Missed Opportunities Amongst UK Small and Mid-Cap Stocks

Missed Opportunities Amongst UK Small and Mid-Cap Stocks June 2013 Paul Spencer Vice President, Fund Manager Franklin Templeton Fund Management Limited

1 The Numis Smaller Companies Index Formerly the Hoare Govett Smaller Companies Index Bottom 10% of the Main UK Listed Market by Value (rebalanced annually) 80% FTSE 250, 15% FTSE Small Cap and 5% Others c.400 Companies (excluding investment trusts) 1.5bn Largest Market Cap (as at 31 December 2012 cut-off point) Source: Franklin Templeton Investments as of 31/03/13.

2 Numis Smaller Companies Index Sector Breakdown Sector NSCI Index (%) Industrials 27.65% Consumer Services 24.57% Financials 18.19% Consumer Goods 7.10% Basic Materials 6.17% Technology 5.72% Oil & Gas 5.02% Healthcare 2.99% Telecommunications 2.14% Utilities 0.45% Sector FTSE 100 Index (%) Financials 20.26% Oil & Gas 17.43% Consumer Goods 15.85% Consumer Services 8.88% Basic Materials 8.80% Healthcare 8.65% Industrials 7.30% Telecommunications 7.26% Utilities 4.49% Technology 1.09% Source: Franklin Templeton Investments as of 30/04/13.

3 Key Sector Differences Sub Sector FTSE 100 (%) NSCI Index (%) Oil & Gas Producers 16.9 3.4 Banks 13.9 0.3 Mining 8.3 2.3 Pharmaceuticals & Biotechnology 8.3 2.0 Mobile Telecommunications 5.9 0.0 Total 53.3% 8.0% Support Services 3.2 15.6 Travel & Leisure 2.4 11.1 General Retailers 1.3 8.1 Financial Services 0.7 7.8 Real Estate Investment Trusts 0.0 4.2 Total 7.6% 46.8% Source: Franklin Templeton Investments as at 30/04/13.

Performance in GBP (rebased to 100) MISSED OPPORTUNITIES AMONGST UK SMALL AND MID-CAP STOCKS 4 NSCI Absolute 10 year Return Performance 450 400 350 300 250 200 150 100 50 0 Apr-03 Apr-04 Apr-05 Apr-06 Apr-07 Apr-08 Apr-09 Apr-10 Apr-11 Apr-12 Apr-13 NCSX EXCl. Investment Trusts TR Index Source: Franklin Templeton Investments as of 30/04/13.

Performance in GBP (rebased to 100) MISSED OPPORTUNITIES AMONGST UK SMALL AND MID-CAP STOCKS 5 NSCI vs. FTSE 100 Relative performance over 10 years 450 400 350 300 250 200 150 100 50 0 Apr-03 Apr-04 Apr-05 Apr-06 Apr-07 Apr-08 Apr-09 Apr-10 Apr-11 Apr-12 Apr-13 NCSX Ex Investment Trusts TR Index FTSE 100 TR Index Source: Franklin Templeton Investments as of 30/04/13.

Cumulative Return GBP MISSED OPPORTUNITIES AMONGST UK SMALL AND MID-CAP STOCKS 6 Superior Performance IMA Asset Class Performance 10 Years 450 400 350 300 250 200 150 100 50 0 Source: Franklin Templeton Investments as at 30/04/13.

Jan-98 Aug-98 Mar-99 Oct-99 May-00 Dec-00 Jul-01 Feb-02 Sep-02 Apr-03 Nov-03 Jun-04 Jan-05 Aug-05 Mar-06 Oct-06 May-07 Dec-07 Jul-08 Feb-09 Sep-09 Apr-10 Nov-10 Jun-11 Jan-12 Aug-12 Mar-13 Funds Under Management in the IMA UK Smaller Companies Sector ( bn) MISSED OPPORTUNITIES AMONGST UK SMALL AND MID-CAP STOCKS 7 Under-Owned Shrinking Asset Class 16 16,000 14 12 10 8 6 4 2 14,000 12,000 10,000 8,000 6,000 4,000 2,000 Market price of the FTSE 250 PR Index 0 0 FUM bn FTSE 250 Ex Investment Trust PR GBP Source: IMA and Franklin Templeton Investments as at 31/03/13.

8 De-equitisation in Small Caps Number of constituents in the Numis Smaller Companies Index 1300 1255 1271 1263 1100 1085 1024 945 900 700 500 858 731 662 583 506 509 495 448 430 422 389 811 300 100-100 Start year 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 155 100 Start year constituents Cumulative loss: net transfers to AIM Cumulative loss: deaths less IPOs Cumulative gain: change in cutoff Source: Numis as at 16/01/13.

9 Small Caps are Under-Researched Average Analyst Coverage 35 30 29 25 25 20 18 15 12 10 5 7 5 3 2 0 10bn+ 5bn- 10bn 1bn- 5bn 500m- 1bn 250m- 500m 100m- 250m 50m- 100m 25m- 50m Market cap bands Source: Bloomberg as at 30/04/13.

Average 12m Forward P/E MISSED OPPORTUNITIES AMONGST UK SMALL AND MID-CAP STOCKS 10 Valuation Market P/Es by Market Cap Band 18 16 FTSE 100 FTSE 250 FTSE Small Cap 14 12 10 8 6 4 2 0 Average Free Float ( m) Source: Bloomberg as at 31/03/13.

11 Case Study Xaar PLC Xaar is the global independent market leader in the manufacture of industrial digital inkjet printheads. Strong industry position in a structural growth market as global customers transition from analogue to digital printing. Rapid adoption of digital inkjet printing by Chinese ceramic manufacturers is driving strong earnings growth. Technological advantage over competition due to Research and Development investment. Strong financials. Strong cash flow and net cash on the balance sheet. Valuation failed to reflect the strong sales and earnings outlook.

12 Case Study Topps Tiles PLC The UK s Leading independent tile retailer with over 320 stores nationwide. Well managed during a difficult market environment taking their market share to 27%. An increase in UK housing transactions will be a catalyst for increased tile demand. Well invested store base and high operational gearing will translate into strong earnings growth. Valuation failed to reflect this profit recovery potential.

13 The Opportunity Large investment universe c.330 stocks in NSCi (210) & AIM (110) with mkt cap between 100m- 1bn Diverse geographical and industry exposure High growth companies Strong balance sheets Rating anomalies Source: Franklin Templeton Investments as at 28/02/13.

Appendix

15 Franklin UK Mid Cap Fund Fund Details Management Asset Category Investment Style IMA sector Benchmark Missed opportunities amongst Paul Spencer UK small and mid-cap stocks UK Equity Launch Date* 17/10/2011 Number of Positions 41 Portfolio Size 780 million Blend UK All Companies FTSE 250 Ex Investment Trust Index * The Franklin UK Mid Cap Fund launched on 17 October 2011 to receive the assets of the Rensburg UK Mid Cap Growth Trust, a unit trust, launched on 12/07/1999. Source: Franklin Templeton Investments as at 30/04/13. Copyright 2013 Rayner Spencer Mills. All rights reserved. Morningstar, Inc. All rights reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information.

16 Franklin UK Mid Cap Fund Performance 1 Year 3 Years 5 Years 10 Years Franklin UK Mid Cap Fund A (inc) 23.44% 59.13% 94.68% 465.30% FTSE 250 Ex Investment Trust Index 27.34% 49.55% 66.85% 342.86% IMA UK All Companies Sector 18.14% 32.47% 31.77% 145.25% Quartile 1 1 1 1 Source: Franklin Templeton Investments and Morningstar as at 30/04/13. 2013 Morningstar, Inc. All rights reserved. Performance details provided are in GBP, include the reinvested dividends net of basic rate UK tax and are net of management fees. The Franklin UK Mid Cap Fund launched on 17/10/11 to receive the assets of Rensburg UK Mid Cap Growth Trust, a unit trust. Fund performance data is based on the mid price of the Rensburg UK Mid Cap Growth Trust from its launch on 12/07/1999 to 30/09/2011 and the net asset value of the Franklin UK Mid Cap Fund A(inc) shares thereafter. Past performance is no guarantee of future performance.

17 Franklin UK Smaller Companies Fund Fund Details Management Asset Category Investment Style IMA sector Benchmark Paul Spencer, Richard Bullas UK Equity Blend IMA UK Smaller Companies Numis Smaller Companies Ex. Investment Trusts TR Index Launch Date 17/10/2011 Number of Positions 40 Portfolio Size 22.32 million Source: Franklin Templeton Investments, as at 30/04/13. The Franklin UK Smaller Companies Fund launched on 17 October 2011 to receive the assets of Rensburg UK Smaller Companies Trust, a unit trust.

18 Franklin UK Smaller Companies Fund Performance Franklin UK Smaller Companies Fund A (inc) Numis Smaller Companies Ex. Investment Trusts Index IMA UK Smaller Companies Sector Average 1 Month 3 Months 6 Months Since Restructure* 1 Year 3 Years 5 Years 1.90% 9.15% 18.19% 26.78% 11.72% 24.19% 2.81% -0.19% 6.60% 16.77% 24.03% 24.30% 51.76% 70.62% -0.18% 5.03% 13.13% 19.42% 17.89% 49.56% 52.82% Quartile 1 1 1 1 4 4 4 Past performance does not guarantee future results. Highlighted data shows performance of the Fund since restructuring ended on 1 September 2012. Source: Franklin Templeton Investments and Morningstar as at 30/04/13. 2013 Morningstar, Inc. All rights reserved. Performance details provided are in GBP, include the reinvested dividends net of basic rate UK tax and are net of management fees. The Franklin UK Smaller Companies Fund launched on 17 October 2011 to receive the assets of Rensburg UK Smaller Companies Trust, a unit trust. All fund performance data is based on the mid price of the Rensburg UK Smaller Companies Trust from its launch on 01/07/1991 to 30/09/2011 and the net asset value of the Franklin UK Smaller Companies Fund A(inc) shares thereafter. The Fund offers other share classes subject to different fees and expenses, which will affect their performance. Please see the prospectus for details.

19 Important Information For professional investor use only, this document is not aimed at, nor intended for use by retail investors. Copyright 2013 Franklin Templeton Investments. All rights reserved. This document is intended to be of general interest only and does not constitute legal or tax advice nor is it an offer for shares or invitation to apply for shares of the UK-domiciled OEIC, Franklin Templeton Funds OEIC ( the Fund ). Nothing in this document should be construed as investment advice. Subscriptions to shares of the Fund can only be made on the basis of the current prospectus, the relevant Key Investor Information Document, accompanied by the latest available audited annual report and the latest semi-annual report if published thereafter, which can be found on our website or requested from the address below. An investment in the Fund entails risks which are described in the Fund s prospectus and the relevant Key Investor Information Document. The value of shares in the Fund and income received from it can go down as well as up, and investors may not get back the full amount invested. Currency fluctuations may affect the value of overseas investment. An investment in the Fund entails risks which are described in the Fund s prospectus and in the relevant Key Investor Information Document. The Fund invests in a specific sector or geographical area and the returns may be more volatile than a more diversified fund. No shares of the Fund may be directly or indirectly offered or sold to nationals or residents of the United States of America. Shares of the Fund are not available for distribution in all jurisdictions and prospective investors should confirm availability with their local Franklin Templeton Investments representative before making any plans to invest. Opinions expressed are the author's at publication date and they are subject to change without prior notice. Performance details provided are in GBP, include the reinvested dividends net of basic rate UK tax and are net of management fees.. Past performance is no guarantee of future performance. 2013 Morningstar, Inc. All rights reserved. The information contained herein: (1) is proprietary to Morningstar; (2) may not be copied or distributed; an (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. References to indices are made for comparative purposes only and are provided to represent the investment environment existing during the time periods shown. An index is unmanaged and one cannot invest directly in an index. The performance of the index does not include the deduction of expenses and does not represent the performance of any Franklin Templeton Group fund. For a free copy of the latest prospectus, and the relevant Key Investor Information Document, the annual report and semi-annual report, if published thereafter or for more information about any Franklin Templeton Investments fund, please contact: Franklin Templeton Investments, Telephone: 0800 305 306, Email: enquiries@franklintempleton.co.uk or write to us at the address below. Issued by Franklin Templeton Investment Management Limited (FTIML) Registered office: The Adelphi, 1-11 John Adam Street, London WC2N 6HT. FTIML is authorised and regulated by the Financial Conduct Authority.