UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number 811-07876
Templeton China World Fund
(Exact name of registrant as specified in charter)
300 S.E. 2nd Street, Fort Lauderdale, FL 33301-1923
(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: 8/31/16___
Item 1. Reports to Stockholders.
| Contents | |
| Annual Report | |
| Templeton China World Fund | 3 |
| Performance Summary | 7 |
| Your Fund’s Expenses | 12 |
| Financial Highlights and Statement of Investments | 14 |
| Financial Statements | 21 |
| Notes to Financial Statements | 25 |
| Report of Independent Registered | |
| Public Accounting Firm. | 33 |
| Tax Information. | 34 |
| Board Members and Officers | 35 |
| Shareholder Information | 40 |
Visit franklintempleton.com for fund updates, to access your account, or to find helpful financial planning tools.
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Templeton China World Fund
This annual report for Templeton China World Fund covers the fiscal year ended August 31, 2016.
Your Fund’s Goal and Main Investments
The Fund seeks long-term capital appreciation. Under normal market conditions, the Fund invests at least 80% of its net assets in securities of “China companies,” as defined in the Fund’s prospectus.
Performance Overview
For the 12 months ended August 31, 2016, the Fund’s Class A shares delivered a total return of +11.19%. For comparison, the MSCI Golden Dragon Index, which measures stock market performance in China, Hong Kong and Taiwan, generated a cumulative total return of +11.31% for the same period.1 Also for comparison, the Standard & Poor’s®/International Finance Corporation Investable China Index, which measures Chinese stock market performance, produced a +12.95% total return for the same period.1 You can find the Fund’s long-term performance data in the Performance Summary beginning on page 7. For the 10-year period ended August 31, 2016, the Fund’s Class A shares delivered a +79.24% cumulative total return, compared with the MSCI Golden Dragon Index’s +94.47% cumulative total return for the same period.2 Please note index performance information is provided for reference and we do not attempt to track the index but rather undertake investments on the basis of fundamental research.
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.
Economic and Market Overview
China’s gross domestic product (GDP) grew an estimated 6.7%
year-over-year in 2016’s first half after expanding 6.9% in 2015.3 Industrial production grew at a relatively steady pace. Retail sales also grew, driven by robust online sales growth. Total fixed-asset investment growth moderated in the second quarter, despite robust infrastructure investment growth. Domestic demand continued to account for a greater portion of GDP, as per-capita income rose. China’s trade surplus narrowed significantly in February 2016 as weak global demand hurt exports. However, the trade balance improved by period-end, as exports declined at a slower rate and imports rose for the first time in nearly two years.
The People’s Bank of China (PBOC) implemented various measures to support economic growth amid relatively subdued inflationary pressures. In addition to cutting its benchmark interest rate, the PBOC reduced the cash reserve requirement ratio for banks several times. During the period’s first half, the PBOC lowered short-term borrowing costs for smaller banks as part of its efforts to establish an interest rate corridor intended to help banks access funds in times of a liquidity crunch and to avoid increased volatility in money market rates. Additionally, the PBOC effectively devalued the renminbi several times during the period, leading to the currency’s lowest level against the U.S. dollar in more than five years. In November, the International Monetary Fund approved the renminbi as a global
1. Source: Morningstar.
2. Source: Morningstar. As of 8/31/16, the Fund’s Class A 10-year average annual total return not including sales charges was +6.01%, compared with the 10-year average annual total return of +6.88% for the MSCI Golden Dragon Index.
The indexes are unmanaged and include reinvestment of any income or distributions. They do not reflect any fees, expenses or sales charges. One cannot invest directly in an index, and an index is not representative of the Fund’s portfolio.
3. Source: The website of the National Bureau of Statistics of the People’s Republic of China (www.stats.gov.cn).
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 18.
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TEMPLETON CHINA WORLD FUND
reserve currency, recognizing Chinese authorities’ progress in reforming the country’s monetary and financial systems.
The 12-month period began during heightened global financial market volatility triggered by the PBOC’s unexpected currency devaluation in August 2015 that contributed to investor anxiety about China’s moderating economic growth and commodity demand. After rallying in October and early November, Greater China stocks experienced some sell-offs through mid-February 2016 amid investor concerns about the direction of the U.S. Federal Reserve’s monetary policy and a plunge in China’s domestic A-share market in January. Further hurting stocks were uncertainty about China’s foreign exchange policy, renewed anxiety about the country’s economic growth, a collapse in crude oil prices and Chinese authorities’ stock market intervention.
However, Greater China stocks generally trended higher beginning in late January as the prices of many commodities rose, the PBOC implemented additional monetary stimulus measures and the Chinese government introduced more fiscal stimulus measures. Toward period-end, MSCI’s decision not to include China’s domestic A shares in the MSCI Emerging Markets Index and the U.K.’s referendum vote to leave the European Union dampened investor sentiment. However, Greater China stocks rebounded by period-end amid additional monetary easing measures by many central banks, notably the Bank of Japan and the Bank of England, as well as some encouraging economic reports from China, Hong Kong and Taiwan.
For the 12 months ended August 31, 2016, Greater China stocks, as measured by the MSCI Golden Dragon Index, generated a total return of +11.31%.1 The MSCI China Index posted a total return of +8.28% for the same period, compared with +12.42% for the MSCI Hong Kong Index and +17.08% for the MSCI Taiwan Index.1
Investment Strategy
Our investment strategy employs a fundamental research, value-oriented, long-term approach. We focus 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 potential. We also consider a company’s profit and loss outlook, balance sheet strength, cash flow trends and asset value in relation to the current price. Our analysis considers the company’s corporate governance behavior as well as its position in its sector, the economic framework and political environment.
| Top 10 Holdings | ||
| 8/31/16 | ||
| Company | % of Total | |
| Sector/Industry, Country | Net Assets | |
| Taiwan Semiconductor Manufacturing Co. Ltd. | 9.2 | % |
| Semiconductors & Semiconductor Equipment, Taiwan | ||
| Tencent Holdings Ltd. | 7.9 | % |
| Internet Software & Services, China | ||
| China Petroleum and Chemical Corp. | 6.4 | % |
| Oil, Gas & Consumable Fuels, China | ||
| China Mobile Ltd. | 5.1 | % |
| Wireless Telecommunication Services, China | ||
| Nine Dragons Paper Holdings Ltd. | 5.0 | % |
| Paper & Forest Products, China | ||
| Anta Sports Products Ltd. | 4.8 | % |
| Textiles, Apparel & Luxury Goods, China | ||
| China Construction Bank Corp. | 4.7 | % |
| Banks, China | ||
| Dairy Farm International Holdings Ltd. | 4.6 | % |
| Food & Staples Retailing, Hong Kong | ||
| AIA Group Ltd. | 3.9 | % |
| Insurance, Hong Kong | ||
| Uni-President China Holdings Ltd. | 3.4 | % |
| Food Products, China |
Manager’s Discussion
During the 12 months under review, key contributors to the Fund’s absolute performance included investments in Taiwan Semiconductor Manufacturing Co. (TSMC), Tencent Holdings and Nine Dragons Paper Holdings.
TSMC is the world’s largest independent integrated circuit foundry. Its record-high second quarter 2016 revenue and earnings results and agreement with Apple to be the exclusive supplier of processors for the next-generation iPhones, leading to higher revenue growth expectations for 2016’s second half, supported share price performance. Additionally, development of technologies in other areas, such as high-performance computing devices, led many investors to adopt a positive view on the company.
Tencent is one of the world’s largest and most widely used Internet service portals. With a strategic goal of providing users with “one-stop online lifestyle services,” Tencent provides value-added Internet, mobile and telecommunication services and online advertising. Its stock performed well during the period, supported by strong second quarter 2016 earnings driven by the mobile gaming, performance-based ad and cloud business segments, reflecting China’s transition toward a consumption economy.
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Nine Dragons Paper is China’s largest containerboard paper manufacturer. The company benefited from the country’s improving supply and demand dynamics for containerboards. Market leaders such as Nine Dragons Paper were beneficiaries of industry consolidation, as China’s weaker economic environment and implementation of environmental policies accelerated the closure of smaller, inefficient factories, reducing market supply and helping to support product prices. Further supporting investor confidence in the company was management’s positive outlook.
In contrast, key detractors from the Fund’s absolute performance included positions in Uni-President China Holdings, Jiangling Motors and PetroChina.
Uni-President China is a food products company that sells instant noodles and a variety of non-alcoholic beverages in China. Investor concerns that China’s moderating economic growth could have a negative effect on noodle and beverage consumption hurt share price performance during the period’s first half. The stock price rose in the period’s second half, reducing earlier losses, amid strong 2015 net profit results reported in March 2016 and decent first half 2016 corporate results, supported by lower raw materials prices.
Jiangling Motors manufactures and sells trucks and commercial vehicles in China, both under its own brand and under the Ford brand in partnership with U.S.-based Ford Motor. Its stock retreated as the company’s earnings declined in 2016’s second quarter due to lower vehicle sales and higher selling expenses amid a challenging competitive environment.
PetroChina is a leading Chinese energy company with a broad range of operations encompassing the exploration and production, transmission, refining and marketing of oil and gas. A decline in oil prices and concerns that a slowdown in China’s economy could dampen oil demand trends hurt investor sentiment in the stock earlier in the period. However, improved refining margins and a one-time gain from pipeline sales that drove first half 2016 corporate results, as well as a special dividend announcement, aided investor sentiment and led to a partial share price recovery in the period’s second half.
During the reporting period, our continued search for what we considered undervalued investments with attractive fundamentals and potential led us to make selective purchases in the Greater China region. Key purchases included new investments in China Life Insurance, one of China’s leading life insurance companies, and Alibaba, China’s largest e-commerce company. Additionally, we increased the Fund’s position in China Overseas Land & Investment, a major Chinese real estate company.
Conversely, share redemptions during the reporting period led us to reduce investments across all markets represented in the Fund’s portfolio. We undertook the largest sales in China H shares, Hong Kong and Taiwan.4 In sector terms, we conducted the largest reductions in financials, information technology (IT) and consumer staples.5 Some of the largest sales included closing the Fund’s position in Bank of China, a major Chinese commercial bank, as well as trimming investments in the aforementioned TSMC and in Dairy Farm International Holdings, a Hong Kong-based regional supermarket, drug store and convenience store operator.
Thank you for your continued participation in Templeton China World Fund. We look forward to serving your future investment needs.
4. “China H” denotes shares of China-incorporated, Hong Kong Stock Exchange-listed companies with most businesses in China.
5. The financials sector comprises banks and insurance in the SOI. The IT sector comprises electronic equipment, instruments and components; Internet software and services;
IT services; and semiconductors and semiconductor equipment in the SOI. The consumer staples sector comprises beverages, food and staples retailing, and food products in
the SOI.
See www.franklintempletondatasources.com for additional data provider information.
CFA® is a trademark owned by CFA Institute.
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TEMPLETON CHINA WORLD FUND
The foregoing information reflects our analysis, opinions and portfolio holdings as of August 31, 2016, 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.
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TEMPLETON CHINA WORLD FUND
Performance Summary as of August 31, 2016
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.
| Net Asset Value | ||||||
| Share Class (Symbol) | 8/31/16 | 8/31/15 | Change | |||
| A (TCWAX) | $ | 21.51 | $ | 26.19 | -$ | 4.68 |
| C (TCWCX) | $ | 21.18 | $ | 25.76 | -$ | 4.58 |
| R6 (FCWRX) | $ | 21.68 | $ | 26.41 | -$ | 4.73 |
| Advisor (TACWX) | $ | 21.68 | $ | 26.39 | -$ | 4.71 |
| Distributions1 (9/1/15–8/31/16) | ||||||
| Dividend | Long-Term | |||||
| Share Class | Income | Capital Gain | Total | |||
| A | $ | 0.4566 | $ | 6.5809 | $ | 7.0375 |
| C | $ | 0.1659 | $ | 6.5809 | $ | 6.7468 |
| R6 | $ | 0.6398 | $ | 6.5809 | $ | 7.2207 |
| Advisor | $ | 0.5687 | $ | 6.5809 | $ | 7.1496 |
See page 11 for Performance Summary footnotes.
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TEMPLETON CHINA WORLD FUND
PERFORMANCE SUMMARY
Performance as of 8/31/162
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 C: 1% contingent deferred sales charge in first year only;
Class R6/Advisor Class: no sales charges.
| Cumulative | Average Annual | Value of | Average Annual | Total Annual | ||||||
| Share Class | Total Return3 | Total Return4 | $ | 10,000 Investment5 | Total Return (9/30/16)6 | Operating Expenses7 | ||||
| A | 1.81 | % | ||||||||
| 1-Year | +11.19 | % | +4.80 | % | $ | 10,480 | +10.14 | % | ||
| 5-Year | -1.62 | % | -1.50 | % | $ | 9,273 | +2.29 | % | ||
| 10-Year | +79.24 | % | +5.38 | % | $ | 16,893 | +5.46 | % | ||
| C | 2.56 | % | ||||||||
| 1-Year | +10.41 | % | +9.59 | % | $ | 10,959 | +15.10 | % | ||
| 5-Year | -5.02 | % | -1.03 | % | $ | 9,498 | +2.78 | % | ||
| 10-Year | +67.21 | % | +5.28 | % | $ | 16,721 | +5.35 | % | ||
| R6 | 1.37 | % | ||||||||
| 1-Year | +11.76 | % | +11.76 | % | $ | 11,176 | +17.47 | % | ||
| 3-Year | +1.05 | % | +0.35 | % | $ | 10,105 | -0.18 | % | ||
| Since Inception (5/1/13) | -4.54 | % | -1.38 | % | $ | 9,546 | -0.49 | % | ||
| Advisor | 1.56 | % | ||||||||
| 1-Year | +11.51 | % | +11.51 | % | $ | 11,151 | +17.15 | % | ||
| 5-Year | -0.17 | % | -0.03 | % | $ | 9,983 | +3.80 | % | ||
| 10-Year | +84.65 | % | +6.33 | % | $ | 18,465 | +6.41 | % |
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.
See page 11 for Performance Summary footnotes.
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PERFORMANCE SUMMARY
Total Return Index Comparison for a Hypothetical $10,000 Investment2
Total return represents the change in value of an investment over the periods shown. It includes any applicable maximum sales charge, Fund expenses, account fees and reinvested distributions. The unmanaged index includes reinvestment of any income or distributions. It differs from the Fund in composition and does not pay management fees or expenses. One cannot invest directly in an index.
See page 11 for Performance Summary footnotes.
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TEMPLETON CHINA WORLD FUND
PERFORMANCE SUMMARY
Total Return Index Comparison for a Hypothetical $10,000 Investment2 (continued)
See page 11 for Performance Summary footnotes.
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TEMPLETON CHINA WORLD FUND
PERFORMANCE SUMMARY
All investments involve risks, including possible loss of principal. The government’s participation in the economy is still high and, therefore, the Fund’s investments in China will be subject to larger regulatory risk levels compared to many other countries. In addition, special risks are associated with international investing, including currency fluctuations, economic instability and political developments. Investments in emerging markets involve heightened risks related to the same factors. Also, as a nondiversified fund investing in China companies, the Fund may invest in a relatively small number of issuers and, as a result, be subject to a greater risk of loss with respect to its portfolio securities. The Fund may also experience greater volatility than a fund that is more broadly diversified geographically. Historically, smaller and midsized securities have experienced more price volatility than larger company stocks, especially over the short term. The Fund is designed for the aggressive portion of a well-diversified portfolio. 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.
| Class C: | These shares have higher annual fees and expenses than Class A shares. |
| Class R6: | Shares are available to certain eligible investors as described in the prospectus. |
| Advisor Class: | Shares are available to certain eligible investors as described in the prospectus. |
1. The distribution amount is the sum of the dividend payments to shareholders for the period shown and includes only estimated tax-basis net investment income and capital
gain.
2. The Fund has a fee waiver associated with any investment it makes in a Franklin Templeton money fund and/or other Franklin Templeton fund, contractually guaranteed
through its current fiscal year-end. Fund investment results reflect the fee waiver; without this waiver, the results would have been lower.
3. Cumulative total return represents the change in value of an investment over the periods indicated.
4. Average annual total return represents the average annual change in value of an investment over the periods indicated. Return for less than one year, ifany,hasnotbeen
annualized.
5. These figures represent the value of a hypothetical $10,000 investment in the Fund over the periods indicated.
6. In accordance with SEC rules, we provide standardized average annual total return information through the latest calendar quarter.
7. Figures are as stated in the Fund’s current prospectus and may differ from the expense ratios disclosed in the Financial Highlights in this report. In periods of market volatility,
assets may decline significantly, causing total annual Fund operating expenses to become higher than the figures shown.
8. Source: Morningstar. The MSCI Golden Dragon Index is a free float-adjusted, market capitalization-weighted index designed to measure equity market performance of China,
Hong Kong and Taiwan.
See www.franklintempletondatasources.com for additional data provider information.
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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.
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.
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| TEMPLETON CHINA WORLD FUND | ||||||
| YOUR FUND’S EXPENSES | ||||||
| Beginning Account | Ending Account | Expenses Paid During | ||||
| Share Class | Value 3/1/16 | Value 8/31/16 | Period* 3/1/16–8/31/16 | |||
| A | ||||||
| Actual | $ | 1,000 | $ | 1,175.40 | $ | 10.50 |
| Hypothetical (5% return before expenses) | $ | 1,000 | $ | 1,015.48 | $ | 9.73 |
| C | ||||||
| Actual | $ | 1,000 | $ | 1,171.50 | $ | 14.57 |
| Hypothetical (5% return before expenses) | $ | 1,000 | $ | 1,011.71 | $ | 13.50 |
| R6 | ||||||
| Actual | $ | 1,000 | $ | 1,178.30 | $ | 7.72 |
| Hypothetical (5% return before expenses) | $ | 1,000 | $ | 1,018.05 | $ | 7.15 |
| Advisor | ||||||
| Actual | $ | 1,000 | $ | 1,177.00 | $ | 9.14 |
| Hypothetical (5% return before expenses) | $ | 1,000 | $ | 1,016.74 | $ | 8.47 |
*Expenses are calculated using the most recent six-month expense ratio, net of expense waivers, annualized for each class (A: 1.92%;
C: 2.67%; R6: 1.41%; and Advisor: 1.67%), multiplied by the average account value over the period, multiplied by 184/366 to reflect the
one-half year period.
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| Financial Highlights | |||||||||||||||
| Year Ended August 31, | |||||||||||||||
| 2016 | 2015 | 2014 | 2013 | 2012 | |||||||||||
| Class A | |||||||||||||||
| Per share operating performance | |||||||||||||||
| (for a share outstanding throughout the year) | |||||||||||||||
| Net asset value, beginning of year | $ | 26.19 | $ | 38.01 | $ | 35.78 | $ | 34.09 | $ | 37.62 | |||||
| Income from investment operationsa: | |||||||||||||||
| Net investment incomeb | 0.17 | 0.32 | 0.44 | 0.41 | 0.56 | ||||||||||
| Net realized and unrealized gains (losses) | 2.19 | (7.53 | ) | 3.94 | 2.11 | (3.53 | ) | ||||||||
| Total from investment operations | 2.36 | (7.21 | ) | 4.38 | 2.52 | (2.97 | ) | ||||||||
| Less distributions from: | |||||||||||||||
| Net investment income | (0.46 | ) | (0.45 | ) | (0.52 | ) | (0.65 | ) | (0.25 | ) | |||||
| Net realized gains | (6.58 | ) | (4.16 | ) | (1.63 | ) | (0.18 | ) | (0.31 | ) | |||||
| Total distributions | (7.04 | ) | (4.61 | ) | (2.15 | ) | (0.83 | ) | (0.56 | ) | |||||
| Net asset value, end of year. | $ | 21.51 | $ | 26.19 | $ | 38.01 | $ | 35.78 | $ | 34.09 | |||||
| Total returnc | 11.19 | % | (20.57 | )% | 12.76 | % | 7.22 | % | (7.86 | )% | |||||
| Ratios to average net assets | |||||||||||||||
| Expenses | 1.91 | %d,e | 1.84 | %d | 1.85 | %d | 1.85 | % | 1.87 | % | |||||
| Net investment income | 0.77 | % | 0.98 | % | 1.23 | % | 1.13 | % | 1.56 | % | |||||
| Supplemental data | |||||||||||||||
| Net assets, end of year (000’s) | $ | 186,850 | $ | 232,814 | $ | 373,231 | $ | 429,085 | $ | 482,277 | |||||
| Portfolio turnover rate | 3.87 | % | 7.42 | % | 3.75 | % | 6.12 | % | 7.13 | % | |||||
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’s shares in relation to income earned and/or fluctuating fair value of the investments of the Fund.
bBased on average daily shares outstanding.
cTotal return does not reflect sales commissions or contingent deferred sales charges, if applicable.
dBenefit of waiver and payments by affiliates rounds to less than 0.01%.
eBenefit of expense reduction rounds to less than 0.01%.
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| TEMPLETON CHINA WORLD FUND | |||||||||||||||
| FINANCIAL HIGHLIGHTS | |||||||||||||||
| Year Ended August 31, | |||||||||||||||
| 2016 | 2015 | 2014 | 2013 | 2012 | |||||||||||
| Class C | |||||||||||||||
| Per share operating performance | |||||||||||||||
| (for a share outstanding throughout the year) | |||||||||||||||
| Net asset value, beginning of year | $ | 25.76 | $ | 37.52 | $ | 35.30 | $ | 33.55 | $ | 37.02 | |||||
| Income from investment operationsa: | |||||||||||||||
| Net investment incomeb | —c | 0.08 | 0.18 | 0.16 | 0.28 | ||||||||||
| Net realized and unrealized gains (losses) | 2.17 | (7.42) | 3.91 | 2.04 | (3.44) | ||||||||||
| Total from investment operations | 2.17 | (7.34) | 4.09 | 2.20 | (3.16) | ||||||||||
| Less distributions from: | |||||||||||||||
| Net investment income | (0.17) | (0.26) | (0.24) | (0.27) | — | ||||||||||
| Net realized gains | (6.58) | (4.16) | (1.63) | (0.18) | (0.31) | ||||||||||
| Total distributions | (6.75) | (4.42) | (1.87) | (0.45) | (0.31) | ||||||||||
| Net asset value, end of year. | $ | 21.18 | $ | 25.76 | $ | 37.52 | $ | 35.30 | $ | 33.55 | |||||
| Total returnd | 10.41% | (21.16)% | 11.98% | 6.50% | (8.51)% | ||||||||||
| Ratios to average net assets | |||||||||||||||
| Expenses | 2.66%e,f | 2.56%e | 2.54%e | 2.55% | 2.56% | ||||||||||
| Net investment income | 0.02% | 0.26% | 0.54% | 0.43% | 0.87% | ||||||||||
| Supplemental data | |||||||||||||||
| Net assets, end of year (000’s) | $ | 48,769 | $ | 63,486 | $ | 103,346 | $ | 123,220 | $ | 134,050 | |||||
| Portfolio turnover rate | 3.87% | 7.42% | 3.75% | 6.12% | 7.13% | ||||||||||
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’s shares in relation to income earned and/or fluctuating fair value of the investments of the Fund.
bBased on average daily shares outstanding.
cAmount rounds to less than $0.01 per share.
dTotal return does not reflect sales commissions or contingent deferred sales charges, if applicable.
eBenefit of waiver and payments by affiliates rounds to less than 0.01%.
fBenefit of expense reduction rounds to less than 0.01%.
franklintempleton.com
The accompanying notes are an integral part of these financial statements. | Annual Report 15
| TEMPLETON CHINA WORLD FUND | ||||||||||||
| FINANCIAL HIGHLIGHTS | ||||||||||||
| Year Ended August 31, | ||||||||||||
| 2016 | 2015 | 2014 | 2013 | a | ||||||||
| Class R6 | ||||||||||||
| Per share operating performance | ||||||||||||
| (for a share outstanding throughout the year) | ||||||||||||
| Net asset value, beginning of year | $ | 26.41 | $ | 38.27 | $ | 36.03 | $ | 38.14 | ||||
| Income from investment operationsb: | ||||||||||||
| Net investment incomec | 0.31 | 0.49 | 0.66 | 0.68 | ||||||||
| Net realized and unrealized gains (losses) | 2.18 | (7.61 | ) | 3.93 | (2.79 | ) | ||||||
| Total from investment operations | 2.49 | (7.12 | ) | 4.59 | (2.11 | ) | ||||||
| Less distributions from: | ||||||||||||
| Net investment income. | (0.64 | ) | (0.58 | ) | (0.72 | ) | — | |||||
| Net realized gains | (6.58 | ) | (4.16 | ) | (1.63 | ) | — | |||||
| Total distributions | (7.22 | ) | (4.74 | ) | (2.35 | ) | — | |||||
| Net asset value, end of year | $ | 21.68 | $ | 26.41 | $ | 38.27 | $ | 36.03 | ||||
| Total returnd | 11.76 | % | (20.20 | )% | 13.31 | % | (5.53 | )% | ||||
| Ratios to average net assetse | ||||||||||||
| Expenses before waiver and payments by affiliates | 1.45 | % | 1.37 | % | 1.37 | % | 1.39 | % | ||||
| Expenses net of waiver and payments by affiliates | 1.42 | %f | 1.37 | %g | 1.37 | %g | 1.39 | % | ||||
| Net investment income | 1.26 | % | 1.45 | % | 1.71 | % | 1.59 | % | ||||
| Supplemental data | ||||||||||||
| Net assets, end of year (000’s) | $ | 720 | $ | 711 | $ | 73,067 | $ | 64,078 | ||||
| Portfolio turnover rate | 3.87 | % | 7.42 | % | 3.75 | % | 6.12 | % | ||||
aFor the period May 1, 2013 (effective date) to August 31, 2013.
bThe 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’s shares in relation to income earned and/or fluctuating fair value of the investments of the Fund.
cBased on average daily shares outstanding.
dTotal return is not annualized for periods less than one year.
eRatios are annualized for periods less than one year.
fBenefit of expense reduction rounds to less than 0.01%.
gBenefit of waiver and payments by affiliates rounds to less than 0.01%.
16 Annual Report | The accompanying notes are an integral part of these financial statements.
franklintempleton.com
| TEMPLETON CHINA WORLD FUND | |||||||||||||||
| FINANCIAL HIGHLIGHTS | |||||||||||||||
| Year Ended August 31, | |||||||||||||||
| 2016 | 2015 | 2014 | 2013 | 2012 | |||||||||||
| Advisor Class | |||||||||||||||
| Per share operating performance | |||||||||||||||
| (for a share outstanding throughout the year) | |||||||||||||||
| Net asset value, beginning of year | $ | 26.39 | $ | 38.26 | $ | 36.01 | $ | 34.33 | $ | 37.91 | |||||
| Income from investment operationsa: | |||||||||||||||
| Net investment incomeb | 0.22 | 0.42 | 0.55 | 0.46 | 0.68 | ||||||||||
| Net realized and unrealized gains (losses) | 2.22 | (7.61 | ) | 3.98 | 2.20 | (3.58 | ) | ||||||||
| Total from investment operations | 2.44 | (7.19 | ) | 4.53 | 2.66 | (2.90 | ) | ||||||||
| Less distributions from: | |||||||||||||||
| Net investment income | (0.57 | ) | (0.52 | ) | (0.65 | ) | (0.80 | ) | (0.37 | ) | |||||
| Net realized gains | (6.58 | ) | (4.16 | ) | (1.63 | ) | (0.18 | ) | (0.31 | ) | |||||
| Total distributions | (7.15 | ) | (4.68 | ) | (2.28 | ) | (0.98 | ) | (0.68 | ) | |||||
| Net asset value, end of year. | $ | 21.68 | $ | 26.39 | $ | 38.26 | $ | 36.01 | $ | 34.33 | |||||
| Total return | 11.51 | % | (20.38 | )% | 13.12 | % | 7.54 | % | (7.57 | )% | |||||
| Ratios to average net assets | |||||||||||||||
| Expenses | 1.66 | %c,d | 1.56 | %c | 1.55 | %c | 1.55 | % | 1.57 | % | |||||
| Net investment income | 1.02 | % | 1.26 | % | 1.53 | % | 1.43 | % | 1.86 | % | |||||
| Supplemental data | |||||||||||||||
| Net assets, end of year (000’s) | $ | 73,504 | $ | 107,454 | $ | 223,825 | $ | 240,826 | $ | 354,249 | |||||
| Portfolio turnover rate | 3.87 | % | 7.42 | % | 3.75 | % | 6.12 | % | 7.13 | % | |||||
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’s shares in relation to income earned and/or fluctuating fair value of the investments of the Fund.
bBased on average daily shares outstanding.
cBenefit of waiver and payments by affiliates rounds to less than 0.01%.
dBenefit of expense reduction rounds to less than 0.01%.
franklintempleton.com
The accompanying notes are an integral part of these financial statements. | Annual Report 17
| TEMPLETON CHINA WORLD FUND | ||||
| Statement of Investments, August 31, 2016 | ||||
| Country | Shares | Value | ||
| Common Stocks 99.4% | ||||
| Auto Components 0.2% | ||||
| Weifu High-Technology Co. Ltd., B | China | 273,527 | $ | 544,046 |
| a,b Xinyi Automobile Glass Hong Kong Enterprises Ltd., Reg S | Hong Kong | 16,250 | 3,352 | |
| Xinyi Glass Holdings Ltd | Hong Kong | 130,000 | 111,941 | |
| 659,339 | ||||
| Automobiles 7.0% | ||||
| Chongqing Changan Automobile Co. Ltd., B | China | 2,812,457 | 4,277,970 | |
| Dongfeng Motor Group Co. Ltd., H | China | 8,421,478 | 8,999,382 | |
| Jiangling Motors Corp. Ltd., B | China | 3,502,646 | 8,280,668 | |
| 21,558,020 | ||||
| Banks 6.7% | ||||
| BOC Hong Kong (Holdings) Ltd | Hong Kong | 609,500 | 2,133,111 | |
| China Construction Bank Corp., H | China | 19,354,926 | 14,470,693 | |
| Industrial and Commercial Bank of China Ltd., H | China | 6,391,725 | 4,061,952 | |
| 20,665,756 | ||||
| Beverages 1.2% | ||||
| Yantai Changyu Pioneer Wine Co. Ltd., B. | China | 1,327,099 | 3,782,352 | |
| Chemicals 0.8% | ||||
| Green Seal Holding Ltd | China | 551,000 | 2,455,715 | |
| Construction Materials 2.3% | ||||
| Asia Cement China Holdings Corp | China | 12,893,271 | 3,024,854 | |
| BBMG Corp., H | China | 4,350,000 | 1,693,425 | |
| Huaxin Cement Co. Ltd., B | China | 3,919,226 | 2,500,466 | |
| 7,218,745 | ||||
| Distributors 1.4% | ||||
| Dah Chong Hong Holdings Ltd | China | 10,266,563 | 4,486,365 | |
| Electric Utilities 2.4% | ||||
| Cheung Kong Infrastructure Holdings Ltd | Hong Kong | 886,348 | 7,443,694 | |
| Electronic Equipment, Instruments & Components 1.2% | ||||
| Simplo Technology Co. Ltd | Taiwan | 285,948 | 941,181 | |
| Synnex Technology International Corp | Taiwan | 2,678,648 | 2,826,379 | |
| 3,767,560 | ||||
| Food & Staples Retailing 6.9% | ||||
| Beijing Jingkelong Co. Ltd., H | China | 4,183,971 | 857,543 | |
| Dairy Farm International Holdings Ltd | Hong Kong | 2,003,676 | 14,366,357 | |
| President Chain Store Corp | Taiwan | 788,059 | 6,267,438 | |
| 21,491,338 | ||||
| Food Products 4.3% | ||||
| Uni-President China Holdings Ltd | China | 14,905,280 | 10,625,150 | |
| Uni-President Enterprises Corp | Taiwan | 1,403,394 | 2,652,167 | |
| 13,277,317 | ||||
| Gas Utilities 0.4% | ||||
| ENN Energy Holdings Ltd | China | 211,300 | 1,183,475 | |
| Health Care Equipment & Supplies 0.2% | ||||
| Ginko International Co. Ltd | Taiwan | 54,000 | 528,962 | |
| Health Care Providers & Services 1.9% | ||||
| Shanghai Pharmaceuticals Holding Co. Ltd., H | China | 2,201,100 | 6,043,509 | |
| Independent Power & Renewable Electricity Producers 0.5% | ||||
| Huaneng Renewables Corp. Ltd., H. | China | 4,092,000 | 1,519,140 | |
18 Annual Report
franklintempleton.com
TEMPLETON CHINA WORLD FUND
STATEMENT OF INVESTMENTS
| Country | Shares | Value | ||
| Common Stocks (continued) | ||||
| Industrial Conglomerates 4.0% | ||||
| CK Hutchison Holdings Ltd | Hong Kong | 278,690 | $ | 3,581,677 |
| Hopewell Holdings Ltd | Hong Kong | 2,491,000 | 8,782,150 | |
| 12,363,827 | ||||
| Insurance 4.7% | ||||
| AIA Group Ltd | Hong Kong | 1,891,900 | 11,962,088 | |
| China Life Insurance Co. Ltd., H | China | 1,039,000 | 2,483,105 | |
| 14,445,193 | ||||
| Internet & Direct Marketing Retail 0.3% | ||||
| a JD.com Inc., ADR | China | 30,937 | 786,109 | |
| Internet Software & Services 11.8% | ||||
| a Alibaba Group Holding Ltd., ADR | China | 51,010 | 4,957,662 | |
| a Baidu Inc., ADR | China | 41,630 | 7,121,644 | |
| Tencent Holdings Ltd | China | 940,900 | 24,475,662 | |
| 36,554,968 | ||||
| IT Services 2.3% | ||||
| a Chinasoft International Ltd | China | 974,000 | 450,737 | |
| TravelSky Technology Ltd., H | China | 3,037,841 | 6,594,425 | |
| 7,045,162 | ||||
| Leisure Products 0.1% | ||||
| Merida Industry Co. Ltd | Taiwan | 67,800 | 276,547 | |
| Machinery 0.1% | ||||
| c Zoomlion Heavy Industry Science and Technology Development Co. Ltd., H | China | 1,279,620 | 412,374 | |
| Marine 1.0% | ||||
| China Shipping Development Co. Ltd., H | China | 4,154,000 | 2,206,142 | |
| a Sinotrans Shipping Ltd | China | 6,398,500 | 923,775 | |
| 3,129,917 | ||||
| Media 0.4% | ||||
| Poly Culture Group Corp. Ltd., H | China | 448,300 | 1,097,974 | |
| Oil, Gas & Consumable Fuels 8.0% | ||||
| China Petroleum and Chemical Corp., H | China | 27,164,478 | 19,714,219 | |
| CNOOC Ltd | China | 1,816,400 | 2,231,383 | |
| PetroChina Co. Ltd., H | China | 4,412,403 | 2,946,285 | |
| 24,891,887 | ||||
| Paper & Forest Products 5.0% | ||||
| Nine Dragons Paper Holdings Ltd | China | 19,218,000 | 15,433,558 | |
| Pharmaceuticals 1.3% | ||||
| Tong Ren Tang Technologies Co. Ltd., H | China | 2,299,700 | 4,073,125 | |
| Real Estate Management & Development 0.9% | ||||
| Cheung Kong Property Holdings Ltd | Hong Kong | 261,690 | 1,838,457 | |
| China Overseas Land & Investment Ltd | China | 320,000 | 1,058,052 | |
| 2,896,509 | ||||
| Semiconductors & Semiconductor Equipment 9.5% | ||||
| GCL-Poly Energy Holdings Ltd | China | 6,545,000 | 928,051 | |
| Taiwan Semiconductor Manufacturing Co. Ltd | Taiwan | 5,135,330 | 28,467,608 | |
| 29,395,659 | ||||
| Textiles, Apparel & Luxury Goods 4.8% | ||||
| Anta Sports Products Ltd | China | 5,454,355 | 14,764,968 | |
franklintempleton.com
Annual Report
19
TEMPLETON CHINA WORLD FUND
STATEMENT OF INVESTMENTS
| Country | Shares | Value | |||
| Common Stocks (continued) | |||||
| Transportation Infrastructure 2.7% | |||||
| COSCO Shipping Ports Ltd | China | 4,814,012 | $ | 5,212,623 | |
| Sichuan Expressway Co. Ltd., H | China | 8,712,000 | 3,189,378 | ||
| 8,402,001 | |||||
| Wireless Telecommunication Services 5.1% | |||||
| China Mobile Ltd | China | 1,290,770 | 15,939,849 | ||
| Total Common Stocks (Cost $172,493,003) | 307,990,914 | ||||
| Short Term Investments 0.8% | |||||
| Money Market Funds (Cost $2,303,332) 0.7% | |||||
| a,d Institutional Fiduciary Trust Money Market Portfolio | United States | 2,303,332 | 2,303,332 | ||
| e Investments from Cash Collateral Received for Loaned Securities | |||||
| (Cost $210,000) 0.1% | |||||
| Money Market Funds 0.1% | |||||
| a,d Institutional Fiduciary Trust Money Market Portfolio | United States | 210,000 | 210,000 | ||
| Total Investments (Cost $175,006,335) 100.2% | 310,504,246 | ||||
| Other Assets, less Liabilities (0.2)% | (662,422) | ||||
| Net Assets 100.0% | $ | 309,841,824 | |||
See Abbreviations on page 32.
aNon-income producing.
bSecurity was purchased pursuant to Regulation S under the Securities Act of 1933, which exempts from registration securities offered and sold outside of the United States.
Such a security cannot be sold in the United States without either an effective registration statement filed pursuant to the Securities Act of 1933, or pursuant to an exemption
from registration. This security has been deemed liquid under guidelines approved by the Fund’s Board of Trustees. At August 31, 2016, the value of this security was $3,352,
representing less than 0.1% of net assets.
cA portion or all of the security is on loan at August 31, 2016. See Note 1(c).
dSee Note 3(f) regarding investments in affiliated management investment companies.
eSee Note 1(c) regarding securities on loan.
20 Annual Report | The accompanying notes are an integral part of these financial statements.
franklintempleton.com
TEMPLETON CHINA WORLD FUND
| Financial Statements | ||
| Statement of Assets and Liabilities | ||
| August 31, 2016 | ||
| Assets: | ||
| Investments in securities: | ||
| Cost - Unaffiliated issuers | $ | 172,493,003 |
| Cost - Non-controlled affiliates (Note 3f) | 2,513,332 | |
| Total cost of investments | $ | 175,006,335 |
| Value - Unaffiliated issuers | $ | 307,990,914 |
| Value - Non-controlled affiliates (Note 3f) | 2,513,332 | |
| Total value of investments (includes securities loaned in the amount of $193,358) | 310,504,246 | |
| Receivables: | ||
| Investment securities sold | 62,990 | |
| Capital shares sold | 147,419 | |
| Dividends | 597,799 | |
| Other assets | 101 | |
| Total assets | 311,312,555 | |
| Liabilities: | ||
| Payables: | ||
| Capital shares redeemed | 660,824 | |
| Management fees | 337,478 | |
| Distribution fees | 81,283 | |
| Transfer agent fees | 111,586 | |
| Payable upon return of securities loaned | 210,000 | |
| Accrued expenses and other liabilities | 69,560 | |
| Total liabilities | 1,470,731 | |
| Net assets, at value | $ | 309,841,824 |
| Net assets consist of: | ||
| Paid-in capital | $ | 138,388,245 |
| Undistributed net investment income | 2,186,597 | |
| Net unrealized appreciation (depreciation) | 135,496,856 | |
| Accumulated net realized gain (loss) | 33,770,126 | |
| Net assets, at value | $ | 309,841,824 |
franklintempleton.com
The accompanying notes are an integral part of these financial statements. | Annual Report 21
| TEMPLETON CHINA WORLD FUND | ||
| FINANCIAL STATEMENTS | ||
| Statement of Assets and Liabilities (continued) | ||
| August 31, 2016 | ||
| Class A: | ||
| Net assets, at value | $ | 186,849,634 |
| Shares outstanding | 8,685,294 | |
| Net asset value per sharea | $ | 21.51 |
| Maximum offering price per share (net asset value per share ÷ 94.25%) | $ | 22.82 |
| Class C: | ||
| Net assets, at value | $ | 48,768,536 |
| Shares outstanding | 2,302,990 | |
| Net asset value and maximum offering price per sharea | $ | 21.18 |
| Class R6: | ||
| Net assets, at value | $ | 719,985 |
| Shares outstanding | 33,203 | |
| Net asset value and maximum offering price per share | $ | 21.68 |
| Advisor Class : | ||
| Net assets, at value | $ | 73,503,669 |
| Shares outstanding | 3,390,052 | |
| Net asset value and maximum offering price per share | $ | 21.68 |
aRedemption price is equal to net asset value less contingent deferred sales charges, if applicable.
22 Annual Report | The accompanying notes are an integral part of these financial statements.
franklintempleton.com
| TEMPLETON CHINA WORLD FUND | |||
| FINANCIAL STATEMENTS | |||
| Statement of Operations | |||
| for the year ended August 31, 2016 | |||
| Investment income: | |||
| Dividends (net of foreign taxes of $743,683) | $ | 8,901,884 | |
| Income from securities loaned (net of fees and rebates) | 18,677 | ||
| Total investment income | 8,920,561 | ||
| Expenses: | |||
| Management fees (Note 3a) | 4,300,447 | ||
| Distribution fees: (Note 3c) | |||
| Class A | 503,065 | ||
| Class C | 527,437 | ||
| Transfer agent fees: (Note 3e) | |||
| Class A | 503,042 | ||
| Class C | 133,884 | ||
| Class R6 | 311 | ||
| Advisor Class | 205,880 | ||
| Custodian fees (Note 4) | 105,273 | ||
| Reports to shareholders | 85,110 | ||
| Registration and filing fees | 92,694 | ||
| Professional fees | 61,861 | ||
| Trustees’ fees and expenses | 32,614 | ||
| Other | 22,358 | ||
| Total expenses | 6,573,976 | ||
| Expense reductions (Note 4) | (63 | ) | |
| Expenses waived/paid by affiliates (Notes 3f and 3g) | (4,370 | ) | |
| Net expenses | 6,569,543 | ||
| Net investment income. | 2,351,018 | ||
| Realized and unrealized gains (losses): | |||
| Net realized gain (loss) from: | |||
| Investments | 45,389,785 | ||
| Foreign currency transactions | (42,366 | ) | |
| Net realized gain (loss) | 45,347,419 | ||
| Net change in unrealized appreciation (depreciation) on: | |||
| Investments | (13,394,961 | ) | |
| Translation of other assets and liabilities | |||
| denominated in foreign currencies. | 7,109 | ||
| Net change in unrealized appreciation (depreciation) | (13,387,852 | ) | |
| Net realized and unrealized gain (loss) | 31,959,567 | ||
| Net increase (decrease) in net assets resulting from operations | $ | 34,310,585 | |
franklintempleton.com
The accompanying notes are an integral part of these financial statements. | Annual Report 23
| TEMPLETON CHINA WORLD FUND | ||||||
| FINANCIAL STATEMENTS | ||||||
| Statements of Changes in Net Assets | ||||||
| Year Ended August 31, | ||||||
| 2016 | 2015 | |||||
| Increase (decrease) in net assets: | ||||||
| Operations: | ||||||
| Net investment income | $ | 2,351,018 | $ | 6,239,465 | ||
| Net realized gain (loss) | 45,347,419 | 80,605,530 | ||||
| Net change in unrealized appreciation (depreciation) | (13,387,852 | ) | (209,079,044 | ) | ||
| Net increase (decrease) in net assets resulting from operations. | 34,310,585 | (122,234,049 | ) | |||
| Distributions to shareholders from: | ||||||
| Net investment income: | ||||||
| Class A | (3,603,536 | ) | (4,134,433 | ) | ||
| Class C | (360,294 | ) | (678,370 | ) | ||
| Class R6 | (16,616 | ) | (1,083,024 | ) | ||
| Advisor Class | (2,085,592 | ) | (2,373,149 | ) | ||
| Net realized gains: | ||||||
| Class A | (51,937,159 | ) | (38,445,422 | ) | ||
| Class C | (14,292,109 | ) | (10,788,325 | ) | ||
| Class R6 | (170,910 | ) | (7,799,385 | ) | ||
| Advisor Class | (24,134,243 | ) | (18,957,393 | ) | ||
| Total distributions to shareholders | (96,600,459 | ) | (84,259,501 | ) | ||
| Capital share transactions: (Note 2) | ||||||
| Class A | (10,848,333 | ) | (32,152,412 | ) | ||
| Class C | (4,950,385 | ) | (9,655,131 | ) | ||
| Class R6 | 116,915 | (58,988,461 | ) | |||
| Advisor Class | (16,652,155 | ) | (61,714,268 | ) | ||
| Total capital share transactions | (32,333,958 | ) | (162,510,272 | ) | ||
| Net increase (decrease) in net assets. | (94,623,832 | ) | (369,003,822 | ) | ||
| Net assets: | ||||||
| Beginning of year | 404,465,656 | 773,469,478 | ||||
| End of year | $ | 309,841,824 | $ | 404,465,656 | ||
| Undistributed net investment income included in net assets: | ||||||
| End of year | $ | 2,186,597 | $ | 5,905,691 | ||
24 Annual Report | The accompanying notes are an integral part of these financial statements.
franklintempleton.com
TEMPLETON CHINA WORLD FUND
Notes to Financial Statements
1. Organization and Significant Accounting Policies
Templeton China World Fund (Fund) is registered under the Investment Company Act of 1940 (1940 Act) as an open-end management investment company and applies the specialized accounting and reporting guidance in U.S. Generally Accepted Accounting Principles (U.S. GAAP). The Fund offers four classes of shares: Class A, Class C, Class R6, and Advisor Class. Each class of shares differs by its initial sales load, contingent deferred sales charges, voting rights on matters affecting a single class, its exchange privilege and fees primarily due to differing arrangements for distribution and transfer agent fees.
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. The Fund calculates the net asset value (NAV) per share as of 4 p.m. Eastern time each day the New York Stock Exchange (NYSE) is open for trading. Under compliance policies and procedures approved by the Fund’s Board of Trustees (the Board), the Fund’s administrator has responsibility for oversight of valuation, including leading the cross-functional Valuation Committee (VC). The VC 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.
Equity securities listed on an 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. Foreign equity securities are valued as of the close of trading on the foreign stock exchange on which the security is primarily traded or as of 4 p.m. Eastern time, whichever is earlier. The value is then converted into its U.S. dollar equivalent at the foreign exchange rate in effect at 4 p.m. Eastern time on the day that the value of the security is determined. Over-the-counter (OTC) securities 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.
Investments in open-end mutual funds are valued at the closing NAV.
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 VC 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 VC 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 VC 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 4 p.m. Eastern time. In addition, trading in certain foreign markets may not take place on every NYSE business day. 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 VC 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
franklintempleton.com
Annual Report
25
TEMPLETON CHINA WORLD FUND
NOTES TO FINANCIAL STATEMENTS
1. Organization and Significant Accounting
Policies (continued)
a. Financial Instrument Valuation (continued)
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.
When the last day of the reporting period is a non-business day, certain foreign markets may be open on those days that the NYSE is closed, which could result in differences between the value of the Fund’s portfolio securities on the last business day and the last calendar day of the reporting period. Any significant security valuation changes due to an open foreign market are adjusted and reflected by the Fund for financial reporting purposes.
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 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 in 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. Securities Lending
The Fund participates in an agency based securities lending program to earn additional income. The Fund receives cash collateral against the loaned securities in an amount equal to at least 102% of the fair value of the loaned securities. Collateral is maintained over the life of the loan in an amount not less than 100% of the fair value of loaned securities, as determined at the close of Fund business each day; any additional collateral required due to changes in security values is delivered to the Fund on the next business day. The collateral is deposited into a joint cash account with other funds and is used to invest in a money market fund managed by Franklin Advisers, Inc., an affiliate of the Fund. The Fund may receive income from the investment of cash collateral, in addition to lending fees and rebates paid by the borrower. Income from securities loaned, net of fees paid to the securities lending agent and/or third-party vendor, is reported separately in the Statement of Operations. The Fund bears the market risk with respect to the collateral investment, securities loaned, and the risk that the agent may default on its obligations to the Fund. If the borrower defaults on its obligation to return the securities loaned, the Fund has the right to repurchase the securities in the open market using the collateral received. The securities lending agent has agreed to indemnify the Fund in the event of default by a third party borrower.
d. 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 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.
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TEMPLETON CHINA WORLD FUND
NOTES TO FINANCIAL STATEMENTS
The Fund may recognize an income tax liability related to its uncertain tax positions under U.S. GAAP when the uncertain tax position has a less than 50% probability that it will be sustained upon examination by the tax authorities based on its technical merits. As of August 31, 2016, the Fund has determined that no tax liability is required in its financial statements related to uncertain tax positions for any open tax years (or expected to be taken in future tax years). Open tax years are those that remain subject to examination and are based on each tax jurisdiction’s statute of limitation.
e. Security Transactions, Investment Income, Expenses and Distributions
Security transactions are accounted for on trade date. Realized gains and losses on security transactions are determined on a specific identification basis. Estimated expenses are accrued daily. Dividend income is recorded on the ex-dividend date except for certain dividends from foreign securities where the dividend rate is not available. In such cases, the dividend is recorded as soon as the information is received by the Fund. 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 U.S. GAAP. 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.
f. Accounting Estimates
The preparation of financial statements in accordance with U.S. GAAP 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.
g. 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.
| 2. Shares of Beneficial Interest | ||||||||||
| At August 31, 2016, there were an unlimited number of shares authorized (without par value). Transactions in the Fund’s shares | ||||||||||
| were as follows: | ||||||||||
| Year Ended August 31, | ||||||||||
| 2016 | 2015 | |||||||||
| Shares | Amount | Shares | Amount | |||||||
| Class A Shares: | ||||||||||
| Shares sold. | 1,594,515 | $ | 33,963,897 | 1,848,012 | $ | 60,728,192 | ||||
| Shares issued in reinvestment of distributions | 2,701,529 | 53,733,408 | 1,359,641 | 40,993,162 | ||||||
| Shares redeemed | (4,500,910) | (98,545,638) | (4,135,588) | (133,873,766) | ||||||
| Net increase (decrease) | (204,866) | $ | (10,848,333) | (927,935) | $ | (32,152,412) | ||||
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TEMPLETON CHINA WORLD FUND
NOTES TO FINANCIAL STATEMENTS
| 2. Shares of Beneficial Interest (continued) | |||||||||||||
| Year Ended August 31, | |||||||||||||
| 2016 | 2015 | ||||||||||||
| Shares | Amount | Shares | Amount | ||||||||||
| Class C Shares: | |||||||||||||
| Shares sold. | 230,824 | $ | 4,829,005 | 299,524 | $ | 9,791,186 | |||||||
| Shares issued in reinvestment of distributions | 642,345 | 12,641,362 | 331,271 | 9,871,861 | |||||||||
| Shares redeemed | (1,034,646 | ) | (22,420,752 | ) | (920,932 | ) | (29,318,178 | ) | |||||
| Net increase (decrease) | (161,477 | ) | $ | (4,950,385 | ) | (290,137 | ) | $ | (9,655,131 | ) | |||
| Class R6 Shares: | |||||||||||||
| Shares sold. | 7,081 | $ | 139,108 | 137,154 | $ | 4,382,087 | |||||||
| Shares issued in reinvestment of distributions | 9,386 | 187,526 | 293,149 | 8,882,408 | |||||||||
| Shares redeemed | (10,192 | ) | (209,719 | ) | (2,312,548 | ) | (72,252,956 | ) | |||||
| Net increase (decrease) | 6,275 | $ | 116,915 | (1,882,245 | ) | $ | (58,988,461 | ) | |||||
| Advisor Class Shares: | |||||||||||||
| Shares sold. | 947,626 | $ | 21,494,473 | 625,398 | $ | 21,052,016 | |||||||
| Shares issued in reinvestment of distributions | 1,051,692 | 21,044,361 | 521,966 | 15,826,017 | |||||||||
| Shares redeemed | (2,680,734 | ) | (59,190,989 | ) | (2,926,540 | ) | (98,592,301 | ) | |||||
| Net increase (decrease) | (681,416 | ) | $ | (16,652,155 | ) | (1,779,176 | ) | $ | (61,714,268 | ) | |||
| 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 | ||||||||||||
| Templeton Asset Management Ltd. (TAML) | Investment manager | ||||||||||||
| Franklin Templeton Services, LLC (FT Services) | Administrative manager | ||||||||||||
| Franklin Templeton Distributors, Inc. (Distributors) | Principal underwriter | ||||||||||||
| Franklin Templeton Investor Services, LLC (Investor Services) | Transfer agent | ||||||||||||
| a. Management Fees | |||||||||||||
| The Fund pays an investment management fee to TAML based on the average weekly net assets of the Fund as follows: | |||||||||||||
| Annualized Fee Rate | Net Assets | ||||||||||||
| 1.300% | Up to and including $1 billion | ||||||||||||
| 1.250% | Over $1 billion, up to and including $5 billion | ||||||||||||
| 1.200% | Over $5 billion, up to and including $10 billion | ||||||||||||
| 1.150% | Over $10 billion, up to and including $15 billion | ||||||||||||
| 1.100% | Over $15 billion, up to and including $20 billion | ||||||||||||
| 1.050% | In excess of $20 billion | ||||||||||||
| For the year ended August 31, 2016, the effective investment management fee rate was 1.292% of the Fund’s average daily net | |||||||||||||
| assets. | |||||||||||||
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TEMPLETON CHINA WORLD FUND
NOTES TO FINANCIAL STATEMENTS
b. Administrative Fees
Under an agreement with TAML, FT Services provides administrative services to the Fund. The fee is paid by TAML based on average weekly net assets, and is not an additional expense of the Fund.
c. Distribution Fees
The Board has adopted distribution plans for each share class, with the exception of Class R6 and 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 C compensation distribution plan, 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. The plan year, for purposes of monitoring compliance with the maximum annual plan rate, is February 1 through January 31.
The maximum annual plan rates, based on the average daily net assets, for each class, are as follows:
| Class A | 0.35 | % |
| Class C | 1.00 | % |
| The Board has set the current rate at 0.25% per year for Class A shares until further notice and approval by the Board. | ||
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 brokers/dealers. | $ | 26,225 |
| CDSC retained | $ | 5,591 |
e. Transfer Agent Fees
Each class of shares, except for Class R6, pays transfer agent fees to Investor Services for its performance of shareholder servicing obligations and reimburses Investor Services for out of pocket expenses incurred, including shareholder servicing fees paid to third parties. These fees are allocated daily based upon their relative proportion of such classes’ aggregate net assets. Class R6 pays Investor Services transfer agent fees specific to that class.
For the year ended August 31, 2016, the Fund paid transfer agent fees of $843,117, of which $391,244 was retained by Investor Services.
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TEMPLETON CHINA WORLD FUND
NOTES TO FINANCIAL STATEMENTS
3. Transactions with Affiliates (continued)
f. Investments in Affiliated Management Investment Companies
The Fund invests in one or more affiliated management investment companies for purposes other than exercising a controlling influence over the management or policies. Management fees paid by the Fund are waived on assets invested in the affiliated management investment company, as noted in the Statement of Operations, in an amount not to exceed the management and administrative fees paid directly or indirectly by each affiliate. Prior to September 1, 2013, the waiver was accounted for as a reduction to management fees. During the year ended August 31, 2016, the Fund held investments in affiliated management investment companies as follows:
| % of | |||||||||||
| Affiliated | |||||||||||
| Number of | Number of | Fund Shares | |||||||||
| Shares Held | Shares | Value | Outstanding | ||||||||
| at Beginning | Gross | Gross | Held at End | at End | Investment | Realized | Held at End | ||||
| of Year | Additions | Reductions | of Year | of Year | Income | Gain (Loss) | of Year | ||||
| Non-Controlled Affiliates | |||||||||||
| Institutional Fiduciary Trust Money Market | |||||||||||
| Portfolio | 1,576,042 | 59,376,586 | (58,439,296 | ) | 2,513,332 | $ | 2,513,332 | $ — | $ — | 0.0 | %a |
| aRounds to less than 0.1%. | |||||||||||
| g. Waiver and Expense Reimbursements | |||||||||||
Investor Services has contractually agreed in advance to waive or limit its fees so that the Class R6 transfer agent fees do not exceed 0.01% until December 31, 2016.
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 August 31, 2016, the custodian fees were reduced as noted in the the Statement of Operations.
5. Income Taxes
The tax character of distributions paid during the years ended August 31, 2016 and 2015, was as follows:
| 2016 | 2015 | |||
| Distributions paid from: | ||||
| Ordinary income | $ | 6,066,038 | $ | 8,268,976 |
| Long term capital gain | 90,534,421 | 75,990,525 | ||
| $ | 96,600,459 | $ | 84,259,501 |
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TEMPLETON CHINA WORLD FUND
NOTES TO FINANCIAL STATEMENTS
At August 31, 2016, the cost of investments, net unrealized appreciation (depreciation), undistributed ordinary income and undistributed long term capital gains for income tax purposes were as follows:
| Cost of investments | $ | 175,859,133 | |
| Unrealized appreciation | $ | 151,460,298 | |
| Unrealized depreciation | (16,815,185) | ||
| Net unrealized appreciation (depreciation) | $ | 134,645,113 | |
| Undistributed ordinary income | 2,308,364 | ||
| Undistributed long term capital gains | 34,501,155 | ||
| Distributable earnings. | $ | 36,809,519 | |
Differences between income and/or capital gains as determined on a book basis and a tax basis are primarily due to differing treatment of wash sales.
6. Investment Transactions
Purchases and sales of investments (excluding short term securities) for the year ended August 31, 2016, aggregated $12,961,590 and $140,023,977, respectively.
At August 31, 2016, in connection with securities lending transactions, the Fund loaned equity investments and received $210,000 of cash collateral. The gross amount of recognized liability for such transactions is included in payable upon return of securities loaned in the Statement of Assets and Liabilities. The agreements can be terminated at any time.
7. Concentration of Risk
Investing in securities of "China companies" may include certain risks and considerations not typically associated with investing in U.S. securities. In general, China companies are those that are organized under the laws of, or with a principal office or principal trading market in, the People’s Republic of China, Hong Kong, or Taiwan. Such risks include fluctuating currency values and changing local and regional economic, political and social conditions, which may result in greater market volatility. In addition, these securities may not be as liquid as U.S. securities.
8. 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 $2 billion (Global Credit Facility) which matures on February 10, 2017. 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 0.07% based upon the unused portion of the Global Credit Facility. Effective February 12, 2016, the annual commitment fee is 0.15%. These fees are reflected in other expenses in the Statement of Operations. During the year ended August 31, 2016, the Fund did not use the Global Credit Facility.
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TEMPLETON CHINA WORLD FUND
NOTES TO FINANCIAL STATEMENTS
9. 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 input levels are not necessarily an indication of the risk or liquidity associated with financial instruments at that level.
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.
At August 31, 2016, all of the Fund’s investments in financial instruments carried at fair value were valued using Level 1 inputs. For detailed categories, see the accompanying Statement of Investments.
A reconciliation of assets in which Level 3 inputs are used in determining fair value is presented when there are significant Level 3 financial instruments at the end of the year. At August 31, 2016, the reconciliation of assets is as follows:
| Balance at | Net Unrealized | Balance at | ||||||||||||||||
| Beginning of | Purchases | Transfers Into | Transfer Out of | Cost Basis | Net Realized | Appreciation | End of | |||||||||||
| Year | (Sales) | Level 3 | Level 3a | Adjustments | Gain (Loss) | (Depreciation) | Year | |||||||||||
| Assets: | ||||||||||||||||||
| Investments in Securities: | ||||||||||||||||||
| Equity Investments: | ||||||||||||||||||
| Marine | $ | 6,778,159 | $ | — | $ | — | $ | (8,846,075 | ) | $ | — | $ | — | $ | 2,067,916 | $ | — | |
| Transportation Infrastructure | 6,115,073 | — | — | (5,626,587 | ) | — | — | (488,486 | ) | — | ||||||||
| Total Investments in Securities | $ | 12,893,232 | $ | — | $ | — | $ | (14,472,662 | ) | $ | — | $ | — | $ | 1,579,430 | $ | — |
aThe investments were transferred out of Level 3 as a result of the availability of a quoted price in an active market for identical securities.
10. 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.
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TEMPLETON CHINA WORLD FUND
Report of Independent Registered Public Accounting Firm
To the Board of Trustees and Shareholders of Templeton China World 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 Templeton China World Fund (the "Fund") at August 31, 2016, 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 the periods presented, 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 August 31, 2016 by correspondence with the custodian, transfer agent and brokers, provides a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
San Francisco, California October 19, 2016
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TEMPLETON CHINA WORLD FUND
Tax Information (unaudited)
Under Section 852(b)(3)(C) of the Internal Revenue Code (Code), the Fund hereby reports the maximum amount allowable but no less than $90,534,421 as a long term capital gain dividend for the fiscal year ended August 31, 2016.
Under Section 854(b)(1)(B) of the Code, the Fund hereby reports the maximum amount allowable but no less than $1,928,706 as qualified dividends for purposes of the maximum rate under Section 1(h)(11) of the Code for the fiscal year ended August 31, 2016. Distributions, including qualified dividend income, paid during calendar year 2016 will be reported to shareholders on Form 1099-DIV by mid-February 2017. Shareholders are advised to check with their tax advisors for information on the treatment of these amounts on their individual income tax returns.
At August 31, 2015, more than 50% of the Fund’s total assets were invested in securities of foreign issuers. In most instances, foreign taxes were withheld from income paid to the Fund on these investments. As shown in the table below, the Fund hereby reports to shareholders the foreign source income and foreign taxes paid, pursuant to Section 853 of the Code. This written statement will allow shareholders of record on December 18, 2015, to treat their proportionate share of foreign taxes paid by the Fund as having been paid directly by them. The shareholder shall consider these amounts as foreign taxes paid in the tax year in which they receive the Fund distribution.
The following table provides a detailed analysis of foreign tax paid, foreign source income, and foreign source qualified dividends as reported by the Fund, to Class A, Class C, Class R6, and Advisor Class shareholders of record.
| Foreign Tax Paid | Foreign Source | Foreign Source Qualified | ||||
| Class | Per Share | Income Per Share | Dividends Per Share | |||
| Class A | $ | 0.1146 | $ | 0.5815 | $ | 0.1026 |
| Class C | $ | 0.1146 | $ | 0.2911 | $ | 0.0513 |
| Class R6 | $ | 0.1146 | $ | 0.7645 | $ | 0.1348 |
| Advisor Class | $ | 0.1146 | $ | 0.6935 | $ | 0.1224 |
Foreign Tax Paid Per Share (Column 1) is the amount per share available to you, as a tax credit (assuming you held your shares in the Fund for a minimum of 16 days during the 31-day period beginning 15 days before the ex-dividend date of the Fund’s distribution to which the foreign taxes relate), or, as a tax deduction.
Foreign Source Income Per Share (Column 2) is the amount per share of income dividends attributable to foreign securities held by the Fund, plus any foreign taxes withheld on these dividends. The amounts reported include foreign source qualified dividends that have not been adjusted for the rate differential applicable to such dividend income.1
Foreign Source Qualified Dividends Per Share (Column 3) is the amount per share of foreign source qualified dividends, plus any foreign taxes withheld on these dividends. These amounts represent the portion of the Foreign Source Income reported to you in column 2 that were derived from qualified foreign securities held by the Fund.1
By mid-February 2016, shareholders received Form 1099-DIV which will include their share of taxes paid and foreign source income distributed during the calendar year 2015. The Foreign Source Income reported on Form 1099-DIV has not been adjusted for the rate differential on foreign source qualified dividend income. Shareholders are advised to check with their tax advisors for information on the treatment of these amounts on their 2015 individual income tax returns.
1Qualified dividends are taxed at reduced long term capital gains tax rates. In determining the amount of foreign tax credit that may be applied against the U.S. tax liability of
individuals receiving foreign source qualified dividends, adjustments may be required to the foreign tax credit limitation calculation to reflect the rate differential applicable to
such dividend income. The rules however permit certain individuals to elect not to apply the rate differential adjustments for capital gains and/or dividends for any taxable
year. Please consult your tax advisor and the instructions to Form 1116 for more information.
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TEMPLETON CHINA WORLD FUND
Board Members and Officers
The name, year of birth and address of the officers and board members, as well as their affiliations, positions held with the Fund, principal occupations during at least the past five years and number of U.S. registered portfolios overseen in the Franklin Templeton Investments fund complex, are shown below. Generally, each board member serves until that person’s successor is elected and qualified.
| Independent Board Members | ||||
| Number of Portfolios in | ||||
| Name, Year of Birth | Length of | Fund Complex Overseen | Other Directorships Held | |
| and Address | Position | Time Served | by Board Member* | During at Least the Past 5 Years |
| Harris J. Ashton (1932) | Trustee | Since 1993 | 145 | Bar-S Foods (meat packing company) |
| 300 S.E. 2nd Street | (1981-2010). | |||
| Fort Lauderdale, FL 33301-1923 | ||||
| Principal Occupation During at Least the Past 5 Years: | ||||
| Director of various companies; and formerly, Director, RBC Holdings, Inc. (bank holding company) (until 2002); and President, Chief Executive | ||||
| Officer and Chairman of the Board, General Host Corporation (nursery and craft centers) (until 1998). | ||||
| Ann Torre Bates (1958) | Trustee | Since 2008 | 42 | Ares Capital Corporation (specialty |
| 300 S.E. 2nd Street | finance company) (2010-present), | |||
| Fort Lauderdale, FL 33301-1923 | United Natural Foods, Inc. (distributor | |||
| of natural, organic and specialty foods) | ||||
| (2013-present), Allied Capital | ||||
| Corporation (financial services) | ||||
| (2003-2010), SLM Corporation (Sallie | ||||
| Mae) (1997-2014) and Navient | ||||
| Corporation (loan management, | ||||
| servicing and asset recovery) | ||||
| (2014-2016). | ||||
| Principal Occupation During at Least the Past 5 Years: | ||||
| Director of various companies; and formerly, Executive Vice President and Chief Financial Officer, NHP Incorporated (manager of multifamily | ||||
| housing) (1995-1997); and Vice President and Treasurer, US Airways, Inc. (until 1995). | ||||
| Edith E. Holiday (1952) | Lead | Trustee since | 145 | Hess Corporation (exploration and |
| 300 S.E. 2nd Street | Independent | 1996 and Lead | refining of oil and gas) (1993-present), | |
| Fort Lauderdale, FL 33301-1923 | Trustee | Independent | Canadian National Railway (railroad) | |
| Trustee | (2001-present), White Mountains | |||
| since 2007 | Insurance Group, Ltd. (holding | |||
| company) (2004-present), RTI | ||||
| International Metals, Inc. (manufacture | ||||
| and distribution of titanium) | ||||
| (1999-2015) and H.J. Heinz Company | ||||
| (processed foods and allied products) | ||||
| (1994-2013). | ||||
| Principal Occupation During at Least the Past 5 Years: | ||||
| Director or Trustee of various companies and trusts; and formerly, Assistant to the President of the United States and Secretary of the | ||||
| Cabinet (1990-1993); General Counsel to the United States Treasury Department (1989-1990); and Counselor to the Secretary and Assistant | ||||
| Secretary for Public Affairs and Public Liaison – United States Treasury Department (1988-1989). | ||||
| J. Michael Luttig (1954) | Trustee | Since 2009 | 145 | Boeing Capital Corporation (aircraft |
| 300 S.E. 2nd Street | financing) (2006-2013). | |||
| Fort Lauderdale, FL 33301-1923 | ||||
| Principal Occupation During at Least the Past 5 Years: | ||||
| Executive Vice President, General Counsel and member of the Executive Council, The Boeing Company (aerospace company) (2006-present); | ||||
| and formerly, Federal Appeals Court Judge, U.S. Court of Appeals for the Fourth Circuit (1991-2006). | ||||
| David W. Niemiec (1949) | Trustee | Since 2005 | 42 | Emeritus Corporation (assisted living) |
| 300 S.E. 2nd Street | (1999-2010) and OSI Pharmaceuticals, | |||
| Fort Lauderdale, FL 33301-1923 | Inc. (pharmaceutical products) | |||
| (2006-2010). | ||||
| Principal Occupation During at Least the Past 5 Years: | ||||
| Advisor, Saratoga Partners (private equity fund); and formerly, Managing Director, Saratoga Partners (1998-2001) and SBC Warburg Dillon | ||||
| Read (investment banking) (1997-1998); Vice Chairman, Dillon, Read & Co. Inc. (investment banking) (1991-1997); and Chief Financial Officer, | ||||
| Dillon, Read & Co. Inc. (1982-1997). | ||||
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| Independent Board Members (continued) | |||||
| Number of Portfolios in | |||||
| Name, Year of Birth | Length of | Fund Complex Overseen | Other Directorships Held | ||
| and Address | Position | Time Served | by Board Member* | During at Least the Past 5 Years | |
| Frank A. Olson (1932) | Trustee | Since 2003 | 145 | Hess Corporation (exploration and | |
| 300 S.E. 2nd Street | refining of oil and gas) (1998-2013). | ||||
| Fort Lauderdale, FL 33301-1923 | |||||
| Principal Occupation During at Least the Past 5 Years: | |||||
| Director of various companies; and formerly, Chairman of the Board, The Hertz Corporation (car rental) (1980-2000) and Chief Executive | |||||
| Officer (1977-1999); and Chairman of the Board, President and Chief Executive Officer, UAL Corporation (airlines) (June-December 1987). | |||||
| Larry D. Thompson (1945) | Trustee | Since 2005 | 145 | The Southern Company (energy | |
| 300 S.E. 2nd Street | company) (2014-present; previously | ||||
| Fort Lauderdale, FL 33301-1923 | 2010-2012), Graham Holdings | ||||
| Company (education and media | |||||
| organization) (2011-present) and | |||||
| Cbeyond, Inc. (business | |||||
| communications provider) | |||||
| (2010-2012). | |||||
| Principal Occupation During at Least the Past 5 Years: | |||||
| Director of various companies; John A. Sibley Professor of Corporate and Business Law, University of Georgia School of Law (2015-present; | |||||
| previously 2011-2012); and formerly, Executive Vice President – Government Affairs, General Counsel and Corporate Secretary, PepsiCo, | |||||
| Inc. (consumer products) (2012-2014); Senior Vice President – Government Affairs, General Counsel and Secretary, PepsiCo, Inc. | |||||
| (2004-2011); Senior Fellow of The Brookings Institution (2003-2004); Visiting Professor, University of Georgia School of Law (2004); and | |||||
| Deputy Attorney General, U.S. Department of Justice (2001-2003). | |||||
| Constantine D. Tseretopoulos | Trustee | Since 1999 | 26 | None | |
| (1954) | |||||
| 300 S.E. 2nd Street | |||||
| Fort Lauderdale, FL 33301-1923 | |||||
| Principal Occupation During at Least the Past 5 Years: | |||||
| Physician, Chief of Staff, owner and operator of the Lyford Cay Hospital (1987-present); director of various nonprofit organizations; and | |||||
| formerly, Cardiology Fellow, University of Maryland (1985-1987); and Internal Medicine Resident, Greater Baltimore Medical Center | |||||
| (1982-1985). | |||||
| Robert E. Wade (1946) | Trustee | Since 2006 | 42 | El Oro Ltd (investments) | |
| 300 S.E. 2nd Street | (2003-present). | ||||
| Fort Lauderdale, FL 33301-1923 | |||||
| Principal Occupation During at Least the Past 5 Years: | |||||
| Attorney at law engaged in private practice (1972-2008) and member of various boards. | |||||
| Interested Board Members and Officers | |||||
| Number of Portfolios in | |||||
| Name, Year of Birth | Length of | Fund Complex Overseen | Other Directorships Held | ||
| and Address | Position | Time Served | by Board Member* | During at Least the Past 5 Years | |
| **Gregory E. Johnson (1961) | Trustee | Since 2007 | 161 | None | |
| One Franklin Parkway | |||||
| San Mateo, CA 94403-1906 | |||||
| Principal Occupation During at Least the Past 5 Years: | |||||
| Chairman of the Board, Member – Office of the Chairman, Director and Chief Executive Officer, Franklin Resources, Inc.; officer and/or | |||||
| director or trustee, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 44 of the investment companies in | |||||
| Franklin Templeton Investments; Vice Chairman, Investment Company Institute; and formerly, President, Franklin Resources, Inc. | |||||
| (1994-2015). | |||||
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| Interested Board Members and Officers (continued) | ||||
| Number of Portfolios in | ||||
| Name, Year of Birth | Length of | Fund Complex Overseen | Other Directorships Held | |
| and Address | Position | Time Served | by Board Member* | During at Least the Past 5 Years |
| **Rupert H. Johnson, Jr. (1940) | Chairman of | Chairman of the | 145 | None |
| One Franklin Parkway | the Board, | Board and Trustee | ||
| San Mateo, CA 94403-1906 | Trustee and | since 2013 and | ||
| Vice President | Vice President | |||
| since 1996 | ||||
| Principal Occupation During at Least the Past 5 Years: | ||||
| Vice Chairman, Member – Office of the Chairman and Director, Franklin Resources, Inc.; Director, Franklin Advisers, Inc.; Senior Vice | ||||
| President, Franklin Advisory Services, LLC; and officer and/or director or trustee, as the case may be, of some of the other subsidiaries of | ||||
| Franklin Resources, Inc. and of 42 of the investment companies in Franklin Templeton Investments. | ||||
| Alison E. Baur (1964) | Vice President | Since 2012 | Not Applicable | Not Applicable |
| One Franklin Parkway | ||||
| San Mateo, CA 94403-1906 | ||||
| Principal Occupation During at Least the Past 5 Years: | ||||
| Deputy General Counsel, Franklin Templeton Investments; and officer of some of the other subsidiaries of Franklin Resources, Inc. and of 45 | ||||
| of the investment companies in Franklin Templeton Investments. | ||||
| Laura F. Fergerson (1962) | Chief Executive Since 2009 | Not Applicable | Not Applicable | |
| One Franklin Parkway | Officer – | |||
| San Mateo, CA 94403-1906 | Finance and | |||
| Administration | ||||
| Principal Occupation During at Least the Past 5 Years: | ||||
| Senior Vice President, Franklin Templeton Services, LLC; Vice President, Franklin Advisers, Inc. and Franklin Templeton Institutional, LLC; and | ||||
| officer of 45 of the investment companies in Franklin Templeton Investments. | ||||
| Aliya S. Gordon (1973) | Vice President | Since 2009 | Not Applicable | Not Applicable |
| One Franklin Parkway | ||||
| San Mateo, CA 94403-1906 | ||||
| Principal Occupation During at Least the Past 5 Years: | ||||
| Senior Associate General Counsel, Franklin Templeton Investments; and officer of 45 of the investment companies in Franklin Templeton | ||||
| Investments. | ||||
| Steven J. Gray (1955) | Vice President | Since 2009 | Not Applicable | Not Applicable |
| One Franklin Parkway | ||||
| San Mateo, CA 94403-1906 | ||||
| Principal Occupation During at Least the Past 5 Years: | ||||
| Senior Associate General Counsel, Franklin Templeton Investments; Vice President, Franklin Templeton Distributors, Inc.; and Franklin | ||||
| Alternative Strategies Advisers, LLC; and officer of 45 of the investment companies in Franklin Templeton Investments. | ||||
| Robert Lim (1948) | Vice President | Since May 2016 | Not Applicable | Not Applicable |
| One Franklin Parkway | – AML | |||
| San Mateo, CA 94403-1906 | Compliance | |||
| Principal Occupation During at Least the Past 5 Years: | ||||
| Vice President, Franklin Templeton Companies, LLC; Chief Compliance Officer, Franklin Templeton Distributors, Inc. and Franklin Templeton | ||||
| Investor Services, LLC; and officer of 45 of the investment companies in Franklin Templeton Investments. | ||||
| Mark Mobius (1936) | President and | President since | Not Applicable | Not Applicable |
| 17th Floor, The Chater House | Chief Executive 1993 and Chief | |||
| 8 Connaught Road Central | Officer – | Executive Officer – | ||
| Hong Kong | Investment | Investment | ||
| Management | Management since | |||
| 2002 | ||||
| Principal Occupation During at Least the Past 5 Years: | ||||
| Portfolio Manager of various Templeton advisory affiliates; Executive Chairman, Templeton Emerging Markets Group; and officer and/or | ||||
| director, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of five of the investment companies in Franklin | ||||
| Templeton Investments. | ||||
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| Interested Board Members and Officers (continued) | ||||
| Number of Portfolios in | ||||
| Name, Year of Birth | Length of | Fund Complex Overseen | Other Directorships Held | |
| and Address | Position | Time Served | by Board Member* | During at Least the Past 5 Years |
| Kimberly H. Novotny (1972) | Vice President | Since 2013 | Not Applicable | Not Applicable |
| 300 S.E. 2nd Street | ||||
| Fort Lauderdale, FL 33301-1923 | ||||
| Principal Occupation During at Least the Past 5 Years: | ||||
| Associate General Counsel, Franklin Templeton Investments; Vice President and Corporate Secretary, Fiduciary Trust International of the | ||||
| South; Vice President, Templeton Investment Counsel, LLC; Assistant Secretary, Franklin Resources, Inc.; and officer of 45 of the investment | ||||
| companies in Franklin Templeton Investments. | ||||
| Mark H. Otani (1968) | Treasurer, Chief Since 2009 | Not Applicable | Not Applicable | |
| One Franklin Parkway | Financial | |||
| San Mateo, CA 94403-1906 | Officer | |||
| and Chief | ||||
| Accounting | ||||
| Officer | ||||
| Principal Occupation During at Least the Past 5 Years: | ||||
| Treasurer, U.S. Fund Administration & Reporting, Franklin Templeton Investments; and officer of 14 of the investment companies in Franklin | ||||
| Templeton Investments. | ||||
| Robert C. Rosselot (1960) | Chief | Since 2013 | Not Applicable | Not Applicable |
| 300 S.E. 2nd Street | Compliance | |||
| Fort Lauderdale, FL 33301-1923 | Officer | |||
| Principal Occupation During at Least the Past 5 Years: | ||||
| Director, Global Compliance, Franklin Templeton Investments; Vice President, Franklin Templeton Companies, LLC; officer of 45 of the | ||||
| investment companies in Franklin Templeton Investments; and formerly, Senior Associate General Counsel, Franklin Templeton Investments | ||||
| (2007-2013); and Secretary and Vice President, Templeton Group of Funds (2004-2013). | ||||
| Karen L. Skidmore (1952) | Vice President | Since 2009 | Not Applicable | Not Applicable |
| One Franklin Parkway | ||||
| San Mateo, CA 94403-1906 | ||||
| Principal Occupation During at Least the Past 5 Years: | ||||
| Senior Associate General Counsel, Franklin Templeton Investments; and officer of 45 of the investment companies in Franklin Templeton | ||||
| Investments. | ||||
| Navid J. Tofigh (1972) | Vice President | Since November | Not Applicable | Not Applicable |
| One Franklin Parkway | 2015 | |||
| San Mateo, CA 94403-1906 | ||||
| Principal Occupation During at Least the Past 5 Years: | ||||
| Associate General Counsel, Franklin Templeton Investments; and officer of 45 of the investment companies in Franklin Templeton Investments. | ||||
| Craig S. Tyle (1960) | Vice President | Since 2005 | Not Applicable | Not Applicable |
| One Franklin Parkway | ||||
| San Mateo, CA 94403-1906 | ||||
| Principal Occupation During at Least the Past 5 Years: | ||||
| General Counsel and Executive Vice President, Franklin Resources, Inc.; and officer of some of the other subsidiaries of Franklin Resources, | ||||
| Inc. and of 45 of the investment companies in Franklin Templeton Investments. | ||||
| Lori A. Weber (1964) | Secretary and | Secretary since | Not Applicable | Not Applicable |
| 300 S.E. 2nd Street | Vice President | 2013 and Vice | ||
| Fort Lauderdale, FL 33301-1923 | President since | |||
| 2011 | ||||
| Principal Occupation During at Least the Past 5 Years: | ||||
| Senior Associate General Counsel, Franklin Templeton Investments; Assistant Secretary, Franklin Resources, Inc.; Vice President and | ||||
| Secretary, Templeton Investment Counsel, LLC; and officer of 45 of the investment companies in Franklin Templeton Investments. | ||||
| *We base the number of portfolios on each separate series of the U.S. registered investment companies within the Franklin Templeton Investments fund complex. These | ||||
| portfolios have a common investment manager or affiliated investment managers. | ||||
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Interested Board Members and Officers (continued)
**Gregory E. Johnson is considered to be an interested person of the Fund under the federal securities laws due to his position as an officer and director ofFranklin Resources, Inc. (Resources), which is the parent company of the Fund’s investment manager and distributor. Rupert H. Johnson, Jr. is considered to be an interested person of the Fund under the federal securities laws due to his position as officer and director and major shareholder of Resources.
Note 1: Rupert H. Johnson, Jr. is the uncle of Gregory E. Johnson.
Note 2: Officer information is current as of the date of this report. It is possible that after this date, information about officers may change.
Note 3: Effective May 13, 2016, Frank J. Crothers ceased to be a trustee of the Trust.
The Sarbanes-Oxley Act of 2002 and Rules adopted by the U.S. Securities and Exchange Commission require the Fund to disclose whether the Fund’s Audit Committee includes at least one member who is an audit committee financial expert within the meaning of such Act and Rules. The Fund’s Board has determined that there is at least one such financial expert on the Audit Committee and has designated each of Ann Torre Bates and David W. Niemiec as an audit committee financial expert. The Board believes that Ms. Bates and Mr. Niemiec qualify as such an expert in view of their extensive business background and experience. Ms. Bates has served as a member of the Fund Audit Committee since 2008. She currently serves as a director of Ares Capital Corporation (2010-present) and United Natural Foods, Inc. (2013-present) and was formerly a director of Navient Corporation from 2014 to 2016, SLM Corporation from 1997 to 2014 and Allied Capital Corporation from 2003 to 2010, Executive Vice President and Chief Financial Officer of NHP Incorporated from 1995 to 1997 and Vice President and Treasurer of US Airways, Inc. until 1995. Mr. Niemiec has served as a member of the Fund Audit Committee since 2005, currently serves as an Advisor to Saratoga Partners and was formerly its Managing Director from 1998 to 2001. Mr. Niemiec was formerly a director of Emeritus Corporation from 1999 to 2010 and OSI Pharmaceuticals, Inc. from 2006 to 2010, Managing Director of SBC Warburg Dillon Read from 1997 to 1998, and was Vice Chairman from 1991 to 1997 and Chief Financial Officer from 1982 to 1997 of Dillon, Read & Co. Inc. As a result of such background and experience, the Board believes that Ms. Bates and Mr. Niemiec have each acquired an understanding of generally accepted accounting principles and financial statements, the general application of such principles in connection with the accounting estimates, accruals and reserves, and analyzing and evaluating financial statements that present a breadth and level of complexity of accounting issues generally comparable to those of the Fund, as well as an understanding of internal controls and procedures for financial reporting and an understanding of audit committee functions. Ms. Bates and Mr. Niemiec are independent Board members as that term is defined under the applicable U.S. Securities and Exchange Commission Rules and Releases.
The Statement of Additional Information (SAI) includes additional information about the board members and is available, without charge, upon request.
Shareholders may call (800) DIAL BEN/342-5236 to request the SAI.
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Shareholder Information
Board Review of Investment Management Agreement
At a meeting held May 17, 2016, the Board of Trustees (Board), including a majority of trustees that are not “interested persons” as such term is defined in section 2(a)(19) of the Investment Company Act of 1940 (hereinafter referred to as “non-interested Trustees” or “independent Trustees”), approved renewal of the investment management agreement for the Fund. In reaching this decision, the Board took into account information furnished throughout the year at regular Board meetings, as well as information prepared specifically in connection with the annual renewal review process. Information furnished and discussed throughout the year included investment performance reports and related financial information for the Fund, along with periodic reports on expenses, shareholder services, legal and compliance matters, pricing, brokerage commissions and execution and other services provided by the Investment Manager (Manager) and its affiliates, as well as marketing support payments made to financial intermediaries. Information furnished specifically in connection with the renewal process included a report for the Fund prepared by Broadridge Financial Solutions, Inc. (Broadridge), an independent organization, as well as additional material, including a Fund profitability analysis prepared by management. The Broadridge report, which used utilized data from Lipper Inc. (Lipper), compared the Fund’s investment performance and expenses with those of other mutual funds deemed comparable to the Fund as selected by Lipper. The Fund profitability analysis discussed the profitability to Franklin Templeton Investments (FTI) from its overall U.S. fund operations, as well as on an individual fund-by-fund basis. Additional material accompanying such profitability analysis included information on a fund-by-fund basis listing portfolio managers and other accounts they manage, as well as information on management fees charged by the Manager and its affiliates to U.S. mutual funds and other accounts, including management’s explanation of differences where relevant. Such material also included a memorandum prepared by management describing project initiatives and capital investments relating to the services provided to the Fund by the FTI organization, as well as a memorandum relating to economies of scale and an analysis concerning transfer agent fees charged by an affiliate of the Manager. The Board also received a report on all marketing support payments made by FTI to financial intermediaries during the past year, as well as a memorandum relating to third-party servicing arrangements in response to a Guidance Update from the U.S. Securities and
Exchange Commission (SEC) relating to mutual fund distribution and sub-accounting fees.
In considering such materials, the independent Trustees received assistance and advice from and met separately with independent counsel. In approving continuance of the investment management agreement for the Fund, the Board, including a majority of independent Trustees, determined that the existing management fee structure was fair and reasonable and that continuance of the investment management agreement was in the best interests of such Fund and its shareholders. While attention was given to all information furnished, the following discusses some primary factors relevant to the Board’s decision.
NATURE, EXTENT AND QUALITY OF SERVICES. The Board was satisfied with the nature and quality of the overall services provided by the Manager and its affiliates to the Fund and its shareholders. In addition to investment performance and expenses discussed later, the Board’s opinion was based, in part, upon periodic reports furnished showing that the investment policies and restrictions for the Fund were consistently complied with as well as other reports periodically furnished to the Board covering matters such as the compliance of portfolio managers and other management personnel with the code of ethics adopted throughout the Franklin Templeton fund complex, the adherence to fair value pricing procedures established by the Board, and the accuracy of net asset value calculations. The Board also noted the extent of benefits provided to Fund shareholders from being part of the Franklin Templeton family of funds, including the right to exchange investments between the same class of shares of different funds without a sales charge, the ability to reinvest Fund dividends into other funds and the right to combine holdings in other funds to obtain a reduced sales charge. Favorable consideration was given to management’s continual efforts and expenditures in establishing effective business continuity plans and developing strategies to address cybersecurity threats. Among other factors taken into account by the Board were the Manager’s best execution trading policies, including a favorable report by an independent portfolio trading analytical firm that also covered global foreign exchange transactions. Consideration was also given to the experience of the Fund’s portfolio management team, the number of accounts managed and general method of compensation. In this latter respect, the Board noted that a primary factor in management’s determination of a portfolio manager’s bonus compensation was the relative investment performance of the funds he or she managed and that a portion of such bonus was required to be
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invested in a pre-designated list of funds within such person’s fund management area so as to be aligned with the interests of shareholders. The Board also took into account the quality of transfer agent and shareholder services provided to Fund shareholders by an affiliate of the Manager and steps taken by FTI to enhance analytical support to the investment management groups and provide additional oversight of liquidity risk and complex securities. The Board also took into account, among other things, management’s efforts in establishing a global credit facility for the benefit of the Fund and other accounts managed by FTI to provide a source of cash for temporary and emergency purposes or to meet unusual redemption requests as well as the strong financial position of the Manager’s parent company and its commitment to the mutual fund business as evidenced by its continued introduction of new funds and reassessment of the fund offerings in response to the market environment.
INVESTMENT PERFORMANCE. The Board placed significant emphasis on the investment performance of the Fund in view of its importance to shareholders. While consideration was given to performance reports and discussions with portfolio managers at Board meetings during the year, particular attention in assessing performance was given to the Broadridge report furnished for the agreement renewal. The Broadridge report showed the performance of the Fund’s Class A shares for the one-year period ended February 29, 2016, as well as the previous 10 years ended such date in comparison with a performance universe consisting of the Fund and all retail and institutional China region funds as selected by Lipper. The Broadridge report showed the Fund’s total return for the one-year period to be in the second-lowest performing quintile of such performance universe, and on an annualized basis to be in the lowest or worst performing quintile of such universe for the previous three- and five-year periods, and the second-lowest performing quintile of such universe for the previous 10-year period. The Board discussed with management the reasons for the Fund’s underperformance. The portfolio managers cited the Fund’s sector weightings and overall value approach to investing as significant contributors to underperformance. While the Board was not satisfied with the Fund’s performance, it recognized management’s continued focus on the investment process and portfolio management resources and for these reasons, determined no action was necessary at this time.
COMPARATIVE EXPENSES. Consideration was given to a Broadridge report analysis of the management fee and total expense ratio of the Fund compared with those of a group of
other funds selected by Lipper as its appropriate Lipper expense group. Lipper expense data is based upon information taken from each fund’s most recent annual report, which reflects historical asset levels that may be quite different from those currently existing, particularly in a period of market volatility. While recognizing such inherent limitation and the fact that expense ratios generally increase as assets decline and decrease as assets grow, the Board believed the independent analysis conducted by Lipper to be an appropriate measure of comparative expenses. In reviewing comparative costs, Lipper provides information on the Fund’s contractual investment management fee in comparison with the contractual investment management fee that would have been charged by other funds within its Lipper expense group assuming they were similar in size to the Fund, as well as the actual total expenses of the Fund in comparison with those of its Lipper expense group. The Lipper contractual investment management fee analysis includes administrative charges as being part of a management fee, and actual total expenses, for comparative consistency, are shown by Lipper for Fund Class A shares. The Lipper expense group comprised six funds, including the Fund, and the expense comparisons showed the Fund’s contractual investment management fee rate to be the second-highest of such expense group, and its actual total expense ratio to be the third-highest in such expense group, but the actual total expense ratio to be within less than six basis points of its median. The Board found such expenses to be acceptable in view of cost factors relating to the Fund’s operations, such as the quality and experience of its portfolio managers and research staff, and the depth of the Manager’s physical presence and coverage in the geographical area in which the Fund invests.
MANAGEMENT PROFITABILITY. The Board also considered the level of profits realized by the Manager and its affiliates in connection with the operation of the Fund. In this respect, the Board reviewed the Fund profitability analysis that addresses the overall profitability of Franklin Templeton’s U.S. fund business, as well as its profits in providing management and other services to each of the individual funds during the 12-month period ended September 30, 2015, being the most recent fiscal year-end for Franklin Resources, Inc., the Manager’s parent. In reviewing the analysis, the Board recognized that allocation methodologies are inherently subjective and various allocation methodologies may be reasonable while producing different results. In this respect, the Board noted that while management continually makes refinements to its methodologies in response to organizational and product related changes, the overall approach as defined by the primary drivers and activity measurements has remained
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SHAREHOLDER INFORMATION
consistent with that used in the Fund’s profitability report presentations from prior years. Additionally, the Fund’s independent registered public accounting firm had been engaged by the Manager to periodically review the reasonableness of the allocation methodologies to be used solely by the Fund’s Board in reference to the profitability analysis. In reviewing and discussing such analysis, management discussed with the Board its belief that costs incurred in establishing the infrastructure necessary for the type of mutual fund operations conducted by the Manager and its affiliates may not be fully reflected in the expenses allocated to the Fund in determining its profitability, as well as the fact that the level of profits, to a certain extent, reflected operational cost savings and efficiencies initiated by management. The Board also took into account management’s expenditures in improving shareholder services provided to the Fund, as well as the need to implement systems and meet additional regulatory and compliance requirements resulting from statutes such as the Sarbanes-Oxley Act of 2002 and Dodd-Frank Wall Street Reform and Consumer Protection Act and recent SEC and other regulatory requirements. In addition, the Board considered a third-party study comparing the profitability of the Manager’s parent on an overall basis to other publicly held managers broken down to show profitability from management operations exclusive of distribution expenses, as well as profitability including distribution expenses. The Board also considered the extent to which the Manager and its affiliates might derive ancillary benefits from fund operations, including revenues generated from transfer agent services and potential benefits resulting from personnel and systems enhancements necessitated by fund growth, increased leverage with the service providers and counterparties, allocation of fund brokerage and the use of commission dollars to pay for research. Based upon its consideration of all these factors, the Board determined that the level of profits realized by the Manager and its affiliates from providing services to the Fund was not excessive in view of the nature, quality and extent of services provided.
ECONOMIES OF SCALE. The Board also considered whether the Manager realizes economies of scale as the Fund grows larger and the extent to which any such benefit is shared with the Fund and its shareholders. While recognizing that any precise determination is inherently subjective, the Board noted that based upon the Fund profitability analysis, it appears that as some funds get larger, at some point economies of scale do result in the Manager realizing a larger profit margin on management services provided to such a fund. The Fund’s current investment management advisory fee schedule provides a rate of 1.30% on the first $1 billion of net assets; 1.25% on the next $4 billion of net assets; 1.20% on the next $5 billion of net assets; 1.15% on the next $5 billion of net assets; 1.10% on the next $5 billion of net assets; and 1.05% on net assets in excess of $20 billion. At December 31, 2015, the Fund had net assets of approximately $338 million, representing a significant decrease in assets from the prior year. As a result, the Manager of this Fund are not expected to realize additional economies of scale. However, to the extent economies of scale may be realized from future growth of the Fund, the Board believed the schedule of management fees provides a sharing of benefits with the Fund and its shareholders.
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, 300 S.E. 2nd Street, Fort Lauderdale, FL 33301, 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.
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
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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.
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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. A prospectus contains this and other information; please read it carefully before investing.
To help ensure we provide you with quality service, all calls to and from our service areas are monitored and/or recorded.
© 2016 Franklin Templeton Investments. All rights reserved. 188 A 10/16
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.
(a) Audit Fees
The aggregate fees paid to the principal accountant for professional services rendered by the principal accountant for the audit of the registrant’s annual financial statements or for services that are normally provided by the principal accountant in connection with statutory and regulatory filings or engagements were $45,097 for the fiscal year ended August 31, 2016 and $46,282 for the fiscal year ended August 31, 2015.
(b) Audit-Related Fees
There were no fees paid to the principal accountant for assurance and related services rendered by the principal accountant to the registrant that are reasonably related to the performance of the audit of the registrant's financial statements and are not reported under paragraph (a) of Item 4.
There were no fees paid to the principal accountant for assurance and related services rendered by the principal accountant to the registrant's investment adviser and any entity controlling, controlled by or under common control with the investment adviser that provides ongoing services to the registrant that are reasonably related to the performance of the audit of their financial statements.
(c) Tax Fees
There were no fees paid to the principal accountant for professional services rendered by the principal accountant to the registrant for tax compliance, tax advice and tax planning.
There were no fees paid to the principal accountant for professional services rendered by the principal accountant to the registrant’s investment adviser and any entity controlling, controlled by or under common control with the investment adviser that provides ongoing services to the registrant for tax compliance, tax advice and tax planning.
(d) All Other Fees
The aggregate fees paid to the principal accountant for products and services rendered by the principal accountant to the registrant, other than the services reported in paragraphs (a)-(c) of Item 4 were $0 for the fiscal year ended August 31, 2016 and $107 for the fiscal year ended August 31, 2015. The services for which these fees were paid included review of materials provided to the fund Board in connection with the investment management contract renewal process.
The aggregate fees paid to the principal accountant for products and services rendered by the principal accountant to the registrant’s investment adviser and any entity controlling, controlled by or under common control with the investment adviser that provides ongoing services to the registrant, other than the services reported in paragraphs (a)-(c) of Item 4 were $0 for the fiscal year ended August 31, 2016 and $9,000 for the fiscal year ended August 31, 2015. The services for which these fees were paid included preparation and review of materials provided to the fund Board in connection with the investment management contract renewal process and certifying assets under management.
(e) (1) The registrant’s audit committee is directly responsible for approving the services to be provided by the auditors, including:
(i) pre-approval of all audit and audit related services;
(ii) pre-approval of all non-audit related services to be provided to the Fund by the auditors;
(iii) pre-approval of all non-audit related services to be provided to the registrant by the auditors to the registrant’s investment adviser or to any entity that controls, is controlled by or is under common control with the registrant’s investment adviser and that provides ongoing services to the registrant where the non-audit services relate directly to the operations or financial reporting of the registrant; and
(iv) establishment by the audit committee, if deemed necessary or appropriate, as an alternative to committee pre-approval of services to be provided by the auditors, as required by paragraphs (ii) and (iii) above, of policies and procedures to permit such services to be pre-approved by other means, such as through establishment of guidelines or by action of a designated member or members of the committee; provided the policies and procedures are detailed as to the particular service and the committee is informed of each service and such policies and procedures do not include delegation of audit committee responsibilities, as contemplated under the Securities Exchange Act of 1934, to management; subject, in the case of (ii) through (iv), to any waivers, exceptions or exemptions that may be available under applicable law or rules.
(e) (2) None of the services provided to the registrant described in paragraphs (b)-(d) of Item 4 were approved by the audit committee pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of regulation S-X.
(f) No disclosures are required by this Item 4(f).
(g) The aggregate non-audit fees paid to the principal accountant for services rendered by the principal accountant to the registrant and the registrant’s investment adviser and any entity controlling, controlled by or under common control with the investment adviser that provides ongoing services to the registrant were $0 for the fiscal year ended August 31, 2016 and $9,107 for the fiscal year ended August 31, 2015.
(h) The registrant’s audit committee of the board has considered whether the provision of non-audit services that were rendered to the registrant’s investment adviser (not including any sub-adviser whose role is primarily portfolio management and is subcontracted with or overseen by another investment adviser), and any entity controlling, controlled by, or under common control with the investment adviser that provides ongoing services to the registrant that were not pre-approved pursuant to paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X is compatible with maintaining the principal accountant’s independence.
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 changes in the Registrant’s internal controls or in other factors that could materially affect the internal controls over financial reporting 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 CHINA WORLD FUND
By /s/Laura F. Fergerson
Laura F. Fergerson
Chief Executive Officer - Finance and
Administration
Date: October 26, 2016
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: October 26, 2016
By /s/Mark H. Otani
Mark H. Otani
Chief Financial Officer and
Chief Accounting Officer
Date: October 26, 2016