Economic and Market Overview
The global economic recovery was mixed during the period under review. Emerging markets continued to lead the recovery as several emerging economies returned to or exceeded their pre-crisis activity levels. Growth in the G-3 (U.S., eurozone and Japan) was slow by the standards of previous recoveries. Nonetheless, economic reports from the largest economies proved inconsistent with some dire predictions of a severe global economic slowdown.
Fears of European sovereign debt default and China’s potential “hard landing” dominated financial headlines early in the period, contributing to heightened market volatility. Despite ongoing uncertainty, we believe eurozone leaders made meaningful progress and began to implement policy solutions aimed at correcting structural issues. Globally, central bankers continued to pursue historically accommodative monetary policies. Among the G-3, the Bank of Japan and U.S. Federal Reserve Board (Fed) maintained their respective policy rates, while the European Central Bank (ECB) implemented a series of rate reductions. Elsewhere, many policymakers paused their tightening cycles or reduced rates in response to the risks to domestic activity from a potential deterioration in the global outlook.
In addition to rate adjustments, central bankers employed a variety of policy tools. The U.S. Fed increased the average maturity of its Treasury holdings and announced plans to increase mortgage-backed securities holdings in a third round of quantitative easing. The Bank of England and Bank of Japan expanded their respective asset purchase programs. The ECB took its most ambitious step yet as part of its efforts to preserve the monetary union when ECB President Mario Draghi announced a plan to make unlimited purchases of government debt through a new program designed to ease borrowing pressures in the eurozone. Importantly, potential future purchases by the ECB are conditional upon government participation in European Financial Stability Facility and European Stability Mechanism programs. Such programs are designed to ensure that participating governments meet stated reform targets.
Investment Strategy
In making investments in foreign hard currencies, we focus on countries and markets that historically have experienced low inflation rates and, in our opinion, follow economic policies favorable to continued low inflation rates and currency appreciation against the U.S. dollar over the long term. We may invest substantially in a combination of U.S. dollar-denominated securities and currency forward contracts or currency futures contracts.
4 | Annual Report
Manager’s Discussion
The U.S. dollar appreciated against most major currencies during the period as continued investor concern over economic uncertainty led to investor appetite for safety. Nonetheless, the Fund remained positioned for a potential reversal of this trend, as we maintained large allocations to currencies such as the Singapore dollar, South Korean won, Canadian dollar and Swedish krona.
Europe
The euro depreciated 7.10% against the U.S. dollar during the period, and the Fund’s lack of exposure to the monetary union’s currency contributed to performance relative to the benchmark.3 This effect was dampened by the Fund’s exposures to other European currencies that depreciated against the U.S. dollar, but generally by a smaller magnitude. For example, the Norwegian krone fell 3.41% and the Swedish krona weakened 2.55% against the dollar.3 Relative to the euro, the krone gained 3.97% as Norway’s economy benefited from elevated oil prices and grew at a relatively strong rate during the period.3 Resilient economic activity in Sweden led the krona to strengthen 4.89% against the euro during the period.3
Asia Pacific
Exposure to Asian ex-Japan currencies was a major contributor to the Fund’s absolute and relative performance. Asia continued to lead the global economic recovery as growth in China remained robust and supported regional economies through demand for imports and through foreign investment. Although Chinese demand for Australia’s exports supported Australia’s currency, its domestic economy also contributed to the currency’s resiliency. Notably, the Australian dollar was generally stable in the face of external conditions and the Reserve Bank of Australia’s four rate cuts totaling 1.5%. Australia had previously been one of the world’s first developed economies to raise interest rates. The Singapore dollar appreciated 2.59%, the South Korean won rose 1.61% and Malaysian ringgit gained 0.72% against the U.S. dollar during the period.3
Americas
Currency positions in the Americas benefited absolute and relative performance. High commodity prices generally supported the Canadian dollar, although it depreciated 0.63% against the U.S. dollar during the period.3 Commodity prices also contributed to the resiliency of several Latin American currencies in the face of global risk aversion. The Mexican peso and Chilean peso appreciated 0.61% and 1.72% against the U.S. dollar during the period.3 Central banks in the region responded to the external environment with varying approaches. For example, Mexico left its policy rate unchanged while Chile cut its rate. Mexico continued to benefit from strong manufacturing exports partly because of rebounding U.S. economic activity.
| Currency Breakdown | ||
| 10/31/12 | ||
| % of Total | ||
| Net Assets | ||
| Asia Pacific | 51.8 | % |
| Singapore Dollar | 21.8 | % |
| South Korean Won | 18.1 | % |
| Malaysian Ringgit | 6.2 | % |
| Australian Dollar | 4.5 | % |
| Indian Rupee | 1.2 | % |
| Americas | 32.7 | % |
| Canadian Dollar | 18.0 | % |
| Mexican Peso | 5.8 | % |
| U.S. Dollar | 5.3 | % |
| Chilean Peso | 3.6 | % |
| Europe | 14.1 | % |
| Swedish Krona | 6.8 | % |
| Norwegian Krone | 5.7 | % |
| Polish Zloty | 1.5 | % |
| British Pound | 0.1 | % |
| Middle East & Africa | 1.4 | % |
| New Israeli Shekel | 1.4 | % |
Annual Report | 5
Performance Summary as of 10/31/12
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 and graphs do not reflect any taxes that a shareholder would pay on Fund dividends, capital gain distributions, if any, or any realized gains on the sale of Fund shares. Total return reflects reinvestment of the Fund’s dividends and capital gain distributions, if any, and any unrealized gains or losses.
| Price and Distribution Information | ||||||||
| Class A (Symbol: ICPHX) | Change | 10/31/12 | 10/31/11 | |||||
| Net Asset Value (NAV) | -$ | 0.44 | $ | 9.54 | $ | 9.98 | ||
| Distributions (11/1/11–10/31/12) | ||||||||
| Dividend Income | $ | 0.4073 | ||||||
| Advisor Class (Symbol: ICHHX) | Change | 10/31/12 | 10/31/11 | |||||
| Net Asset Value (NAV) | -$ | 0.45 | $ | 9.56 | $ | 10.01 | ||
| Distributions (11/1/11–10/31/12) | ||||||||
| Dividend Income | $ | 0.4368 | ||||||
Performance
Cumulative total return excludes sales charges. Average annual total returns and value of $10,000 investment include maximum sales charges. Class A: 2.25% maximum initial sales charge; Advisor Class: no sales charges.
| Class A | 1-Year | 5-Year | 10-Year | ||||||||
| Cumulative Total Return1 | -0.13 | % | + | 14.58 | % | + | 81.49 | % | |||
| Average Annual Total Return2 | -2.38 | % | + | 2.30 | % | + | 5.90 | % | |||
| Value of $10,000 Investment3 | $ | 9,762 | $ | 11,205 | $ | 17,734 | |||||
| Avg. Ann. Total Return (9/30/12)4 | + | 1.80 | % | + | 2.66 | % | + | 5.98 | % | ||
| 30-Day Standardized Yield5 | -0.49 | % | |||||||||
| Total Annual Operating Expenses6 | 1.29 | % | |||||||||
| Advisor Class | 1-Year | 5-Year | 10-Year | ||||||||
| Cumulative Total Return1 | + | 0.08 | % | + | 16.22 | % | + | 87.07 | % | ||
| Average Annual Total Return2 | + | 0.08 | % | + | 3.05 | % | + | 6.46 | % | ||
| Value of $10,000 Investment3 | $ | 10,008 | $ | 11,622 | $ | 18,707 | |||||
| Avg. Ann. Total Return (9/30/12)4 | + | 4.36 | % | + | 3.42 | % | + | 6.56 | % | ||
| 30-Day Standardized Yield5 | -0.22 | % | |||||||||
| Total Annual Operating Expenses6 | 0.99 | % |
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.
Annual Report | 7
Performance Summary (continued)
Endnotes
All investments involve risks, including possible loss of principal. Special risks are associated with foreign investing, including economic instability and political developments. The Fund’s assets are largely invested in foreign currencies, and therefore involve potential for significant gain or loss from currency exchange rate fluctuations. The Fund does not seek to maintain a stable net asset value and should not be considered a substitute for a U.S. dollar money market fund. The Fund is also nondiversified, which involves the risk of greater price fluctuation than a more diversified portfolio. Changes in the financial strength of a debt security issuer or in a debt security’s credit rating may affect its value. The Fund is actively managed but there is no guarantee that the manager’s investment decisions will produce the desired results. The Fund’s prospectus also includes a description of the main investment risks.
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. 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. The 30-day standardized yield for the 30 days ended 10/31/12 reflects an estimated yield to maturity (assuming all portfolio securities are held to maturity). It should be regarded as an estimate of the Fund’s rate of investment income, and it may not equal the Fund’s actual income distribution rate (which reflects the Fund’s past dividends paid to shareholders) or the income reported in the Fund’s financial statements.
6. 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.
7. Source: J.P. Morgan. The JPM 3 Month Global Cash Index tracks total returns of 3-month constant maturity euro-currency deposits, the only short-term securities consistent across all markets in terms of liquidity, maturity and credit quality.
Annual Report | 9
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.
10 | Annual Report
Your Fund’s Expenses (continued)
Please note that expenses shown in the table are meant to highlight ongoing costs and do not reflect any transaction costs, such as sales charges. Therefore, the second line for each class is useful in comparing ongoing costs only, and will not help you compare total costs of owning different funds. In addition, if transaction costs were included, your total costs would have been higher. Please refer to the Fund prospectus for additional information on operating expenses.
| Beginning Account | Ending Account | Expenses Paid During | ||||
| Class A | Value 5/1/12 | Value 10/31/12 | Period* 5/1/12–10/31/12 | |||
| Actual | $ | 1,000 | $ | 1,006.30 | $ | 5.24 |
| Hypothetical (5% return before expenses) | $ | 1,000 | $ | 1,019.91 | $ | 5.28 |
| Advisor Class | ||||||
| Actual | $ | 1,000 | $ | 1,007.40 | $ | 3.94 |
| Hypothetical (5% return before expenses) | $ | 1,000 | $ | 1,021.22 | $ | 3.96 |
*Expenses are calculated using the most recent six-month expense ratio, annualized for each class (A: 1.04% and Advisor: 0.78%), multiplied by the average account value over the period, multiplied by 184/366 to reflect the one-half year period.
Annual Report | 11
| Franklin Templeton Global Trust | |||||||||||||||
| Financial Highlights | |||||||||||||||
| Franklin Templeton Hard Currency Fund | |||||||||||||||
| Year Ended October 31, | |||||||||||||||
| Class A | 2012 | 2011 | 2010 | 2009 | 2008 | ||||||||||
| Per share operating performance | |||||||||||||||
| (for a share outstanding throughout the year) | |||||||||||||||
| Net asset value, beginning of year | $ | 9.98 | $ | 10.21 | $ | 9.61 | $ | 9.13 | $ | 10.16 | |||||
| Income from investment operationsa: | |||||||||||||||
| Net investment income (loss)b | (0.02 | ) | (—)c | 0.01 | (0.02 | ) | 0.10 | ||||||||
| Net realized and unrealized gains (losses) | (0.01 | ) | 0.34 | 0.59 | 0.74 | (0.45 | ) | ||||||||
| Total from investment operations | (0.03 | ) | 0.34 | 0.60 | 0.72 | (0.35 | ) | ||||||||
| Less distributions from: | |||||||||||||||
| Net investment income and net realized foreign currency gains | (0.41 | ) | (0.57 | ) | — | (0.22 | ) | (0.68 | ) | ||||||
| Tax return of capital | — | — | — | (0.02 | ) | — | |||||||||
| Total distributions | (0.41 | ) | (0.57 | ) | — | (0.24 | ) | (0.68 | ) | ||||||
| Redemption feesd | — | — | — | — | —c | ||||||||||
| Net asset value, end of year | $ | 9.54 | $ | 9.98 | $ | 10.21 | $ | 9.61 | $ | 9.13 | |||||
| Total returne | (0.13 | )% | 3.62 | % | 6.24 | % | 8.09 | % | (3.57 | )% | |||||
| Ratios to average net assets | |||||||||||||||
| Expenses before expense reduction | 1.06 | % | 1.05 | % | 1.07 | % | 0.95 | % | 1.09 | % | |||||
| Expenses net of expense reduction | 1.06 | % | 1.05 | % | 1.07 | %f | 0.94 | % | 1.09 | %f | |||||
| Net investment income (loss) | (0.17 | )% | (0.03 | )% | 0.07 | % | (0.28 | )% | 1.07 | % | |||||
| Supplemental data | |||||||||||||||
| Net assets, end of year (000’s) | $ | 376,926 | $ | 463,128 | $ | 279,445 | $ | 422,665 | $ | 479,764 | |||||
aThe 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.
bBased on average daily shares outstanding.
cAmount rounds to less than $0.01 per share.
dEffective September 1, 2008, the redemption fee was eliminated.
eTotal return does not reflect sales commissions or contingent deferred sales charges, if applicable.
fBenefit of expense reduction rounds to less than 0.01%.
12 | The accompanying notes are an integral part of these financial statements. | Annual Report
| Franklin Templeton Global Trust | |||||||||||
| Statement of Investments, October 31, 2012 (continued) | |||||||||||
| Franklin Templeton Hard Currency Fund | |||||||||||
| Forward Exchange Contracts (continued) | |||||||||||
| Contract | Settlement | Unrealized | Unrealized | ||||||||
| Currency | Counterparty Type | Quantity | Amount | Date | Appreciation | Depreciation | |||||
| Canadian Dollar | UBSW | Buy | 2,746,830 | $ | 2,746,281 | 4/19/13 | $ | — | $ | (7,025 | ) |
| Chilean Peso | DBAB | Buy | 5,568,075,000 | 10,971,576 | 4/19/13 | 331,865 | — | ||||
| Chilean Peso | DBAB | Buy | 2,261,650,000 | 4,447,689 | 4/24/13 | 140,534 | — | ||||
| Singapore Dollar | CITI | Buy | 22,335,150 | 18,300,000 | 4/30/13 | 6,833 | — | ||||
| Polish Zloty | DBAB | Buy | 2,700,000 | 769,077 | 5/22/13 | 58,994 | — | ||||
| Mexican Peso | DBAB | Buy | 91,836,169 | 6,384,872 | 6/13/13 | 463,335 | — | ||||
| Polish Zloty | DBAB | Buy | 2,514,355 | 705,230 | 6/14/13 | 64,398 | — | ||||
| Malaysian Ringgit | DBAB | Buy | 4,700,000 | 1,454,928 | 6/18/13 | 65,124 | — | ||||
| Malaysian Ringgit | DBAB | Buy | 4,054,200 | 1,265,909 | 6/21/13 | 45,059 | — | ||||
| Polish Zloty | DBAB | Buy | 6,900,000 | 1,954,674 | 6/27/13 | 155,038 | — | ||||
| Mexican Peso | DBAB | Buy | 36,456,000 | 2,673,472 | 7/19/13 | 34,585 | — | ||||
| South Korean Won | DBAB | Buy | 13,001,450,000 | 11,214,431 | 7/19/13 | 568,467 | — | ||||
| Polish Zloty | DBAB | Buy | 1,800,000 | 509,698 | 7/22/13 | 39,495 | — | ||||
| Canadian Dollar | CITI | Buy | 6,899,000 | 6,887,910 | 7/26/13 | — | (24,799 | ) | |||
| Malaysian Ringgit | HSBK | Buy | 45,816,100 | 14,305,908 | 7/31/13 | 476,261 | — | ||||
| Mexican Peso | MSCO | Buy | 73,028,700 | 5,300,000 | 8/06/13 | 114,306 | — | ||||
| South Korean Won | HSBK | Buy | 3,297,000,000 | 2,878,722 | 8/19/13 | 106,115 | — | ||||
| Chilean Peso | JPHQ | Buy | 1,667,700,000 | 3,328,743 | 8/20/13 | 8,378 | — | ||||
| Mexican Peso | JPHQ | Buy | 43,066,100 | 3,180,775 | 8/20/13 | 7,305 | — | ||||
| South Korean Won | HSBK | Buy | 14,582,700,000 | 12,682,814 | 8/20/13 | 518,752 | — | ||||
| Malaysian Ringgit | HSBK | Buy | 10,167,700 | 3,205,959 | 8/22/13 | 71,330 | — | ||||
| New Israeli Shekel | DBAB | Buy | 28,230,000 | 6,953,202 | 8/23/13 | 252,290 | — | ||||
| Polish Zloty | DBAB | Buy | 4,402,925 | 1,314,071 | 8/27/13 | 25,535 | — | ||||
| Unrealized appreciation (depreciation) | 7,428,660 | (153,443 | ) | ||||||||
| Net unrealized appreciation (depreciation) | $ | 7,275,217 | |||||||||
| See Abbreviations on page 29. | |||||||||||
Annual Report | The accompanying notes are an integral part of these financial statements. | 15
| Franklin Templeton Global Trust | ||||
| Financial Statements | ||||
| Statement of Assets and Liabilities | ||||
| October 31, 2012 | ||||
| Franklin | ||||
| Templeton | ||||
| Hard Currency | ||||
| Fund | ||||
| Assets: | ||||
| Investments in securities: | ||||
| Cost - Unaffiliated issuers | $ | 256,263,582 | ||
| Cost - Sweep Money Fund (Note 7) | 271,819,896 | |||
| Total cost of investments | $ | 528,083,478 | ||
| Value - Unaffiliated issuers | $ | 259,095,180 | ||
| Value - Sweep Money Fund (Note 7) | 271,819,896 | |||
| Total value of investments | 530,915,076 | |||
| Restricted Cash (Note 1d) | 3,370,000 | |||
| Foreign currency, at value (cost $6,704,748) | 6,751,011 | |||
| Receivables: | ||||
| Capital shares sold | 1,620,925 | |||
| Interest | 861,890 | |||
| Unrealized appreciation on forward exchange contracts | 7,428,660 | |||
| Other assets | 60 | |||
| Total assets | 550,947,622 | |||
| Liabilities: | ||||
| Payables: | ||||
| Investment securities purchased | 18,436,607 | |||
| Capital shares redeemed | 1,538,586 | |||
| Affiliates | 334,559 | |||
| Due to brokers | 3,370,000 | |||
| Unrealized depreciation on forward exchange contracts | 153,443 | |||
| Accrued expenses and other liabilities | 163,085 | |||
| Total liabilities | 23,996,280 | |||
| Net assets, at value | $ | 526,951,342 | ||
| Net assets consist of: | ||||
| Paid-in capital | $ | 531,458,412 | ||
| Distributions in excess of net investment income | (5,510,707 | ) | ||
| Net unrealized appreciation (depreciation) | 10,152,533 | |||
| Accumulated net realized gain (loss) | (9,148,896 | ) | ||
| Net assets, at value | $ | 526,951,342 | ||
| Class A: | ||||
| Net assets, at value | $ | 376,925,946 | ||
| Shares outstanding | 39,519,031 | |||
| Net asset value per sharea | $ | 9.54 | ||
| Maximum offering price per share (net asset value per share ÷ 97.75%) | $ | 9.76 | ||
| Advisor Class: | ||||
| Net assets, at value | $ | 150,025,396 | ||
| Shares outstanding | 15,687,068 | |||
| Net asset value and maximum offering price per share | $ | 9.56 | ||
| aRedemption price is equal to net asset value less contingent deferred sales charges, if applicable. | ||||
| 16 | The accompanying notes are an integral part of these financial statements. | | Annual Report | |||
| Franklin Templeton Global Trust | |||
| Financial Statements (continued) | |||
| Statement of Operations | |||
| for the year ended October 31, 2012 | |||
| Franklin | |||
| Templeton | |||
| Hard Currency | |||
| Fund | |||
| Investment income: | |||
| Interest | $ | 5,149,655 | |
| Expenses: | |||
| Management fees (Note 3a) | 3,434,363 | ||
| Distribution fees: (Note 3c) | |||
| Class A | 1,123,149 | ||
| Transfer agent fees (Note 3e) | 785,287 | ||
| Custodian fees (Note 4) | 36,855 | ||
| Reports to shareholders | 80,115 | ||
| Registration and filing fees | 84,810 | ||
| Professional fees | 55,759 | ||
| Trustees’ fees and expenses | 40,084 | ||
| Other | 17,423 | ||
| Total expenses | 5,657,845 | ||
| Net investment income (loss) | (508,190 | ) | |
| Realized and unrealized gains (losses): | |||
| Net realized gain (loss) from: | |||
| Investments | (6,929,871 | ) | |
| Foreign currency transactions | (14,756,362 | ) | |
| Net realized gain (loss) | (21,686,233 | ) | |
| Net change in unrealized appreciation (depreciation) on: | |||
| Investments | 2,149,714 | ||
| Translation of other assets and liabilities denominated in foreign currencies | 14,758,335 | ||
| Net change in unrealized appreciation (depreciation) | 16,908,049 | ||
| Net realized and unrealized gain (loss) | (4,778,184 | ) | |
| Net increase (decrease) in net assets resulting from operations | $ | (5,286,374 | ) |
Annual Report | The accompanying notes are an integral part of these financial statements. | 17
| Franklin Templeton Global Trust | ||||||
| Financial Statements (continued) | ||||||
| Statements of Changes in Net Assets | ||||||
| Franklin Templeton | ||||||
| Hard Currency Fund | ||||||
| Year Ended October 31, | ||||||
| 2012 | 2011 | |||||
| Increase (decrease) in net assets: | ||||||
| Operations: | ||||||
| Net investment income (loss) | $ | (508,190 | ) | $ | 246,943 | |
| Net realized gain (loss) from investments and foreign currency transactions | (21,686,233 | ) | 35,313,874 | |||
| Net change in unrealized appreciation (depreciation) on investments and translation of other | ||||||
| assets and liabilities denominated in foreign currencies | 16,908,049 | (26,149,521 | ) | |||
| Net increase (decrease) in net assets resulting from operations | (5,286,374 | ) | 9,411,296 | |||
| Distributions to shareholders from: | ||||||
| Net investment income and net realized foreign currency gains: | ||||||
| Class A | (17,617,301 | ) | (15,567,950 | ) | ||
| Advisor Class | (10,038,472 | ) | (4,727,790 | ) | ||
| Total distributions to shareholders | (27,655,773 | ) | (20,295,740 | ) | ||
| Capital share transactions: (Note 2) | ||||||
| Class A | (64,853,113 | ) | 190,147,715 | |||
| Advisor Class | (75,093,550 | ) | 170,140,193 | |||
| Total capital share transactions | (139,946,663 | ) | 360,287,908 | |||
| Net increase (decrease) in net assets | (172,888,810 | ) | 349,403,464 | |||
| Net assets: | ||||||
| Beginning of year | 699,840,152 | 350,436,688 | ||||
| End of year | $ | 526,951,342 | $ | 699,840,152 | ||
| Undistributed net investment income (distributions in excess of net investment income) included | ||||||
| in net assets: | ||||||
| End of year | $ | (5,510,707 | ) | $ | 30,958,686 | |
18 | The accompanying notes are an integral part of these financial statements. | Annual Report
Franklin Templeton Global Trust
Notes to Financial Statements
Franklin Templeton Hard Currency Fund
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Franklin Templeton Global Trust (Trust) is registered under the Investment Company Act of 1940, as amended, (1940 Act) as an open-end investment company, consisting of one fund, the Franklin Templeton Hard Currency Fund (Fund). The Fund offers two classes of shares: Class A 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. Financial Instrument Valuation
The Fund’s investments in financial instruments are carried at fair value daily. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date. Under procedures approved by the Fund’s Board of Trustees (the Board), the Fund’s administrator, investment manager and other affiliates have formed the Valuation and Liquidity Oversight Committee (VLOC). The VLOC provides administration and oversight of the Fund’s valuation policies and procedures, which are approved annually by the Board. Among other things, these procedures allow the Fund to utilize independent pricing services, quotations from securities and financial instrument dealers, and other market sources to determine fair value.
Debt securities generally trade in the over-the-counter (OTC) market rather than on a securities exchange. The Fund’s pricing services use multiple valuation techniques to determine fair value. In instances where sufficient market activity exists, the pricing services may utilize a market-based approach through which quotes from market makers are used to determine fair value. In instances where sufficient market activity may not exist or is limited, the pricing services also utilize proprietary valuation models which may consider market characteristics such as benchmark yield curves, credit spreads, estimated default rates, anticipated market interest rate volatility, coupon rates, anticipated timing of principal repayments, underlying collateral, and other unique security features in order to estimate the relevant cash flows, which are then discounted to calculate the fair value. Securities denominated in a foreign currency are converted into their U.S. dollar equivalent at the foreign exchange rate in effect at the close of the NYSE on the date that the values of the foreign debt securities are determined. Investments in open-end mutual funds are valued at the closing net asset value.
Certain derivative financial instruments (derivatives) trade in the OTC market. The Fund’s pricing services use various techniques including industry standard option pricing models and proprietary discounted cash flow models to determine the fair value of those instruments. The Fund’s net benefit or obligation under the derivative contract, as measured by the fair market value of the contract, is included in net assets.
Annual Report | 19
Franklin Templeton Global Trust
Notes to Financial Statements (continued)
Franklin Templeton Hard Currency Fund
| 1. | ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued) |
| a. | Financial Instrument Valuation (continued) |
The Fund has procedures to determine the fair value of financial instruments for which market prices are not reliable or readily available. Under these procedures, the VLOC convenes on a regular basis to review such financial instruments and considers a number of factors, including significant unobservable valuation inputs, when arriving at fair value. The VLOC primarily employs a market-based approach which may use related or comparable assets or liabilities, recent transactions, market multiples, book values, and other relevant information for the investment to determine the fair value of the investment. An income-based valuation approach may also be used in which the anticipated future cash flows of the investment are discounted to calculate fair value. Discounts may also be applied due to the nature or duration of any restrictions on the disposition of the investments. Due to the inherent uncertainty of valuations of such investments, the fair values may differ significantly from the values that would have been used had an active market existed. The VLOC employs various methods for calibrating these valuation approaches including a regular review of key inputs and assumptions, transactional back-testing or disposition analysis, and reviews of any related market activity.
Trading in securities on foreign securities stock exchanges and OTC markets may be completed before the daily close of business on the NYSE. Occasionally, events occur between the time at which trading in a foreign security is completed and the close of the NYSE that might call into question the reliability of the value of a portfolio security held by the Fund. As a result, differences may arise between the value of the Fund’s portfolio securities as determined at the foreign market close and the latest indications of value at the close of the NYSE. In order to minimize the potential for these differences, the VLOC 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 Depositary 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 that may call into question the reliability of the values of the foreign securities held by the Fund. If such an event occurs, the securities may be valued using fair value procedures, which may include the use of independent pricing services.
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. Portfolio securities and assets and liabilities denominated
20 | Annual Report
Franklin Templeton Global Trust
Notes to Financial Statements (continued)
Franklin Templeton Hard Currency Fund
| 1. | ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued) |
| b. | Foreign Currency Translation (continued) |
in foreign currencies contain risks that those currencies will decline in value relative to the U.S. dollar. 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 Board.
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. Derivative Financial Instruments
The Fund invested in derivatives in order to manage risk or gain exposure to various other investments or markets. Derivatives are financial contracts based on an underlying or notional amount, require no initial investment or an initial net investment that is smaller than would normally be required to have a similar response to changes in market factors, and require or permit net settlement. Derivatives contain various risks including the potential inability of the counterparty to fulfill their obligations under the terms of the contract, the potential for an illiquid secondary market, and/or the potential for market movements which expose the Fund to gains or losses in excess of the amounts shown on the Statement of Assets and Liabilities. Realized gain and loss and unrealized appreciation and depreciation on these contracts for the period are included in the Statement of Operations.
The Fund investments in OTC derivatives are subject to the terms of International Swaps and Derivatives Association Master Agreements and other related agreements between the Fund and certain derivative counterparties. These agreements contain various provisions, including but not limited to collateral requirements, events of default, requirements for the Fund to maintain certain net asset levels and/or limit the decline in net assets over various periods of time. Should the Fund fail to meet any of these provisions, the derivative counterparty has the right to terminate the derivative contract and require immediate payment by the Fund for those OTC derivatives with that particular counterparty that are in a net liability position. At October 31, 2012, the Fund had OTC derivatives in a net liability position for such contracts of $24,991.
Annual Report | 21
Franklin Templeton Global Trust
Notes to Financial Statements (continued)
Franklin Templeton Hard Currency Fund
| 1. | ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued) |
| c. | Derivative Financial Instruments (continued) |
The Fund entered into OTC forward exchange contracts primarily to manage and/or gain exposure to certain foreign currencies. A forward exchange contract is an agreement between the Fund and a counterparty to buy or sell a foreign currency for a specific exchange rate on a future date. Pursuant to the terms of the forward exchange contracts, cash or securities may be required to be deposited as collateral. Unrestricted cash may be invested according to the Fund’s investment objectives.
At October 31, 2012, the Fund held $3,766,349 in United Kingdom and U.S. treasury notes as collateral for derivatives.
See Note 9 regarding other derivative information.
d. Restricted Cash
At October 31, 2012, the Fund held restricted cash in connection with investments in certain derivative securities. Restricted cash is held in a segregated account with the Fund’s custodian and is reflected in the Statement of Assets and Liabilities.
e. Income and Deferred Taxes
It is the Fund’s policy to qualify as a regulated investment company under the Internal Revenue Code. The Fund intends to distribute to shareholders substantially all of its taxable income and net realized gains to relieve it from federal income and if applicable, excise taxes. As a result, no provision for U.S. federal income taxes is required.
The Fund may be subject to foreign taxation related to income received, capital gains on the sale of securities and certain foreign currency transactions in the foreign jurisdictions in which it invests. Foreign taxes, if any, are recorded based on the tax regulations and rates that exist in the foreign markets in which the Fund invests. When a capital gain tax is determined to apply the Fund records an estimated deferred tax liability in an amount that would be payable if the securities were disposed of on the valuation date.
The Fund recognizes the tax benefits of uncertain tax positions only when the position is “more likely than not” to be sustained upon examination by the tax authorities based on the technical merits of the tax position. As of October 31, 2012, and for all open tax years, the Fund has determined that no liability for unrecognized tax benefits is required in the Fund's financial statements related to uncertain tax positions taken on a tax return (or expected to be taken on future tax returns). Open tax years are those that remain subject to examination and are based on each tax jurisdiction statute of limitation.
22 | Annual Report
Franklin Templeton Global Trust
Notes to Financial Statements (continued)
Franklin Templeton Hard Currency Fund
| 1. | ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued) |
| f. | 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. 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.
g. 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.
h. Guarantees and Indemnifications
Under the Trust’s organizational documents, its officers and trustees are indemnified by the Trust against certain liabilities arising out of the performance of their duties to the Trust. Additionally, in the normal course of business, the Trust, on behalf of the Fund, enters into contracts with service providers that contain general indemnification clauses. The Trust’s maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Trust that have not yet occurred. Currently, the Trust expects the risk of loss to be remote.
Annual Report | 23
Franklin Templeton Global Trust
Notes to Financial Statements (continued)
Franklin Templeton Hard Currency Fund
| 3. | TRANSACTIONS WITH AFFILIATES (continued) |
| c. | Distribution Fees |
The Board has adopted a reimbursement distribution plan for Class A pursuant to Rule 12b-1 under the 1940 Act, under which the Fund reimburses Distributors for costs incurred in connection with the servicing, sale and distribution of the Fund’s shares up to 0.45% per year of its average daily net assets. Distribution fees are not charged on shares held by affiliates. The Board has set the current rate at 0.30% per year for Class A shares until further notice and approval by the Board. Costs exceeding the maximum for the current plan year cannot be reimbursed in subsequent periods.
d. Sales Charges/Underwriting Agreements
Front-end sales charges and contingent deferred sales charges (CDSC) do not represent expenses of the Fund. These charges are deducted from the proceeds of sales of Fund shares prior to investment or from redemption proceeds prior to remittance, as applicable. Distributors has advised the Fund of the following commission transactions related to the sales and redemptions of the Fund’s shares for the year:
| Sales charges retained net of commissions paid to unaffiliated | ||
| broker/dealers | $ | 41,833 |
| CDSC retained | $ | 29,797 |
e. Transfer Agent Fees
For the year ended October 31, 2012, the Fund paid transfer agent fees of $785,287, of which $293,751 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 year ended October 31, 2012, there were no credits earned.
5. INCOME TAXES
For tax purposes, capital losses may be carried over to offset future capital gains, if any. Under the Regulated Investment Company Modernization Act of 2010, capital losses incurred by the Fund in taxable years beginning after December 22, 2010 are not subject to expiration and such losses retain their character as either short-term or long-term, rather than being considered short-term as under previous law. Post-enactment capital losses must be fully utilized prior to utilizing any losses incurred in pre-enactment tax years.
Annual Report | 25
Franklin Templeton Global Trust
Notes to Financial Statements (continued)
Franklin Templeton Hard Currency Fund
5. INCOME TAXES (continued)
At October 31, 2012, capital loss carryforwards were as follows:
| Capital loss carryforwards subject to expiration: | ||
| 2013 | $ | 1,956,120 |
| 2014 | 190,081 | |
| 2017 | 276,805 | |
| 2019 | 63,831 | |
| Capital loss carryforwards not subject to expiration: | ||
| Short term | 4,407,364 | |
| Long term | 1,528,405 | |
| Total capital loss carryforwards | $ | 8,422,606 |
The tax character of distributions paid during the years ended October 31, 2012 and 2011, was as follows:
| 2012 | 2011 | |||
| Distributions paid from: | ||||
| Ordinary income | $ | 27,655,773 | $ | 20,295,740 |
At October 31, 2012, the cost of investments and net unrealized appreciation (depreciation) for income tax purposes were as follows:
| Cost of investments | $ | 528,221,274 | |
| Unrealized appreciation | $ | 3,232,896 | |
| Unrealized depreciation | (539,094 | ) | |
| Net unrealized appreciation (depreciation) | $ | 2,693,802 | |
Differences between income and/or capital gains as determined on a book basis and a tax basis are primarily due to differing treatments of foreign currency transactions and bond discounts and premiums.
6. INVESTMENT TRANSACTIONS
There were no purchases or sales of investments (other than short term securities) for the year ended October 31, 2012.
7. INVESTMENTS IN INSTITUTIONAL FIDUCIARY TRUST MONEY MARKET PORTFOLIO
The Fund invests in the Institutional Fiduciary Trust Money Market Portfolio (Sweep Money Fund), an open-end investment company managed by Advisers. Management fees paid by the Fund are reduced on assets invested in the Sweep Money Fund, in an amount not to exceed the management and administrative fees paid by the Sweep Money Fund.
26 | Annual Report
Franklin Templeton Global Trust
Notes to Financial Statements (continued)
Franklin Templeton Hard Currency Fund
10. 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 joint syndicated senior unsecured credit facility totaling $1.5 billion (Global Credit Facility) which matures on January 18, 2013. This Global Credit Facility provides a source of funds to the Borrowers for temporary and emergency purposes, including the ability to meet future unanticipated or unusually large redemption requests.
Under the terms of the Global Credit Facility, the 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 0.08% based upon the unused portion of the Global Credit Facility, which is reflected in other expenses on the Statement of Operations. During the year ended October 31, 2012, the Fund did not use the Global Credit Facility.
11. 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 financial instruments and are summarized in the following fair value hierarchy:
- Level 1 – quoted prices in active markets for identical financial instruments
- Level 2 – other significant observable inputs (including quoted prices for similar financial instruments, interest rates, prepayment speed, credit risk, etc.)
- Level 3 – significant unobservable inputs (including the Fund’s own assumptions in determining the fair value of financial instruments)
The inputs or methodology used for valuing financial instruments are not an indication of the risk associated with investing in those financial instruments.
For movements between the levels within the fair value hierarchy, the Fund has adopted a policy of recognizing the transfers as of the date of the underlying event which caused the movement.
28 | Annual Report
Franklin Templeton Global Trust
Report of Independent Registered Public Accounting Firm
To the Board of Trustees and Shareholders of Franklin Templeton Hard Currency Fund
In our opinion, the accompanying statement of assets and liabilities, including the statement of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of Franklin Templeton Hard Currency Fund (the “Fund”) at October 31, 2012, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as “financial statements”) are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at October 31, 2012 by correspondence with the custodian, transfer agent, and brokers, provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
San Francisco, California
December 17, 2012
30 | Annual Report
Annual Report | 35
Franklin Templeton Global Trust
Shareholder Information
Franklin Templeton Hard Currency Fund
Proxy Voting Policies and Procedures
The Trust’s investment manager has established Proxy Voting Policies and Procedures (Policies) that the Trust uses to determine how to vote proxies relating to portfolio securities. Shareholders may view the Trust’s complete Policies online at franklintempleton.com. Alternatively, shareholders may request copies of the Policies free of charge by calling the Proxy Group collect at (954) 527-7678 or by sending a written request to: Franklin Templeton Companies, LLC, 300 S.E. 2nd Street, Fort Lauderdale, FL 33301, Attention: Proxy Group. Copies of the Trust’s proxy voting records are also made available online at franklintempleton.com and posted on the U.S. Securities and Exchange Commission’s website at sec.gov and reflect the most recent 12-month period ended June 30.
Quarterly Statement of Investments
The Trust files a complete statement of investments with the U.S. Securities and Exchange Commission for the first and third quarters for each fiscal year on Form N-Q. Shareholders may view the filed Form N-Q by visiting the Commission’s website at sec.gov. The filed form may also be viewed and copied at the Commission’s Public Reference Room in Washington, DC. Information regarding the operations of the Public Reference Room may be obtained by calling (800) SEC-0330.
Householding of Reports and Prospectuses
You will receive the Fund’s financial reports every six months as well as an annual updated summary prospectus (prospectus available upon request). To reduce Fund expenses, we try to identify related shareholders in a household and send only one copy of the financial reports and summary prospectus. This process, called “householding,” will continue indefinitely unless you instruct us otherwise. If you prefer not to have these documents householded, please call us at (800) 632-2301. At any time you may view current prospectuses/summary prospectuses and financial reports on our website. If you choose, you may receive these documents through electronic delivery.
36 | Annual Report
