N-CSRS 1 tgscf_ncsrs022810.txt TGSCF NCSRS 022810 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 811-03143 ---------- TEMPLETON GLOBAL SMALLER COMPANIES FUND ------------------------------------------ (Exact name of registrant as specified in charter) 500 EAST BROWARD BLVD., SUITE 2100, FORT LAUDERDALE, FL 33394-3091 ------------------------------------------------------------------- (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: (954) 527-7500 -------------- Date of fiscal year end: 8/31 ---- Date of reporting period: 2/28/10 -------- ITEM 1. REPORTS TO STOCKHOLDERS. FEBRUARY 28, 2010 SEMIANNUAL REPORT AND SHAREHOLDER LETTER SIGN UP FOR ELECTRONIC DELIVERY on franklintempleton.com (GRAPHIC) GLOBAL TEMPLETON GLOBAL SMALLER COMPANIES FUND (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 Templeton Global Smaller Companies Fund ................................... 3 Performance Summary ....................................................... 8 Your Fund's Expenses ...................................................... 11 Financial Highlights and Statement of Investments ......................... 13 Financial Statements ...................................................... 21 Notes to Financial Statements ............................................. 25 Shareholder Information ................................................... 34
Shareholder Letter Dear Shareholder: During the six months ended February 28, 2010, world economies experienced a significant recovery driven by one of the most aggressive global policy responses in financial history. At the end of the period, however, as investors began to believe the overall financial system was on the mend, many governments began positioning themselves to curtail their spending programs and low interest rate policies, and the market began to focus on the risks associated with this transition. Templeton Global Smaller Companies Fund's semiannual report goes into greater detail about prevailing conditions during the period under review. In addition, the portfolio managers discuss investment management decisions and Fund performance for the period. 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. Historically, patient investors have achieved rewarding results by evaluating their goals, diversifying their assets globally and maintaining a disciplined investment program, all hallmarks of the Templeton investment philosophy developed more than 50 years ago. We continue to 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. NOT FDIC INSURED | MAY LOSE VALUE | NO BANK GUARANTEE Not part of the semiannual report | 1 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/ Gary P. Motyl Gary P. Motyl, CFA President and Chief Executive Officer - Investment Management Templeton Global Smaller Companies Fund CFA(R) and Chartered Financial Analyst(R) are trademarks owned by CFA Institute. THIS LETTER REFLECTS OUR ANALYSIS AND OPINIONS AS OF FEBRUARY 28, 2010. 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 Templeton Global Smaller Companies Fund YOUR FUND'S GOAL AND MAIN INVESTMENTS: Templeton Global Smaller Companies Fund seeks to achieve long-term capital growth. Under normal market conditions, the Fund invests at least 80% of its net assets in equity securities of smaller companies located anywhere in the world, including emerging markets. GEOGRAPHIC BREAKDOWN Based on Total Net Assets as of 2/28/10 (PIE CHART) North America .............................. 34.1% Asia ....................................... 28.8% Europe ..................................... 24.0% Australia & New Zealand .................... 5.7% Short-Term Investments & Other Net Assets .. 7.4%
We are pleased to bring you Templeton Global Smaller Companies Fund's semiannual report for the period ended February 28, 2010. 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. For the six months under review, Templeton Global Smaller Companies Fund - Class A delivered a +9.62% cumulative total return. The Fund outperformed its benchmark, the Morgan Stanley Capital International (MSCI) World Index, which had a +5.41% total return for the same period.(1) Please note that index (1.) Source: (C) 2010 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 MSCI World Index is a free float-adjusted, market capitalization-weighted index designed to measure equity market performance in global developed markets. The index is unmanaged and includes reinvested dividends. One cannot invest directly in an index, and an index is not 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 17. Semiannual Report | 3 performance information is provided for reference and that we do not attempt to track the index, but rather undertake investments on the basis of fundamental research. You can find the Fund's long-term performance data in the Performance Summary beginning on page 8. ECONOMIC AND MARKET OVERVIEW Equity markets broadly advanced and global economic data indicated measured improvements during the six months under review. Significant problems persisted, however, and investor anxiety resurfaced in the period's latter half. Global equity markets began the period having just delivered their best six-month returns in more than four decades as governments' aggressive monetary and fiscal interventions began to gain traction. Investor sentiment reached its highest level since the onset of the financial crisis, and most major economies technically exited recession at the beginning of the period. Market volatility increased in October, however, as lackluster economic data cast doubt over the global recovery's sustainability. Strong corporate earnings helped buoy markets through the final months of 2009, although concerns about Dubai's ability to meet its debt obligations temporarily rattled markets and foreshadowed the sovereign solvency issues that would gain attention in the initial months of 2010. Bank lending restrictions in China and escalating debate about financial sector reform added to concerns over the sovereign debt woes of Greece and some other European countries, and the market rally stalled in early 2010. Economic data remained broadly positive showing U.S. gross domestic product (GDP) growth at a 0.1% rate and Chinese GDP up 10.7% year-over-year in the fourth quarter of 2009. However, investors received such economic reports with heightened skepticism. While the market punished stocks of companies that failed to meet investors' significantly elevated earnings expectations, overall financial results generally exceeded those expectations, as emerging market demand and official stimulus bolstered a global economic rebound and cost-reduction initiatives drove corporate earnings growth. The mix of subsidized and organic demand also supported commodities, most of which made gains during the period. Monetary policy remained extraordinarily loose, although many central bankers began to discuss ways to withdraw stimulus without stifling the fragile recovery. In developing economies with more capacity for policy normalization, like India and China, officials increased reserve requirements and tightened lending standards to forestall asset bubble formation and general price inflation. Growing concerns surrounding Europe's sovereign debt situation punished the euro, triggering the common currency's longest losing 4 | Semiannual Report streak against the dollar in more than a year. Sovereign bond yields rose in the world's more fiscally vulnerable regions, and European policymakers considered a bilateral lending package should Greece require funding assistance. By period-end, the future direction of financial markets and the global economy was unclear, and pundits speculated on a wide range of potential outcomes. INVESTMENT STRATEGY At Templeton, when choosing investments for the Fund, we take a bottom-up, value-oriented, long-term approach, focusing on the market price of a company's securities relative to our evaluation of the company's long-term earnings, asset value and cash flow growth potential. We also consider the company's price/earnings ratio, profit margins and liquidation value. MANAGER'S DISCUSSION Many holdings performed well during the six months under review. The most significant contributor to Fund performance relative to the benchmark MSCI World Index was bed manufacturer Tempur-Pedic International. The company is one of North America's largest mattress manufacturers and the largest specialty mattress manufacturer. Investors reacted positively to the improving economic outlook and viewed the company's steady sales gains favorably. Based in Finland, Amer Sports was another strong contributor to relative performance. Established in 1950 as an industrial company, Amer Sports gradually became a holding company for global sports equipment brands over the last 15 to 20 years. The company sought to emerge as the market's superior cost leader and gain strength versus its smaller competitors, and recent performance reflected these trends. At period-end, we believed the company was still attractive on a long-term basis due to cost-cutting efforts that led to a low fixed-cost base. Steiner Leisure, the world's leading provider of spa services, was another top contributor to the Fund's returns. Steiner offers a valuable service for most of the world's leading cruise lines by providing their customers with a seamless, high-quality spa experience while guaranteeing minimum concession fees, without much operating risk to the ship owners. We like Steiner for its powerful niche position in the cruise industry, its potential to benefit from an aging population and wellness trends, and its strong balance sheet and track record of buying back outstanding shares of its stock. In our analysis, Steiner could benefit from two primary trends: future worldwide growth in TOP 10 COUNTRIES Based on Equity Securities 2/28/10
% OF TOTAL NET ASSETS ---------- U.S. 18.7% Netherlands 7.7% Hong Kong 7.5% Canada 7.3% U.K. 6.7% South Korea 6.1% Australia 5.7% Taiwan 4.6% Japan 3.9% China 3.5%
Semiannual Report | 5 TOP 10 EQUITY HOLDINGS 2/28/10
COMPANY % OF TOTAL SECTOR/INDUSTRY, COUNTRY NET ASSETS ------------------------ ---------- Dah Sing Financial Group 2.2% COMMERCIAL BANKS, HONG KONG Bank of Ayudhya Public Co. Ltd., fgn. 2.2% COMMERCIAL BANKS, THAILAND Pacific Brands Ltd., ord. & 144A 2.2% DISTRIBUTORS, AUSTRALIA Steiner Leisure Ltd. 2.1% DIVERSIFIED CONSUMER SERVICES, BAHAMAS Chico's FAS Inc. 2.1% SPECIALTY RETAIL, U.S. Hibbett Sports Inc. 2.0% SPECIALTY RETAIL, U.S. MF Global Holdings Ltd. 1.9% CAPITAL MARKETS, BERMUDA Busan Bank 1.9% COMMERCIAL BANKS, SOUTH KOREA Sinotrans Ltd., H 1.8% AIR FREIGHT & LOGISTICS, CHINA Henderson Group PLC 1.8% CAPITAL MARKETS, U.K.
cruising, and the continued development of high-end spas at luxury hotels and resorts. In addition, Steiner's management team has exhibited a track record for being cost-focused operators with a disciplined approach to generating high returns. Despite positive absolute and relative performance, the Fund had some disappointments during the period. One of the most significant detractors from relative performance was U.K.-based Game Group, Europe's largest retailer of computer software, video games, consoles and related products. The company issued a weak trading statement in December, with unit hardware sales increases unable to offset the effect of price cuts. Despite strong sales of the most popular new games, competition from supermarkets pressured margins, and sales of less heavily supported games lagged. While acknowledging its recent setbacks, we believe Game Group remains a fundamentally strong company with a solid balance sheet. Swiss logistics operation Panalpina Welttransport also detracted from relative performance for the period. Freight forwarding is the company's core operation, accounting for about 85% of its revenue. It is the world's third-largest air freight forwarder and fourth-largest ocean freight forwarder. The stock price fell significantly from its overall peak in June 2007 due to macroeconomic concerns and a slowdown of consumer spending. Looking at the longer term, however, we consider business fundamentals solid as the company has a strong balance sheet with net cash. Based on our assessment, we continued to hold the stock because we believe the negatives were reflected in Panalpina Welttransport's share price and that its growth and return potential was underappreciated by the market. JAKKS Pacific, a leading U.S. toy company that designs, develops, produces and markets toys and other leisure products, was also a key detractor. According to our analysis, JAKKS offers attractive longer term value given the company's ability to successfully create toys internally which, in combination with recent and potential acquisitions, could continue to provide the company with attractive growth prospects. 6 | Semiannual Report Thank you for your continued participation in Templeton Global Smaller Companies Fund. We look forward to serving your future investment needs. (PHOTO OF BRADLEY RADIN) /s/ Bradley Radin Bradley Radin, CFA (PHOTO OF HARLAN B. HODES) /s/ Harlan B. Hodes Harlan B. Hodes, CPA (PHOTO OF CINDY L. SWEETING) /s/ Cindy L. Sweeting Cindy L. Sweeting, CFA Portfolio Management Team Templeton Global Smaller Companies Fund CFA(R) and Chartered Financial Analyst(R) are trademarks owned by CFA Institute. THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS AS OF FEBRUARY 28, 2010, 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 2/28/10 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: TEMGX) CHANGE 2/28/10 8/31/09 ----------------------- ------ ------- ------- Net Asset Value (NAV) +$0.46 $5.88 $5.42 DISTRIBUTIONS (9/1/09-2/28/10) Dividend Income $0.0606
CLASS B (SYMBOL: N/A) CHANGE 2/28/10 8/31/09 ----------------------- ------ ------- ------- Net Asset Value (NAV) +$0.44 $5.60 $5.16 DISTRIBUTIONS (9/1/09-2/28/10) Dividend Income $0.0382
CLASS C (SYMBOL: TESGX) CHANGE 2/28/10 8/31/09 ----------------------- ------ ------- ------- Net Asset Value (NAV) +$0.45 $5.73 $5.28 DISTRIBUTIONS (9/1/09-2/28/10) Dividend Income $0.0395
ADVISOR CLASS (SYMBOL: TGSAX) CHANGE 2/28/10 8/31/09 ----------------------------- ------ ------- ------- Net Asset Value (NAV) +$0.46 $5.89 $5.43 DISTRIBUTIONS (9/1/09-2/28/10) Dividend Income $0.0665
8 | Semiannual Report Performance Summary (CONTINUED) PERFORMANCE CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETURNS 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; ADVISOR CLASS: NO SALES CHARGES.
CLASS A 6-MONTH 1-YEAR 5-YEAR 10-YEAR ------- ------- ------- ------- ------- Cumulative Total Return(1) +9.62% +99.38% +11.30% +78.40% Average Annual Total Return(2) +3.33% +88.03% +0.97% +5.34% Value of $10,000 Investment(3) $10,333 $18,803 $10,494 $16,818 Avg. Ann. Total Return (3/31/10)(4) +88.47% +2.79% +5.83% Total Annual Operating Expenses(5) 1.49%
CLASS B 6-MONTH 1-YEAR 5-YEAR 10-YEAR ------- ------- ------- ------- ------- Cumulative Total Return(1) +9.28% +97.85% +7.15% +67.61% Average Annual Total Return(2) +5.28% +93.85% +1.16% +5.30% Value of $10,000 Investment(3) $10,528 $19,385 $10,594 $16,761 Avg. Ann. Total Return (3/31/10)(4) +94.76% +3.04% +5.81% Total Annual Operating Expenses(5) 2.26%
CLASS C 6-MONTH 1-YEAR 5-YEAR 10-YEAR ------- ------- ------- ------- ------- Cumulative Total Return(1) +9.28% +97.60% +7.09% +65.58% Average Annual Total Return(2) +8.28% +96.60% +1.38% +5.17% Value of $10,000 Investment(3) $10,828 $19,660 $10,709 $16,558 Avg. Ann. Total Return (3/31/10)(4) +97.83% +3.25% +5.67% Total Annual Operating Expenses(5) 2.26%
ADVISOR CLASS 6-MONTH 1-YEAR 5-YEAR 10-YEAR ------- ------- -------- ------- ------- Cumulative Total Return(1) +9.72% +99.25% +12.55% +83.03% Average Annual Total Return(2) +9.72% +99.25% +2.39% +6.23% Value of $10,000 Investment(3) $10,972 $ 19,925 $11,255 $18,303 Avg. Ann. Total Return (3/31/10)(4) +101.04% +4.30% +6.73% Total Annual Operating Expenses(5) 1.26%
PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM FIGURES SHOWN. FOR MOST RECENT MONTH-END PERFORMANCE, GO TO franklintempleton.com OR CALL (800) 342-5236. Semiannual Report | 9 Performance Summary (CONTINUED) ENDNOTES SPECIAL RISKS ARE ASSOCIATED WITH FOREIGN INVESTING, INCLUDING CURRENCY FLUCTUATIONS, ECONOMIC INSTABILITY AND POLITICAL DEVELOPMENTS. INVESTMENTS IN EMERGING MARKETS INVOLVE HEIGHTENED RISKS RELATED TO THE SAME FACTORS, IN ADDITION TO THOSE ASSOCIATED WITH THESE MARKETS' SMALLER SIZE AND LESSER LIQUIDITY. IN ADDITION, SMALLER COMPANY STOCKS HAVE HISTORICALLY EXHIBITED GREATER PRICE VOLATILITY THAN LARGE-COMPANY STOCKS, PARTICULARLY OVER THE SHORT TERM. 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. ADVISOR CLASS: Shares are available to certain eligible investors as described in the prospectus. (1.) Cumulative total return represents the change in value of an investment over the periods indicated. (2.) 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. (3.) These figures represent the value of a hypothetical $10,000 investment in the Fund over the periods indicated. (4.) In accordance with SEC rules, we provide standardized average annual total return information through the latest calendar quarter. (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 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 ACCOUNT ENDING ACCOUNT EXPENSES PAID DURING VALUE 9/1/09 VALUE 2/28/10 PERIOD* 9/1/09-2/28/10 ----------------- -------------- ---------------------- CLASS A Actual $1,000 $1,096.20 $ 7.28 Hypothetical (5% return before expenses) $1,000 $1,017.85 $ 7.00 CLASS B Actual $1,000 $1,092.80 $11.10 Hypothetical (5% return before expenses) $1,000 $1,014.18 $10.69 CLASS C Actual $1,000 $1,092.80 $11.16 Hypothetical (5% return before expenses) $1,000 $1,014.13 $10.74 ADVISOR CLASS Actual $1,000 $1,097.20 $ 5.98 Hypothetical (5% return before expenses) $1,000 $1,019.09 $ 5.76
* Expenses are calculated using the most recent six-month expense ratio, annualized for each class (A: 1.40%; B: 2.14%; C: 2.15%; and Advisor: 1.15%), multiplied by the average account value over the period, multiplied by 181/365 to reflect the one-half year period. 12 | Semiannual Report Templeton Global Smaller Companies Fund FINANCIAL HIGHLIGHTS
SIX MONTHS ENDED YEAR ENDED AUGUST 31, FEBRUARY 28, 2010 ----------------------------------------------------------- CLASS A (UNAUDITED) 2009 2008 2007 2006 2005 ------- ----------------- -------- -------- ---------- ---------- -------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period .. $ 5.42 $ 6.97 $ 10.13 $ 9.09 $ 9.82 $ 8.69 -------- -------- -------- ---------- ---------- -------- Income from investment operations(a): Net investment income (loss)(b) .... (0.02) 0.06 0.07 0.06 0.08 0.12 Net realized and unrealized gains (losses) ........................ 0.54 (0.98) (2.27) 2.13 0.83 2.02 -------- -------- -------- ---------- ---------- -------- Total from investment operations ...... 0.52 (0.92) (2.20) 2.19 0.91 2.14 -------- -------- -------- ---------- ---------- -------- Less distributions from: Net investment income .............. (0.06) (0.09) (0.10) (0.12) (0.14) (0.10) Net realized gains ................. -- (0.54) (0.86) (1.03) (1.50) (0.91) -------- -------- -------- ---------- ---------- -------- Total distributions ................... (0.06) (0.63) (0.96) (1.15) (1.64) (1.01) -------- -------- -------- ---------- ---------- -------- Redemption fees(c) .................... -- -- --(d) --(d) --(d) --(d) -------- -------- -------- ---------- ---------- -------- Net asset value, end of period ........ $ 5.88 $ 5.42 $ 6.97 $ 10.13 $ 9.09 $ 9.82 ======== ======== ======== ========== ========== ======== Total return(e) ....................... 9.62% (8.08)% (23.88)% 26.52% 11.66% 26.78% RATIOS TO AVERAGE NET ASSETS(f) Expenses(g) ........................... 1.40% 1.49% 1.35% 1.32% 1.34% 1.35% Net investment income (loss) .......... (0.58)% 1.47% 0.93% 0.68% 0.90% 1.33% SUPPLEMENTAL DATA Net assets, end of period (000's) ..... $815,366 $732,847 $936,192 $1,470,895 $1,128,415 $949,606 Portfolio turnover rate ............... 7.97% 31.29% 17.46% 28.07% 33.90% 41.58%
(a) 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. (b) Based on average daily shares outstanding. (c) Effective September 1, 2008, the redemption fee was eliminated. (d) Amount rounds to less than $0.01 per share. (e) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. (f) Ratios are annualized for periods less than one year. (g) Benefit of expense reduction rounds to less than 0.01%. The accompanying notes are an integral part of these financial statements. Semiannual Report | 13 Templeton Global Smaller Companies Fund FINANCIAL HIGHLIGHTS (CONTINUED)
SIX MONTHS ENDED YEAR ENDED AUGUST 31, FEBRUARY 28, 2010 ---------------------------------------------- CLASS B (UNAUDITED) 2009 2008 2007 2006 2005 ------- ----------------- ------ ------- ------ ------ ------ PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period .. $ 5.16 $ 6.63 $ 9.68 $ 8.72 $ 9.50 $ 8.42 ------ ------ ------- ------ ------ ------ Income from investment operations(a): Net investment income (loss)(b) .... (0.04) 0.03 0.01 (0.01) 0.01 0.06 Net realized and unrealized gains (losses) ........................ 0.52 (0.94) (2.17) 2.05 0.81 1.95 ------ ------ ------- ------ ------ ------ Total from investment operations ...... 0.48 (0.91) (2.16) 2.04 0.82 2.01 ------ ------ ------- ------ ------ ------ Less distributions from: Net investment income .............. (0.04) (0.02) (0.03) (0.05) (0.10) (0.02) Net realized gains ................. -- (0.54) (0.86) (1.03) (1.50) (0.91) ------ ------ ------- ------ ------ ------ Total distributions ................... (0.04) (0.56) (0.89) (1.08) (1.60) (0.93) ------ ------ ------- ------ ------ ------ Redemption fees(c) .................... -- -- --(d) --(d) --(d) --(d) ------ ------ ------- ------ ------ ------ Net asset value, end of period ........ $ 5.60 $ 5.16 $ 6.63 $ 9.68 $ 8.72 $ 9.50 ====== ====== ======= ====== ====== ====== Total return(e) ....................... 9.28% (8.88)% (24.47)% 25.69% 10.74% 25.86% RATIOS TO AVERAGE NET ASSETS(f) Expenses(g) ........................... 2.14% 2.26% 2.12% 2.07% 2.09% 2.10% Net investment income (loss) .......... (1.32)% 0.70% 0.16% (0.07)% 0.15% 0.58% SUPPLEMENTAL DATA Net assets, end of period (000's) ..... $2,896 $2,929 $ 4,470 $9,010 $8,027 $7,983 Portfolio turnover rate ............... 7.97% 31.29% 17.46% 28.07% 33.90% 41.58%
(a) 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. (b) Based on average daily shares outstanding. (c) Effective September 1, 2008, the redemption fee was eliminated. (d) Amount rounds to less than $0.01 per share. (e) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. (f) Ratios are annualized for periods less than one year. (g) Benefit of expense reduction rounds to less than 0.01%. The accompanying notes are an integral part of these financial statements. 14 | Semiannual Report Templeton Global Smaller Companies Fund FINANCIAL HIGHLIGHTS (CONTINUED)
SIX MONTHS ENDED YEAR ENDED AUGUST 31, FEBRUARY 28, 2010 -------------------------------------------------- CLASS C (UNAUDITED) 2009 2008 2007 2006 2005 ------- ----------------- ------- ------- ------- ------- ------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period .. $ 5.28 $ 6.77 $ 9.86 $ 8.88 $ 9.65 $ 8.55 ------- ------- ------- ------- ------- ------- Income from investment operations(a): Net investment income (loss)(b) .... (0.04) 0.03 0.01 --(c) 0.01 0.06 Net realized and unrealized gains (losses) ........................ 0.53 (0.96) (2.21) 2.07 0.83 1.98 ------- ------- ------- ------- ------- ------- Total from investment operations ...... 0.49 (0.93) (2.20) 2.07 0.84 2.04 ------- ------- ------- ------- ------- ------- Less distributions from: Net investment income .............. (0.04) (0.02) (0.03) (0.06) (0.11) (0.03) Net realized gains ................. -- (0.54) (0.86) (1.03) (1.50) (0.91) ------- ------- ------- ------- ------- ------- Total distributions ................... (0.04) (0.56) (0.89) (1.09) (1.61) (0.94) ------- ------- ------- ------- ------- ------- Redemption fees(d) .................... -- -- --(c) --(c) --(c) --(c) ------- ------- ------- ------- ------- ------- Net asset value, end of period ........ $ 5.73 $ 5.28 $ 6.77 $ 9.86 $ 8.88 $ 9.65 ======= ======= ======= ======= ======= ======= Total return(e) ....................... 9.28% (8.96)% (24.38)% 25.58% 10.89% 25.74% RATIOS TO AVERAGE NET ASSETS(f) Expenses(g) ........................... 2.15% 2.26% 2.09% 2.06% 2.09% 2.10% Net investment income (loss) .......... (1.33)% 0.70% 0.19% (0.06)% 0.15% 0.58% SUPPLEMENTAL DATA Net assets, end of period (000's) ..... $35,310 $33,300 $49,346 $98,269 $71,857 $55,448 Portfolio turnover rate ............... 7.97% 31.29% 17.46% 28.07% 33.90% 41.58%
(a) 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. (b) Based on average daily shares outstanding. (c) Amount rounds to less than $0.01 per share. (d) Effective September 1, 2008, the redemption fee was eliminated. (e) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. (f) Ratios are annualized for periods less than one year. (g) Benefit of expense reduction rounds to less than 0.01%. The accompanying notes are an integral part of these financial statements. Semiannual Report | 15 Templeton Global Smaller Companies Fund FINANCIAL HIGHLIGHTS (CONTINUED)
SIX MONTHS ENDED YEAR ENDED AUGUST 31, FEBRUARY 28, 2010 ----------------------------------------------------- ADVISOR CLASS (UNAUDITED) 2009 2008 2007 2006 2005 ------------- ----------------- -------- -------- -------- ------- ------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period .. $ 5.43 $ 7.00 $ 10.17 $ 9.11 $ 9.84 $ 8.71 -------- -------- -------- -------- ------- ------- Income from investment operations(a): Net investment income (loss)(b) .... (0.01) 0.07 0.10 0.10 0.11 0.16 Net realized and unrealized gains (losses) ........................ 0.54 (1.00) (2.29) 2.13 0.82 2.01 -------- -------- -------- -------- ------- ------- Total from investment operations ...... 0.53 (0.93) (2.19) 2.23 0.93 2.17 -------- -------- -------- -------- ------- ------- Less distributions from: Net investment income .............. (0.07) (0.10) (0.12) (0.14) (0.16) (0.13) Net realized gains ................. -- (0.54) (0.86) (1.03) (1.50) (0.91) -------- -------- -------- -------- ------- ------- Total distributions ................... (0.07) (0.64) (0.98) (1.17) (1.66) (1.04) -------- -------- -------- -------- ------- ------- Redemption fees(c) .................... -- -- --(d) --(d) --(d) --(d) -------- -------- -------- -------- ------- ------- Net asset value, end of period ........ $ 5.89 $ 5.43 $ 7.00 $ 10.17 $ 9.11 $ 9.84 ======== ======== ======== ======== ======= ======= Total return(e) ....................... 9.72% (7.94)% (23.69)% 26.98% 11.83% 27.07% RATIOS TO AVERAGE NET ASSETS(f) Expenses(g) ........................... 1.15% 1.26% 1.12% 1.07% 1.09% 1.10% Net investment income (loss) .......... (0.33)% 1.70% 1.16% 0.93% 1.15% 1.58% SUPPLEMENTAL DATA Net assets, end of period (000's) ..... $112,327 $108,383 $126,003 $117,115 $60,588 $39,912 Portfolio turnover rate ............... 7.97% 31.29% 17.46% 28.07% 33.90% 41.58%
(a) 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. (b) Based on average daily shares outstanding. (c) Effective September 1, 2008, the redemption fee was eliminated. (d) Amount rounds to less than $0.01 per share. (e) Total return is not annualized for periods less than one year. (f) Ratios are annualized for periods less than one year. (g) Benefit of expense reduction rounds to less than 0.01%. The accompanying notes are an integral part of these financial statements. 16 | Semiannual Report Templeton Global Smaller Companies Fund STATEMENT OF INVESTMENTS, FEBRUARY 28, 2010 (UNAUDITED)
INDUSTRY SHARES VALUE ---------------------------------- ----------- ------------ COMMON STOCKS 89.8% AUSTRALIA 5.7% Billabong International Ltd. ........ Textiles, Apparel & Luxury Goods 597,939 $ 5,447,091 (a) Billabong International Ltd., 144A .. Textiles, Apparel & Luxury Goods 103,686 944,556 Emeco Holdings Ltd. ................. Trading Companies & Distributors 18,804,313 11,538,115 (b) Iluka Resources Ltd. ................ Metals & Mining 3,205,222 10,278,458 (b) Pacific Brands Ltd. ................. Distributors 11,651,881 11,898,377 (a, b) Pacific Brands Ltd., 144A ........... Distributors 8,738,910 8,923,782 (b) PaperlinX Ltd. ...................... Paper & Forest Products 10,456,146 5,853,808 ------------ 54,884,187 ------------ BAHAMAS 2.1% (b) Steiner Leisure Ltd. ................ Diversified Consumer Services 464,960 19,979,331 ------------ BELGIUM 1.2% (b) Barco NV ............................ Electronic Equipment, Instruments & Components 294,630 11,685,600 ------------ BERMUDA 1.9% (b) MF Global Holdings Ltd. ............. Capital Markets 2,645,470 18,306,652 ------------ CANADA 7.3% (b) ATS Automation Tooling Systems Inc. ............................. Machinery 885,180 5,779,497 Biovail Corp. ....................... Pharmaceuticals 896,170 13,261,136 Canaccord Financial Inc. ............ Capital Markets 1,926,100 15,504,720 Dorel Industries Inc., B ............ Household Durables 171,100 4,928,760 Genworth MI Canada Inc. ............. Thrifts & Mortgage Finance 107,100 2,773,688 (a) Genworth MI Canada Inc., 144A ....... Thrifts & Mortgage Finance 466,800 12,089,242 (b) HudBay Minerals Inc. ................ Metals & Mining 666,400 8,417,084 Mullen Group Ltd. ................... Energy Equipment & Services 531,700 7,766,802 ------------ 70,520,929 ------------ CAYMAN ISLANDS 1.3% Stella International Holdings Ltd. .. Textiles, Apparel & Luxury Goods 6,236,487 12,855,009 ------------ CHINA 3.5% (b) Bio-Treat Technology Ltd. ........... Commercial Services & Supplies 22,322,095 1,349,678 People's Food Holdings Ltd. ......... Food Products 31,076,840 15,032,189 Sinotrans Ltd., H ................... Air Freight & Logistics 66,042,621 17,867,178 ------------ 34,249,045 ------------ FINLAND 2.8% Amer Sports OYJ ..................... Leisure Equipment & Products 1,561,477 17,242,094 (b) Elcoteq SE, A ....................... Communications Equipment 143,298 243,884 Huhtamaki OYJ ....................... Containers & Packaging 863,810 9,408,964 ------------ 26,894,942 ------------ GERMANY 0.6% (b) Jenoptik AG Electronic Equipment, Instruments & Components 977,110 6,033,292 ------------
Semiannual Report | 17 Templeton Global Smaller Companies Fund STATEMENT OF INVESTMENTS, FEBRUARY 28, 2010 (UNAUDITED) (CONTINUED)
INDUSTRY SHARES VALUE ---------------------------------- ----------- ------------ COMMON STOCKS (CONTINUED) HONG KONG 7.5% Asia Satellite Telecommunications Holdings Ltd. .................... Diversified Telecommunication Services 3,454,500 $ 4,850,919 (b) Dah Sing Financial Group ............ Commercial Banks 4,228,400 21,462,715 (b) Fountain Set (Holdings) Ltd. ........ Textiles, Apparel & Luxury Goods 33,524,000 5,614,506 Giordano International Ltd. ......... Specialty Retail 40,089,348 12,601,760 Hopewell Holdings Ltd. .............. Real Estate Management & Development 2,982,000 8,720,590 Hung Hing Printing Group Ltd. ....... Containers & Packaging 20,862,508 6,611,713 Yue Yuen Industrial Holdings Ltd. ... Textiles, Apparel & Luxury Goods 4,196,500 12,461,506 ------------ 72,323,709 ------------ JAPAN 3.9% Asics Corp. ......................... Textiles, Apparel & Luxury Goods 36,000 337,861 Descente Ltd. ....................... Textiles, Apparel & Luxury Goods 2,333,000 12,706,600 Kobayashi Pharmaceutical Co. Ltd. ... Personal Products 227,200 9,267,991 MEITEC Corp. ........................ Professional Services 239,900 4,389,550 (b) Takuma Co. Ltd. ..................... Machinery 2,348,000 5,469,375 USS Co. Ltd. ........................ Specialty Retail 81,030 5,252,155 ------------ 37,423,532 ------------ NETHERLANDS 7.7% Aalberts Industries NV .............. Machinery 803,140 11,164,790 (b) Draka Holding NV .................... Electrical Equipment 859,206 14,184,454 Imtech NV ........................... Construction & Engineering 354,681 10,829,389 Mediq NV ............................ Health Care Providers & Services 838,560 14,334,562 TKH Group NV ........................ Communications Equipment 847,666 15,580,884 (b) USG People NV ....................... Professional Services 521,736 8,456,950 ------------ 74,551,029 ------------ NORWAY 0.3% Tomra Systems ASA ................... Commercial Services & Supplies 715,996 3,452,773 ------------ SINGAPORE 0.1% (b) Huan Hsin Holdings Ltd. ............. Electronic Equipment, Instruments & Components 6,101,000 1,041,571 ------------ SOUTH KOREA 6.1% Busan Bank .......................... Commercial Banks 1,793,670 18,014,013 Daeduck Electronics Co. Ltd. ........ Electronic Equipment, Instruments & Components 1,221,875 6,362,177 Daegu Bank Co. Ltd. ................. Commercial Banks 1,171,230 14,943,279 INTOPS Co. Ltd. ..................... Electronic Equipment, Instruments & Components 223,678 3,114,138 Sindoh Co. Ltd. ..................... Office Electronics 177,899 8,296,841 Youngone Corp. ...................... Textiles, Apparel & Luxury Goods 657,168 5,393,310 Youngone Holdings Co. Ltd. .......... Textiles, Apparel & Luxury Goods 93,948 2,425,640 ------------ 58,549,398 ------------ SPAIN 0.8% Sol Melia SA ........................ Hotels, Restaurants & Leisure 1,078,193 7,780,472 ------------
18 | Semiannual Report Templeton Global Smaller Companies Fund STATEMENT OF INVESTMENTS, FEBRUARY 28, 2010 (UNAUDITED) (CONTINUED)
INDUSTRY SHARES VALUE ---------------------------------- ----------- ------------ COMMON STOCKS (CONTINUED) SWEDEN 0.7% (b, c) D. Carnegie & Co. AB ................ Capital Markets 2,352,546 $ -- Niscayah Group AB ................... Commercial Services & Supplies 3,472,830 6,972,086 ------------ 6,972,086 ------------ SWITZERLAND 3.2% Panalpina Welttransport Holding AG .. Air Freight & Logistics 244,850 16,406,124 Verwaltungs- und Privat-Bank AG ..... Capital Markets 75,518 7,569,018 Vontobel Holding AG ................. Capital Markets 230,647 6,857,914 ------------ 30,833,056 ------------ TAIWAN 4.6% D-Link Corp. ........................ Communications Equipment 5,902,930 5,989,278 Giant Manufacturing Co. Ltd. ........ Leisure Equipment & Products 4,639,320 12,836,463 (b) Ta Chong Bank Ltd. .................. Commercial Banks 52,393,000 10,256,831 Taiwan Fu Hsing ..................... Building Products 9,336,180 5,491,871 Test-Rite International Co. Ltd. .... Distributors 16,875,630 9,454,134 ------------ 44,028,577 ------------ THAILAND 3.1% Bank of Ayudhya Public Co. Ltd., fgn. ............................. Commercial Banks 34,027,200 21,102,937 Independent Power Producers & Glow Energy Public Co. Ltd., fgn. ... Energy Traders 8,979,896 9,032,871 ------------ 30,135,808 ------------ UNITED KINGDOM 6.7% Bodycote PLC ........................ Machinery 4,644,597 12,670,260 Burberry Group PLC .................. Textiles, Apparel & Luxury Goods 975,321 9,309,986 Fiberweb PLC ........................ Personal Products 7,298,999 6,483,154 Future PLC .......................... Media 11,231,610 3,211,223 GAME Group PLC ...................... Specialty Retail 3,408,480 4,269,681 Henderson Group PLC ................. Capital Markets 9,149,752 17,481,856 (b) Yule Catto & Co. PLC ................ Chemicals 4,296,057 10,972,661 ------------ 64,398,821 ------------ UNITED STATES 18.7% Brinker International Inc. .......... Hotels, Restaurants & Leisure 539,910 9,777,770 (b) Chico's FAS Inc. .................... Specialty Retail 1,472,490 19,952,239 (b) Fossil Inc. ......................... Textiles, Apparel & Luxury Goods 440,540 15,969,575 (b) Hibbett Sports Inc. ................. Specialty Retail 821,570 18,904,326 (b) JAKKS Pacific Inc. .................. Leisure Equipment & Products 983,320 12,144,002 (b) K-Swiss Inc., A ..................... Textiles, Apparel & Luxury Goods 1,293,330 12,079,702 (b, d) Leapfrog Enterprises Inc. ........... Leisure Equipment & Products 2,971,610 16,195,274 Legg Mason Inc. ..................... Capital Markets 591,630 15,293,636 (b) RC2 Corp. ........................... Leisure Equipment & Products 292,400 4,125,764 (b) Sealy Corp. ......................... Household Durables 3,655,420 12,647,753 (b) Tempur-Pedic International Inc. ..... Household Durables 338,080 9,601,472 (b) True Religion Apparel Inc. .......... Textiles, Apparel & Luxury Goods 250,510 6,152,526 (b) VASCO Data Security International Inc. ............................. Software 1,010,230 8,001,022
Semiannual Report | 19 Templeton Global Smaller Companies Fund STATEMENT OF INVESTMENTS, FEBRUARY 28, 2010 (UNAUDITED) (CONTINUED)
INDUSTRY SHARES VALUE ---------------------------------- ----------- ------------ COMMON STOCKS (CONTINUED) UNITED STATES (CONTINUED) (b) Volcom Inc. ......................... Textiles, Apparel & Luxury Goods 516,790 $ 8,340,991 (b, d) West Marine Inc. .................... Specialty Retail 1,260,280 11,884,440 ------------ 181,070,492 ------------ TOTAL COMMON STOCKS (COST $887,723,216) .............. 867,970,311 ------------
NOTE AMOUNT(e) ----------- CONVERTIBLE BONDS (COST $22,376,433) 2.8% UNITED STATES 2.8% (f) Sealy Corp., 8.00%, cvt. pfd. note, PIK, 7/15/16 ..................... Household Durables 281,186 26,712,670 ------------ TOTAL INVESTMENTS BEFORE SHORT TERM INVESTMENTS (COST $910,099,649) .. 894,682,981 ------------
PRINCIPAL AMOUNT ----------- SHORT TERM INVESTMENTS 6.9% U.S. GOVERNMENT AND AGENCY SECURITIES 6.9% (g) FHLB, 3/01/10 ....................... 26,525,000 26,525,000 (g) FHLMC, 6/25/10 .......................... 15,000,000 14,995,170 6/29/10 .......................... 25,000,000 24,991,675 ------------ TOTAL U.S. GOVERNMENT AND AGENCY SECURITIES (COST $66,499,422) .... 66,511,845 ------------ TOTAL INVESTMENTS (COST $976,599,071) 99.5% ............................ 961,194,826 OTHER ASSETS, LESS LIABILITIES 0.5% 4,705,149 ------------ NET ASSETS 100.0% ................... $965,899,975 ============
See Abbreviations on page 33. (a) Security was purchased pursuant to Rule 144A under the Securities Act of 1933 and may be sold in transactions exempt from registration only to qualified institutional buyers or in a public offering registered under the Securities Act of 1933. These securities have been deemed liquid under guidelines approved by the Fund's Board of Trustees. At February 28, 2010, the aggregate value of these securities was $21,957,580, representing 2.27% of net assets. (b) Non-income producing. (c) Security has been deemed illiquid because it may not be able to be sold within seven days. (d) See Note 8 regarding holdings of 5% voting securities. (e) Principal amount is equal to $26 per note. Total principal amount is $7,310,836. (f) Income may be received in additional securities and/or cash. (g) The security is traded on a discount basis with no stated coupon rate. The accompanying notes are an integral part of these financial statements. 20 | Semiannual Report Templeton Global Smaller Companies Fund FINANCIAL STATEMENTS STATEMENT OF ASSETS AND LIABILITIES February 28, 2010 (unaudited) Assets: Investments in securities: Cost - Unaffiliated issuers ............................. $ 928,413,730 Cost - Non-controlled affiliated issuers (Note 8) ....... 48,185,341 -------------- Total cost of investments ............................... $ 976,599,071 ============== Value - Unaffiliated issuers ............................ $ 933,115,112 Value - Non-controlled affiliated issuers (Note 8) ...... 28,079,714 ============== Total value of investments .............................. 961,194,826 Cash ....................................................... 4,580 Receivables: Investment securities sold .............................. 5,404,401 Capital shares sold ..................................... 1,215,544 Dividends ............................................... 1,624,353 Other assets ............................................... 2,797 -------------- Total assets ......................................... 969,446,501 -------------- Liabilities: Payables: Investment securities purchased ......................... 1,027,395 Capital shares redeemed ................................. 1,184,164 Affiliates .............................................. 913,450 Unaffiliated transfer agent fees ........................ 192,691 Accrued expenses and other liabilities ..................... 228,826 -------------- Total liabilities .................................... 3,546,526 -------------- Net assets, at value .............................. $ 965,899,975 ============== Net assets consist of: Paid-in capital ............................................ $1,169,162,617 Distributions in excess of net investment income ........... (2,998,463) Net unrealized appreciation (depreciation) ................. (15,379,216) Accumulated net realized gain (loss) ....................... (184,884,963) -------------- Net assets, at value .............................. $ 965,899,975 ==============
The accompanying notes are an integral part of these financial statements. Semiannual Report | 21 Templeton Global Smaller Companies Fund FINANCIAL STATEMENTS (CONTINUED) STATEMENT OF ASSETS AND LIABILITIES (CONTINUED) February 28, 2010 (unaudited) CLASS A: Net assets, at value ....................................... $815,366,248 ============ Shares outstanding ......................................... 138,685,913 ============ Net asset value per share(a) ............................... $ 5.88 ============ Maximum offering price per share (net asset value per share / 94.25%) ............................................... $ 6.24 ============ CLASS B: Net assets, at value ....................................... $ 2,896,065 ============ Shares outstanding ......................................... 517,025 ============ Net asset value and maximum offering price per share(a) .... $ 5.60 ============ CLASS C: Net assets, at value ....................................... $ 35,310,225 ============ Shares outstanding ......................................... 6,161,144 ============ Net asset value and maximum offering price per share(a) .... $ 5.73 ============ ADVISOR CLASS: Net assets, at value ....................................... $112,327,437 ============ Shares outstanding ......................................... 19,056,435 ============ Net asset value and maximum offering price per share ....... $ 5.89 ============
(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. 22 | Semiannual Report Templeton Global Smaller Companies Fund FINANCIAL STATEMENTS (CONTINUED) STATEMENT OF OPERATIONS for the six months ended February 28, 2010 (unaudited) Investment income: Dividends (net of foreign taxes of $395,573) ................ $ 3,953,109 Interest .................................................... 31,167 ----------- Total investment income ............................ 3,984,276 ----------- Expenses: Management fees (Note 3a) ................................... 3,642,886 Administrative fees (Note 3b) ............................... 622,173 Distribution fees: (Note 3c) Class A .................................................. 1,058,613 Class B .................................................. 14,748 Class C .................................................. 179,323 Transfer agent fees (Note 3e) ............................... 943,107 Custodian fees (Note 4) ..................................... 142,364 Reports to shareholders ..................................... 86,643 Registration and filing fees ................................ 49,694 Professional fees ........................................... 22,410 Trustees' fees and expenses ................................. 40,834 Other ....................................................... 19,505 ----------- Total expenses ..................................... 6,822,300 Expense reductions (Note 4) ........................ (232) ----------- Net expenses .................................... 6,822,068 ----------- Net investment income (loss) ................. (2,837,792) ----------- Realized and unrealized gains (losses): Net realized gain (loss) from: Investments: Unaffiliated issuers .................................. 13,360,848 Non-controlled affiliated issuers (Note 8) ............ (2,671,831) Foreign currency transactions ............................ (10,224) ----------- Net realized gain (loss) ........................ 10,678,793 ----------- Net change in unrealized appreciation (depreciation) on: Investments .............................................. 78,011,420 Translation of other assets and liabilities denominated in foreign currencies .................................... (21,013) ----------- Net change in unrealized appreciation (depreciation) ............................... 77,990,407 ----------- Net realized and unrealized gain (loss) ........................ 88,669,200 ----------- Net increase (decrease) in net assets resulting from operations $85,831,408 ===========
The accompanying notes are an integral part of these financial statements. Semiannual Report | 23 Templeton Global Smaller Companies Fund FINANCIAL STATEMENTS (CONTINUED) STATEMENTS OF CHANGES IN NET ASSETS
SIX MONTHS ENDED FEBRUARY 28, 2010 YEAR ENDED (UNAUDITED) AUGUST 31, 2009 ----------------- --------------- Increase (decrease) in net assets: Operations: Net investment income (loss) ........................................ $ (2,837,792) $ 10,208,191 Net realized gain (loss) from investments and foreign currency transactions ..................................................... 10,678,793 (195,685,294) Net change in unrealized appreciation (depreciation) on investments and translation of other assets and liabilities denominated in foreign currencies ................................ 77,990,407 56,459,180 ------------ -------------- Net increase (decrease) in net assets resulting from operations ................................................. 85,831,408 (129,017,923) ------------ -------------- Distributions to shareholders from: Net investment income: Class A .......................................................... (8,704,162) (10,399,127) Class B .......................................................... (20,173) (11,709) Class C .......................................................... (249,345) (143,310) Advisor Class .................................................... (1,234,268) (2,277,049) Net realized gains: Class A .......................................................... -- (66,168,273) Class B .......................................................... -- (306,993) Class C .......................................................... -- (3,426,195) Advisor Class .................................................... -- (12,127,130) ------------ -------------- Total distributions to shareholders .................................... (10,207,948) (94,859,786) ------------ -------------- Capital share transactions: (Note 2) Class A .......................................................... 18,257,857 (8,508,052) Class B .......................................................... (278,759) (548,255) Class C .......................................................... (792,514) (4,470,044) Advisor Class .................................................... (4,369,812) (1,147,071) ------------ -------------- Total capital share transactions ....................................... 12,816,772 (14,673,422) ------------ -------------- Net increase (decrease) in net assets ......................... 88,440,232 (238,551,131) Net assets: Beginning of period .................................................... 877,459,743 1,116,010,874 ------------ -------------- End of period .......................................................... $965,899,975 $ 877,459,743 ============ ============== Undistributed net investment income (distributions in excess of net investment income) included in net assets: End of period .......................................................... $ (2,998,463) $ 10,047,277 ============ ==============
The accompanying notes are an integral part of these financial statements. 24 | Semiannual Report Templeton Global Smaller Companies Fund NOTES TO FINANCIAL STATEMENTS (UNAUDITED) 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES Templeton Global Smaller Companies Fund (Fund) is registered under the Investment Company Act of 1940, as amended, (1940 Act) as an open-end investment company. The Fund offers four classes of shares: Class A, Class B, Class C, 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 Fund's significant accounting policies. A. SECURITY VALUATION Equity and other securities listed on a securities exchange or on the NASDAQ National Market System are valued at the last quoted sale price or the official closing price of the day, respectively. Over-the-counter securities and listed securities for which there is no reported sale are valued within the range of the most recent quoted bid and ask prices. Securities that trade in multiple markets or on multiple exchanges are valued according to the broadest and most representative market. Certain equity securities are valued based upon fundamental characteristics or relationships to similar securities. Corporate debt and government securities generally trade in the over-the-counter market rather than on a securities exchange. The Fund may utilize independent pricing services, quotations from bond dealers, and information with respect to bond and note transactions, to assist in determining a current market value for each security. The Fund's pricing services may use valuation models or matrix pricing which considers information with respect to comparable bond and note transactions, quotations from bond dealers, or by reference to other securities that are considered comparable in such characteristics as rating, interest rate and maturity date, option adjusted spread models, prepayment projections, interest rate spreads and yield curves, to determine current value. Foreign equity securities are valued as of the close of trading on the foreign stock exchange on which the security is primarily traded, or the NYSE, whichever is earlier. If no sale is reported at that time, the foreign equity security will be valued within the range of the most recent quoted bid and ask prices. The value is then converted into its U.S. dollar equivalent at the foreign exchange rate in effect at the close of the NYSE on the day that the value of the security is determined. The Fund has procedures to determine the fair value of individual securities and other assets for which market prices are not readily available or which may not be reliably priced. Methods for valuing these securities may include: fundamental analysis based upon the underlying investment book value, anticipated future cash flows, market changes in comparable or similar securities, matrix pricing, discounts from market prices of similar securities, or discounts applied due to the nature and duration of restrictions on the disposition of the securities. Due to the inherent uncertainty of valuations of such securities, the fair values may differ significantly from the values that would have been used had a ready market for such investments existed. Occasionally, events occur between the time at which trading in a security is completed and the close of the NYSE that might call into question the availability (including the reliability) of the value of a portfolio security held Semiannual Report | 25 Templeton Global Smaller Companies Fund NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) A. SECURITY VALUATION (CONTINUED) by the Fund. The investment manager monitors price movements following the close of trading in foreign stock markets through a series of country specific market proxies (such as baskets of American Depository Receipts, futures contracts and exchange traded funds). These price movements are measured against established trigger thresholds for each specific market proxy to assist in determining if an event has occurred. If such an event occurs, the securities may be valued using fair value procedures, which may include the use of independent pricing services. All security valuation procedures are approved by the Fund's Board of Trustees. B. FOREIGN CURRENCY TRANSLATION Portfolio securities and other assets and liabilities denominated in foreign currencies are translated into U.S. dollars based on the exchange rate of such currencies against U.S. dollars on the date of valuation. The Fund may enter into foreign currency exchange contracts to facilitate transactions denominated in a foreign currency. Purchases and sales of securities, income and expense items denominated in foreign currencies are translated into U.S. dollars at the exchange rate in effect on the transaction date. Occasionally, events may impact the availability or reliability of foreign exchange rates used to convert the U.S. dollar equivalent value. If such an event occurs, the foreign exchange rate will be valued at fair value using procedures established and approved by the Fund's Board of Trustees. The Fund does not separately report the effect of changes in foreign exchange rates from changes in market prices on securities held. Such changes are included in net realized and unrealized gain or loss from investments on the Statement of Operations. Realized foreign exchange gains or losses arise from sales of foreign currencies, currency gains or losses realized between the trade and settlement dates on securities transactions and the difference between the recorded amounts of dividends, interest, and foreign withholding taxes and the U.S. dollar equivalent of the amounts actually received or paid. Net unrealized foreign exchange gains and losses arise from changes in foreign exchange rates on foreign denominated assets and liabilities other than investments in securities held at the end of the reporting period. C. INCOME TAXES No provision has been made for U.S. income taxes because it is the 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 Fund has reviewed the tax positions, taken on federal income tax returns, for each of the three open tax years and as of February 28, 2010, and has determined that no provision for income tax is required in the Fund's financial statements. 26 | Semiannual Report Templeton Global Smaller Companies Fund NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) C. INCOME TAXES (CONTINUED) Foreign securities held by the Fund may be subject to foreign taxation on dividend and interest income received. Foreign taxes, if any, are recorded based on the tax regulations and rates that exist in the foreign markets in which the Fund invests. D. 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. Interest income and estimated expenses are accrued daily. Amortization of premium and accretion of discount on debt securities are included in interest income. Dividend income is recorded on the ex-dividend date except that certain dividends from foreign securities are recognized as soon as the Fund is notified of 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. 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. E. 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. F. GUARANTEES AND INDEMNIFICATIONS Under the Fund's organizational documents, its officers and trustees are indemnified by the Fund against certain liabilities arising out of the performance of their duties to the Fund. Additionally, in the normal course of business, the Fund, enters into contracts with service providers that contain general indemnification clauses. The Fund's maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Fund that have not yet occurred. Currently, the Fund expects the risk of loss to be remote. Semiannual Report | 27 Templeton Global Smaller Companies Fund NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 2. SHARES OF BENEFICIAL INTEREST At February 28, 2010, there were an unlimited number of shares authorized (without par value). Transactions in the Fund's shares were as follows:
SIX MONTHS ENDED YEAR ENDED FEBRUARY 28, 2010 AUGUST 31, 2009 --------------------------- --------------------------- SHARES AMOUNT SHARES AMOUNT ----------- ------------- ----------- ------------- CLASS A SHARES: Shares sold .................... 27,370,505 $ 159,727,974 15,188,376 $ 69,507,491 Shares issued in reinvestment of distributions ............... 1,281,302 7,655,959 19,523,769 67,357,003 Shares redeemed ................ (25,238,885) (149,126,076) (33,690,427) (145,372,546) ---------- ------------- ----------- ------------- Net increase (decrease) ........ 3,412,922 $ 18,257,857 1,021,718 $ (8,508,052) ========== ============= =========== ============= CLASS B SHARES: Shares sold .................... 12,891 $ 72,018 50,752 $ 217,080 Shares issued in reinvestment of distributions ............... 3,389 19,752 87,357 288,277 Shares redeemed ................ (66,733) (370,529) (244,634) (1,053,612) ---------- ------------- ----------- ------------- Net increase (decrease) ........ (50,453) $ (278,759) (106,525) $ (548,255) ========== ============= =========== ============= CLASS C SHARES: Shares sold .................... 657,153 $ 3,757,372 826,267 $ 3,466,848 Shares issued in reinvestment of distributions ............... 36,379 217,055 842,760 2,848,530 Shares redeemed ................ (836,215) (4,766,941) (2,655,994) (10,785,422) ---------- ------------- ----------- ------------- Net increase (decrease) ........ (142,683) $ (792,514) (986,967) $ (4,470,044) ========== ============= =========== ============= ADVISOR CLASS SHARES: Shares sold .................... 1,689,262 $ 9,903,389 9,099,343 $ 37,372,758 Shares issued in reinvestment of distributions ............... 195,334 1,179,629 4,079,917 14,075,713 Shares redeemed ................ (2,783,432) (15,452,830) (11,220,232) (52,595,542) ---------- ------------- ----------- ------------- Net increase (decrease) ........ (898,836) $ (4,369,812) 1,959,028 $ (1,147,071) ========== ============= =========== =============
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 Fund are also officers and/or directors of the following subsidiaries:
SUBSIDIARY AFFILIATION ---------- -------------------------------- Franklin Templeton Investment Corp. (FTIC) Investment manager Templeton Investment Counsel, LLC (TIC) Investment manager - sub advisor Franklin Templeton Services, LLC (FT Services) Administrative manager Franklin Templeton Distributors, Inc. (Distributors) Principal underwriter Franklin Templeton Investor Services, LLC (Investor Services) Transfer agent
28 | Semiannual Report Templeton Global Smaller Companies Fund NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 3. TRANSACTIONS WITH AFFILIATES (CONTINUED) A. MANAGEMENT FEES The Fund pays an investment management fee to FTIC based on the average daily net assets of the Fund as follows:
ANNUALIZED FEE RATE NET ASSETS ------------------- ------------------------------------------------- 0.750% Up to and including $1 billion 0.730% Over $1 billion, up to and including $5 billion 0.710% Over $5 billion, up to and including $10 billion 0.690% Over $10 billion, up to and including $15 billion 0.670% Over $15 billion, up to and including $20 billion 0.650% In excess of $20 billion
Under a subadvisory agreement, TIC, an affiliate of FTIC, provides subadvisory services to the Fund and receives from FTIC fees based on the average daily net assets of the Fund. B. ADMINISTRATIVE FEES The Fund pays an administrative fee to FT Services based on the Fund's average daily net assets as follows:
ANNUALIZED FEE RATE NET ASSETS ------------------- --------------------------------------------------- 0.150% Up to and including $200 million 0.135% Over $200 million, up to and including $700 million 0.100% Over $700 million, up to and including $1.2 billion 0.075% In excess of $1.2 billion
C. DISTRIBUTION FEES The Fund'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 Fund's Class A reimbursement distribution plan, the Fund reimburses Distributors for costs incurred in connection with the servicing, sale and distribution of the Fund's shares up to the maximum annual plan rate. Under the Class A reimbursement distribution plan, costs exceeding the maximum for the current plan year cannot be reimbursed in subsequent periods. In addition, under the Fund's Class B and C compensation distribution plans, the Fund pays Distributors for costs incurred in connection with the servicing, sale and distribution of the 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%
Semiannual Report | 29 Templeton Global Smaller Companies Fund NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 3. TRANSACTIONS WITH AFFILIATES (CONTINUED) D. SALES CHARGES/UNDERWRITING AGREEMENTS Distributors has advised the Fund of the following commission transactions related to the sales and redemptions of the Fund's shares for the period: Sales charges retained net of commissions paid to unaffiliated broker/dealers ............................................ $93,036 Contingent deferred sales charges retained ................... $ 1,133
E. TRANSFER AGENT FEES For the period ended February 28, 2010, the Fund paid transfer agent fees of $943,107, of which $519,755 was retained by Investor Services. 4. EXPENSE OFFSET ARRANGEMENT The Fund has entered into an arrangement with its custodian whereby credits realized as a result of uninvested cash balances are used to reduce a portion of the Fund's custodian expenses. During the period ended February 28, 2010, the custodian fees were reduced as noted in the Statement of Operations. 5. INCOME TAXES For tax purposes, capital losses may be carried over to offset future capital gains, if any. At August 31, 2009, the Fund had tax basis capital losses of $20,850,045 expiring in 2017. 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 August 31, 2009, the Fund deferred realized capital losses of $174,713,711. At February 28, 2010, the cost of investments and net unrealized appreciation (depreciation) for income tax purposes were as follows: Cost of investments ......................... $ 977,412,185 ============= Unrealized appreciation ..................... $ 173,870,746 Unrealized depreciation ..................... (190,088,105) ------------- Net unrealized appreciation (depreciation) .. $ (16,217,359) =============
Net investment income (loss) differs for financial statement and tax purposes primarily due to differing treatments of foreign currency transactions, passive foreign investment company shares, bond discounts and premiums, and corporate actions. Net realized gains (losses) differ for financial statement and tax purposes primarily due to differing treatments of foreign currency transactions, and bond discounts and premiums. 30 | Semiannual Report Templeton Global Smaller Companies Fund NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 6. INVESTMENT TRANSACTIONS Purchases and sales of investments (excluding short term securities) for the period ended February 28, 2010, aggregated $72,198,186 and $130,637,091, respectively. 7. CONCENTRATION OF RISK Investing in foreign securities may include certain risks and considerations not typically associated with investing in U.S. securities, such as fluctuating currency values and changing local and regional economic, political and social conditions, which may result in greater market volatility. In addition, certain foreign securities may not be as liquid as U.S. securities. 8. HOLDINGS OF 5% VOTING SECURITIES OF PORTFOLIO COMPANIES The 1940 Act defines "affiliated companies" to include investments in portfolio companies in which a fund owns 5% or more of the outstanding voting securities. Investments in "affiliated companies" for the Fund for the period ended February 28, 2010, were as shown below.
NUMBER OF NUMBER OF SHARES HELD SHARES HELD VALUE REALIZED AT BEGINNING GROSS GROSS AT END AT END INVESTMENT CAPITAL NAME OF ISSUER OF PERIOD ADDITIONS REDUCTIONS OF PERIOD OF PERIOD INCOME GAIN (LOSS) -------------- ------------ --------- ---------- ----------- ----------- ---------- ----------- NON-CONTROLLED AFFILIATES Leapfrog Enterprises Inc. .................. 2,971,610 -- -- 2,971,610 $16,195,274 $-- $ -- West Marine Inc. ......... 1,592,777 -- 332,497 1,260,280 11,884,440 -- (2,671,831) ----------- --- ----------- TOTAL AFFILIATED SECURITIES (2.91% of Net Assets) .............................................................. $28,079,714 $-- $(2,671,831) =========== === ===========
9. CREDIT FACILITY The Fund, together with other U.S. registered and foreign investment funds (collectively "Borrowers"), managed by Franklin Templeton Investments, are borrowers in a 364-day joint syndicated senior unsecured credit facility totaling $750 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. On January 22, 2010, the Fund renewed the Global Credit Facility for a total of $750 million, maturing January 21, 2011. Under the terms of the Global Credit Facility, the Fund shall, in addition to interest charged on any borrowings made by the Fund and other costs incurred by the Fund, 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 of 0.10% based upon the unused portion of the Global Credit Facility, which is reflected in other expenses on the Statement of Operations. During the period ended February 28, 2010, the Fund did not utilize the Global Credit Facility. Semiannual Report | 31 Templeton Global Smaller Companies Fund NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 10. FAIR VALUE MEASUREMENTS The Fund follows a fair value hierarchy that distinguishes between market data obtained from independent sources (observable inputs) and the Fund's own market assumptions (unobservable inputs). These inputs are used in determining the value of the Fund's 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. The following is a summary of the inputs used as of February 28, 2010, in valuing the Fund's assets carried at fair value:
LEVEL 1 LEVEL 2 LEVEL 3 TOTAL ------------ ----------- ------- ------------ ASSETS: Investments in Securities: Equity Investments(a) ... $867,970,311 $ -- $--(b) $867,970,311 Convertible Bonds ....... 26,712,670 -- -- 26,712,670 Short Term Investments .. -- 66,511,845 -- 66,511,845 ------------ ----------- --- ------------ Total Investments in Securities ........ $894,682,981 $66,511,845 $-- $961,194,826 ============ =========== === ============
(a) For detailed industry descriptions, see the accompanying Statement of Investments. (b) Includes securities determined to have no value at February 28, 2010. 11. NEW ACCOUNTING PRONOUNCEMENTS In January 2010, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2010-6, FAIR VALUE MEASUREMENTS AND DISCLOSURES (TOPIC 820): IMPROVING DISCLOSURES ABOUT FAIR VALUE MEASUREMENTS, which enhances and clarifies existing fair value measurement disclosure requirements and is effective for interim and annual periods beginning after December 15, 2009. The Fund is currently evaluating the impact, if any, of applying this provision. In March 2010, the FASB issued ASU No. 2010-11, DERIVATIVES AND HEDGING (TOPIC 815): SCOPE EXCEPTION RELATED TO EMBEDDED CREDIT DERIVATIVES, which clarifies existing derivatives and hedging disclosure requirements and is effective for fiscal quarters beginning after June 15, 2010. The Fund is currently evaluating the impact, if any, of applying this provision. 32 | Semiannual Report Templeton Global Smaller Companies Fund NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 12. SUBSEQUENT EVENTS The Fund has evaluated subsequent events through the issuance of the financial statements and determined that no events have occurred that require disclosure. ABBREVIATIONS SELECTED PORTFOLIO FHLB - Federal Home Loan Bank FHLMC - Federal Home Loan Mortgage Corp. PIK - Payment-In-Kind Semiannual Report | 33 Templeton Global Smaller Companies Fund SHAREHOLDER INFORMATION PROXY VOTING POLICIES AND PROCEDURES The Fund's investment manager has established Proxy Voting Policies and Procedures (Policies) that the Fund uses to determine how to vote proxies relating to portfolio securities. Shareholders may view the Fund'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 Fund'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 Fund 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. 34 | Semiannual Report 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(2) Mutual Recovery Fund(3) Mutual Shares Fund BLEND Franklin Focused Core Equity Fund Franklin Large Cap Equity Fund Franklin Rising Dividends Fund GROWTH Franklin DynaTech Fund 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 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(4) Templeton Global Long-Short Fund(5) 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(6) Franklin Floating Rate Daily Access Fund Franklin High Income Fund Franklin Limited Maturity U.S. Government Securities Fund(6) 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(6) Templeton Global Bond Fund Templeton Global Total Return Fund Templeton International Bond Fund TAX-FREE INCOME(7) NATIONAL Double Tax-Free Income Fund Federal Tax-Free Income Fund High Yield Tax-Free Income Fund Insured Tax-Free Income Fund(8) 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(9) Colorado Connecticut Florida Georgia Kentucky Louisiana Maryland Massachusetts(10) Michigan(10) Minnesota(10) Missouri New Jersey New York(9) North Carolina Ohio(10) Oregon Pennsylvania Tennessee Virginia INSURANCE FUNDS Franklin Templeton Variable Insurance Products Trust(11) (1.) The fund is closed to new investors. Existing shareholders and select retirement plans can continue adding to their accounts. (2.) Effective 5/1/09, Mutual Qualified Fund changed its name to Mutual Quest Fund. The fund's investment goal and strategy remained unchanged. (3.) 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. (4.) Effective 5/1/09, Mutual Discovery Fund changed its name to Mutual Global Discovery Fund. The fund's investment goal and strategy remained unchanged. (5.) Effective 12/18/09, this fund is closed to new investors, pending a proposal to merge the fund into Templeton World Fund. Existing shareholders may continue to make additional investments until shortly before the completion of the transaction, expected in April 2010. (6.) An investment in the fund is neither insured nor guaranteed by the U.S. government or by any other entity or institution. (7.) For investors subject to the alternative minimum tax, a small portion of fund dividends may be taxable. Distributions of capital gains are generally taxable. (8.) The fund invests primarily in insured municipal securities. (9.) These funds are available in three or more variations, including long-term portfolios, intermediate-term portfolios, portfolios of insured securities, a high-yield portfolio (CA only) and a money market portfolio (CA only). (10.) 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 2/15/09. (11.) The funds of the Franklin Templeton Variable Insurance Products Trust are generally available only through insurance company variable contracts. 02/10 Not part of the semiannual report (FRANKLIN TEMPLETON INVESTMENTS(R) LOGO) One Franklin Parkway San Mateo, CA 94403-1906 SIGN UP FOR ELECTRONIC DELIVERY on franklintempleton.com SEMIANNUAL REPORT AND SHAREHOLDER LETTER TEMPLETON GLOBAL SMALLER COMPANIES FUND INVESTMENT MANAGER Franklin Templeton Investments Corp. SUBADVISOR Templeton Investment Counsel, LLC PRINCIPAL UNDERWRITER 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 summary prospectus and/or prospectus. Investors should carefully consider a fund's investment goals, risks, charges and expenses before investing. Like any investment in securities, the value of the Fund's portfolio will be subject to the risk of loss from market, currency, economic, political and other factors. The Fund and its investors are not protected from such losses by the investment manager or the subadvisor. Therefore, investors who cannot accept this risk should not invest in shares of the Fund. A 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. 103 S 04/10 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 David W. Niemiec 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 Mark H. Otani, 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 Mark H. Otani, 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. TEMPLETON GLOBAL SMALLER COMPANIES FUND By /s/LAURA F. FERGERSON ------------------------------ Laura F. Fergerson Chief Executive Officer - Finance and Administration Date: April 27, 2010 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: April 27, 2010 By /s/MARK H. OTANI ------------------------------- Mark H. Otani Chief Financial Officer and Chief Accounting Officer Date: April 27, 2010