1.50 0.75 1.17 1.20 -------- -------- -------- -------- -------- -------- -------- Less distributions from: Net investment income ............... (0.08) (0.35) (0.43) (0.38) (0.30) (0.13) (0.19) Net realized gains .................. (0.10) (0.37) (0.55) (0.23) -- -- -- -------- -------- -------- -------- -------- -------- -------- Total distributions .................... (0.18) (0.72) (0.98) (0.61) (0.30) (0.13) (0.19) -------- -------- -------- -------- -------- -------- -------- Redemption fees(e) ..................... -- --(f) --(f) --(f) --(f) --(f) --(f) -------- -------- -------- -------- -------- -------- -------- Net asset value, end of period ......... $ 11.37 $ 10.67 $ 14.35 $ 14.03 $ 13.14 $ 12.69 $ 11.65 ======== ======== ======== ======== ======== ======== ======== Total return(g) ........................ 8.22% (21.22)% 9.40% 11.57% 5.94% 10.14% 11.18% RATIOS TO AVERAGE NET ASSETS(h) Expenses before waiver and payments by affiliates(i) ........... 0.62% 0.68% 0.68% 0.70% 0.74% 0.81% 0.89% Expenses net of waiver and payments by affiliates(i) ........... 0.50% 0.52% 0.50% 0.50% 0.69% 0.81% 0.89% Net investment income(d) ............... 1.23% 2.74% 2.92% 2.56% 1.93% 2.32% 1.75% SUPPLEMENTAL DATA Net assets, end of period (000's) ...... $563,978 $476,415 $491,451 $401,392 $316,754 $281,033 $219,273 Portfolio turnover rate ................ 7.88% 7.29% 10.29% 9.40% 10.59% 2.78% 4.13%
(a) For the period August 1, 2004 to December 31, 2004. (b) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (c) Based on average daily shares outstanding. (d) Recognition of net investment income by the Fund is affected by the timing of declaration of dividends by the Underlying Funds in which the Fund invests. (e) Effective September 1, 2008, the redemption fee was eliminated. (f) Amount rounds to less than $0.01 per share. (g) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. (h) Ratios are annualized for periods less than one year. (I) Does not include expenses of the Underlying Funds in which the Fund invests. The annualized weighted average expense ratio of the Underlying Funds was 0.77% for the period ended June 30, 2009. The accompanying notes are an integral part of these financial statements. Semiannual Report | 35 Franklin Templeton Fund Allocator Series FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN TEMPLETON MODERATE TARGET FUND
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, PERIOD ENDED JUNE 30, 2009 ------------------------------------------------------- JULY 31, CLASS B (UNAUDITED) 2008 2007 2006 2005 2004(a) 2004(b) - ------- ---------------- ------- ------- ------- ------- ------- ------------ PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ......................... $ 10.64 $ 14.31 $ 13.99 $ 13.10 $ 12.66 $11.62 $11.62 ------- ------- ------- ------- ------- ------ ------ Income from investment operations(c): Net investment income(d, e) .... 0.03 0.25 0.31 0.24 0.15 0.09 0.05 Net realized and unrealized gains (losses) .............. 0.80 (3.30) 0.88 1.15 0.50 1.03 0.09 ------- ------- ------- ------- ------- ------ ------ Total from investment operations ..................... 0.83 (3.05) 1.19 1.39 0.65 1.12 0.14 ------- ------- ------- ------- ------- ------ ------ Less distributions from: Net investment income .......... (0.04) (0.25) (0.32) (0.27) (0.21) (0.08) (0.14) Net realized gains ............. (0.10) (0.37) (0.55) (0.23) -- -- -- ------- ------- ------- ------- ------- ------ ------ Total distributions ............... (0.14) (0.62) (0.87) (0.50) (0.21) (0.08) (0.14) ------- ------- ------- ------- ------- ------ ------ Redemption fees(f) ................ -- --(g) --(g) --(g) --(g) --(g) --(g) ------- ------- ------- ------- ------- ------ ------ Net asset value, end of period .... $ 11.33 $ 10.64 $ 14.31 $ 13.99 $ 13.10 $12.66 $11.62 ======= ======= ======= ======= ======= ====== ====== Total return(h) ................... 7.75% (21.80)% 8.61% 10.70% 5.18% 9.77% 1.18% RATIOS TO AVERAGE NET ASSETS(i) Expenses before waiver and payments by affiliates(j) ...... 1.37% 1.43% 1.43% 1.45% 1.49% 1.56% 1.64% Expenses net of waiver and payments by affiliates(j) ............... 1.25% 1.27% 1.25% 1.25% 1.44% 1.56% 1.64% Net investment income(e) .......... 0.48% 1.99% 2.17% 1.81% 1.18% 1.57% 1.00% SUPPLEMENTAL DATA Net assets, end of period (000's) ........................ $12,019 $11,060 $12,445 $11,533 $10,170 $8,700 $5,417 Portfolio turnover rate ........... 7.88% 7.29% 10.29% 9.40% 10.59% 2.78% 4.13%
(a) For the period August 1, 2004 to December 31, 2004. (b) For the period December 1, 2003 (effective date) to July 31, 2004. (c) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (d) Based on average daily shares outstanding. (e) Recognition of net investment income by the Fund is affected by the timing of declaration of dividends by the Underlying Funds in which the Fund invests. (f) Effective September 1, 2008, the redemption fee was eliminated. (g) Amount rounds to less than $0.01 per share. (h) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. (i) Ratios are annualized for periods less than one year. (j) Does not include expenses of the Underlying Funds in which the Fund invests. The annualized weighted average expense ratio of the Underlying Funds was 0.77% for the period ended June 30, 2009. The accompanying notes are an integral part of these financial statements. 36 | Semiannual Report Franklin Templeton Fund Allocator Series FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN TEMPLETON MODERATE TARGET FUND
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, YEAR ENDED JUNE 30, 2009 ------------------------------------------------------------ JULY 31, CLASS C (UNAUDITED) 2008 2007 2006 2005 2004(a) 2004 - ------- ---------------- -------- -------- -------- -------- -------- ---------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ...................... $ 10.47 $ 14.11 $ 13.81 $ 12.94 $ 12.50 $ 11.47 $ 10.48 -------- -------- -------- -------- -------- -------- ------- Income from investment operations(b): Net investment income(c, d) .... 0.02 0.25 0.31 0.24 0.15 0.08 0.12 Net realized and unrealized gains (losses) .............. 0.81 (3.26) 0.87 1.13 0.50 1.03 0.98 -------- -------- -------- -------- -------- -------- ------- Total from investment operations .. 0.83 (3.01) 1.18 1.37 0.65 1.11 1.10 -------- -------- -------- -------- -------- -------- ------- Less distributions from: Net investment income .......... (0.04) (0.26) (0.33) (0.27) (0.21) (0.08) (0.11) Net realized gains ............. (0.10) (0.37) (0.55) (0.23) -- -- -- -------- -------- -------- -------- -------- -------- ------- Total distributions ............... (0.14) (0.63) (0.88) (0.50) (0.21) (0.08) (0.11) -------- -------- -------- -------- -------- -------- ------- Redemption fees(e) ................ -- --(f) --(f) --(f) --(f) --(f) --(f) -------- -------- -------- -------- -------- -------- ------- Net asset value, end of period .... $ 11.16 $ 10.47 $ 14.11 $ 13.81 $ 12.94 $ 12.50 $ 11.47 ======== ======== ======== ======== ======== ======== ======= Total return(g) ................... 7.91% (21.87)% 8.61% 10.72% 5.25% 9.75% 10.39% RATIOS TO AVERAGE NET ASSETS(h) Expenses before waiver and payments by affiliates(i) ...... 1.37% 1.43% 1.43% 1.45% 1.48% 1.56% 1.64% Expenses net of waiver and payments by affiliates(i) ...... 1.25% 1.27% 1.25% 1.25% 1.43% 1.56% 1.64% Net investment income(d) .......... 0.48% 1.99% 2.17% 1.81% 1.19% 1.57% 1.00% SUPPLEMENTAL DATA Net assets, end of period (000's) ........................ $204,521 $164,355 $160,563 $134,465 $112,294 $105,966 $90,988 Portfolio turnover rate ........... 7.88% 7.29% 10.29% 9.40% 10.59% 2.78% 4.13%
(a) For the period August 1, 2004 to December 31, 2004. (b) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (c) Based on average daily shares outstanding. (d) Recognition of net investment income by the Fund is affected by the timing of declaration of dividends by the Underlying Funds in which the Fund invests. (e) Effective September 1, 2008, the redemption fee was eliminated. (f) Amount rounds to less than $0.01 per share. (g) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. (h) Ratios are annualized for periods less than one year. (i) Does not include expenses of the Underlying Funds in which the Fund invests. The annualized weighted average expense ratio of the Underlying Funds was 0.77% for the period ended June 30, 2009. The accompanying notes are an integral part of these financial statements. Semiannual Report | 37 Franklin Templeton Fund Allocator Series FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN TEMPLETON MODERATE TARGET FUND
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, YEAR ENDED JUNE 30, 2009 ------------------------------------------------------- JULY 31, CLASS R (UNAUDITED) 2008 2007 2006 2005 2004(a) 2004 - ------- ---------------- ------- ------- ------- ------- ------- ---------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ......................... $ 10.64 $ 14.32 $ 14.00 $ 13.11 $ 12.66 $11.62 $ 10.62 ------- ------- ------- ------- ------- ------- ------- Income from investment operations(b): Net investment income(c, d) .... 0.05 0.33 0.39 0.31 0.21 0.11 0.18 Net realized and unrealized gains (losses) .............. 0.81 (3.32) 0.88 1.15 0.51 1.04 0.98 ------- ------- ------- ------- ------- ------- ------- Total from investment operations .. 0.86 (2.99) 1.27 1.46 0.72 1.15 1.16 ------- ------- ------- ------- ------- ------- ------- Less distributions from: Net investment income .......... (0.06) (0.32) (0.40) (0.34) (0.27) (0.11) (0.16) Net realized gains ............. (0.10) (0.37) (0.55) (0.23) -- -- -- ------- ------- ------- ------- ------- ------- ------- Total distributions ............... (0.16) (0.69) (0.95) (0.57) (0.27) (0.11) (0.16) ------- ------- ------- ------- ------- ------- ------- Redemption fees(e) ................ -- --(f) --(f) --(f) --(f) --(f) --(f) ------- ------- ------- ------- ------- ------- ------- Net asset value, end of period .... $ 11.34 $ 10.64 $ 14.32 $ 14.00 $ 13.11 $ 12.66 $ 11.62 ======= ======= ======= ======= ======= ======= ======= Total return(g) ................... 8.12% (21.45)% 9.16% 11.27% 5.73% 9.92% 10.95% RATIOS TO AVERAGE NET ASSETS(h) Expenses before waiver and payments by affiliates(i) ...... 0.87% 0.93% 0.93% 0.95% 0.99% 1.06% 1.14% Expenses net of waiver and payments by affiliates(i) ...... 0.75% 0.77% 0.75% 0.75% 0.94% 1.06% 1.14% Net investment income(d) .......... 0.98% 2.49% 2.67% 2.31% 1.68% 2.07% 1.50% SUPPLEMENTAL DATA Net assets, end of period (000's) ........................ $63,266 $47,009 $40,102 $31,719 $30,403 $25,162 $17,161 Portfolio turnover rate ........... 7.88% 7.29% 10.29% 9.40% 10.59% 2.78% 4.13%
(a) For the period August 1, 2004 to December 31, 2004. (b) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (c) Based on average daily shares outstanding. (d) Recognition of net investment income by the Fund is affected by the timing of declaration of dividends by the Underlying Funds in which the Fund invests. (e) Effective September 1, 2008, the redemption fee was eliminated. (f) Amount rounds to less than $0.01 per share. (g) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. (h) Ratios are annualized for periods less than one year. (i) Does not include expenses of the Underlying Funds in which the Fund invests. The annualized weighted average expense ratio of the Underlying Funds was 0.77% for the period ended June 30, 2009. The accompanying notes are an integral part of these financial statements. 38 | Semiannual Report Franklin Templeton Fund Allocator Series FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN TEMPLETON MODERATE TARGET FUND
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, PERIOD ENDED JUNE 30, 2009 ------------------------------ DECEMBER 31, ADVISOR CLASS (UNAUDITED) 2008 2007 2006 2005(a) - ------------- ---------------- -------- ------ ------ ------------ PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ......................... $ 10.67 $ 14.35 $14.03 $13.15 $13.23 ------- ------- ------ ------ ------ Income from investment operations(b): Net investment income(c, d) .... 0.08 0.40 0.46 0.40 0.08 Net realized and unrealized gains (losses) .............. 0.81 (3.33) 0.88 1.13 0.02 ------- ------- ------ ------ ------ Total from investment operations .. 0.89 (2.93) 1.34 1.53 0.10 ------- ------- ------ ------ ------ Less distributions from: Net investment income .......... (0.09) (0.38) (0.47) (0.42) (0.18) Net realized gains ............. (0.10) (0.37) (0.55) (0.23) -- ------- ------- ------ ------ ------ Total distributions ............... (0.19) (0.75) (1.02) (0.65) (0.18) ------- ------- ------ ------ ------ Redemption fees(e) ................ -- --(f) --(f) --(f) --(f) ------- ------- ------ ------ ------ Net asset value, end of period .... $ 11.37 $ 10.67 $14.35 $14.03 $13.15 ======= ======= ====== ====== ====== Total return(g) ................... 8.35% (21.02)% 9.66% 11.87% 0.68% RATIOS TO AVERAGE NET ASSETS(h) Expenses before waiver and payments by affiliates(i) ............... 0.37% 0.43% 0.43% 0.45% 0.49% Expenses net of waiver and payments by affiliates(i) ............... 0.25% 0.27% 0.25% 0.25% 0.44% Net investment income(d) .......... 1.48% 2.99% 3.17% 2.81% 2.18% SUPPLEMENTAL DATA Net assets, end of period (000's) ........................ $16,330 $11,489 $9,699 $7,071 $3,890 Portfolio turnover rate ........... 7.88% 7.29% 10.29% 9.40% 10.59%
(a) For the period December 1, 2005 (effective date) to December 31, 2005. (b) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (c) Based on average daily shares outstanding. (d) Recognition of net investment income by the Fund is affected by the timing of declaration of dividends by the Underlying Funds in which the Fund invests. (e) Effective September 1, 2008, the redemption fee was eliminated. (f) Amount rounds to less than $0.01 per share. (g) Total return is not annualized for periods less than one year. (h) Ratios are annualized for periods less than one year. (i) Does not include expenses of the Underlying Funds in which the Fund invests. The annualized weighted average expense ratio of the Underlying Funds was 0.77% for the period ended June 30, 2009. The accompanying notes are an integral part of these financial statements. Semiannual Report | 39 Franklin Templeton Fund Allocator Series STATEMENT OF INVESTMENTS, JUNE 30, 2009 (UNAUDITED)
FRANKLIN TEMPLETON MODERATE TARGET FUND SHARES VALUE - --------------------------------------- ---------- ------------ INVESTMENTS IN UNDERLYING FUNDS(a) DOMESTIC EQUITY 38.8% (b) Franklin Flex Cap Growth Fund, Advisor Class ...................... 3,516,719 $119,498,125 (b) Franklin Growth Opportunities Fund, Advisor Class ................. 3,482,145 52,615,213 Franklin MicroCap Value Fund, Advisor Class ....................... 1,023,026 23,642,135 (b) Franklin Natural Resources Fund, Advisor Class .................... 776,568 20,315,023 (b) Franklin Small Cap Growth Fund, Advisor Class ..................... 2,848,925 20,740,172 Mutual Shares Fund, Class Z ....................................... 5,975,380 96,502,383 ------------ 333,313,051 ------------ DOMESTIC FIXED INCOME 20.8% Franklin Total Return Fund, Advisor Class ......................... 8,982,725 82,102,105 Franklin U.S. Government Securities Fund, Advisor Class ........... 14,544,698 96,431,349 ------------ 178,533,454 ------------ FOREIGN EQUITY 17.5% Franklin Global Real Estate Fund, Advisor Class ................... 2,061,495 9,689,027 (b) Franklin Gold and Precious Metals Fund, Advisor Class ............. 813,511 26,439,118 Mutual European Fund, Class Z ..................................... 3,017,232 53,616,220 Templeton China World Fund, Advisor Class ......................... 1,010,313 28,955,568 Templeton Foreign Fund, Advisor Class ............................. 6,202,206 32,189,448 ------------ 150,889,381 ------------ FOREIGN FIXED INCOME 12.5% Franklin Templeton Emerging Market Debt Opportunities Fund ........ 740,240 6,869,430 Templeton Global Bond Fund, Advisor Class ......................... 8,575,073 101,100,105 ------------ 107,969,535 ------------ TOTAL INVESTMENTS IN UNDERLYING FUNDS BEFORE SHORT TERM INVESTMENTS (COST $798,946,716) 89.6% ...................................... 770,705,421 ------------ SHORT TERM INVESTMENTS (COST $90,408,113) 10.5% MONEY MARKET FUNDS 10.5% (c) Institutional Fiduciary Trust Money Market Portfolio, 0.00% ....... 90,408,113 90,408,113 ------------ TOTAL INVESTMENTS IN UNDERLYING FUNDS (COST $889,354,829) 100.1% .. 861,113,534 OTHER ASSETS, LESS LIABILITIES (0.1)% ............................. (1,000,369) ------------ NET ASSETS 100.0% ................................................. $860,113,165 ============
(a) See Note 6 regarding investments in Underlying Funds. (b) Non-income producing. (c) The rate shown is the annualized seven-day yield at period end. The accompanying notes are an integral part of these financial statements. 40 | Semiannual Report Franklin Templeton Fund Allocator Series FINANCIAL HIGHLIGHTS FRANKLIN TEMPLETON GROWTH TARGET FUND
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, YEAR ENDED JUNE 30, 2009 ---------------------------------------------------------- JULY 31, CLASS A (UNAUDITED) 2008 2007 2006 2005 2004(a) 2004 - ------- ---------------- ---------- --------- -------- -------- -------- ---------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ....................... $ 10.48 $ 16.17 $ 15.63 $ 14.10 $ 13.17 $ 11.83 $ 10.46 -------- -------- -------- -------- -------- -------- -------- Income from investment operations(b): Net investment income(c, d) ..... 0.02 0.19 0.32 0.24 0.14 0.09 0.11 Net realized and unrealized gains (losses) ..................... 0.97 (5.00) 1.31 1.73 0.96 1.33 1.36 -------- -------- -------- -------- -------- -------- -------- Total from investment operations ...................... 0.99 (4.81) 1.63 1.97 1.10 1.42 1.47 -------- -------- -------- -------- -------- -------- -------- Less distributions from: Net investment income and short term gains received from Underlying Funds ........ (0.02) (0.22) (0.32) (0.32) (0.17) (0.08) (0.10) Net realized gains .............. --(e) (0.66) (0.77) (0.12) -- -- -- -------- -------- -------- -------- -------- -------- -------- Total distributions ................ (0.02) (0.88) (1.09) (0.44) (0.17) (0.08) (0.10) -------- -------- -------- -------- -------- -------- -------- Redemption fees(f) ................. -- --(e) --(e) --(e) --(e) --(e) --(e) -------- -------- -------- -------- -------- -------- -------- Net asset value, end of period ..... $ 11.45 $ 10.48 $ 16.17 $ 15.63 $ 14.10 $ 13.17 $ 11.83 ======== ======== ======== ======== ======== ======== ======== Total return(g) .................... 9.55% (30.75)% 10.58% 13.90% 8.47% 12.04% 14.04% RATIOS TO AVERAGE NET ASSETS(h) Expenses before waiver and payments by affiliates(i) ....... 0.70% 0.76% 0.74% 0.75% 0.79% 0.85% 0.83% Expenses net of waiver and payments by affiliates(i) ....... 0.49% 0.51% 0.50% 0.50% 0.72% 0.85% 0.83% Net investment income(d) ........... 0.36% 1.43% 1.93% 1.59% 1.07% 1.72% 0.91% SUPPLEMENTAL DATA Net assets, end of period (000's) .................. $318,727 $283,111 $394,689 $319,521 $230,686 $202,560 $165,500 Portfolio turnover rate ............ 10.56% 8.87% 10.36% 9.31% 10.50% 3.98% 3.46%
(a) For the period August 1, 2004 to December 31, 2004. (b) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (c) Based on average daily shares outstanding. (d) Recognition of net investment income by the Fund is affected by the timing of declaration of dividends by the Underlying Funds in which the Fund invests. (e) Amount rounds to less than $0.01 per share. (f) Effective September 1, 2008, the redemption fee was eliminated. (g) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. (h) Ratios are annualized for periods less than one year. (i) Does not include expenses of the Underlying Funds in which the Fund invests. The annualized weighted average expense ratio of the Underlying Funds was 0.85% for the period ended June 30, 2009. The accompanying notes are an integral part of these financial statements. Semiannual Report | 41 Franklin Templeton Fund Allocator Series FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN TEMPLETON GROWTH TARGET FUND
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, PERIOD ENDED JUNE 30, 2009 ------------------------------------------------ JULY 31, CLASS B (UNAUDITED) 2008 2007 2006 2005 2004(a) 2004(b) - ------- ---------------- ------- ------ ------ ------ ------- ------------ PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ....................... $10.32 $ 15.91 $15.45 $13.97 $13.09 $11.75 $11.80 ------ ------- ------ ------ ------ ------ ------ Income from investment operations(c): Net investment income (loss)(d, e) ................. (0.02) 0.09 0.17 0.12 0.04 0.06 (0.02) Net realized and unrealized gains (losses) ..................... 0.95 (4.90) 1.31 1.72 0.96 1.32 0.09 ------ ------- ------ ------ ------ ------ ------ Total from investment operations ...................... 0.93 (4.81) 1.48 1.84 1.00 1.38 0.02 ------ ------- ------ ------ ------ ------ ------ Less distributions from: Net investment income and short term gains received from Underlying Funds ........ (0.02) (0.12) (0.25) (0.24) (0.12) (0.04) (0.12) Net realized gains .............. --(f) (0.66) (0.77) (0.12) -- -- -- ------ ------- ------ ------ ------ ------ ------ Total distributions ................ (0.02) (0.78) (1.02) (0.36) (0.12) (0.04) (0.12) ------ ------- ------ ------ ------ ------ ------ Redemption fees(g) ................. -- --(f) --(f) --(f) --(f) --(f) --(f) ------ ------- ------ ------ ------ ------ ------ Net asset value, end of period ..... $11.23 $ 10.32 $15.91 $15.45 $13.97 $13.09 $11.75 ====== ======= ====== ====== ====== ====== ====== Total return(h) .................... 9.02% (31.24)% 9.76% 13.06% 7.63% 11.76% 0.56% RATIOS TO AVERAGE NET ASSETS(i) Expenses before waiver and payments by affiliates(j) ....... 1.45% 1.51% 1.49% 1.50% 1.54% 1.60% 1.58% Expenses net of waiver and payments by affiliates(j) ....... 1.24% 1.26% 1.25% 1.25% 1.47% 1.60% 1.58% Net investment income (loss)(e) .... (0.39)% 0.68% 1.18% 0.84% 0.32% 0.97% 0.16% SUPPLEMENTAL DATA Net assets, end of period (000's)... $6,829 $ 6,261 $8,292 $8,195 $6,468 $5,343 $3,178 Portfolio turnover rate ............ 10.56% 8.87% 10.36% 9.31% 10.50% 3.98% 3.46%
(a) For the period August 1, 2004 to December 31, 2004. (b) For the period December 1, 2003 (effective date) to July 31, 2004. (c) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (d) Based on average daily shares outstanding. (e) Recognition of net investment income by the Fund is affected by the timing of declaration of dividends by the Underlying Funds in which the Fund invests. (f) Amount rounds to less than $0.01 per share. (g) Effective September 1, 2008, the redemption fee was eliminated. (h) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. (i) Ratios are annualized for periods less than one year. (j) Does not include expenses of the Underlying Funds in which the Fund invests. The annualized weighted average expense ratio of the Underlying Funds was 0.85% for the period ended June 30, 2009. The accompanying notes are an integral part of these financial statements. 42 | Semiannual Report Franklin Templeton Fund Allocator Series FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN TEMPLETON GROWTH TARGET FUND
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, YEAR ENDED JUNE 30, 2009 ------------------------------------------------------ JULY 31, CLASS C (UNAUDITED) 2008 2007 2006 2005 2004(A) 2004 - ------- ---------------- -------- -------- -------- ------- ------- ---------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ....................... $ 10.31 $ 15.90 $ 15.44 $ 13.97 $ 13.09 $ 11.72 $ 10.38 -------- -------- -------- -------- ------- ------- ------- Income from investment operations(b): Net investment income (loss)(c, d) ................. (0.02) 0.09 0.19 0.13 0.04 0.05 0.02 Net realized and unrealized gains (losses) ..................... 0.95 (4.90) 1.29 1.70 0.96 1.32 1.35 -------- -------- -------- -------- ------- ------- ------- Total from investment operations ...................... 0.93 (4.81) 1.48 1.83 1.00 1.37 1.27 -------- -------- -------- -------- ------- ------- ------- Less distributions from: Net investment income and short term gains received from Underlying Funds ........ (0.02) (0.12) (0.25) (0.24) (0.12) -- (0.03) Net realized gains .............. --(e) (0.66) (0.77) (0.12) -- -- -- -------- -------- -------- -------- ------- ------- ------- Total distributions ................ (0.02) (0.78) (1.02) (0.36) (0.12) -- (0.03) -------- -------- -------- -------- ------- ------- ------- Redemption fees(f) ................. -- --(e) --(e) --(e) --(e) --(e) --(e) -------- -------- -------- -------- ------- ------- ------- Net asset value, end of period ..... $ 11.22 $ 10.31 $ 15.90 $ 15.44 $ 13.97 $ 13.09 $ 11.72 ======== ======== ======== ======== ======= ======= ======= Total return(g) .................... 9.13% (31.26)% 9.72% 13.08% 7.63% 11.69% 13.18% RATIOS TO AVERAGE NET ASSETS(h) Expenses before waiver and payments by affiliates(i) ....... 1.45% 1.51% 1.49% 1.50% 1.54% 1.60% 1.58% Expenses net of waiver and payments by affiliates(i) ....... 1.24% 1.26% 1.25% 1.25% 0.47% 1.60% 1.58% Net investment income (loss)(d) .... (0.39)% 0.68% 1.18% 0.84% 0.32% 0.97% 0.16% SUPPLEMENTAL DATA Net assets, end of period (000's)... $120,730 $106,379 $145,218 $122,156 $88,986 $73,816 $61,179 Portfolio turnover rate ............ 10.56% 8.87% 10.36% 9.31% 10.50% 3.98% 3.46%
(a) For the period August 1, 2004 to December 31, 2004. (b) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (c) Based on average daily shares outstanding. (d) Recognition of net investment income by the Fund is affected by the timing of declaration of dividends by the Underlying Funds in which the Fund invests. (e) Amount rounds to less than $0.01 per share. (f) Effective September 1, 2008, the redemption fee was eliminated. (g) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. (h) Ratios are annualized for periods less than one year. (i) Does not include expenses of the Underlying Funds in which the Fund invests. The annualized weighted average expense ratio of the Underlying Funds was 0.85% for the period ended June 30, 2009. The accompanying notes are an integral part of these financial statements. Semiannual Report | 43 Franklin Templeton Fund Allocator Series FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN TEMPLETON GROWTH TARGET FUND
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, YEAR ENDED JUNE 30, 2009 ------------------------------------------------------ JULY 31, CLASS R (UNAUDITED) 2008 2007 2006 2005 2004(a) 2004 - ------- ---------------- -------- -------- -------- ------- ------- ---------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ....................... $ 10.38 $ 16.02 $ 15.52 $ 14.02 $ 13.11 $ 11.76 $ 10.40 ------- ------- ------- ------- ------- ------- ------- Income from investment operations(b): Net investment income(c, d) ..... 0.01 0.17 0.29 0.20 0.11 0.08 0.08 Net realized and unrealized gains (losses) ..................... 0.96 (4.96) 1.28 1.71 0.95 1.33 1.36 ------- ------- ------- ------- ------- ------- ------- Total from investment operations ...................... 0.97 (4.79) 1.57 1.91 1.06 1.41 1.44 ------- ------- ------- ------- ------- ------- ------- Less distributions from: Net investment income and short term gains received from Underlying Funds ........ (0.02) (0.19) (0.30) (0.29) (0.15) (0.06) (0.08) Net realized gains .............. --(e) (0.66) (0.77) (0.12) -- -- -- ------- ------- ------- ------- ------- ------- ------- Total distributions ................ (0.02) (0.85) (1.07) (0.41) (0.15) (0.06) (0.08) ------- ------- ------- ------- ------- ------- ------- Redemption fees(f) ................. -- --(e) --(e) --(e) --(e) --(e) --(e) ------- ------- ------- ------- ------- ------- ------- Net asset value, end of period ..... $ 11.33 $ 10.38 $ 16.02 $ 15.52 $ 14.02 $ 13.11 $ 11.76 ======= ======= ======= ======= ======= ======= ======= Total return(g) .................... 9.45% (30.92)% 10.31% 13.65% 8.10% 12.00% 13.89% RATIOS TO AVERAGE NET ASSETS(h) Expenses before waiver and payments by affiliates(i) ....... 0.95% 1.01% 0.99% 1.00% 1.04% 1.10% 1.08% Expenses net of waiver and payments by affiliates(i) ....... 0.74% 0.76% 0.75% 0.75% 0.97% 1.10% 1.08% Net investment income(d) ........... 0.11% 1.18% 1.68% 1.34% 0.82% 1.47% 0.66% SUPPLEMENTAL DATA Net assets, end of period (000's) .. $44,034 $35,485 $36,757 $26,215 $19,461 $15,206 $11,714 Portfolio turnover rate ............ 10.56% 8.87% 10.36% 9.31% 10.50% 3.98% 3.46%
(a) For the period August 1, 2004 to December 31, 2004. (b) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (c) Based on average daily shares outstanding. (d) Recognition of net investment income by the Fund is affected by the timing of declaration of dividends by the Underlying Funds in which the Fund invests. (e) Amount rounds to less than $0.01 per share. (f) Effective September 1, 2008, the redemption fee was eliminated. (g) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. (h) Ratios are annualized for periods less than one year. (i) Does not include expenses of the Underlying Funds in which the Fund invests. The annualized weighted average expense ratio of the Underlying Funds was 0.85% for the period ended June 30, 2009. The accompanying notes are an integral part of these financial statements. 44 | Semiannual Report Franklin Templeton Fund Allocator Series FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN TEMPLETON GROWTH TARGET FUND
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, PERIOD ENDED JUNE 30, 2009 -------------------------------- DECEMBER 31, ADVISOR CLASS (UNAUDITED) 2008 2007 2006 2005(a) - ------------- ---------------- -------- -------- -------- ------------ PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ....................... $ 10.49 $ 16.19 $15.64 $14.10 $ 14.18 ------- ------- ------ ------ ------- Income from investment operations(b): Net investment income(c, d) ..... 0.03 0.27 0.38 0.29 0.11 Net realized and unrealized gains (losses) ..................... 0.97 (5.06) 1.29 1.72 (0.03) ------- ------- ------ ------ ------- Total from investment operations ... 1.00 (4.79) 1.67 2.01 0.08 ------- ------- ------ ------ ------- Less distributions from: Net investment income and short term gains received from Underlying Funds ........ (0.02) (0.25) (0.35) (0.35) (0.16) Net realized gains .............. --(e) (0.66) (0.77) (0.12) -- ------- ------- ------ ------ ------- Total distributions ................ (0.02) (0.91) (1.12) (0.47) (0.16) ------- ------- ------ ------ ------- Redemption fees(f) ................. -- --(e) --(e) --(e) --(e) ------- ------- ------ ------ ------- Net asset value, end of period ..... $ 11.47 $ 10.49 $16.19 $15.64 $ 14.10 ======= ======= ====== ====== ======= Total return(g) .................... 9.64% (30.56)% 10.80% 14.26% 0.54% RATIOS TO AVERAGE NET ASSETS(h) Expenses before waiver and payments by affiliates(i) ....... 0.45% 0.51% 0.49% 0.50% 0.54% Expenses net of waiver and payments by affiliates(i) ....... 0.24% 0.26% 0.25% 0.25% 0.47% Net investment income(d) ........... 0.61% 1.68% 2.18% 1.84% 1.32% SUPPLEMENTAL DATA Net assets, end of period (000's) .. $13,562 $11,059 $9,917 $5,593 $ 3,320 Portfolio turnover rate ............ 10.56% 8.87% 10.36% 9.31% 10.50%
(a) For the period December 1, 2005 (effective date) to December 31, 2005. (b) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (c) Based on average daily shares outstanding. (d) Recognition of net investment income by the Fund is affected by the timing of declaration of dividends by the Underlying Funds in which the Fund invests. (e) Amount rounds to less than $0.01 per share. (f) Effective September 1, 2008, the redemption fee was eliminated. (g) Total return is not annualized for periods less than one year. (h) Ratios are annualized for periods less than one year. (i) Does not include expenses of the Underlying Funds in which the Fund invests. The annualized weighted average expense ratio of the Underlying Funds was 0.85% for the period ended June 30, 2009. The accompanying notes are an integral part of these financial statements. Semiannual Report | 45 Franklin Templeton Fund Allocator Series STATEMENT OF INVESTMENTS, JUNE 30, 2009 (UNAUDITED)
FRANKLIN TEMPLETON GROWTH TARGET FUND SHARES VALUE ------------------------------------- ---------- ------------ INVESTMENTS IN UNDERLYING FUNDS(a) DOMESTIC EQUITY 54.9% (b) Franklin Flex Cap Growth Fund, Advisor Class .......................... 2,927,736 $ 99,484,485 (b) Franklin Growth Opportunities Fund, Advisor Class ..................... 2,795,030 42,232,896 Franklin MicroCap Value Fund, Advisor Class ........................... 839,001 19,389,312 (b) Franklin Natural Resources Fund, Advisor Class ........................ 675,084 17,660,187 (b) Franklin Small Cap Growth Fund, Advisor Class ......................... 2,377,038 17,304,840 Mutual Shares Fund, Class Z ........................................... 4,982,961 80,474,828 ------------ 276,546,548 ------------ DOMESTIC FIXED INCOME 9.5% Franklin Total Return Fund, Advisor Class ............................. 2,374,806 21,705,723 Franklin U.S. Government Securities Fund, Advisor Class ............... 3,917,921 25,975,813 ------------ 47,681,536 ------------ FOREIGN EQUITY 24.9% Franklin Global Real Estate Fund, Advisor Class ....................... 1,582,917 7,439,709 (b) Franklin Gold and Precious Metals Fund, Advisor Class ................. 744,465 24,195,109 Mutual European Fund, Class Z ......................................... 2,431,569 43,208,975 Templeton China World Fund, Advisor Class ............................. 820,736 23,522,281 Templeton Foreign Fund, Advisor Class ................................. 5,216,727 27,074,812 ------------ 125,440,886 ------------ FOREIGN FIXED INCOME 5.7% Franklin Templeton Emerging Market Debt Opportunities Fund ............ 212,586 1,972,795 Templeton Global Bond Fund, Advisor Class ............................. 2,273,467 26,804,171 ------------ 28,776,966 ------------ TOTAL INVESTMENTS IN UNDERLYING FUNDS BEFORE SHORT TERM INVESTMENTS (COST $523,626,569) 95.0% .......................................... 478,445,936 ------------ SHORT TERM INVESTMENTS (COST $26,917,435) 5.3% MONEY MARKET FUNDS 5.3% (c) Institutional Fiduciary Trust Money Market Portfolio, 0.00% ........... 26,917,435 26,917,435 ------------ TOTAL INVESTMENTS IN UNDERLYING FUNDS (COST $550,544,004) 100.3% ...... 505,363,371 OTHER ASSETS, LESS LIABILITIES (0.3)% ................................. (1,480,861) ------------ NET ASSETS 100.0% ..................................................... $503,882,510 ============
(a) See Note 6 regarding investments in Underlying Funds. (b) Non-income producing. (c) The rate shown is the annualized seven-day yield at period end. The accompanying notes are an integral part of these financial statements. 46 | Semiannual Report Franklin Templeton Fund Allocator Series FINANCIAL STATEMENTS STATEMENTS OF ASSETS AND LIABILITIES June 30, 2009 (unaudited)
FRANKLIN FRANKLIN FRANKLIN TEMPLETON TEMPLETON TEMPLETON CONSERVATIVE MODERATE GROWTH TARGET FUND TARGET FUND TARGET FUND ------------ ------------ ------------ Assets: Investments in Underlying Funds: (Note 6) Cost ..................................... $595,526,892 $889,354,829 $550,544,004 ------------ ------------ ------------ Value .................................... $579,109,204 $861,113,534 $505,363,371 Receivables: Capital shares sold ...................... 2,031,566 3,106,772 731,911 Underlying Funds (Note 3f) ............... 120,378 209,437 183,421 Other assets ................................ 668 993 621 ------------ ------------ ------------ Total assets .......................... 581,261,816 864,430,736 506,279,324 ------------ ------------ ------------ Liabilities: Payables: Capital shares redeemed .................. 1,312,732 2,820,916 1,678,883 Affiliates ............................... 604,269 839,706 494,054 Distributions to shareholders ............ 554,802 464,805 8,472 Unaffiliated transfer agent fees ......... 78,735 154,783 139,759 Accrued expenses and other liabilities ...... 49,541 37,361 75,646 ------------ ------------ ------------ Total liabilities ..................... 2,600,079 4,317,571 2,396,814 ------------ ------------ ------------ Net assets, at value ............... $578,661,737 $860,113,165 $503,882,510 ------------ ------------ ------------ Net assets consist of: Paid-in capital ............................. $609,363,938 $913,755,959 $571,710,980 Undistributed net investment income ......... 17,796 116,724 341,576 Net unrealized appreciation (depreciation) .. (16,417,688) (28,241,295) (45,180,633) Accumulated net realized gain (loss) ........ (14,302,309) (25,518,223) (22,989,413) ------------ ------------ ------------ Net assets, at value ............... $578,661,737 $860,113,165 $503,882,510 ============ ============ ============
The accompanying notes are an integral part of these financial statements. Semiannual Report | 47 Franklin Templeton Fund Allocator Series FINANCIAL STATEMENTS (CONTINUED) STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED) June 30, 2009 (unaudited)
FRANKLIN FRANKLIN FRANKLIN TEMPLETON TEMPLETON TEMPLETON CONSERVATIVE MODERATE GROWTH TARGET FUND TARGET FUND TARGET FUND ------------ ------------ ------------ CLASS A: Net assets, at value ................................................... $336,973,551 $563,977,537 $318,726,730 ------------ ------------ ------------ Shares outstanding ..................................................... 29,326,699 49,591,634 27,839,911 ------------ ------------ ------------ Net asset value per share(a) ........................................... $ 11.49 $ 11.37 $ 11.45 ------------ ------------ ------------ Maximum offering price per share (net asset value per share / 94.25%) .. $ 12.19 $ 12.06 $ 12.15 ------------ ------------ ------------ CLASS B: Net assets, at value ................................................... $ 7,369,182 $ 12,019,201 $ 6,829,432 ------------ ------------ ------------ Shares outstanding ..................................................... 643,250 1,060,431 608,411 ------------ ------------ ------------ Net asset value and maximum offering price per share(a) ................ $ 11.46 $ 11.33 $ 11.23 ------------ ------------ ------------ CLASS C: Net assets, at value ................................................... $187,974,291 $204,520,646 $120,730,406 ------------ ------------ ------------ Shares outstanding ..................................................... 16,590,700 18,333,768 10,758,461 ------------ ------------ ------------ Net asset value and maximum offering price per share(a) ................ $ 11.33 $ 11.16 $ 11.22 ------------ ------------ ------------ CLASS R: Net assets, at value ................................................... $ 40,527,422 $ 63,266,231 $ 44,033,919 ------------ ------------ ------------ Shares outstanding ..................................................... 3,536,800 5,577,749 3,885,763 ------------ ------------ ------------ Net asset value and maximum offering price per share ................... $ 11.46 $ 11.34 $ 11.33 ------------ ------------ ------------ ADVISOR CLASS: Net assets, at value ................................................... $ 5,817,291 $ 16,329,550 $ 13,562,023 ------------ ------------ ------------ Shares outstanding ..................................................... 506,669 1,435,910 1,182,093 ------------ ------------ ------------ Net asset value and maximum offering price per share ................... $ 11.48 $ 11.37 $ 11.47 ------------ ------------ ------------
(a) Redemption price is equal to net asset value less contingent deferred sales charges, if applicable. The accompanying notes are an integral part of these financial statements. 48 | Semiannual Report Franklin Templeton Fund Allocator Series FINANCIAL STATEMENTS (CONTINUED) STATEMENTS OF OPERATIONS for the six months ended June 30, 2009 (unaudited)
FRANKLIN FRANKLIN FRANKLIN TEMPLETON TEMPLETON TEMPLETON CONSERVATIVE MODERATE GROWTH TARGET FUND TARGET FUND TARGET FUND ------------ ------------ ------------ Investment income: Dividends from Underlying Funds (Note 6) ................................. $ 5,062,040 $ 6,459,942 $ 1,906,092 ------------ ------------ ------------ Expenses: Asset allocation fees (Note 3a) .......................................... 503,295 839,949 530,357 Distribution fees: (Note 3c) Class A ............................................................... 370,577 617,329 353,635 Class B ............................................................... 34,521 54,729 31,113 Class C ............................................................... 807,322 867,279 534,074 Class R ............................................................... 84,426 137,787 96,890 Transfer agent fees (Note 3e) ............................................ 377,773 628,337 559,310 Reports to shareholders .................................................. 21,058 36,881 34,174 Registration and filing fees ............................................. 69,410 51,617 41,377 Professional fees ........................................................ 14,245 15,113 13,150 Trustees' fees and expenses .............................................. 2,295 3,329 2,268 Other .................................................................... 10,100 14,462 10,506 Expenses borne by Underlying Funds (Note 3f) ............................. (120,378) (209,437) (183,421) ------------ ------------ ------------ Total expenses ..................................................... 2,174,644 3,057,375 2,023,433 Expenses waived/paid by affiliates (Note 3g) ....................... (245,828) (439,460) (462,798) ------------ ------------ ------------ Net expenses .................................................... 1,928,816 2,617,915 1,560,635 ------------ ------------ ------------ Net investment income ........................................ 3,133,224 3,842,027 345,457 ------------ ------------ ------------ Realized and unrealized gains (losses): Net realized gain (loss) from sale of investments in Underlying Funds .... (11,827,548) (22,514,086) (20,361,904) Net change in unrealized appreciation (depreciation) on investments in Underlying Funds ...................................................... 43,832,612 80,516,096 62,191,640 ------------ ------------ ------------ Net realized and unrealized gain (loss) ..................................... 32,005,064 58,002,010 41,829,736 ------------ ------------ ------------ Net increase (decrease) in net assets resulting from operations ............. $ 35,138,288 $ 61,844,037 $ 42,175,193 ------------ ------------ ------------
The accompanying notes are an integral part of these financial statements. Semiannual Report | 49 Franklin Templeton Fund Allocator Series FINANCIAL STATEMENTS (CONTINUED) STATEMENTS OF CHANGES IN NET ASSETS
FRANKLIN TEMPLETON FRANKLIN TEMPLETON CONSERVATIVE TARGET FUND MODERATE TARGET FUND ------------------------------------ ------------------------------------ SIX MONTHS ENDED SIX MONTHS ENDED JUNE 30, 2009 YEAR ENDED JUNE 30, 2009 YEAR ENDED (UNAUDITED) DECEMBER 31, 2008 (UNAUDITED) DECEMBER 31, 2008 ---------------- ----------------- ---------------- ----------------- Increase (decrease) in net assets: Operations: Net investment income ..................... $ 3,133,224 $ 13,249,694 $ 3,842,027 $ 18,213,483 Net realized gain (loss) from Underlying Funds ....................... (11,827,548) 2,841,441 (22,514,086) 6,799,917 Net change in unrealized appreciation (depreciation) on investments in Underlying Funds ....................... 43,832,612 (94,915,134) 80,516,096 (196,772,246) ------------ ------------ ------------ ------------- Net increase (decrease) in net assets resulting from operations ........ 35,138,288 (78,823,999) 61,844,037 (171,758,846) ------------ ------------ ------------ ------------- Distributions to shareholders from: Net investment income: Class A ................................ (2,433,184) (9,093,615) (3,524,640) (14,241,980) Class B ................................ (28,698) (175,167) (36,381) (248,537) Class C ................................ (784,404) (3,810,306) (645,961) (3,721,764) Class R ................................ (246,810) (869,315) (329,729) (1,250,162) Advisor Class .......................... (49,787) (134,845) (118,494) (346,065) Net realized gains: Class A ................................ (2,322,350) (5,215,326) (4,752,076) (14,041,188) Class B ................................ (51,084) (122,096) (100,628) (327,683) Class C ................................ (1,316,425) (2,743,261) (1,746,438) (4,781,082) Class R ................................ (279,848) (541,689) (529,097) (1,274,713) Advisor Class .......................... (40,108) (67,963) (135,386) (281,923) ------------ ------------ ------------ ------------- Total distributions to shareholders ....... (7,552,698) (22,773,583) (11,918,830) (40,515,097) ------------ ------------ ------------ ------------- Capital share transactions: (Note 2) Class A ................................ 38,350,677 92,679,878 54,778,269 128,035,233 Class B ................................ (117,411) 2,232,512 250,757 2,045,174 Class C ................................ 26,103,850 73,404,375 28,606,480 52,799,515 Class R ................................ 9,088,832 10,284,248 12,306,215 20,814,658 Advisor Class .......................... 1,185,749 1,455,357 3,918,781 4,642,852 ------------ ------------ ------------ ------------- Total capital share transactions .......... 74,611,697 180,056,370 99,860,502 208,337,432 ------------ ------------ ------------ ------------- Redemption fees ........................... -- 12,809 -- 4,916 ------------ ------------ ------------ ------------- Net increase (decrease) in net assets ....................... 102,197,287 78,471,597 149,785,709 (3,931,595) Net assets: Beginning of period .......................... 476,464,450 397,992,853 710,327,456 714,259,051 ------------ ------------ ------------ ------------- End of period ................................ $578,661,737 $476,464,450 $860,113,165 $ 710,327,456 ============ ============ ============ ============= Undistributed net investment income included in net assets: End of period ................................ $ 17,796 $ 427,455 $ 116,724 $ 929,902 ============ ============ ============ =============
The accompanying notes are an integral part of these financial statements. 50 | Semiannual Report Franklin Templeton Fund Allocator Series FINANCIAL STATEMENTS (CONTINUED) STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
FRANKLIN TEMPLETON GROWTH TARGET FUND ------------------------------------ SIX MONTHS ENDED JUNE 30, 2009 YEAR ENDED (UNAUDITED) DECEMBER 31, 2008 ---------------- ----------------- Increase (decrease) in net assets: Operations: Net investment income ........................................................ $ 345,457 $ 6,496,173 Net realized gain (loss) from Underlying Funds ............................... (20,361,904) 177,061 Net change in unrealized appreciation (depreciation) on investments in Underlying Funds .......................................................... 62,191,640 (197,001,270) ------------ ------------- Net increase (decrease) in net assets resulting from operations ........ 42,175,193 (190,328,036) ------------ ------------- Distributions to shareholders from: Net investment income and short term gains received from Underlying Funds: Class A ................................................................... (618,213) (5,761,341) Class B ................................................................... (15,800) (72,932) Class C ................................................................... (237,411) (1,258,031) Class R ................................................................... (87,222) (646,134) Advisor Class ............................................................. (26,626) (257,043) Net realized gains: Class A ................................................................... (133,986) (16,500,974) Class B ................................................................... (2,919) (368,168) Class C ................................................................... (51,632) (6,340,529) Class R ................................................................... (18,683) (1,770,767) Advisor Class ............................................................. (5,671) (434,667) ------------ ------------- Total distributions to shareholders .......................................... (1,198,163) (33,410,586) ------------ ------------- Capital share transactions: (Note 2) Class A ................................................................... 9,450,932 34,252,033 Class B ................................................................... 27,285 1,172,839 Class C ................................................................... 4,953,513 16,176,377 Class R ................................................................... 4,835,314 14,662,480 Advisor Class ............................................................. 1,345,217 4,892,287 ------------ ------------- Total capital share transactions ............................................. 20,612,261 71,156,016 ------------ ------------- Redemption fees .............................................................. -- 2,223 ------------ ------------- Net increase (decrease) in net assets .................................. 61,589,291 (152,580,383) Net assets: Beginning of period ............................................................. 442,293,219 594,873,602 ------------ ------------- End of period ................................................................... $503,882,510 $ 442,293,219 ============ ============= Undistributed net investment income included in net assets: End of period ................................................................... $ 341,576 $ 981,391 ============ =============
The accompanying notes are an integral part of these financial statements. Semiannual Report | 51 Franklin Templeton Fund Allocator Series NOTES TO FINANCIAL STATEMENTS (UNAUDITED) 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES Franklin Templeton Fund Allocator Series (Trust) is registered under the Investment Company Act of 1940, as amended, (1940 Act) as an open-end investment company, consisting of ten separate funds, three of which are included in this report (Funds). The financial statements of the remaining funds in the Trust are presented separately. The Funds invest primarily in Franklin Templeton mutual funds (Underlying Funds). The Funds offer five classes of shares: Class A, Class B, Class C, Class R, and Advisor Class. Each class of shares differs by its initial sales load, contingent deferred sales charges, distribution fees, voting rights on matters affecting a single class and its exchange privilege. The following summarizes the Funds' significant accounting policies. A. SECURITY VALUATION Net asset value per share is calculated as of the close of trading of the NYSE. Investments in the Underlying Funds are valued at their closing net asset value each trading day. B. INCOME TAXES No provision has been made for U.S. income taxes because it is each fund's policy to qualify as a regulated investment company under the Internal Revenue Code and to distribute to shareholders substantially all of its taxable income and net realized gains. The Funds have reviewed the tax positions, taken on federal income tax returns, for each of the three open tax years and as of June 30, 2009, and have determined that no provision for income tax is required in the Funds' financial statements. C. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS Security transactions are accounted for on trade date. Realized gains and losses on security transactions are determined on a specific identification basis. Estimated expenses are accrued daily. Dividend income and realized gain distributions by Underlying Funds are recorded on the ex-dividend date. Distributions to shareholders are recorded on the ex-dividend date and are determined according to income tax regulations (tax basis). Distributable earnings determined on a tax basis may differ from earnings recorded in accordance with accounting principles generally accepted in the United States of America. These differences may be permanent or temporary. Permanent differences are reclassified among capital accounts to reflect their tax character. These reclassifications have no impact on net assets or the results of operations. Temporary differences are not reclassified, as they may reverse in subsequent periods. Common expenses incurred by the Trust are allocated among the funds based on the ratio of net assets of each fund to the combined net assets of the Trust. Fund specific expenses are charged directly to the fund that incurred the expense. 52 | Semiannual Report Franklin Templeton Fund Allocator Series NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) C. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS (CONTINUED) The Funds indirectly bear their proportionate share of expenses from the Underlying Funds. Since the Underlying Funds have varied expense levels and the Funds may own different proportions of the Underlying Funds at different times, the amount of expenses incurred indirectly by the Funds will vary. Realized and unrealized gains and losses and net investment income, not including class specific expenses, are allocated daily to each class of shares based upon the relative proportion of net assets of each class. Differences in per share distributions, by class, are generally due to differences in class specific expenses. D. ACCOUNTING ESTIMATES The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the amounts of income and expenses during the reporting period. Actual results could differ from those estimates. E. REDEMPTION FEES A short term trading redemption fee was imposed, with some exceptions, on any fund shares that were redeemed or exchanged within seven calendar days following their purchase date. The redemption fee was 2% of the amount redeemed. Such fees were retained by the Funds and accounted for as an addition to paid-in capital. Effective September 1, 2008, the redemption fee was eliminated. F. GUARANTEES AND INDEMNIFICATIONS Under the Trust's organizational documents, its officers and trustees are indemnified by the Trust against certain liabilities arising out of the performance of their duties to the Trust. Additionally, in the normal course of business, the Trust, on behalf of the Funds, enters into contracts with service providers that contain general indemnification clauses. The Trust's maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Trust that have not yet occurred. Currently, the Trust expects the risk of loss to be remote. Semiannual Report | 53 Franklin Templeton Fund Allocator Series NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 2. SHARES OF BENEFICIAL INTEREST At June 30, 2009, there were an unlimited number of shares authorized (without par value). Transactions in the Funds' shares were as follows:
FRANKLIN TEMPLETON FRANKLIN TEMPLETON CONSERVATIVE TARGET FUND MODERATE TARGET FUND -------------------------- ---------------------------- SHARES AMOUNT SHARES AMOUNT ---------- ------------- ----------- -------------- CLASS A SHARES: Six Months ended June 30, 2009 Shares sold ....................... 7,616,038 $ 83,774,832 11,150,693 $ 119,436,647 Shares issued in reinvestment of distributions .................. 382,475 4,299,469 714,194 7,912,329 Shares redeemed ................... (4,572,929) (49,723,624) (6,916,603) (72,570,707) ---------- ------------- ----------- ------------- Net increase (decrease) ........... 3,425,584 $ 38,350,677 4,948,284 $ 54,778,269 ========== ============= =========== ============= Year ended December 31, 2008 Shares sold ....................... 15,568,306 $ 190,953,863 19,698,628 $ 242,960,356 Shares issued in reinvestment of distributions .................. 1,088,389 13,016,234 2,242,119 27,400,727 Shares redeemed ................... (9,272,012) (111,290,219) (11,533,860) (142,325,850) ---------- ------------- ----------- ------------- Net increase (decrease) ........... 7,384,683 $ 92,679,878 10,406,887 $ 128,035,233 ========== ============= =========== ============= CLASS B SHARES: Six Months ended June 30, 2009 Shares sold ....................... 119,965 $ 1,309,690 190,822 $ 2,037,089 Shares issued in reinvestment of distributions .................. 6,221 70,011 11,823 131,235 Shares redeemed ................... (139,766) (1,497,112) (181,951) (1,917,567) ---------- ------------- ----------- ------------- Net increase (decrease) ........... (13,580) $ (117,411) 20,694 $ 250,757 ========== ============= =========== ============= Year ended December 31, 2008 Shares sold ....................... 386,978 $ 4,705,293 439,730 $ 5,372,790 Shares issued in reinvestment of distributions .................. 21,263 252,962 44,191 537,722 Shares redeemed ................... (231,042) (2,725,743) (313,835) (3,865,338) ---------- ------------- ----------- ------------- Net increase (decrease) ........... 177,199 $ 2,232,512 170,086 $ 2,045,174 ========== ============= =========== ============= CLASS C SHARES: Six Months ended June 30, 2009 Shares sold ....................... 4,561,696 $ 48,985,075 4,723,925 $ 49,784,743 Shares issued in reinvestment of distributions .................. 163,652 1,821,073 199,125 2,178,428 Shares redeemed ................... (2,321,064) (24,702,298) (2,280,755) (23,356,691) ---------- ------------- ----------- ------------- Net increase (decrease) ........... 2,404,284 $ 26,103,850 2,642,295 $ 28,606,480 ========== ============= =========== ============= Year ended December 31, 2008 Shares sold ....................... 9,143,048 $ 111,410,003 7,246,871 $ 88,052,929 Shares issued in reinvestment of distributions .................. 485,398 5,720,049 641,662 7,691,753 Shares redeemed ................... (3,708,346) (43,725,677) (3,579,060) (42,945,167) ---------- ------------- ----------- ------------- Net increase (decrease) ........... 5,920,100 $ 73,404,375 4,309,473 $ 52,799,515 ========== ============= =========== =============
54 | Semiannual Report Franklin Templeton Fund Allocator Series NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 2. SHARES OF BENEFICIAL INTEREST (CONTINUED)
FRANKLIN TEMPLETON FRANKLIN TEMPLETON CONSERVATIVE TARGET FUND MODERATE TARGET FUND ------------------------ ------------------------- SHARES AMOUNT SHARES AMOUNT --------- ------------ ---------- ------------ CLASS R SHARES: Six Months ended June 30, 2009 Shares sold ....................... 1,150,856 $12,546,663 1,827,383 $ 19,282,830 Shares issued in reinvestment of distributions .................. 43,592 489,290 74,606 825,606 Shares redeemed ................... (363,750) (3,947,121) (740,406) (7,802,221) --------- ----------- --------- ------------ Net increase (decrease) ........... 830,698 $ 9,088,832 1,161,583 $ 12,306,215 ========= =========== ========= ============ Year ended December 31, 2008 Shares sold ....................... 1,459,923 $18,062,085 2,991,280 $ 37,361,989 Shares issued in reinvestment of distributions .................. 113,747 1,356,174 202,851 2,464,649 Shares redeemed ................... (747,198) (9,134,011) (1,577,937) (19,011,980) --------- ----------- --------- ------------ Net increase (decrease) ........... 826,472 $10,284,248 1,616,194 $ 20,814,658 ========= =========== ========= ============ ADVISOR CLASS SHARES: Six Months ended June 30, 2009 Shares sold ....................... 244,937 $ 2,663,537 470,786 $ 5,051,600 Shares issued in reinvestment of distributions .................. 7,999 89,667 22,791 252,357 Shares redeemed ................... (141,189) (1,567,455) (134,312) (1,385,176) --------- ----------- --------- ------------ Net increase (decrease) ........... 111,747 $ 1,185,749 359,265 $ 3,918,781 ========= =========== ========= ============ Year ended December 31, 2008 Shares sold ....................... 257,955 $ 2,902,039 495,708 $ 5,839,904 Shares issued in reinvestment of distributions .................. 16,949 201,287 51,803 626,829 Shares redeemed ................... (140,537) (1,647,969) (146,513) (1,823,881) --------- ----------- --------- ------------ Net increase (decrease) ........... 134,367 $ 1,455,357 400,998 $ 4,642,852 ========= =========== ========= ============
FRANKLIN TEMPLETON GROWTH TARGET FUND -------------------------- SHARES AMOUNT ---------- ------------- CLASS A SHARES: Six Months ended June 30, 2009 Shares sold ..................................... 4,003,435 $ 42,190,341 Shares issued in reinvestment of distributions .. 70,900 725,419 Shares redeemed ................................. (3,243,482) (33,464,828) ---------- ------------- Net increase (decrease) ......................... 830,853 $ 9,450,932 ========== ============= Year ended December 31, 2008 Shares sold ..................................... 8,614,981 $ 114,733,064 Shares issued in reinvestment of distributions .. 1,667,657 21,595,931 Shares redeemed ................................. (7,689,195) (102,076,962) ---------- ------------- Net increase (decrease) ......................... 2,593,443 $ 34,252,033 ========== =============
Semiannual Report | 55 Franklin Templeton Fund Allocator Series NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 2. SHARES OF BENEFICIAL INTEREST (CONTINUED)
FRANKLIN TEMPLETON GROWTH TARGET FUND ------------------------- SHARES AMOUNT ---------- ------------ CLASS B SHARES: Six Months ended June 30, 2009 Shares sold ..................................... 62,774 $ 641,174 Shares issued in reinvestment of distributions .. 1,796 18,038 Shares redeemed ................................. (62,878) (631,927) ---------- ------------ Net increase (decrease) ......................... 1,692 $ 27,285 ========== ============ Year ended December 31, 2008 Shares sold ..................................... 169,541 $ 2,246,202 Shares issued in reinvestment of distributions .. 32,101 421,308 Shares redeemed ................................. (116,215) (1,494,671) ---------- ------------ Net increase (decrease) ......................... 85,427 $ 1,172,839 ========== ============ CLASS C SHARES: Six Months ended June 30, 2009 Shares sold ..................................... 1,527,627 $ 15,779,710 Shares issued in reinvestment of distributions .. 26,225 263,504 Shares redeemed ................................. (1,109,807) (11,089,701) ---------- ------------ Net increase (decrease) ......................... 444,045 $ 4,953,513 ========== ============ Year ended December 31, 2008 Shares sold ..................................... 3,113,955 $ 41,358,304 Shares issued in reinvestment of distributions .. 526,370 6,908,111 Shares redeemed ................................. (2,459,694) (32,090,038) ---------- ------------ Net increase (decrease) ......................... 1,180,631 $ 16,176,377 ========== ============ CLASS R SHARES: Six Months ended June 30, 2009 Shares sold ..................................... 889,278 $ 9,177,924 Shares issued in reinvestment of distributions .. 10,272 104,114 Shares redeemed ................................. (431,589) (4,446,724) ---------- ------------ Net increase (decrease) ......................... 467,961 $ 4,835,314 ========== ============ Year ended December 31, 2008 Shares sold ..................................... 2,125,306 $ 28,652,652 Shares issued in reinvestment of distributions .. 185,467 2,367,456 Shares redeemed ................................. (1,186,756) (16,357,628) ---------- ------------ Net increase (decrease) ......................... 1,124,017 $ 14,662,480 ========== ============ ADVISOR CLASS SHARES: Six Months ended June 30, 2009 Shares sold ..................................... 285,023 $ 2,963,189 Shares issued in reinvestment of distributions .. 3,136 32,139 Shares redeemed ................................. (160,119) (1,650,111) ---------- ------------ Net increase (decrease) ......................... 128,040 $ 1,345,217 ========== ============ Year ended December 31, 2008 Shares sold ..................................... 529,385 $ 6,071,746 Shares issued in reinvestment of distributions .. 55,379 690,032 Shares redeemed ................................. (143,400) (1,869,491) ---------- ------------ Net increase (decrease) ......................... 441,364 $ 4,892,287 ========== ============
56 | Semiannual Report Franklin Templeton Fund Allocator Series NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 3. TRANSACTIONS WITH AFFILIATES Franklin Resources, Inc. is the holding company for various subsidiaries that together are referred to as Franklin Templeton Investments. Certain officers and trustees of the Trust are also officers and/or directors/trustees of certain of the Underlying Funds and of the following subsidiaries:
SUBSIDIARY AFFILIATION - ---------- ----------- Franklin Advisers, Inc. (Advisers) Investment manager Franklin Templeton Services, LLC (FT Services) Administrative manager Franklin Templeton Distributors, Inc. (Distributors) Principal underwriter Franklin Templeton Investor Services, LLC (Investor Services) Transfer agent
A. ASSET ALLOCATION FEES The Funds pay an asset allocation fee to Advisers of 0.25% per year of the average daily net assets of each of the Funds for investment advisory services, consisting principally of determining the allocation of assets of the Funds among the designated Underlying Funds. B. ADMINISTRATIVE FEES Under an agreement with Advisers, FT Services provides administrative services to the Funds. The fee is paid by Advisers based on average daily net assets, and is not an additional expense of the Funds. C. DISTRIBUTION FEES The Trust's Board of Trustees has adopted distribution plans for each share class, with the exception of Advisor Class shares, pursuant to Rule 12b-1 under the 1940 Act. Under the Funds' Class A reimbursement distribution plans, the Funds reimburse Distributors for costs incurred in connection with the servicing, sale and distribution of each fund's shares up to the maximum annual plan rate. Under the Class A reimbursement distribution plans, costs exceeding the maximum for the current plan year cannot be reimbursed in subsequent periods. In addition, under the Funds' Class B, C and R compensation distribution plans, the Funds pay Distributors for costs incurred in connection with the servicing, sale and distribution of each fund's shares up to the maximum annual plan rate for each class. The maximum annual plan rates, based on the average daily net assets, for each class, are as follows: Class A ....... 0.25% Class B ....... 1.00% Class C ....... 1.00% Class R ....... 0.50%
Semiannual Report | 57 Franklin Templeton Fund Allocator Series NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 3. TRANSACTIONS WITH AFFILIATES (CONTINUED) D. SALES CHARGES/UNDERWRITING AGREEMENTS Distributors has advised the Funds of the following commission transactions related to the sales and redemptions of the Funds' shares for the period:
FRANKLIN FRANKLIN FRANKLIN TEMPLETON TEMPLETON TEMPLETON CONSERVATIVE MODERATE GROWTH TARGET FUND TARGET FUND TARGET FUND ------------ ------------ ----------- Sales charges retained net of commissions paid to unaffiliated broker/dealers ............................................ $183,729 $316,045 $112,086 Contingent deferred sales charges retained ................... $ 16,917 $ 20,322 $ 8,351
E. TRANSFER AGENT FEES For the period ended June 30, 2009, the Funds paid transfer agent fees as noted in the Statements of Operations of which the following amounts were retained by Investor Services:
FRANKLIN FRANKLIN FRANKLIN TEMPLETON TEMPLETON TEMPLETON CONSERVATIVE MODERATE GROWTH TARGET FUND TARGET FUND TARGET FUND ------------ ------------ ----------- Transfer agent fees .......................................... $207,505 $347,804 $323,313
F. SPECIAL SERVICING AGREEMENT Effective May 1, 2009, the Funds entered into a Special Servicing Agreement with the Underlying Funds and certain service providers of the Funds and of the Underlying Funds, pursuant to which each Underlying Fund pays a portion of the Funds' eligible expenses, which include transfer agency and shareholder servicing costs, to the extent such payments are less than the amount of the benefits realized or expected to be realized by the Underlying Fund from the investment in the Underlying Fund by the Funds. G. WAIVER AND EXPENSE REIMBURSEMENTS Advisers has agreed in advance to waive all or a portion of its respective fees and to assume payment of other expenses through April 30, 2010. Total expenses waived or paid are not subject to reimbursement by the Funds subsequent to the Funds' fiscal year end. After April 30, 2010, Advisers may discontinue this waiver at any time upon notice to the Funds' Board of Trustees. 58 | Semiannual Report Franklin Templeton Fund Allocator Series NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 4. INCOME TAXES At June 30, 2009, the cost of investments and net unrealized appreciation (depreciation) for income tax purposes were as follows:
FRANKLIN FRANKLIN FRANKLIN TEMPLETON TEMPLETON TEMPLETON CONSERVATIVE MODERATE GROWTH TARGET FUND TARGET FUND TARGET FUND ------------ ------------ ------------ Cost of investments .......................................... $600,155,081 $896,233,025 $553,309,862 ============ ============ ============ Unrealized appreciation ...................................... $ 17,474,180 $ 35,977,295 $ 25,049,957 Unrealized depreciation ...................................... (38,520,057) (71,096,786) (72,996,448) ------------ ------------ ------------ Net unrealized appreciation (depreciation) ................... $(21,045,877) $(35,119,491) $(47,946,491) ============ ============ ============
Net investment income differs for financial statement and tax purposes primarily due to differing treatment of short term capital gains distributions from Underlying Funds. Net realized gains (losses) differ for financial statement and tax purposes primarily due to differing treatments of wash sales and short term capital gains distributions from Underlying Funds. 5. INVESTMENT TRANSACTIONS Purchases and sales of Underlying Funds (excluding short term securities) for the period ended June 30, 2009, were as follows:
FRANKLIN FRANKLIN FRANKLIN TEMPLETON TEMPLETON TEMPLETON CONSERVATIVE MODERATE GROWTH TARGET FUND TARGET FUND TARGET FUND ------------ ------------ ------------ Purchases .................................................... $83,679,777 $142,981,641 $62,415,741 Sales ........................................................ $31,497,037 $ 53,583,676 $45,435,122
6. INVESTMENTS IN UNDERLYING FUNDS The Funds invest primarily in the Underlying Funds which are managed by Advisers or an affiliate of Advisers. The Funds do not invest in the Underlying Funds for the purpose of exercising management or control. At June 30, 2009, the Funds held the following positions which exceed 5% of the Underlying Funds' shares outstanding:
NAME OF ISSUER % OF SHARES HELD - -------------- ---------------- FRANKLIN TEMPLETON CONSERVATIVE TARGET FUND Franklin Global Real Estate Fund ............. 8.55% Franklin Growth Opportunities Fund ........... 7.33% FRANKLIN TEMPLETON MODERATE TARGET FUND Franklin Global Real Estate Fund ............. 19.49% Franklin Growth Opportunities Fund ........... 15.94% Franklin Small Cap Growth Fund ............... 7.54%
Semiannual Report | 59 Franklin Templeton Fund Allocator Series NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 6. INVESTMENTS IN UNDERLYING FUNDS (CONTINUED)
NAME OF ISSUER % OF SHARES HELD - -------------- ---------------- FRANKLIN TEMPLETON GROWTH TARGET FUND Franklin Global Real Estate Fund ............. 14.96% Franklin Growth Opportunities Fund ........... 12.79% Franklin Small Cap Growth Fund ............... 6.29%
The Funds may invest in the Institutional Fiduciary Trust Money Market Portfolio (Sweep Money Fund), an open-end investment company managed by Advisers. Pursuant to a SEC exemptive order specific to the Funds' investment in the Sweep Money Fund, asset allocation fees are reduced on assets invested in the Sweep Money Fund, in an amount not to exceed the management and administrative fees paid by the Sweep Money Fund. 7. CREDIT FACILITY Effective January 23, 2009, the Funds, together with other U.S. registered and foreign investment funds managed by Franklin Templeton Investments (individually, "Borrower"; collectively "Borrowers"), entered into a joint syndicated senior unsecured credit facility totaling $725 million (Global Credit Facility) to provide a source of funds to the Borrowers for temporary and emergency purposes, including the ability to meet future unanticipated or unusually large redemption requests. Under the terms of the Global Credit Facility, the Funds shall, in addition to interest charged on any borrowings made by the Funds and other costs incurred by the Funds, pay their share of fees and expenses incurred in connection with the implementation and maintenance of the Global Credit Facility, based upon their relative share of the aggregate net assets of all of the Borrowers, including an annual commitment fee based upon the unused portion of the Global Credit Facility. During the period, the Funds incurred commitment fees of their pro rata portion of the Global Credit Facility, which is reflected in other expenses on the Statements of Operations. During the period ended June 30, 2009, the Funds did not utilize the Global Credit Facility. The commitment fees the Funds incurred for the period were as follows:
FRANKLIN FRANKLIN FRANKLIN TEMPLETON TEMPLETON TEMPLETON CONSERVATIVE MODERATE GROWTH TARGET FUND TARGET FUND TARGET FUND ------------ ------------ ----------- Commitment fees .............................................. $525 $779 $488
60 | Semiannual Report Franklin Templeton Fund Allocator Series NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 8. FAIR VALUE MEASUREMENTS Financial Accounting Standards Board (FASB) Statement No. 157, "Fair Value Measurement" (SFAS 157) establishes a fair value hierarchy that distinguishes between market data obtained from independent sources (observable inputs) and the Trust's own market assumptions (unobservable inputs). These inputs are used in determining the value of the Funds' investments and are summarized in the following fair value hierarchy: - Level 1 - quoted prices in active markets for identical securities - Level 2 - other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speed, credit risk, etc.) - Level 3 - significant unobservable inputs (including the Fund's own assumptions in determining the fair value of investments) The inputs or methodology used for valuing securities are not an indication of the risk associated with investing in those securities. At June 30, 2009, all the Funds' investments in securities carried at fair value were in Level 1 inputs. For detailed industry descriptions, see the accompanying Statements of Investments. 9. SUBSEQUENT EVENTS Management has evaluated subsequent events through August 18, 2009 and determined that no events have occurred that require disclosure. Semiannual Report | 61 Franklin Templeton Fund Allocator Series SHAREHOLDER INFORMATION BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT At a meeting held February 24, 2009, the Board of Trustees (Board), including a majority of non-interested or independent Trustees, approved renewal of the investment management agreement for each of the separate funds comprising Franklin Templeton Fund Allocator Series (Fund(s)). In reaching this decision, the Board took into account information furnished throughout the year at regular Board meetings, as well as information prepared specifically in connection with the annual renewal review process. Information furnished and discussed throughout the year included investment performance reports and related financial information for each Fund, as well as periodic reports on shareholder services, legal, compliance, pricing, brokerage commissions and execution and other services provided by the Investment Manager (Manager) and its affiliates. Information furnished specifically in connection with the renewal process included a report for each Fund prepared by Lipper, Inc. (Lipper), an independent organization, as well as additional material, including a Fund profitability analysis report prepared by management. The Lipper reports compared each Fund's investment performance and expenses with those of other mutual funds deemed comparable to the Fund as selected by Lipper. The Fund profitability analysis report discussed the profitability to Franklin Templeton Investments from its overall U.S. fund operations, as well as on an individual fund-by-fund basis. Included with such profitability analysis report was information on a fund-by-fund basis listing portfolio managers and other accounts they manage, as well as information on management fees charged by the Manager and its affiliates including management's explanation of differences where relevant and a three-year expense analysis with an explanation for any increase in expense ratios. Additional material accompanying such report was a memorandum prepared by management describing project initiatives and capital investments relating to the services provided to the Funds by the Franklin Templeton Investments organization, as well as a memorandum relating to economies of scale and a comparative analysis concerning transfer agent fees charged each Fund. Such material also discussed some of the actions taken by management in coping with problems arising out of the past year's financial upheaval. In considering such materials, the independent Trustees received assistance and advice from and met separately with independent counsel. While the investment management agreements for all Funds were considered at the same Board meeting, the Board dealt with each Fund separately. In approving continuance of the investment management agreement for each Fund, the Board, including a majority of independent Trustees, determined that the existing management fee structure was fair and reasonable and that continuance of the investment management agreement was in the best interests of each Fund and its shareholders. While attention was given to all information furnished, the following discusses some primary factors relevant to the Board's decision. NATURE, EXTENT AND QUALITY OF SERVICE. The Board was satisfied with the nature and quality of the overall services provided by the Manager and its affiliates to the Funds and their shareholders. In addition to investment performance and expenses discussed later, the Board's opinion was based, in part, upon periodic reports furnished it showing that the investment policies and restrictions for each Fund were consistently complied with as well as other reports periodically furnished the Board covering matters such as the compliance of portfolio managers and other 62 | Semiannual Report Franklin Templeton Fund Allocator Series SHAREHOLDER INFORMATION (CONTINUED) BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT (CONTINUED) management personnel with the code of ethics adopted throughout the Franklin Templeton fund complex, the adherence to fair value pricing procedures established by the Board, and the accuracy of net asset value calculations. The Board also noted the extent of benefits provided Fund shareholders from being part of the Franklin Templeton family of funds, including the right to exchange investments between the same class of funds without a sales charge, the ability to reinvest Fund dividends into other funds and the right to combine holdings in other funds to obtain a reduced sales charge. Favorable consideration was given to management's continuous efforts and expenditures in establishing back-up systems and recovery procedures to function in the event of a natural disaster, it being noted that such systems and procedures had functioned smoothly during the Florida hurricanes and blackouts experienced in recent years. Among other factors taken into account by the Board were the Manager's best execution trading policies, including a favorable report by an independent portfolio trading analytical firm. Consideration was also given to the experience of each Fund's portfolio management team, the number of accounts managed and general method of compensation. In this latter respect, the Board noted that a primary factor in management's determination of a portfolio manager's bonus compensation was the relative investment performance of the funds he or she managed and that a portion of such bonus was required to be invested in a predesignated list of funds within such person's fund management area so as to be aligned with the interests of Fund shareholders. The Board also took into account the quality of transfer agent and shareholder services provided Fund shareholders by an affiliate of the Manager, noting continuing expenditures by management to increase and improve the scope of such services, periodic favorable reports on such service conducted by third parties, and the continuous enhancements to and high industry ranking given the Franklin Templeton website. Particular attention was given to the overall performance and actions taken by the Manager and its affiliates in response to problems arising out of the market turmoil and financial crisis experienced during the past year. In this respect, the Board noted that management's independent credit analysis and diligent risk management procedures had minimized exposure of funds within the Franklin Templeton complex to subprime mortgages and that its continuous monitoring of counterparty credit risk had limited fund exposure to firms experiencing financial difficulties like Bear Stearns and AIG. The same type of conservative approach and attention to risk had also prevented any structured investment products or other volatile instruments being held in the portfolios of any of the money market funds within the Franklin Templeton complex, including the sweep money fund utilized by many of the funds as part of their cash management. The Board also took into account, among other things, management's efforts in establishing a $725 million global credit facility for the benefit of the funds and other accounts managed by Franklin Templeton Investments to provide a source of cash for temporary and emergency purposes or to meet unusual redemption requests as well as the strong financial position of the Manager's parent company and its commitment to the mutual fund business. The Board also noted that during the past year Franklin Templeton Investments, like many other fund managers, had announced a hiring freeze and implemented employee reductions, and the Board discussed with management the nature of such reductions and steps being taken to minimize any negative impact on the nature and quality of services being provided the funds. Semiannual Report | 63 Franklin Templeton Fund Allocator Series SHAREHOLDER INFORMATION (CONTINUED) BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT (CONTINUED) INVESTMENT PERFORMANCE. The Board placed significant emphasis on the investment performance of each Fund in view of its importance to shareholders. While consideration was given to performance reports and discussions with portfolio managers at Board meetings throughout the year, particular attention in assessing performance was given to the Lipper reports furnished for the agreement renewals. The Lipper reports prepared for each individual Fund showed the investment performance of Class A shares, in comparison to a performance universe selected by Lipper. Comparative performance for each Fund was shown for the one-year period ended December 31, 2008, and for additional periods ended that date depending on when a particular Fund commenced operations. The following summarizes the performance results for each of the Funds and the Board's view of such performance. FRANKLIN TEMPLETON CONSERVATIVE TARGET FUND - The performance universe for this Fund consisted of the Fund and all retail and institutional mixed-asset target allocation conservative funds as selected by Lipper. The Lipper report showed that the Fund's income return for the one-year period was in the middle quintile of its performance universe and on an annualized basis was also in the middle quintile of such universe for the previous three-, five- and 10-year periods. Consistent with the market sell-off that occurred in 2008, the Fund and a majority of the other funds within its performance universe experienced losses during the past year. On a comparative basis, however, the Lipper report showed the Fund's total return for the one-year period to be in the second-highest quintile of such performance universe, and for each of the previous three-, five- and 10-year periods on an annualized basis to be in the highest quintile of such performance universe. The Board noted such favorable comparative performance. FRANKLIN TEMPLETON MODERATE TARGET FUND - The performance universe of this Fund consisted of the Fund and all retail and institutional mixed-asset target allocation moderate funds as selected by Lipper. The Lipper report showed the Fund's income return for the one-year period to be in the middle quintile of this universe and on an annualized basis for each of the previous three- and 10-year periods to be in the second-highest quintile of such universe, and in the middle quintile for the previous five-year period. Consistent with the market sell-off that occurred in 2008, the Fund and all other funds within its performance universe experienced losses during the past year. On a comparative basis, however, the Lipper report showed the Fund's total return for the one-year period to be in the second-highest quintile of such performance universe and in each of the previous three-, five- and 10-year periods on an annualized basis to be in the highest quintile of such performance universe. The Board noted such favorable comparative performance. FRANKLIN TEMPLETON GROWTH TARGET FUND - The performance universe for this Fund consisted of the Fund and all retail and institutional mixed-asset target allocation growth funds as selected by Lipper. The Lipper report showed the Fund's income return for the one-year period, as well as the previous three- and 10-year periods on an annualized basis to be in the middle quintile of such universe, and to be in the second-lowest quintile of such universe for the previous five-year period on an annualized basis. Consistent with the market sell-off that occurred in 2008, the Fund and all 64 | Semiannual Report Franklin Templeton Fund Allocator Series SHAREHOLDER INFORMATION (CONTINUED) BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT (CONTINUED) other funds within its performance universe experienced losses during the past year. On a comparative basis, the Lipper report showed the Fund's total return for the one-year period to be in the second-lowest quintile of its performance universe, but to be in the highest or second-highest quin-tile of such universe during each of the previous three-, five- and 10-year periods on an annualized basis. The Board discussed with management the reasons for the Fund's total return performance during 2008, but was satisfied with its overall comparative performance. COMPARATIVE EXPENSES. Consideration was given to the management fee and total expense ratios of each Fund compared with those of a group of retail front-end load fund of funds selected by Lipper as its appropriate Lipper expense group. Lipper expense data is based upon historical information taken from each fund's most recent annual report and, as a result of the severe decline in mutual fund industry assets during the last quarter of 2008, is based on asset levels that are higher than the level currently existing for most funds. While recognizing the limitations inherent in Lipper's methodology and recognizing that current expense ratios may increase as assets decline, the Board believed that the independent analysis conducted by Lipper remained an appropriate measure of comparative expenses. In reviewing comparative costs, Lipper provides information on each Fund's contractual investment management fee in comparison with the contractual investment management fee that would have been charged by other funds within its Lipper expense group assuming they were similar in size to the Fund, as well as the actual total expenses of the Fund including expenses of the underlying funds they invest in. The Board noted the Funds pay an asset allocation fee. The Lipper contractual investment management fee analysis includes the advisory and administrative fees directly charged to each of the Funds as being part of the contractual investment management fee, with the investment management fees charged underlying funds being included within actual total expenses. Contractual investment management fees and total expenses for comparative consistency are shown by Lipper for Fund Class A shares. The Lipper expense reports noted in the case of each Fund that expenses had been subsidized by management fee waivers and reimbursements. The Lipper report for Franklin Templeton Moderate Target Fund, Franklin Templeton Conservative Target Fund and Franklin Templeton Growth Target Fund showed in each case that the contractual fee rate and ratio of expenses charged directly to such Funds, along with their actual total expense ratios (including underlying fund expenses), were in the most expensive or second most expensive quintiles of their respective Lipper expense groups. The actual total expense ratios of Franklin Templeton Moderate Target Fund, Franklin Templeton Conservative Target Fund and Franklin Templeton Growth Target Fund, however, were within 14 basis points, nine basis points and 13 basis points, respectively, of the median actual total expense ratios for their particular Lipper expense groups. The Board believed the expenses of each Fund were acceptable, taking into account the fee waiver expense reimbursements applicable to each of them. MANAGEMENT PROFITABILITY. The Board also considered the level of profits realized by the Manager and its affiliates in connection with the operation of each Fund. In this respect, the Board reviewed the Fund profitability analysis that addresses the overall profitability of Franklin Templeton's U.S. fund business, as well as its profits in providing management and other services Semiannual Report | 65 Franklin Templeton Fund Allocator Series SHAREHOLDER INFORMATION (CONTINUED) BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT (CONTINUED) to each of the individual funds during the 12-month period ended September 30, 2008, being the most recent fiscal year end for Franklin Resources, Inc., the Manager's parent. During such period, the assets of the Franklin Templeton U.S. fund business were significantly higher than currently existing, and to such extent the profitability analysis does not reflect current fund operations. While taking this into account in assessing the significance of the Fund profitability analysis, the Board recognized such analysis was made at a given point in time and that the decline in assets and effect on profitability would be reflected in the profitability analysis covering Franklin Resources' 2009 fiscal year period. In reviewing the analysis, attention was given to the methodology followed in allocating costs to each Fund, it being recognized that allocation methodologies are inherently subjective and various allocation methodologies may each be reasonable while producing different results. In this respect, the Board noted that, while being continuously refined and reflecting changes in the Manager's own cost accounting, the allocation methodology was consistent with that followed in profitability report presentations for the Funds made in prior years and that the Funds' independent registered public accounting firm had been engaged by the Manager to perform certain procedures on a biennial basis, specified and approved by the Manager and the Funds' Board solely for their purposes and use in reference to the profitability analysis. In reviewing and discussing such analysis, management discussed with the Board its belief that costs incurred in establishing the infrastructure necessary for the type of mutual fund operations conducted by the Manager and its affiliates may not be fully reflected in the expenses allocated to each Fund in determining its profitability, as well as the fact that the level of profits, to a certain extent, reflected operational cost savings and efficiencies initiated by management. The Board also took into account management's expenditures in improving shareholder services provided the Funds, as well as the need to meet additional regulatory and compliance requirements resulting from the Sarbanes-Oxley Act and recent SEC and other regulatory requirements. In addition, the Board considered a third-party study comparing the profitability of the Manager's parent on an overall basis as compared to other publicly held managers broken down to show profitability from management operations exclusive of distribution expenses, as well as profitability including distribution expenses. The Board also considered the extent to which the Manager and its affiliates might derive ancillary benefits from fund operations, including its interest in a joint venture entity that financed up-front commissions paid to brokers/dealers who sold fund Class B shares prior to February 2005 when the offering of such shares was discontinued, as well as potential benefits resulting from allocation of fund brokerage and the use of commission dollars to pay for research. Based upon its consideration of all these factors, the Board determined that the level of profits realized by the Manager and its affiliates from providing services to each Fund was not excessive in view of the nature, quality and extent of services provided. ECONOMIES OF SCALE. The Board also considered whether economies of scale are realized by the Managers as the Funds grow larger and the extent to which this is reflected in the level of management fees charged. While recognizing that any precise determination is inherently subjective, the Board noted that based upon the Fund profitability analysis, it appears that as some funds get larger, at some point economies of scale do result in the Managers realizing a larger profit 66 | Semiannual Report Franklin Templeton Fund Allocator Series SHAREHOLDER INFORMATION (CONTINUED) BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT (CONTINUED) margin on management services provided such a fund. The Board also noted that economies of scale are shared with a fund and its shareholders through management fee breakpoints so that as a fund grows in size, its effective management fee rate declines. The management fees charged all the underlying funds in which the Funds may invest provide for such management fee breakpoints. Consequently, to the extent economies of scale may be realized by the investment managers of these funds, the benefits are shared with each Fund and its shareholders through a reduction in actual total expense ratios. PROXY VOTING POLICIES AND PROCEDURES The Trust's investment manager has established Proxy Voting Policies and Procedures (Policies) that the Trust uses to determine how to vote proxies relating to portfolio securities. Shareholders may view the Trust's complete Policies online at franklintempleton.com. Alternatively, shareholders may request copies of the Policies free of charge by calling the Proxy Group collect at (954) 527-7678 or by sending a written request to: Franklin Templeton Companies, LLC, 500 East Broward Boulevard, Suite 1500, Fort Lauderdale, FL 33394, Attention: Proxy Group. Copies of the Trust's proxy voting records are also made available online at franklintempleton.com and posted on the U.S. Securities and Exchange Commission's website at sec.gov and reflect the most recent 12-month period ended June 30. QUARTERLY STATEMENT OF INVESTMENTS The Trust files a complete statement of investments with the U.S. Securities and Exchange Commission for the first and third quarters for each fiscal year on Form N-Q. Shareholders may view the filed Form N-Q by visiting the Commission's website at sec.gov. The filed form may also be viewed and copied at the Commission's Public Reference Room in Washington, DC. Information regarding the operations of the Public Reference Room may be obtained by calling (800) SEC-0330. Semiannual Report | 67 This page intentionally left blank. Franklin Templeton Funds LITERATURE REQUEST. TO RECEIVE A PROSPECTUS, PLEASE CALL US AT (800) DIAL BEN/(800) 342-5236 OR VISIT franklintempleton.com. INVESTORS SHOULD CAREFULLY CONSIDER A FUND'S INVESTMENT GOALS, RISKS, CHARGES AND EXPENSES BEFORE INVESTING. THE PROSPECTUS CONTAINS THIS AND OTHER INFORMATION. PLEASE CAREFULLY READ THE PROSPECTUS BEFORE INVESTING. TO ENSURE THE HIGHEST QUALITY OF SERVICE, WE MAY MONITOR, RECORD AND ACCESS TELEPHONE CALLS TO OR FROM OUR SERVICE DEPARTMENTS. THESE CALLS CAN BE IDENTIFIED BY THE PRESENCE OF A REGULAR BEEPING TONE. VALUE Franklin All Cap Value Fund Franklin Balance Sheet Investment Fund Franklin Large Cap Value Fund Franklin MicroCap Value Fund(1) Franklin MidCap Value Fund Franklin Small Cap Value Fund Mutual Beacon Fund Mutual Quest Fund Mutual Recovery Fund(2) Mutual Shares Fund BLEND Franklin Focused Core Equity Fund Franklin Large Cap Equity Fund Franklin Rising Dividends Fund GROWTH Franklin Flex Cap Growth Fund Franklin Growth Fund Franklin Growth Opportunities Fund Franklin Small Cap Growth Fund Franklin Small-Mid Cap Growth Fund SECTOR Franklin Biotechnology Discovery Fund Franklin DynaTech Fund Franklin Global Real Estate Fund Franklin Gold & Precious Metals Fund Franklin Natural Resources Fund Franklin Real Estate Securities Fund Franklin Utilities Fund Mutual Financial Services Fund GLOBAL Mutual Global Discovery Fund Templeton Global Long-Short Fund Templeton Global Opportunities Trust Templeton Global Smaller Companies Fund Templeton Growth Fund Templeton World Fund INTERNATIONAL Franklin India Growth Fund Franklin International Growth Fund Franklin International Small Cap Growth Fund Mutual European Fund Mutual International Fund Templeton BRIC Fund Templeton China World Fund Templeton Developing Markets Trust Templeton Emerging Markets Small Cap Fund Templeton Foreign Fund Templeton Foreign Smaller Companies Fund Templeton Frontier Markets Fund HYBRID Franklin Balanced Fund Franklin Convertible Securities Fund Franklin Equity Income Fund Franklin Income Fund Templeton Income Fund ASSET ALLOCATION Franklin Templeton Corefolio(R) Allocation Fund Franklin Templeton Founding Funds Allocation Fund Franklin Templeton Perspectives Allocation Fund Franklin Templeton Conservative Target Fund Franklin Templeton Growth Target Fund Franklin Templeton Moderate Target Fund Franklin Templeton 2015 Retirement Target Fund Franklin Templeton 2025 Retirement Target Fund Franklin Templeton 2035 Retirement Target Fund Franklin Templeton 2045 Retirement Target Fund FIXED INCOME Franklin Adjustable U.S. Government Securities Fund(3) Franklin Floating Rate Daily Access Fund Franklin High Income Fund Franklin Limited Maturity U.S. Government Securities Fund(3) Franklin Low Duration Total Return Fund Franklin Real Return Fund Franklin Strategic Income Fund Franklin Strategic Mortgage Portfolio Franklin Templeton Hard Currency Fund Franklin Total Return Fund Franklin U.S. Government Securities Fund(3) Templeton Global Bond Fund Templeton Global Total Return Fund Templeton International Bond Fund TAX-FREE INCOME(4) NATIONAL Double Tax-Free Income Fund Federal Tax-Free Income Fund High Yield Tax-Free Income Fund Insured Tax-Free Income Fund(5) LIMITED-/INTERMEDIATE-TERM California Intermediate-Term Tax-Free Income Fund Federal Intermediate-Term Tax-Free Income Fund Federal Limited-Term Tax-Free Income Fund New York Intermediate-Term Tax-Free Income Fund STATE-SPECIFIC Alabama Arizona California(6) Colorado Connecticut Florida Georgia Kentucky Louisiana Maryland Massachusetts(7) Michigan(7) Minnesota(7) Missouri New Jersey New York(6) North Carolina Ohio(7) Oregon Pennsylvania Tennessee Virginia INSURANCE FUNDS Franklin Templeton Variable Insurance Products Trust(8) (1.) The fund is closed to new investors. Existing shareholders and select retirement plans can continue adding to their accounts. (2.) The fund is a continuously offered, closed-end fund. Shares may be purchased daily; there is no daily redemption. However, each quarter, pending board approval, the fund will authorize the repurchase of 5%-25% of the outstanding number of shares. Investors may tender all or a portion of their shares during the tender period. (3.) An investment in the fund is neither insured nor guaranteed by the U.S. government or by any other entity or institution. (4.) For investors subject to the alternative minimum tax, a small portion of fund dividends may be taxable. Distributions of capital gains are generally taxable. (5.) The fund invests primarily in insured municipal securities. (6.) These funds are available in four or more variations, including long-term portfolios, intermediate-term portfolios, portfolios of insured securities, a high-yield portfolio (CA only) and money market portfolios. (7.) The Board of Trustees approved the elimination of the non-fundamental policy requiring the fund to invest at least 80% of net assets in insured municipal securities and the removal of the word "Insured" from the fund name. The changes became effective 2/17/09. (8.) The funds of the Franklin Templeton Variable Insurance Products Trust are generally available only through insurance company variable contracts. 04/09 Not part of the semiannual report (FRANKLIN TEMPLETON INVESTMENTS(R) LOGO) One Franklin Parkway San Mateo, CA 94403-1906 SIGN UP FOR EDELIVERY Log onto franklintempleton.com and click "My Profile" SEMIANNUAL REPORT AND SHAREHOLDER LETTER FRANKLIN TEMPLETON FUND ALLOCATOR SERIES INVESTMENT MANAGER Franklin Advisers, Inc. DISTRIBUTOR Franklin Templeton Distributors, Inc. (800) DIAL BEN(R) franklintempleton.com SHAREHOLDER SERVICES (800) 632-2301 Authorized for distribution only when accompanied or preceded by a prospectus. Investors should carefully consider a fund's investment goals, risks, charges and expenses before investing. The prospectus contains this and other information; please read it carefully before investing. To ensure the highest quality of service, telephone calls to or from our service departments may be monitored, recorded and accessed. These calls can be identified by the presence of a regular beeping tone. FAS S2009 08/09 JUNE 30, 2009 SEMIANNUAL REPORT AND SHAREHOLDER LETTER Franklin Templeton Corefolio Allocation Fund Franklin Templeton Founding Funds Allocation Fund Franklin Templeton Perspectives Allocation Fund SIGN UP FOR EDELIVERY Log onto franklintempleton.com and click "My Profile" (GRAPHIC) ASSET ALLOCATION FRANKLIN TEMPLETON FUND ALLOCATOR SERIES (FRANKLIN TEMPLETON INVESTMENTS(R) LOGO) FRANKLIN - TEMPLETON - MUTUAL SERIES FRANKLIN TEMPLETON INVESTMENTS GAIN FROM OUR PERSPECTIVE(R) Franklin Templeton's distinct multi-manager structure combines the specialized expertise of three world-class investment management groups--Franklin, Templeton and Mutual Series. SPECIALIZED EXPERTISE Each of our portfolio management groups operates autonomously, relying on its own research and staying true to the unique investment disciplines that underlie its success. FRANKLIN. Founded in 1947, Franklin is a recognized leader in fixed income investing and also brings expertise in growth- and value-style U.S. equity investing. TEMPLETON. Founded in 1940, Templeton pioneered international investing and, in 1954, launched what has become the industry's oldest global fund. Today, with offices in over 25 countries, Templeton offers investors a truly global perspective. MUTUAL SERIES. Founded in 1949, Mutual Series is dedicated to a unique style of value investing, searching aggressively for opportunity among what it believes are undervalued stocks, as well as arbitrage situations and distressed securities. TRUE DIVERSIFICATION Because our management groups work independently and adhere to different investment approaches, Franklin, Templeton and Mutual Series funds typically have distinct portfolios. That's why our funds can be used to build truly diversified allocation plans covering every major asset class. RELIABILITY YOU CAN At Franklin Templeton Investments, we seek to TRUST consistently provide investors with exceptional risk-adjusted returns over the long term, as well as the reliable, accurate and personal service that has helped us become one of the most trusted names in financial services.
MUTUAL FUNDS | RETIREMENT PLANS | 529 COLLEGE SAVINGS PLANS | SEPARATE ACCOUNTS (GRAPHIC) Not part of the semiannual report Contents Shareholder Letter ........................................................ 1 SEMIANNUAL REPORT Economic and Market Overview .............................................. 3 Franklin Templeton Corefolio Allocation Fund .............................. 5 Franklin Templeton Founding Funds Allocation Fund ......................... 12 Franklin Templeton Perspectives Allocation Fund ........................... 19 Financial Highlights and Statements of Investments ........................ 26 Financial Statements ...................................................... 43 Notes to Financial Statements ............................................. 48 Shareholder Information ................................................... 58
Shareholder Letter Dear Shareholder: The six months ended June 30, 2009, offered some relief from the financial shocks of 2008. The U.S. economy, while still in a downturn, became marginally "less worse" as the recession seemed to loosen its grip. The federal stimulus package and interventions by the Federal Reserve appeared to gain some traction, and household spending began to stabilize. Many investors reentered the stock market, which started a rally in March that brought the major indexes off this cycle's lows. U.S. Treasury yields rose as investor risk aversion waned. Amid recent events, we think it is important to put short-term market developments in perspective. Keep in mind that we have navigated through past periods of high market volatility by remaining committed to our long-term perspective and disciplined investment philosophy. During such times, we search for bargains that we believe may be well positioned to become eventual winners. Although conditions remain challenging, our experience gives us ample reason to be optimistic about future market stabilization and recovery. The enclosed semiannual report for Franklin Templeton Fund Allocator Series includes a discussion of market conditions and each Fund's performance during the period under review. You will also find performance data and financial information. Please remember that all securities markets fluctuate, as do mutual fund share prices. If you would like more frequent updates, FRANKLINTEMPLETON.COM provides daily prices, monthly performance figures, portfolio holdings and other information. You can also access your account, buy and sell shares, read timely articles, and find helpful financial planning tools. We hope you will take advantage of these online services. NOT FDIC INSURED | MAY LOSE VALUE | NO BANK GUARANTEE Not part of the semiannual report | 1 Although market conditions are constantly changing, we remain committed to our disciplined strategy as we manage the Funds. As always, we recommend investors consult their financial advisors and review their portfolios to design a long-term strategy and portfolio allocation that meet their individual needs, goals and risk tolerance. We firmly believe that most people benefit from professional advice, and that advice is invaluable as investors navigate changing market environments. We thank you for investing with Franklin Templeton, welcome your questions and remain focused on serving your investment needs. Sincerely, /s/ Charles B. Johnson Charles B. Johnson Chairman Franklin Templeton Fund Allocator Series THIS LETTER REFLECTS OUR ANALYSIS AND OPINIONS AS OF JUNE 30, 2009. 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. 2 | Not part of the semiannual report Semiannual Report Economic and Market Overview During the six-month period ended June 30, 2009, the U.S. economy and stock markets seemed to stabilize after signs appeared that the recession's severity had eased. Strains on the banking system and credit markets that surfaced in 2008 improved in 2009's first half with the help of federal aid and tighter regulations. Despite rising unemployment, near period-end home sales edged higher, the decline in manufacturing activity slowed and consumer confidence started to pick up. Economic growth as measured by gross domestic product (GDP) fell at annualized rates of 6.4% and an estimated 1.0% in the first and second quarters of 2009. Although the price of oil rose from $44 per barrel at the beginning of the period to $70 by period-end on speculation that the downturn was abating, it was still off more than 50% from its July 2008 record high.(1) June's inflation rate, as measured by the Consumer Price Index, was an annualized -1.4%, representing the steepest yearly decline in the cost of living in nearly six decades.(2) Core inflation, which excludes food and energy costs, rose at a 1.7% annualized rate, which was within the Federal Reserve Board's (Fed's) informal target range of 1.5%-2.0%.(2) A deepening recession and decelerating inflation prompted Washington policy-makers to keep interest rates low and enact stimulus plans -- including income tax cuts, aid to ailing state governments and funding for transportation infrastructure, school construction and high-tech projects. During the period under review, the Fed kept the federal funds target rate in a range of 0% to 0.25% and said the "pace of economic contraction is slowing" but the financial system had not yet returned to normal. Most U.S. stocks suffered major losses through early March as investors worried about an uncertain future. Stocks then recovered somewhat from 12-year lows as investors perceived many bargains among the bear market fallout and data indicated the economy's pace of contraction was moderating. By June, however, fresh investor concerns about the economy and stock valuations reemerged and dampened the rally's momentum. For the six months under review, the blue chip stocks of the Dow Jones Industrial Average had a total return of -2.01%, while the broader Standard & Poor's 500 Index (S&P 500) (1.) Source: New York Mercantile Exchange. (2.) Source: Bureau of Labor Statistics. Semiannual Report | 3 posted a +3.16% total return and the technology-heavy NASDAQ Composite Index returned +16.99%.(3) Global equities followed the same trend. At the beginning of the period, with investor sentiment depressed and risk aversion elevated, defensive, non-cyclical sectors like utilities, consumer staples and health care were market leaders. As data emerged suggesting a fledgling recovery in the financials sector and a moderating pace of global economic contraction, investors regained some risk appetite, rotating capital back into cyclical sectors such as financials, materials and consumer discretionary. Resurgent risk appetite also buoyed emerging markets stocks, which delivered their best three-month returns on record from March through May 2009. Emerging market optimism in turn supported higher commodity prices, which gained the most since the bubble in hard assets burst in the summer of 2008. Also supporting commodity prices was a weaker U.S. dollar. Although systemic risk aversion and the consensus belief that the U.S. could lead the global economy out of recession helped strengthen the dollar at the beginning of the period, investors soon began to worry about the currency's ongoing stability in the face of aggressive and unconventional monetary policy, and the greenback lost value relative to most currencies for the six-month period. In the reporting period's final weeks, global equity markets moderated as investors appeared to contemplate the rally's merits and reassess their new positions. Although sentiment had improved and most seemed to believe the global economy had exited the worst stage of this recessionary cycle, indicators remained mixed and lacked the sustainable upward trajectory investors had hoped for. In Europe, policymakers committed to an easier monetary regime, but the eurozone's industrial production declined, capacity utilization continued to shrink, and price deflation was recorded for the first time since data began in 1997.(4) In China, a stimulative monetary campaign spurred lending and fueled an annualized money growth rate of 26%, a powerful measure against near-term economic headwinds but a potentially dangerous catalyst for longer-term inflation and asset bubble formation.(5) THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS AND OPINIONS AS OF JUNE 30, 2009. 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. (3.) Source: (C) 2009 Morningstar. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (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. Past performance is no guarantee of future results. The Dow Jones Industrial Average is price weighted based on the average market price of 30 blue chip stocks of companies that are generally industry leaders. The S&P 500 consists of 500 stocks chosen for market size, liquidity and industry group representation. Each stock's weight in the index is proportionate to its market value. The S&P 500 is one of the most widely used benchmarks of U.S. equity performance. The NASDAQ Composite Index measures all NASDAQ domestic and international based common type stocks listed on The NASDAQ Stock Market. The index is market value weighted and includes more than 3,000 companies. (4.) Source: European Communities Eurostat. (5.) Source: People's Bank of China. 4 | Semiannual Report Franklin Templeton Corefolio Allocation Fund YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin Templeton Corefolio Allocation Fund seeks capital appreciation through investments in a combination of Franklin Growth Fund, Mutual Shares Fund and Templeton Growth Fund. ASSET ALLOCATION* Franklin Templeton Corefolio Allocation Fund Based on Total Net Assets as of 6/30/09 (PIE CHART) Domestic Equity... 75.0% Foreign Equity.... 25.0%
* The asset allocation is based on the Statement of Investments (SOI), which classifies each underlying fund into a broad asset class. This semiannual report for Franklin Templeton Corefolio Allocation Fund covers the period ended June 30, 2009. PERFORMANCE OVERVIEW 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. PLEASE VISIT franklintempleton.com OR CALL (800) 342-5236 FOR MOST RECENT MONTH-END PERFORMANCE. Franklin Templeton Corefolio Allocation Fund - Class A delivered a +6.33% cumulative total return for the six months under review. In comparison, the Fund's benchmarks, the Standard & Poor's 500 Index (S&P 500) and the Morgan Stanley Capital International (MSCI) World Index, posted total returns of +3.16% and +6.79%.(1) You can find other performance data in the Performance Summary beginning on page 7. (1.) Source: (C) 2009 Morningstar. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (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 S&P 500 consists of 500 stocks chosen for market size, liquidity and industry group representation. Each stock's weight in the index is proportionate to its market value. The S&P 500 is one of the most widely used benchmarks of U.S. equity performance. The MSCI World Index is a free float-adjusted, market capitalization-weighted index designed to measure equity market performance in global developed markets. The indexes are unmanaged and include reinvested distributions. One cannot invest directly in an index, nor is an index representative of the Fund's portfolio. THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND NAMES OF ALL PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S SOI, WHICH BEGINS ON PAGE 31. Semiannual Report | 5 INVESTMENT STRATEGY The Fund invests its assets allocated approximately 50% in Franklin Growth Fund and approximately 25% each in Mutual Shares Fund and Templeton Growth Fund. These underlying funds, in turn, invest primarily in U.S. and foreign equity securities and, to a lesser extent, fixed income and money market securities. As market conditions affect the underlying funds, we rebalance the Fund's allocations to maintain the predetermined weightings in each underlying fund whenever the actual allocations exceed plus or minus 3% of the fixed allocation percentages. PORTFOLIO REVIEW The Fund's performance can be attributed largely to maintaining a relatively static allocation among domestic and foreign equities, fixed income securities, and short-term investments and other net assets, and by the actual performance of the selected underlying funds. During the period under review, Fund performance was driven most by Franklin Growth Fund - Advisor Class, which outperformed the S&P 500. Mutual Shares Fund - - Class Z also outperformed the S&P 500. However, Templeton Growth Fund - Advisor Class underperformed the MSCI World Index. Thank you for your continued participation in Franklin Templeton Corefolio Allocation Fund. We look forward to serving your future investment needs. (PHOTO OF T. ANTHONY COFFEY) /s/ T. Anthony Coffey T. Anthony Coffey, CFA Vice President of Franklin Advisers, Inc. Franklin Templeton Corefolio Allocation Fund THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS AS OF JUNE 30, 2009, 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. 6 | Semiannual Report Performance Summary as of 6/30/09 FRANKLIN TEMPLETON COREFOLIO ALLOCATION FUND 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. The performance table does 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. PRICE AND DISTRIBUTION INFORMATION
CLASS A (SYMBOL: FTCOX) CHANGE 6/30/09 12/31/08 - ----------------------- ------ ------- -------- Net Asset Value (NAV) $0.50 $8.96 $8.46 DISTRIBUTIONS (1/1/09-6/30/09) Dividend Income $0.0354
CLASS B (SYMBOL: FBCOX) CHANGE 6/30/09 12/31/08 - ----------------------- ------ ------- -------- Net Asset Value (NAV) $0.46 $8.90 $8.44 DISTRIBUTIONS (1/1/09-6/30/09) Dividend Income $0.0354
CLASS C (SYMBOL: FTCLX) CHANGE 6/30/09 12/31/08 - ----------------------- ------ ------- -------- Net Asset Value (NAV) $0.47 $8.87 $8.40 DISTRIBUTIONS (1/1/09-6/30/09) Dividend Income $0.0354
CLASS R (SYMBOL: N/A) CHANGE 6/30/09 12/31/08 - --------------------- ------ ------- -------- Net Asset Value (NAV) $0.49 $8.95 $8.46 DISTRIBUTIONS (1/1/09-6/30/09) Dividend Income $0.0354
ADVISOR CLASS (SYMBOL: N/A) CHANGE 6/30/09 12/31/08 - --------------------------- ------ ------- -------- Net Asset Value (NAV) $0.51 $8.98 $8.47 DISTRIBUTIONS (1/1/09-6/30/09) Dividend Income $0.0354
Semiannual Report | 7 Performance Summary (CONTINUED) PERFORMANCE(1) CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETURN AND VALUE OF $10,000 INVESTMENT INCLUDE MAXIMUM SALES CHARGES. CLASS A: 5.75% MAXIMUM INITIAL SALES CHARGE; CLASS B: CONTINGENT DEFERRED SALES CHARGE (CDSC) DECLINING FROM 4% TO 1% OVER SIX YEARS, AND ELIMINATED THEREAFTER; CLASS C: 1% CDSC IN FIRST YEAR ONLY; CLASS R/ADVISOR CLASS: NO SALES CHARGES.
CLASS A 6-MONTH 1-YEAR 5-YEAR INCEPTION (8/15/03) - ------- ------- ------- ------ ------------------- Cumulative Total Return(2) +6.33% -24.91% -8.75% +5.37% Average Annual Total Return(3) +0.17% -29.22% -2.97% -0.12% Value of $10,000 Investment(4) $10,017 $ 7,078 $8,601 $9,932 Total Annual Operating Expenses(5) Without Waiver 1.34% With Waiver 1.12%
CLASS B 6-MONTH 1-YEAR 5-YEAR INCEPTION (8/15/03) - ------- ------- ------- ------ ------------------- Cumulative Total Return(2) +5.87% -25.45% -11.81% +1.19% Average Annual Total Return(3) +1.87% -28.41% -2.83% +0.05% Value of $10,000 Investment(4) $10,187 $ 7,159 $8,663 $10,030 Total Annual Operating Expenses(5) Without Waiver 2.04% With Waiver 1.82%
CLASS C 6-MONTH 1-YEAR 5-YEAR INCEPTION (8/15/03) - ------- ------- ------- ------ ------------------- Cumulative Total Return(2) +6.02% -25.45% -11.72% +1.22% Average Annual Total Return(3) +5.02% -26.19% -2.46% +0.21% Value of $10,000 Investment(4) $10,502 $ 7,381 $8,828 $10,122 Total Annual Operating Expenses(5) Without Waiver 2.04% With Waiver 1.82%
CLASS R 6-MONTH 1-YEAR 5-YEAR INCEPTION (8/15/03) - ------- ------- ------- ------ ------------------- Cumulative Total Return(2) +6.21% -25.10% -9.56% +4.26% Average Annual Total Return(3) +6.21% -25.10% -1.99% +0.71% Value of $10,000 Investment(4) $10,621 $ 7,490 $9,044 $10,426 Total Annual Operating Expenses(5) Without Waiver 1.54% With Waiver 1.32%
ADVISOR CLASS 6-MONTH 1-YEAR 5-YEAR INCEPTION (8/15/03) - ------------- ------- ------- ------ ------------------- Cumulative Total Return(2) +6.44% -24.72% -7.29% +7.22% Average Annual Total Return(3) +6.44% -24.72% -1.50% +1.19% Value of $10,000 Investment(4) $10,644 $7,528 $9,271 $10,722 Total Annual Operating Expenses(5) Without Waiver 1.04% With Waiver 0.82%
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, SEE "FUNDS AND PERFORMANCE" AT franklintempleton.com OR CALL (800) 342-5236. THE ADMINISTRATOR HAS CONTRACTUALLY AGREED TO WAIVE OR LIMIT ITS FEES AND TO ASSUME AS ITS OWN EXPENSE CERTAIN EXPENSES OTHERWISE PAYABLE BY THE FUND SO THAT COMMON EXPENSES (I.E., A COMBINATION OF FUND ADMINISTRATION FEES, AND OTHER EXPENSES, BUT EXCLUDING RULE 12B-1 FEES AND ACQUIRED FUND FEES AND EXPENSES) FOR EACH CLASS OF THE FUND DO NOT EXCEED 0.10% (OTHER THAN CERTAIN NON-ROUTINE EXPENSES OR COSTS, INCLUDING THOSE RELATING TO LITIGATION, INDEMNIFICATION, REORGANIZATIONS AND LIQUIDATIONS) UNTIL 4/30/10. 8 | Semiannual Report Performance Summary (CONTINUED) ENDNOTES BECAUSE THE FUND INVESTS IN UNDERLYING FUNDS THAT MAY ENGAGE IN A VARIETY OF INVESTMENT STRATEGIES INVOLVING CERTAIN RISKS, THIS FUND OF FUNDS IS SUBJECT TO THESE SAME RISKS. STOCKS HISTORICALLY HAVE OUTPERFORMED OTHER ASSET CLASSES OVER THE LONG TERM, BUT TEND TO FLUCTUATE MORE DRAMATICALLY OVER THE SHORT TERM. FOREIGN INVESTING CARRIES ADDITIONAL RISKS SUCH AS CURRENCY AND MARKET VOLATILITY, AND POLITICAL OR SOCIAL INSTABILITY. THESE AND OTHER RISKS, INCLUDING INVESTMENTS IN SPECIALIZED INDUSTRY SECTORS, SUCH AS THE TECHNOLOGY SECTOR, WHICH HAS BEEN AMONG THE MARKET'S MOST VOLATILE SECTORS, INVOLVES SPECIAL CONSIDERATIONS. THE FUND'S PROSPECTUS ALSO INCLUDES A DESCRIPTION OF THE MAIN INVESTMENT RISKS. CLASS B: These shares have higher annual fees and expenses than Class A shares. CLASS C: Prior to 1/1/04, these shares were offered with an initial sales charge; thus actual total returns would have differed. These shares have higher annual fees and expenses than Class A shares. CLASS R: Shares are available to certain eligible investors as described in the prospectus. These shares have higher annual fees and expenses than Class A shares. ADVISOR CLASS: Shares are available to certain eligible investors as described in the prospectus. (1.) If the administrator had not waived fees, the Fund's total returns would have been lower. (2.) Cumulative total return represents the change in value of an investment over the periods indicated. (3.) Average annual total return represents the average annual change in value of an investment over the periods indicated. Six-month return has not been annualized. (4.) These figures represent the value of a hypothetical $10,000 investment in the Fund over the periods indicated. (5.) Figures are as stated in the Fund's prospectus current as of the date of this report. In periods of market volatility, assets may decline significantly, causing total annual Fund operating expenses to become higher than the figures shown. Semiannual Report | 9 Your Fund's Expenses FRANKLIN TEMPLETON COREFOLIO ALLOCATION FUND As a Fund shareholder, you can incur two types of costs: - - Transaction costs, including sales charges (loads) on Fund purchases; and - - Ongoing Fund costs, including management fees, distribution and service (12b-1) fees, and other Fund expenses. All mutual funds have ongoing costs, sometimes referred to as operating expenses. The following table shows ongoing costs of investing in the Fund and can help you understand these costs and compare them with those of other mutual funds. The table assumes a $1,000 investment held for the six months indicated. ACTUAL FUND EXPENSES The first line (Actual) for each share class listed in the table provides actual account values and expenses. The "Ending Account Value" is derived from the Fund's actual return, which includes the effect of Fund expenses. You can estimate the expenses you paid during the period by following these steps. OF COURSE, YOUR ACCOUNT VALUE AND EXPENSES WILL DIFFER FROM THOSE IN THIS ILLUSTRATION: 1. Divide your account value by $1,000. IF AN ACCOUNT HAD AN $8,600 VALUE, THEN $8,600 / $1,000 = 8.6. 2. Multiply the result by the number under the heading "Expenses Paid During Period." IF EXPENSES PAID DURING PERIOD WERE $7.50, THEN 8.6 X $7.50 = $64.50. In this illustration, the estimated expenses paid this period are $64.50. HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS Information in the second line (Hypothetical) for each class in the table can help you compare ongoing costs of investing in the Fund with those of other mutual funds. This information may not be used to estimate the actual ending account balance or expenses you paid during the period. The hypothetical "Ending Account Value" is based on the actual expense ratio for each class and an assumed 5% annual rate of return before expenses, which does not represent the Fund's actual return. The figure under the heading "Expenses Paid During Period" shows the hypothetical expenses your account would have incurred under this scenario. You can compare this figure with the 5% hypothetical examples that appear in shareholder reports of other funds. 10 | Semiannual Report Your Fund's Expenses (CONTINUED) PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES. Therefore, the second line for each class is useful in comparing ongoing costs only, and will not help you compare total costs of owning different funds. In addition, if transaction costs were included, your total costs would have been higher. Please refer to the Fund prospectus for additional information on operating expenses.
BEGINNING ENDING EXPENSES PAID EXPENSES PAID ACCOUNT VALUE ACCOUNT VALUE DURING PERIOD* DURING PERIOD** 1/1/09 6/30/09 1/1/09-6/30/09 1/1/09-6/30/09 ------------- ------------- -------------- --------------- CLASS A Actual $1,000 $1,063.30 $1.94 $5.99 Hypothetical (5% return before expenses) $1,000 $1,022.91 $1.91 $5.86 CLASS B Actual $1,000 $1,058.70 $5.61 $9.65 Hypothetical (5% return before expenses) $1,000 $1,019.34 $5.51 $9.44 CLASS C Actual $1,000 $1,060.20 $5.62 $9.65 Hypothetical (5% return before expenses) $1,000 $1,019.34 $5.51 $9.44 CLASS R Actual $1,000 $1,062.10 $3.12 $7.16 Hypothetical (5% return before expenses) $1,000 $1,021.77 $3.06 $7.00 ADVISOR CLASS Actual $1,000 $1,064.40 $0.61 $4.66 Hypothetical (5% return before expenses) $1,000 $1,024.20 $0.60 $4.56
* Expenses are calculated using the most recent six-month expense ratio excluding expenses of the underlying funds, net of expense waivers, annualized for each class (A: 0.38%; B: 1.10%; C: 1.10%; R: 0.61%; and Advisor: 0.12%), multiplied by the average account value over the period, multiplied by 181/365 to reflect the one-half year period. A portion of the Fund's expenses have been paid by the underlying funds in which the Fund invests. ** Expenses are calculated using the most recent six-month expense ratio including expenses of the underlying funds, net of expense waivers, annualized for each class (A: 1.17%; B: 1.89%; C: 1.89%; R: 1.40%; and Advisor: 0.91%), multiplied by the average account value over the period, multiplied by 181/365 to reflect the one-half year period. A portion of the Fund's expenses have been paid by the underlying funds in which the Fund invests. Semiannual Report | 11 Franklin Templeton Founding Funds Allocation Fund YOUR FUND'S GOALS AND MAIN INVESTMENTS: Franklin Templeton Founding Funds Allocation Fund's principal investment goal is capital appreciation, with a secondary goal of income. The Fund invests in an equally weighted combination of Franklin Income Fund, Mutual Shares Fund and Templeton Growth Fund. 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. PLEASE VISIT franklintempleton.com OR CALL (800) 342-5236 FOR MOST RECENT MONTH-END PERFORMANCE. We are pleased to bring you Franklin Templeton Founding Funds Allocation Fund's semiannual report for the period ended June 30, 2009. PERFORMANCE OVERVIEW Franklin Templeton Founding Funds Allocation Fund - Class A delivered a +7.59% cumulative total return for the six months under review. The Fund's benchmarks, the Standard & Poor's 500 Index (S&P 500) and the Morgan Stanley Capital International (MSCI) World Index, posted total returns of +3.16% and +6.79%.(1) You can find other performance data in the Performance Summary beginning on page 14. INVESTMENT STRATEGY The Fund invests its assets in an equally weighted combination of Franklin Income Fund, Mutual Shares Fund and Templeton Growth Fund. These underlying funds, in turn, invest primarily in U.S. and foreign equity securities and, to a lesser extent, fixed income and money market securities. As market conditions affect the underlying funds, we rebalance the Fund's allocations to maintain the predetermined equal weightings of approximately 331/3% of total net assets in each underlying fund whenever the actual allocations exceed plus or minus 3% of the fixed allocation percentages. (1.) Source: (C) 2009 Morningstar. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (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 S&P 500 consists of 500 stocks chosen for market size, liquidity and industry group representation. Each stock's weight in the index is proportionate to its market value. The S&P 500 is one of the most widely used benchmarks of U.S. equity performance. The MSCI World Index is a free float-adjusted, market capitalization-weighted index designed to measure equity market performance in global developed markets. The indexes are unmanaged and include reinvested distributions. One cannot invest directly in an index, nor is an index representative of the Fund's portfolio. 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 37. 12 | Semiannual Report PORTFOLIO REVIEW The Fund's performance can be attributed largely to maintaining a relatively static allocation among domestic and foreign equities, fixed income securities, and short-term investments and other net assets, and by the actual performance of the selected underlying funds. During the period under review, all three funds had positive total returns. Fund performance was boosted most by Franklin Income Fund - Advisor Class, which outperformed the S&P 500. Mutual Shares Fund - Class Z also outperformed the S&P 500. However, Templeton Growth Fund - Advisor Class underperformed the MSCI World Index. Thank you for your continued participation in Franklin Templeton Founding Funds Allocation Fund. We look forward to serving your future investment needs. (PHOTO OF T. ANTHONY COFFEY) /s/ T. Anthony Coffey T. Anthony Coffey, CFA Vice President of Franklin Advisers, Inc. Franklin Templeton Founding Funds Allocation Fund ASSET ALLOCATION* Franklin Templeton Founding Funds Allocation Fund Based on Total Net Assets as of 6/30/09 (PERFORMANCE GRAPH) Domestic Hybrid 33.3% Foreign Equity 33.3% Domestic Equity 33.2% Short-Term Investments & Other Net Assets 0.2%
* The asset allocation is based on the SOI, which classifies each underlying fund into a broad asset class. THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS AS OF JUNE 30, 2009, 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. Semiannual Report | 13 Performance Summary as of 6/30/09 FRANKLIN TEMPLETON FOUNDING FUNDS ALLOCATION FUND 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. The performance table does 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. PRICE AND DISTRIBUTION INFORMATION
CLASS A (SYMBOL: FFALX) CHANGE 6/30/09 12/31/08 - ----------------------- ------ ------- -------- Net Asset Value (NAV) +$0.39 $8.22 $7.83 DISTRIBUTIONS (1/1/09-6/30/09) Dividend Income $0.2045
CLASS B (SYMBOL: FFABX) CHANGE 6/30/09 12/31/08 - ----------------------- ------ ------- -------- Net Asset Value (NAV) +$0.39 $8.23 $7.84 DISTRIBUTIONS (1/1/09-6/30/09) Dividend Income $0.1753
CLASS C (SYMBOL: FFACX) CHANGE 6/30/09 12/31/08 - ----------------------- ------ ------- -------- Net Asset Value (NAV) +$0.38 $8.12 $7.74 DISTRIBUTIONS (1/1/09-6/30/09) Dividend Income $0.1768
CLASS R (SYMBOL: FFARX) CHANGE 6/30/09 12/31/08 - ----------------------- ------ ------- -------- Net Asset Value (NAV) +$0.39 $8.23 $7.84 DISTRIBUTIONS (1/1/09-6/30/09) Dividend Income $0.1936
ADVISOR CLASS (SYMBOL: FFAAX) CHANGE 6/30/09 12/31/08 - ----------------------------- ------ ------- -------- Net Asset Value (NAV) +$0.39 $8.26 $7.87 DISTRIBUTIONS (1/1/09-6/30/09) Dividend Income $0.2149
14 | Semiannual Report Performance Summary (CONTINUED) PERFORMANCE(1) CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETURN AND VALUE OF $10,000 INVESTMENT INCLUDE MAXIMUM SALES CHARGES. CLASS A: 5.75% MAXIMUM INITIAL SALES CHARGE; CLASS B: CONTINGENT DEFERRED SALES CHARGE (CDSC) DECLINING FROM 4% TO 1% OVER SIX YEARS, AND ELIMINATED THEREAFTER; CLASS C: 1% CDSC IN FIRST YEAR ONLY; CLASS R/ADVISOR CLASS: NO SALES CHARGES.
CLASS A 6-MONTH 1-YEAR 5-YEAR INCEPTION (8/15/03) - ------- ------- ------- ------ ------------------- Cumulative Total Return(2) +7.59% -23.92% -2.97% +11.21% Average Annual Total Return(3) +1.38% -28.30% -1.76% +0.80% Value of $10,000 Investment(4) $10,138 $ 7,170 $9,148 $10,482 Total Annual Operating Expenses(5) Without Waiver 1.21% With Waiver 1.07%
CLASS B 6-MONTH 1-YEAR 5-YEAR INCEPTION (8/15/03) - ------- ------- ------- ------ ------------------- Cumulative Total Return(2) +7.21% -24.49% -6.15% +6.99% Average Annual Total Return(3) +3.21% -27.35% -1.57% +1.02% Value of $10,000 Investment(4) $10,321 $ 7,265 $9,420 $10,617 Total Annual Operating Expenses(5) Without Waiver 1.91% With Waiver 1.77%
CLASS C 6-MONTH 1-YEAR 5-YEAR INCEPTION (8/15/03) - ------- ------- ------- ------ ------------------- Cumulative Total Return(2) +7.19% -24.43% -6.11% +7.04% Average Annual Total Return(3) +6.19% -25.14% -1.25% +1.16% Value of $10,000 Investment(4) $10,619 $ 7,486 $9,389 $10,704 Total Annual Operating Expenses(5) Without Waiver 1.91% With Waiver 1.77%
CLASS R 6-MONTH 1-YEAR 5-YEAR INCEPTION (8/15/03) - ------- ------- ------- ------ ------------------- Cumulative Total Return(2) +7.44% -24.09% -3.91% +10.22% Average Annual Total Return(3) +7.44% -24.09% -0.79% +1.67% Value of $10,000 Investment(4) $10,744 $ 7,591 $9,609 $11,022 Total Annual Operating Expenses(5) Without Waiver 1.41% With Waiver 1.27%
ADVISOR CLASS 6-MONTH 1-YEAR 5-YEAR INCEPTION (8/15/03) - ------------- ------- ------- ------ ------------------- Cumulative Total Return(2) +7.69% -23.71% -1.43% +13.43% Average Annual Total Return(3) +7.69% -23.71% -0.29% +2.17% Value of $10,000 Investment(4) $10,769 $ 7,629 $9,857 $11,343 Total Annual Operating Expenses(5) Without Waiver 0.91% With Waiver 0.77%
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, SEE "FUNDS AND PERFORMANCE" AT franklintempleton.com OR CALL (800) 342-5236. THE ADMINISTRATOR HAS CONTRACTUALLY AGREED TO WAIVE OR LIMIT ITS FEES AND TO ASSUME AS ITS OWN EXPENSE CERTAIN EXPENSES OTHERWISE PAYABLE BY THE FUND SO THAT COMMON EXPENSES (I.E., A COMBINATION OF FUND ADMINISTRATION FEES, AND OTHER EXPENSES, BUT EXCLUDING RULE 12B-1 FEES AND ACQUIRED FUND FEES AND EXPENSES) FOR EACH CLASS OF THE FUND DO NOT EXCEED 0.10% (OTHER THAN CERTAIN NON-ROUTINE EXPENSES OR COSTS, INCLUDING THOSE RELATING TO LITIGATION, INDEMNIFICATION, REORGANIZATIONS AND LIQUIDATIONS) UNTIL 4/30/10. Semiannual Report | 15 Performance Summary (CONTINUED) ENDNOTES BECAUSE THE FUND INVESTS IN UNDERLYING FUNDS THAT MAY ENGAGE IN A VARIETY OF INVESTMENT STRATEGIES INVOLVING CERTAIN RISKS, THE FUND MAY BE SUBJECT TO THESE SAME RISKS. STOCKS HISTORICALLY HAVE OUTPERFORMED OTHER ASSET CLASSES OVER THE LONG TERM, BUT TEND TO FLUCTUATE MORE DRAMATICALLY OVER THE SHORT TERM. BONDS ARE AFFECTED BY CHANGES IN INTEREST RATES AND THE CREDIT WORTHINESS OF THEIR ISSUERS. BOND PRICES GENERALLY MOVE IN THE OPPOSITE DIRECTION OF INTEREST RATES. THUS, AS PRICES OF BONDS ADJUST TO A RISE IN INTEREST RATES, THE FUND'S SHARE PRICE MAY DECLINE. HIGHER YIELDING, LOWER RATED CORPORATE BONDS ENTAIL A GREATER DEGREE OF CREDIT RISK COMPARED TO INVESTMENT-GRADE SECURITIES. FOREIGN INVESTING, ESPECIALLY IN DEVELOPING COUNTRIES, CARRIES ADDITIONAL RISKS SUCH AS CURRENCY AND MARKET VOLATILITY, AND POLITICAL OR SOCIAL INSTABILITY. VALUE SECURITIES MAY NOT INCREASE IN PRICE AS ANTICIPATED OR MAY DECLINE FURTHER IN VALUE. THE FUND'S PROSPECTUS ALSO INCLUDES A DESCRIPTION OF THE MAIN INVESTMENT RISKS. CLASS B: These shares have higher annual fees and expenses than Class A shares. CLASS C: Prior to 1/1/04, these shares were offered with an initial sales charge; thus actual total returns would have differed. These shares have higher annual fees and expenses than Class A shares. CLASS R: Shares are available to certain eligible investors as described in the prospectus. These shares have higher annual fees and expenses than Class A shares. ADVISOR CLASS: Shares are available to certain eligible investors as described in the prospectus. (1.) If the administrator had not waived fees, the Fund's total returns would have been lower. (2.) Cumulative total return represents the change in value of an investment over the periods indicated. (3.) Average annual total return represents the average annual change in value of an investment over the periods indicated. Six-month return has not been annualized. (4.) These figures represent the value of a hypothetical $10,000 investment in the Fund over the periods indicated. (5.) Figures are as stated in the Fund's prospectus current as of the date of this report. In periods of market volatility, assets may decline significantly, causing total annual Fund operating expenses to become higher than the figures shown. 16 | Semiannual Report Your Fund's Expenses FRANKLIN TEMPLETON FOUNDING FUNDS ALLOCATION FUND As a Fund shareholder, you can incur two types of costs: - - Transaction costs, including sales charges (loads) on Fund purchases; and - - Ongoing Fund costs, including management fees, distribution and service (12b-1) fees, and other Fund expenses. All mutual funds have ongoing costs, sometimes referred to as operating expenses. The following table shows ongoing costs of investing in the Fund and can help you understand these costs and compare them with those of other mutual funds. The table assumes a $1,000 investment held for the six months indicated. ACTUAL FUND EXPENSES The first line (Actual) for each share class listed in the table provides actual account values and expenses. The "Ending Account Value" is derived from the Fund's actual return, which includes the effect of Fund expenses. You can estimate the expenses you paid during the period by following these steps. OF COURSE, YOUR ACCOUNT VALUE AND EXPENSES WILL DIFFER FROM THOSE IN THIS ILLUSTRATION: 1. Divide your account value by $1,000. IF AN ACCOUNT HAD AN $8,600 VALUE, THEN $8,600 / $1,000 = 8.6. 2. Multiply the result by the number under the heading "Expenses Paid During Period." IF EXPENSES PAID DURING PERIOD WERE $7.50, THEN 8.6 X $7.50 = $64.50. In this illustration, the estimated expenses paid this period are $64.50. HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS Information in the second line (Hypothetical) for each class in the table can help you compare ongoing costs of investing in the Fund with those of other mutual funds. This information may not be used to estimate the actual ending account balance or expenses you paid during the period. The hypothetical "Ending Account Value" is based on the actual expense ratio for each class and an assumed 5% annual rate of return before expenses, which does not represent the Fund's actual return. The figure under the heading "Expenses Paid During Period" shows the hypothetical expenses your account would have incurred under this scenario. You can compare this figure with the 5% hypothetical examples that appear in shareholder reports of other funds. Semiannual Report | 17 Your Fund's Expenses (CONTINUED) PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES. Therefore, the second line for each class is useful in comparing ongoing costs only, and will not help you compare total costs of owning different funds. In addition, if transaction costs were included, your total costs would have been higher. Please refer to the Fund prospectus for additional information on operating expenses.
BEGINNING ENDING EXPENSES PAID EXPENSES PAID ACCOUNT VALUE ACCOUNT VALUE DURING PERIOD* DURING PERIOD** 1/1/09 6/30/09 1/1/09-6/30/09 1/1/09-6/30/09 ------------- ------------- -------------- --------------- CLASS A Actual $1,000 $1,075.90 $2.01 $5.76 Hypothetical (5% return before expenses) $1,000 $1,022.86 $1.96 $5.61 CLASS B Actual $1,000 $1,072.10 $5.81 $9.56 Hypothetical (5% return before expenses) $1,000 $1,019.19 $5.66 $9.30 CLASS C Actual $1,000 $1,071.90 $5.75 $9.50 Hypothetical (5% return before expenses) $1,000 $1,019.24 $5.61 $9.25 CLASS R Actual $1,000 $1,074.40 $3.24 $6.99 Hypothetical (5% return before expenses) $1,000 $1,021.67 $3.16 $6.80 ADVISOR CLASS Actual $1,000 $1,076.90 $0.67 $4.43 Hypothetical (5% return before expenses) $1,000 $1,024.15 $0.65 $4.31
* Expenses are calculated using the most recent six-month expense ratio excluding expenses of the underlying funds, net of expense waivers, annualized for each class (A: 0.39%; B: 1.13%; C: 1.12%; R: 0.63%; and Advisor: 0.13%), multiplied by the average account value over the period, multiplied by 181/365 to reflect the one-half year period. A portion of the Fund's expenses have been paid by the underlying funds in which the Fund invests. ** Expenses are calculated using the most recent six-month expense ratio including expenses of the underlying funds, net of expense waivers, annualized for each class (A: 1.12%; B: 1.86%; C: 1.85%; R: 1.36%; and Advisor: 0.86%), multiplied by the average account value over the period, multiplied by 181/365 to reflect the one-half year period. A portion of the Fund's expenses have been paid by the underlying funds in which the Fund invests. 18 | Semiannual Report Franklin Templeton Perspectives Allocation Fund YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin Templeton Perspectives Allocation Fund seeks capital appreciation through investments in an equally weighted combination of Franklin Flex Cap Growth Fund, Mutual Shares Fund and Templeton Growth Fund. 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. PLEASE VISIT FRANKLINTEMPLETON.COM OR CALL (800) 342-5236 FOR MOST RECENT MONTH-END PERFORMANCE. This semiannual report for Franklin Templeton Perspectives Allocation Fund covers the period ended June 30, 2009. PERFORMANCE OVERVIEW Franklin Templeton Perspectives Allocation Fund - Class A delivered a +6.15% cumulative total return for the six months under review. The Fund's benchmarks, the Standard & Poor's 500 Index (S&P 500) and the Morgan Stanley Capital International (MSCI) World Index, had total returns of +3.16% and +6.79%.(1) You can find other performance data in the Performance Summary beginning on page 21. INVESTMENT STRATEGY The Fund invests its assets in an equally weighted combination of Franklin Flex Cap Growth Fund, Mutual Shares Fund and Templeton Growth Fund. These underlying funds, in turn, invest primarily in U.S. and foreign equity securities and, to a lesser extent, fixed income and money market securities. As market conditions affect the underlying funds, we rebalance the Fund's allocations to maintain the predetermined equal weightings of approximately 331/3% of total net assets in each underlying fund whenever the actual allocations exceed plus or minus 3% of the fixed allocation percentages. (1.) Source: (C) 2009 Morningstar. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (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 S&P 500 consists of 500 stocks chosen for market size, liquidity and industry group representation. Each stock's weight in the index is proportionate to its market value. The S&P 500 is one of the most widely used benchmarks of U.S. equity performance. The MSCI World Index is a free float-adjusted, market capitalization-weighted index designed to measure equity market performance in global developed markets. The indexes are unmanaged and include reinvested distributions. One cannot invest directly in an index, nor is an index representative of the Fund's portfolio. 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 42. Semiannual Report | 19 ASSET ALLOCATION* Franklin Templeton Perspectives Allocation Fund Based on Total Net Assets as of 6/30/09 (PERFORMANCE GRAPH) Domestic Equity 66.3% Foreign Equity 33.2% Short-Term Investments & Other Net Assets 0.5%
* The asset allocation is based on the SOI, which classifies each underlying fund into a broad asset class. PORTFOLIO REVIEW The Fund's performance can be attributed largely to maintaining a relatively static allocation among domestic and foreign equities, fixed income securities, and short-term investments and other net assets, and by the actual performance of the selected underlying funds. During the period under review, all three underlying funds had positive returns, but Fund performance was boosted most by Franklin Flex Cap Growth Fund - Advisor Class, which outperformed the S&P 500. Franklin Growth Fund -Advisor Class also outperformed the S&P 500. However, Templeton Growth Fund - Advisor Class underperformed the MSCI World Index. Thank you for your continued participation in Franklin Templeton Perspectives Allocation Fund. We look forward to serving your future investment needs. (PHOTO OF T. ANTHONY COFFEY) /s/ T. Anthony Coffey T. Anthony Coffey, CFA Vice President of Franklin Advisers, Inc. Franklin Templeton Perspectives Allocation Fund THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS AS OF JUNE 30, 2009, 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. 20 | Semiannual Report Performance Summary as of 6/30/09 FRANKLIN TEMPLETON PERSPECTIVES ALLOCATION FUND 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. The performance table does 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. PRICE AND DISTRIBUTION INFORMATION
CLASS A (SYMBOL: FPAAX) CHANGE 6/30/09 12/31/08 - ----------------------- ------ ------- -------- Net Asset Value (NAV) +$0.45 $8.14 $7.69 DISTRIBUTIONS (1/1/09-6/30/09) Dividend Income $0.0231
CLASS C (SYMBOL: FPCAX) CHANGE 6/30/09 12/31/08 - ----------------------- ------ ------- -------- Net Asset Value (NAV) +$0.43 $8.09 $7.66 DISTRIBUTIONS (1/1/09-6/30/09) Dividend Income $0.0231
CLASS R (SYMBOL: N/A) CHANGE 6/30/09 12/31/08 - --------------------- ------ ------- -------- Net Asset Value (NAV) +$0.45 $8.15 $7.70 DISTRIBUTIONS (1/1/09-6/30/09) Dividend Income $0.0231
ADVISOR CLASS (SYMBOL: N/A) CHANGE 6/30/09 12/31/08 - --------------------------- ------ ------- -------- Net Asset Value (NAV) +$0.46 $8.17 $7.71 DISTRIBUTIONS (1/1/09-6/30/09) Dividend Income $0.0231
Semiannual Report | 21 Performance Summary (CONTINUED) PERFORMANCE(1) CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETURN AND VALUE OF $10,000 INVESTMENT INCLUDE MAXIMUM SALES CHARGES. CLASS A: 5.75% MAXIMUM INITIAL SALES CHARGE; CLASS C: 1% CONTINGENT DEFERRED SALES CHARGE IN FIRST YEAR ONLY; CLASS R/ADVISOR CLASS: NO SALES CHARGES.
CLASS A 6-MONTH 1-YEAR 3-YEAR INCEPTION (8/2/04) - ------- ------- ------- ------- ------------------ Cumulative Total Return(2) +6.15% -26.08% -24.07% -3.80% Average Annual Total Return(3) +0.04% -30.31% -10.56% -1.97% Value of $10,000 Investment(4) $10,004 $ 6,969 $ 7,154 $9,067 Total Annual Operating Expenses(5) Without Waiver 1.42% With Waiver 1.14%
CLASS C 6-MONTH 1-YEAR 3-YEAR INCEPTION (8/2/04) - ------- ------- ------- ------- ------------------ Cumulative Total Return(2) +5.92% -26.53% -25.56% -6.82% Average Annual Total Return(3) +4.92% -27.26% -9.37% -1.43% Value of $10,000 Investment(4) $10,492 $ 7,274 $ 7,444 $9,318 Total Annual Operating Expenses(5) Without Waiver 2.12% With Waiver 1.84%
CLASS R 6-MONTH 1-YEAR 3-YEAR INCEPTION (8/2/04) - ------- ------- ------- ------- ------------------ Cumulative Total Return(2) +6.14% -26.20% -24.48% -4.55% Average Annual Total Return(3) +6.14% -26.20% -8.94% -0.94% Value of $10,000 Investment(4) $10,614 $ 7,380 $ 7,552 $9,545 Total Annual Operating Expenses(5) Without Waiver 1.62% With Waiver 1.34%
ADVISOR CLASS 6-MONTH 1-YEAR 3-YEAR INCEPTION (8/2/04) - ------------- ------- ------- ------- ------------------ Cumulative Total Return(2) +6.27% -25.88% -23.30% -2.24% Average Annual Total Return(3) +6.27% -25.88% -8.46% -0.46% Value of $10,000 Investment(4) $10,627 $ 7,412 $ 7,670 $9,776 Total Annual Operating Expenses(5) Without Waiver 1.12% With Waiver 0.84%
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, SEE "FUNDS AND PERFORMANCE" AT franklintempleton.com OR CALL (800) 342-5236. THE ADMINISTRATOR HAS CONTRACTUALLY AGREED TO WAIVE OR LIMIT ITS FEES AND TO ASSUME AS ITS OWN EXPENSE CERTAIN EXPENSES OTHERWISE PAYABLE BY THE FUND SO THAT COMMON EXPENSES (I.E., A COMBINATION OF FUND ADMINISTRATION FEES, AND OTHER EXPENSES, BUT EXCLUDING RULE 12B-1 FEES AND ACQUIRED FUND FEES AND EXPENSES) FOR EACH CLASS OF THE FUND DO NOT EXCEED 0.10% (OTHER THAN CERTAIN NON-ROUTINE EXPENSES OR COSTS, INCLUDING THOSE RELATING TO LITIGATION, INDEMNIFICATION, REORGANIZATIONS AND LIQUIDATIONS) UNTIL 4/30/10. 22 | Semiannual Report Performance Summary (CONTINUED) ENDNOTES BECAUSE THE FUND INVESTS IN UNDERLYING FUNDS THAT MAY ENGAGE IN A VARIETY OF INVESTMENT STRATEGIES INVOLVING CERTAIN RISKS, THE FUND IS SUBJECT TO THESE SAME RISKS. STOCKS HISTORICALLY HAVE OUTPERFORMED OTHER ASSET CLASSES OVER THE LONG TERM, BUT TEND TO FLUCTUATE MORE DRAMATICALLY OVER THE SHORT TERM. FOREIGN INVESTING, ESPECIALLY IN DEVELOPING COUNTRIES, CARRIES ADDITIONAL RISKS SUCH AS CURRENCY AND MARKET VOLATILITY, AND POLITICAL OR SOCIAL INSTABILITY. THE PORTFOLIO MAY INCLUDE INVESTMENTS IN THE TECHNOLOGY SECTOR, WHICH HAS BEEN AMONG THE MOST VOLATILE IN THE MARKET. SMALLER OR RELATIVELY NEW OR UNSEASONED COMPANIES CAN BE PARTICULARLY SENSITIVE TO CHANGING ECONOMIC CONDITIONS, AND THEIR PROSPECTS FOR GROWTH ARE LESS CERTAIN THAN THOSE OF LARGER, MORE ESTABLISHED COMPANIES. VALUE SECURITIES MAY NOT INCREASE IN PRICE AS ANTICIPATED OR MAY DECLINE FURTHER IN VALUE. THE FUND'S PROSPECTUS ALSO INCLUDES A DESCRIPTION OF THE MAIN INVESTMENT RISKS. CLASS C: These shares have higher annual fees and expenses than Class A shares. CLASS R: Shares are available to certain eligible investors as described in the prospectus. These shares have higher annual fees and expenses than Class A shares. ADVISOR CLASS: Shares are available to certain eligible investors as described in the prospectus. (1.) If the administrator had not waived fees, the Fund's total returns would have been lower. (2.) Cumulative total return represents the change in value of an investment over the periods indicated. (3.) Average annual total return represents the average annual change in value of an investment over the periods indicated. Six-month return has not been annualized. (4.) These figures represent the value of a hypothetical $10,000 investment in the Fund over the periods indicated. (5.) Figures are as stated in the Fund's prospectus current as of the date of this report. In periods of market volatility, assets may decline significantly, causing total annual Fund operating expenses to become higher than the figures shown. Semiannual Report | 23 Your Fund's Expenses FRANKLIN TEMPLETON PERSPECTIVES ALLOCATION FUND As a Fund shareholder, you can incur two types of costs: - - Transaction costs, including sales charges (loads) on Fund purchases; and - - Ongoing Fund costs, including management fees, distribution and service (12b-1) fees, and other Fund expenses. All mutual funds have ongoing costs, sometimes referred to as operating expenses. The following table shows ongoing costs of investing in the Fund and can help you understand these costs and compare them with those of other mutual funds. The table assumes a $1,000 investment held for the six months indicated. ACTUAL FUND EXPENSES The first line (Actual) for each share class listed in the table provides actual account values and expenses. The "Ending Account Value" is derived from the Fund's actual return, which includes the effect of Fund expenses. You can estimate the expenses you paid during the period by following these steps. OF COURSE, YOUR ACCOUNT VALUE AND EXPENSES WILL DIFFER FROM THOSE IN THIS ILLUSTRATION: 1. Divide your account value by $1,000. IF AN ACCOUNT HAD AN $8,600 VALUE, THEN $8,600 / $1,000 = 8.6. 2. Multiply the result by the number under the heading "Expenses Paid During Period." IF EXPENSES PAID DURING PERIOD WERE $7.50, THEN 8.6 X $7.50 = $64.50. In this illustration, the estimated expenses paid this period are $64.50. HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS Information in the second line (Hypothetical) for each class in the table can help you compare ongoing costs of investing in the Fund with those of other mutual funds. This information may not be used to estimate the actual ending account balance or expenses you paid during the period. The hypothetical "Ending Account Value" is based on the actual expense ratio for each class and an assumed 5% annual rate of return before expenses, which does not represent the Fund's actual return. The figure under the heading "Expenses Paid During Period" shows the hypothetical expenses your account would have incurred under this scenario. You can compare this figure with the 5% hypothetical examples that appear in shareholder reports of other funds. 24 | Semiannual Report Your Fund's Expenses (CONTINUED) PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES. Therefore, the second line for each class is useful in comparing ongoing costs only, and will not help you compare total costs of owning different funds. In addition, if transaction costs were included, your total costs would have been higher. Please refer to the Fund prospectus for additional information on operating expenses.
BEGINNING ENDING EXPENSES PAID EXPENSES PAID ACCOUNT VALUE ACCOUNT VALUE DURING PERIOD* DURING PERIOD** 1/1/09 6/30/09 1/1/09-6/30/09 1/1/09-6/30/09 ------------- ------------- -------------- --------------- CLASS A Actual $1,000 $1,061.50 $2.04 $6.13 Hypothetical (5% return before expenses) $1,000 $1,022.81 $2.01 $6.01 CLASS C Actual $1,000 $1,059.20 $5.72 $9.80 Hypothetical (5% return before expenses) $1,000 $1,019.24 $5.61 $9.59 CLASS R Actual $1,000 $1,061.40 $3.22 $7.31 Hypothetical (5% return before expenses) $1,000 $1,021.67 $3.16 $7.15 ADVISOR CLASS Actual $1,000 $1,062.70 $0.66 $4.76 Hypothetical (5% return before expenses) $1,000 $1,024.15 $0.65 $4.66
* Expenses are calculated using the most recent six-month expense ratio excluding expenses of the underlying funds, net of expense waivers, annualized for each class (A: 0.40%; C: 1.12%; R: 0.63%; and Advisor: 0.13%), multiplied by the average account value over the period, multiplied by 181/365 to reflect the one-half year period. A portion of the Fund's expenses have been paid by the underlying funds in which the Fund invests. ** Expenses are calculated using the most recent six-month expense ratio including expenses of the underlying funds, net of expense waivers, annualized for each class (A: 1.20%; C: 1.92%; R: 1.43%; and Advisor: 0.93%), multiplied by the average account value over the period, multiplied by 181/365 to reflect the one-half year period. A portion of the Fund's expenses have been paid by the underlying funds in which the Fund invests. Semiannual Report | 25 Franklin Templeton Fund Allocator Series FINANCIAL HIGHLIGHTS FRANKLIN TEMPLETON COREFOLIO ALLOCATION FUND
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, PERIOD ENDED JUNE 30, 2009 -------------------------------------------------------- JULY 31, CLASS A (UNAUDITED) 2008 2007 2006 2005 2004(a) 2004(b) - ------- ---------------- -------- -------- -------- -------- -------- ------------ PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period .......................... $ 8.46 $ 14.22 $ 14.09 $ 12.71 $ 12.20 $ 11.02 $ 10.00 -------- -------- -------- -------- -------- -------- -------- Income from investment operations(c): Net investment income (loss) (d, e) .......................... (0.01) 0.12 0.15 0.11 0.09 0.09 0.01 Net realized and unrealized gains (losses) ........................ 0.55 (5.46) 0.57 1.81 0.71 1.21 1.07 -------- -------- -------- -------- -------- -------- -------- Total from investment operations ...................... 0.54 (5.34) 0.72 1.92 0.80 1.30 1.08 -------- -------- -------- -------- -------- -------- -------- Less distributions from: Net investment income and short term gains received from Underlying Funds ............. (0.04) (0.13) (0.17) (0.16) (0.10) (0.07) -- Net realized gains .............. -- (0.29) (0.42) (0.38) (0.19) (0.05) -- Tax return of capital ........... -- -- -- -- -- -- (0.06) -------- -------- -------- -------- -------- -------- -------- Total distributions ................ (0.04) (0.42) (0.59) (0.54) (0.29) (0.12) (0.06) -------- -------- -------- -------- -------- -------- -------- Redemption fees(f) ................. -- --(g) --(g) --(g) --(g) --(g) --(g) -------- -------- -------- -------- -------- -------- -------- Net asset value, end of period ..... $ 8.96 $ 8.46 $ 14.22 $ 14.09 $ 12.71 $ 12.20 $ 11.02 ======== ======== ======== ======== ======== ======== ======== Total return(h) .................... 6.33% (38.13)% 5.20% 15.25% 6.63% 11.77% 10.85% RATIOS TO AVERAGE NET ASSETS(i) Expenses before waiver and payments by affiliates(j) ....... 0.62% 0.62% 0.64% 0.65% 0.66% 0.68% 0.74% Expenses net of waiver and payments by affiliates(j) ....... 0.38% 0.48% 0.50% 0.50% 0.58% 0.68% 0.47% Net investment income (loss)(e) .... (0.28)% 1.01% 0.99% 0.82% 0.72% 1.86% 0.14% SUPPLEMENTAL DATA Net assets, end of period (000's) .. $268,116 $278,539 $497,314 $458,460 $353,016 $238,564 $157,792 Portfolio turnover rate ............ 0.39% 3.20% 1.72% 1.66% 2.49% 1.02% 0.62%
(a) For the period August 1, 2004 to December 31, 2004. (b) For the period August 15, 2003 (commencement of operations) to July 31, 2004. (c) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (d) Based on average daily shares outstanding. (e) Recognition of net investment income by the Fund is affected by the timing of declaration of dividends by the Underlying Funds in which the Fund invests. (f) Effective September 1, 2008, the redemption fee was eliminated. (g) Amount rounds to less than $0.01 per share. (h) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. (i) Ratios are annualized for periods less than one year. (j) Does not include expenses of the Underlying Funds in which the Fund invests. The annualized weighted average expense ratio of the Underlying Funds was 0.79% for the period ended June 30, 2009. The accompanying notes are an integral part of these financial statements. 26 | Semiannual Report Franklin Templeton Fund Allocator Series FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN TEMPLETON COREFOLIO ALLOCATION FUND
PERIOD SIX MONTHS ENDED YEAR ENDED DECEMBER 31, ENDED JUNE 30, 2009 --------------------------------------------------- JULY 31, CLASS B (UNAUDITED) 2008 2007 2006 2005 2004(a) 2004(b) - ------- ---------------- ------- ------- ------- ------- ------- -------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period .......................... $ 8.44 $ 14.12 $ 13.99 $ 12.62 $ 12.12 $ 10.95 $ 10.00 ------- ------- ------- ------- ------- ------- ------- Income from investment operations(c): Net investment income (loss)(d, e) .................... (0.04) 0.03 0.05 0.01 0.01 0.06 (0.06) Net realized and unrealized gains (losses) ........................ 0.54 (5.38) 0.57 1.81 0.70 1.20 1.06 ------- ------- ------- ------- ------- ------- ------- Total from investment operations ... 0.50 (5.35) 0.62 1.82 0.71 1.26 1.00 ------- ------- ------- ------- ------- ------- ------- Less distributions from: Net investment income and short term gains received from Underlying Funds ............. (0.04) (0.04) (0.07) (0.07) (0.02) (0.04) -- Net realized gains .............. -- (0.29) (0.42) (0.38) (0.19) (0.05) -- Tax return of capital .............. -- -- -- -- -- -- (0.05) ------- ------- ------- ------- ------- ------- ------- Total distributions ................ (0.04) (0.33) (0.49) (0.45) (0.21) (0.09) (0.05) ------- ------- ------- ------- ------- ------- ------- Redemption fees(f) ................. -- --(g) --(g) --(g) --(g) --(g) --(g) ------- ------- ------- ------- ------- ------- ------- Net asset value, end of period ..... $ 8.90 $ 8.44 $ 14.12 $ 13.99 $ 12.62 $ 12.12 $ 10.95 ======= ======= ======= ======= ======= ======= ======= Total return(h) .................... 5.87% (38.53)% 4.49% 14.55% 5.89% 11.50% 10.02% RATIOS TO AVERAGE NET ASSETS(i) Expenses before waiver and payments by affiliates(j) ....... 1.34% 1.32% 1.31% 1.30% 1.31% 1.33% 1.39% Expenses net of waiver and payments by affiliates(j) ....... 1.10% 1.18% 1.16% 1.15% 1.23% 1.33% 1.12% Net investment income (loss)(e) .... (1.00)% 0.31% 0.32% 0.17% 0.07% 1.21% (0.51)% SUPPLEMENTAL DATA Net assets, end of period (000's) .. $33,782 $35,616 $72,530 $76,408 $71,496 $66,562 $44,297 Portfolio turnover rate ............ 0.39% 3.20% 1.72% 1.66% 2.49% 1.02% 0.62%
(a) For the period August 1, 2004 to December 31, 2004. (b) For the period August 15, 2003 (commencement of operations) to July 31, 2004. (c) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (d) Based on average daily shares outstanding. (e) Recognition of net investment income by the Fund is affected by the timing of declaration of dividends by the Underlying Funds in which the Fund invests. (f) Effective September 1, 2008, the redemption fee was eliminated. (g) Amount rounds to less than $0.01 per share. (h) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. (i) Ratios are annualized for periods less than one year. (j) Does not include expenses of the Underlying Funds in which the Fund invests. The annualized weighted average expense ratio of the Underlying Funds was 0.79% for the period ended June 30, 2009. The accompanying notes are an integral part of these financial statements. Semiannual Report | 27 Franklin Templeton Fund Allocator Series FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN TEMPLETON COREFOLIO ALLOCATION FUND
PERIOD SIX MONTHS ENDED YEAR ENDED DECEMBER 31, ENDED JUNE 30, 2009 ------------------------------------------------------ JULY 31, CLASS C (UNAUDITED) 2008 2007 2006 2005 2004(a) 2004(b) - ------- ---------------- ------- -------- -------- -------- ------- -------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period .......................... $ 8.40 $ 14.08 $ 13.96 $ 12.61 $ 12.11 $ 10.94 $ 10.00 ------- ------- -------- -------- -------- ------- ------- Income from investment operations(c): Net investment income (loss)(d, e) .................... (0.04) 0.03 0.05 0.02 0.01 0.06 (0.05) Net realized and unrealized gains (losses) ........................ 0.55 (5.37) 0.57 1.79 0.71 1.20 1.04 ------- ------- -------- -------- -------- ------- ------- Total from investment operations ... 0.51 (5.34) 0.62 1.81 0.72 1.26 0.99 ------- ------- -------- -------- -------- ------- ------- Less distributions from: Net investment income and short term gains received from Underlying Funds ............. (0.04) (0.05) (0.08) (0.08) (0.03) (0.04) -- Net realized gains .............. -- (0.29) (0.42) (0.38) (0.19) (0.05) -- Tax return of capital ........... -- -- -- -- -- -- (0.05) ------- ------- -------- -------- -------- ------- ------- Total distributions ................ (0.04) (0.34) (0.50) (0.46) (0.22) (0.09) (0.05) ------- ------- -------- -------- -------- ------- ------- Redemption fees(f) ................. -- --(g) --(g) --(g) --(g) --(g) --(g) ------- ------- -------- -------- -------- ------- ------- Net asset value, end of period ..... $ 8.87 $ 8.40 $ 14.08 $ 13.96 $ 12.61 $ 12.11 $ 10.94 ======= ======= ======== ======== ======== ======= ======= Total return(h) .................... 6.02% (38.58)% 4.50% 14.48% 6.02% 11.49% 9.93% RATIOS TO AVERAGE NET ASSETS(i) Expenses before waiver and payments by affiliates(j) ....... 1.34% 1.31% 1.30% 1.29% 1.29% 1.33% 1.39% Expenses net of waiver and payments by affiliates(j) ....... 1.10% 1.17% 1.16% 1.14% 1.21% 1.33% 1.12% Net investment income (loss)(e) .... (1.00)% 0.32% 0.33% 0.18% 0.09% 1.21% (0.51)% SUPPLEMENTAL DATA Net assets, end of period (000's) .. $94,994 $99,663 $181,951 $166,688 $132,459 $96,487 $73,272 Portfolio turnover rate ............ 0.39% 3.20% 1.72% 1.66% 2.49% 1.02% 0.62%
(a) For the period August 1, 2004 to December 31, 2004. (b) For the period August 15, 2003 (commencement of operations) to July 31, 2004. (c) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (d) Based on average daily shares outstanding. (e) Recognition of net investment income by the Fund is affected by the timing of declaration of dividends by the Underlying Funds in which the Fund invests. (f) Effective September 1, 2008, the redemption fee was eliminated. (g) Amount rounds to less than $0.01 per share. (h) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. (i) Ratios are annualized for periods less than one year. (j) Does not include expenses of the Underlying Funds in which the Fund invests. The annualized weighted average expense ratio of the Underlying Funds was 0.79% for the period ended June 30, 2009. The accompanying notes are an integral part of these financial statements. 28 | Semiannual Report Franklin Templeton Fund Allocator Series FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN TEMPLETON COREFOLIO ALLOCATION FUND
PERIOD SIX MONTHS ENDED YEAR ENDED DECEMBER 31, ENDED JUNE 30, 2009 ---------------------------------------------------- JULY 31, CLASS R (UNAUDITED) 2008 2007 2006 2005 2004(a) 2004(b) - ------- ---------------- ------- ------ ------ ------ ------- -------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period .......................... $ 8.46 $ 14.20 $14.07 $12.69 $12.18 $11.00 $10.00 ------ ------- ------ ------ ------ ------ ------ Income from investment operations(c): Net investment income (loss)(d, e) ................. (0.02) 0.08 0.12 0.09 0.05 0.08 (0.02) Net realized and unrealized gains (losses) ..................... 0.55 (5.43) 0.57 1.81 0.73 1.21 1.08 ------ ------- ------ ------ ------ ------ ------ Total from investment operations ... 0.53 (5.35) 0.69 1.90 0.78 1.29 1.06 ------ ------- ------ ------ ------ ------ ------ Less distributions from: Net investment income and short term gains received from Underlying Funds ............. (0.04) (0.10) (0.14) (0.14) (0.08) (0.06) -- Net realized gains .............. -- (0.29) (0.42) (0.38) (0.19) (0.05) -- Tax return of capital ........... -- -- -- -- -- -- (0.06) ------ ------- ------ ------ ------ ------ ------ Total distributions ................ (0.04) (0.39) (0.56) (0.52) (0.27) (0.11) (0.06) ------ ------- ------ ------ ------ ------ ------ Redemption fees(f) ................. -- --(g) --(g) --(g) --(g) --(g) --(g) ------ ------- ------ ------ ------ ------ ------ Net asset value, end of period ..... $ 8.95 $ 8.46 $14.20 $14.07 $12.69 $12.18 $11.00 ====== ======= ====== ====== ====== ====== ====== Total return(h) .................... 6.21% (38.28)% 5.02% 15.10% 6.43% 11.73% 10.65% RATIOS TO AVERAGE NET ASSETS(i) Expenses before waiver and payments by affiliates(j) ....... 0.85% 0.82% 0.81% 0.80% 0.81% 0.83% 0.89% Expenses net of waiver and payments by affiliates(j) ....... 0.61% 0.68% 0.66% 0.65% 0.73% 0.83% 0.62% Net investment income (loss)(e) .... (0.51)% 0.81% 0.82% 0.67% 0.57% 1.71% (0.01)% SUPPLEMENTAL DATA Net assets, end of period (000's) .. $1,100 $ 1,182 $2,602 $2,534 $2,190 $1,944 $1,408 Portfolio turnover rate ............ 0.39% 3.20% 1.72% 1.66% 2.49% 1.02% 0.62%
(a) For the period August 1, 2004 to December 31, 2004. (b) For the period August 15, 2003 (commencement of operations) to July 31, 2004. (c) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (d) Based on average daily shares outstanding. (e) Recognition of net investment income by the Fund is affected by the timing of declaration of dividends by the Underlying Funds in which the Fund invests. (f) Effective September 1, 2008, the redemption fee was eliminated. (g) Amount rounds to less than $0.01 per share. (h) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. (i) Ratios are annualized for periods less than one year. (j) Does not include expenses of the Underlying Funds in which the Fund invests. The annualized weighted average expense ratio of the Underlying Funds was 0.79% for the period ended June 30, 2009. The accompanying notes are an integral part of these financial statements. Semiannual Report | 29 Franklin Templeton Fund Allocator Series FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN TEMPLETON COREFOLIO ALLOCATION FUND
PERIOD SIX MONTHS ENDED YEAR ENDED DECEMBER 31, ENDED JUNE 30, 2009 ---------------------------------------------------- JULY 31, ADVISOR CLASS (UNAUDITED) 2008 2007 2006 2005 2004(a) 2004(b) - ------------- ---------------- ------- ------ ------ ------ ------- -------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period .......................... $ 8.47 $ 14.25 $14.12 $12.73 $12.21 $11.02 $10.00 ------ ------- ------ ------ ------ ------ ------ Income from investment operations(c): Net investment income (loss)(d, e) ................. --(f) 0.15 0.19 0.15 0.13 0.11 0.04 Net realized and unrealized gains (losses) ..................... 0.55 (5.47) 0.58 1.83 0.72 1.21 1.05 ------ ------- ------ ------ ------ ------ ------ Total from investment operations ... 0.55 (5.32) 0.77 1.98 0.85 1.32 1.09 ------ ------- ------ ------ ------ ------ ------ Less distributions from: Net investment income and short term gains received from Underlying Funds ............. (0.04) (0.17) (0.22) (0.21) (0.14) (0.08) -- Net realized gains .............. -- (0.29) (0.42) (0.38) (0.19) (0.05) -- Tax return of capital ........... -- -- -- -- -- -- (0.07) ------ ------- ------ ------ ------ ------ ------ Total distributions ................ (0.04) (0.46) (0.64) (0.59) (0.33) (0.13) (0.07) ------ ------- ------ ------ ------ ------ ------ Redemption fees(g) ................. -- --(f) --(f) --(f) --(f) --(f) --(f) ------ ------- ------ ------ ------ ------ ------ Net asset value, end of period ..... $ 8.98 $ 8.47 $14.25 $14.12 $12.73 $12.21 $11.02 ====== ======= ====== ====== ====== ====== ====== Total return(h) .................... 6.44% (37.92)% 5.53% 15.65% 6.93% 12.09% 10.92% RATIOS TO AVERAGE NET ASSETS(i) Expenses before waiver and payments by affiliates(j) ................ 0.36% 0.32% 0.31% 0.30% 0.31% 0.33% 0.39% Expenses net of waiver and payments by affiliates(j) ................ 0.12% 0.18% 0.16% 0.15% 0.23% 0.33% 0.12% Net investment income (loss)(e) .... (0.02)% 1.31% 1.32% 1.17% 1.07% 2.21% 0.49% SUPPLEMENTAL DATA Net assets, end of period (000's) .. $1,505 $ 1,654 $3,243 $3,073 $2,792 $2,097 $1,181 Portfolio turnover rate ............ 0.39% 3.20% 1.72% 1.66% 2.49% 1.02% 0.62%
(a) For the period August 1, 2004 to December 31, 2004. (b) For the period August 15, 2003 (commencement of operations) to July 31, 2004. (c) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (d) Based on average daily shares outstanding. (e) Recognition of net investment income by the Fund is affected by the timing of declaration of dividends by the Underlying Funds in which the Fund invests. (f) Amount rounds to less than $0.01 per share. (g) Effective September 1, 2008, the redemption fee was eliminated. (h) Total return is not annualized for periods less than one year. (i) Ratios are annualized for periods less than one year. (j) Does not include expenses of the Underlying Funds in which the Fund invests. The annualized weighted average expense ratio of the Underlying Funds was 0.79% for the period ended June 30, 2009. The accompanying notes are an integral part of these financial statements. 30 | Semiannual Report Franklin Templeton Fund Allocator Series STATEMENT OF INVESTMENTS, JUNE 30, 2009 (UNAUDITED)
FRANKLIN TEMPLETON COREFOLIO ALLOCATION FUND SHARES VALUE - -------------------------------------------- --------- ------------ INVESTMENTS IN UNDERLYING FUNDS(a) DOMESTIC EQUITY 75.0% Franklin Growth Fund, Advisor Class .................................. 6,422,281 $199,347,598 Mutual Shares Fund, Class Z .......................................... 6,204,899 100,209,114 ------------ 299,556,712 ------------ FOREIGN EQUITY 25.0% Templeton Growth Fund Inc., Advisor Class ............................ 7,293,591 99,849,260 ------------ TOTAL INVESTMENTS IN UNDERLYING FUNDS BEFORE SHORT TERM INVESTMENTS (COST $506,341,672) 100.0% ........................................ 399,405,972 ------------ SHORT TERM INVESTMENTS (COST $875,832) 0.2% MONEY MARKET FUNDS 0.2% (b) Institutional Fiduciary Trust Money Market Portfolio, 0.00% .......... 875,832 875,832 ------------ TOTAL INVESTMENTS IN UNDERLYING FUNDS (COST $507,217,504) 100.2% ..... 400,281,804 OTHER ASSETS, LESS LIABILITIES (0.2)% ................................ (784,408) ------------ NET ASSETS 100.0% .................................................... $399,497,396 ============
(a) See Note 6 regarding investments in Underlying Funds. (b) The rate shown is the annualized seven-day yield at period end. The accompanying notes are an integral part of these financial statements. Semiannual Report | 31 Franklin Templeton Fund Allocator Series FINANCIAL HIGHLIGHTS FRANKLIN TEMPLETON FOUNDING FUNDS ALLOCATION FUND
SIX MONTHS ENDED PERIOD JUNE 30, YEAR ENDED DECEMBER 31, ENDED 2009 ------------------------------------------------------------------- JULY 31, CLASS A (UNAUDITED) 2008 2007 2006 2005 2004(a) 2004(b) - ------- ----------- ---------- ----------- ---------- ---------- ---------- -------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period .......................... $ 7.83 $ 13.50 $ 13.98 $ 12.50 $ 12.28 $ 11.21 $ 10.00 ---------- ---------- ----------- ---------- ---------- ---------- -------- Income from investment operations(c): Net investment income(d, e) ..... 0.11 0.37 0.43 0.40 0.37 0.22 0.23 Net realized and unrealized gains (losses) ..................... 0.48 (5.38) --(f) 1.99 0.40 1.14 1.07 ---------- ---------- ----------- ---------- ---------- ---------- -------- Total from investment operations ... 0.59 (5.01) 0.43 2.39 0.77 1.36 1.30 ---------- ---------- ----------- ---------- ---------- ---------- -------- Less distributions from: Net investment income and short term gains received from Underlying Funds ............. (0.20) (0.38) (0.44) (0.44) (0.30) (0.23) (0.09) Net realized gains .............. -- (0.28) (0.47) (0.47) (0.25) (0.06) -- ---------- ---------- ----------- ---------- ---------- ---------- -------- Total distributions ................ (0.20) (0.66) (0.91) (0.91) (0.55) (0.29) (0.09) ---------- ---------- ----------- ---------- ---------- ---------- -------- Redemption fees(g) ................. -- --(f) --(f) --(f) --(f) --(f) --(f) ---------- ---------- ----------- ---------- ---------- ---------- -------- Net asset value, end of period ..... $ 8.22 $ 7.83 $ 13.50 $ 13.98 $ 12.50 $ 12.28 $ 11.21 ========== ========== =========== ========== ========== ========== ======== Total return(h) .................... 7.59% (37.66)% 3.12% 19.34% 6.31% 12.16% 13.00% RATIOS TO AVERAGE NET ASSETS(i) Expenses before waiver and payments by affiliates(j) ................ 0.50% 0.54% 0.55% 0.57% 0.58% 0.60% 0.61% Expenses net of waiver and payments by affiliates(j) ................ 0.39% 0.48% 0.50% 0.50% 0.54% 0.60% 0.49% Net investment income(e) ........... 2.82% 3.27% 2.99% 3.00% 2.98% 4.48% 2.16% SUPPLEMENTAL DATA Net assets, end of period (000's) .. $4,778,827 $5,015,566 $10,161,473 $7,288,143 $4,051,695 $1,640,876 $882,175 Portfolio turnover rate ............ 1.58% 4.16% 0.73% 0.96% 0.74% 0.37% 0.71%
(a) For the period August 1, 2004 to December 31, 2004. (b) For the period August 15, 2003 (commencement of operations) to July 31, 2004. (c) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (d) Based on average daily shares outstanding. (e) Recognition of net investment income by the Fund is affected by the timing of declaration of dividends by the Underlying Funds in which the Fund invests. (f) Amount rounds to less than $0.01 per share. (g) Effective September 1, 2008, the redemption fee was eliminated. (h) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. (i) Ratios are annualized for periods less than one year. (j) Does not include expenses of the Underlying Funds in which the Fund invests. The annualized weighted average expense ratio of the Underlying Funds was 0.73% for the period ended June 30, 2009. The accompanying notes are an integral part of these financial statements. 32 | Semiannual Report Franklin Templeton Fund Allocator Series FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN TEMPLETON FOUNDING FUNDS ALLOCATION FUND
SIX MONTHS ENDED PERIOD JUNE 30, YEAR ENDED DECEMBER 31, ENDED 2009 -------------------------------------------------------- JULY 31, CLASS B (UNAUDITED) 2008 2007 2006 2005 2004(a) 2004(b) - ------- ----------- -------- -------- -------- -------- -------- -------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period .......................... $ 7.84 $ 13.45 $ 13.93 $ 12.46 $ 12.23 $ 11.16 $ 10.00 -------- -------- -------- -------- -------- -------- -------- Income from investment operations(c): Net investment income(d, e) ..... 0.08 0.28 0.35 0.28 0.26 0.19 0.16 Net realized and unrealized gains (losses) ..................... 0.49 (5.32) (0.02) 2.00 0.43 1.13 1.08 -------- -------- -------- -------- -------- -------- -------- Total from investment operations ... 0.57 (5.04) 0.33 2.28 0.69 1.32 1.24 -------- -------- -------- -------- -------- -------- -------- Less distributions from: Net investment income and short term gains received from Underlying Funds ............. (0.18) (0.29) (0.34) (0.34) (0.21) (0.19) (0.08) Net realized gains .............. -- (0.28) (0.47) (0.47) (0.25) (0.06) -- -------- -------- -------- -------- -------- -------- -------- Total distributions ................ (0.18) (0.57) (0.81) (0.81) (0.46) (0.25) (0.08) -------- -------- -------- -------- -------- -------- -------- Redemption fees(f) ................. -- --(g) --(g) --(g) --(g) --(g) --(g) -------- -------- -------- -------- -------- -------- -------- Net asset value, end of period ..... $ 8.23 $ 7.84 $ 13.45 $ 13.93 $ 12.46 $ 12.23 $ 11.16 ======== ======== ======== ======== ======== ======== ======== Total return(h) .................... 7.21% (38.05)% 2.36% 18.53% 5.58% 11.90% 12.39% RATIOS TO AVERAGE NET ASSETS(i) Expenses before waiver and payments by affiliates(j) ................ 1.24% 1.24% 1.22% 1.22% 1.23% 1.25% 1.26% Expenses net of waiver and payments by affiliates(j) ................ 1.13% 1.18% 1.17% 1.15% 1.19% 1.25% 1.14% Net investment income(e) ........... 2.08% 2.57% 2.32% 2.35% 2.33% 3.83% 1.51% SUPPLEMENTAL DATA Net assets, end of period (000's) .. $322,590 $344,396 $722,716 $766,452 $688,590 $612,553 $357,282 Portfolio turnover rate ............ 1.58% 4.16% 0.73% 0.96% 0.74% 0.37% 0.71%
(a) For the period August 1, 2004 to December 31, 2004. (b) For the period August 15, 2003 (commencement of operations) to July 31, 2004. (c) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (d) Based on average daily shares outstanding. (e) Recognition of net investment income by the Fund is affected by the timing of declaration of dividends by the Underlying Funds in which the Fund invests. (f) Effective September 1, 2008, the redemption fee was eliminated. (g) Amount rounds to less than $0.01 per share. (h) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. (i) Ratios are annualized for periods less than one year. (j) Does not include expenses of the Underlying Funds in which the Fund invests. The annualized weighted average expense ratio of the Underlying Funds was 0.73% for the period ended June 30, 2009. The accompanying notes are an integral part of these financial statements. Semiannual Report | 33 Franklin Templeton Fund Allocator Series FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN TEMPLETON FOUNDING FUNDS ALLOCATION FUND
SIX MONTHS ENDED PERIOD JUNE 30, YEAR ENDED DECEMBER 31, ENDED 2009 ---------------------------------------------------------------- JULY 31, CLASS C (UNAUDITED) 2008 2007 2006 2005 2004(a) 2004(b) - ------- ----------- ---------- ---------- ---------- ---------- -------- -------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period .......................... $ 7.74 $ 13.29 $ 13.78 $ 12.36 $ 12.23 $ 11.16 $ 10.00 ---------- ---------- ---------- ---------- ---------- -------- -------- Income from investment operations(c): Net investment income(d, e) ..... 0.08 0.28 0.29 0.31 0.29 0.19 0.17 Net realized and unrealized gains (losses) ..................... 0.48 (5.26) 0.05 1.95 0.39 1.13 1.07 ---------- ---------- ---------- ---------- ---------- -------- -------- Total from investment operations ... 0.56 (4.98) 0.34 2.26 0.68 1.32 1.24 ---------- ---------- ---------- ---------- ---------- -------- -------- Less distributions from: Net investment income and short term gains received from Underlying Funds ............. (0.18) (0.29) (0.36) (0.37) (0.30) (0.19) (0.08) Net realized gains .............. -- (0.28) (0.47) (0.47) (0.25) (0.06) -- ---------- ---------- ---------- ---------- ---------- -------- -------- Total distributions ................ (0.18) (0.57) (0.83) (0.84) (0.55) (0.25) (0.08) ---------- ---------- ---------- ---------- ---------- -------- -------- Redemption fees(f) ................. -- --(g) --(g) --(g) --(g) --(g) --(g) ---------- ---------- ---------- ---------- ---------- -------- -------- Net asset value, end of period ..... $ 8.12 $ 7.74 $ 13.29 $ 13.78 $ 12.36 $ 12.23 $ 11.16 ========== ========== ========== ========== ========== ======== ======== Total return(h) .................... 7.19% (38.04)% 2.47% 18.50% 5.63% 11.79% 12.40% RATIOS TO AVERAGE NET ASSETS(i) Expenses before waiver and payments by affiliates(j) ................ 1.23% 1.21% 1.22% 1.22% 1.20% 1.25% 1.26% Expenses net of waiver and payments by affiliates(j) ................ 1.12% 1.15% 1.17% 1.15% 1.16% 1.25% 1.14% Net investment income(e) ........... 2.09% 2.60% 2.32% 2.35% 2.36% 3.83% 1.51% SUPPLEMENTAL DATA Net assets, end of period (000's) .. $2,311,237 $2,491,516 $5,295,157 $3,692,307 $2,075,041 $927,786 $535,778 Portfolio turnover rate ............ 1.58% 4.16% 0.73% 0.96% 0.74% 0.37% 0.71%
(a) For the period August 1, 2004 to December 31, 2004. (b) For the period August 15, 2003 (commencement of operations) to July 31, 2004. (c) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (d) Based on average daily shares outstanding. (e) Recognition of net investment income by the Fund is affected by the timing of declaration of dividends by the Underlying Funds in which the Fund invests. (f) Effective September 1, 2008, the redemption fee was eliminated. (g) Amount rounds to less than $0.01 per share. (h) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. (i) Ratios are annualized for periods less than one year. (j) Does not include expenses of the Underlying Funds in which the Fund invests. The annualized weighted average expense ratio of the Underlying Funds was 0.73% for the period ended June 30, 2009. The accompanying notes are an integral part of these financial statements. 34 | Semiannual Report Franklin Templeton Fund Allocator Series FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN TEMPLETON FOUNDING FUNDS ALLOCATION FUND
SIX MONTHS ENDED PERIOD JUNE 30, YEAR ENDED DECEMBER 31, ENDED 2009 --------------------------------------------------- JULY 31, CLASS R (UNAUDITED) 2008 2007 2006 2005 2004(a) 2004(b) - ------- ----------- ------- ------- ------- ------- ------- -------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period $ 7.84 $ 13.50 $ 13.98 $ 12.50 $ 12.28 $ 11.22 $10.00 ------- ------- ------- ------- ------- ------- ------ Income from investment operations(c): Net investment income(d, e) ..... 0.10 0.35 0.42 0.37 0.33 0.22 0.20 Net realized and unrealized gains (losses) ............... 0.48 (5.38) (0.01) 1.99 0.42 1.13 1.11 ------- ------- ------- ------- ------- ------- ------ Total from investment operations ... 0.58 (5.03) 0.41 2.36 0.75 1.35 1.31 ------- ------- ------- ------- ------- ------- ------ Less distributions from: Net investment income and short term gains received from Underlying Funds ............. (0.19) (0.35) (0.42) (0.41) (0.28) (0.23) (0.09) Net realized gains .............. -- (0.28) (0.47) (0.47) (0.25) (0.06) -- ------- ------- ------- ------- ------- ------- ------ Total distributions ................ (0.19) (0.63) (0.89) (0.88) (0.53) (0.29) (0.09) ------- ------- ------- ------- ------- ------- ------ Redemption fees(f) ................. -- --(g) --(g) --(g) --(g) --(g) --(g) ------- ------- ------- ------- ------- ------- ------ Net asset value, end of period ..... $ 8.23 $ 7.84 $ 13.50 $ 13.98 $ 12.50 $ 12.28 $11.22 ======= ======= ======= ======= ======= ======= ====== Total return(h) .................... 7.44% (37.77)% 2.92% 19.15% 6.12% 12.02% 13.09% RATIOS TO AVERAGE NET ASSETS(i) Expenses before waiver and payments by affiliates(j) ................ 0.74% 0.74% 0.72% 0.72% 0.73% 0.75% 0.76% Expenses net of waiver and payments by affiliates(j) ................ 0.63% 0.68% 0.67% 0.65% 0.69% 0.75% 0.64% Net investment income(e) ........... 2.58% 3.07% 2.82% 2.85% 2.83% 4.33% 2.01% SUPPLEMENTAL DATA Net assets, end of period (000's) .. $11,752 $14,300 $29,028 $24,435 $17,247 $12,101 $5,225 Portfolio turnover rate ............ 1.58% 4.16% 0.73% 0.96% 0.74% 0.37% 0.71%
(a) For the period August 1, 2004 to December 31, 2004. (b) For the period August 15, 2003 (commencement of operations) to July 31, 2004. (c) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (d) Based on average daily shares outstanding. (e) Recognition of net investment income by the Fund is affected by the timing of declaration of dividends by the Underlying Funds in which the Fund invests. (f) Effective September 1, 2008, the redemption fee was eliminated. (g) Amount rounds to less than $0.01 per share. (h) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. (i) Ratios are annualized for periods less than one year. (j) Does not include expenses of the Underlying Funds in which the Fund invests. The annualized weighted average expense ratio of the Underlying Funds was 0.73% for the period ended June 30, 2009. The accompanying notes are an integral part of these financial statements. Semiannual Report | 35 Franklin Templeton Fund Allocator Series FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN TEMPLETON FOUNDING FUNDS ALLOCATION FUND
PERIOD SIX MONTHS ENDED YEAR ENDED DECEMBER 31, ENDED JUNE 30, 2009 --------------------------------------------------- JULY 31, ADVISOR CLASS (UNAUDITED) 2008 2007 2006 2005 2004(a) 2004(b) - ------------- ---------------- ------- ------- ------- ------- ------- -------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period .......................... $ 7.87 $ 13.58 $ 14.05 $ 12.55 $ 12.32 $11.25 $10.00 ------- ------- ------- ------- ------- ------ ------ Income from investment operations(c): Net investment income(d, e) ..... 0.12 0.47 0.48 0.47 0.39 0.24 0.25 Net realized and unrealized gains (losses) ..................... 0.48 (5.49) 0.01 1.98 0.42 1.14 1.09 ------- ------- ------- ------- ------- ------ ------ Total from investment operations ... 0.60 (5.02) 0.49 2.45 0.81 1.38 1.34 ------- ------- ------- ------- ------- ------ ------ Less distributions from: Net investment income and short term gains received from Underlying Funds ............. (0.21) (0.41) (0.49) (0.48) (0.33) (0.25) (0.09) Net realized gains .............. -- (0.28) (0.47) (0.47) (0.25) (0.06) -- ------- ------- ------- ------- ------- ------ ------ Total distributions ................ (0.21) (0.69) (0.96) (0.95) (0.58) (0.31) (0.09) ------- ------- ------- ------- ------- ------ ------ Redemption fees(f) ................. -- --(g) --(g) --(g) --(g) --(g) --(g) ------- ------- ------- ------- ------- ------ ------ Net asset value, end of period ..... $ 8.26 $ 7.87 $ 13.58 $ 14.05 $ 12.55 $12.32 $11.25 ======= ======= ======= ======= ======= ====== ====== Total return(h) .................... 7.69% (37.44)% 3.48% 19.73% 6.63% 12.32% 13.46% RATIOS TO AVERAGE NET ASSETS(i) Expenses before waiver and payments by affiliates(j) ................ 0.24% 0.24% 0.22% 0.22% 0.23% 0.25% 0.26% Expenses net of waiver and payments by affiliates(j) ................ 0.13% 0.18% 0.17% 0.15% 0.19% 0.25% 0.14% Net investment income(e) ........... 3.08% 3.57% 3.32% 3.35% 3.33% 4.83% 2.51% SUPPLEMENTAL DATA Net assets, end of period (000's) .. $33,259 $35,445 $46,866 $25,124 $12,535 $7,792 $4,991 Portfolio turnover rate ............ 1.58% 4.16% 0.73% 0.96% 0.74% 0.37% 0.71%
(a) For the period August 1, 2004 to December 31, 2004. (b) For the period August 15, 2003 (commencement of operations) to July 31, 2004. (c) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (d) Based on average daily shares outstanding. (e) Recognition of net investment income by the Fund is affected by the timing of declaration of dividends by the Underlying Funds in which the Fund invests. (f) Effective September 1, 2008, the redemption fee was eliminated. (g) Amount rounds to less than $0.01 per share. (h) Total return is not annualized for periods less than one year. (i) Ratios are annualized for periods less than one year. (j) Does not include expenses of the Underlying Funds in which the Fund invests. The annualized weighted average expense ratio of the Underlying Funds was 0.73% for the period ended June 30, 2009. The accompanying notes are an integral part of these financial statements. 36 | Semiannual Report Franklin Templeton Fund Allocator Series STATEMENT OF INVESTMENTS, JUNE 30, 2009 (UNAUDITED)
FRANKLIN TEMPLETON FOUNDING FUNDS ALLOCATION FUND SHARES VALUE ------------------------------------------------- ------------- -------------- INVESTMENTS IN UNDERLYING FUNDS(a) DOMESTIC EQUITY 33.2% Mutual Shares Fund, Class Z ....................................... 153,364,497 $2,476,836,630 -------------- DOMESTIC HYBRID 33.3% Franklin Income Fund Inc., Advisor Class .......................... 1,387,152,948 2,483,003,778 -------------- FOREIGN EQUITY 33.3% Templeton Growth Fund Inc., Advisor Class ......................... 181,172,475 2,480,251,183 -------------- TOTAL INVESTMENTS IN UNDERLYING FUNDS BEFORE SHORT TERM INVESTMENTS (COST $10,951,822,005) 99.8% ................................... 7,440,091,591 -------------- SHORT TERM INVESTMENTS (COST $46,928,179) 0.6% MONEY MARKET FUNDS 0.6% (b) Institutional Fiduciary Trust Money Market Portfolio, 0.00% ....... 46,928,179 46,928,179 -------------- TOTAL INVESTMENTS IN UNDERLYING FUNDS (COST $10,998,750,184) 100.4% ... 7,487,019,770 OTHER ASSETS, LESS LIABILITIES (0.4)% ................................. (29,354,660) -------------- NET ASSETS 100.0% ..................................................... $7,457,665,110 ==============
(a) See Note 6 regarding investments in Underlying Funds. (b) The rate shown is the annualized seven-day yield at period end. The accompanying notes are an integral part of these financial statements. Semiannual Report | 37 Franklin Templeton Fund Allocator Series FINANCIAL HIGHLIGHTS FRANKLIN TEMPLETON PERSPECTIVES ALLOCATION FUND
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, 2009 ------------------------------------------------------- CLASS A (UNAUDITED) 2008 2007 2006 2005 2004(a) - ------- ---------------- -------- -------- -------- -------- ------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period .......................... $ 7.69 $ 13.17 $ 12.90 $ 11.79 $ 11.19 $ 10.00 -------- -------- -------- -------- -------- ------- Income from investment operations(b): Net investment income (loss)(c, d) ................. (0.01) 0.10 0.15 0.17 0.16 0.17 Net realized and unrealized gains (losses) ..................... 0.48 (5.20) 0.71 1.55 0.73 1.12 -------- -------- -------- -------- -------- ------- Total from investment operations ... 0.47 (5.10) 0.86 1.72 0.89 1.29 -------- -------- -------- -------- -------- ------- Less distributions from: Net investment income and short term gains received from Underlying Funds ............. (0.02) (0.12) (0.16) (0.19) (0.13) (0.07) Net realized gains .............. -- (0.26) (0.43) (0.42) (0.16) (0.03) -------- -------- -------- -------- -------- ------- Total distributions ................ (0.02) (0.38) (0.59) (0.61) (0.29) (0.10) -------- -------- -------- -------- -------- ------- Redemption fees(e) ................. -- --(f) --(f) --(f) --(f) --(f) -------- -------- -------- -------- -------- ------- Net asset value, end of period ..... $ 8.14 $ 7.69 $ 13.17 $ 12.90 $ 11.79 $ 11.19 ======== ======== ======== ======== ======== ======= Total return(g) .................... 6.15% (39.29)% 6.79% 14.69% 7.93% 12.93% RATIOS TO AVERAGE NET ASSETS(h) Expenses before waiver and payments by affiliates(i) ................ 0.63% 0.68% 0.68% 0.72% 0.90% 2.31% Expenses net of waiver and payments by affiliates(i) ................ 0.40% 0.48% 0.50% 0.50% 0.46% 0.39% Net investment income (loss)(d) .... (0.40)% 0.95% 1.09% 1.18% 1.41% 3.78% SUPPLEMENTAL DATA Net assets, end of period (000's) .. $140,423 $132,432 $228,876 $190,189 $103,348 $16,155 Portfolio turnover rate ............ 3.48% 9.37% 2.53% 0.98% 0.68% 0.51%
(a) For the period August 2, 2004 (commencement of operations) to December 31, 2004. (b) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (c) Based on average daily shares outstanding. (d) Recognition of net investment income by the Fund is affected by the timing of declaration of dividends by the Underlying Funds in which the Fund invests. (e) Effective September 1, 2008, the redemption fee was eliminated. (f) Amount rounds to less than $0.01 per share. (g) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. (h) Ratios are annualized for periods less than one year. (i) Does not include expenses of the Underlying Funds in which the Fund invests. The annualized weighted average expense ratio of the Underlying Funds was 0.80% for the period ended June 30, 2009. The accompanying notes are an integral part of these financial statements. 38 | Semiannual Report Franklin Templeton Fund Allocator Series FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN TEMPLETON PERSPECTIVES ALLOCATION FUND
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, 2009 --------------------------------------------------- CLASS C (UNAUDITED) 2008 2007 2006 2005 2004(a) - ------- ---------------- ------- ------- ------- ------- ------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period .......................... $ 7.66 $ 13.08 $ 12.82 $ 11.74 $ 11.18 $10.00 ------- ------- ------- ------- ------- ------ Income from investment operations(b): Net investment income (loss)(c, d) ................. (0.04) 0.02 0.06 0.08 0.09 0.15 Net realized and unrealized gains (losses) ..................... 0.49 (5.14) 0.71 1.54 0.72 1.12 ------- ------- ------- ------- ------- ------ Total from investment operations ... 0.45 (5.12) 0.77 1.62 0.81 1.27 ------- ------- ------- ------- ------- ------ Less distributions from: Net investment income and short term gains received from Underlying Funds ............. (0.02) (0.04) (0.08) (0.12) (0.09) (0.06) Net realized gains .............. -- (0.26) (0.43) (0.42) (0.16) (0.03) ------- ------- ------- ------- ------- ------ Total distributions ................ (0.02) (0.30) (0.51) (0.54) (0.25) (0.09) ------- ------- ------- ------- ------- ------ Redemption fees(e) ................. -- --(f) --(f) --(f) --(f) --(f) ------- ------- ------- ------- ------- ------ Net asset value, end of period ..... $ 8.09 $ 7.66 $ 13.08 $ 12.82 $ 11.74 $11.18 ======= ======= ======= ======= ======= ====== Total return(g) .................... 5.92% (39.75)% 6.11% 13.92% 7.22% 12.66% RATIOS TO AVERAGE NET ASSETS(h) Expenses before waiver and payments by affiliates(i) ................ 1.35% 1.37% 1.34% 1.36% 1.55% 2.96% Expenses net of waiver and payments by affiliates(i) ................ 1.12% 1.17% 1.16% 1.14% 1.11% 1.04% Net investment income (loss)(d) .... (1.12)% 0.26% 0.43% 0.54% 0.76% 3.13% SUPPLEMENTAL DATA Net assets, end of period (000's) .. $45,216 $46,232 $84,173 $68,482 $36,568 $4,558 Portfolio turnover rate ............ 3.48% 9.37% 2.53% 0.98% 0.68% 0.51%
(a) For the period August 2, 2004 (commencement of operations) to December 31, 2004. (b) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (c) Based on average daily shares outstanding. (d) Recognition of net investment income by the Fund is affected by the timing of declaration of dividends by the Underlying Funds in which the Fund invests. (e) Effective September 1, 2008, the redemption fee was eliminated. (f) Amount rounds to less than $0.01 per share. (g) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. (h) Ratios are annualized for periods less than one year. (i) Does not include expenses of the Underlying Funds in which the Fund invests. The annualized weighted average expense ratio of the Underlying Funds was 0.80% for the period ended June 30, 2009. The accompanying notes are an integral part of these financial statements. Semiannual Report | 39 Franklin Templeton Fund Allocator Series FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN TEMPLETON PERSPECTIVES ALLOCATION FUND
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, 2009 ------------------------------------------------- CLASS R (UNAUDITED) 2008 2007 2006 2005 2004(a) - ------- ---------------- ------- ------ ------ ------ -------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ....................... $ 7.70 $ 13.17 $12.90 $11.79 $11.18 $10.00 ------ ------- ------ ------ ------ ------ Income from investment operations(b): Net investment income (loss) (c, d) ....................... (0.02) 0.06 0.11 0.14 0.11 0.15 Net realized and unrealized gains (losses) ..................... 0.49 (5.18) 0.73 1.55 0.77 1.13 ------ ------- ------ ------ ------ ------ Total from investment operations ... 0.47 (5.12) 0.84 1.69 0.88 1.28 ------ ------- ------ ------ ------ ------ Less distributions from: Net investment income and short term gains received from Underlying Funds ............. (0.02) (0.09) (0.14) (0.16) (0.11) (0.07) Net realized gains .............. -- (0.26) (0.43) (0.42) (0.16) (0.03) ------ ------- ------ ------ ------ ------ Total distributions ................ (0.02) (0.35) (0.57) (0.58) (0.27) (0.10) ------ ------- ------ ------ ------ ------ Redemption fees(e) ................. -- --(f) --(f) --(f) --(f) --(f) ------ ------- ------ ------ ------ ------ Net asset value, end of period ..... $ 8.15 $ 7.70 $13.17 $12.90 $11.79 $11.18 ====== ======= ====== ====== ====== ====== Total return(g) .................... 6.14% (39.44)% 6.58% 14.49% 7.86% 12.81% RATIOS TO AVERAGE NET ASSETS(h) Expenses before waiver and payments by affiliates(i) ................ 0.86% 0.88% 0.85% 0.87% 1.05% 2.46% Expenses net of waiver and payments by affiliates(i) ................ 0.63% 0.68% 0.67% 0.65% 0.61% 0.54% Net investment income (loss)(d) .... (0.63)% 0.75% 0.92% 1.03% 1.26% 3.63% SUPPLEMENTAL DATA Net assets, end of period (000's) .. $ 601 $ 693 $1,433 $1,539 $1,287 $ 260 Portfolio turnover rate ............ 3.48% 9.37% 2.53% 0.98% 0.68% 0.51%
(a) For the period August 2, 2004 (commencement of operations) to December 31, 2004. (b) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (c) Based on average daily shares outstanding. (d) Recognition of net investment income by the Fund is affected by the timing of declaration of dividends by the Underlying Funds in which the Fund invests. (e) Effective September 1, 2008, the redemption fee was eliminated. (f) Amount rounds to less than $0.01 per share. (g) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. (h) Ratios are annualized for periods less than one year. (i) Does not include expenses of the Underlying Funds in which the Fund invests. The annualized weighted average expense ratio of the Underlying Funds was 0.80% for the period ended June 30, 2009. The accompanying notes are an integral part of these financial statements. 40 | Semiannual Report Franklin Templeton Fund Allocator Series FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN TEMPLETON PERSPECTIVES ALLOCATION FUND
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, 2009 ------------------------------------------------ ADVISOR CLASS (UNAUDITED) 2008 2007 2006 2005 2004(a) - ------------- ---------------- ------- ------ ------ ------ ------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period .......................... $ 7.71 $ 13.22 $12.93 $11.81 $11.19 $10.00 ------ ------- ------ ------ ------ ------ Income from investment operations(b): Net investment income(c, d) ..... --(e) 0.19 0.24 0.22 0.11 0.14 Net realized and unrealized gains (losses) ............... 0.48 (5.29) 0.68 1.54 0.82 1.16 ------ ------- ------ ------ ------ ------ Total from investment operations ... 0.48 (5.10) 0.92 1.76 0.93 1.30 ------ ------- ------ ------ ------ ------ Less distributions from: Net investment income and short term gains received from Underlying Funds ........ (0.02) (0.15) (0.20) (0.22) (0.15) (0.08) Net realized gains .............. -- (0.26) (0.43) (0.42) (0.16) (0.03) ------ ------- ------ ------ ------ ------ Total distributions ................ (0.02) (0.41) (0.63) (0.64) (0.31) (0.11) ------ ------- ------ ------ ------ ------ Redemption fees(f) ................. -- --(e) --(e) --(e) --(e) --(e) ------ ------- ------ ------ ------ ------ Net asset value, end of period ..... $ 8.17 $ 7.71 $13.22 $12.93 $11.81 $11.19 ====== ======= ====== ====== ====== ====== Total return(g) .................... 6.27% (39.10)% 7.26% 15.07% 8.31% 13.01% RATIOS TO AVERAGE NET ASSETS(h) Expenses before waiver and payments by affiliates(i) ................ 0.36% 0.38% 0.35% 0.37% 0.55% 1.96% Expenses net of waiver and payments by affiliates(i) ................ 0.13% 0.18% 0.17% 0.15% 0.11% 0.04% Net investment income (loss)(d) .... (0.13)% 1.25% 1.42% 1.53% 1.76% 4.13% SUPPLEMENTAL DATA Net assets, end of period (000's) .. $2,971 $ 2,480 $2,804 $1,931 $1,104 $ 196 Portfolio turnover rate ............ 3.48% 9.37% 2.53% 0.98% 0.68% 0.51%
(a) For the period August 2, 2004 (commencement of operations) to December 31, 2004. (b) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (c) Based on average daily shares outstanding. (d) Recognition of net investment income by the Fund is affected by the timing of declaration of dividends by the Underlying Funds in which the Fund invests. (e) Amount rounds to less than $0.01 per share. (f) Effective September 1, 2008, the redemption fee was eliminated. (g) Total return is not annualized for periods less than one year. (h) Ratios are annualized for periods less than one year. (i) Does not include expenses of the Underlying Funds in which the Fund invests. The annualized weighted average expense ratio of the Underlying Funds was 0.80% for the period ended June 30, 2009. The accompanying notes are an integral part of these financial statements. Semiannual Report | 41 Franklin Templeton Fund Allocator Series STATEMENT OF INVESTMENTS, JUNE 30, 2009 (UNAUDITED)
FRANKLIN TEMPLETON PERSPECTIVES ALLOCATION FUND SHARES VALUE - ----------------------------------------------- --------- ------------ INVESTMENTS IN UNDERLYING FUNDS(a) DOMESTIC EQUITY 66.3% (b) Franklin Flex Cap Growth Fund, Advisor Class ...................... 1,840,601 $ 62,543,613 Mutual Shares Fund, Class Z ....................................... 3,896,276 62,924,858 ------------ 125,468,471 ------------ FOREIGN EQUITY 33.2% Templeton Growth Fund Inc., Advisor Class ......................... 4,584,183 62,757,469 ------------ TOTAL INVESTMENTS IN UNDERLYING FUNDS BEFORE SHORT TERM INVESTMENTS (COST $265,361,822) 99.5% ...................................... 188,225,940 ------------ SHORT TERM INVESTMENTS (COST $981,703) 0.5% MONEY MARKET FUNDS 0.5% (c) Institutional Fiduciary Trust Money Market Portfolio, 0.00% ....... 981,703 981,703 ------------ TOTAL INVESTMENTS IN UNDERLYING FUNDS (COST $266,343,525) 100.0% .. 189,207,643 OTHER ASSETS, LESS LIABILITIES 0.0%(d) ............................ 4,205 ------------ NET ASSETS 100.0% ................................................. $189,211,848 ============
(a) See Note 6 regarding investments in Underlying Funds. (b) Non-income producing. (c) The rate shown is the annualized seven-day yield at period end. (d) Rounds to less than 0.1% of net assets. The accompanying notes are an integral part of these financial statements. 42 | Semiannual Report Franklin Templeton Fund Allocator Series FINANCIAL STATEMENTS STATEMENTS OF ASSETS AND LIABILITIES June 30, 2009 (unaudited)
FRANKLIN FRANKLIN FRANKLIN TEMPLETON TEMPLETON TEMPLETON COREFOLIO FOUNDING FUNDS PERSPECTIVES ALLOCATION FUND ALLOCATION FUND ALLOCATION FUND --------------- --------------- --------------- Assets: Investments in Underlying Funds: (Note 6) Cost ........................................... $ 507,217,504 $10,998,750,184 $266,343,525 ============= =============== ============ Value .......................................... $ 400,281,804 $ 7,487,019,770 $189,207,643 Receivables: Capital shares sold ............................ 77,249 6,848,167 252,795 Underlying Funds (Note 3e) ..................... 144,477 2,209,279 69,103 Other assets ...................................... 584 11,117 255 ------------- --------------- ------------ Total assets ................................ 400,504,114 7,496,088,333 189,529,796 ------------- --------------- ------------ Liabilities: Payables: Capital shares redeemed ........................ 685,023 18,001,646 216,240 Affiliates ..................................... 95,678 5,988,263 55,712 Distributions to shareholders .................. 85,018 12,941,730 20,454 Unaffiliated transfer agent fees ............... 84,989 689,706 8,939 Accrued expenses and other liabilities ............ 56,010 801,878 16,603 ------------- --------------- ------------ Total liabilities ........................... 1,006,718 38,423,223 317,948 ------------- --------------- ------------ Net assets, at value ..................... $ 399,497,396 $ 7,457,665,110 $189,211,848 ============= =============== ============ Net assets consist of: Paid-in capital ................................... $ 544,142,045 $12,853,083,978 $282,596,245 Distributions in excess of net investment income .. (972,617) (329,657) (493,413) Net unrealized appreciation (depreciation) ........ (106,935,700) (3,511,730,414) (77,135,882) Accumulated net realized gain (loss) .............. (36,736,332) (1,883,358,797) (15,755,102) ------------- --------------- ------------ Net assets, at value ..................... $ 399,497,396 $ 7,457,665,110 $189,211,848 ============= =============== ============
The accompanying notes are an integral part of these financial statements. Semiannual Report | 43 Franklin Templeton Fund Allocator Series FINANCIAL STATEMENTS (CONTINUED) STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED) June 30, 2009 (unaudited)
FRANKLIN FRANKLIN FRANKLIN TEMPLETON TEMPLETON TEMPLETON COREFOLIO FOUNDING FUNDS PERSPECTIVES ALLOCATION FUND ALLOCATION FUND ALLOCATION FUND --------------- --------------- --------------- CLASS A: Net assets, at value ................................................... $268,115,867 $4,778,826,762 $140,423,406 ------------ -------------- ------------ Shares outstanding ..................................................... 29,912,567 581,198,098 17,244,313 ------------ -------------- ------------ Net asset value per share(a) ........................................... $ 8.96 $ 8.22 $ 8.14 ------------ -------------- ------------ Maximum offering price per share (net asset value per share / 94.25%) .. $ 9.51 $ 8.72 $ 8.64 ------------ -------------- ------------ CLASS B: Net assets, at value ................................................... $ 33,782,129 $ 322,590,494 ------------ -------------- Shares outstanding ..................................................... 3,794,534 39,199,178 ------------ -------------- Net asset value and maximum offering price per share(a) ................ $ 8.90 $ 8.23 ------------ -------------- CLASS C: Net assets, at value ................................................... $ 94,994,048 $2,311,236,807 $ 45,216,429 ------------ -------------- ------------ Shares outstanding ..................................................... 10,710,126 284,679,118 5,591,988 ------------ -------------- ------------ Net asset value and maximum offering price per share(a) ................ $ 8.87 $ 8.12 $ 8.09 ------------ -------------- ------------ CLASS R: Net assets, at value ................................................... $ 1,100,298 $ 11,752,252 $ 601,495 ------------ -------------- ------------ Shares outstanding ..................................................... 122,888 1,427,190 73,823 ------------ -------------- ------------ Net asset value and maximum offering price per share ................... $ 8.95 $ 8.23 $ 8.15 ------------ -------------- ------------ ADVISOR CLASS: Net assets, at value ................................................... $ 1,505,054 $ 33,258,795 $ 2,970,518 ------------ -------------- ------------ Shares outstanding ..................................................... 167,583 4,024,516 363,437 ------------ -------------- ------------ Net asset value and maximum offering price per share ................... $ 8.98 $ 8.26 $ 8.17 ------------ -------------- ------------
(a) Redemption price is equal to net asset value less contingent deferred sales charges, if applicable. The accompanying notes are an integral part of these financial statements. 44 | Semiannual Report Franklin Templeton Fund Allocator Series FINANCIAL STATEMENTS (CONTINUED) STATEMENTS OF OPERATIONS for the six months ended June 30, 2009 (unaudited)
FRANKLIN FRANKLIN FRANKLIN TEMPLETON TEMPLETON TEMPLETON COREFOLIO FOUNDING FUNDS PERSPECTIVES ALLOCATION FUND ALLOCATION FUND ALLOCATION FUND --------------- --------------- --------------- Investment income: Dividends from Underlying Funds (Note 6) ............ $ 196,123 $ 113,605,396 $ 869 ------------ -------------- ----------- Expenses: Administrative fees (Note 3a) ....................... 188,315 3,524,463 85,225 Distribution fees: (Note 3b) Class A .......................................... 332,605 5,954,738 172,215 Class B .......................................... 156,681 1,535,609 -- Class C .......................................... 439,832 10,891,466 208,549 Class R .......................................... 2,572 30,064 1,562 Transfer agent fees (Note 3d) ....................... 524,951 6,070,220 243,527 Reports to shareholders ............................. 35,860 540,345 16,366 Registration and filing fees ........................ 43,129 230,101 23,235 Professional fees ................................... 12,888 55,529 8,795 Trustees' fees and expenses ......................... 2,255 33,443 583 Other ............................................... 13,458 167,873 4,507 Expenses borne by Underlying Funds (Note 3e) ........ (144,477) (2,138,607) (69,103) ------------ -------------- ----------- Total expenses ................................ 1,608,069 26,895,244 695,461 Expenses waived/paid by affiliates (Note 3f) .. (443,009) (3,933,162) (203,398) ------------ -------------- ----------- Net expenses ............................... 1,165,060 22,962,082 492,063 ------------ -------------- ----------- Net investment income (loss) ............ (968,937) 90,643,314 (491,194) ------------ -------------- ----------- Realized and unrealized gains (losses): Net realized gain (loss) from sale of investments in Underlying Funds ................................. (24,080,988) (786,942,086) (5,998,563) Net change in unrealized appreciation (depreciation) on investments in Underlying Funds ............... 44,682,863 1,150,741,481 16,503,636 ------------ -------------- ----------- Net realized and unrealized gain (loss) ................ 20,601,875 363,799,395 10,505,073 ------------ -------------- ----------- Net increase (decrease) in net assets resulting from operations .......................................... $ 19,632,938 $ 454,442,709 $10,013,879 ============ ============== ===========
The accompanying notes are an integral part of these financial statements. Semiannual Report | 45 Franklin Templeton Fund Allocator Series FINANCIAL STATEMENTS (CONTINUED) STATEMENTS OF CHANGES IN NET ASSETS
FRANKLIN TEMPLETON FRANKLIN TEMPLETON COREFOLIO ALLOCATION FUND FOUNDING FUNDS ALLOCATION FUND ------------------------------------ ------------------------------------ SIX MONTHS ENDED SIX MONTHS ENDED JUNE 30, 2009 YEAR ENDED JUNE 30, 2009 YEAR ENDED (UNAUDITED) DECEMBER 31, 2008 (UNAUDITED) DECEMBER 31, 2008 ---------------- ----------------- ---------------- ----------------- Increase (decrease) in net assets: Operations: Net investment income (loss) ................ $ (968,937) $ 4,675,740 $ 90,643,314 $ 377,712,264 Net realized gain (loss) from Underlying Funds ......................... (24,080,988) (10,770,252) (786,942,086) (1,044,973,765) Net change in unrealized appreciation (depreciation) on investments in Underlying Funds ......................... 44,682,863 (266,649,939) 1,150,741,481 (4,923,135,686) ------------ ------------- -------------- --------------- Net increase (decrease) in net assets resulting from operations ... 19,632,938 (272,744,451) 454,442,709 (5,590,397,187) ------------ ------------- -------------- --------------- Distributions to shareholders from: Net investment income and short term gains received from Underlying Funds: Class A .................................. (1,055,167) (4,306,007) (116,205,840) (232,663,422) Class B .................................. (134,003) (173,762) (6,740,505) (12,296,371) Class C .................................. (377,730) (555,567) (49,355,452) (91,206,625) Class R .................................. (4,333) (14,468) (269,861) (613,620) Advisor Class ............................ (5,909) (33,624) (842,438) (1,808,459) Net realized gains: Class A .................................. -- (9,912,353) -- (206,963,605) Class B .................................. -- (1,420,594) -- (14,528,676) Class C .................................. -- (3,696,588) -- (108,826,242) Class R .................................. -- (51,580) -- (581,731) Advisor Class ............................ -- (65,462) -- (920,311) ------------ ------------- -------------- --------------- Total distributions to shareholders ......... (1,577,142) (20,230,005) (173,414,096) (670,409,062) ------------ ------------- -------------- --------------- Capital share transactions: (Note 2) Class A .................................. (22,702,935) (25,532,551) (420,224,300) (1,199,297,735) Class B .................................. (3,378,749) (10,233,436) (34,363,235) (106,380,153) Class C .................................. (8,804,256) (11,322,678) (263,575,322) (791,796,601) Class R .................................. (136,212) (480,559) (2,999,481) (3,925,755) Advisor Class ............................ (190,373) (443,248) (3,424,414) 8,144,816 ------------ ------------- -------------- --------------- Total capital share transactions ............ (35,212,525) (48,012,472) (724,586,752) (2,093,255,428) ------------ ------------- -------------- --------------- Redemption fees ............................. -- 1,576 -- 44,669 ------------ ------------- -------------- --------------- Net increase (decrease) in net assets ......................... (17,156,729) (340,985,352) (443,558,139) (8,354,017,008) Net assets: Beginning of period ......................... 416,654,125 757,639,477 7,901,223,249 16,255,240,257 ------------ ------------- -------------- --------------- End of period ............................... $399,497,396 $ 416,654,125 $7,457,665,110 $ 7,901,223,249 ============ ============= ============== =============== Undistributed net investment income (distributions in excess of net investment income) included in net assets: End of period ............................... $ (972,617) $ 1,573,462 $ (329,657) $ 82,441,125 ============ ============= ============== ===============
The accompanying notes are an integral part of these financial statements. 46 | Semiannual Report Franklin Templeton Fund Allocator Series FINANCIAL STATEMENTS (CONTINUED) STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
FRANKLIN TEMPLETON PERSPECTIVES ALLOCATION FUND ------------------------------------ SIX MONTHS ENDED JUNE 30, 2009 YEAR ENDED (UNAUDITED) DECEMBER 31, 2008 ---------------- ----------------- Increase (decrease) in net assets: Operations: Net investment income (loss) ....................... $ (491,194) $ 1,994,479 Net realized gain (loss) from Underlying Funds ..... (5,998,563) (8,917,483) Net change in unrealized appreciation (depreciation) on investments in Underlying Funds .............. 16,503,636 (117,330,528) ------------ ------------- Net increase (decrease) in net assets resulting from operations ................. 10,013,879 (124,253,532) ------------ ------------- Distributions to shareholders from: Net investment income and short term gains received from Underlying Funds: Class A ......................................... (396,930) (2,005,641) Class C ......................................... (128,822) (220,353) Class R ......................................... (1,700) (8,254) Advisor Class ................................... (8,372) (47,054) Net realized gains: Class A ......................................... -- (4,521,662) Class C ......................................... -- (1,694,032) Class R ......................................... -- (29,595) Advisor Class ................................... -- (50,944) ------------ ------------- Total distributions to shareholders ................... (535,824) (8,577,535) ------------ ------------- Capital share transactions: (Note 2) Class A ......................................... 689,364 (223,905) Class C ......................................... (3,029,808) (3,260,020) Class R ......................................... (126,426) (182,809) Advisor Class ................................... 364,553 1,046,832 ------------ ------------- Total capital share transactions ...................... (2,102,317) (2,619,902) ------------ ------------- Redemption fees ....................................... -- 378 ------------ ------------- Net increase (decrease) in net assets ........ 7,375,738 (135,450,591) Net assets: Beginning of period ................................ 181,836,110 317,286,701 ------------ ------------- End of period ...................................... $189,211,848 $ 181,836,110 ============ ============= Undistributed net investment income (distributions in excess of net investment income) included in net assets: End of period ...................................... $ (493,413) $ 533,605 ============ =============
The accompanying notes are an integral part of these financial statements. Semiannual Report | 47 Franklin Templeton Fund Allocator Series NOTES TO FINANCIAL STATEMENTS (UNAUDITED) 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES Franklin Templeton Fund Allocator Series (Trust) is registered under the Investment Company Act of 1940, as amended, (1940 Act) as an open-end investment company, consisting of ten separate funds, three of which are included in this report (Funds). The financial statements of the remaining funds in the Trust are presented separately. The Funds invest primarily in Franklin Templeton mutual funds (Underlying Funds). The classes of shares offered within each of the Funds are indicated below. Each class of shares differs by its initial sales load, contingent deferred sales charges, distribution fees, voting rights on matters affecting a single class and its exchange privilege.
CLASS A, CLASS B, CLASS C, CLASS R & ADVISOR CLASS CLASS A, CLASS C, CLASS R & ADVISOR CLASS - -------------------------------------------------- ----------------------------------------------- Franklin Templeton Corefolio Allocation Fund Franklin Templeton Perspectives Allocation Fund Franklin Templeton Founding Funds Allocation Fund
The following summarizes the Funds' significant accounting policies. A. SECURITY VALUATION Net asset value per share is calculated as of the close of trading of the NYSE. Investments in the Underlying Funds are valued at their closing net asset value each trading day. B. INCOME TAXES No provision has been made for U.S. income taxes because it is each fund's policy to qualify as a regulated investment company under the Internal Revenue Code and to distribute to shareholders substantially all of its taxable income and net realized gains. The Funds have reviewed the tax positions, taken on federal income tax returns, for each of the three open tax years and as of June 30, 2009, and have determined that no provision for income tax is required in the Funds' financial statements. C. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS Security transactions are accounted for on trade date. Realized gains and losses on security transactions are determined on a specific identification basis. Estimated expenses are accrued daily. Dividend income and realized gain distributions by Underlying Funds are recorded on the ex-dividend date. Distributions to shareholders are recorded on the ex-dividend date and are determined according to income tax regulations (tax basis). Distributable earnings determined on a tax basis may differ from earnings recorded in accordance with accounting principles generally accepted in the United States of America. These differences may be permanent or temporary. Permanent differences are reclassified among capital accounts to reflect their tax character. These reclassifications have no impact on net assets or the results of operations. Temporary differences are not reclassified, as they may reverse in subsequent periods. 48 | Semiannual Report Franklin Templeton Fund Allocator Series NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) C. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS (CONTINUED) Common expenses incurred by the Trust are allocated among the Funds based on the ratio of net assets of each fund to the combined net assets of the Trust. Fund specific expenses are charged directly to the fund that incurred the expense. The Funds indirectly bear their proportionate share of expenses from the Underlying Funds. Since the Underlying Funds have varied expense levels and the Funds may own different proportions of the Underlying Funds at different times, the amount of expenses incurred indirectly by the Funds will vary. Realized and unrealized gains and losses and net investment income, not including class specific expenses, are allocated daily to each class of shares based upon the relative proportion of net assets of each class. Differences in per share distributions, by class, are generally due to differences in class specific expenses. D. ACCOUNTING ESTIMATES The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the amounts of income and expenses during the reporting period. Actual results could differ from those estimates. E. REDEMPTION FEES A short term trading redemption fee was imposed, with some exceptions, on any fund shares that were redeemed or exchanged within seven calendar days following their purchase date. The redemption fee was 2% of the amount redeemed. Such fees were retained by the funds and accounted for as an addition to paid-in capital. Effective September 1, 2008, the redemption fee was eliminated. F. GUARANTEES AND INDEMNIFICATIONS Under the Trust's organizational documents, its officers and trustees are indemnified by the Trust against certain liabilities arising out of the performance of their duties to the Trust. Additionally, in the normal course of business, the Trust, on behalf of the Funds, enters into contracts with service providers that contain general indemnification clauses. The Trust's maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Trust that have not yet occurred. Currently, the Trust expects the risk of loss to be remote. Semiannual Report | 49 Franklin Templeton Fund Allocator Series NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 2. SHARES OF BENEFICIAL INTEREST At June 30, 2009, there were an unlimited number of shares authorized (without par value). Transactions in the Funds' shares were as follows:
FRANKLIN TEMPLETON FRANKLIN TEMPLETON COREFOLIO FOUNDING FUNDS ALLOCATION FUND ALLOCATION FUND -------------------------- ------------------------------ SHARES AMOUNT SHARES AMOUNT ---------- ------------- ------------ --------------- CLASS A SHARES: Six Months ended June 30, 2009 Shares sold ..................... 1,872,647 $ 15,292,834 25,719,695 $ 194,601,134 Shares issued in reinvestment of distributions ................ 111,985 1,003,500 13,320,997 109,498,169 Shares redeemed ................. (4,985,124) (38,999,269) (98,413,895) (724,323,603) ---------- ------------- ------------ --------------- Net increase (decrease) ......... (3,000,492) $ (22,702,935) (59,373,203) $ (420,224,300) ========== ============= ============ =============== Year ended December 31, 2008 Shares sold ..................... 5,567,019 $ 61,833,850 101,658,440 $ 1,166,213,136 Shares issued in reinvestment of distributions ................ 1,265,389 13,537,176 45,436,762 415,107,291 Shares redeemed ................. (8,891,290) (100,903,577) (259,459,671) (2,780,618,162) ---------- ------------- ------------ --------------- Net increase (decrease) ......... (2,058,882) $ (25,532,551) (112,364,469) $(1,199,297,735) ========== ============= ============ =============== CLASS B SHARES: Six Months ended June 30, 2009 Shares sold ..................... 47,388 $ 399,628 254,759 $ 1,940,238 Shares issued in reinvestment of distributions ................ 14,169 126,106 761,120 6,264,452 Shares redeemed ................. (488,883) (3,904,483) (5,749,723) (42,567,925) ---------- ------------- ------------ --------------- Net increase (decrease) ......... (427,326) $ (3,378,749) (4,733,844) $ (34,363,235) ========== ============= ============ =============== Year ended December 31, 2008 Shares sold ..................... 104,352 $ 1,141,683 986,795 $ 10,589,681 Shares issued in reinvestment of distributions ................ 129,819 1,507,686 2,649,869 24,917,785 Shares redeemed ................. (1,149,669) (12,882,805) (13,417,606) (141,887,619) ---------- ------------- ------------ --------------- Net increase (decrease) ......... (915,498) $ (10,233,436) (9,780,942) $ (106,380,153) ========== ============= ============ =============== CLASS C SHARES: Six Months ended June 30, 2009 Shares sold ..................... 712,776 $ 5,792,788 11,022,959 $ 82,556,677 Shares issued in reinvestment of distributions ................ 39,724 352,352 5,375,865 43,652,181 Shares redeemed ................. (1,900,449) (14,949,396) (53,811,111) (389,784,180) ---------- ------------- ------------ --------------- Net increase (decrease) ......... (1,147,949) $ (8,804,256) (37,412,287) $ (263,575,322) ========== ============= ============ =============== Year ended December 31, 2008 Shares sold ..................... 2,048,102 $ 22,152,029 45,290,328 $ 503,556,683 Shares issued in reinvestment of distributions ................ 344,964 3,952,057 18,821,585 174,787,157 Shares redeemed ................. (3,459,667) (37,426,764) (140,521,755) (1,470,140,441) ---------- ------------- ------------ --------------- Net increase (decrease) ......... (1,066,601) $ (11,322,678) (76,409,842) $ (791,796,601) ========== ============= ============ ===============
50 | Semiannual Report Franklin Templeton Fund Allocator Series NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 2. SHARES OF BENEFICIAL INTEREST (CONTINUED)
FRANKLIN TEMPLETON FRANKLIN TEMPLETON COREFOLIO FOUNDING FUNDS ALLOCATION FUND ALLOCATION FUND ------------------- ------------------------- SHARES AMOUNT SHARES AMOUNT ------- --------- ---------- ------------ CLASS R SHARES: Six Months ended June 30, 2009 Shares sold ..................... 3,225 $ 25,956 172,260 $ 1,283,493 Shares issued in reinvestment of distributions ................ 484 4,333 33,050 271,784 Shares redeemed ................. (20,492) (166,501) (602,137) (4,554,758) ------- --------- ---------- ------------ Net increase (decrease) ......... (16,783) $(136,212) (396,827) $ (2,999,481) ======= ========= ========== ============ Year ended December 31, 2008 Shares sold ..................... 16,325 $ 200,227 370,382 $ 4,119,404 Shares issued in reinvestment of distributions ................ 5,950 66,049 129,876 1,191,611 Shares redeemed ................. (65,849) (746,835) (826,353) (9,236,770) ------- --------- ---------- ------------ Net increase (decrease) ......... (43,574) $(480,559) (326,095) $ (3,925,755) ======= ========= ========== ============ ADVISOR CLASS SHARES: Six Months ended June 30, 2009 Shares sold ..................... 13,576 $ 116,464 621,153 $ 4,735,638 Shares issued in reinvestment of distributions ................ 649 5,832 95,389 787,913 Shares redeemed ................. (41,916) (312,669) (1,197,081) (8,947,965) ------- --------- ---------- ------------ Net increase (decrease) ......... (27,691) $(190,373) (480,539) $ (3,424,414) ======= ========= ========== ============ Year ended December 31, 2008 Shares sold ..................... 45,547 $ 411,512 2,448,980 $ 23,486,926 Shares issued in reinvestment of distributions ................ 8,128 84,684 288,863 2,496,414 Shares redeemed ................. (85,974) (939,444) (1,683,911) (17,838,524) ------- --------- ---------- ------------ Net increase (decrease) ......... (32,299) $(443,248) 1,053,932 $ 8,144,816 ======= ========= ========== ============
FRANKLIN TEMPLETON PERSPECTIVES ALLOCATION FUND ------------------------- SHARES AMOUNT ---------- ------------ CLASS A SHARES: Six Months ended June 30, 2009 Shares sold .................... 1,872,493 $ 13,939,599 Shares issued in reinvestment of distributions ............... 47,214 384,351 Shares redeemed ................ (1,899,354) (13,634,586) ---------- ------------ Net increase (decrease) ........ 20,353 $ 689,364 ========== ============ Year ended December 31, 2008 Shares sold .................... 3,470,298 $ 37,241,720 Shares issued in reinvestment of distributions ............... 658,516 6,336,696 Shares redeemed ................ (4,285,488) (43,802,321) ---------- ------------ Net increase (decrease) ........ (156,674) $ (223,905) ========== ============
Semiannual Report | 51 Franklin Templeton Fund Allocator Series NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 2. SHARES OF BENEFICIAL INTEREST (CONTINUED)
FRANKLIN TEMPLETON PERSPECTIVES ALLOCATION FUND ------------------------- SHARES AMOUNT ---------- ------------ CLASS C SHARES: Six Months ended June 30, 2009 Shares sold .................... 409,720 $ 3,045,081 Shares issued in reinvestment of distributions ............... 14,988 121,256 Shares redeemed ................ (866,010) (6,196,145) ---------- ------------ Net increase (decrease) ........ (441,302) $ (3,029,808) ========== ============ Year ended December 31, 2008 Shares sold .................... 1,394,980 $ 14,721,259 Shares issued in reinvestment of distributions ............... 171,980 1,784,729 Shares redeemed ................ (1,970,998) (19,766,008) ---------- ------------ Net increase (decrease) ........ (404,038) $ (3,260,020) ========== ============ CLASS R SHARES: Six Months ended June 30, 2009 Shares sold .................... 10,259 $ 76,521 Shares issued in reinvestment of distributions ............... 209 1,700 Shares redeemed ................ (26,659) (204,647) ---------- ------------ Net increase (decrease) ........ (16,191) $ (126,426) ========== ============ Year ended December 31, 2008 Shares sold .................... 15,267 $ 171,827 Shares issued in reinvestment of distributions ............... 3,789 37,849 Shares redeemed ................ (37,884) (392,485) ---------- ------------ Net increase (decrease) ........ (18,828) $ (182,809) ========== ============ ADVISOR CLASS SHARES: Six Months ended June 30, 2009 Shares sold .................... 91,335 $ 732,743 Shares issued in reinvestment of distributions ............... 987 8,063 Shares redeemed ................ (50,565) (376,253) ---------- ------------ Net increase (decrease) ........ 41,757 $ 364,553 ========== ============ Year ended December 31, 2008 Shares sold .................... 193,937 $ 1,925,016 Shares issued in reinvestment of distributions ............... 9,626 86,274 Shares redeemed ................ (93,976) (964,458) ---------- ------------ Net increase (decrease) ........ 109,587 $ 1,046,832 ========== ============
3. TRANSACTIONS WITH AFFILIATES Franklin Resources, Inc. is the holding company for various subsidiaries that together are referred to as Franklin Templeton Investments. Certain officers and trustees of the Trust are also officers and/or directors/trustees of certain of the Underlying Funds and of the following subsidiaries:
SUBSIDIARY AFFILIATION - ---------- ----------- Franklin Templeton Services, LLC (FT Services) Administrative manager Franklin Templeton Distributors, Inc. (Distributors) Principal underwriter Franklin Templeton Investor Services, LLC (Investor Services) Transfer agent
52 | Semiannual Report Franklin Templeton Fund Allocator Series NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 3. TRANSACTIONS WITH AFFILIATES (CONTINUED) A. ADMINISTRATIVE FEES The Funds pay an administrative fee to FT Services of 0.10% per year of the average daily net assets of each of the Funds for administrative services including monitoring and rebalancing the percentage of each Fund's investment in the Underlying Funds. B. DISTRIBUTION FEES The Trust's Board of Trustees has adopted distribution plans for each share class, with the exception of Advisor Class shares, pursuant to Rule 12b-1 under the 1940 Act. On December 1, 2008, the Trust's Board of Trustees approved a modification to the Class A distribution plan, for those funds that had a Class A compensation plan, changing the form of the plan from a compensation to a reimbursement distribution plan. Under the distribution plan, the Funds reimburse Distributors for costs incurred in connection with the servicing, sale and distribution of each Funds' shares up to the maximum annual plan rate for each class. This change was effective February 1, 2009. Prior to February 1, 2009, under the Funds' Class A compensation distribution plan, the Funds paid Distributors for costs incurred in connection with the servicing, sale and distribution of the Funds' shares up to a certain percentage per year of its average daily net assets. In addition, under the Funds' compensation distribution plans, the Funds pay Distributors for costs incurred in connection with the servicing, sale and distribution of each fund's shares up to the maximum annual plan rate for each class. The maximum annual plan rates, based on the average daily net assets, for each class, are as follows:
FRANKLIN TEMPLETON FRANKLIN TEMPLETON FRANKLIN TEMPLETON COREFOLIO FOUNDING FUNDS PERSPECTIVES ALLOCATION FUND ALLOCATION FUND ALLOCATION FUND ------------------ ------------------ ------------------ Class A ...... 0.35% 0.35% 0.35% Class B ...... 1.00% 1.00% -- Class C ...... 1.00% 1.00% 1.00% Class R ...... 0.50% 0.50% 0.50%
The Board of Trustees has set the current rate at 0.30% per year for Class A shares for the Franklin Templeton Corefolio Allocation Fund and the Franklin Templeton Perspectives Allocation Fund, and at 0.25% per year for Class A shares for the Franklin Templeton Founding Funds Allocation Fund until further notice and approval by the Board. Semiannual Report | 53 Franklin Templeton Fund Allocator Series NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 3. TRANSACTIONS WITH AFFILIATES (CONTINUED) C. SALES CHARGES/UNDERWRITING AGREEMENTS Distributors has advised the Funds of the following commission transactions related to the sales and redemptions of the Funds' shares for the period:
FRANKLIN TEMPLETON FRANKLIN TEMPLETON FRANKLIN TEMPLETON COREFOLIO FOUNDING FUNDS PERSPECTIVES ALLOCATION FUND ALLOCATION FUND ALLOCATION FUND ------------------ ------------------ ------------------ Sales charges retained net of commissions paid to unaffiliated broker/dealers .......... $79,566 $5,439,871 $56,151 Contingent deferred sales charges retained ...... $ 4,588 $ 127,816 $ 2,558
D. TRANSFER AGENT FEES For the period ended June 30, 2009, the Funds paid transfer agent fees as noted in the Statements of Operations of which the following amounts were retained by Investor Services:
FRANKLIN TEMPLETON FRANKLIN TEMPLETON FRANKLIN TEMPLETON COREFOLIO FOUNDING FUNDS PERSPECTIVES ALLOCATION FUND ALLOCATION FUND ALLOCATION FUND ------------------ ------------------ ------------------ Transfer agent fees ...................... $377,152 $4,199,617 $205,553
E. SPECIAL SERVICING AGREEMENT Effective May 1, 2009, the Funds entered into a Special Servicing Agreement with the Underlying Funds and certain service providers of the Funds and of the Underlying Funds, pursuant to which each Underlying Fund pays a portion of the Funds' eligible expenses, which include transfer agency and shareholder servicing costs, to the extent such payments are less than the amount of the benefits realized or expected to be realized by the Underlying Fund from the investment in the Underlying Fund by the Funds. F. WAIVER AND EXPENSE REIMBURSEMENTS FT Services and Investor Services have agreed in advance to waive all or a portion of their respective fees and to assume payment of other expenses through April 30, 2010. Total expenses waived or paid are not subject to reimbursement by the Fund subsequent to the Fund's fiscal year end. After April 30, 2010, FT Services and Investor Services may discontinue this waiver at any time upon notice to the Fund's Board of Trustees. 54 | Semiannual Report Franklin Templeton Fund Allocator Series NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 4. INCOME TAXES For tax purposes, capital losses may be carried over to offset future capital gains, if any. At December 31, 2008, the capital loss carryforwards were as follows:
FRANKLIN TEMPLETON FRANKLIN TEMPLETON FRANKLIN TEMPLETON COREFOLIO FOUNDING FUNDS PERSPECTIVES ALLOCATION FUND ALLOCATION FUND ALLOCATION FUND ------------------ ------------------ ------------------ Capital loss carryforwards expiring in: 2016 .................................. $6,021,473 $666,677,037 $2,696,618
For tax purposes, realized capital losses occurring subsequent to October 31, may be deferred and treated as occurring on the first day of the following fiscal year. At December 31, 2008, deferred losses were as follows:
FRANKLIN TEMPLETON FRANKLIN TEMPLETON FRANKLIN TEMPLETON COREFOLIO FOUNDING FUNDS PERSPECTIVES ALLOCATION FUND ALLOCATION FUND ALLOCATION FUND ------------------ ------------------ ------------------ Realized capital losses .................. $1,237,479 $159,430,133 $1,184,345
At June 30, 2009, the cost of investments and net unrealized appreciation (depreciation) for income tax purposes were as follows:
FRANKLIN FRANKLIN FRANKLIN TEMPLETON TEMPLETON TEMPLETON COREFOLIO FOUNDING FUNDS PERSPECTIVES ALLOCATION FUND ALLOCATION FUND ALLOCATION FUND --------------- --------------- --------------- Cost of investments ......................... $ 513,583,874 $11,317,127,739 $272,219,101 ============= =============== ============ Unrealized appreciation ..................... $ -- $ -- $ -- Unrealized depreciation ..................... (113,302,070) (3,830,107,969) (83,011,458) ------------- --------------- ------------ Net unrealized appreciation (depreciation) .. $(113,302,070) $(3,830,107,969) $(83,011,458) ============= =============== ============
Net investment income (loss) differs for financial statement and tax purposes primarily due to differing treatments of short term capital gains distributions from Underlying Funds. Net realized gains (losses) differ for financial statement and tax purposes primarily due to differing treatments of wash sales and short term capital gains distributions from Underlying Funds. 5. INVESTMENT TRANSACTIONS Purchases and sales of Underlying Funds (excluding short term securities) for the period ended June 30, 2009, were as follows:
FRANKLIN TEMPLETON FRANKLIN TEMPLETON FRANKLIN TEMPLETON COREFOLIO FOUNDING FUNDS PERSPECTIVES ALLOCATION FUND ALLOCATION FUND ALLOCATION FUND ------------------ ------------------ ------------------ Purchases .. $ 1,495,626 $113,578,958 $6,000,000 Sales ...... $38,906,635 $963,424,143 $8,401,092
Semiannual Report | 55 Franklin Templeton Fund Allocator Series NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 6. INVESTMENTS IN UNDERLYING FUNDS The Funds invest primarily in the Underlying Funds which are managed by Franklin Advisers, Inc. (Advisers), an affiliate of FT Services, or by an affiliate of Advisers. The Funds do not invest in the Underlying Funds for the purpose of exercising management or control. At June 30, 2009, the Funds held the following positions which exceed 5% of the Underlying Funds' shares outstanding:
NAME OF ISSUER % OF SHARES HELD - -------------- ---------------- FRANKLIN TEMPLETON COREFOLIO ALLOCATION FUND Franklin Growth Fund ............................ 7.50% FRANKLIN TEMPLETON FOUNDING FUNDS ALLOCATION FUND Mutual Shares Fund .............................. 18.55% Templeton Growth Fund Inc. ...................... 15.18% Franklin Income Fund Inc. ....................... 6.03%
The Funds may invest in the Institutional Fiduciary Trust Money Market Portfolio (Sweep Money Fund), an open-end investment company managed by Advisers. Pursuant to a SEC exemptive order specific to the Funds' investment in the Sweep Money Fund, administrative fees are reduced on assets invested in the Sweep Money Fund, in an amount not to exceed the management and administrative fees paid by the Sweep Money Fund. 7. CREDIT FACILITY Effective January 23, 2009, the Funds, together with other U.S. registered and foreign investment funds managed by Franklin Templeton Investments (individually, "Borrower"; collectively "Borrowers"), entered into a joint syndicated senior unsecured credit facility totaling $725 million (Global Credit Facility) to provide a source of funds to the Borrowers for temporary and emergency purposes, including the ability to meet future unanticipated or unusually large redemption requests. Under the terms of the Global Credit Facility, the Funds shall, in addition to interest charged on any borrowings made by the Funds and other costs incurred by the Funds, pay its share of fees and expenses incurred in connection with the implementation and maintenance of the Global Credit Facility, based upon its relative share of the aggregate net assets of all of the Borrowers, including an annual commitment fee based upon the unused portion of the Global Credit Facility. During the period, the Funds incurred commitment fees of their pro rata portion of the Global Credit Facility, which is reflected in other expenses on the Statements of Operations. During the period ended June 30, 2009, the Funds did not utilize the Global Credit Facility. The commitment fees the Funds incurred for the period were as follows:
FRANKLIN TEMPLETON FRANKLIN TEMPLETON FRANKLIN TEMPLETON COREFOLIO FOUNDING FUNDS PERSPECTIVES ALLOCATION FUND ALLOCATION FUND ALLOCATION FUND ------------------ ------------------ ------------------ Commitment fees ... $460 $8,726 $201
56 | Semiannual Report Franklin Templeton Fund Allocator Series NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 8. FAIR VALUE MEASUREMENTS Financial Accounting Standards Board (FASB) Statement No. 157, "Fair Value Measurement" (SFAS 157) establishes a fair value hierarchy that distinguishes between market data obtained from independent sources (observable inputs) and the Trust's own market assumptions (unobservable inputs). These inputs are used in determining the value of the Funds' investments and are summarized in the following fair value hierarchy: - Level 1 - quoted prices in active markets for identical securities - Level 2 - other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speed, credit risk, etc.) - Level 3 - significant unobservable inputs (including the Fund's own assumptions in determining the fair value of investments) The inputs or methodology used for valuing securities are not an indication of the risk associated with investing in those securities. At June 30, 2009, all the Funds' investments in securities carried at fair value were in Level 1 inputs. For detailed industry descriptions, see the accompanying Statements of Investments. 9. SUBSEQUENT EVENTS Management has evaluated subsequent events through August 13, 2009 and determined that no events have occurred that require disclosure. Semiannual Report | 57 Franklin Templeton Fund Allocator Series SHAREHOLDER INFORMATION BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT At a meeting held February 24, 2009, the Board of Trustees (Board), including a majority of non-interested or independent Trustees, approved renewal of the investment management agreement for each of the separate funds comprising Franklin Templeton Fund Allocator Series (Fund(s)). In reaching this decision, the Board took into account information furnished throughout the year at regular Board meetings, as well as information prepared specifically in connection with the annual renewal review process. Information furnished and discussed throughout the year included investment performance reports and related financial information for each Fund, as well as periodic reports on shareholder services, legal, compliance, pricing, brokerage commissions and execution and other services provided by the Investment Manager (Manager) and its affiliates. Information furnished specifically in connection with the renewal process included a report for each Fund prepared by Lipper, Inc. (Lipper), an independent organization, as well as additional material, including a Fund profitability analysis report prepared by management. The Lipper reports compared each Fund's investment performance and expenses with those of other mutual funds deemed comparable to the Fund as selected by Lipper. The Fund profitability analysis report discussed the profitability to Franklin Templeton Investments from its overall U.S. fund operations, as well as on an individual fund-by-fund basis. Included with such profitability analysis report was information on a fund-by-fund basis listing portfolio managers and other accounts they manage, as well as information on management fees charged by the Manager and its affiliates including management's explanation of differences where relevant and a three-year expense analysis with an explanation for any increase in expense ratios. Additional material accompanying such report was a memorandum prepared by management describing project initiatives and capital investments relating to the services provided to the Funds by the Franklin Templeton Investments organization, as well as a memorandum relating to economies of scale and a comparative analysis concerning transfer agent fees charged each Fund. Such material also discussed some of the actions taken by management in coping with problems arising out of the past year's financial upheaval. In considering such materials, the independent Trustees received assistance and advice from and met separately with independent counsel. While the investment management agreements for all Funds were considered at the same Board meeting, the Board dealt with each Fund separately. In approving continuance of the investment management agreement for each Fund, the Board, including a majority of independent Trustees, determined that the existing management fee structure was fair and reasonable and that continuance of the investment management agreement was in the best interests of each Fund and its shareholders. While attention was given to all information furnished, the following discusses some primary factors relevant to the Board's decision. NATURE, EXTENT AND QUALITY OF SERVICE. The Board was satisfied with the nature and quality of the overall services provided by the Manager and its affiliates to the Funds and their shareholders. In addition to investment performance and expenses discussed later, the Board's opinion was based, in part, upon periodic reports furnished it showing that the investment policies and restrictions for each Fund were consistently complied with as well as other reports periodically furnished the Board covering matters such as the compliance of portfolio managers and other 58 | Semiannual Report Franklin Templeton Fund Allocator Series SHAREHOLDER INFORMATION (CONTINUED) BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT (CONTINUED) management personnel with the code of ethics adopted throughout the Franklin Templeton fund complex, the adherence to fair value pricing procedures established by the Board, and the accuracy of net asset value calculations. The Board also noted the extent of benefits provided Fund shareholders from being part of the Franklin Templeton family of funds, including the right to exchange investments between the same class of funds without a sales charge, the ability to reinvest Fund dividends into other funds and the right to combine holdings in other funds to obtain a reduced sales charge. Favorable consideration was given to management's continuous efforts and expenditures in establishing back-up systems and recovery procedures to function in the event of a natural disaster, it being noted that such systems and procedures had functioned smoothly during the Florida hurricanes and blackouts experienced in recent years. Among other factors taken into account by the Board were the Manager's best execution trading policies, including a favorable report by an independent portfolio trading analytical firm. Consideration was also given to the experience of each Fund's portfolio management team, the number of accounts managed and general method of compensation. In this latter respect, the Board noted that a primary factor in management's determination of a portfolio manager's bonus compensation was the relative investment performance of the funds he or she managed and that a portion of such bonus was required to be invested in a predesignated list of funds within such person's fund management area so as to be aligned with the interests of Fund shareholders. The Board also took into account the quality of transfer agent and shareholder services provided Fund shareholders by an affiliate of the Manager, noting continuing expenditures by management to increase and improve the scope of such services, periodic favorable reports on such service conducted by third parties, and the continuous enhancements to and high industry ranking given the Franklin Templeton website. Particular attention was given to the overall performance and actions taken by the Manager and its affiliates in response to problems arising out of the market turmoil and financial crisis experienced during the past year. In this respect, the Board noted that management's independent credit analysis and diligent risk management procedures had minimized exposure of funds within the Franklin Templeton complex to subprime mortgages and that its continuous monitoring of counterparty credit risk had limited fund exposure to firms experiencing financial difficulties like Bear Stearns and AIG. The same type of conservative approach and attention to risk had also prevented any structured investment products or other volatile instruments from being held in the portfolios of any of the money market funds within the Franklin Templeton complex, including the sweep money fund utilized by many of the funds as part of their cash management. The Board also took into account, among other things, management's efforts in establishing a $725 million global credit facility for the benefit of the funds and other accounts managed by Franklin Templeton Investments to provide a source of cash for temporary and emergency purposes or to meet unusual redemption requests as well as the strong financial position of the Manager's parent company and its commitment to the mutual fund business. The Board also noted that during the past year Franklin Templeton Investments, like many other fund managers, had announced a hiring freeze and implemented employee reductions, and the Board discussed with management the nature of such reductions and steps being taken to minimize any negative impact on the nature and quality of services being provided the Funds. Semiannual Report | 59 Franklin Templeton Fund Allocator Series SHAREHOLDER INFORMATION (CONTINUED) BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT (CONTINUED) INVESTMENT PERFORMANCE. The Board placed significant emphasis on the investment performance of each Fund in view of its importance to shareholders. While consideration was given to performance reports and discussions with portfolio managers at Board meetings throughout the year, particular attention in assessing performance was given to the Lipper reports furnished for the agreement renewals. The Lipper reports prepared for each individual Fund showed the investment performance of Class A shares, in comparison to a performance universe selected by Lipper. Comparative performance for each Fund was shown for the one-year period ended December 31, 2008, and for additional periods ended that date depending on when a particular Fund commenced operations. The following summarizes the performance results for each of the Funds and the Board's view of such performance. FRANKLIN TEMPLETON COREFOLIO ALLOCATION FUND - The performance universe for this Fund consisted of the Fund and all retail and institutional multi-cap core funds as selected by Lipper. The Fund had been in operation for five full years at the date of the Lipper report, which showed its income return for the one-year period as well as for the previous five-year period on an annualized basis to be in each case in the second-highest quintile of such universe. Consistent with the market sell-off that occurred in 2008, the Fund and all other funds within its performance universe experienced losses during the past year. On a comparative basis, the Lipper report showed the Fund's total return for both the one-year period and the annualized three- and five-year periods to be in the middle quintile of its performance universe. The Board found such comparative performance to be acceptable. FRANKLIN TEMPLETON FOUNDING FUNDS ALLOCATION FUND - The performance universe for this Fund consisted of the Fund and all retail and institutional mixed-asset target allocation growth funds as selected by Lipper. This Fund had been in operation for five full years at the date of the Lipper report, which showed its income return for both the one-year period and the annualized five-year period to be in the highest quintile of such universe. Consistent with the market sell-off that occurred in 2008, the Fund and all other funds within its performance universe experienced losses during the past year. On a comparative basis, the Lipper report showed the Fund's total return for the one-year period to be in the lowest quintile of such performance universe, and on an annualized basis for the five-year period to be in the second-lowest quintile of such universe. The Fund's performance reflects that of the underlying funds in which it invests on a fixed percentage basis, and the Board discussed with management the reasons for the performance of such underlying funds and steps being taken to improve their performance. While intending to continuously monitor the Fund, based on such discussions, the Board did not believe that any change in portfolio management of such underlying funds was warranted. FRANKLIN TEMPLETON PERSPECTIVES ALLOCATION FUND - The performance universe for this Fund consisted of the Fund and all retail and institutional multi-cap core funds as selected by Lipper. The Fund has been in operation for only four full years at the date of the Lipper report, which showed its income return to be in the second-highest quintile of such universe for the one-year period as well 60 | Semiannual Report Franklin Templeton Fund Allocator Series SHAREHOLDER INFORMATION (CONTINUED) BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT (CONTINUED) as the four-year period on an annualized basis. Consistent with the market sell-off that occurred in 2008, the Fund and all other funds within its performance universe experienced losses during the past year. On a comparative basis, the Lipper report showed its total return to be in the middle quintile for both the one-year period and the annualized four-year period. The Board believed such comparative performance to be acceptable. COMPARATIVE EXPENSES. Consideration was given to the management fee and total expense ratios of each Fund compared with those of a group of retail front-end load fund of funds selected by Lipper as its appropriate Lipper expense group. Lipper expense data is based upon historical information taken from each fund's most recent annual report and, as a result of the severe decline in mutual fund industry assets during the last quarter of 2008, is based on asset levels that are higher than the level currently existing for most funds. While recognizing the limitations inherent in Lipper's methodology and recognizing that current expense ratios may increase as assets decline, the Board believed that the independent analysis conducted by Lipper remained an appropriate measure of comparative expenses. In reviewing comparative costs, Lipper provides information on each Fund's contractual investment management fee in comparison with the contractual investment management fee that would have been charged by other funds within its Lipper expense group assuming they were similar in size to the Fund, as well as the actual total expenses of the Fund including expenses of the underlying funds they invest in. The Board noted that for Franklin Templeton Corefolio Allocation Fund, Franklin Templeton Founding Funds Allocation Fund, and Franklin Templeton Perspectives Allocation Fund there is no investment management agreement or investment advisory fee, but only an administration agreement with FT Services, LLC. The Lipper contractual investment management fee analysis includes the advisory and administrative fees directly charged to each of the Funds as being part of the contractual investment management fee, with the investment management fees charged underlying funds being included within actual total expenses. Contractual investment management fees and total expenses for comparative consistency are shown by Lipper for Fund Class A shares. The Lipper expense reports noted in the case of each Fund that expenses had been subsidized by management fee waivers and reimbursements. In the case of Franklin Templeton Corefolio Allocation Fund and Franklin Templeton Perspectives Allocation Fund, their Lipper reports showed in each case that their respective contractual management fee rate and ratio of expenses charged directly to such Funds were at the median of their respective expense groups, and that their actual total expense ratios (including expenses of their underlying funds) were in the least and second least expensive quintiles, respectively, of their expense groups. The Lipper report for Franklin Templeton Founding Funds Allocation Fund showed its contractual management fee rate to be at the median of its Lipper expense group, and that while the ratio of total expenses charged directly to such Fund was in the most expensive quintile of such group, its actual total expense ratio (including expenses of its underlying funds) was in the second least expensive quintile of such group. The Board believed the expenses of each Fund were acceptable, taking into account the fee waiver expense reimbursements applicable to each of them. Semiannual Report | 61 Franklin Templeton Fund Allocator Series SHAREHOLDER INFORMATION (CONTINUED) BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT (CONTINUED) MANAGEMENT PROFITABILITY. The Board also considered the level of profits realized by the Manager and its affiliates in connection with the operation of each Fund. In this respect, the Board reviewed the Fund profitability analysis that addresses the overall profitability of Franklin Templeton's U.S. fund business, as well as its profits in providing management and other services to each of the individual funds during the 12-month period ended September 30, 2008, being the most recent fiscal year end for Franklin Resources, Inc., the Manager's parent. During such period, the assets of the Franklin Templeton U.S. fund business were significantly higher than currently existing, and to such extent the profitability analysis does not reflect current fund operations. While taking this into account in assessing the significance of the Fund profitability analysis, the Board recognized such analysis was made at a given point in time and that the decline in assets and effect on profitability would be reflected in the profitability analysis covering Franklin Resources' 2009 fiscal year period. In reviewing the analysis, attention was given to the methodology followed in allocating costs to each Fund, it being recognized that allocation methodologies are inherently subjective and various allocation methodologies may each be reasonable while producing different results. In this respect, the Board noted that, while being continuously refined and reflecting changes in the Manager's own cost accounting, the allocation methodology was consistent with that followed in profitability report presentations for the Funds made in prior years and that the Funds' independent registered public accounting firm had been engaged by the Manager to perform certain procedures on a biennial basis, specified and approved by the Manager and the Funds' Board solely for their purposes and use in reference to the profitability analysis. In reviewing and discussing such analysis, management discussed with the Board its belief that costs incurred in establishing the infrastructure necessary for the type of mutual fund operations conducted by the Manager and its affiliates may not be fully reflected in the expenses allocated to each Fund in determining its profitability, as well as the fact that the level of profits, to a certain extent, reflected operational cost savings and efficiencies initiated by management. The Board also took into account management's expenditures in improving shareholder services provided the Funds, as well as the need to meet additional regulatory and compliance requirements resulting from the Sarbanes-Oxley Act and recent SEC and other regulatory requirements. In addition, the Board considered a third-party study comparing the profitability of the Manager's parent on an overall basis as compared to other publicly held managers broken down to show profitability from management operations exclusive of distribution expenses, as well as profitability including distribution expenses. The Board also considered the extent to which the Manager and its affiliates might derive ancillary benefits from fund operations, including its interest in a joint venture entity that financed up-front commissions paid to brokers/dealers who sold fund Class B shares prior to February 2005 when the offering of such shares was discontinued, as well as potential benefits resulting from allocation of fund brokerage and the use of commission dollars to pay for research. Based upon its consideration of all these factors, the Board determined that the level of profits realized by the Manager and its affiliates from providing services to each Fund was not excessive in view of the nature, quality and extent of services provided. 62 | Semiannual Report Franklin Templeton Fund Allocator Series SHAREHOLDER INFORMATION (CONTINUED) BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT (CONTINUED) ECONOMIES OF SCALE. The Board also considered whether economies of scale are realized by the Managers as the Funds grow larger and the extent to which this is reflected in the level of management fees charged. While recognizing that any precise determination is inherently subjective, the Board noted that based upon the Fund profitability analysis, it appears that as some funds get larger, at some point economies of scale do result in the Managers realizing a larger profit margin on management services provided such a fund. The Board also noted that economies of scale are shared with a fund and its shareholders through management fee breakpoints so that as a fund grows in size, its effective management fee rate declines. The management fees charged all the underlying funds in which the Funds may invest provide for such management fee breakpoints. Consequently, to the extent economies of scale may be realized by the investment managers of these funds, the benefits are shared with each Fund and its shareholders through a reduction in actual total expense ratios. PROXY VOTING POLICIES AND PROCEDURES The Trust's investment manager has established Proxy Voting Policies and Procedures (Policies) that the Trust uses to determine how to vote proxies relating to portfolio securities. Shareholders may view the Trust's complete Policies online at franklintempleton.com. Alternatively, shareholders may request copies of the Policies free of charge by calling the Proxy Group collect at (954) 527-7678 or by sending a written request to: Franklin Templeton Companies, LLC, 500 East Broward Boulevard, Suite 1500, Fort Lauderdale, FL 33394, Attention: Proxy Group. Copies of the Trust's proxy voting records are also made available online at franklintempleton.com and posted on the U.S. Securities and Exchange Commission's website at sec.gov and reflect the most recent 12-month period ended June 30. QUARTERLY STATEMENT OF INVESTMENTS The Trust files a complete statement of investments with the U.S. Securities and Exchange Commission for the first and third quarters for each fiscal year on Form N-Q. Shareholders may view the filed Form N-Q by visiting the Commission's website at sec.gov. The filed form may also be viewed and copied at the Commission's Public Reference Room in Washington, DC. Information regarding the operations of the Public Reference Room may be obtained by calling (800) SEC-0330. Semiannual Report | 63 This page intentionally left blank. Franklin Templeton Funds LITERATURE REQUEST. TO RECEIVE A PROSPECTUS, PLEASE CALL US AT (800) DIAL BEN/(800) 342-5236 OR VISIT FRANKLINTEMPLETON.COM. INVESTORS SHOULD CAREFULLY CONSIDER A FUND'S INVESTMENT GOALS, RISKS, CHARGES AND EXPENSES BEFORE INVESTING. THE PROSPECTUS CONTAINS THIS AND OTHER INFORMATION. PLEASE CAREFULLY READ THE PROSPECTUS BEFORE INVESTING. TO ENSURE THE HIGHEST QUALITY OF SERVICE, WE MAY MONITOR, RECORD AND ACCESS TELEPHONE CALLS TO OR FROM OUR SERVICE DEPARTMENTS. THESE CALLS CAN BE IDENTIFIED BY THE PRESENCE OF A REGULAR BEEPING TONE. VALUE Franklin All Cap Value Fund Franklin Balance Sheet Investment Fund Franklin Large Cap Value Fund Franklin MicroCap Value Fund(1) Franklin MidCap Value Fund Franklin Small Cap Value Fund Mutual Beacon Fund Mutual Quest Fund Mutual Recovery Fund(2) Mutual Shares Fund BLEND Franklin Focused Core Equity Fund Franklin Large Cap Equity Fund Franklin Rising Dividends Fund GROWTH Franklin Flex Cap Growth Fund Franklin Growth Fund Franklin Growth Opportunities Fund Franklin Small Cap Growth Fund Franklin Small-Mid Cap Growth Fund SECTOR Franklin Biotechnology Discovery Fund Franklin DynaTech Fund Franklin Global Real Estate Fund Franklin Gold & Precious Metals Fund Franklin Natural Resources Fund Franklin Real Estate Securities Fund Franklin Utilities Fund Mutual Financial Services Fund GLOBAL Mutual Global Discovery Fund Templeton Global Long-Short Fund Templeton Global Opportunities Trust Templeton Global Smaller Companies Fund Templeton Growth Fund Templeton World Fund INTERNATIONAL Franklin India Growth Fund Franklin International Growth Fund Franklin International Small Cap Growth Fund Mutual European Fund Mutual International Fund Templeton BRIC Fund Templeton China World Fund Templeton Developing Markets Trust Templeton Emerging Markets Small Cap Fund Templeton Foreign Fund Templeton Foreign Smaller Companies Fund Templeton Frontier Markets Fund HYBRID Franklin Balanced Fund Franklin Convertible Securities Fund Franklin Equity Income Fund Franklin Income Fund Templeton Income Fund ASSET ALLOCATION Franklin Templeton Corefolio(R) Allocation Fund Franklin Templeton Founding Funds Allocation Fund Franklin Templeton Perspectives Allocation Fund Franklin Templeton Conservative Target Fund Franklin Templeton Growth Target Fund Franklin Templeton Moderate Target Fund Franklin Templeton 2015 Retirement Target Fund Franklin Templeton 2025 Retirement Target Fund Franklin Templeton 2035 Retirement Target Fund Franklin Templeton 2045 Retirement Target Fund FIXED INCOME Franklin Adjustable U.S. Government Securities Fund(3) Franklin Floating Rate Daily Access Fund Franklin High Income Fund Franklin Limited Maturity U.S. Government Securities Fund(3) Franklin Low Duration Total Return Fund Franklin Real Return Fund Franklin Strategic Income Fund Franklin Strategic Mortgage Portfolio Franklin Templeton Hard Currency Fund Franklin Total Return Fund Franklin U.S. Government Securities Fund(3) Templeton Global Bond Fund Templeton Global Total Return Fund Templeton International Bond Fund TAX-FREE INCOME(4) NATIONAL Double Tax-Free Income Fund Federal Tax-Free Income Fund High Yield Tax-Free Income Fund Insured Tax-Free Income Fund(5) LIMITED-/INTERMEDIATE-TERM California Intermediate-Term Tax-Free Income Fund Federal Intermediate-Term Tax-Free Income Fund Federal Limited-Term Tax-Free Income Fund New York Intermediate-Term Tax-Free Income Fund STATE-SPECIFIC Alabama Arizona California(6) Colorado Connecticut Florida Georgia Kentucky Louisiana Maryland Massachusetts(7) Michigan(7) Minnesota(7) Missouri New Jersey New York(6) North Carolina Ohio(7) Oregon Pennsylvania Tennessee Virginia INSURANCE FUNDS Franklin Templeton Variable Insurance Products Trust(8) (1.) The fund is closed to new investors. Existing shareholders and select retirement plans can continue adding to their accounts. (2.) The fund is a continuously offered, closed-end fund. Shares may be purchased daily; there is no daily redemption. However, each quarter, pending board approval, the fund will authorize the repurchase of 5%-25% of the outstanding number of shares. Investors may tender all or a portion of their shares during the tender period. (3.) An investment in the fund is neither insured nor guaranteed by the U.S. government or by any other entity or institution. (4.) For investors subject to the alternative minimum tax, a small portion of fund dividends may be taxable. Distributions of capital gains are generally taxable. (5.) The fund invests primarily in insured municipal securities. (6.) These funds are available in four or more variations, including long-term portfolios, intermediate-term portfolios, portfolios of insured securities, a high-yield portfolio (CA only) and money market portfolios. (7.) The Board of Trustees approved the elimination of the non-fundamental policy requiring the fund to invest at least 80% of net assets in insured municipal securities and the removal of the word "Insured" from the fund name. The changes became effective 2/17/09. (8.) The funds of the Franklin Templeton Variable Insurance Products Trust are generally available only through insurance company variable contracts. 04/09 Not part of the semiannual report (FRANKLIN TEMPLETON INVESTMENTS(R) LOGO) One Franklin Parkway San Mateo, CA 94403-1906 SIGN UP FOR EDELIVERY Log onto franklintempleton.com and click "My Profile" SEMIANNUAL REPORT AND SHAREHOLDER LETTER FRANKLIN TEMPLETON FUND ALLOCATOR SERIES INVESTMENT MANAGER Franklin Advisers, Inc. DISTRIBUTOR Franklin Templeton Distributors, Inc. (800) DIAL BEN(R) franklintempleton.com SHAREHOLDER SERVICES (800) 632-2301 Authorized for distribution only when accompanied or preceded by a prospectus. Investors should carefully consider a fund's investment goals, risks, charges and expenses before investing. The prospectus contains this and other information; please read it carefully before investing. To ensure the highest quality of service, telephone calls to or from our service departments may be monitored, recorded and accessed. These calls can be identified by the presence of a regular beeping tone. FAS2 S2009 08/09 JUNE 30, 2009 SEMIANNUAL REPORT AND SHAREHOLDER LETTER Franklin Templeton 2015 Retirement Target Fund Franklin Templeton 2025 Retirement Target Fund Franklin Templeton 2035 Retirement Target Fund Franklin Templeton 2045 Retirement Target Fund SIGN UP FOR EDELIVERY Log onto franklintempleton.com and click "My Profile" (GRAPHIC) ASSET ALLOCATION FRANKLIN TEMPLETON FUND ALLOCATOR SERIES (FRANKLIN TEMPLETON INVESTMENTS(R) LOGO) FRANKLIN - TEMPLETON - MUTUAL SERIES Franklin Templeton Investments GAIN FROM OUR PERSPECTIVE(R) Franklin Templeton's distinct multi-manager structure combines the specialized expertise of three world-class investment management groups-- Franklin, Templeton and Mutual Series. SPECIALIZED EXPERTISE Each of our portfolio management groups operates autonomously, relying on its own research and staying true to the unique investment disciplines that underlie its success. FRANKLIN. Founded in 1947, Franklin is a recognized leader in fixed income investing and also brings expertise in growth- and value-style U.S. equity investing. TEMPLETON. Founded in 1940, Templeton pioneered international investing and, in 1954, launched what has become the industry's oldest global fund. Today, with offices in over 25 countries, Templeton offers investors a truly global perspective. MUTUAL SERIES. Founded in 1949, Mutual Series is dedicated to a unique style of value investing, searching aggressively for opportunity among what it believes are undervalued stocks, as well as arbitrage situations and distressed securities. TRUE DIVERSIFICATION Because our management groups work independently and adhere to different investment approaches, Franklin, Templeton and Mutual Series funds typically have distinct portfolios. That's why our funds can be used to build truly diversified allocation plans covering every major asset class. RELIABILITY YOU CAN TRUST At Franklin Templeton Investments, we seek to consistently provide investors with exceptional risk-adjusted returns over the long term, as well as the reliable, accurate and personal service that has helped us become one of the most trusted names in financial services.
MUTUAL FUNDS | RETIREMENT PLANS | 529 COLLEGE SAVINGS PLANS | SEPARATE ACCOUNTS (GRAPHIC) Not part of the semiannual report Contents SHAREHOLDER LETTER ........................................................ 1 SEMIANNUAL REPORT Economic and Market Overview .............................................. 3 Franklin Templeton 2015 Retirement Target Fund ............................ 5 Franklin Templeton 2025 Retirement Target Fund ............................ 13 Franklin Templeton 2035 Retirement Target Fund ............................ 21 Franklin Templeton 2045 Retirement Target Fund ............................ 29 Financial Highlights and Statements of Investments ........................ 37 Financial Statements ...................................................... 57 Notes to Financial Statements ............................................. 62 Shareholder Information ................................................... 72
Shareholder Letter Dear Shareholder: The six months ended June 30, 2009, offered some relief from the financial shocks of 2008. The U.S. economy, while still in a downturn, became marginally "less worse" as the recession seemed to loosen its grip. The federal stimulus package and interventions by the Federal Reserve appeared to gain some traction, and household spending began to stabilize. Many investors reentered the stock market, which started a rally in March that brought the major indexes off this cycle's lows. U.S. Treasury yields rose as investor risk aversion waned. Amid recent events, we think it is important to put short-term market developments in perspective. Keep in mind that we have navigated through past periods of high market volatility by remaining committed to our long-term perspective and disciplined investment philosophy. During such times, we search for bargains that we believe may be well positioned to become eventual winners. Although conditions remain challenging, our experience gives us ample reason to be optimistic about future market stabilization and recovery. In the enclosed semiannual report for Franklin Templeton Retirement Target Funds, the portfolio manager discusses investment management decisions and Fund performance during the period under review. You will also find performance data and financial information. Please remember that all securities markets fluctuate, as do mutual fund share prices. If you would like more frequent updates, franklintempleton.com provides daily prices, monthly performance figures, portfolio holdings and other information. You can also access your account, buy and sell shares, read timely articles, and find helpful financial planning tools. We hope you will take advantage of these online services. NOT FDIC INSURED | MAY LOSE VALUE | NO BANK GUARANTEE Not part of the semiannual report | 1 Although market conditions are constantly changing, we remain committed to our disciplined strategy as we manage the Funds. As always, we recommend investors consult their financial advisors and review their portfolios to design a long-term strategy and portfolio allocation that meet their individual needs, goals and risk tolerance. We firmly believe that most people benefit from professional advice, and that advice is invaluable as investors navigate changing market environments. We thank you for investing with Franklin Templeton, welcome your questions and remain focused on serving your investment needs. Sincerely, /s/ Charles B. Johnson Charles B. Johnson Chairman Franklin Templeton Fund Allocator Series THIS LETTER REFLECTS OUR ANALYSIS AND OPINIONS AS OF JUNE 30, 2009. 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. 2 | Not part of the semiannual report Semiannual Report Economic and Market Overview During the six-month period ended June 30, 2009, the U.S. economy and stock markets seemed to stabilize after signs appeared that the recession's severity had eased. Strains on the banking system and credit markets that surfaced in 2008 improved in 2009's first half with the help of federal aid and tighter regulations. Despite rising unemployment, near period-end home sales edged higher, the decline in manufacturing activity slowed and consumer confidence started to pick up. Economic growth as measured by gross domestic product (GDP) fell at annualized rates of 6.4% and an estimated 1.0% in the first and second quarters of 2009. Although the price of oil rose from $44 per barrel at the beginning of the period to $70 by period-end on speculation that the downturn was abating, it was still off more than 50% from its July 2008 record high.(1) June's inflation rate, as measured by the Consumer Price Index, was an annualized -1.4%, representing the steepest yearly decline in the cost of living in nearly six decades.(2) Core inflation, which excludes food and energy costs, rose at a 1.7% annualized rate, which was within the Federal Reserve Board's (Fed's) informal target range of 1.5%-2.0%.(2) A deepening recession and decelerating inflation prompted Washington policymakers to keep interest rates low and enact stimulus plans -- including income tax cuts, aid to ailing state governments and funding for transportation infrastructure, school construction and high-tech projects. During the period under review, the Fed kept the federal funds target rate in a range of 0% to 0.25% and said the "pace of economic contraction is slowing" but the financial system had not yet returned to normal. Most U.S. stocks suffered major losses through early March as investors worried about an uncertain future. Stocks then recovered somewhat from 12-year lows as investors perceived many bargains among the bear market fallout and data indicated the economy's pace of contraction was moderating. By June, however, fresh investor concerns about the economy and stock valuations reemerged and dampened the rally's momentum. For the six months under review, the blue chip stocks of the Dow Jones Industrial Average had a total return of -2.01%, while the broader Standard & Poor's 500 Index (S&P 500) (1.) Source: New York Mercantile Exchange. (2.) Source: Bureau of Labor Statistics. Semiannual Report | 3 posted a +3.16% total return and the technology-heavy NASDAQ Composite Index returned +16.99%.(3) Global equities followed the same trend. At the beginning of the period, with investor sentiment depressed and risk aversion elevated, defensive, non-cyclical sectors like utilities, consumer staples and health care were market leaders. As data emerged suggesting a fledgling recovery in the financials sector and a moderating pace of global economic contraction, investors regained some risk appetite, rotating capital back into cyclical sectors such as financials, materials and consumer discretionary. Resurgent risk appetite also buoyed emerging markets stocks, which delivered their best three-month returns on record from March through May 2009. Emerging market optimism in turn supported higher commodity prices, which gained the most since the bubble in hard assets burst in the summer of 2008. Also supporting commodity prices was a weaker U.S. dollar. Although systemic risk aversion and the consensus belief that the U.S. could lead the global economy out of recession helped strengthen the dollar at the beginning of the period, investors soon began to worry about the currency's ongoing stability in the face of aggressive and unconventional monetary policy, and the greenback lost value relative to most currencies for the six-month period. In the reporting period's final weeks, global equity markets moderated as investors appeared to contemplate the rally's merits and reassess their new positions. Although sentiment had improved and most seemed to believe the global economy had exited the worst stage of this recessionary cycle, indicators remained mixed and lacked the sustainable upward trajectory investors had hoped for. In Europe, policymakers committed to an easier monetary regime, but the eurozone's industrial production declined, capacity utilization continued to shrink, and price deflation was recorded for the first time since data began in 1997.(4) In China, a stimulative monetary campaign spurred lending and fueled an annualized money growth rate of 26%, a powerful measure against near-term economic headwinds but a potentially dangerous catalyst for longer-term inflation and asset bubble formation.(5) THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS AND OPINIONS AS OF JUNE 30, 2009. 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. (3.) Source: (C) 2009 Morningstar. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (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. Past performance is no guarantee of future results. The Dow Jones Industrial Average is price weighted based on the average market price of 30 blue chip stocks of companies that are generally industry leaders. The S&P 500 consists of 500 stocks chosen for market size, liquidity and industry group representation. Each stock's weight in the index is proportionate to its market value. The S&P 500 is one of the most widely used benchmarks of U.S. equity performance. The NASDAQ Composite Index measures all NASDAQ domestic and international based common type stocks listed on The NASDAQ Stock Market. The index is market value weighted and includes more than 3,000 companies. (4.) Source: European Communities Eurostat. (5.) Source: People's Bank of China. 4 | Semiannual Report Franklin Templeton 2015 Retirement Target Fund YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin Templeton 2015 Retirement Target Fund seeks the highest level of long-term total return, which consists of capital appreciation and income, consistent with the Fund's asset allocation. The Fund allocates among the broad asset classes of equity, fixed income and short-term (money market) investments by investing in a distinctly weighted combination of Franklin Templeton mutual funds (underlying funds), within an increasing emphasis on income as the target date of 2015 approaches. ASSET ALLOCATION* Franklin Templeton 2015 Retirement Target Fund Based on Total Net Assets as of 6/30/09 (PIE CHART) Domestic Equity ........... 44.9% Foreign Equity ............ 21.1% Domestic Fixed Income ..... 16.4% Foreign Fixed Income ...... 9.8% Short-Term Investments & Other Net Assets ....... 7.8%
* The asset allocation is based on the Statement of Investments (SOI), which classifies each underlying fund into a broad asset class. 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. PLEASE VISIT franklintempleton.com OR CALL (800) 342-5236 FOR MOST RECENT MONTH-END PERFORMANCE. We are pleased to bring you Franklin Templeton 2015 Retirement Target Fund's semiannual report for the period ended June 30, 2009. PERFORMANCE OVERVIEW Franklin Templeton 2015 Retirement Target Fund - Class A delivered a +9.75% cumulative total return for the six months ended June 30, 2009. By comparison the Fund's benchmarks, the Standard & Poor's 500 Index (S&P 500) and Morgan Stanley Capital International (MSCI) Europe, Australasia, Far East (EAFE) Index for equities, the Barclays Capital (BC) U.S. Aggregate THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND NAMES OF ALL PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S SOI, WHICH BEGINS ON PAGE 41. Semiannual Report | 5 TOP 10 FUND HOLDINGS Franklin Templeton 2015 Retirement Target Fund 6/30/09
% OF TOTAL NET ASSETS ---------- Franklin Flex Cap Growth Fund - - Advisor Class 16.5% Mutual Shares Fund - - Class Z 13.2% Templeton Global Bond Fund - - Advisor Class 9.1% Franklin U.S. Government Securities Fund - - Advisor Class 9.0% Franklin Total Return Fund - - Advisor Class 7.4% Mutual European Fund - - Class Z 7.4% Franklin Growth Opportunities Fund - - Advisor Class 6.5% Templeton Foreign Fund - - Advisor Class 4.6% Templeton China World Fund - - Advisor Class 4.1% Franklin Gold and Precious Metals Fund - - Advisor Class 3.9%
Index for fixed income, and the Payden & Rygel (P&R) 90 Day U.S. T-Bill Index for short-term investments and other net assets, posted total returns of +3.16%, +8.42%, +1.90% and +0.08%, respectively, during the same time.(1) You can find other performance data in the Performance Summary beginning on page 8. INVESTMENT STRATEGY When selecting equity funds, we consider the underlying funds' foreign and domestic exposure, market capitalization ranges, and investment style (growth vs. value). When selecting fixed income funds, our primary focus is on maximizing income appropriate to the Fund's risk profile. In evaluating the risk level of the underlying funds, we analyze such factors as: (a) relative and absolute performance, including correlations with other underlying funds as well as corresponding benchmarks, and (b) their volatility (the variability of returns from one period to the next). We attempt to invest the assets of each target fund in the same underlying funds and will vary the underlying funds' allocation percentages based upon each fund's risk/return level. We change the Fund's target asset allocation gradually over time, and it becomes increasingly conservative as the stated target date draws near. MANAGER'S DISCUSSION The Fund's performance can be attributed largely to its allocation among equities, fixed income securities, and short-term investments and other net assets, and by the actual performance of the selected underlying funds. This allocation shifts every year, in accordance with the retirement date associated with the portfolio. (1.) Source: (C) 2009 Morningstar. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (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 S&P 500 consists of 500 stocks chosen for market size, liquidity and industry group representation. Each stock's weight in the index is proportionate to its market value. The S&P 500 is one of the most widely used benchmarks of U.S. equity performance. The MSCI EAFE Index is a free float-adjusted, market capitalization-weighted index designed to measure equity market performance in global developed markets excluding the U.S. and Canada. The BC U.S. Aggregate Index is a market-capitalization weighted index representing the U.S. investment-grade, fixed-rate, taxable bond market with index components for government and corporate, mortgage pass-through and asset-backed securities. All issues included are SEC registered, taxable, dollar denominated and non-convertible, must have at least one year to final maturity and must be rated investment grade (Baa3/BBB-/BBB- or higher) by Moody's, Standard & Poor's or Fitch, respectively. The P&R 90 Day U.S. T-Bill Index is a total return index based on a constant maturity instrument. Payden & Rygel includes both accrued interest and change in market price in its monthly total return calculations. The value of Treasuries, if held to maturity, is fixed; principal is guaranteed and interest is fixed. The indexes are unmanaged and include reinvestment of any income or distributions. One cannot invest directly in an index, nor is an index representative of the Fund's portfolio. 6 | Semiannual Report At period-end, Franklin Templeton 2015 Retirement Target Fund's domestic equity exposure was 68.0% of its total equity weighting, and foreign equity made up the balance. The portfolio was diversified across capitalization sizes and investment styles, and on June 30, 2009, we held shares in large-, mid- and small-capitalization equity funds, representing both growth and value styles. Franklin Flex Cap Growth Fund - Advisor Class, at 16.5% of the Fund's total net assets, was our largest equity fund weighting at period-end. On the fixed income side, domestic exposure was 62.7% of the Fund's total fixed income weighting, with the balance in foreign fixed income. Templeton Global Bond Fund - Advisor Class was our largest fixed income fund weighting at 9.1% of total net assets. Our largest domestic growth fund holding, Franklin Flex Cap Growth Fund - Advisor Class, and our largest domestic value fund holding, Mutual Shares Fund - Class Z, outperformed the S&P 500. Our largest foreign equity holding, Mutual European Fund - Class Z, underperformed the MSCI EAFE Index. On the fixed income side, Templeton Global Bond Fund - Advisor Class, Franklin U.S. Government Securities Fund - Advisor Class, and Franklin Total Return Fund - Advisor Class each outperformed the BC U.S. Aggregate Index. Thank you for your continued participation in Franklin Templeton 2015 Retirement Target Fund. We look forward to serving your future investment needs. (PHOTO OF T. ANTHONY COFFEY,CFA) /s/ T. Anthony Coffey T. Anthony Coffey, CFA Portfolio Manager Franklin Templeton 2015 Retirement Target Fund THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS AS OF JUNE 30, 2009, 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. Semiannual Report | 7 Performance Summary as of 6/30/09 FRANKLIN TEMPLETON 2015 RETIREMENT TARGET FUND 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. The performance table does 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. PRICE AND DISTRIBUTION INFORMATION
CLASS A (SYMBOL: FTRAX) CHANGE 6/30/09 12/31/08 - ----------------------- ------ ------- -------- Net Asset Value (NAV) +$0.66 $8.80 $8.14 DISTRIBUTIONS (1/1/09-6/30/09) Dividend Income $0.0733 Long-Term Capital Gain $0.0528 TOTAL $0.1261
CLASS C (SYMBOL: N/A) CHANGE 6/30/09 12/31/08 - ----------------------- ------ ------- -------- Net Asset Value (NAV) +$0.66 $8.74 $8.08 DISTRIBUTIONS (1/1/09-6/30/09) Dividend Income $0.0442 Long-Term Capital Gain $0.0528 TOTAL $0.0970
CLASS R (SYMBOL: N/A) CHANGE 6/30/09 12/31/08 - ----------------------- ------ ------- -------- Net Asset Value (NAV) +$0.66 $8.78 $8.12 DISTRIBUTIONS (1/1/09-6/30/09) Dividend Income $0.0654 Long-Term Capital Gain $0.0528 TOTAL $0.1182
ADVISOR CLASS (SYMBOL: N/A) CHANGE 6/30/09 12/31/08 - ----------------------- ------ ------- -------- Net Asset Value (NAV) +$0.67 $8.82 $8.15 DISTRIBUTIONS (1/1/09-6/30/09) Dividend Income $0.0850 Long-Term Capital Gain $0.0528 TOTAL $0.1378
8 | Semiannual Report Performance Summary (CONTINUED) PERFORMANCE(1) CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETURN AND VALUE OF $10,000 INVESTMENT INCLUDE MAXIMUM SALES CHARGES. CLASS A: 5.75% MAXIMUM INITIAL SALES CHARGE; CLASS C: 1% CONTINGENT DEFERRED SALES CHARGE IN FIRST YEAR ONLY; CLASS R/ADVISOR CLASS: NO SALES CHARGES.
CLASS A 6-MONTH 1-YEAR INCEPTION (8/1/06) - ------- ------- ------- ------------------ Cumulative Total Return(2) +9.75% -12.51% -2.55% Average Annual Total Return(3) +3.40% -17.51% -2.88% Value of $10,000 Investment(4) $10,340 $ 8,249 $9,185 Total Annual Operating Expenses(5) Without Waiver 2.14% With Waiver 1.21%
CLASS C 6-MONTH 1-YEAR INCEPTION (8/1/06) - ------- ------- ------- ------------------ Cumulative Total Return(2) +9.44% -13.13% -4.50% Average Annual Total Return(3) +8.44% -13.98% -1.57% Value of $10,000 Investment(4) $10,844 $ 8,602 $9,550 Total Annual Operating Expenses(5) Without Waiver 2.84% With Waiver 1.91%
CLASS R 6-MONTH 1-YEAR INCEPTION (8/1/06) - ------- ------- ------- ------------------ Cumulative Total Return(2) +9.67% -12.72% -3.14% Average Annual Total Return(3) +9.67% -12.72% -1.09% Value of $10,000 Investment(4) $10,967 $ 8,728 $9,686 Total Annual Operating Expenses(5) Without Waiver 2.34% With Waiver 1.41%
ADVISOR CLASS 6-MONTH 1-YEAR INCEPTION (8/1/06) - ------------- ------- ------- ------------------ Cumulative Total Return(2) +10.01% -12.23% -1.62% Average Annual Total Return(3) +10.01% -12.23% -0.56% Value of $10,000 Investment(4) $11,001 $ 8,777 $9,838 Total Annual Operating Expenses(5) Without Waiver 1.84% With Waiver 0.91%
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, SEE "FUNDS AND PERFORMANCE" AT franklintempleton.com OR CALL (800) 342-5236. THE INVESTMENT MANAGER HAS CONTRACTUALLY AGREED TO WAIVE OR LIMIT ITS FEES AND TO ASSUME AS ITS OWN EXPENSE CERTAIN EXPENSES OTHERWISE PAYABLE BY THE FUND SO THAT COMMON EXPENSES (I.E., A COMBINATION OF ASSET ALLOCATION FEES AND OTHER EXPENSES, BUT EXCLUDING RULE 12B-1 FEES AND ACQUIRED FUND FEES AND EXPENSES) FOR EACH CLASS OF THE FUND DO NOT EXCEED 0.15% (OTHER THAN CERTAIN NON-ROUTINE EXPENSES OR COSTS, INCLUDING THOSE RELATING TO LITIGATION, INDEMNIFICATION, REORGANIZATIONS AND LIQUIDATIONS) UNTIL 4/30/10. Semiannual Report | 9 Performance Summary (CONTINUED) ENDNOTES WHILE AN ASSET ALLOCATION PLAN CAN BE A VALUABLE TOOL TO HELP REDUCE OVERALL VOLATILITY, ALL INVESTMENTS INVOLVE SOME DEGREE OF RISK. GENERALLY, INVESTORS SHOULD BE COMFORTABLE WITH FLUCTUATION IN THE VALUE OF THEIR INVESTMENTS, ESPECIALLY OVER THE SHORT TERM. STOCKS HAVE HISTORICALLY OUTPERFORMED OTHER ASSET CLASSES OVER THE LONG TERM, BUT THEY TEND TO FLUCTUATE MORE DRAMATICALLY OVER THE SHORTER TERM. BOND PRICES GENERALLY MOVE IN THE OPPOSITE DIRECTION OF INTEREST RATES. THUS, AS PRICES OF BONDS IN THE FUND ADJUST TO A RISE IN INTEREST RATES, THE FUND'S SHARE PRICE MAY DECLINE. BECAUSE THE FUND INVESTS IN UNDERLYING FUNDS, WHICH MAY ENGAGE IN A VARIETY OF INVESTMENT STRATEGIES INVOLVING CERTAIN RISKS, THE FUND MAY BE SUBJECT TO THOSE SAME RISKS. THE FUND'S PROSPECTUS ALSO INCLUDES A DESCRIPTION OF THE MAIN INVESTMENT RISKS. CLASS C: These shares have higher annual fees and expenses than Class A shares. CLASS R: Shares are available to certain eligible investors as described in the prospectus. These shares have higher annual fees and expenses than Class A shares. ADVISOR CLASS: Shares are available to certain eligible investors as described in the prospectus. (1.) If the manager had not waived fees, the Fund's total returns would have been lower. (2.) Cumulative total return represents the change in value of an investment over the periods indicated. (3.) Average annual total return represents the average annual change in value of an investment over the periods indicated. Six-month return has not been annualized. (4.) These figures represent the value of a hypothetical $10,000 investment in the Fund over the periods indicated. (5.) Figures are as stated in the Fund's prospectus current as of the date of this report. In periods of market volatility, assets may decline significantly, causing total annual Fund operating expenses to become higher than the figures shown. 10 | Semiannual Report Your Fund's Expenses FRANKLIN TEMPLETON 2015 RETIREMENT TARGET FUND As a Fund shareholder, you can incur two types of costs: - - Transaction costs, including sales charges (loads) on Fund purchases; and - - Ongoing Fund costs, including management fees, distribution and service (12b-1) fees, and other Fund expenses. All mutual funds have ongoing costs, sometimes referred to as operating expenses. The following table shows ongoing costs of investing in the Fund and can help you understand these costs and compare them with those of other mutual funds. The table assumes a $1,000 investment held for the six months indicated. ACTUAL FUND EXPENSES The first line (Actual) for each share class listed in the table provides actual account values and expenses. The "Ending Account Value" is derived from the Fund's actual return, which includes the effect of Fund expenses. You can estimate the expenses you paid during the period by following these steps. OF COURSE, YOUR ACCOUNT VALUE AND EXPENSES WILL DIFFER FROM THOSE IN THIS ILLUSTRATION: 1. Divide your account value by $1,000. IF AN ACCOUNT HAD AN $8,600 VALUE, THEN $8,600 / $1,000 = 8.6. 2. Multiply the result by the number under the heading "Expenses Paid During Period." IF EXPENSES PAID DURING PERIOD WERE $7.50, THEN 8.6 X $7.50 = $64.50. In this illustration, the estimated expenses paid this period are $64.50. HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS Information in the second line (Hypothetical) for each class in the table can help you compare ongoing costs of investing in the Fund with those of other mutual funds. This information may not be used to estimate the actual ending account balance or expenses you paid during the period. The hypothetical "Ending Account Value" is based on the actual expense ratio for each class and an assumed 5% annual rate of return before expenses, which does not represent the Fund's actual return. The figure under the heading "Expenses Paid During Period" shows the hypothetical expenses your account would have incurred under this scenario. You can compare this figure with the 5% hypothetical examples that appear in shareholder reports of other funds. Semiannual Report | 11 Your Fund's Expenses (CONTINUED) PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES. Therefore, the second line for each class is useful in comparing ongoing costs only, and will not help you compare total costs of owning different funds. In addition, if transaction costs were included, your total costs would have been higher. Please refer to the Fund prospectus for additional information on operating expenses.
BEGINNING ENDING EXPENSES PAID EXPENSES PAID ACCOUNT VALUE ACCOUNT VALUE DURING PERIOD* DURING PERIOD** 1/1/09 6/30/09 1/1/09-6/30/09 1/1/09-6/30/09 ------------- ------------- -------------- --------------- CLASS A Actual $1,000 $1,097.50 $2.44 $ 6.60 Hypothetical (5% return before expenses) $1,000 $1,022.46 $2.36 $ 6.36 CLASS C Actual $1,000 $1,094.40 $6.13 $10.28 Hypothetical (5% return before expenses) $1,000 $1,018.94 $5.91 $ 9.89 CLASS R Actual $1,000 $1,096.70 $3.48 $ 7.64 Hypothetical (5% return before expenses) $1,000 $1,021.47 $3.36 $ 7.35 ADVISOR CLASS Actual $1,000 $1,100.10 $0.89 $ 5.05 Hypothetical (5% return before expenses) $1,000 $1,023.95 $0.85 $ 4.86
* Expenses are calculated using the most recent six-month expense ratio excluding expenses of the underlying funds, net of expense waivers, annualized for each class (A: 0.47%; C: 1.18%; R: 0.67%; and Advisor: 0.17%), multiplied by the average account value over the period, multiplied by 181/365 to reflect the one-half year period. A portion of the Fund's expenses have been paid by the underlying funds in which the Fund invests. ** Expenses are calculated using the most recent six-month expense ratio including expenses of the underlying funds, net of expense waivers, annualized for each class (A: 1.27%; C: 1.98%; R: 1.47%; and Advisor: 0.97%), multiplied by the average account value over the period, multiplied by 181/365 to reflect the one-half year period. A portion of the Fund's expenses have been paid by the underlying funds in which the Fund invests. 12 | Semiannual Report Franklin Templeton 2025 Retirement Target Fund YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin Templeton 2025 Retirement Target Fund seeks the highest level of long-term total return, which consists of capital appreciation and income, consistent with the Fund's asset allocation. The Fund allocates among the broad asset classes of equity, fixed income and short-term (money market) investments by investing in a distinctly weighted combination of Franklin Templeton mutual funds (underlying funds), within an increasing emphasis on income as the target date of 2025 approaches. ASSET ALLOCATION* Franklin Templeton 2025 Retirement Target Fund Based on Total Net Assets as of 6/30/09 Domestic Equity............................. 53.1% Foreign Equity.............................. 24.3% Domestic Fixed Income....................... 9.8% Foreign Fixed Income........................ 5.9% Short-Term Investments & Other Net Assets... 6.9%
* The asset allocation is based on the Statement of Investments (SOI), which classifies each underlying fund into a broad asset class. 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. PLEASE VISIT franklintempleton.com OR CALL (800) 342-5236 FOR MOST RECENT MONTH-END PERFORMANCE. We are pleased to bring you Franklin Templeton 2025 Retirement Target Fund's semiannual report for the period ended June 30, 2009. PERFORMANCE OVERVIEW Franklin Templeton 2025 Retirement Target Fund - Class A delivered a +9.84% cumulative total return for the six months ended June 30, 2009. By comparison the Fund's benchmarks, the Standard & Poor's 500 Index (S&P 500) and Morgan Stanley Capital International (MSCI) Europe, Australasia, Far East (EAFE) Index for equities, the Barclays Capital (BC) THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND NAMES OF ALL PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S SOI, WHICH BEGINS ON PAGE 46. Semiannual Report | 13 TOP 10 FUND HOLDINGS Franklin Templeton 2025 Retirement Target Fund 6/30/09
% OF TOTAL NET ASSETS ---------- Franklin Flex Cap Growth Fund - - Advisor Class 19.4% Mutual Shares Fund - - Class Z 15.7% Mutual European Fund - - Class Z 8.8% Franklin Growth Opportunities Fund - - Advisor Class 7.8% Templeton Global Bond Fund - - Advisor Class 5.5% Franklin U.S. Government Securities Fund - - Advisor Class 5.3% Templeton Foreign Fund - - Advisor Class 5.0% Templeton China World Fund - - Advisor Class 4.7% Franklin Total Return Fund - - Advisor Class 4.5% Franklin Gold and Precious Metals Fund - - Advisor Class 4.4%
U.S. Aggregate Index for fixed income, and the Payden & Rygel (P&R) 90 Day U.S. T-Bill Index for short-term investments and other net assets, posted total returns of +3.16%, +8.42%, +1.90% and +0.08%, respectively, during the same time.(1) You can find other performance data in the Performance Summary beginning on page 16. INVESTMENT STRATEGY When selecting equity funds, we consider the underlying funds' foreign and domestic exposure, market capitalization ranges, and investment style (growth vs. value). When selecting fixed income funds, our primary focus is on maximizing income appropriate to the Fund's risk profile. In evaluating the risk level of the underlying funds, we analyze such factors as: (a) relative and absolute performance, including correlations with other underlying funds as well as corresponding benchmarks, and (b) their volatility (the variability of returns from one period to the next). We attempt to invest the assets of each target fund in the same underlying funds and will vary the underlying funds' allocation percentages based upon each fund's risk/return level. We change the Fund's target asset allocation gradually over time, and it becomes increasingly conservative as the stated target date draws near. MANAGER'S DISCUSSION The Fund's performance can be attributed largely to its allocation among equities, fixed income securities, and short-term investments and other net assets, and by the actual performance of the selected underlying funds. This allocation shifts every year, in accordance with the retirement date associated with the portfolio. (1.) Source: (C) 2009 Morningstar. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (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 S&P 500 consists of 500 stocks chosen for market size, liquidity and industry group representation. Each stock's weight in the index is proportionate to its market value. The S&P 500 is one of the most widely used benchmarks of U.S. equity performance. The MSCI EAFE Index is a free float-adjusted, market capitalization-weighted index designed to measure equity market performance in global developed markets excluding the U.S. and Canada. The BC U.S. Aggregate Index is a market-capitalization weighted index representing the U.S. investment-grade, fixed-rate, taxable bond market with index components for government and corporate, mortgage pass-through and asset-backed securities. All issues included are SEC registered, taxable, dollar denominated and non-convertible, must have at least one year to final maturity and must be rated investment grade (Baa3/BBB-/BBB- or higher) by Moody's, Standard & Poor's or Fitch, respectively. The P&R 90 Day U.S. T-Bill Index is a total return index based on a constant maturity instrument. Payden & Rygel includes both accrued interest and change in market price in its monthly total return calculations. The value of Treasuries, if held to maturity, is fixed; principal is guaranteed and interest is fixed. The indexes are unmanaged and include reinvestment of any income or distributions. One cannot invest directly in an index, nor is an index representative of the Fund's portfolio. 14 | Semiannual Report At period-end, Franklin Templeton 2025 Retirement Target Fund's domestic equity exposure was 68.6% of its total equity weighting, and foreign equity made up the balance. The portfolio was diversified across capitalization sizes and investment styles, and on June 30, 2009, we held shares in large-, mid- and small-capitalization equity funds, representing both growth and value styles. Franklin Flex Cap Growth Fund - Advisor Class, at 19.4% of the Fund's total net assets, was our largest equity fund weighting at period-end. On the fixed income side, domestic exposure was 62.6% of the Fund's total fixed income weighting, with the balance in foreign fixed income. Templeton Global Bond Fund - Advisor Class was our largest fixed income fund weighting at 5.5% of total net assets. Our largest domestic growth fund holding, Franklin Flex Cap Growth Fund - Advisor Class, and our largest domestic value fund holding, Mutual Shares Fund - Class Z, outperformed the S&P 500. Our largest foreign equity holding, Mutual European Fund - Class Z, underperformed the MSCI EAFE Index. On the fixed income side, Templeton Global Bond Fund - Advisor Class and Franklin U.S. Government Securities Fund - Advisor Class outperformed the BC U.S. Aggregate Index. Thank you for your continued participation in Franklin Templeton 2025 Retirement Target Fund. We look forward to serving your future investment needs. (PHOTO OF T. ANTHONY COFFEY) /s/ T. Anthony Coffey T. Anthony Coffey, CFA Portfolio Manager Franklin Templeton 2025 Retirement Target Fund THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS AS OF JUNE 30, 2009, 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. Semiannual Report | 15 Performance Summary as of 6/30/09 FRANKLIN TEMPLETON 2025 RETIREMENT TARGET FUND 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. The performance table does 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. PRICE AND DISTRIBUTION INFORMATION
CLASS A (SYMBOL: FTRTX) CHANGE 6/30/09 12/31/08 - ----------------------- ------ ------- -------- Net Asset Value (NAV) +$0.62 $8.09 $7.47 DISTRIBUTIONS (1/1/09-6/30/09) Dividend Income $0.0130 Long-Term Capital Gain $0.1001 TOTAL $0.1131
CLASS C (SYMBOL: N/A) CHANGE 6/30/09 12/31/08 - --------------------- ------ ------- -------- Net Asset Value (NAV) +$0.58 $8.01 $7.43 DISTRIBUTIONS (1/1/09-6/30/09) Dividend Income $0.0130 Long-Term Capital Gain $0.1001 TOTAL $0.1131
CLASS R (SYMBOL: N/A) CHANGE 6/30/09 12/31/08 - --------------------- ------ ------- -------- Net Asset Value (NAV) +$0.61 $8.08 $7.47 DISTRIBUTIONS (1/1/09-6/30/09) Dividend Income $0.0130 Long-Term Capital Gain $0.1001 TOTAL $0.1131
ADVISOR CLASS (SYMBOL: N/A) CHANGE 6/30/09 12/31/08 - --------------------------- ------ ------- -------- Net Asset Value (NAV) +$0.62 $8.10 $7.48 DISTRIBUTIONS (1/1/09-6/30/09) Dividend Income $0.0130 Long-Term Capital Gain $0.1001 TOTAL $0.1131
16 | Semiannual Report Performance Summary (CONTINUED) PERFORMANCE(1) CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETURN AND VALUE OF $10,000 INVESTMENT INCLUDE MAXIMUM SALES CHARGES. CLASS A: 5.75% MAXIMUM INITIAL SALES CHARGE; CLASS C: 1% CONTINGENT DEFERRED SALES CHARGE IN FIRST YEAR ONLY; CLASS R/ADVISOR CLASS: NO SALES CHARGES.
CLASS A 6-MONTH 1-YEAR INCEPTION (8/1/06) - ------- ------- ------- ------------------ Cumulative Total Return(2) +9.84% -18.10% -9.61% Average Annual Total Return(3) +3.47% -22.79% -5.35% Value of $10,000 Investment(4) $10,347 $ 7,721 $ 8,519 Total Annual Operating Expenses(5) Without Waiver 2.32% With Waiver 1.26%
CLASS C 6-MONTH 1-YEAR INCEPTION (8/1/06) - ------- ------- ------- ------------------ Cumulative Total Return(2) +9.35% -18.69% -11.36% Average Annual Total Return(3) +8.35% -19.48% -4.05% Value of $10,000 Investment(4) $10,835 $ 8,052 $ 8,864 Total Annual Operating Expenses(5) Without Waiver 3.02% With Waiver 1.96%
CLASS R 6-MONTH 1-YEAR INCEPTION (8/1/06) - ------- ------- ------- ------------------ Cumulative Total Return(2) +9.71% -18.28% -10.08% Average Annual Total Return(3) +9.71% -18.28% -3.58% Value of $10,000 Investment(4) $10,971 $ 8,172 $ 8,992 Total Annual Operating Expenses(5) Without Waiver 2.52% With Waiver 1.46%
ADVISOR CLASS 6-MONTH 1-YEAR INCEPTION (8/1/06) - ------------- ------- ------- ------------------ Cumulative Total Return(2) +9.83% -17.93% -8.93% Average Annual Total Return(3) +9.83% -17.93% -3.16% Value of $10,000 Investment(4) $10,983 $ 8,207 $9,107 Total Annual Operating Expenses(5) Without Waiver 2.02% With Waiver 0.96%
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, SEE "FUNDS AND PERFORMANCE" AT franklintempleton.com OR CALL (800) 342-5236. THE INVESTMENT MANAGER HAS CONTRACTUALLY AGREED TO WAIVE OR LIMIT ITS FEES AND TO ASSUME AS ITS OWN EXPENSE CERTAIN EXPENSES OTHERWISE PAYABLE BY THE FUND SO THAT COMMON EXPENSES (I.E., A COMBINATION OF ASSET ALLOCATION FEES AND OTHER EXPENSES, BUT EXCLUDING RULE 12B-1 FEES AND ACQUIRED FUND FEES AND EXPENSES) FOR EACH CLASS OF THE FUND DO NOT EXCEED 0.15% (OTHER THAN CERTAIN NON-ROUTINE EXPENSES OR COSTS, INCLUDING THOSE RELATING TO LITIGATION, INDEMNIFICATION, REORGANIZATIONS AND LIQUIDATIONS) UNTIL 4/30/10. Semiannual Report | 17 Performance Summary (CONTINUED) ENDNOTES WHILE AN ASSET ALLOCATION PLAN CAN BE A VALUABLE TOOL TO HELP REDUCE OVERALL VOLATILITY, ALL INVESTMENTS INVOLVE SOME DEGREE OF RISK. GENERALLY, INVESTORS SHOULD BE COMFORTABLE WITH FLUCTUATION IN THE VALUE OF THEIR INVESTMENTS, ESPECIALLY OVER THE SHORT TERM. STOCKS HAVE HISTORICALLY OUTPERFORMED OTHER ASSET CLASSES OVER THE LONG TERM, BUT THEY TEND TO FLUCTUATE MORE DRAMATICALLY OVER THE SHORTER TERM. BOND PRICES GENERALLY MOVE IN THE OPPOSITE DIRECTION OF INTEREST RATES. THUS, AS PRICES OF BONDS IN THE FUND ADJUST TO A RISE IN INTEREST RATES, THE FUND'S SHARE PRICE MAY DECLINE. BECAUSE THE FUND INVESTS IN UNDERLYING FUNDS, WHICH MAY ENGAGE IN A VARIETY OF INVESTMENT STRATEGIES INVOLVING CERTAIN RISKS, THE FUND MAY BE SUBJECT TO THOSE SAME RISKS. THE FUND'S PROSPECTUS ALSO INCLUDES A DESCRIPTION OF THE MAIN INVESTMENT RISKS. CLASS C: These shares have higher annual fees and expenses than Class A shares. CLASS R: Shares are available to certain eligible investors as described in the prospectus. These shares have higher annual fees and expenses than Class A shares. ADVISOR CLASS: Shares are available to certain eligible investors as described in the prospectus. (1.) If the manager had not waived fees, the Fund's total returns would have been lower. (2.) Cumulative total return represents the change in value of an investment over the periods indicated. (3.) Average annual total return represents the average annual change in value of an investment over the periods indicated. Six-month return has not been annualized. (4.) These figures represent the value of a hypothetical $10,000 investment in the Fund over the periods indicated. (5.) Figures are as stated in the Fund's prospectus current as of the date of this report. In periods of market volatility, assets may decline significantly, causing total annual Fund operating expenses to become higher than the figures shown. 18 | Semiannual Report Your Fund's Expenses FRANKLIN TEMPLETON 2025 RETIREMENT TARGET FUND As a Fund shareholder, you can incur two types of costs: - - Transaction costs, including sales charges (loads) on Fund purchases; and - - Ongoing Fund costs, including management fees, distribution and service (12b-1) fees, and other Fund expenses. All mutual funds have ongoing costs, sometimes referred to as operating expenses. The following table shows ongoing costs of investing in the Fund and can help you understand these costs and compare them with those of other mutual funds. The table assumes a $1,000 investment held for the six months indicated. ACTUAL FUND EXPENSES The first line (Actual) for each share class listed in the table provides actual account values and expenses. The "Ending Account Value" is derived from the Fund's actual return, which includes the effect of Fund expenses. You can estimate the expenses you paid during the period by following these steps. OF COURSE, YOUR ACCOUNT VALUE AND EXPENSES WILL DIFFER FROM THOSE IN THIS ILLUSTRATION: 1. Divide your account value by $1,000. IF AN ACCOUNT HAD AN $8,600 VALUE, THEN $8,600 / $1,000 = 8.6. 2. Multiply the result by the number under the heading "Expenses Paid During Period." IF EXPENSES PAID DURING PERIOD WERE $7.50, THEN 8.6 X $7.50 = $64.50. In this illustration, the estimated expenses paid this period are $64.50. HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS Information in the second line (Hypothetical) for each class in the table can help you compare ongoing costs of investing in the Fund with those of other mutual funds. This information may not be used to estimate the actual ending account balance or expenses you paid during the period. The hypothetical "Ending Account Value" is based on the actual expense ratio for each class and an assumed 5% annual rate of return before expenses, which does not represent the Fund's actual return. The figure under the heading "Expenses Paid During Period" shows the hypothetical expenses your account would have incurred under this scenario. You can compare this figure with the 5% hypothetical examples that appear in shareholder reports of other funds. Semiannual Report | 19 Your Fund's Expenses (CONTINUED) PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES. Therefore, the second line for each class is useful in comparing ongoing costs only, and will not help you compare total costs of owning different funds. In addition, if transaction costs were included, your total costs would have been higher. Please refer to the Fund prospectus for additional information on operating expenses.
BEGINNING ENDING EXPENSES PAID EXPENSES PAID ACCOUNT VALUE ACCOUNT VALUE DURING PERIOD* DURING PERIOD** 1/1/09 6/30/09 1/1/09-6/30/09 1/1/09-6/30/09 ------------- ------------- -------------- --------------- CLASS A Actual $1,000 $1,098.40 $2.45 $ 6.87 Hypothetical (5% return before expenses) $1,000 $1,022.46 $2.36 $ 6.61 CLASS C Actual $1,000 $1,093.50 $6.07 $10.49 Hypothetical (5% return before expenses) $1,000 $1,018.99 $5.86 $10.09 CLASS R Actual $1,000 $1,097.10 $3.48 $ 7.90 Hypothetical (5% return before expenses) $1,000 $1,021.47 $3.36 $ 7.60 ADVISOR CLASS Actual $1,000 $1,098.30 $0.88 $ 5.31 Hypothetical (5% return before expenses) $1,000 $1,023.95 $0.85 $ 5.11
* Expenses are calculated using the most recent six-month expense ratio excluding expenses of the underlying funds, net of expense waivers, annualized for each class (A: 0.47%; C: 1.17%; R: 0.67%; and Advisor: 0.17%), multiplied by the average account value over the period, multiplied by 181/365 to reflect the one-half year period. A portion of the Fund's expenses have been paid by the underlying funds in which the Fund invests. ** Expenses are calculated using the most recent six-month expense ratio including expenses of the underlying funds, net of expense waivers, annualized for each class (A: 1.32%; C: 2.02%; R: 1.52%; and Advisor: 1.02%), multiplied by the average account value over the period, multiplied by 181/365 to reflect the one-half year period. A portion of the Fund's expenses have been paid by the underlying funds in which the Fund invests. 20 | Semiannual Report Franklin Templeton 2035 Retirement Target Fund YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin Templeton 2035 Retirement Target Fund seeks the highest level of long-term total return, which consists of capital appreciation and income, consistent with the Fund's asset allocation. The Fund allocates among the broad asset classes of equity, fixed income and short-term (money market) investments by investing in a distinctly weighted combination of Franklin Templeton mutual funds (underlying funds), within an increasing emphasis on income as the target date of 2035 approaches. ASSET ALLOCATION* Franklin Templeton 2035 Retirement Target Fund Based on Total Net Assets as of 6/30/09 (PIE CHART) Domestic Equity ........... 64.6% Foreign Equity ............ 29.3% Domestic Fixed Income ..... 3.0% Foreign Fixed Income ...... 1.8% Short-Term Investments & Other Net Assets ....... 1.3%
* The asset allocation is based on the Statement of Investments (SOI), which classifies each underlying fund into a broad asset class. 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. PLEASE VISIT franklintempleton.com OR CALL (800) 342-5236 FOR MOST RECENT MONTH-END PERFORMANCE. We are pleased to bring you Franklin Templeton 2035 Retirement Target Fund's semiannual report for the period ended June 30, 2009. PERFORMANCE OVERVIEW Franklin Templeton 2035 Retirement Target Fund - Class A delivered a +10.75% cumulative total return for the six months ended June 30, 2009. By comparison the Fund's benchmarks, the Standard & Poor's 500 Index (S&P 500) and Morgan Stanley Capital International (MSCI) Europe, THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND NAMES OF ALL PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S SOI, WHICH BEGINS ON PAGE 51. Semiannual Report | 21 TOP 10 FUND HOLDINGS Franklin Templeton 2035 Retirement Target Fund 6/30/09
% OF TOTAL NET ASSETS ---------- Franklin Flex Cap Growth Fund - Advisor Class 23.4% Mutual Shares Fund - Class Z 19.5% Mutual European Fund - Class Z 10.4% Franklin Growth Opportunities Fund - Advisor Class 9.3% Templeton Foreign Fund - Advisor Class 6.0% Franklin Gold and Precious Metals Fund - Advisor Class 5.7% Templeton China World Fund - Advisor Class 5.6% Franklin MicroCap Value Fund - Advisor Class 4.3% Franklin Natural Resources Fund - Advisor Class 4.1% Franklin Small Cap Growth Fund - Advisor Class 4.0%
Australasia, Far East (EAFE) Index for equities, the Barclays Capital (BC) U.S. Aggregate Index for fixed income, and the Payden & Rygel (P&R) 90 Day U.S. T-Bill Index for short-term investments and other net assets, posted total returns of +3.16%, +8.42%, +1.90% and +0.08%, respectively, during the same time.(1) You can find other performance data in the Performance Summary beginning on page 24. INVESTMENT STRATEGY When selecting equity funds, we consider the underlying funds' foreign and domestic exposure, market capitalization ranges, and investment style (growth vs. value). When selecting fixed income funds, our primary focus is on obtaining a maximum amount of current income. In evaluating the risk level of the underlying funds, we analyze such factors as: (a) relative and absolute performance, including correlations with other underlying funds as well as corresponding benchmarks, and (b) their volatility (the variability of returns from one period to the next). We attempt to invest the assets of each Fund in the same underlying funds and will vary the underlying funds' allocation percentages based upon each Fund's risk/return level. We change the Fund's target asset allocation gradually over time, and it becomes increasingly conservative as the stated target date draws near. MANAGER'S DISCUSSION The Fund's performance can be attributed largely to its allocation among equities, fixed income securities, and short-term investments and other net assets, and by the actual performance of the selected underlying funds. This allocation shifts every year, in accordance with the retirement date associated with the portfolio. (1.) Source: (C) 2009 Morningstar. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (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 S&P 500 consists of 500 stocks chosen for market size, liquidity and industry group representation. Each stock's weight in the index is proportionate to its market value. The S&P 500 is one of the most widely used benchmarks of U.S. equity performance. The MSCI EAFE Index is a free float-adjusted, market capitalization-weighted index designed to measure equity market performance in global developed markets excluding the U.S. and Canada. The BC U.S. Aggregate Index is a market-capitalization weighted index representing the U.S. investment-grade, fixed-rate, taxable bond market with index components for government and corporate, mortgage pass-through and asset-backed securities. All issues included are SEC registered, taxable, dollar denominated and non-convertible, must have at least one year to final maturity and must be rated investment grade (Baa3/BBB-/BBB- or higher) by Moody's, Standard & Poor's or Fitch, respectively. The P&R 90 Day U.S. T-Bill Index is a total return index based on a constant maturity instrument. Payden & Rygel includes both accrued interest and change in market price in its monthly total return calculations. The value of Treasuries, if held to maturity, is fixed; principal is guaranteed and interest is fixed. The indexes are unmanaged and include reinvestment of any income or distributions. One cannot invest directly in an index, nor is an index representative of the Fund's portfolio. 22 | Semiannual Report At period-end, Franklin Templeton 2035 Retirement Target Fund's domestic equity exposure was 68.8% of its total equity weighting, and foreign equity made up the balance. The portfolio was diversified across capitalization sizes and investment styles, and on June 30, 2009, we held shares in large-, mid- and small-capitalization equity funds, representing both growth and value styles. Franklin Flex Cap Growth Fund - Advisor Class, at 23.4% of the Fund's total net assets, was our largest equity fund weighting at period-end. On the fixed income side, domestic exposure was 63.0% of the Fund's total fixed income weighting, with the balance in foreign fixed income. The Fund's largest domestic growth fund holding, Franklin Flex Cap Growth Fund - Advisor Class, and our largest domestic value fund holding, Mutual Shares Fund - Class Z, outperformed the S&P 500. Our largest foreign equity holding, Mutual European Fund - Class Z, underperformed the MSCI EAFE Index; while Templeton Foreign Fund - Advisor Class outperformed the MSCI EAFE Index. Thank you for your continued participation in Franklin Templeton 2035 Retirement Target Fund. We look forward to serving your future investment needs. (PHOTO OF T. ANTHONY COFFEY, CFA) /s/ T. Anthony Coffey T. Anthony Coffey, CFA Portfolio Manager Franklin Templeton 2035 Retirement Target Fund THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS AS OF JUNE 30, 2009, 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. Semiannual Report | 23 Performance Summary as of 6/30/09 FRANKLIN TEMPLETON 2035 RETIREMENT TARGET FUND 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. The performance table does 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. PRICE AND DISTRIBUTION INFORMATION
CLASS A (SYMBOL: N/A) CHANGE 6/30/09 12/31/08 - --------------------- ------ ------- -------- Net Asset Value (NAV) +$0.65 $7.77 $7.12 DISTRIBUTIONS (1/1/09-6/30/09) Dividend Income $0.0148 Long-Term Capital Gain $0.0982 TOTAL $0.1130
CLASS C (SYMBOL: N/A) CHANGE 6/30/09 12/31/08 - --------------------- ------ ------- -------- Net Asset Value (NAV) +$0.61 $7.67 $7.06 DISTRIBUTIONS (1/1/09-6/30/09) Dividend Income $0.0148 Long-Term Capital Gain $0.0982 TOTAL $0.1130
CLASS R (SYMBOL: N/A) CHANGE 6/30/09 12/31/08 - --------------------- ------ ------- -------- Net Asset Value (NAV) +$0.64 $7.77 $7.13 DISTRIBUTIONS (1/1/09-6/30/09) Dividend Income $0.0148 Long-Term Capital Gain $0.0982 TOTAL $0.1130
ADVISOR CLASS (SYMBOL: N/A) CHANGE 6/30/09 12/31/08 - --------------------------- ------ ------- -------- Net Asset Value (NAV) +$0.66 $7.80 $7.14 DISTRIBUTIONS (1/1/09-6/30/09) Dividend Income $0.0148 Long-Term Capital Gain $0.0982 TOTAL $0.1130
24 | Semiannual Report Performance Summary (CONTINUED) PERFORMANCE(1) CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETURN AND VALUE OF $10,000 INVESTMENT INCLUDE MAXIMUM SALES CHARGES. CLASS A: 5.75% MAXIMUM INITIAL SALES CHARGE; CLASS C: 1% CONTINGENT DEFERRED SALES CHARGE IN FIRST YEAR ONLY; CLASS R/ADVISOR CLASS: NO SALES CHARGES.
CLASS A 6-MONTH 1-YEAR INCEPTION (8/1/06) - ------- ------- ------ ------------------ Cumulative Total Return(2) +10.75% -21.35% -13.04% Average Annual Total Return(3) +4.44% -25.88% -6.60% Value of $10,000 Investment(4) $10,444 $7,412 $ 8,196 Total Annual Operating Expenses(5) Without Waiver 2.99% With Waiver 1.30%
CLASS C 6-MONTH 1-YEAR INCEPTION (8/1/06) - ------- ------- ------ ------------------ Cumulative Total Return(2) +10.28% -21.91% -14.86% Average Annual Total Return(3) +9.28% -22.68% -5.37% Value of $10,000 Investment(4) $10,928 $7,732 $ 8,514 Total Annual Operating Expenses(5) Without Waiver 3.69% With Waiver 2.00%
CLASS R 6-MONTH 1-YEAR INCEPTION (8/1/06) - ------- ------- ------ ------------------ Cumulative Total Return(2) +10.60% -21.45% -13.52% Average Annual Total Return(3) +10.60% -21.45% -4.87% Value of $10,000 Investment(4) $11,060 $7,855 $ 8,648 Total Annual Operating Expenses(5) Without Waiver 3.19% With Waiver 1.50%
ADVISOR CLASS 6-MONTH 1-YEAR INCEPTION (8/1/06) - ------------- ------- ------ ------------------ Cumulative Total Return(2) +10.86% -21.12% -12.25% Average Annual Total Return(3) +10.86% -21.12% -4.39% Value of $10,000 Investment(4) $11,086 $7,888 $ 8,775 Total Annual Operating Expenses(5) Without Waiver 2.69% With Waiver 1.00%
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, SEE "FUNDS AND PERFORMANCE" AT franklintempleton.com OR CALL (800) 342-5236. THE INVESTMENT MANAGER HAS CONTRACTUALLY AGREED TO WAIVE OR LIMIT ITS FEES AND TO ASSUME AS ITS OWN EXPENSE CERTAIN EXPENSES OTHERWISE PAYABLE BY THE FUND SO THAT COMMON EXPENSES (I.E., A COMBINATION OF ASSET ALLOCATION FEES AND OTHER EXPENSES, BUT EXCLUDING RULE 12B-1 FEES AND ACQUIRED FUND FEES AND EXPENSES) FOR EACH CLASS OF THE FUND DO NOT EXCEED 0.15% (OTHER THAN CERTAIN NON-ROUTINE EXPENSES OR COSTS, INCLUDING THOSE RELATING TO LITIGATION, INDEMNIFICATION, REORGANIZATIONS AND LIQUIDATIONS) UNTIL 4/30/10. Semiannual Report | 25 Performance Summary (CONTINUED) ENDNOTES WHILE AN ASSET ALLOCATION PLAN CAN BE A VALUABLE TOOL TO HELP REDUCE OVERALL VOLATILITY, ALL INVESTMENTS INVOLVE SOME DEGREE OF RISK. GENERALLY, INVESTORS SHOULD BE COMFORTABLE WITH FLUCTUATION IN THE VALUE OF THEIR INVESTMENTS, ESPECIALLY OVER THE SHORT TERM. STOCKS HAVE HISTORICALLY OUT- PERFORMED OTHER ASSET CLASSES OVER THE LONG TERM, BUT THEY TEND TO FLUCTUATE MORE DRAMATICALLY OVER THE SHORTER TERM. BOND PRICES GENERALLY MOVE IN THE OPPOSITE DIRECTION OF INTEREST RATES. THUS, AS PRICES OF BONDS IN THE FUND ADJUST TO A RISE IN INTEREST RATES, THE FUND'S SHARE PRICE MAY DECLINE. BECAUSE THE FUND INVESTS IN UNDERLYING FUNDS, WHICH MAY ENGAGE IN A VARIETY OF INVESTMENT STRATEGIES INVOLVING CERTAIN RISKS, THE FUND MAY BE SUBJECT TO THOSE SAME RISKS. THE FUND'S PROSPECTUS ALSO INCLUDES A DESCRIPTION OF THE MAIN INVESTMENT RISKS. CLASS C: These shares have higher annual fees and expenses than Class A shares. CLASS R: Shares are available to certain eligible investors as described in the prospectus. These shares have higher annual fees and expenses than Class A shares. ADVISOR CLASS: Shares are available to certain eligible investors as described in the prospectus. (1.) If the manager had not waived fees, the Fund's total returns would have been lower. (2.) Cumulative total return represents the change in value of an investment over the periods indicated. (3.) Average annual total return represents the average annual change in value of an investment over the periods indicated. Six-month return has not been annualized. (4.) These figures represent the value of a hypothetical $10,000 investment in the Fund over the periods indicated. (5.) Figures are as stated in the Fund's prospectus current as of the date of this report. In periods of market volatility, assets may decline significantly, causing total annual Fund operating expenses to become higher than the figures shown. 26 | Semiannual Report Your Fund's Expenses FRANKLIN TEMPLETON 2035 RETIREMENT TARGET FUND As a Fund shareholder, you can incur two types of costs: - - Transaction costs, including sales charges (loads) on Fund purchases; and - - Ongoing Fund costs, including management fees, distribution and service (12b-1) fees, and other Fund expenses. All mutual funds have ongoing costs, sometimes referred to as operating expenses. The following table shows ongoing costs of investing in the Fund and can help you understand these costs and compare them with those of other mutual funds. The table assumes a $1,000 investment held for the six months indicated. ACTUAL FUND EXPENSES The first line (Actual) for each share class listed in the table provides actual account values and expenses. The "Ending Account Value" is derived from the Fund's actual return, which includes the effect of Fund expenses. You can estimate the expenses you paid during the period by following these steps. OF COURSE, YOUR ACCOUNT VALUE AND EXPENSES WILL DIFFER FROM THOSE IN THIS ILLUSTRATION: 1. Divide your account value by $1,000. IF AN ACCOUNT HAD AN $8,600 VALUE, THEN $8,600 / $1,000 = 8.6. 2. Multiply the result by the number under the heading "Expenses Paid During Period." IF EXPENSES PAID DURING PERIOD WERE $7.50, THEN 8.6 X $7.50 = $64.50. In this illustration, the estimated expenses paid this period are $64.50. HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS Information in the second line (Hypothetical) for each class in the table can help you compare ongoing costs of investing in the Fund with those of other mutual funds. This information may not be used to estimate the actual ending account balance or expenses you paid during the period. The hypothetical "Ending Account Value" is based on the actual expense ratio for each class and an assumed 5% annual rate of return before expenses, which does not represent the Fund's actual return. The figure under the heading "Expenses Paid During Period" shows the hypothetical expenses your account would have incurred under this scenario. You can compare this figure with the 5% hypothetical examples that appear in shareholder reports of other funds. Semiannual Report | 27 Your Fund's Expenses (CONTINUED) PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES. Therefore, the second line for each class is useful in comparing ongoing costs only, and will not help you compare total costs of owning different funds. In addition, if transaction costs were included, your total costs would have been higher. Please refer to the Fund prospectus for additional information on operating expenses.
BEGINNING ENDING EXPENSES PAID EXPENSES PAID ACCOUNT VALUE ACCOUNT VALUE DURING PERIOD* DURING PERIOD** 1/1/09 6/30/09 1/1/09-6/30/09 1/1/09-6/30/09 ------------- ------------- -------------- --------------- CLASS A Actual $1,000 $1,107.50 $2.40 $ 7.05 Hypothetical (5% return before expenses) $1,000 $1,022.51 $2.31 $ 6.76 CLASS C Actual $1,000 $1,102.80 $6.10 $10.74 Hypothetical (5% return before expenses) $1,000 $1,018.99 $5.86 $10.29 CLASS R Actual $1,000 $1,106.00 $3.45 $ 8.09 Hypothetical (5% return before expenses) $1,000 $1,021.52 $3.31 $ 7.75 ADVISOR CLASS Actual $1,000 $1,108.60 $0.84 $ 5.49 Hypothetical (5% return before expenses) $1,000 $1,024.00 $0.80 $ 5.26
* Expenses are calculated using the most recent six-month expense ratio excluding expenses of the underlying funds, net of expense waivers, annualized for each class (A: 0.46%; C: 1.17%; R: 0.66%; and Advisor: 0.16%), multiplied by the average account value over the period, multiplied by 181/365 to reflect the one-half year period. A portion of the Fund's expenses have been paid by the underlying funds in which the Fund invests. ** Expenses are calculated using the most recent six-month expense ratio including expenses of the underlying funds, net of expense waivers, annualized for each class (A: 1.35%; C: 2.06%; R: 1.55%; and Advisor: 1.05%), multiplied by the average account value over the period, multiplied by 181/365 to reflect the one-half year period. A portion of the Fund's expenses have been paid by the underlying funds in which the Fund invests. 28 | Semiannual Report Franklin Templeton 2045 Retirement Target Fund YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin Templeton 2045 Retirement Target Fund seeks the highest level of long-term total return, which consists of capital appreciation and income, consistent with the Fund's asset allocation. The Fund allocates among the broad asset classes of equity, fixed income and short-term (money market) investments by investing in a distinctly weighted combination of Franklin Templeton mutual funds (underlying funds), within an increasing emphasis on income as the target date of 2045 approaches. ASSET ALLOCATION* Franklin Templeton 2045 Retirement Target Fund Based on Total Net Assets as of 6/30/09 (PIE CHART) Domestic Equity ............................ 67.3% Foreign Equity ............................. 31.4% Short-Term Investments & Other Net Assets .. 1.3%
* The asset allocation is based on the Statement of Investments (SOI), which classifies each underlying fund into a broad asset class. 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. PLEASE VISIT franklintempleton.com OR CALL (800) 342-5236 FOR MOST RECENT MONTH-END PERFORMANCE. We are pleased to bring you Franklin Templeton 2045 Retirement Target Fund's semiannual report for the period ended June 30, 2009. PERFORMANCE OVERVIEW Franklin Templeton 2045 Retirement Target Fund - Class A delivered a cumulative total return of +11.00% for the six months ended June 30, 2009. By comparison the Fund's benchmarks, the Standard & Poor's 500 Index (S&P 500) and Morgan Stanley Capital International (MSCI) Europe, THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND NAMES OF ALL PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S SOI, WHICH BEGINS ON PAGE 56. Semiannual Report | 29 TOP 10 FUND HOLDINGS Franklin Templeton 2045 Retirement Target Fund 6/30/09
% OF TOTAL NET ASSETS ---------- Franklin Flex Cap Growth Fund - - Advisor Class 23.9% Mutual Shares Fund - - Class Z 19.8% Mutual European Fund - - Class Z 11.2% Franklin Growth Opportunities Fund - - Advisor Class 10.1% Templeton Foreign Fund - - Advisor Class 6.3% Templeton China World Fund - - Advisor Class 6.1% Franklin Gold and Precious Metals Fund - - Advisor Class 6.0% Franklin MicroCap Value Fund - - Advisor Class 4.6% Franklin Natural Resources Fund - - Advisor Class 4.5% Franklin Small Cap Growth Fund - - Advisor Class 4.3%
Australasia, Far East (EAFE) Index for equities, the Barclays Capital (BC) U.S. Aggregate Index for fixed income, and the Payden & Rygel (P&R) 90 Day U.S. T-Bill Index for short-term investments and other net assets, posted total returns of +3.16%, +8.42%, +1.90% and +0.08%, respectively, during the same time.(1) You can find other performance data in the Performance Summary beginning on page 32. INVESTMENT STRATEGY When selecting equity funds, we consider the underlying funds' foreign and domestic exposure, market capitalization ranges, and investment style (growth vs. value). When selecting fixed income funds, our primary focus is on obtaining a maximum amount of current income. In evaluating the risk level of the underlying funds, we analyze such factors as: (a) relative and absolute performance, including correlations with other underlying funds as well as corresponding benchmarks, and (b) their volatility (the variability of returns from one period to the next). We attempt to invest the assets of each Fund in the same underlying funds and will vary the underlying funds' allocation percentages based upon each Fund's risk/return level. We change the Fund's target asset allocation gradually over time, and it becomes increasingly conservative as the stated target date draws near. MANAGER'S DISCUSSION The Fund's performance can be attributed largely to its allocation among equities and short-term investments and other net assets, and by the actual performance of the selected underlying funds. This allocation shifts every year, in accordance with the retirement date associated with the portfolio. (1.) Source: (C) 2009 Morningstar. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (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 S&P 500 consists of 500 stocks chosen for market size, liquidity and industry group representation. Each stock's weight in the index is proportionate to its market value. The S&P 500 is one of the most widely used benchmarks of U.S. equity performance. The MSCI EAFE Index is a free float-adjusted, market capitalization-weighted index designed to measure equity market performance in global developed markets excluding the U.S. and Canada. The BC U.S. Aggregate Index is a market-capitalization weighted index representing the U.S. investment-grade, fixed-rate, taxable bond market with index components for government and corporate, mortgage pass-through and asset-backed securities. All issues included are SEC registered, taxable, dollar denominated and non-convertible, must have at least one year to final maturity and must be rated investment grade (Baa3/BBB-/BBB- or higher) by Moody's, Standard & Poor's or Fitch, respectively. The P&R 90 Day U.S. T-Bill Index is a total return index based on a constant maturity instrument. Payden & Rygel includes both accrued interest and change in market price in its monthly total return calculations. The value of Treasuries, if held to maturity, is fixed; principal is guaranteed and interest is fixed. The indexes are unmanaged and include reinvestment of any income or distributions. One cannot invest directly in an index, nor is an index representative of the Fund's portfolio. 30 | Semiannual Report At period-end, Franklin Templeton 2045 Retirement Target Fund's domestic equity exposure was 68.2% of its total equity weighting, and foreign equity made up the balance. The portfolio was diversified across capitalization sizes and investment styles, and on June 30, 2009, we held shares in large-, mid- and small-capitalization equity funds, representing both growth and value styles. Franklin Flex Cap Growth Fund - Advisor Class, at 23.9% of the Fund's total net assets, was our largest equity fund weighting at period-end. The Fund's largest domestic growth fund holding, Franklin Flex Cap Growth Fund - Advisor Class, and our largest domestic value fund holding, Mutual Shares Fund - Class Z, outperformed the S&P 500. Our largest foreign equity holding, Mutual European Fund - Class Z, underperformed the MSCI EAFE Index, while Templeton Foreign Fund - Advisor Class outperformed the MSCI EAFE Index. Thank you for your continued participation in Franklin Templeton 2045 Retirement Target Fund. We look forward to serving your future investment needs. (PHOTO OF T. ANTHONY COFFEY) /s/ T. Anthony Coffey T. Anthony Coffey, CFA Portfolio Manager Franklin Templeton 2045 Retirement Target Fund THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS AS OF JUNE 30, 2009, 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. Semiannual Report | 31 Performance Summary as of 6/30/09 FRANKLIN TEMPLETON 2045 RETIREMENT TARGET FUND 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. The performance table does 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. PRICE AND DISTRIBUTION INFORMATION
CLASS A (SYMBOL: N/A) CHANGE 6/30/09 12/31/08 - --------------------- ------ ------- -------- Net Asset Value (NAV) +$0.61 $7.50 $6.89 DISTRIBUTIONS (1/1/09-6/30/09) Dividend Income $0.0026 Long-Term Capital Gain $0.1448 TOTAL $0.1474
CLASS C (SYMBOL: N/A) CHANGE 6/30/09 12/31/08 - --------------------- ------ ------- -------- Net Asset Value (NAV) +$0.58 $7.39 $6.81 DISTRIBUTIONS (1/1/09-6/30/09) Dividend Income $0.0026 Long-Term Capital Gain $0.1448 TOTAL $0.1474
CLASS R (SYMBOL: N/A) CHANGE 6/30/09 12/31/08 - --------------------- ------ ------- -------- Net Asset Value (NAV) +$0.61 $7.49 $6.88 DISTRIBUTIONS (1/1/09-6/30/09) Dividend Income $0.0026 Long-Term Capital Gain $0.1448 TOTAL $0.1474
ADVISOR CLASS (SYMBOL: N/A) CHANGE 6/30/09 12/31/08 - --------------------------- ------ ------- -------- Net Asset Value (NAV) +$0.64 $7.53 $6.89 DISTRIBUTIONS (1/1/09-6/30/09) Dividend Income $0.0026 Long-Term Capital Gain $0.1448 TOTAL $0.1474
32 | Semiannual Report Performance Summary (CONTINUED) PERFORMANCE(1) CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETURN AND VALUE OF $10,000 INVESTMENT INCLUDE MAXIMUM SALES CHARGES. CLASS A: 5.75% MAXIMUM INITIAL SALES CHARGE; CLASS C: 1% CONTINGENT DEFERRED SALES CHARGE IN FIRST YEAR ONLY; CLASS R/ADVISOR CLASS: NO SALES CHARGES.
CLASS A 6-MONTH 1-YEAR INCEPTION (8/1/06) - ------- ------- ------- ------------------ Cumulative Total Return(2) +11.00% -22.95% -14.56% Average Annual Total Return(3) +4.62% -27.36% -7.17% Value of $10,000 Investment(4) $10,462 $ 7,264 $ 8,052 Total Annual Operating Expenses(5) Without Waiver 3.99% With Waiver 1.32%
CLASS C 6-MONTH 1-YEAR INCEPTION (8/1/06) - ------- ------- ------- ------------------ Cumulative Total Return(2) +10.69% -23.56% -16.29% Average Annual Total Return(3) +9.69% -24.30% -5.92% Value of $10,000 Investment(4) $10,969 $ 7,570 $ 8,371 Total Annual Operating Expenses(5) Without Waiver 4.69% With Waiver 2.02%
CLASS R 6-MONTH 1-YEAR INCEPTION (8/1/06) - ------- ------- ------- ------------------ Cumulative Total Return(2) +11.02% -23.14% -15.03% Average Annual Total Return(3) +11.02% -23.14% -5.44% Value of $10,000 Investment(4) $11,102 $ 7,686 $ 8,497 Total Annual Operating Expenses(5) Without Waiver 4.19% With Waiver 1.52%
ADVISOR CLASS 6-MONTH 1-YEAR INCEPTION (8/1/06) - ------------- ------- ------- ------------------ Cumulative Total Return(2) +11.44% -22.73% -13.75% Average Annual Total Return(3) +11.44% -22.73% -4.95% Value of $10,000 Investment(4) $11,144 $ 7,727 $ 8,625 Total Annual Operating Expenses(5) Without Waiver 3.69% With Waiver 1.02%
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, SEE "FUNDS AND PERFORMANCE" AT franklintempleton.com OR CALL (800) 342-5236. THE INVESTMENT MANAGER HAS CONTRACTUALLY AGREED TO WAIVE OR LIMIT ITS FEES AND TO ASSUME AS ITS OWN EXPENSE CERTAIN EXPENSES OTHERWISE PAYABLE BY THE FUND SO THAT COMMON EXPENSES (I.E., A COMBINATION OF ASSET ALLOCATION FEES AND OTHER EXPENSES, BUT EXCLUDING RULE 12B-1 FEES AND ACQUIRED FUND FEES AND EXPENSES) FOR EACH CLASS OF THE FUND DO NOT EXCEED 0.15% (OTHER THAN CERTAIN NON-ROUTINE EXPENSES OR COSTS, INCLUDING THOSE RELATING TO LITIGATION, INDEMNIFICATION, REORGANIZATIONS AND LIQUIDATIONS) UNTIL 4/30/10. Semiannual Report | 33 Performance Summary (CONTINUED) ENDNOTES WHILE AN ASSET ALLOCATION PLAN CAN BE A VALUABLE TOOL TO HELP REDUCE OVERALL VOLATILITY, ALL INVESTMENTS INVOLVE SOME DEGREE OF RISK. GENERALLY, INVESTORS SHOULD BE COMFORTABLE WITH FLUCTUATION IN THE VALUE OF THEIR INVESTMENTS, ESPECIALLY OVER THE SHORT TERM. STOCKS HAVE HISTORICALLY OUTPERFORMED OTHER ASSET CLASSES OVER THE LONG TERM, BUT THEY TEND TO FLUCTUATE MORE DRAMATICALLY OVER THE SHORTER TERM. BOND PRICES GENERALLY MOVE IN THE OPPOSITE DIRECTION OF INTEREST RATES. THUS, AS PRICES OF BONDS IN THE FUND ADJUST TO A RISE IN INTEREST RATES, THE FUND'S SHARE PRICE MAY DECLINE. BECAUSE THE FUND INVESTS IN UNDERLYING FUNDS, WHICH MAY ENGAGE IN A VARIETY OF INVESTMENT STRATEGIES INVOLVING CERTAIN RISKS, THE FUND MAY BE SUBJECT TO THOSE SAME RISKS. THE FUND'S PROSPECTUS ALSO INCLUDES A DESCRIPTION OF THE MAIN INVESTMENT RISKS. CLASS C: These shares have higher annual fees and expenses than Class A shares. CLASS R: Shares are available to certain eligible investors as described in the prospectus. These shares have higher annual fees and expenses than Class A shares. ADVISOR CLASS: Shares are available to certain eligible investors as described in the prospectus. (1.) If the manager had not waived fees, the Fund's total returns would have been lower. (2.) Cumulative total return represents the change in value of an investment over the periods indicated. (3.) Average annual total return represents the average annual change in value of an investment over the periods indicated. Six-month return has not been annualized. (4.) These figures represent the value of a hypothetical $10,000 investment in the Fund over the periods indicated. (5.) Figures are as stated in the Fund's prospectus current as of the date of this report. In periods of market volatility, assets may decline significantly, causing total annual Fund operating expenses to become higher than the figures shown. 34 | Semiannual Report Your Fund's Expenses FRANKLIN TEMPLETON 2045 RETIREMENT TARGET FUND As a Fund shareholder, you can incur two types of costs: - - Transaction costs, including sales charges (loads) on Fund purchases; and - - Ongoing Fund costs, including management fees, distribution and service (12b-1) fees, and other Fund expenses. All mutual funds have ongoing costs, sometimes referred to as operating expenses. The following table shows ongoing costs of investing in the Fund and can help you understand these costs and compare them with those of other mutual funds. The table assumes a $1,000 investment held for the six months indicated. ACTUAL FUND EXPENSES The first line (Actual) for each share class listed in the table provides actual account values and expenses. The "Ending Account Value" is derived from the Fund's actual return, which includes the effect of Fund expenses. You can estimate the expenses you paid during the period by following these steps. OF COURSE, YOUR ACCOUNT VALUE AND EXPENSES WILL DIFFER FROM THOSE IN THIS ILLUSTRATION: 1. Divide your account value by $1,000. IF AN ACCOUNT HAD AN $8,600 VALUE, THEN $8,600 / $1,000 = 8.6. 2. Multiply the result by the number under the heading "Expenses Paid During Period." IF EXPENSES PAID DURING PERIOD WERE $7.50, THEN 8.6 X $7.50 = $64.50. In this illustration, the estimated expenses paid this period are $64.50. HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS Information in the second line (Hypothetical) for each class in the table can help you compare ongoing costs of investing in the Fund with those of other mutual funds. This information may not be used to estimate the actual ending account balance or expenses you paid during the period. The hypothetical "Ending Account Value" is based on the actual expense ratio for each class and an assumed 5% annual rate of return before expenses, which does not represent the Fund's actual return. The figure under the heading "Expenses Paid During Period" shows the hypothetical expenses your account would have incurred under this scenario. You can compare this figure with the 5% hypothetical examples that appear in shareholder reports of other funds. Semiannual Report | 35 Your Fund's Expenses (CONTINUED) PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES. Therefore, the second line for each class is useful in comparing ongoing costs only, and will not help you compare total costs of owning different funds. In addition, if transaction costs were included, your total costs would have been higher. Please refer to the Fund prospectus for additional information on operating expenses.
BEGINNING ENDING EXPENSES PAID EXPENSES PAID ACCOUNT VALUE ACCOUNT VALUE DURING PERIOD* DURING PERIOD** 1/1/09 6/30/09 1/1/09-6/30/09 1/1/09-6/30/09 ------------- ------------- --------------- --------------- CLASS A Actual $1,000 $1,110.00 $2.35 $ 7.17 Hypothetical (5% return before expenses) $1,000 $1,022.56 $2.26 $ 6.85 CLASS C Actual $1,000 $1,106.90 $6.01 $10.81 Hypothetical (5% return before expenses) $1,000 $1,019.09 $5.76 $10.34 CLASS R Actual $1,000 $1,110.20 $3.40 $ 8.21 Hypothetical (5% return before expenses) $1,000 $1,021.57 $3.26 $ 7.85 ADVISOR CLASS Actual $1,000 $1,114.40 $0.79 $ 5.61 Hypothetical (5% return before expenses) $1,000 $1,024.05 $0.75 $ 5.36
* Expenses are calculated using the most recent six-month expense ratio excluding expenses of the underlying funds, net of expense waivers, annualized for each class (A: 0.45%; C: 1.15%; R: 0.65%; and Advisor: 0.15%), multiplied by the average account value over the period, multiplied by 181/365 to reflect the one-half year period. A portion of the Fund's expenses have been paid by the underlying funds in which the Fund invests. ** Expenses are calculated using the most recent six-month expense ratio including expenses of the underlying funds, net of expense waivers, annualized for each class (A: 1.37%; C: 2.07%; R: 1.57%; and Advisor: 1.07%), multiplied by the average account value over the period, multiplied by 181/365 to reflect the one-half year period. A portion of the Fund's expenses have been paid by the underlying funds in which the Fund invests. 36 | Semiannual Report Franklin Templeton Fund Allocator Series FINANCIAL HIGHLIGHTS FRANKLIN TEMPLETON 2015 RETIREMENT TARGET FUND
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, 2009 ---------------------------- CLASS A (UNAUDITED) 2008 2007 2006(a) - ------- ---------------- ------- ------ ------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period .................. $ 8.14 $ 11.35 $10.69 $10.00 ------- ------- ------ ------ Income from investment operations(b): Net investment income(c, d) ........................ 0.04 0.23 0.33 0.13 Net realized and unrealized gains (losses) ......... 0.74 (3.08) 0.72 0.73 ------- ------- ------ ------ Total from investment operations ...................... 0.78 (2.85) 1.05 0.86 ------- ------- ------ ------ Less distributions from: Net investment income and short term gains received from Underlying Funds .................. (0.07) (0.19) (0.23) (0.15) Net realized gains ................................. (0.05) (0.17) (0.16) (0.02) ------- ------- ------ ------ Total distributions ................................... (0.12) (0.36) (0.39) (0.17) ------- ------- ------ ------ Redemption fees(e) .................................... -- --(f) --(f) -- ------- ------- ------ ------ Net asset value, end of period ........................ $ 8.80 $ 8.14 $11.35 $10.69 ======= ======= ====== ====== Total return(g) ....................................... 9.75% (25.55)% 9.84% 8.59% RATIOS TO AVERAGE NET ASSETS(h) Expenses before waiver and payments by affiliates(i) .. 1.21% 1.36% 3.60% 12.13% Expenses net of waiver and payments by affiliates(i) .. 0.47% 0.51% 0.48% 0.50% Net investment income(d) .............................. 0.92% 2.25% 3.11% 2.92% SUPPLEMENTAL DATA Net assets, end of period (000's) ..................... $12,123 $ 9,407 $5,269 $1,364 Portfolio turnover rate ............................... 7.44% 8.69% 8.19% 2.42%
(a) For the period August 1, 2006 (commencement of operations) to December 31, 2006. (b) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (c) Based on average daily shares outstanding. (d) Recognition of net investment income by the Fund is affected by the timing of declaration of dividends by the Underlying Funds in which the Fund invests. (e) Effective September 1, 2008, the redemption fee was eliminated. (f) Amount rounds to less than $0.01 per share. (g) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. (h) Ratios are annualized for periods less than one year. (i) Does not include expenses of the Underlying Funds in which the Fund invests. The annualized weighted average expense ratio of the Underlying Funds was 0.80% for the period ended June 30, 2009. The accompanying notes are an integral part of these financial statements. Semiannual Report | 37 Franklin Templeton Fund Allocator Series FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN TEMPLETON 2015 RETIREMENT TARGET FUND
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, 2009 ---------------------------- CLASS C (UNAUDITED) 2008 2007 2006(a) - ------- ---------------- ------- ------ ------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period .................. $ 8.08 $ 11.28 $10.67 $10.00 ------ ------- ------ ------ Income from investment operations(b): Net investment income(c, d) ........................ 0.01 0.14 0.36 0.14 Net realized and unrealized gains (losses) ......... 0.74 (3.04) 0.60 0.69 ------ ------- ------ ------ Total from investment operations ...................... 0.75 (2.90) 0.96 0.83 ------ ------- ------ ------ Less distributions from: Net investment income and short term gains received from Underlying Funds ............ (0.04) (0.13) (0.19) (0.14) Net realized gains ................................. (0.05) (0.17) (0.16) (0.02) ------ ------- ------ ------ Total distributions ................................... (0.09) (0.30) (0.35) (0.16) ------ ------- ------ ------ Redemption fees(e) .................................... -- --(f) --(f) -- ------ ------- ------ ------ Net asset value, end of period ........................ $ 8.74 $ 8.08 $11.28 $10.67 ====== ======= ====== ====== Total return(g) ....................................... 9.44% (26.09)% 9.02% 8.30% RATIOS TO AVERAGE NET ASSETS(h) Expenses before waiver and payments by affiliates(i) .. 1.92% 2.04% 4.28% 12.78% Expenses net of waiver and payments by affiliates(i) .. 1.18% 1.19% 1.16% 1.15% Net investment income(d) .............................. 0.21% 1.57% 2.43% 2.27% SUPPLEMENTAL DATA Net assets, end of period (000's) ..................... $4,886 $ 4,621 $2,213 $ 63 Portfolio turnover rate ............................... 7.44% 8.69% 8.19% 2.42%
(a) For the period August 1, 2006 (commencement of operations) to December 31, 2006. (b) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (c) Based on average daily shares outstanding. (d) Recognition of net investment income by the Fund is affected by the timing of declaration of dividends by the Underlying Funds in which the Fund invests. (e) Effective September 1, 2008, the redemption fee was eliminated. (f) Amount rounds to less than $0.01 per share. (g) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. (h) Ratios are annualized for periods less than one year. (i) Does not include expenses of the Underlying Funds in which the Fund invests. The annualized weighted average expense ratio of the Underlying Funds was 0.80% for the period ended June 30, 2009. The accompanying notes are an integral part of these financial statements. 38 | Semiannual Report Franklin Templeton Fund Allocator Series FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN TEMPLETON 2015 RETIREMENT TARGET FUND
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, 2009 ---------------------------- CLASS R (UNAUDITED) 2008 2007 2006(a) - ------- ---------------- ------- ------ ------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period .................. $ 8.12 $ 11.32 $10.68 $10.00 ------ ------- ------ ------ Income from investment operations(b): Net investment income(c, d) ........................ 0.03 0.18 0.34 0.11 Net realized and unrealized gains (losses) ......... 0.75 (3.05) 0.68 0.74 ------ ------- ------ ------ Total from investment operations ...................... 0.78 (2.87) 1.02 0.85 ------ ------- ------ ------ Less distributions from: Net investment income and short term gains received from Underlying Funds .................. (0.07) (0.16) (0.22) (0.15) Net realized gains ................................. (0.05) (0.17) (0.16) (0.02) ------ ------- ------ ------ Total distributions ................................... (0.12) (0.33) (0.38) (0.17) ------ ------- ------ ------ Redemption fees(e) .................................... -- --(f) --(f) -- ------ ------- ------ ------ Net asset value, end of period ........................ $ 8.78 $ 8.12 $11.32 $10.68 ====== ======= ====== ====== Total return(g) ....................................... 9.67% (25.70)% 9.59% 8.48% RATIOS TO AVERAGE NET ASSETS(h) Expenses before waiver and payments by affiliates(i) .. 1.41% 1.56% 3.78% 12.28% Expenses net of waiver and payments by affiliates(i) .. 0.67% 0.71% 0.66% 0.65% Net investment income(d) .............................. 0.72% 2.05% 2.93% 2.77% SUPPLEMENTAL DATA Net assets, end of period (000's) ..................... $1,069 $ 821 $1,071 $ 11 Portfolio turnover rate ............................... 7.44% 8.69% 8.19% 2.42%
(a) For the period August 1, 2006 (commencement of operations) to December 31, 2006. (b) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (c) Based on average daily shares outstanding. (d) Recognition of net investment income by the Fund is affected by the timing of declaration of dividends by the Underlying Funds in which the Fund invests. (e) Effective September 1, 2008, the redemption fee was eliminated. (f) Amount rounds to less than $0.01 per share. (g) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. (h) Ratios are annualized for periods less than one year. (i) Does not include expenses of the Underlying Funds in which the Fund invests. The annualized weighted average expense ratio of the Underlying Funds was 0.80% for the period ended June 30, 2009. The accompanying notes are an integral part of these financial statements. Semiannual Report | 39 Franklin Templeton Fund Allocator Series FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN TEMPLETON 2015 RETIREMENT TARGET FUND
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, 2009 ---------------------------- ADVISOR CLASS (UNAUDITED) 2008 2007 2006(a) - ------------- ---------------- ------- ------ ------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period .................. $ 8.15 $ 11.37 $10.70 $10.00 ------ ------- ------ ------ Income from investment operations(b): Net investment income(c, d) ........................ 0.05 0.25 0.30 0.17 Net realized and unrealized gains (losses) ......... 0.76 (3.09) 0.79 0.71 ------ ------- ------ ------ Total from investment operations ...................... 0.81 (2.84) 1.09 0.88 ------ ------- ------ ------ Less distributions from: Net investment income and short term gains received from Underlying Funds .................. (0.09) (0.21) (0.26) (0.16) Net realized gains ................................. (0.05) (0.17) (0.16) (0.02) ------ ------- ------ ------ Total distributions ................................... (0.14) (0.38) (0.42) (0.18) ------ ------- ------ ------ Redemption fees(e) .................................... -- --(f) --(f) -- ------ ------- ------ ------ Net asset value, end of period ........................ $ 8.82 $ 8.15 $11.37 $10.70 ====== ======= ====== ====== Total return(g) ....................................... 10.01% (25.39)% 10.21% 8.75% RATIOS TO AVERAGE NET ASSETS(h) Expenses before waiver and payments by affiliates(i) .. 0.91% 1.06% 3.28% 11.78% Expenses net of waiver and payments by affiliates(i) .. 0.17% 0.21% 0.16% 0.15% Net investment income(d) .............................. 1.22% 2.55% 3.43% 3.27% SUPPLEMENTAL DATA Net assets, end of period (000's) ..................... $ 180 $ 164 $ 32 $ 20 Portfolio turnover rate ............................... 7.44% 8.69% 8.19% 2.42%
(a) For the period August 1, 2006 (commencement of operations) to December 31, 2006. (b) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (c) Based on average daily shares outstanding. (d) Recognition of net investment income by the Fund is affected by the timing of declaration of dividends by the Underlying Funds in which the Fund invests. (e) Effective September 1, 2008, the redemption fee was eliminated. (f) Amount rounds to less than $0.01 per share. (g) Total return is not annualized for periods less than one year. (h) Ratios are annualized for periods less than one year. (i) Does not include expenses of the Underlying Funds in which the Fund invests. The annualized weighted average expense ratio of the Underlying Funds was 0.80% for the period ended June 30, 2009. The accompanying notes are an integral part of these financial statements. 40 | Semiannual Report Franklin Templeton Fund Allocator Series STATEMENT OF INVESTMENTS, JUNE 30, 2009 (UNAUDITED)
FRANKLIN TEMPLETON 2015 RETIREMENT TARGET FUND SHARES VALUE ---------------------------------------------- ----------- ------------- INVESTMENTS IN UNDERLYING FUNDS(a) DOMESTIC EQUITY 44.9% (b) Franklin Flex Cap Growth Fund, Advisor Class ...................... 88,465 $ 3,006,050 (b) Franklin Growth Opportunities Fund, Advisor Class ................. 78,610 1,187,801 Franklin MicroCap Value Fund, Advisor Class ....................... 23,777 549,494 (b) Franklin Natural Resources Fund, Advisor Class .................... 20,341 532,108 (b) Franklin Small Cap Growth Fund, Advisor Class ..................... 71,759 522,403 Mutual Shares Fund, Class Z ....................................... 148,870 2,404,244 ------------- 8,202,100 ------------- DOMESTIC FIXED INCOME 16.4% Franklin Total Return Fund, Advisor Class ......................... 148,354 1,355,952 Franklin U.S. Government Securities Fund, Advisor Class ........... 247,811 1,642,988 ------------- 2,998,940 ------------- FOREIGN EQUITY 21.1% Franklin Global Real Estate Fund, Advisor Class ................... 43,371 203,844 (b) Franklin Gold and Precious Metals Fund, Advisor Class ............. 21,639 703,280 Mutual European Fund, Class Z ..................................... 75,996 1,350,455 Templeton China World Fund, Advisor Class ......................... 26,303 753,856 Templeton Foreign Fund, Advisor Class ............................. 160,379 832,368 ------------- 3,843,803 ------------- FOREIGN FIXED INCOME 9.8% Franklin Templeton Emerging Market Debt Opportunities Fund ........ 13,362 124,001 Templeton Global Bond Fund, Advisor Class ......................... 140,598 1,657,652 ------------- 1,781,653 ------------- TOTAL INVESTMENTS IN UNDERLYING FUNDS BEFORE SHORT TERM INVESTMENTS (COST $19,545,884) 92.2% ....................................... 16,826,496 ------------- SHORT TERM INVESTMENTS (COST $1,466,197) 8.0% MONEY MARKET FUNDS 8.0% (c) Institutional Fiduciary Trust Money Market Portfolio, 0.00% ....... 1,466,197 1,466,197 ------------- TOTAL INVESTMENTS IN UNDERLYING FUNDS (COST $21,012,081) 100.2% ... 18,292,693 OTHER ASSETS, LESS LIABILITIES (0.2)% ............................. (34,584) ------------- NET ASSETS 100.0% ................................................. $ 18,258,109 =============
(a) See Note 6 regarding investments in Underlying Funds. (b) Non-income producing. (c) The rate shown is the annualized seven-day yield at period end. The accompanying notes are an integral part of these financial statements. Semiannual Report | 41 Franklin Templeton Fund Allocator Series FINANCIAL HIGHLIGHTS FRANKLIN TEMPLETON 2025 RETIREMENT TARGET FUND
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, 2009 ---------------------------- CLASS A (UNAUDITED) 2008 2007 2006(a) - ------- ---------------- ------- ------ ------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period .................. $ 7.47 $ 11.45 $10.78 $10.00 ------- ------- ------ ------ Income from investment operations(b): Net investment income(c, d) ........................ 0.01 0.14 0.28 0.12 Net realized and unrealized gains (losses) ......... 0.72 (3.71) 0.82 0.82 ------- ------- ------ ------ Total from investment operations ...................... 0.73 (3.57) 1.10 0.94 ------- ------- ------ ------ Less distributions from: Net investment income and short term gains received from Underlying Funds .................. (0.01) (0.14) (0.21) (0.14) Net realized gains ................................. (0.10) (0.27) (0.22) (0.02) ------- ------- ------ ------ Total distributions ................................... (0.11) (0.41) (0.43) (0.16) ------- ------- ------ ------ Redemption fees(e) .................................... -- --(f) --(f) --(f) ------- ------- ------ ------ Net asset value, end of period ........................ $ 8.09 $ 7.47 $11.45 $10.78 ======= ======= ====== ====== Total return(g) ....................................... 9.84% (31.74)% 10.19% 9.41% RATIOS TO AVERAGE NET ASSETS(h) Expenses before waiver and payments by affiliates(i) .. 1.26% 1.50% 3.31% 10.76% Expenses net of waiver and payments by affiliates(i) .. 0.47% 0.49% 0.47% 0.50% Net investment income(d) .............................. 0.35% 1.53% 2.55% 2.78% SUPPLEMENTAL DATA Net assets, end of period (000's) ..................... $14,254 $ 9,918 $6,952 $1,699 Portfolio turnover rate ............................... 7.41% 6.07% 16.28% 5.36%
(a) For the period August 1, 2006 (commencement of operations) to December 31, 2006. (b) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (c) Based on average daily shares outstanding. (d) Recognition of net investment income by the Fund is affected by the timing of declaration of dividends by the Underlying Funds in which the Fund invests. (e) Effective September 1, 2008, the redemption fee was eliminated. (f) Amount rounds to less than $0.01 per share. (g) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. (h) Ratios are annualized for periods less than one year. (i) Does not include expenses of the Underlying Funds in which the Fund invests. The annualized weighted average expense ratio of the Underlying Funds was 0.85% for the period ended June 30, 2009. The accompanying notes are an integral part of these financial statements. 42 | Semiannual Report Franklin Templeton Fund Allocator Series FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN TEMPLETON 2025 RETIREMENT TARGET FUND
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, 2009 ---------------------------- CLASS C (UNAUDITED) 2008 2007 2006(a) - ------- ---------------- ------- ------ ------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period .................. $ 7.43 $ 11.40 $10.77 $10.00 ------ ------- ------ ------ Income from investment operations(b): Net investment income (loss)(c, d) ................. (0.01) 0.10 0.28 0.10 Net realized and unrealized gains (losses) ......... 0.70 (3.70) 0.74 0.82 ------ ------- ------ ------ Total from investment operations ...................... 0.69 (3.60) 1.02 0.92 ------ ------- ------ ------ Less distributions from: Net investment income and short term gains received from Underlying Funds .................. (0.01) (0.10) (0.17) (0.13) Net realized gains ................................. (0.10) (0.27) (0.22) (0.02) ------ ------- ------ ------ Total distributions ................................... (0.11) (0.37) (0.39) (0.15) ------ ------- ------ ------ Redemption fees(e) .................................... -- --(f) --(f) --(f) ------ ------- ------ ------ Net asset value, end of period ........................ $ 8.01 $ 7.43 $11.40 $10.77 ====== ======= ====== ====== Total return(g) ....................................... 9.35% (32.16)% 9.43% 9.20% RATIOS TO AVERAGE NET ASSETS(h) Expenses before waiver and payments by affiliates(i) .. 1.96% 2.20% 3.99% 11.41% Expenses net of waiver and payments by affiliates(i) .. 1.17% 1.19% 1.15% 1.15% Net investment income (loss)(d) ....................... (0.35)% 0.83% 1.87% 2.13% SUPPLEMENTAL DATA Net assets, end of period (000's) ..................... $3,985 $ 2,551 $1,104 $ 54 Portfolio turnover rate ............................... 7.41% 6.07% 16.28% 5.36%
(a) For the period August 1, 2006 (commencement of operations) to December 31, 2006. (b) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (c) Based on average daily shares outstanding. (d) Recognition of net investment income by the Fund is affected by the timing of declaration of dividends by the Underlying Funds in which the Fund invests. (e) Effective September 1, 2008, the redemption fee was eliminated. (f) Amount rounds to less than $0.01 per share. (g) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. (h) Ratios are annualized for periods less than one year. (i) Does not include expenses of the Underlying Funds in which the Fund invests. The annualized weighted average expense ratio of the Underlying Funds was 0.85% for the period ended June 30, 2009. The accompanying notes are an integral part of these financial statements. Semiannual Report | 43 Franklin Templeton Fund Allocator Series FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN TEMPLETON 2025 RETIREMENT TARGET FUND
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, 2009 ---------------------------- CLASS R (UNAUDITED) 2008 2007 2006(a) - ------- ---------------- ------- ------ ------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period .................. $ 7.47 $ 11.44 $10.77 $10.00 ------ ------- ------ ------ Income from investment operations(b): Net investment income(c, d) ........................ 0.01 0.10 0.27 0.11 Net realized and unrealized gains (losses) ......... 0.71 (3.68) 0.82 0.82 ------ ------- ------ ------ Total from investment operations ...................... 0.72 (3.58) 1.09 0.93 ------ ------- ------ ------ Less distributions from: Net investment income and short term gains received from Underlying Funds .................. (0.01) (0.12) (0.20) (0.14) Net realized gains ................................. (0.10) (0.27) (0.22) (0.02) ------ ------- ------ ------ Total distributions ................................... (0.11) (0.39) (0.42) (0.16) ------ ------- ------ ------ Redemption fees(e) .................................... -- --(f) --(f) --(f) ------ ------- ------ ------ Net asset value, end of period ........................ $ 8.08 $ 7.47 $11.44 $10.77 ====== ======= ====== ====== Total return(g) ....................................... 9.71% (31.90)% 10.11% 9.31% RATIOS TO AVERAGE NET ASSETS(h) Expenses before waiver and payments by affiliates(i) .. 1.46% 1.70% 3.49% 10.91% Expenses net of waiver and payments by affiliates(i) .. 0.67% 0.69% 0.65% 0.65% Net investment incomed ................................ 0.15% 1.33% 2.37% 2.63% SUPPLEMENTAL DATA Net assets, end of period (000's) ..................... $ 184 $ 155 $ 188 $ 19 Portfolio turnover rate ............................... 7.41% 6.07% 16.28% 5.36%
(a) For the period August 1, 2006 (commencement of operations) to December 31, 2006. (b) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (c) Based on average daily shares outstanding. (d) Recognition of net investment income by the Fund is affected by the timing of declaration of dividends by the Underlying Funds in which the Fund invests. (e) Effective September 1, 2008, the redemption fee was eliminated. (f) Amount rounds to less than $0.01 per share. (g) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. (h) Ratios are annualized for periods less than one year. (i) Does not include expenses of the Underlying Funds in which the Fund invests. The annualized weighted average expense ratio of the Underlying Funds was 0.85% for the period ended June 30, 2009. The accompanying notes are an integral part of these financial statements. 44 | Semiannual Report Franklin Templeton Fund Allocator Series FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN TEMPLETON 2025 RETIREMENT TARGET FUND
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, 2009 ---------------------------- ADVISOR CLASS (UNAUDITED) 2008 2007 2006(a) - ------------- ---------------- ------- ------ ------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period .................. $ 7.48 $ 11.46 $10.79 $10.00 ------ ------- ------ ------ Income from investment operations(b): Net investment income(c, d) ........................ 0.02 0.16 0.46 0.20 Net realized and unrealized gains (losses) ......... 0.71 (3.70) 0.67 0.76 ------ ------- ------ ------ Total from investment operations ...................... 0.73 (3.54) 1.13 0.96 ------ ------- ------ ------ Less distributions from: Net investment income and short term gains received from Underlying Funds .................. (0.01) (0.17) (0.24) (0.15) Net realized gains ................................. (0.10) (0.27) (0.22) (0.02) ------ ------- ------ ------ Total distributions ................................... (0.11) (0.44) (0.46) (0.17) ------ ------- ------ ------ Redemption fees(e) .................................... -- --(f) --(f) --(f) ------ ------- ------ ------ Net asset value, end of period ........................ $ 8.10 $ 7.48 $11.46 $10.79 ====== ======= ====== ====== Total return(g) ....................................... 9.83% (31.49)% 10.46% 9.57% RATIOS TO AVERAGE NET ASSETS(h) Expenses before waiver and payments by affiliates(i) .. 0.96% 1.20% 2.99% 10.41% Expenses net of waiver and payments by affiliates(i) .. 0.17% 0.19% 0.15% 0.15% Net investment income(d) .............................. 0.65% 1.83% 2.87% 3.13% SUPPLEMENTAL DATA Net assets, end of period (000's) ..................... $ 374 $ 322 $ 417 $ 51 Portfolio turnover rate ............................... 7.41% 6.07% 16.28% 5.36%
(a) For the period August 1, 2006 (commencement of operations) to December 31, 2006. (b) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (c) Based on average daily shares outstanding. (d) Recognition of net investment income by the Fund is affected by the timing of declaration of dividends by the Underlying Funds in which the Fund invests. (e) Effective September 1, 2008, the redemption fee was eliminated. (f) Amount rounds to less than $0.01 per share. (g) Total return is not annualized for periods less than one year. (h) Ratios are annualized for periods less than one year. (i) Does not include expenses of the Underlying Funds in which the Fund invests. The annualized weighted average expense ratio of the Underlying Funds was 0.85% for the period ended June 30, 2009. The accompanying notes are an integral part of these financial statements. Semiannual Report | 45 Franklin Templeton Fund Allocator Series STATEMENT OF INVESTMENTS, JUNE 30, 2009 (UNAUDITED)
FRANKLIN TEMPLETON 2025 RETIREMENT TARGET FUND SHARES VALUE ---------------------------------------------- ----------- ------------- INVESTMENTS IN UNDERLYING FUNDS(a) DOMESTIC EQUITY 53.1% (b) Franklin Flex Cap Growth Fund, Advisor Class ...................... 107,195 $ 3,642,480 (b) Franklin Growth Opportunities Fund, Advisor Class ................. 97,641 1,475,354 Franklin MicroCap Value Fund, Advisor Class ....................... 28,522 659,147 (b) Franklin Natural Resources Fund, Advisor Class .................... 24,607 643,719 (b) Franklin Small Cap Growth Fund, Advisor Class ..................... 84,506 615,204 Mutual Shares Fund, Class Z ....................................... 182,517 2,947,642 ------------- 9,983,546 ------------- DOMESTIC FIXED INCOME 9.8% Franklin Total Return Fund, Advisor Class ......................... 91,675 837,908 Franklin U.S. Government Securities Fund, Advisor Class ........... 151,970 1,007,563 ------------- 1,845,471 ------------- FOREIGN EQUITY 24.3% Franklin Global Real Estate Fund, Advisor Class ................... 51,723 243,099 (b) Franklin Gold and Precious Metals Fund, Advisor Class ............. 25,692 834,997 Mutual European Fund, Class Z ..................................... 93,165 1,655,537 Templeton China World Fund, Advisor Class ......................... 30,827 883,510 Templeton Foreign Fund, Advisor Class ............................. 181,536 942,169 ------------- 4,559,312 ------------- FOREIGN FIXED INCOME 5.9% Franklin Templeton Emerging Market Debt Opportunities Fund ........ 7,328 68,003 Templeton Global Bond Fund, Advisor Class ......................... 87,806 1,035,230 ------------- 1,103,233 ------------- TOTAL INVESTMENTS IN UNDERLYING FUNDS BEFORE SHORT TERM INVESTMENTS (COST $20,456,329) 93.1% ....................................... 17,491,562 ------------- SHORT TERM INVESTMENTS (COST $1,230,059) 6.5% MONEY MARKET FUNDS 6.5% (c) Institutional Fiduciary Trust Money Market Portfolio, 0.00% ....... 1,230,059 1,230,059 ------------- TOTAL INVESTMENTS IN UNDERLYING FUNDS (COST $21,686,388) 99.6% .... 18,721,621 OTHER ASSETS, LESS LIABILITIES 0.4% ............................... 75,682 ------------- NET ASSETS 100.0% ................................................. $ 18,797,303 =============
(a) See Note 6 regarding investments in Underlying Funds. (b) Non-income producing. (c) The rate shown is the annualized seven-day yield at period end. The accompanying notes are an integral part of these financial statements. 46 | Semiannual Report Franklin Templeton Fund Allocator Series FINANCIAL HIGHLIGHTS FRANKLIN TEMPLETON 2035 RETIREMENT TARGET FUND
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, 2009 ---------------------------- CLASS A (UNAUDITED) 2008 2007 2006(a) - ------- ---------------- ------- ------ ------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period .................. $ 7.12 $ 11.61 $10.88 $10.00 ------ ------- ------ ------ Income from investment operations(b): Net investment income (loss)(c, d) ................. (0.01) 0.08 0.22 0.09 Net realized and unrealized gains (losses) ......... 0.77 (4.16) 0.97 0.95 ------ ------- ------ ------ Total from investment operations ...................... 0.76 (4.08) 1.19 1.04 ------ ------- ------ ------ Less distributions from: Net investment income and short term gains received from Underlying Funds .................. (0.01) (0.09) (0.16) (0.13) Net realized gains ................................. (0.10) (0.32) (0.30) (0.03) ------ ------- ------ ------ Total distributions ................................... (0.11) (0.41) (0.46) (0.16) ------ ------- ------ ------ Redemption fees(e) .................................... -- --(f) --(f) -- ------ ------- ------ ------ Net asset value, end of period ........................ $ 7.77 $ 7.12 $11.61 $10.88 ====== ======= ====== ====== Total return(g) ....................................... 10.75% (35.97)% 11.05% 10.44% RATIOS TO AVERAGE NET ASSETS(h) Expenses before waiver and payments by affiliates(i) .. 1.79% 2.14% 5.16% 13.47% Expenses net of waiver and payments by affiliates(i) .. 0.46% 0.49% 0.48% 0.50% Net investment income (loss)(d) ....................... (0.18)% 0.87% 2.07% 2.04% SUPPLEMENTAL DATA Net assets, end of period (000's) ..................... $7,707 $ 5,349 $3,760 $1,171 Portfolio turnover rate ............................... 8.85% 7.54% 14.95% 8.29%
(a) For the period August 1, 2006 (commencement of operations) to December 31, 2006. (b) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (c) Based on average daily shares outstanding. (d) Recognition of net investment income by the Fund is affected by the timing of declaration of dividends by the Underlying Funds in which the Fund invests. (e) Effective September 1, 2008, the redemption fee was eliminated. (f) Amount rounds to less than $0.01 per share. (g) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. (h) Ratios are annualized for periods less than one year. (i) Does not include expenses of the Underlying Funds in which the Fund invests. The annualized weighted average expense ratio of the Underlying Funds was 0.89% for the period ended June 30, 2009. The accompanying notes are an integral part of these financial statements. Semiannual Report | 47 Franklin Templeton Fund Allocator Series FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN TEMPLETON 2035 RETIREMENT TARGET FUND
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, 2009 ------------------------------ CLASS C (UNAUDITED) 2008 2007 2006(a) - ------- ---------------- ------- ------ ------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period .......................................... $ 7.06 $ 11.52 $10.86 $10.00 ------ ------- ------ ------ Income from investment operations(b): Net investment income (loss)(c, d) ......................................... (0.03) 0.03 0.26 0.12 Net realized and unrealized gains (losses) ................................. 0.75 (4.13) 0.84 0.89 ------ ------- ------ ------ Total from investment operations .............................................. 0.72 (4.10) 1.10 1.01 ------ ------- ------ ------ Less distributions from: Net investment income and short term gains received from Underlying Funds .. (0.01) (0.04) (0.14) (0.12) Net realized gains ......................................................... (0.10) (0.32) (0.30) (0.03) ------ ------- ------ ------ Total distributions ........................................................... (0.11) (0.36) (0.44) (0.15) ------ ------- ------ ------ Redemption fees(e) ............................................................ -- --(f) --(f) -- ------ ------- ------ ------ Net asset value, end of period ................................................ $ 7.67 $ 7.06 $11.52 $10.86 ====== ======= ====== ====== Total return(g) ............................................................... 10.28% (36.34)% 10.12% 10.14% RATIOS TO AVERAGE NET ASSETS(h) Expenses before waiver and payments by affiliates(i) .......................... 2.50% 2.84% 5.84% 14.12% Expenses net of waiver and payments by affiliates(i) .......................... 1.17% 1.19% 1.16% 1.15% Net investment income (loss)(d) ............................................... (0.89)% 0.17% 1.39% 1.39% SUPPLEMENTAL DATA Net assets, end of period (000's) ............................................. $2,509 $ 1,522 $1,103 $ 57 Portfolio turnover rate ....................................................... 8.85% 7.54% 14.95% 8.29%
(a) For the period August 1, 2006 (commencement of operations) to December 31, 2006. (b) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (c) Based on average daily shares outstanding. (d) Recognition of net investment income by the Fund is affected by the timing of declaration of dividends by the Underlying Funds in which the Fund invests. (e) Effective September 1, 2008, the redemption fee was eliminated. (f) Amount rounds to less than $0.01 per share. (g) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. (h) Ratios are annualized for periods less than one year. (i) Does not include expenses of the Underlying Funds in which the Fund invests. The annualized weighted average expense ratio of the Underlying Funds was 0.89% for the period ended June 30, 2009. The accompanying notes are an integral part of these financial statements. 48 | Semiannual Report Franklin Templeton Fund Allocator Series FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN TEMPLETON 2035 RETIREMENT TARGET FUND
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, 2009 ------------------------------ CLASS R (UNAUDITED) 2008 2007 2006(a) - ------- ---------------- ------- ------ ------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period .......................................... $ 7.13 $ 11.59 $10.88 $10.00 ------ ------- ------ ------ Income from investment operations(b): Net investment income (loss)(c, d) ......................................... (0.01) 0.03 0.28 0.11 Net realized and unrealized gains (losses) ................................. 0.76 (4.12) 0.89 0.93 ------ ------- ------ ------ Total from investment operations .............................................. 0.75 (4.09) 1.17 1.04 ------ ------- ------ ------ Less distributions from: Net investment income and short term gains received from Underlying Funds .. (0.01) (0.05) (0.16) (0.13) Net realized gains ......................................................... (0.10) (0.32) (0.30) (0.03) ------ ------- ------ ------ Total distributions ........................................................... (0.11) (0.37) (0.46) (0.16) ------ ------- ------ ------ Redemption fees(e) ............................................................ -- --(f) --(f) -- ------ ------- ------ ------ Net asset value, end of period ................................................ $ 7.77 $ 7.13 $11.59 $10.88 ====== ======= ====== ====== Total return(g) ............................................................... 10.60% (36.05)% 10.76% 10.40% RATIOS TO AVERAGE NET ASSETS(h) Expenses before waiver and payments by affiliates(i) .......................... 1.99% 2.34% 5.34% 13.62% Expenses net of waiver and payments by affiliates(i) .......................... 0.66% 0.69% 0.66% 0.65% Net investment income (loss)(d) ............................................... (0.38)% 0.67% 1.89% 1.89% SUPPLEMENTAL DATA Net assets, end of period (000's) ............................................. $ 267 $ 172 $ 314 $ 23 Portfolio turnover rate ....................................................... 8.85% 7.54% 14.95% 8.29%
(a) For the period August 1, 2006 (commencement of operations) to December 31, 2006. (b) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (c) Based on average daily shares outstanding. (d) Recognition of net investment income by the Fund is affected by the timing of declaration of dividends by the Underlying Funds in which the Fund invests. (e) Effective September 1, 2008, the redemption fee was eliminated. (f) Amount rounds to less than $0.01 per share. (g) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. (h) Ratios are annualized for periods less than one year. (i) Does not include expenses of the Underlying Funds in which the Fund invests. The annualized weighted average expense ratio of the Underlying Funds was 0.89% for the period ended June 30, 2009. The accompanying notes are an integral part of these financial statements. Semiannual Report | 49 Franklin Templeton Fund Allocator Series FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN TEMPLETON 2035 RETIREMENT TARGET FUND
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, 2009 ------------------------------ ADVISOR CLASS (UNAUDITED) 2008 2007 2006(a) - ------------- ---------------- ------- ------ ------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period .......................................... $ 7.14 $ 11.64 $10.89 $10.00 ------ ------- ------ ------ Income from investment operations(b): Net investment income(c, d) ................................................ --(e) 0.11 0.20 0.18 Net realized and unrealized gains (losses) ................................. 0.77 (4.18) 1.04 0.88 ------ ------- ------ ------ Total from investment operations .............................................. 0.77 (4.07) 1.24 1.06 ------ ------- ------ ------ Less distributions from: Net investment income and short term gains received from Underlying Funds .. (0.01) (0.11) (0.19) (0.14) Net realized gains ......................................................... (0.10) (0.32) (0.30) (0.03) ------ ------- ------ ------ Total distributions ........................................................... (0.11) (0.43) (0.49) (0.17) ------ ------- ------ ------ Redemption fees(f) ............................................................ -- --(e) --(e) -- ------ ------- ------ ------ Net asset value, end of period ................................................ $ 7.80 $ 7.14 $11.64 $10.89 ------ ------- ------ ------ Total return(g) ............................................................... 10.86% (35.72)% 11.34% 10.60% ====== ======= ====== ====== RATIOS TO AVERAGE NET ASSETS(h) Expenses before waiver and payments by affiliates(i) .......................... 1.49% 1.84% 4.84% 13.12% Expenses net of waiver and payments by affiliates(i) .......................... 0.16% 0.19% 0.16% 0.15% Net investment incomed ........................................................ 0.12% 1.17% 2.39% 2.39% SUPPLEMENTAL DATA Net assets, end of period (000's) ............................................. $ 377 $ 213 $ 119 $ 59 Portfolio turnover rate ....................................................... 8.85% 7.54% 14.95% 8.29%
(a) For the period August 1, 2006 (commencement of operations) to December 31, 2006. (b) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (c) Based on average daily shares outstanding. (d) Recognition of net investment income by the Fund is affected by the timing of declaration of dividends by the Underlying Funds in which the Fund invests. (e) Amount rounds to less than $0.01 per share. (f) Effective September 1, 2008, the redemption fee was eliminated. (g) Total return is not annualized for periods less than one year. (h) Ratios are annualized for periods less than one year. (i) Does not include expenses of the Underlying Funds in which the Fund invests. The annualized weighted average expense ratio of the Underlying Funds was 0.89% for the period ended June 30, 2009. The accompanying notes are an integral part of these financial statements. 50 | Semiannual Report Franklin Templeton Fund Allocator Series STATEMENT OF INVESTMENTS, JUNE 30, 2009 (UNAUDITED)
FRANKLIN TEMPLETON 2035 RETIREMENT TARGET FUND SHARES VALUE ---------------------------------------------- ------- ----------- INVESTMENTS IN UNDERLYING FUNDS(a) DOMESTIC EQUITY 64.6% (b) Franklin Flex Cap Growth Fund, Advisor Class ...................... 74,655 $ 2,536,791 (b) Franklin Growth Opportunities Fund, Advisor Class ................. 66,827 1,009,751 Franklin MicroCap Value Fund, Advisor Class ....................... 20,040 463,134 (b) Franklin Natural Resources Fund, Advisor Class .................... 17,114 447,694 (b) Franklin Small Cap Growth Fund, Advisor Class ..................... 60,199 438,250 Mutual Shares Fund, Class Z ....................................... 131,110 2,117,422 ----------- 7,013,042 ----------- DOMESTIC FIXED INCOME 3.0% Franklin Total Return Fund, Advisor Class ......................... 16,402 149,914 Franklin U.S. Government Securities Fund, Advisor Class ........... 27,302 181,016 ----------- 330,930 ----------- FOREIGN EQUITY 29.3% Franklin Global Real Estate Fund, Advisor Class ................... 35,356 166,172 (b) Franklin Gold and Precious Metals Fund, Advisor Class ............. 18,974 616,641 Mutual European Fund, Class Z ..................................... 63,775 1,133,279 Templeton China World Fund, Advisor Class ......................... 21,275 609,741 Templeton Foreign Fund, Advisor Class ............................. 125,962 653,741 ----------- 3,179,574 ----------- FOREIGN FIXED INCOME 1.8% Franklin Templeton Emerging Market Debt Opportunities Fund ........ 1,406 13,049 Templeton Global Bond Fund, Advisor Class ......................... 15,405 181,627 ----------- 194,676 ----------- TOTAL INVESTMENTS IN UNDERLYING FUNDS BEFORE SHORT TERM INVESTMENTS (COST $12,575,468) 98.7% ....................................... 10,718,222 ----------- SHORT TERM INVESTMENTS (COST $93,337) 0.9% MONEY MARKET FUNDS 0.9% (c) Institutional Fiduciary Trust Money Market Portfolio, 0.00% ....... 93,337 93,337 ----------- TOTAL INVESTMENTS IN UNDERLYING FUNDS (COST $12,668,805) 99.6% .... 10,811,559 OTHER ASSETS, LESS LIABILITIES 0.4% ............................... 48,718 ----------- NET ASSETS 100.0% ................................................. $10,860,277 ===========
(a) See Note 6 regarding investments in Underlying Funds. (b) Non-income producing. (c) The rate shown is the annualized seven-day yield at period end. The accompanying notes are an integral part of these financial statements. Semiannual Report | 51 Franklin Templeton Fund Allocator Series FINANCIAL HIGHLIGHTS FRANKLIN TEMPLETON 2045 RETIREMENT TARGET FUND
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, 2009 ----------------------------- CLASS A (UNAUDITED) 2008 2007 2006(a) - ------- ---------------- ------- ------- ------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period .................. $ 6.89 $ 11.57 $ 10.89 $ 10.00 ------ ------- ------- ------- Income from investment operations(b): Net investment income (loss)(c, d) ................. (0.02) 0.06 0.17 0.08 Net realized and unrealized gains (losses) ......... 0.77 (4.29) 1.06 0.97 ------ ------- ------- ------- Total from investment operations ...................... 0.75 (4.23) 1.23 1.05 ------ ------- ------- ------- Less distributions from: Net investment income and short term gains received from Underlying Funds .................. --(e) (0.08) (0.16) (0.13) Net realized gains ................................. (0.14) (0.37) (0.39) (0.03) ------ ------- ------- ------- Total distributions ................................... (0.14) (0.45) (0.55) (0.16) ------ ------- ------- ------- Redemption fees(f) .................................... -- --(e) --(e) -- ------ ------- ------- ------- Net asset value, end of period ........................ $ 7.50 $ 6.89 $ 11.57 $ 10.89 ====== ======= ======= ======= Total return(g) ....................................... 11.00% (37.46)% 11.32% 10.55% RATIOS TO AVERAGE NET ASSETS(h) Expenses before waiver and payments by affiliates(i) .. 2.43% 3.12% 6.86% 13.15% Expenses net of waiver and payments by affiliates(i) .. 0.45% 0.47% 0.47% 0.50% Net investment income (loss)(d) ....................... (0.45)% 0.66% 1.70% 1.97% SUPPLEMENTAL DATA Net assets, end of period (000's) ..................... $4,891 $ 3,389 $ 2,439 $ 1,169 Portfolio turnover rate ............................... 8.19% 8.09% 24.40% 8.01%
(a) For the period August 1, 2006 (commencement of operations) to December 31, 2006. (b) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (c) Based on average daily shares outstanding. (d) Recognition of net investment income by the Fund is affected by the timing of declaration of dividends by the Underlying Funds in which the Fund invests. (e) Amount rounds to less than $0.01 per share. (f) Effective September 1, 2008, the redemption fee was eliminated. (g) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. (h) Ratios are annualized for periods less than one year. (i) Does not include expenses of the Underlying Funds in which the Fund invests. The annualized weighted average expense ratio of the Underlying Funds was 0.92% for the period ended June 30, 2009. The accompanying notes are an integral part of these financial statements. 52 | Semiannual Report Franklin Templeton Fund Allocator Series FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN TEMPLETON 2045 RETIREMENT TARGET FUND
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, 2009 ----------------------------- CLASS C (UNAUDITED) 2008 2007 2006(a) - ------- ---------------- ------- ------- ------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period .................. $ 6.81 $ 11.48 $ 10.87 $10.00 ------ ------- ------- ------ Income from investment operations(b): Net investment income (loss)(c, d) ................. (0.04) 0.02 0.23 0.16 Net realized and unrealized gains (losses) ......... 0.76 (4.27) 0.91 0.87 ------ ------- ------- ------ Total from investment operations ...................... 0.72 (4.25) 1.14 1.03 Less distributions from: Net investment income and short term gains received from Underlying Funds ....... --(e) (0.05) (0.14) (0.13) Net realized gains ................................. (0.14) (0.37) (0.39) (0.03) ------ ------- ------- ------ Total distributions ................................... (0.14) (0.42) (0.53) (0.16) ------ ------- ------- ------ Redemption fees(f) .................................... -- --(e) --(e) -- ------ ------- ------- ------ Net asset value, end of period ........................ $ 7.39 $ 6.81 $ 11.48 $10.87 ====== ======= ======= ====== Total return(g) ....................................... 10.69% (37.95)% 10.50% 10.30% RATIOS TO AVERAGE NET ASSETS(h) Expenses before waiver and payments by affiliates(i) .. 3.13% 3.82% 7.55% 13.74% Expenses net of waiver and payments by affiliates(i) .. 1.15% 1.17% 1.16% 1.09% Net investment income (loss)(d) ....................... (1.15)% (0.04)% 1.01% 1.38% SUPPLEMENTAL DATA Net assets, end of period (000's) ..................... $1,456 $ 958 $ 487 $ 67 Portfolio turnover rate ............................... 8.19% 8.09% 24.40% 8.01%
(a) For the period August 1, 2006 (commencement of operations) to December 31, 2006. (b) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (c) Based on average daily shares outstanding. (d) Recognition of net investment income by the Fund is affected by the timing of declaration of dividends by the Underlying Funds in which the Fund invests. (e) Amount rounds to less than $0.01 per share. (f) Effective September 1, 2008, the redemption fee was eliminated. (g) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. (h) Ratios are annualized for periods less than one year. (i) Does not include expenses of the Underlying Funds in which the Fund invests. The annualized weighted average expense ratio of the Underlying Funds was 0.92% for the period ended June 30, 2009. The accompanying notes are an integral part of these financial statements. Semiannual Report | 53 Franklin Templeton Fund Allocator Series FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN TEMPLETON 2045 RETIREMENT TARGET FUND
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, 2009 ---------------------------- CLASS R (UNAUDITED) 2008 2007 2006(a) - ------- ---------------- ------- ------- ------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period .................. $ 6.88 $ 11.54 $10.88 $10.00 ------ ------- ------ ------ Income from investment operations(b): Net investment income (loss)(c, d) ................. (0.02) 0.02 0.24 0.08 Net realized and unrealized gains (losses) ......... 0.77 (4.25) 0.97 0.96 ------ ------- ------ ------ Total from investment operations ...................... 0.75 (4.23) 1.21 1.04 ------ ------- ------ ------ Less distributions from: Net investment income and short term gains received from Underlying Funds ....... --(e) (0.06) (0.16) (0.13) Net realized gains ................................. (0.14) (0.37) (0.39) (0.03) ------ ------- ------ ------ Total distributions ................................... (0.14) (0.43) (0.55) (0.16) ------ ------- ------ ------ Redemption fees(f) .................................... -- --(e) --(e) -- ------ ------- ------ ------ Net asset value, end of period ........................ $ 7.49 $ 6.88 $11.54 $10.88 ====== ======= ====== ====== Total return(g) ....................................... 11.02% (37.64)% 11.13% 10.44% RATIOS TO AVERAGE NET ASSETS(h) Expenses before waiver and payments by affiliates(i) .. 2.63% 3.32% 7.04% 13.30% Expenses net of waiver and payments by affiliates(i) .. 0.65% 0.67% 0.65% 0.65% Net investment income (loss)(d) ....................... (0.65)% 0.46% 1.52% 1.82% SUPPLEMENTAL DATA Net assets, end of period (000's) ..................... $ 204 $ 156 $ 160 $ 12 Portfolio turnover rate ............................... 8.19% 8.09% 24.40% 8.01%
(a) For the period August 1, 2006 (commencement of operations) to December 31, 2006. (b) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (c) Based on average daily shares outstanding. (d) Recognition of net investment income by the Fund is affected by the timing of declaration of dividends by the Underlying Funds in which the Fund invests. (e) Amount rounds to less than $0.01 per share. (f) Effective September 1, 2008, the redemption fee was eliminated. (g) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. (h) Ratios are annualized for periods less than one year. (i) Does not include expenses of the Underlying Funds in which the Fund invests. The annualized weighted average expense ratio of the Underlying Funds was 0.92% for the period ended June 30, 2009. The accompanying notes are an integral part of these financial statements. 54 | Semiannual Report Franklin Templeton Fund Allocator Series FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN TEMPLETON 2045 RETIREMENT TARGET FUND
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, 2009 ----------------------------- ADVISOR CLASS (UNAUDITED) 2008 2007 2006(a) - ------------- ---------------- ------- ------- ------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period .................. $ 6.89 $ 11.59 $10.90 $10.00 ------ ------- ------ ------ Income from investment operations(b): Net investment income (loss)(c, d) ................. (0.01) 0.06 0.49 0.12 Net realized and unrealized gains (losses) ......... 0.79 (4.29) 0.78 0.95 ------ ------- ------ ------ Total from investment operations ...................... 0.78 (4.23) 1.27 1.07 ------ ------- ------ ------ Less distributions from: Net investment income and short term gains received from Underlying Funds ............ --(e) (0.10) (0.19) (0.14) Net realized gains ................................. (0.14) (0.37) (0.39) (0.03) ------ ------- ------ ------ Total distributions ................................... (0.14) (0.47) (0.58) (0.17) ------ ------- ------ ------ Redemption fees(f) .................................... -- --(e) --(e) -- ------ ------- ------ ------ Net asset value, end of period ........................ $ 7.53 $ 6.89 $11.59 $10.90 ====== ======= ====== ====== Total return(g) ....................................... 11.44% (37.39)% 11.65% 10.72% RATIOS TO AVERAGE NET ASSETS(h) Expenses before waiver and payments by affiliates(i) .. 2.13% 2.82% 6.54% 12.80% Expenses net of waiver and payments by affiliates(i) .. 0.15% 0.17% 0.15% 0.15% Net investment income (loss)(d) ....................... (0.15)% 0.96% 2.02% 2.32% SUPPLEMENTAL DATA Net assets, end of period (000's) ..................... $ 139 $ 105 $ 164 $ 17 Portfolio turnover rate ............................... 8.19% 8.09% 24.40% 8.01%
(a) For the period August 1, 2006 (commencement of operations) to December 31, 2006. (b) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (c) Based on average daily shares outstanding. (d) Recognition of net investment income by the Fund is affected by the timing of declaration of dividends by the Underlying Funds in which the Fund invests. (e) Amount rounds to less than $0.01 per share. (f) Effective September 1, 2008, the redemption fee was eliminated. (g) Total return is not annualized for periods less than one year. (h) Ratios are annualized for periods less than one year. (i) Does not include expenses of the Underlying Funds in which the Fund invests. The annualized weighted average expense ratio of the Underlying Funds was 0.92% for the period ended June 30, 2009. The accompanying notes are an integral part of these financial statements. Semiannual Report | 55 Franklin Templeton Fund Allocator Series STATEMENT OF INVESTMENTS, JUNE 30, 2009 (UNAUDITED)
FRANKLIN TEMPLETON 2045 RETIREMENT TARGET FUND SHARES VALUE - ---------------------------------------------- ------ ---------- INVESTMENTS IN UNDERLYING FUNDS(a) DOMESTIC EQUITY 67.3% (b) Franklin Flex Cap Growth Fund, Advisor Class ...................... 47,149 $1,602,111 (b) Franklin Growth Opportunities Fund, Advisor Class ................. 44,875 678,059 Franklin MicroCap Value Fund, Advisor Class ....................... 13,236 305,894 (b) Franklin Natural Resources Fund, Advisor Class .................... 11,545 302,016 (b) Franklin Small Cap Growth Fund, Advisor Class ..................... 39,912 290,558 Mutual Shares Fund, Class Z ....................................... 82,128 1,326,368 ---------- 4,505,006 ---------- FOREIGN EQUITY 31.4% Franklin Global Real Estate Fund, Advisor Class ................... 23,676 111,279 (b) Franklin Gold and Precious Metals Fund, Advisor Class ............. 12,400 403,012 Mutual European Fund, Class Z ..................................... 42,256 750,881 Templeton China World Fund, Advisor Class ......................... 14,266 408,859 Templeton Foreign Fund, Advisor Class ............................. 81,714 424,095 ---------- 2,098,126 ---------- TOTAL INVESTMENTS IN UNDERLYING FUNDS BEFORE SHORT TERM INVESTMENTS (COST $7,716,607) 98.7% ........................................ 6,603,132 ---------- SHORT TERM INVESTMENTS (COST $54,779) 0.8% MONEY MARKET FUNDS 0.8% (c) Institutional Fiduciary Trust Money Market Portfolio, 0.00% ....... 54,779 54,779 ---------- TOTAL INVESTMENTS IN UNDERLYING FUNDS (COST $7,771,386) 99.5% ..... 6,657,911 OTHER ASSETS, LESS LIABILITIES 0.5% ............................... 32,148 ---------- NET ASSETS 100.0% ................................................. $6,690,059 ==========
(a) See Note 6 regarding investments in Underlying Funds. (b) Non-income producing. (c) The rate shown is the annualized seven-day yield at period end. The accompanying notes are an integral part of these financial statements. 56 | Semiannual Report Franklin Templeton Fund Allocator Series FINANCIAL STATEMENTS STATEMENTS OF ASSETS AND LIABILITIES June 30, 2009 (unaudited)
FRANKLIN TEMPLETON FRANKLIN TEMPLETON FRANKLIN TEMPLETON FRANKLIN TEMPLETON 2015 RETIREMENT 2025 RETIREMENT 2035 RETIREMENT 2045 RETIREMENT TARGET FUND TARGET FUND TARGET FUND TARGET FUND ------------------ ------------------ ------------------ ------------------ Assets: Investments in Underlying Funds: (Note 6) Cost .................................. $21,012,081 $21,686,388 $12,668,805 $7,771,386 ----------- ----------- ----------- ---------- Value ................................. $18,292,693 $18,721,621 $10,811,559 $6,657,911 Receivables: Capital shares sold ................... 44,982 64,859 42,603 26,680 Affiliates ............................ 23,319 25,339 36,008 38,979 Underlying Funds (Note 3f) ............ 8,701 9,413 6,186 4,068 Other assets ............................. 21 18 10 7 ----------- ----------- ----------- ---------- Total assets ....................... 18,369,716 18,821,250 10,896,366 6,727,645 ----------- ----------- ----------- ---------- Liabilities: Payables: Capital shares redeemed ............... 85,289 56 9,178 3,463 Distributions to shareholders ......... 8,275 9,572 13,541 20,211 Reports to shareholders ............... 6,523 7,168 4,629 4,581 Professional fees ..................... 9,225 6,385 6,850 5,506 Accrued expenses and other liabilities ... 2,295 766 1,891 3,825 ----------- ----------- ----------- ---------- Total liabilities .................. 111,607 23,947 36,089 37,586 ----------- ----------- ----------- ---------- Net assets, at value ............ $18,258,109 $18,797,303 $10,860,277 $6,690,059 ----------- ----------- ----------- ---------- Net assets consist of: Paid-in capital .......................... $21,721,956 $22,736,408 $13,409,756 $8,307,198 Undistributed net investment income (loss) ................................ -- 14,935 (13,861) (15,732) Distributions in excess of net investment income ................................ (6,618) -- -- -- Net unrealized appreciation (depreciation) (2,719,388) (2,964,767) (1,857,246) (1,113,475) Accumulated net realized gain (loss) ..... (737,841) (989,273) (678,372) (487,932) ----------- ----------- ----------- ---------- Net assets, at value ............ $18,258,109 $18,797,303 $10,860,277 $6,690,059 =========== =========== =========== ==========
The accompanying notes are an integral part of these financial statements. Semiannual Report | 57 Franklin Templeton Fund Allocator Series FINANCIAL STATEMENTS (CONTINUED) STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED) June 30, 2009 (unaudited)
FRANKLIN TEMPLETON FRANKLIN TEMPLETON FRANKLIN TEMPLETON FRANKLIN TEMPLETON 2015 RETIREMENT 2025 RETIREMENT 2035 RETIREMENT 2045 RETIREMENT TARGET FUND TARGET FUND TARGET FUND TARGET FUND ------------------ ------------------ ------------------ ------------------ CLASS A: Net assets, at value ...................... $12,123,403 $14,253,686 $7,706,964 $4,891,168 ----------- ----------- ---------- ---------- Shares outstanding ........................ 1,377,286 1,762,369 992,286 652,112 ----------- ----------- ---------- ---------- Net asset value per sharea ................ $ 8.80 $ 8.09 $ 7.77 $ 7.50 ----------- ----------- ---------- ---------- Maximum offering price per share (net asset value per share / 94.25%) .............. $ 9.34 $ 8.58 $ 8.24 $ 7.96 ----------- ----------- ---------- ---------- CLASS C: Net assets, at value ...................... $ 4,885,578 $ 3,985,258 $2,509,194 $1,455,669 ----------- ----------- ---------- ---------- Shares outstanding ........................ 558,897 497,406 327,028 196,889 ----------- ----------- ---------- ---------- Net asset value and maximum offering price per share(a) ........................... $ 8.74 $ 8.01 $ 7.67 $ 7.39 ----------- ----------- ---------- ---------- CLASS R: Net assets, at value ...................... $ 1,068,825 $ 183,968 $ 267,450 $ 203,830 ----------- ----------- ---------- ---------- Shares outstanding ........................ 121,692 22,780 34,417 27,217 ----------- ----------- ---------- ---------- Net asset value and maximum offering price per share .............................. $ 8.78 $ 8.08 $ 7.77 $ 7.49 ----------- ----------- ---------- ---------- ADVISOR CLASS: Net assets, at value ...................... $ 180,303 $ 374,391 $ 376,669 $ 139,392 ----------- ----------- ---------- ---------- Shares outstanding ........................ 20,441 46,196 48,281 18,521 ----------- ----------- ---------- ---------- Net asset value and maximum offering price per share ............................... $ 8.82 $ 8.10 $ 7.80 $ 7.53 ----------- ----------- ---------- ----------
(a) Redemption price is equal to net asset value less contingent deferred sales charges, if applicable. The accompanying notes are an integral part of these financial statements. 58 | Semiannual Report Franklin Templeton Fund Allocator Series FINANCIAL STATEMENTS (CONTINUED) STATEMENTS OF OPERATIONS for the six months ended June 30, 2009 (unaudited)
FRANKLIN TEMPLETON FRANKLIN TEMPLETON FRANKLIN TEMPLETON FRANKLIN TEMPLETON 2015 RETIREMENT 2025 RETIREMENT 2035 RETIREMENT 2045 RETIREMENT TARGET FUND TARGET FUND TARGET FUND TARGET FUND ------------------ ------------------ ------------------ ------------------ Investment income: Dividends from Underlying Funds (Note 6) ............................ $ 109,694 $ 60,084 $ 12,204 $ 55 ---------- ---------- ---------- --------- Expenses: Asset allocation fees (Note 3a) ........ 18,337 17,426 10,383 6,502 Distribution fees: (Note 3c) Class A ............................. 15,155 16,815 9,355 5,861 Class C ............................. 22,979 15,376 9,131 5,547 Class R ............................. 2,326 399 505 418 Transfer agent fees (Note 3e) .......... 13,212 16,629 15,778 14,233 Reports to shareholders ................ 8,330 8,272 6,158 5,744 Registration and filing fees ........... 27,198 23,919 24,097 22,881 Professional fees ...................... 10,521 11,574 10,909 10,474 Trustees' fees and expenses ............ 154 64 40 23 Other .................................. 2,450 2,384 2,307 643 Expenses borne by Underlying Funds (Note 3f) ........................... (8,701) (9,413) (6,186) (4,068) ---------- ---------- ---------- --------- Total expenses ................... 111,961 103,445 82,477 68,258 Expenses waived/paid by affiliates (Note 3g) ..................... (58,094) (58,542) (56,577) (52,486) ---------- ---------- ---------- --------- Net expenses ..................... 53,867 44,903 25,900 15,772 ---------- ---------- ---------- --------- Net investment income (loss) .. 55,827 15,181 (13,696) (15,717) ---------- ---------- ---------- --------- Realized and unrealized gains (losses): Net realized gain (loss) from sale of investments in Underlying Funds ..... (618,800) (718,921) (495,636) (327,748) Net change in unrealized appreciation (depreciation) on investments in Underlying Funds .................... 2,013,641 2,345,667 1,521,412 1,009,972 ---------- ---------- ---------- --------- Net realized and unrealized gain (loss) ... 1,394,841 1,626,746 1,025,776 682,224 ---------- ---------- ---------- --------- Net increase (decrease) in net assets resulting from operations .............. $1,450,668 $1,641,927 $1,012,080 $ 666,507 ========== ========== ========== =========
The accompanying notes are an integral part of these financial statements. Semiannual Report | 59 Franklin Templeton Fund Allocator Series FINANCIAL STATEMENTS (CONTINUED) STATEMENTS OF CHANGES IN NET ASSETS
FRANKLIN TEMPLETON 2015 FRANKLIN TEMPLETON 2025 RETIREMENT TARGET FUND RETIREMENT TARGET FUND ------------------------------------ ------------------------------------ SIX MONTHS ENDED SIX MONTHS ENDED JUNE 30, 2009 YEAR ENDED JUNE 30, 2009 YEAR ENDED (UNAUDITED) DECEMBER 31, 2008 (UNAUDITED) DECEMBER 31, 2008 ---------------- ----------------- ---------------- ----------------- Increase (decrease) in net assets: Operations: Net investment income ..................... $ 55,827 $ 295,731 $ 15,181 $ 182,034 Net realized gain (loss) from Underlying Funds ....................... (618,800) 41,856 (718,921) 46,702 Net change in unrealized appreciation (depreciation) on investments in Underlying Funds ....................... 2,013,641 (4,633,652) 2,345,667 (5,148,508) ----------- ----------- ----------- ----------- Net increase (decrease) in net assets resulting from operations ........ 1,450,668 (4,296,065) 1,641,927 (4,919,772) ----------- ----------- ----------- ----------- Distributions to shareholders from: Net investment income and short term gains received from Underlying Funds: Class A ................................ (95,020) (191,755) (19,540) (181,018) Class C ................................ (28,139) (71,295) (5,249) (32,675) Class R ................................ (7,594) (16,886) (279) (2,414) Advisor Class .......................... (1,767) (3,962) (647) (6,999) Net realized gains: Class A ................................ (68,721) (143,847) (173,643) (293,606) Class C ................................ (26,120) (107,235) (49,144) (51,093) Class R ................................ (6,367) (18,739) (2,250) (6,089) Advisor Class .......................... (1,018) (3,513) (4,568) (12,457) ----------- ----------- ----------- ----------- Total distributions to shareholders .......... (234,746) (557,232) (255,320) (586,351) ----------- ----------- ----------- ----------- Capital share transactions: (Note 2) Class A ................................ 1,879,978 7,039,466 3,271,590 7,272,636 Class C ................................ (18,240) 3,984,119 1,161,689 2,382,415 Class R ................................ 164,845 72,378 15,244 49,941 Advisor Class .......................... 2,647 184,187 14,765 86,251 ----------- ----------- ----------- ----------- Total capital share transactions ............. 2,029,230 11,280,150 4,463,288 9,791,243 ----------- ----------- ----------- ----------- Redemption fees .............................. -- 112 -- 253 ----------- ----------- ----------- ----------- Net increase (decrease) in net assets ....................... 3,245,152 6,426,965 5,849,895 4,285,373 Net assets: Beginning of period .......................... 15,012,957 8,585,992 12,947,408 8,662,035 ----------- ----------- ----------- ----------- End of period ................................ $18,258,109 $15,012,957 $18,797,303 $12,947,408 =========== =========== =========== =========== Undistributed net investment income (distributions in excess of net investment income) included in net assets: End of period ............................. $ (6,618) $ 70,075 $ 14,935 $ 25,469 =========== =========== =========== ===========
The accompanying notes are an integral part of these financial statements. 60 | Semiannual Report Franklin Templeton Fund Allocator Series FINANCIAL STATEMENTS (CONTINUED) STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
FRANKLIN TEMPLETON 2035 FRANKLIN TEMPLETON 2045 RETIREMENT TARGET FUND RETIREMENT TARGET FUND ------------------------------------ ------------------------------------ SIX MONTHS ENDED SIX MONTHS ENDED JUNE 30, 2009 YEAR ENDED JUNE 30, 2009 YEAR ENDED (UNAUDITED) DECEMBER 31, 2008 (UNAUDITED) DECEMBER 31, 2008 ---------------- ----------------- ---------------- ----------------- Increase (decrease) in net assets: Operations: Net investment income (loss) .............. $ (13,696) $ 53,049 $ (15,717) $ 23,744 Net realized gain (loss) from Underlying Funds ....................... (495,636) 2,648 (327,748) 12,489 Net change in unrealized appreciation (depreciation) on investments in Underlying Funds ....................... 1,521,412 (3,303,139) 1,009,972 (2,122,749) ----------- ----------- ---------- ----------- Net increase (decrease) in net assets resulting from operations ......... 1,012,080 (3,247,442) 666,507 (2,086,516) ----------- ----------- ---------- ----------- Distributions to shareholders from: Net investment income and short term gains received from Underlying Funds: Class A ................................ (13,028) (63,814) (1,463) (40,147) Class C ................................ (3,660) (9,049) (416) (7,185) Class R ................................ (385) (1,220) (65) (1,248) Advisor Class .......................... (475) (3,175) (41) (1,555) Net realized gains: Class A ................................ (96,086) (183,268) (92,607) (124,622) Class C ................................ (31,560) (45,620) (27,945) (27,951) Class R ................................ (3,334) (10,162) (3,857) (10,661) Advisor Class .......................... (4,682) (8,438) (2,631) (6,679) ----------- ----------- ---------- ----------- Total distributions to shareholders .......... (153,210) (324,746) (129,025) (220,048) ----------- ----------- ---------- ----------- Capital share transactions: (Note 2) Class A ................................ 1,723,248 4,203,952 1,103,270 2,708,547 Class C ................................ 808,690 1,141,684 386,129 841,350 Class R ................................ 73,769 (16,717) 31,363 99,956 Advisor Class .......................... 139,168 203,645 24,494 14,472 ----------- ----------- ---------- ----------- Total capital share transactions ............. 2,744,875 5,532,564 1,545,256 3,664,325 ----------- ----------- ---------- ----------- Redemption fees .............................. -- 105 -- 68 ----------- ----------- ---------- ----------- Net increase (decrease) in net assets ........................... 3,603,745 1,960,481 2,082,738 1,357,829 Net assets: Beginning of period .......................... 7,256,532 5,296,051 4,607,321 3,249,492 ----------- ----------- ---------- ----------- End of period ................................ $10,860,277 $ 7,256,532 $6,690,059 $ 4,607,321 ----------- ----------- ---------- ----------- Undistributed net investment income (loss) included in net assets: End of period ................................ $ (13,861) $ 17,383 $ (15,732) $ 1,970 =========== =========== ========== ===========
The accompanying notes are an integral part of these financial statements. Semiannual Report | 61 Franklin Templeton Fund Allocator Series NOTES TO FINANCIAL STATEMENTS (UNAUDITED) 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES Franklin Templeton Fund Allocator Series (Trust) is registered under the Investment Company Act of 1940, as amended, (1940 Act) as an open-end investment company, consisting of ten separate funds, four of which are included in this report (Funds). The financial statements of the remaining funds in the Trust are presented separately. The Funds invest primarily in Franklin Templeton mutual funds (Underlying Funds). The Funds offer four classes of shares: Class A, Class C, Class R, and Advisor Class. Each class of shares differs by its initial sales load, contingent deferred sales charges, distribution fees, voting rights on matters affecting a single class and its exchange privilege. The following summarizes the Funds' significant accounting policies. A. SECURITY VALUATION Net asset value per share is calculated as of the close of trading of the NYSE. Investments in the Underlying Funds are valued at their closing net asset value each trading day. B. INCOME TAXES No provision has been made for U.S. income taxes because it is each fund's policy to qualify as a regulated investment company under the Internal Revenue Code and to distribute to shareholders substantially all of its taxable income and net realized gains. The Funds have reviewed the tax positions, taken on federal income tax returns, for each of the three open tax years and as of June 30, 2009, and have determined that no provision for income tax is required in the Funds' financial statements. C. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS Security transactions are accounted for on trade date. Realized gains and losses on security transactions are determined on a specific identification basis. Estimated expenses are accrued daily. Dividend income and realized gain distributions by Underlying Funds are recorded on the ex-dividend date. Distributions to shareholders are recorded on the ex-dividend date and are determined according to income tax regulations (tax basis). Distributable earnings determined on a tax basis may differ from earnings recorded in accordance with accounting principles generally accepted in the United States of America. These differences may be permanent or temporary. Permanent differences are reclassified among capital accounts to reflect their tax character. These reclassifications have no impact on net assets or the results of operations. Temporary differences are not reclassified, as they may reverse in subsequent periods. Common expenses incurred by the Trust are allocated among the funds based on the ratio of net assets of each fund to the combined net assets of the Trust. Fund specific expenses are charged directly to the fund that incurred the expense. 62 | Semiannual Report Franklin Templeton Fund Allocator Series NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) C. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS (CONTINUED) The Funds indirectly bear their proportionate share of expenses from the Underlying Funds. Since the Underlying Funds have varied expense levels and the Funds may own different proportions of the Underlying Funds at different times, the amount of expenses incurred indirectly by the Funds will vary. Realized and unrealized gains and losses and net investment income, not including class specific expenses, are allocated daily to each class of shares based upon the relative proportion of net assets of each class. Differences in per share distributions, by class, are generally due to differences in class specific expenses. D. ACCOUNTING ESTIMATES The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the amounts of income and expenses during the reporting period. Actual results could differ from those estimates. E. REDEMPTION FEES A short term trading redemption fee was imposed, with some exceptions, on any fund shares that were redeemed or exchanged within seven calendar days following their purchase date. The redemption fee was 2% of the amount redeemed. Such fees were retained by the Funds and accounted for as an addition to paid-in capital. Effective September 1, 2008, the redemption fee was eliminated. F. GUARANTEES AND INDEMNIFICATIONS Under the Trust's organizational documents, its officers and trustees are indemnified by the Trust against certain liabilities arising out of the performance of their duties to the Trust. Additionally, in the normal course of business, the Trust, on behalf of the Funds, enters into contracts with service providers that contain general indemnification clauses. The Trust's maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Trust that have not yet occurred. Currently, the Trust expects the risk of loss to be remote. Semiannual Report | 63 Franklin Templeton Fund Allocator Series NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 2. SHARES OF BENEFICIAL INTEREST At June 30, 2009, there were an unlimited number of shares authorized (without par value). Transactions in the Funds' shares were as follows:
FRANKLIN TEMPLETON FRANKLIN TEMPLETON 2015 RETIREMENT 2025 RETIREMENT TARGET FUND TARGET FUND ---------------------- ---------------------- SHARES AMOUNT SHARES AMOUNT -------- ----------- -------- ----------- CLASS A SHARES: Six Months ended June 30, 2009 Shares sold .................... 446,811 $ 3,656,749 555,939 $ 4,145,582 Shares issued in reinvestment of distributions ............... 18,578 155,667 23,652 188,838 Shares redeemed ................ (243,951) (1,932,438) (144,616) (1,062,830) -------- ----------- -------- ----------- Net increase (decrease) ........ 221,438 $ 1,879,978 434,975 $ 3,271,590 ======== =========== ======== =========== Year ended December 31, 2008 Shares sold .................... 875,282 $ 8,706,575 961,941 $ 9,374,538 Shares issued in reinvestment of distributions ............... 32,398 299,153 49,889 441,620 Shares redeemed ................ (216,068) (1,966,262) (291,651) (2,543,522) -------- ----------- -------- ----------- Net increase (decrease) ........ 691,612 $ 7,039,466 720,179 $ 7,272,636 ======== =========== ======== =========== CLASS C SHARES: Six Months ended June 30, 2009 Shares sold .................... 270,380 $ 2,153,571 232,711 $ 1,759,156 Shares issued in reinvestment of distributions ............... 5,689 47,298 6,059 47,951 Shares redeemed ................ (288,816) (2,219,109) (84,898) (645,418) -------- ----------- -------- ----------- Net increase (decrease) ........ (12,747) $ (18,240) 153,872 $ 1,161,689 ======== =========== ======== =========== Year ended December 31, 2008 Shares sold .................... 710,317 $ 7,167,011 273,080 $ 2,613,167 Shares issued in reinvestment of distributions ............... 16,315 154,225 8,634 76,524 Shares redeemed ................ (351,199) (3,337,117) (35,040) (307,276) -------- ----------- -------- ----------- Net increase (decrease) ........ 375,433 $ 3,984,119 246,674 $ 2,382,415 ======== =========== ======== =========== CLASS R SHARES: Six Months ended June 30, 2009 Shares sold .................... 23,094 $ 185,639 2,841 $ 21,126 Shares issued in reinvestment of distributions ............... 1,672 13,951 318 2,530 Shares redeemed ................ (4,126) (34,745) (1,144) (8,412) -------- ----------- -------- ----------- Net increase (decrease) ........ 20,640 $ 164,845 2,015 $ 15,244 ======== =========== ======== =========== Year ended December 31, 2008 Shares sold .................... 27,245 $ 283,010 13,572 $ 137,944 Shares issued in reinvestment of distributions ............... 3,756 35,625 897 8,225 Shares redeemed ................ (24,499) (246,257) (10,175) (96,228) -------- ----------- -------- ----------- Net increase (decrease) ........ 6,502 $ 72,378 4,294 $ 49,941 ======== =========== ======== ===========
64 | Semiannual Report Franklin Templeton Fund Allocator Series NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 2. SHARES OF BENEFICIAL INTEREST (CONTINUED)
FRANKLIN TEMPLETON FRANKLIN TEMPLETON 2015 RETIREMENT 2025 RETIREMENT TARGET FUND TARGET FUND ---------------------- ---------------------- SHARES AMOUNT SHARES AMOUNT -------- ----------- -------- ----------- ADVISOR CLASS SHARES: Six Months ended June 30, 2009 Shares sold .................... -- $ -- 6,781 $ 44,550 Shares issued in reinvestment of distributions ............... 316 2,647 654 5,215 Shares redeemed ................ -- -- (4,370) (35,000) -------- ----------- -------- ----------- Net increase (decrease) ........ 316 $ 2,647 3,065 $ 14,765 ======== =========== ======== =========== Year ended December 31, 2008 Shares sold .................... 18,911 $ 201,893 10,079 $ 110,551 Shares issued in reinvestment of distributions ............... 750 7,092 2,132 19,170 Shares redeemed ................ (2,394) (24,798) (5,464) (43,470) -------- ----------- -------- ----------- Net increase (decrease) ........ 17,267 $ 184,187 6,747 $ 86,251 ======== =========== ======== ===========
FRANKLIN TEMPLETON FRANKLIN TEMPLETON 2035 RETIREMENT 2045 RETIREMENT TARGET FUND TARGET FUND ---------------------- ---------------------- SHARES AMOUNT SHARES AMOUNT -------- ----------- -------- ----------- CLASS A SHARES: Six Months ended June 30, 2009 Shares sold .................... 298,219 $ 2,105,844 194,017 $ 1,340,476 Shares issued in reinvestment of distributions ............... 12,840 97,999 10,627 79,513 Shares redeemed ................ (70,450) (480,595) (44,679) (316,719) -------- ----------- -------- ----------- Net increase (decrease) ........ 240,609 $ 1,723,248 159,965 $ 1,103,270 ======== =========== ======== =========== Year ended December 31, 2008 Shares sold .................... 539,247 $ 5,181,122 312,283 $ 3,000,890 Shares issued in reinvestment of distributions ............... 22,905 206,765 13,716 120,164 Shares redeemed ................ (134,219) (1,183,935) (44,626) (412,507) -------- ----------- -------- ----------- Net increase (decrease) ........ 427,933 $ 4,203,952 281,373 $ 2,708,547 ======== =========== ======== =========== CLASS C SHARES: Six Months ended June 30, 2009 Shares sold .................... 138,200 $ 990,350 64,848 $ 444,538 Shares issued in reinvestment of distributions ............... 4,092 30,906 3,027 22,327 Shares redeemed ................ (30,828) (212,566) (11,613) (80,736) -------- ----------- -------- ----------- Net increase (decrease) ........ 111,464 $ 808,690 56,262 $ 386,129 ======== =========== ======== =========== Year ended December 31, 2008 Shares sold .................... 143,566 $ 1,353,699 103,668 $ 882,722 Shares issued in reinvestment of distributions ............... 5,241 48,916 3,042 27,321 Shares redeemed ................ (28,939) (260,931) (8,500) (68,693) -------- ----------- -------- ----------- Net increase (decrease) ........ 119,868 $ 1,141,684 98,210 $ 841,350 ======== =========== ======== ===========
Semiannual Report | 65 Franklin Templeton Fund Allocator Series NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 2. SHARES OF BENEFICIAL INTEREST (CONTINUED)
FRANKLIN TEMPLETON FRANKLIN TEMPLETON 2035 RETIREMENT 2045 RETIREMENT TARGET FUND TARGET FUND ---------------------- ---------------------- SHARES AMOUNT SHARES AMOUNT -------- ----------- -------- ----------- CLASS R SHARES: Six Months ended June 30, 2009 Shares sold .................... 10,317 $ 74,036 7,375 $ 48,929 Shares issued in reinvestment of distributions ............... 480 3,672 525 3,922 Shares redeemed ................ (529) (3,939) (3,294) (21,488) -------- ----------- -------- ----------- Net increase (decrease) ........ 10,268 $ 73,769 4,606 $ 31,363 ======== =========== ======== =========== Year ended December 31, 2008 Shares sold .................... 15,557 $ 156,698 19,145 $ 196,091 Shares issued in reinvestment of distributions ............... 1,147 11,056 1,208 11,418 Shares redeemed ................ (19,649) (184,471) (11,585) (107,553) -------- ----------- -------- ----------- Net increase (decrease) ........ (2,945) $ (16,717) 8,768 $ 99,956 ======== =========== ======== =========== ADVISOR CLASS SHARES: Six Months ended June 30, 2009 Shares sold .................... 17,724 $ 133,996 3,624 $ 26,159 Shares issued in reinvestment of distributions ............... 671 5,157 356 2,672 Shares redeemed ................ 2 15 (660) (4,337) -------- ----------- -------- ----------- Net increase (decrease) ........ 18,397 $ 139,168 3,320 $ 24,494 ======== =========== ======== =========== Year ended December 31, 2008 Shares sold .................... 20,527 $ 212,613 7,432 $ 73,689 Shares issued in reinvestment of distributions ............... 1,254 11,287 863 7,870 Shares redeemed ................ (2,139) (20,255) (7,256) (67,087) -------- ----------- -------- ----------- Net increase (decrease) ........ 19,642 $ 203,645 1,039 $ 14,472 ======== =========== ======== ===========
3. TRANSACTIONS WITH AFFILIATES Franklin Resources, Inc. is the holding company for various subsidiaries that together are referred to as Franklin Templeton Investments. Certain officers and trustees of the Trust are also officers and/or directors/trustees of certain of the Underlying Funds and of the following subsidiaries:
SUBSIDIARY AFFILIATION - ---------- --------------------- Franklin Advisers, Inc. (Advisers) Investment manager Franklin Templeton Services, LLC (FT Services) Administrative manager Franklin Templeton Distributors, Inc. (Distributors) Principal underwriter Franklin Templeton Investor Services, LLC (Investor Services) Transfer agent
66 | Semiannual Report Franklin Templeton Fund Allocator Series NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 3. TRANSACTIONS WITH AFFILIATES (CONTINUED) A. ASSET ALLOCATION FEES The Funds pay an asset allocation fee to Advisers of 0.25% per year of the average daily net assets of each of the Funds for investment advisory services, consisting principally of determining the allocation of assets of the Funds among the designated Underlying Funds. B. ADMINISTRATIVE FEES Under an agreement with Advisers, FT Services provides administrative services to the Funds. The fee is paid by Advisers based on average daily net assets, and is not an additional expense of the Funds. C. DISTRIBUTION FEES The Trust's Board of Trustees has adopted distribution plans for each share class, with the exception of Advisor Class shares, pursuant to Rule 12b-1 under the 1940 Act. On December 1, 2008, the Trust's Board of Trustees approved a modification to the Class A distribution plan, for those funds that had a Class A compensation plan, changing the form of the plan from a compensation to a reimbursement distribution plan. Under the distribution plan, the Funds reimburse Distributors for costs incurred in connection with the servicing, sale and distribution of each Funds' shares up to the maximum annual plan rate for each class. This change was effective February 1, 2009. Prior to February 1, 2009, under the Funds' Class A compensation distribution plan, the Funds paid Distributors for costs incurred in connection with the servicing, sale and distribution of the Funds' shares up to a certain percentage per year of its average daily net assets. In addition, under the Funds' compensation distribution plans, the Funds pay Distributors for costs incurred in connection with the servicing, sale and distribution of each fund's shares up to the maximum annual plan rate for each class. The maximum annual plan rates, based on the average daily net assets, for each class, are as follows: Class A .. 0.35% Class C .. 1.00% Class R .. 0.50%
The Board of Trustees has set the current rate at 0.30% per year for Class A shares until further notice and approval by the Board. Semiannual Report | 67 Franklin Templeton Fund Allocator Series NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 3. TRANSACTIONS WITH AFFILIATES (CONTINUED) D. SALES CHARGES/UNDERWRITING AGREEMENTS Distributors has advised the Funds of the following commission transactions related to the sales and redemptions of the Funds' shares for the period:
FRANKLIN FRANKLIN FRANKLIN FRANKLIN TEMPLETON TEMPLETON TEMPLETON TEMPLETON 2015 2025 2035 2045 RETIREMENT RETIREMENT RETIREMENT RETIREMENT TARGET FUND TARGET FUND TARGET FUND TARGET FUND ----------- ----------- ----------- ----------- Sales charges retained net of commissions paid to unaffiliated broker/dealers ... $14,761 $17,167 $9,901 $5,660 Contingent deferred sales charges retained .............. $ 106 $ 448 $ 217 $ 70
E. TRANSFER AGENT FEES For the period ended June 30, 2009, the Funds paid transfer agent fees as noted in the Statements of Operations of which the following amounts were retained by Investor Services:
FRANKLIN FRANKLIN FRANKLIN FRANKLIN TEMPLETON TEMPLETON TEMPLETON TEMPLETON 2015 2025 2035 2045 RETIREMENT RETIREMENT RETIREMENT RETIREMENT TARGET FUND TARGET FUND TARGET FUND TARGET FUND ----------- ----------- ----------- ----------- Transfer agent fees .............. $10,692 $14,807 $13,849 $12,485
F. SPECIAL SERVICING AGREEMENT Effective May 1, 2009, the Funds entered into a Special Servicing Agreement with the Underlying Funds and certain service providers of the Funds and of the Underlying Funds, pursuant to which each Underlying Fund pays a portion of the Funds' eligible expenses, which include transfer agency and shareholder servicing costs, to the extent such payments are less than the amount of the benefits realized or expected to be realized by the Underlying Fund from the investment in the Underlying Fund by the Funds. G. WAIVER AND EXPENSE REIMBURSEMENTS Advisers and Investor Services have agreed in advance to waive all or a portion of their respective fees and to assume payment of other expenses through April, 2010. Total expenses waived or paid are not subject to reimbursement by the Funds subsequent to the Funds' fiscal year end. After April 30, 2010, Advisers and Investor Services may discontinue this waiver at any time upon notice to the Funds' Board of Trustees. 68 | Semiannual Report Franklin Templeton Fund Allocator Series NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 3. TRANSACTIONS WITH AFFILIATES (CONTINUED) H. OTHER AFFILIATED TRANSACTIONS At June 30, 2009, Advisers owned a percentage of the Funds' outstanding shares as follows:
FRANKLIN TEMPLETON FRANKLIN TEMPLETON 2035 RETIREMENT 2045 RETIREMENT TARGET FUND TARGET FUND - ------------------ -------------------- 6.92% 10.84%
4. INCOME TAXES At June 30, 2009, the cost of investments and net unrealized appreciation (depreciation) for income tax purposes were as follows:
FRANKLIN FRANKLIN FRANKLIN FRANKLIN TEMPLETON TEMPLETON TEMPLETON TEMPLETON 2015 2025 2035 2045 RETIREMENT RETIREMENT RETIREMENT RETIREMENT TARGET FUND TARGET FUND TARGET FUND TARGET FUND ------------ ------------ ------------ ----------- Cost of investments ....... $ 21,276,323 $ 22,119,902 $ 13,006,101 $ 8,031,961 ============ ============ ============ =========== Unrealized appreciation ... $ 184,845 $ 118,816 $ 68,809 $ 39,661 Unrealized depreciation ... (3,168,475) (3,517,097) (2,263,351) (1,413,711) ------------ ------------ ------------ ----------- Net unrealized appreciation (depreciation) ......... $ (2,983,630) $ (3,398,281) $ (2,194,542) $(1,374,050) ------------ ------------ ------------ -----------
Net investment income (loss) differs for financial statement and tax purposes primarily due to differing treatment of short term capital gains distributions from Underlying Funds. Net realized gains (losses) differ for financial statement and tax purposes primarily due to differing treatments of wash sales and short term capital gains distributions from Underlying Funds. 5. INVESTMENT TRANSACTIONS Purchases and sales of Underlying Funds (excluding short term securities) for the period ended June 30, 2009, were as follows:
FRANKLIN FRANKLIN FRANKLIN FRANKLIN TEMPLETON TEMPLETON TEMPLETON TEMPLETON 2015 2025 2035 2045 RETIREMENT RETIREMENT RETIREMENT RETIREMENT TARGET FUND TARGET FUND TARGET FUND TARGET FUND ------------ ------------ ------------ ----------- Purchases ................. $2,661,710 $4,611,365 $3,412,826 $1,864,735 Sales ..................... $1,105,599 $1,046,948 $ 749,167 $ 432,833
Semiannual Report | 69 Franklin Templeton Fund Allocator Series NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 6. INVESTMENTS IN UNDERLYING FUNDS The Funds invest primarily in the Underlying Funds which are managed by Advisers or an affiliate of Advisers. The Funds do not invest in the Underlying Funds for the purpose of exercising management or control. At June 30, 2009, the Funds held no positions which exceed 5% of the Underlying Funds' shares outstanding. The Funds may invest in the Institutional Fiduciary Trust Money Market Portfolio (Sweep Money Fund), an open-end investment company managed by Advisers. Pursuant to a SEC exemptive order specific to the Funds' investment in the Sweep Money Fund, asset allocation fees are reduced on assets invested in the Sweep Money Fund, in an amount not to exceed the management and administrative fees paid by the Sweep Money Fund. 7. CREDIT FACILITY Effective January 23, 2009, the Funds, together with other U.S. registered and foreign investment funds managed by Franklin Templeton Investments (individually, "Borrower"; collectively "Borrowers"), entered into a joint syndicated senior unsecured credit facility totaling $725 million (Global Credit Facility) to provide a source of funds to the Borrowers for temporary and emergency purposes, including the ability to meet future unanticipated or unusually large redemption requests. Under the terms of the Global Credit Facility, the Funds shall, in addition to interest charged on any borrowings made by the Funds and other costs incurred by the Funds, pay their share of fees and expenses incurred in connection with the implementation and maintenance of the Global Credit Facility, based upon their relative share of the aggregate net assets of all of the Borrowers, including an annual commitment fee based upon the unused portion of the Global Credit Facility. During the period, the Funds incurred commitment fees of their pro rata portion of the Global Credit Facility, which is reflected in other expenses on the Statements of Operations. During the period ended June 30, 2009, the Funds did not utilize the Global Credit Facility. The commitment fees the Funds incurred for the period were as follows:
FRANKLIN FRANKLIN FRANKLIN FRANKLIN TEMPLETON TEMPLETON TEMPLETON TEMPLETON 2015 2025 2035 2045 RETIREMENT RETIREMENT RETIREMENT RETIREMENT TARGET FUND TARGET FUND TARGET FUND TARGET FUND ------------ ------------ ------------ ----------- Commitment fees ........... $16 $14 $8 $5
70 | Semiannual Report Franklin Templeton Fund Allocator Series NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 8. FAIR VALUE MEASUREMENTS Financial Accounting Standards Board (FASB) Statement No. 157, "Fair Value Measurement" (SFAS 157) establishes a fair value hierarchy that distinguishes between market data obtained from independent sources (observable inputs) and the Trust's own market assumptions (unobservable inputs). These inputs are used in determining the value of the Funds' investments and are summarized in the following fair value hierarchy: - Level 1 - quoted prices in active markets for identical securities - Level 2 - other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speed, credit risk, etc.) - Level 3 - significant unobservable inputs (including the Fund's own assumptions in determining the fair value of investments) The inputs or methodology used for valuing securities are not an indication of the risk associated with investing in those securities. At June 30, 2009, all the Funds' investments in securities carried at fair value were in Level 1 inputs. For detailed industry descriptions, see the accompanying Statements of Investments. 9. SUBSEQUENT EVENTS Management has evaluated subsequent events through August 17, 2009 and determined that no events have occurred that require disclosure. Semiannual Report | 71 Franklin Templeton Fund Allocator Series SHAREHOLDER INFORMATION BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT At a meeting held February 24, 2009, the Board of Trustees (Board), including a majority of non-interested or independent Trustees, approved renewal of the investment management agreement for each of the separate funds comprising Franklin Templeton Fund Allocator Series (Fund(s)). In reaching this decision, the Board took into account information furnished throughout the year at regular Board meetings, as well as information prepared specifically in connection with the annual renewal review process. Information furnished and discussed throughout the year included investment performance reports and related financial information for each Fund, as well as periodic reports on shareholder services, legal, compliance, pricing, brokerage commissions and execution and other services provided by the Investment Manager (Manager) and its affiliates. Information furnished specifically in connection with the renewal process included a report for each Fund prepared by Lipper, Inc. (Lipper), an independent organization, as well as additional material, including a Fund profitability analysis report prepared by management. The Lipper reports compared each Fund's investment performance and expenses with those of other mutual funds deemed comparable to the Fund as selected by Lipper. The Fund profitability analysis report discussed the profitability to Franklin Templeton Investments from its overall U.S. fund operations, as well as on an individual fund-by-fund basis. Included with such profitability analysis report was information on a fund-by-fund basis listing portfolio managers and other accounts they manage, as well as information on management fees charged by the Manager and its affiliates including management's explanation of differences where relevant and a three-year expense analysis with an explanation for any increase in expense ratios. Additional material accompanying such report was a memorandum prepared by management describing project initiatives and capital investments relating to the services provided to the Funds by the Franklin Templeton Investments organization, as well as a memorandum relating to economies of scale and a comparative analysis concerning transfer agent fees charged each Fund. Such material also discussed some of the actions taken by management in coping with problems arising out of the past year's financial upheaval. In considering such materials, the independent Trustees received assistance and advice from and met separately with independent counsel. While the investment management agreements for all Funds were considered at the same Board meeting, the Board dealt with each Fund separately. In approving continuance of the investment management agreement for each Fund, the Board, including a majority of independent Trustees, determined that the existing management fee structure was fair and reasonable and that continuance of the investment management agreement was in the best interests of each Fund and its shareholders. While attention was given to all information furnished, the following discusses some primary factors relevant to the Board's decision. NATURE, EXTENT AND QUALITY OF SERVICE. The Board was satisfied with the nature and quality of the overall services provided by the Manager and its affiliates to the Funds and their shareholders. In addition to investment performance and expenses discussed later, the Board's opinion was 72 | Semiannual Report Franklin Templeton Fund Allocator Series SHAREHOLDER INFORMATION (CONTINUED) BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT (CONTINUED) based, in part, upon periodic reports furnished it showing that the investment policies and restrictions for each Fund were consistently complied with as well as other reports periodically furnished the Board covering matters such as the compliance of portfolio managers and other management personnel with the code of ethics adopted throughout the Franklin Templeton fund complex, the adherence to fair value pricing procedures established by the Board, and the accuracy of net asset value calculations. The Board also noted the extent of benefits provided Fund shareholders from being part of the Franklin Templeton family of funds, including the right to exchange investments between the same class of funds without a sales charge, the ability to reinvest Fund dividends into other funds and the right to combine holdings in other funds to obtain a reduced sales charge. Favorable consideration was given to management's continuous efforts and expenditures in establishing back-up systems and recovery procedures to function in the event of a natural disaster, it being noted that such systems and procedures had functioned smoothly during the Florida hurricanes and blackouts experienced in recent years. Among other factors taken into account by the Board were the Manager's best execution trading policies, including a favorable report by an independent portfolio trading analytical firm. Consideration was also given to the experience of each Fund's portfolio management team, the number of accounts managed and general method of compensation. In this latter respect, the Board noted that a primary factor in management's determination of a portfolio manager's bonus compensation was the relative investment performance of the funds he or she managed and that a portion of such bonus was required to be invested in a predesignated list of funds within such person's fund management area so as to be aligned with the interests of Fund shareholders. The Board also took into account the quality of transfer agent and shareholder services provided Fund shareholders by an affiliate of the Manager, noting continuing expenditures by management to increase and improve the scope of such services, periodic favorable reports on such service conducted by third parties, and the continuous enhancements to and high industry ranking given the Franklin Templeton website. Particular attention was given to the overall performance and actions taken by the Manager and its affiliates in response to problems arising out of the market turmoil and financial crisis experienced during the past year. In this respect, the Board noted that management's independent credit analysis and diligent risk management procedures had minimized exposure of funds within the Franklin Templeton complex to subprime mortgages and that its continuous monitoring of counterparty credit risk had limited fund exposure to firms experiencing financial difficulties like Bear Stearns and AIG. The same type of conservative approach and attention to risk had also prevented any structured investment products or other volatile instruments from being held in the portfolios of any of the money market funds within the Franklin Templeton complex, including the sweep money fund utilized by many of the funds as part of their cash management. The Board also took into account, among other things, management's efforts in establishing a $725 million global credit facility for the benefit of the funds and other accounts managed by Franklin Templeton Investments to provide a source of cash for temporary and emergency purposes or to meet unusual redemption requests as well as the strong financial position of the Manager's parent company and its commitment to the mutual fund business. The Board also noted that during the past year Franklin Templeton Investments, like many other fund managers, had announced a hiring freeze and implemented employee reductions, and the Board discussed with management Semiannual Report | 73 Franklin Templeton Fund Allocator Series SHAREHOLDER INFORMATION (CONTINUED) BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT (CONTINUED) the nature of such reductions and steps being taken to minimize any negative impact on the nature and quality of services being provided the Funds. INVESTMENT PERFORMANCE. The Board placed significant emphasis on the investment performance of each Fund in view of its importance to shareholders. While consideration was given to performance reports and discussions with portfolio managers at Board meetings throughout the year, particular attention in assessing performance was given to the Lipper reports furnished for the agreement renewals. The Lipper reports prepared for each individual Fund showed the investment performance of Class A shares, in comparison to a performance universe selected by Lipper. Comparative performance for each Fund was shown for the one-year period ended December 31, 2008, and for additional periods ended that date depending on when a particular Fund commenced operations. The following summarizes the performance results for each of the Funds and the Board's view of such performance. FRANKLIN TEMPLETON 2015 RETIREMENT TARGET FUND - The performance universe for this Fund consisted of the Fund and all retail and institutional mixed-asset target 2020 funds as selected by Lipper. The Fund has been in operation for only two full years at the date of the Lipper report, which showed its income return to be in the second-lowest quintile of its performance universe during each such year, and its total return to be in either the highest or second-highest quintile of its performance universe during such years. The Board believed that the Fund's brief period of existence limited the meaningfulness of such performance record. FRANKLIN TEMPLETON 2025 RETIREMENT TARGET FUND - The performance universe for this Fund consisted of the Fund and all retail and institutional mixed-asset target 2030 funds as selected by Lipper. The Fund has been in operation for only two full years at the date of the Lipper report, which showed its income return during such years to be in the middle and second-lowest quintiles of its performance universe, respectively, but its total return to be in either the highest or second-highest quintile of its performance universe during such years. The Board believed that the Fund's brief period of existence limited the meaningfulness of such performance record. FRANKLIN TEMPLETON 2035 RETIREMENT TARGET FUND - The performance universe for this Fund consisted of the Fund and all retail and institutional mixed-asset target 2030+ funds as selected by Lipper. The Fund has been in operation for only two full years at the date of the Lipper report, which showed its income return to be in the second-lowest quintile of its performance universe during each of these years, and its total return to be in the middle quintile of its performance universe for 2008 and in the highest quintile of such universe for the previous year. The Board believed that the Fund's brief period of existence limited the meaningfulness of such performance record. FRANKLIN TEMPLETON 2045 RETIREMENT TARGET FUND - The performance universe for this Fund consisted of the Fund and all retail and institutional mixed-asset target 2030+ funds as selected by Lipper. The Fund has been in operation for only two full years at the date of the Lipper report, which showed its income return to be in the second-lowest quintile of its performance universe during each 74 | Semiannual Report Franklin Templeton Fund Allocator Series SHAREHOLDER INFORMATION (CONTINUED) BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT (CONTINUED) of these years, and its total return to be in the highest or second-highest quintile of its performance universe during such years. The Board believed that the Fund's brief period of existence limited the meaningfulness of its performance record. COMPARATIVE EXPENSES. Consideration was given to the management fee and total expense ratios of each Fund compared with those of a group of retail front-end load fund of funds selected by Lipper as its appropriate Lipper expense group. Lipper expense data is based upon historical information taken from each fund's most recent annual report and, as a result of the severe decline in mutual fund industry assets during the last quarter of 2008, is based on asset levels that are higher than the level currently existing for most funds. While recognizing the limitations inherent in Lipper's methodology and recognizing that current expense ratios may increase as assets decline, the Board believed that the independent analysis conducted by Lipper remained an appropriate measure of comparative expenses. In reviewing comparative costs, Lipper provides information on each Fund's contractual investment management fee in comparison with the contractual investment management fee that would have been charged by other funds within its Lipper expense group assuming they were similar in size to the Fund, as well as the actual total expenses of the Fund including expenses of the underlying funds they invest in. The Board noted the Funds pay an asset allocation advisory fee. The Lipper contractual investment management fee analysis includes the advisory and administrative fees directly charged to each of the Funds as being part of the contractual investment management fee, with the investment management fees charged underlying funds being included within actual total expenses. Contractual investment management fees and total expenses for comparative consistency are shown by Lipper for Fund Class A shares. The Lipper expense reports noted in the case of each Fund that expenses had been subsidized by management fee waivers and reimbursements. The Lipper report for Franklin Templeton 2015 Target Retirement Fund showed that the ratio of expenses, including the management fee charged directly to the Fund, was at the median for its Lipper expense group, while its actual total expense ratio (including underlying fund expenses) was within 10 basis points of the median for such expense group. The Lipper report for Franklin Templeton 2025 Target Retirement Fund showed that the ratio of expenses, including the management fee charged directly to the Fund, was in the middle quintile of its Lipper expense group, while its actual total expense ratio (including underlying fund expenses) was within five basis points of the median for such expense group. The Lipper reports for both Franklin Templeton 2035 Target Retirement Fund and Franklin Templeton 2045 Target Retirement Fund showed, in each case, that the ratio of expenses, including the management fee directly charged each Fund, was in the second most expensive quintiles of their respective Lipper expense groups, while actual total expense ratios (including underlying fund expenses) were within 14 basis points of the Lipper expense group median in the case of Franklin Templeton 2035 Target Retirement Fund, and nine basis points of the Lipper expense group median in the case of Franklin Templeton 2045 Target Retirement Fund. The Board believed the expenses of each Fund were acceptable, taking into account the fee waiver expense reimbursements applicable to each of them. Semiannual Report | 75 Franklin Templeton Fund Allocator Series SHAREHOLDER INFORMATION (CONTINUED) BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT (CONTINUED) MANAGEMENT PROFITABILITY. The Board also considered the level of profits realized by the Manager and its affiliates in connection with the operation of each Fund. In this respect, the Board reviewed the Fund profitability analysis that addresses the overall profitability of Franklin Templeton's U.S. fund business, as well as its profits in providing management and other services to each of the individual funds during the 12-month period ended September 30, 2008, being the most recent fiscal year end for Franklin Resources, Inc., the Manager's parent. During such period, the assets of the Franklin Templeton U.S. fund business were significantly higher than currently existing, and to such extent the profitability analysis does not reflect current fund operations. While taking this into account in assessing the significance of the Fund profitability analysis, the Board recognized such analysis was made at a given point in time and that the decline in assets and effect on profitability would be reflected in the profitability analysis covering Franklin Resources' 2009 fiscal year period. In reviewing the analysis, attention was given to the methodology followed in allocating costs to each Fund, it being recognized that allocation methodologies are inherently subjective and various allocation methodologies may each be reasonable while producing different results. In this respect, the Board noted that, while being continuously refined and reflecting changes in the Manager's own cost accounting, the allocation methodology was consistent with that followed in profitability report presentations for the Funds made in prior years and that the Funds' independent registered public accounting firm had been engaged by the Manager to perform certain procedures on a biennial basis, specified and approved by the Manager and the Funds' Board solely for their purposes and use in reference to the profitability analysis. In reviewing and discussing such analysis, management discussed with the Board its belief that costs incurred in establishing the infrastructure necessary for the type of mutual fund operations conducted by the Manager and its affiliates may not be fully reflected in the expenses allocated to each Fund in determining its profitability, as well as the fact that the level of profits, to a certain extent, reflected operational cost savings and efficiencies initiated by management. The Board also took into account management's expenditures in improving shareholder services provided the Funds, as well as the need to meet additional regulatory and compliance requirements resulting from the Sarbanes-Oxley Act and recent SEC and other regulatory requirements. In addition, the Board considered a third-party study comparing the profitability of the Manager's parent on an overall basis as compared to other publicly held managers broken down to show profitability from management operations exclusive of distribution expenses, as well as profitability including distribution expenses. The Board also considered the extent to which the Manager and its affiliates might derive ancillary benefits from fund operations, including its interest in a joint venture entity that financed up-front commissions paid to brokers/dealers who sold fund Class B shares prior to February 2005 when the offering of such shares was discontinued, as well as potential benefits resulting from allocation of fund brokerage and the use of commission dollars to pay for research. Based upon its consideration of all these factors, the Board determined that the level of profits realized by the Manager and its affiliates from providing services to each Fund was not excessive in view of the nature, quality and extent of services provided. 76 | Semiannual Report Franklin Templeton Fund Allocator Series SHAREHOLDER INFORMATION (CONTINUED) BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT (CONTINUED) ECONOMIES OF SCALE. The Board also considered whether economies of scale are realized by the Managers as the Funds grow larger and the extent to which this is reflected in the level of management fees charged. While recognizing that any precise determination is inherently subjective, the Board noted that based upon the Fund profitability analysis, it appears that as some funds get larger, at some point economies of scale do result in the Managers realizing a larger profit margin on management services provided such a fund. The Board also noted that economies of scale are shared with a fund and its shareholders through management fee breakpoints so that as a fund grows in size, its effective management fee rate declines. The management fees charged all the underlying funds in which the Funds may invest provide for such management fee breakpoints. Consequently, to the extent economies of scale may be realized by the investment managers of these funds, the benefits are shared with each Fund and its shareholders through a reduction in actual total expense ratios. PROXY VOTING POLICIES AND PROCEDURES The Trust's investment manager has established Proxy Voting Policies and Procedures (Policies) that the Trust uses to determine how to vote proxies relating to portfolio securities. Shareholders may view the Trust's complete Policies online at franklintempleton.com. Alternatively, shareholders may request copies of the Policies free of charge by calling the Proxy Group collect at (954) 527-7678 or by sending a written request to: Franklin Templeton Companies, LLC, 500 East Broward Boulevard, Suite 1500, Fort Lauderdale, FL 33394, Attention: Proxy Group. Copies of the Trust's proxy voting records are also made available online at franklintempleton.com and posted on the U.S. Securities and Exchange Commission's website at sec.gov and reflect the most recent 12-month period ended June 30. QUARTERLY STATEMENT OF INVESTMENTS The Trust files a complete statement of investments with the U.S. Securities and Exchange Commission for the first and third quarters for each fiscal year on Form N-Q. Shareholders may view the filed Form N-Q by visiting the Commission's website at sec.gov. The filed form may also be viewed and copied at the Commission's Public Reference Room in Washington, DC. Information regarding the operations of the Public Reference Room may be obtained by calling (800) SEC-0330. Semiannual Report | 77 This page intentionally left blank. This page intentionally left blank. This page intentionally left blank. Franklin Templeton Funds LITERATURE REQUEST. TO RECEIVE A PROSPECTUS, PLEASE CALL US AT (800) DIAL BEN/(800) 342-5236 OR VISIT FRANKLINTEMPLETON.COM. INVESTORS SHOULD CAREFULLY CONSIDER A FUND'S INVESTMENT GOALS, RISKS, CHARGES AND EXPENSES BEFORE INVESTING. THE PROSPECTUS CONTAINS THIS AND OTHER INFORMATION. PLEASE CAREFULLY READ THE PROSPECTUS BEFORE INVESTING. TO ENSURE THE HIGHEST QUALITY OF SERVICE, WE MAY MONITOR, RECORD AND ACCESS TELEPHONE CALLS TO OR FROM OUR SERVICE DEPARTMENTS. THESE CALLS CAN BE IDENTIFIED BY THE PRESENCE OF A REGULAR BEEPING TONE. VALUE Franklin All Cap Value Fund Franklin Balance Sheet Investment Fund Franklin Large Cap Value Fund Franklin MicroCap Value Fund(1) Franklin MidCap Value Fund Franklin Small Cap Value Fund Mutual Beacon Fund Mutual Quest Fund Mutual Recovery Fund(2) Mutual Shares Fund BLEND Franklin Focused Core Equity Fund Franklin Large Cap Equity Fund Franklin Rising Dividends Fund GROWTH Franklin Flex Cap Growth Fund Franklin Growth Fund Franklin Growth Opportunities Fund Franklin Small Cap Growth Fund Franklin Small-Mid Cap Growth Fund SECTOR Franklin Biotechnology Discovery Fund Franklin DynaTech Fund Franklin Global Real Estate Fund Franklin Gold & Precious Metals Fund Franklin Natural Resources Fund Franklin Real Estate Securities Fund Franklin Utilities Fund Mutual Financial Services Fund GLOBAL Mutual Global Discovery Fund Templeton Global Long-Short Fund Templeton Global Opportunities Trust Templeton Global Smaller Companies Fund Templeton Growth Fund Templeton World Fund INTERNATIONAL Franklin India Growth Fund Franklin International Growth Fund Franklin International Small Cap Growth Fund Mutual European Fund Mutual International Fund Templeton BRIC Fund Templeton China World Fund Templeton Developing Markets Trust Templeton Emerging Markets Small Cap Fund Templeton Foreign Fund Templeton Foreign Smaller Companies Fund Templeton Frontier Markets Fund HYBRID Franklin Balanced Fund Franklin Convertible Securities Fund Franklin Equity Income Fund Franklin Income Fund Templeton Income Fund ASSET ALLOCATION Franklin Templeton Corefolio(R) Allocation Fund Franklin Templeton Founding Funds Allocation Fund Franklin Templeton Perspectives Allocation Fund Franklin Templeton Conservative Target Fund Franklin Templeton Growth Target Fund Franklin Templeton Moderate Target Fund Franklin Templeton 2015 Retirement Target Fund Franklin Templeton 2025 Retirement Target Fund Franklin Templeton 2035 Retirement Target Fund Franklin Templeton 2045 Retirement Target Fund FIXED INCOME Franklin Adjustable U.S. Government Securities Fund(3) Franklin Floating Rate Daily Access Fund Franklin High Income Fund Franklin Limited Maturity U.S. Government Securities Fund(3) Franklin Low Duration Total Return Fund Franklin Real Return Fund Franklin Strategic Income Fund Franklin Strategic Mortgage Portfolio Franklin Templeton Hard Currency Fund Franklin Total Return Fund Franklin U.S. Government Securities Fund(3) Templeton Global Bond Fund Templeton Global Total Return Fund Templeton International Bond Fund TAX-FREE INCOME(4) NATIONAL Double Tax-Free Income Fund Federal Tax-Free Income Fund High Yield Tax-Free Income Fund Insured Tax-Free Income Fund(5) LIMITED-/INTERMEDIATE-TERM California Intermediate-Term Tax-Free Income Fund Federal Intermediate-Term Tax-Free Income Fund Federal Limited-Term Tax-Free Income Fund New York Intermediate-Term Tax-Free Income Fund STATE-SPECIFIC Alabama Arizona California(6) Colorado Connecticut Florida Georgia Kentucky Louisiana Maryland Massachusetts(7) Michigan(7) Minnesota(7) Missouri New Jersey New York(6) North Carolina Ohio(7) Oregon Pennsylvania Tennessee Virginia INSURANCE FUNDS Franklin Templeton Variable Insurance Products Trust(8) (1.) The fund is closed to new investors. Existing shareholders and select retirement plans can continue adding to their accounts. (2.) The fund is a continuously offered, closed-end fund. Shares may be purchased daily; there is no daily redemption. However, each quarter, pending board approval, the fund will authorize the repurchase of 5%-25% of the outstanding number of shares. Investors may tender all or a portion of their shares during the tender period. (3.) An investment in the fund is neither insured nor guaranteed by the U.S. government or by any other entity or institution. (4.) For investors subject to the alternative minimum tax, a small portion of fund dividends may be taxable. Distributions of capital gains are generally taxable. (5.) The fund invests primarily in insured municipal securities. (6.) These funds are available in four or more variations, including long-term portfolios, intermediate-term portfolios, portfolios of insured securities, a high-yield portfolio (CA only) and money market portfolios. (7.) The Board of Trustees approved the elimination of the non-fundamental policy requiring the fund to invest at least 80% of net assets in insured municipal securities and the removal of the word "Insured" from the fund name. The changes became effective 2/17/09. (8.) The funds of the Franklin Templeton Variable Insurance Products Trust are generally available only through insurance company variable contracts. 04/09 Not part of the semiannual report (FRANKLIN TEMPLETON INVESTMENTS(R) LOGO) One Franklin Parkway San Mateo, CA 94403-1906 SIGN UP FOR EDELIVERY Log onto franklintempleton.com and click "My Profile" SEMIANNUAL REPORT AND SHAREHOLDER LETTER FRANKLIN TEMPLETON FUND ALLOCATOR SERIES INVESTMENT MANAGER Franklin Advisers, Inc. DISTRIBUTOR Franklin Templeton Distributors, Inc. (800) DIAL BEN(R) franklintempleton.com SHAREHOLDER SERVICES (800) 632-2301 Authorized for distribution only when accompanied or preceded by a prospectus. Investors should carefully consider a fund's investment goals, risks, charges and expenses before investing. The prospectus contains this and other information; please read it carefully before investing. To ensure the highest quality of service, telephone calls to or from our service departments may be monitored, recorded and accessed. These calls can be identified by the presence of a regular beeping tone. RTF S2009 08/09 ITEM 2. CODE OF ETHICS. (a) The Registrant has adopted a code of ethics that applies to its principal executive officers and principal financial and accounting officer. (c) N/A (d) N/A (f) Pursuant to Item 12(a)(1), the Registrant is attaching as an exhibit a copy of its code of ethics that applies to its principal executive officers and principal financial and accounting officer. ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT. (a)(1) The Registrant has an audit committee financial expert serving on its audit committee. (2) The audit committee financial expert is John B. Wilson and he is "independent" as defined under the relevant Securities and Exchange Commission Rules and Releases. ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES. N/A ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS. N/A ITEM 6. SCHEDULE OF INVESTMENTS. N/A ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END MANAGEMENT INVESTMENT COMPANIES. N/A ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES. N/A ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT COMPANY AND AFFILIATED PURCHASERS. N/A ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. There have been no changes to the procedures by which shareholders may recommend nominees to the Registrant's Board of Trustees that would require disclosure herein. ITEM 11. CONTROLS AND PROCEDURES. (a) Evaluation of Disclosure Controls and Procedures. The Registrant maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Registrant's filings under the Securities Exchange Act of 1934 and the Investment Company Act of 1940 is recorded, processed, summarized and reported within the periods specified in the rules and forms of the Securities and Exchange Commission. Such information is accumulated and communicated to the Registrant's management, including its principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. The Registrant's management, including the principal executive officer and the principal financial officer, recognizes that any set of controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. Within 90 days prior to the filing date of this Shareholder Report on Form N-CSR, the Registrant had carried out an evaluation, under the supervision and with the participation of the Registrant's management, including the Registrant's principal executive officer and the Registrant's principal financial officer, of the effectiveness of the design and operation of the Registrant's disclosure controls and procedures. Based on such evaluation, the Registrant's principal executive officer and principal financial officer concluded that the Registrant's disclosure controls and procedures are effective. (b) Changes in Internal Controls. There have been no significant changes in the Registrant's internal controls or in other factors that could significantly affect the internal controls subsequent to the date of their evaluation in connection with the preparation of this Shareholder Report on Form N-CSR. ITEM 12. EXHIBITS. (a)(1) Code of Ethics (a)(2) Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 of Laura F. Fergerson, Chief Executive Officer - Finance and Administration, and Gaston Gardey, Chief Financial Officer and Chief Accounting Officer (b) Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of Laura F. Fergerson, Chief Executive Officer - Finance and Administration, and Gaston Gardey, Chief Financial Officer and Chief Accounting Officer SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. FRANKLIN TEMPLETON FUND ALLOCATOR SERIES By /S/ Laura F. Fergerson -------------------------- Laura F. Fergerson Chief Executive Officer - Finance and Administration Date August 27, 2009 Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. By /S/ Laura F. Fergerson ------------------------ Laura F. Fergerson Chief Executive Officer - Finance and Administration Date August 27, 2009 By /S/GASTON GARDEY --------------------- Gaston Gardey Chief Financial Officer and Chief Accounting Officer Date August 27, 2009 EX-99.CODE ETH 2 ncsr_code1208.txt REVISED CODE 12/08 Exhibit 12(a)(1) CODE OF ETHICS FOR PRINCIPAL EXECUTIVES & SENIOR FINANCIAL OFFICERS - ------------------------------------------------------------------------------ PROCEDURES Revised December 22, 2008 - ------------------------------------------------------------------------------- FRANKLIN TEMPLETON FUNDS CODE OF ETHICS FOR PRINCIPAL EXECUTIVE AND SENIOR FINANCIAL OFFICERS I. Covered Officers and Purpose of the Code This code of ethics (the "Code") applies to the Principal Executive Officers, Principal Financial Officer and Principal Accounting Officer (the "Covered Officers," each of whom is set forth in Exhibit A) of each investment company advised by a Franklin Resources subsidiary and that is registered with the United States Securities & Exchange Commission ("SEC") (collectively, "FT Funds") for the purpose of promoting: o Honest and ethical conduct, including the ethical resolution of actual or apparent conflicts of interest between personal and professional relationships; o Full, fair, accurate, timely and understandable disclosure in reports and documents that a registrant files with, or submits to, the SEC and in other public communications made by or on behalf of the FT Funds; o Compliance with applicable laws and governmental rules and regulations; o The prompt internal reporting of violations of the Code to an appropriate person or persons identified in the Code; and o Accountability for adherence to the Code. Each Covered Officer will be expected to adhere to a high standard of business ethics and must be sensitive to situations that may give rise to actual as well as apparent conflicts of interest. II. Other Policies and Procedures This Code shall be the sole code of ethics adopted by the Funds for purposes of Section 406 of the Sarbanes-Oxley Act and the rules and forms applicable to registered investment companies thereunder. Franklin Resources, Inc. has separately adopted the CODE OF ETHICS AND BUSINESS CONDUCT ("Business Conduct"), which is applicable to all officers, directors and employees of Franklin Resources, Inc., including Covered Officers. It summarizes the values, principles and business practices that guide the employee's business conduct and also provides a set of basic principles to guide officers, directors and employees regarding the minimum ethical requirements expected of them. It supplements the values, principles and business conduct identified in the Code and other existing employee policies. Additionally, the Franklin Templeton Funds have separately adopted the CODE OF ETHICS AND POLICY STATEMENT ON INSIDER TRADING governing personal securities trading and other related matters. The Code for Insider Trading provides for separate requirements that apply to the Covered Officers and others, and therefore is not part of this Code. Insofar as other policies or procedures of Franklin Resources, Inc., the Funds, the Funds' adviser, principal underwriter, or other service providers govern or purport to govern the behavior or activities of the Covered Officers who are subject to this Code, they are superceded by this Code to the extent that they overlap or conflict with the provisions of this Code. Please review these other documents or consult with the Legal Department if have questions regarding the applicability of these policies to you. III. Covered Officers Should Handle Ethically Actual and Apparent Conflicts of Interest OVERVIEW. A "conflict of interest" occurs when a Covered Officer's private interest interferes with the interests of, or his or her service to, the FT Funds. For example, a conflict of interest would arise if a Covered Officer, or a member of his family, receives improper personal benefits as a result of apposition with the FT Funds. Certain conflicts of interest arise out of the relationships between Covered Officers and the FT Funds and already are subject to conflict of interest provisions in the Investment Company Act of 1940 ("Investment Company Act") and the Investment Advisers Act of 1940 ("Investment Advisers Act"). For example, Covered Officers may not individually engage in certain transactions (such as the purchase or sale of securities or other property) with the FT Funds because of their status as "affiliated persons" of the FT Funds. The FT Funds' and the investment advisers' compliance programs and procedures are designed to prevent, or identify and correct, violations of these provisions. This Code does not, and is not intended to, repeat or replace these programs and procedures, and such conflicts fall outside of the parameters of this Code. Although typically not presenting an opportunity for improper personal benefit, conflicts arise from, or as a result of, the contractual relationship between the FT Funds, the investment advisers and the fund administrator of which the Covered Officers are also officers or employees. As a result, this Code recognizes that the Covered Officers will, in the normal course of their duties (whether formally for the FT Funds, for the adviser, the administrator, or for all three), be involved in establishing policies and implementing decisions that will have different effects on the adviser, administrator and the FT Funds. The participation of the Covered Officers in such activities is inherent in the contractual relationship between the FT Funds, the adviser, and the administrator and is consistent with the performance by the Covered Officers of their duties as officers of the FT Funds. Thus, if performed in conformity with the provisions of the Investment Company Act and the Investment Advisers Act, such activities will be deemed to have been handled ethically. In addition, it is recognized by the FT Funds' Boards of Directors ("Boards") that the Covered Officers may also be officers or employees of one or more other investment companies covered by this or other codes. Other conflicts of interest are covered by the Code, even if such conflicts of interest are not subject to provisions in the Investment Company Act and the Investment Advisers Act. The following list provides examples of conflicts of interest under the Code, but Covered Officers should keep in mind that these examples are not exhaustive. The overarching principle is that the personal interest of a Covered Officer should not be placed improperly before the interest of the FT Funds. Each Covered Officer must: o Not use his or her personal influence or personal relationships improperly to influence investment decisions orfinancial reporting by the FT Funds whereby the Covered Officer would benefit personally to the detriment of the FT Funds; o Not cause the FT Funds to take action, or fail to take action, for the individual personal benefit of the Covered Officer rather than the benefit the FT Funds; o Not retaliate against any other Covered Officer or any employee of the FT Funds or their affiliated persons for reports of potential violations that are made in good faith; o Report at least annually the following affiliations or other relationships:/ 1 o all directorships for public companies and all companies that are required to file reports with the SEC; o any direct or indirect business relationship with any independent directors of the FT Funds; o any direct or indirect business relationship with any independent public accounting firm (which are not related to the routine issues related to the firm's service as the Covered Persons accountant); and o any direct or indirect interest in any transaction with any FT Fund that will benefit the officer (not including benefits derived from the advisory, sub-advisory, distribution or service agreements with affiliates of Franklin Resources). These reports will be reviewed by the Legal Department for compliance with the Code. There are some conflict of interest situations that should always be approved in writing by Franklin Resources General Counsel or Deputy General Counsel, if material. Examples of these include/2: o Service as a director on the board of any public or private Company; o The receipt of any gifts in excess of $100 from any person, from any corporation or association o The receipt of any entertainment from any Company with which the FT Funds has current or prospective business dealings unless such entertainment is business related, reasonable in cost, appropriate as to time and place, and not so frequent as to raise any question of impropriety. Notwithstanding the foregoing, the Covered Officers must obtain prior approval from the Franklin Resources General Counsel for any entertainment with a value in excess of $1000. o Any ownership interest in, or any consulting or employment relationship with, any of the FT Fund's service providers, other than an investment adviser, principal underwriter, administrator or any affiliated person thereof; o A direct or indirect financial interest in commissions, transaction charges or spreads paid by the FT Funds for effecting portfolio transactions or for selling or redeeming shares other than an interest arising from the Covered Officer's employment, such as compensation or equity ownership. Franklin Resources General Counsel or Deputy General Counsel will provide a report to the FT Funds Audit Committee of any approvals granted at the next regularly scheduled meeting. IV. Disclosure and Compliance o Each Covered Officer should familiarize himself with the disclosure requirements generally applicable to the FT Funds; o Each Covered Officer should not knowingly misrepresent, or cause others to misrepresent, facts about the FT Funds to others, whether within or outside the FT Funds, including to the FT Funds' directors and auditors, and to governmental regulators and self-regulatory organizations; o Each Covered Officer should, to the extent appropriate within his or her area of responsibility, consult with other officers and employees of the FT Funds, the FT Fund's adviser and the administrator with the goal of promoting full, fair, accurate, timely and understandable disclosure in the reports and documents the FT Funds file with, or submit to, the SEC and in other public communications made by the FT Funds; and o It is the responsibility of each Covered Officer to promote compliance with the standards and restrictions imposed by applicable laws, rules and regulations. V. Reporting and Accountability Each Covered Officer must: o Upon becoming a covered officer affirm in writing to the Board that he or she has received, read, and understands the Code (see Exhibit B); o Annually thereafter affirm to the Board that he has complied with the requirements of the Code; and o Notify Franklin Resources' General Counsel or Deputy General Counsel promptly if he or she knows of any violation of this Code. Failure to do so is itself is a violation of this Code. Franklin Resources' General Counsel and Deputy General Counsel are responsible for applying this Code to specific situations in which questions are presented under it and have the authority to interpret this Code in any particular situation./3 However, the Independent Directors of the respective FT Funds will consider any approvals or waivers/4 sought by any Chief Executive Officers of the Funds. The FT Funds will follow these procedures in investigating and enforcing this Code: o Franklin Resources General Counsel or Deputy General Counsel will take all appropriate action to investigate any potential violations reported to the Legal Department; o If, after such investigation, the General Counsel or Deputy General Counsel believes that no violation has occurred, The General Counsel is not required to take any further action; o Any matter that the General Counsel or Deputy General Counsel believes is a violation will be reported to the Independent Directors of the appropriate FT Fund; o If the Independent Directors concur that a violation has occurred, it will inform and make a recommendation to the Board of the appropriate FT Fund or Funds, which will consider appropriate action, which may include review of, and appropriate modifications to, applicable policies and procedures; notification to appropriate personnel of the investment adviser or its board; or a recommendation to dismiss the Covered Officer; o The Independent Directors will be responsible for granting waivers, as appropriate; and o Any changes to or waivers of this Code will, to the extent required, are disclosed as provided by SEC rules./5 VI. Other Policies and Procedures This Code shall be the sole code of ethics adopted by the FT Funds for purposes of Section 406 of the Sarbanes-Oxley Act and the rules and forms applicable to registered investment companies thereunder. Insofar as other policies or procedures of the FT Funds, the FT Funds' advisers, principal underwriter, or other service providers govern or purport to govern the behavior or activities of the Covered Officers who are subject to this Code, they are superseded by this Code to the extent that they overlap or conflict with the provisions of this Code. The FT Code of Ethics and Policy Statement On Insider Trading, adopted by the FT Funds, FT investment advisers and FT Fund's principal underwriter pursuant to Rule 17j-1 under the Investment Company Act, the Code of Ethics and Business Conduct and more detailed policies and procedures set forth in FT's Employee Handbook are separate requirements applying to the Covered Officers and others, and are not part of this Code. VII. Amendments Any amendments to this Code, other than amendments to Exhibit A, must be approved or ratified by a majority vote of the FT Funds' Board including a majority of independent directors. VIII. Confidentiality All reports and records prepared or maintained pursuant to this Code will be considered confidential and shall be maintained and protected accordingly. Except as otherwise required by law or this Code, such matters shall not be disclosed to anyone other than the FT Funds' Board and their counsel. IX. Internal Use The Code is intended solely for the internal use by the FT Funds and does not constitute an admission, by or on behalf of any FT Funds, as to any fact, circumstance, or legal conclusion. X. Disclosure on Form N-CSR Item 2 of Form N-CSR requires a registered management investment company to disclose annually whether, as of the end of the period covered by the report, it has adopted a code of ethics that applies to the registrant's principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, regardless of whether these officers are employed by the registrant or a third party. If the registrant has not adopted such a code of ethics, it must explain why it has not done so. The registrant must also: (1) file with the SEC a copy of the code as an exhibit to its annual report; (2) post the text of the code on its Internet website and disclose, in its most recent report on Form N-CSR, its Internet address and the fact that it has posted the code on its Internet website; or (3) undertake in its most recent report on Form N-CSR to provide to any person without charge, upon request, a copy of the code and explain the manner in which such request may be made. Disclosure is also required of amendments to, or waivers (including implicit waivers) from, a provision of the code in the registrant's annual report on Form N-CSR or on its website. If the registrant intends to satisfy the requirement to disclose amendments and waivers by posting such information on its website, it will be required to disclose its Internet address and this intention. The Legal Department shall be responsible for ensuring that: o a copy of the Code is filed with the SEC as an exhibit to each Fund's annual report; and o any amendments to, or waivers (including implicit waivers) from, a provision of the Code is disclosed in the registrant's annual report on Form N-CSR. In the event that the foregoing disclosure is omitted or is determined to be incorrect, the Legal Department shall promptly file such information with the SEC as an amendment to Form N-CSR. In such an event, the Fund Chief Compliance Officer shall review the Code and propose such changes to the Code as are necessary or appropriate to prevent reoccurrences. EXHIBIT A Persons Covered by the Franklin Templeton Funds Code of Ethics December 2008 FRANKLIN GROUP OF FUNDS Edward B. Jamieson President and Chief Executive Officer - Investment Management Charles B. Johnson President and Chief Executive Officer - Investment Management Rupert H. Johnson, Jr. President and Chief Executive Officer - Investment Management William J. Lippman President and Chief Executive Officer - Investment Management Christopher Molumphy President and Chief Executive Officer - Investment Management Jennifer J. Bolt Chief Executive Officer - Finance and Administration Laura Fergerson Chief Financial Officer and Chief Accounting Officer FRANKLIN MUTUAL SERIES FUNDS Peter Langerman Chief Executive Officer-Investment Management Jennifer J. Bolt Chief Executive Officer - Finance and Administration Laura Fergerson Chief Financial Officer and Chief Accounting Officer TEMPLETON GROUP OF FUNDS Mark Mobius President and Chief Executive Officer - Investment Management Christopher J. Molumphy President and Chief Executive Officer - Investment Management Gary P. Motyl President and Chief Executive Officer - Investment Management Donald F. Reed President and Chief Executive Officer - Investment Management Jennifer J. Bolt Chief Executive Officer - Finance and Administration Laura Fergerson Chief Financial Officer and Chief Accounting Officer EXHIBIT B ACKNOWLEDGMENT FORM DECEMBER FRANKLIN TEMPLETON FUNDS CODE OF ETHICS FOR PRINCIPAL EXECUTIVE AND SENIOR FINANCIAL OFFICERS INSTRUCTIONS: 1. Complete all sections of this form. 2. Print the completed form, sign, and date. 3. Submit completed form to FT's General Counsel c/o Code of Ethics Administration within 10 days of becoming a Covered Officer and by January 30th of each subsequent year. INTER-OFFICE MAIL: Code of Ethics Administration, Global Compliance SM-920/2 TELEPHONE: (650) 312-5698 Fax: (650) 312-5646 E-MAIL: Preclear-Code of Ethics (internal address); lpreclear@frk.com (external address) - ------------------------------------------------------------------------------ COVERED OFFICER'S NAME: - ------------------------------------------------------------------------------ TITLE: - ------------------------------------------------------------------------------ DEPARTMENT: - ------------------------------------------------------------------------------ LOCATION: - ------------------------------------------------------------------------------ CERTIFICATION FOR YEAR ENDING: - ------------------------------------------------------------------------------ TO: Franklin Resources General Counsel, Legal Department I hereby acknowledge receipt of a copy of Franklin Templeton Fund's code of ethics for Principal Executive Officers and Senior Financial Officers (the "Code") that I have read and understand. I will comply fully with all provisions of the Code to the extent they apply to me during the period of my employment. I further understand and acknowledge that any violation of the Code may subject me to disciplinary action, including termination of employment. ---------------------------- ---------------------- Signature Date signed - ----------------------------- 1. Reporting of these affiliations or other relationships shall be made by completing the annual Directors and Officers Questionnaire and returning the questionnaire to Franklin Resources Inc, General Counsel or Deputy General Counsel. 2. Any activity or relationship that would present a conflict for a Covered Officer may also present a conflict for the Covered Officer if a member of the Covered Officer's immediate family engages in such an activity or has such a relationship. The Cover Person should also obtain written approval by FT's General Counsel in such situations. 3. Franklin Resources General Counsel and Deputy General Counsel are authorized to consult, as appropriate, with members of the Audit Committee, counsel to the FT Funds and counsel to the Independent Directors, and are encouraged to do so. 4. Item 2 of Form N-CSR defines "waiver" as "the approval by the registrant of a material departure from a provision of the code of ethics" and "implicit waiver," which must also be disclosed, as "the registrant's failure to take action within a reasonable period of time regarding a material departure from a provision of the code of ethics that has been made known to an executive officer" of the registrant. See Part X. 5. See Part X. EX-99.CERT 3 ftfas302cert-809.txt 302 CERTIFICATION Exhibit 12(a)(2) I, Laura F. Fergerson, certify that: 1. I have reviewed this report on Form N-CSR of FRANKLIN TEMPLETON FUND ALLOCATOR SERIES; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) and internal control over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of a date within 90 days prior to the filing date of this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the second fiscal quarter of the period covered by this report that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. 8/27/2009 S\LAURA F. FERGERSON Laura F. Fergerson Chief Executive Officer - Finance and Administration Exhibit 12(a)(2) I, Gaston Gardey, certify that: 1. I have reviewed this report on Form N-CSR of FRANKLIN TEMPLETON FUND ALLOCATOR SERIES; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) and internal control over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of a date within 90 days prior to the filing date of this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the second fiscal quarter of the period covered by this report that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. 8/27/2009 S\GASTON GARDEY Gaston Gardey Chief Financial Officer and Chief Accounting Officer EX-99.906CERT 4 ftfas906cert-809.txt 906 CERTIFICATION Exhibit 12(b) CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 I, Laura F. Fergerson, Chief Executive Officer of the FRANKLIN TEMPLETON FUND ALLOCATOR SERIES (the "Registrant"), certify, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge: 1. The periodic report on Form N-CSR of the Registrant for the period ended 6/30/2009 (the "Form N-CSR") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Form N-CSR fairly presents, in all material respects, the financial condition and results of operations of the Registrant. Dated: 8/27/2009 S\LAURA F. FERGERSON Laura F. Fergerson Chief Executive Officer - Finance and Administration Exhibit 12(b) CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 I, Gaston Gardey, Chief Financial Officer of the FRANKLIN TEMPLETON FUND ALLOCATOR SERIES (the "Registrant"), certify, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge: 1. The periodic report on Form N-CSR of the Registrant for the period ended 6/30/2009 (the "Form N-CSR") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Form N-CSR fairly presents, in all material respects, the financial condition and results of operations of the Registrant. Dated: 8/27/2009 S\GASTON GARDEY Gaston Gardey Chief Financial Officer and Chief Accounting Officer -----END PRIVACY-ENHANCED MESSAGE-----