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Dealer Use Only / Not for Distribution to the Public
Franklin Templeton Fixed Income
Michael B. ReedVice PresidentInstitutional Portfolio ManagerFranklin Templeton Fixed Income Group®
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Table of Contents
This presentation is provided by Franklin Templeton Institutional for informational purposes only. This information is considered proprietary and shall be treated as confidential. It shall not be distributed or otherwise communicated to third parties. While every effort has been made to ensure the accuracy of the information contained within these materials, we do not guarantee such accuracy. Information provided in this presentation is as of September 30, 2012, unless otherwise indicated.© 2012 Franklin Templeton Investments. All rights reserved. 2
• Firm and Investment Platform Overview
• Investment Teams and Process
• Strategic Overview and Performance
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Investment Platform Overview
Source: Franklin Templeton Investments (FTI), as of September 30, 2012, unless otherwise noted. Assets under management (AUM) combines the U.S. and non-U.S. AUM of the investment management subsidiaries of the parent company, Franklin Resources, Inc. [NYSE: BEN], a global investment organization operating as Franklin Templeton Investments. AUM includes discretionary and advisory accounts, including pooled investment vehicles, separate accounts and other vehicles, as well as some accounts that may not be eligible for inclusion in composites as defined by the firm’s policies. AUM may also include advisory accounts with or without trading authority. In addition, the Firm may provide asset allocation advisory services, and if the assets are not allocated to FTI products, then the assets are not included in AUM. Numbers may not equal 100% due to rounding. Please note that the table above does not include all affiliates under FTI.Franklin Templeton Multi-Asset Strategies (FTMAS) AUM as of September 30, 2012. FTMAS invests in various Franklin Templeton Investments and external investment platforms; AUM for FTMAS is reported under each utilized investment platform, as well as for FTMAS.Each local asset manager may be considered as an entity affiliated with or associated to Franklin Templeton Investments by virtue of being wholly-owned subsidiaries, or other entities or joint ventures in which Franklin Resources, Inc., owns a partial interest, which may be a minority interest. Local asset management AUM includes AUM for Franklin Templeton Investments (ME) Limited and Balanced Equity Management Pty. Limited. Franklin Templeton Investments (ME) Limited and Balanced Equity Management Pty. Limited are both indirect wholly-owned subsidiaries of Franklin Resources, Inc.
For firms claiming compliance with the Global Investment Performance Standards (GIPS®), figures for the assets under management above may not correspond to the assets under management as defined by GIPS®. For GIPS® purposes, Franklin Equity Group and Franklin Templeton Fixed Income Group are both units of the firm Franklin; Templeton Emerging Markets Group and Templeton Global Equity Group are both units of the firm Templeton.
Please refer to the “Important Disclosures” slide for additional information.
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Franklin Templeton Investments offers a full range of investment capabilities from a breadth of investment management platforms.
FRANKLIN TEMPLETON INVESTMENTSTotal Combined Assets Under Management (AUM) : US$749.9 Billion
Institutional AUM : US$165.2 BillionSingle Business Development, Relationship Management, and Consultant Relations Platform
EQUITY FIXED INCOME SPECIALIZED STRATEGIES
Franklin Equity Group
Templeton Emerging
Markets GroupTempleton Global
Equity Group Mutual Series
Franklin Templeton Fixed
Income Group
Franklin Templeton Local
Asset Management
Franklin Templeton Real Asset Advisors Darby
Franklin Templeton Multi-Asset Strategies
Established 1947 1987 1940 1949 1970 1993 1984 1994 1982
Focus U.S. Equity
Global Equity
International Equity
Emerging Markets Equity
Global Equity
International Equity
Global Equity
International Equity
U.S. Equity
Distressed Debt & Merger Arbitrage
Global Fixed Income
Regional Fixed Income
Emerging Market Debt
Global Equity and Fixed Income
Regional Equity and Fixed Income
Single-Country Equity and Fixed Income
Global Private Real Estate
Global Listed Real Estate Securities
Global Private Infrastructure and Real Resources
Emerging Markets Private Equity & Mezzanine Finance
Infrastructure
Multi-Asset
Fund-of-Funds Strategies
Global Tactical Asset Allocation
Style Growth, Value, Core/Hybrid
Core Value Core Value Deep Value Single Sector, Multi-Sector
Multi-Sector, Single-or Multi-Region
Multi-Sector, Multi-Region
Multi-Sector Multi-Style
AUM US$144.1 Billion US$48.2 Billion US$100.7 Billion US$58.8 Billion US$334.7 Billion US$41.5 Billion US$4.2 Billion US$1.5 Billion US$27.4 Billion
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Representative Client List1
Foundations and EndowmentsAlbert Einstein Medical CenterBaptist Community MinistriesBuena Vista UniversityCommunity of ChristDallas Museum of ArtGeorge SchoolGirl Scouts of the USAIndiana University FoundationJewish Community Foundation
of MetrowestUniversity of Florida FoundationUniversity of ToledoWashington UniversityWestern Michigan University
Public Funds (continued)Public FundsArizona State Retirement SystemCalifornia State Teachers’ Retirement
System (CalSTRS)City of Fort LauderdaleCity of StamfordCity of St. PetersburgCommonwealth of Pennsylvania SERSDenver Employees Retirement SystemEast Bay Municipal Utility District
Employees’ Retirement SystemIllinois State Board of InvestmentImperial County Employees’
Retirement SystemKansas Public Employee Retirement SystemLeominster (MA) Contributory
Retirement SystemLos Angeles City Employees’
Retirement SystemMaryland State Retirement AgencyNevada Public Employees’
Retirement SystemNew Mexico Public Employees
Retirement SystemNew York State Common Retirement FundOhio Police and Fire Pension FundOhio Public Employees Retirement SystemOrange County Employees
Retirement SystemPensacola (FL) General Pension and
Retirement Fund Sioux Falls Employee Retirement SystemSonoma County Employees’
Retirement System
State Board Administration of FloridaTeachers’ Retirement System of the
State of IllinoisThe City of Jacksonville General
Employees’ Pension Plan
CorporateAmerican AirlinesAmerican Bible Society American Electric PowerArmy & Air Force Exchange ServiceCarolinas HealthCare SystemCisco System, Inc.Cooperative BanksCurtiss-Wright CorporationDel Monte CorporationDeluxe CorporationHackensack University Medical CenterHewlett PackardKinder Morgan, Inc.Minnesota LifeNewell Rubbermaid, Inc.OfficeMax, Inc. ProHealth Care, Inc.ProMedica Health System, Inc.Providence Health SystemRio Tinto Alcan Saint-Gobain CorporationSequa CorporationSisters of Charity of Leavenworth
Health SystemThe Linde GroupThe Methodist Hospital
Corporate (continued)The Woodlawn CemeteryTime Warner Cable, Inc.Universal CorporationWellmark
Taft-HartleyAlaska Plumbing & Pipefitting Boilermakers National Annuity
TrustHeating, Piping and Refrigeration
Pension Fund (Steamfitters Local #602)
HRSA-ILA Pension PlanLocal 152 PensionSouthern California United Food
& Commercial WorkersWashington Meat Industry
Sub-AdvisedAmerican Beacon FundsLincoln LifeNorthwestern Mutual Life
InsuranceSierra Investment Partners, Inc.
1. Clients on this list are those of Franklin Templeton affiliated investment advisors and have been selected to represent the broad range of our institutional clients. They do not represent clients in a particular fund or with a particular mandate. They have not been selected based on portfolio performance. Inclusion on this list does not constitute an endorsement by any of these clients of the investment services provided by Franklin Templeton.As of October 19, 2012. 4
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As of September 30, 2012
Franklin Templeton Fixed Income Group Products Overview
StrategyAsset Size
(USD Billions)1 BenchmarkAverage Quality
Excess Return Targets
(Gross of Fees)2
Multi-Sector Strategies
Global Aggregate US$3.3 Barclays Global Aggregate Index AA 150–200 bpsU.S. Core Plus3 US$16.0 Barclays U.S. Aggregate Index AA 100–150 bpsU.S. Long Duration Government/Credit3 US$0.2 Barclays U.S. Government/Credit - Long Index AA 75–125 bpsU.S. Low & Intermediate Duration Strategies3 US$4.6 BofA Merrill Lynch U.S. Corporate & Government 1–5
Years Index and Barclays U.S. Intermediate Index AAA–AA 75–150 bps
Euro Aggregate US$0.9 Barclays Euro Aggregate (EUR) Index AA 100–150 bpsAsian Bond US$4.1 HSBC Asian Local Bond Index A 200–400 bpsGlobal Multisector Plus US$34.0 Barclays Multiverse Index A–BBB 400–700 bps
Single-Sector Strategies
U.S. TIPS US$0.8 Barclays U.S. TIPS Index AAA 25–100 bpsGlobal Credit & U.S. Credit Strategies US$0.4 Barclays Global Aggregate Credit Index/Barclays U.S.
Credit IndexA 50–150 bps
Mortgages US$20.4 Barclays U.S. MBS Index AAA 50–100 bpsMunicipals4 US$79.2 Barclays Municipal Index AA 50–100 bpsGlobal Bond Plus US$120.4 JP Morgan Global Government Bond Index AA–A 300–600 bps
Single-Sector, Non-Investment
Grade Strategies
Global High Yield US$0.6 Barclays Global High Yield Excl CMBS & EMG 2% Cap Index
BB–B 100–200 bps
U.S. High Yield US$11.1 JP Morgan Global High Yield Index BB–B 100–200 bpsEuropean High Yield US$0.8 BofA Merrill Lynch Euro HY Constrained Index BB–B 100–200 bpsBank Loans US$4.6 Credit Suisse Leveraged Loan Split BB Index BB–B 50–150 bps
Alternative Strategies
Emerging Market Debt Opportunities US$9.2 JP Morgan EMBI Global Diversified Index BB 300–500 bps
Global Absolute Return US$0.4 UBS Australian Bank Bill Index A 150–300 bps
Objective: Consistent Outperformance across All Strategies
1. Asset size includes all discretionary, nondiscretionary, and advisory accounts within the given mandate including pooled investment vehicles, separate accounts and other vehicles, as well as some accounts that may not be eligible for inclusion in composites as defined by the firm’s policies. 2. The excess return targets represent the goals of the constituent composites against their designated benchmarks. Target returns are gross of fees and do not take into account investment management fees or other expenses an investor would incur in the management of an account, which would reduce returns that would be realized by investors. There is no assurance that employment of any of the above strategies will result in the intended targets being achieved.3. U.S. Core Plus, U.S. Low & Intermediate Duration and U.S. Long Duration Government/Credit strategies include multiple composites. 4. Tax-free municipal products are all mutual funds that are deemed to be single account composites due to the specific nature of each municipal product. 5
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Franklin Templeton Fixed Income Group Organizational Structure
CORPORATE CREDIT
Eric Takaha, CFA
GLOBAL SOVEREIGN/ EMERGING MARKETS
John BeckMichael Hasenstab, Ph.D.
William Ledward
MORTGAGES
Roger Bayston, CFA
BANKLOANS
Mark Boyadjian, CFA
MUNICIPALS
Sheila AmorosoRafael Costas
LOCAL ASSET MANAGEMENT1
Stephen Dover, CFA Brazil, China,2 India, Korea,
and UAE
QUANTITATIVE: David Yuen, CFA, FRM, 7 Professionals
Additional Resources
Sector Teams
Over 100 Dedicated Fixed Income Investment Professionals50 CFA Charterholders, 12 Ph.D.s, 42 M.B.A.s
32 Professionals 25 Professionals 9 Professionals 18 Professionals 31 Professionals 24 Professionals
CHIEF INVESTMENT OFFICERChristopher Molumphy, CFA
FIXED INCOME POLICY COMMITTEECo-Chairs: Christopher Molumphy and Michael Materasso
1. This unit is comprised of investment professionals located in affiliates and joint venture partners within Franklin Templeton Investments. The Local Asset Management Group is not a part of, but does share research with, Franklin Templeton Fixed Income Group. 2. Includes individuals that are not employees of Franklin Resources, Inc. (FRI) or wholly owned subsidiaries of FRI. However, these individuals are part of our joint venture or strategic partnership relationships worldwide and are an integral component of our overall fixed income research efforts. Investment professionals include portfolio managers, analysts and traders. CFA® and Chartered Financial Analyst® are trademarks owned by CFA Institute. As of September 30, 2012. 6
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Franklin Templeton Fixed Income Group―Global Investment Professional Presence
The Franklin Templeton Fixed Income Group consists of more than 100 investment professionals2 providing comprehensive coverage of potential alpha opportunities across sectors and around the world.
San Mateo(99)
New York(10)
London(12)
Mumbai(5)
Shanghai1(2)
Seoul(7)
Franklin Templeton Fixed Income Group Offices
Local Asset Management Offices
São Paulo(6)
Dubai(2)
Singapore(3)
Kuala Lumpur(2)
1. Includes individuals that are not employees of Franklin Resources, Inc. (FRI) or wholly owned subsidiaries of FRI. However, these individuals are part of our joint venture or strategic partnership relationships worldwide and are an integral component of our overall fixed income research efforts. 2. Investment professionals include portfolio managers, analysts and traders. As of September 30, 2012. 7
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Broad Capabilities and Deep Resources in One Platform• Global platform with more than 30 years of investment experience• Pursuit of diversified sources of potential alpha across securities, sectors and global markets
Multiple Sources of Expertise• More than 100 investment professionals globally seek return opportunities across sectors around
the world1
Franklin Templeton Fixed Income Group Overview
Combination of Expertise Aiming to Build:
Diverse Portfolios of Low-Correlated Positions
Top-Down Bottom-Up Quantitative
Fixed Income Policy Committee (FIPC) and Multi-Sector Strategists
Senior leaders seek to capitalize on global economic trends
• Sector Rotation• Country Duration• Yield Curve• Currency• Volatility
Sector SpecialistsDedicated sector teams strive to add value through security- and sector-specific insights
• Corporate Credit• Global Sovereign/Emerging Markets Debt• Mortgages• Bank Loans • Municipals
Quantitative AnalystsDedicated team builds proprietary risk models to identify potential alpha opportunities
• Active Risk Analysis• Portfolio Optimizations and
Expected Returns• Relative Value Analysis• Derivatives
1. Investment professionals include portfolio managers, analysts and traders. 8
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Franklin Templeton Fixed Income Group Multi-Sector Functional Chart
CHRISTOPHER MOLUMPHY, CFAChief Investment Officer
BANK LOANS(18 Professionals)
• Over 100 dedicated fixed income investment professionals
• More than US$334.7 billion in fixed income assets under management1
MORTGAGES(9 Professionals)
QUANTITATIVE ANALYSIS(7 Professionals)
GLOBAL SOVEREIGN/EMERGING MARKETS
(25 Professionals)LOCAL ASSET MANAGEMENT
(24 Professionals)
MUNICIPALS(31 Professionals)
FIXED INCOME POLICY COMMITTEECo-Chairs: Christopher Molumphy and Michael Materasso
CORPORATE CREDIT(32 Professionals)
Investment Grade Credit Research High Yield Credit Research
STRATEGY TEAMMike Materasso
Roger Bayston, CFAJohn Beck
Michael Hasenstab, Ph.D.Warren Keyser
Eric Takaha, CFARob Waldner, CFADavid Zahn, CFA
1. Includes aggregate Franklin Templeton Fixed Income Group assets managed through its affiliates. Professionals include portfolio managers, analysts and traders. CFA® and Chartered Financial Analyst® are trademarks owned by CFA Institute. As of September 30, 2012. 9
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Franklin Templeton Fixed Income Group—Investment Process
WEEKLY
FIXED INCOME POLICY COMMITTEE (FIPC)Consists of co-chairs and senior members of the Franklin Templeton Fixed Income Group• Discuss political and economic factors affecting global economy and fixed income markets • Assess qualitative factors and apply quantitative tools to determine relative value of segments of
the fixed income markets
ONGOING
SECTOR TEAMS Consist of all fixed income portfolio managers, research analysts and traders• Develop strategies for each sector by working with analysts and traders• Build portfolios similarly across mandates, within context of client guidelines• Provide bottom-up feedback to the FIPC
ONGOING
STRATEGY TEAMSConsist of senior portfolio managers on each strategy• Incorporate themes from FIPC and sector teams to optimize portfolio-building process• Develop model portfolio, including country, currency, duration, yield curve and sector allocations
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Corporate Credit Research TeamComprehensive Coverage• Globally integrated team of experienced credit analysts fosters
intensive industry and issuer coverage• Global coverage facilitates cross-currency investment analysis and
relative value assessment
Research Orientation• Consistent credit process emphasizes in-depth fundamental analysis,
with analysts taking a proactive, forward-looking approach• Joint investment-grade/high-yield team approach• Collaboration with global equity analysts
– Joint company visits– Shared coverage responsibilities– Ongoing dialogue
Market Presence • Size of Franklin Templeton Investments can provide access to senior
management teams and sellside resources• Potential to influence new-issue deal structure and related covenants
Eric Takaha, CFADirector of Corporates/High Yield
24 Credit Research AnalystsLocated in San Mateo, New York and London
Equity AnalystsProvide Additional Perspective
on Companies Globally
Analysts include research analysts and research associates. CFA® and Chartered Financial Analyst® are trademarks owned by CFA Institute. As of September 30, 2012. 11
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Global Sovereign and Emerging Markets Debt Team Comprehensive Coverage• Conduct rigorous research on developed and emerging countries• Disciplined application of various exchange rate equilibrium
models and scenario analyses• Frequent interaction and consultation with global equity research
analysts and local asset management investment professionals
Research Orientation• Consistent research process emphasizes in-depth fundamental
analysis, with analysts taking a proactive, forward-looking approach
• Multi-faceted proprietary research focused on macroeconomic country fundamentals, currency and interest rate analysis
Market Presence • Size and breadth of Franklin Templeton Investments provides
access to information and markets• Global trading platform provides ability to trade directly in many
local markets
John Beck and Michael Hasenstab, Ph.D.Co-Directors of Global Fixed Income
Global Fixed Income Research Team25 Professionals located in San Mateo, New York, London
and SingaporeCoverage includes Global Sovereign, Emerging Markets and Currency
Templeton Emerging Markets and Global Equity Analysts1—89 Investment Professionals
Provide additional perspective on local market dynamics
Franklin Templeton Local Asset Management1
Brazil, China,2 India, Korea, Malaysia and UAE—24 Fixed Income Investment Professionals
Provide additional perspective on local market dynamics
1. This unit is comprised of investment professionals located in affiliates and joint venture partners within Franklin Templeton Investments. The Local Asset Management Group is not a part of, but does share research with, Franklin Templeton Fixed Income Group. 2. Includes individuals that are not employees of Franklin Resources, Inc. (FRI) or wholly owned subsidiaries of FRI. However, these individuals are part of our joint venture or strategic partnership relationships worldwide and are an integral component of our overall fixed income research efforts. Investment professionals include portfolio managers, analysts and traders. As of September 30, 2012. 12
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Quantitative Analysis TeamFunctions That Can Add Value• Analytical tools
– Individual position sizing– Allocations of risk capital
• Alpha generation potential sought– Sector allocations and portfolio optimizations– Relative value tools
Original Research Supports Idea Generation• Team contributes active alpha ideas for portfolio consideration• Topics may include:
– Quantitative credit modeling (default and recovery)– Capital structure opportunities (loan, bond, convertible,
preferred, hybrid, equity)– Credit curve dynamics– Long-short basis opportunities– Credit derivative and hedging strategies– Volatility and correlation– Loan prepayment model
David Yuen, CFA, FRMDirector of Quantitative Research
7 Quantitative ProfessionalsLocated in San Mateo, New York
and Singapore
San Mateo:4 Professionals
New York:2 Professionals
Singapore:1 Professional
Professionals include portfolio managers, analysts and traders. CFA® and Chartered Financial Analyst® are trademarks owned by CFA Institute. As of September 30, 2012. 13
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Global integrated team independent from portfolio management that seeks to integrate timely and accurate risk management and performance information into the investment process.
Value-Added Functions• Summary level reporting/commentary • Risk oversight • Manager review (includes multi-portfolio comparison and relative
historical performance analysis)• Detailed account analysis
Portfolio Review Process• Risk budgeting
– Utilize risk budgeting seeking to find an appropriate level of risk (tracking error relative to the benchmark) consistent with portfolio return objectives
• Risk decomposition– Identify and quantify primary sources of risk
• Performance attribution– Confirm that the level of risk is consistent with portfolio objectives
Performance Analysis and Investment Risk (PAIR) Team
Tom Wilkinson, CFA, FRMDirector, PAIR—Fixed Income
24 PAIR AnalystsLocated in Offices Worldwide
CFA® and Chartered Financial Analyst® are trademarks owned by CFA Institute. As of September 30, 2012. 14
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Experience and History• Senior professionals have been with the firm over 18 years on average• More than 30 years of research, portfolio management and trading experience
Multiple Sources of Expertise• Top-down, bottom-up and quantitative techniques provide a broad spectrum of opportunities that aim to
add value in a consistent, systematic fashion• Integrated research capabilities across equity and fixed income platforms designed to achieve thorough
company and sector coverage from multiple viewpoints
Global Scale and Resources• With more than 100 dedicated fixed income investment professionals and $318.0 billion in assets under
management through its affiliates, the Franklin Templeton Fixed Income Group provides comprehensive coverage of alpha opportunities across sectors and around the world
• Deep and experienced sector teams conduct rigorous proprietary security analysis– Dedicated teams draw on Franklin Templeton’s risk management, legal and operational resources
• Access to business leaders, central bankers and government officials• Value-added trading platform that includes our ability to structure new issuance and trade in local markets
Strong Historical Performance• Competitive historical performance for our multi- and single-sector strategies across various market cycles
The Franklin Templeton Fixed Income Group Advantage
As of June 30, 2012. 15
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Anticipated Sources of Value Added• Country/Duration Positioning• Currency Allocation• Credit Analysis• Sector Allocation
Investment Objectives1
• Benchmark: HSBC Asian Local Bond Index• Performance Target: 200–400 basis points of alpha over a market cycle (gross of fees)• Tracking Error Target: 200–400 basis points over a market cycle (gross of fees)
Strategy Overview
1. Targets are not intended to represent historical performance. Targets represent the goal that the strategy seeks against the HSBC Asian Local Bond Index and do not take into account management fees or other expenses an investor would incur in the management of its account, which would reduce any returns. There is no assurance that employment of the strategy will result in the intended targets being achieved.
Asian Bond
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Investment PhilosophyWe believe that applying a fundamental, research-driven approach focused on identifying potential sources of total return (current income and capital appreciation) worldwide and seeking to capitalize on global interest rates and currency trends provides the best potential for solid risk-adjusted returns over time. The portfolio is run independently of its benchmark, allowing the manager to hold only the positions it believes have the best potential to maximize risk-adjusted returns. This is a high alpha seeking strategy that invests globally and may include allocations to both developed and emerging markets. However, below investment grade exposure is limited to no more than 25% of total assets.
Investment StrategyLong-Term, Opportunistic Value Approach• Long-term, fundamentally driven investment focus• Total return approach that is not benchmark driven• Identify economic imbalances that may lead to value opportunities in:
– Interest rates (duration)– Currencies– Sovereign credit
• Active positioning across these areas– Precisely isolate desired exposures– Risk budget composition will shift based on relative attractiveness during global economic and
credit cycles
Investment Philosophy and Process
There is no assurance that a portfolio will achieve its investment objective. Past performance does not guarantee future results.
Asian Bond (cont’d)
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Philosophy Our philosophy is that a diversified portfolio consisting of issues denominated in hard and local currencies has the potential to generate attractive returns at lower levels of absolute risk than the standard emerging market debt benchmarks, which tend to be concentrated in a few issuers. We believe that a bottom-up, research-driven, qualitative investment process, combined with a risk-controlled approach, has the potential to achieve our objective of outperforming standard benchmarks while reducing levels of absolute risk.
Investment Objectives1
• To capture high yields on emerging market debt while minimizing the risk of default• Return target: 8% to 10% per annum over the course of a full market cycle (gross of fees)
Approach• Absolute return approach, whereby we invest only in countries and securities we find attractive• Not constrained by a benchmark
– JP Morgan EMBI Global Diversified Index is a relatively small investment universe – Indexes tend to be all hard currency or all local currency– Many issuers not included in standard benchmarks– No single benchmark is representative of the universe of potential trades
• Research-driven, bottom-up, qualitative approach
1. There is no assurance that any investment objective will be met.
Strategy Overview
Emerging Market Debt Opportunities
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Anticipated Sources of Potential Excess Return• Issue selection: 90%• Sector selection/avoidance: 10%
Investment Target Objective1
• Seeking 50–150 basis points of alpha (gross of fees) over a market cycle measured against the Credit Suisse Leveraged Loan Split BB Index
Portfolio Target Characteristics1,2
• Benchmark: Credit Suisse Leveraged Loan Split BB Index • Ba3/B1 average rating• 150–550 weighted average spread• 250–800 weighted average discount margin• 100–250 credits (excludes multiple loans from same borrower)• 2% of MV maximum portfolio position limit• Seeking approximately 50–80% annual discretionary turnover• 6–7 year term maturity
Strategy Overview
1. Targets are not intended to represent historical performance. Targets represent the goal the strategy seeks against the Credit Suisse Leveraged Loan Split BB Index and do not take into account management fees or other expenses an investor would incur in the management of its account, which would reduce any returns. There is no assurance that employment of the strategy will result in the intended targets being achieved. Our investment strategies and the resulting portfolio holdings are subject to change due to market and economic conditions. 2. These are target characteristics for a typical bank loan portfolio managed by Franklin Advisers, Inc. They do not represent an actual portfolio whose characteristics may vary depending on a variety of factors, including a portfolio’s asset size, specific investment guidelines or restrictions, and policies and market conditions.
Floating Rate Bank Loans
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We believe that independent credit research and active portfolio management can potentially achieve competitive levels of floating rate income, while significantly reducing uncompensated credit risk and principal volatility, for those investors desiring a portfolio of below investment-grade senior secured floating rate bank debt. Our core portfolios are primarily managed to pursue attractive levels of income while seeking to reduce default risk, and as such, do not explicitly seek price appreciation at the expense of high default exposure.
Philosophy
Fundamental Credit AnalysisThe investable universe for our core portfolios is defined by the PD (probability of default) dimension. Our team of seven dedicated and unbiased career credit research analysts rely upon proprietary financial data in order to continuously assess, monitor and communicate changes in PD and LGD (loss given default) for their companies.
Discipline and Focus• Concentrated emphasis on seeking a high level of floating rate income consistent with preservation
of capital• Client-specific portfolio managers proactively assess the sources of principal risk while incorporating
client-specific return objectives and constraints• Trading desk consistently seeks best execution
Risk Management• Rigorous sell discipline combined with decisive portfolio management predicated upon client objectives
seeking an attractive risk signature
Approach
Floating Rate Bank Loans (cont’d)
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Strategy OverviewInvestment Objectives1
• Performance target: 75–175 basis points (gross of fees)• Expected tracking error target: 150–350 basis points (gross of fees)• Benchmark: Barclays Global Aggregate Index
Evolution of Active Risk2
Anticipated Sources of Value Added• Country/duration positioning• Currency allocation• Sector allocation• Security selection
1. There is no assurance that any investment objective or target will be met. 2. Based on a representative account taken from the Franklin Templeton Global Aggregate (Unhedged) Fixed Income Composite. This information is for illustration only, and may vary significantly from other similarly managed separate accounts depending on a variety of factors such as portfolio size, specific investment guidelines, and inception date of the account. Tracking error is a measure of a manager’s risk or volatility compared to a benchmark. The expected tracking error is an ex-ante (beforehand) calculation that represents a predicted tracking error based on our proprietary risk system. The expected tracking error is measured as of the dates indicated above and is not intended to reflect current or future tracking error. Expected tracking error differs from ex-post tracking error (observed or realized), which is the annualized standard deviation of the difference in returns between the strategy and the benchmark. 3. Total Expected Tracking Error will not equal the sum of active risk positions due to the lack of perfect correlation.
Global Aggregate
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As of September 30, 2012
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We believe that a portfolio built around a diversified set of active management positions has the potential to generate the most attractive information ratios over a full market cycle. We seek to accomplish this by implementing a large number of small, low-correlated active positions, in order to reduce the risk of underperformance from any single active position. Our global framework, significant bottom-up resources, and integrated quantitative group allow us to identify market inefficiencies which we seek to exploit, while utilizing a disciplined risk management process.
Philosophy and Approach
1. Combined allocation to below investment-grade sectors will not exceed 20%.2. Source: Barclays. As of June 30, 2012.Sector allocations may change depending on factors such as market and economic conditions. Percentages may not equal 100% due to rounding.
FT Global Aggregate
Barclays Global Aggregate2
Treasuries Government-Related Corporate Securitized
0–100%
54%
0–50%
14%
0–50%
16%
0–50%
16%
Inflation-Linked
0–30%
Municipals
0–10%
Preferreds
0–10%
Emerging Markets
0–20%
Global High Yield
0–20%
Bank Loans
0–10%
Core Sectors Plus Sectors1
Global Aggregate (cont’d)
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Investment Objectives1
• Seeks to maximize total return (current income and capital appreciation) subject to expected volatility• Investment universe: Global government and government-related fixed income, global currencies and
related derivatives• Performance benchmark: JP Morgan Global Government Bond Index• The strategy is managed in a benchmark unconstrained manner, focusing on overall expected volatility and
potential total return, rather than tracking error against an index. Consistent with this approach, the strategy does not have rigid risk constraints or volatility limits
– While we do not manage to the following ranges for the reason described above, under normal market conditions, we would expect that the strategy’s risk and return profile would typically be as follows:
• Absolute volatility: 6–8%1 (annualized, gross of fees)• Tracking error: 3–6%1 (annualized, gross of fees)• Alpha: 3–6%1 (annualized, gross of fees)
Anticipated Sources of Value Added• Both positive and negative directional risk exposures to these sources will be utilized:
– Duration positioning– Currency allocation– Sovereign credit allocation
Strategy Overview
1. There is no assurance that the strategy will achieve its investment objectives. As stated above, the strategy is managed in a benchmark unconstrained manner, so the expected risk and return profile is provided solely to illustrate the manager’s expectations with respect to strategy characteristics, based on the strategy’s historical experience during normal market conditions. Past performance does not guarantee future results. Thus, the characteristics do not take into account future market risks or changing economic conditions and are not a prediction or guarantee of future performance. An investor in the strategy may experience significantly different risk and return characteristics including greater volatility, higher tracking error and lower returns than the expected characteristics, including the potential for loss of principal amounts invested. Risk and return characteristics do not take into account management fees or other expenses an investor would incur in the management of its account, which would reduce any returns and affect the risk characteristic measurements.
Global Bond Plus
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CLIENT EDUCATION PROGRAM MATERIALS. NOT FOR PUBLIC DISTRIBUTION.
Investment PhilosophyWe believe that applying a fundamental, research-driven approach focused on identifying potential sources of total return (current income and capital appreciation) worldwide and seeking to capitalize on global interest rates and currency trends provides the best potential for solid risk-adjusted returns over time. The portfolio is run independently of its benchmark, allowing the manager to hold only the positions it believes have the best potential to maximize risk-adjusted returns. This is a high alpha seeking strategy that invests globally and may include allocations to both developed and emerging markets. However, below investment grade exposure is limited to no more than 25% of total assets.
Investment StrategyLong-Term, Opportunistic Value Approach• Long-term, fundamentally driven investment focus• Total return approach that is not benchmark driven• Identify economic imbalances that may lead to value opportunities in:
– Interest rates (duration)– Currencies– Sovereign credit
• Active positioning across these areas– Precisely isolate desired exposures– Risk budget composition will shift based on relative attractiveness during global economic and
credit cycles
Investment Philosophy and Process
There is no assurance that a portfolio will achieve its investment objective. Past performance does not guarantee future results.There is no assurance that a portfolio will achieve its investment objective. Past performance does not guarantee future results.
Global Bond Plus (cont’d)
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CLIENT EDUCATION PROGRAM MATERIALS. NOT FOR PUBLIC DISTRIBUTION.
Anticipated Sources of Value Added• Spread/Intracredit Allocation• Security Selection• Country/Duration Positioning• Currency Allocation
Investment Objectives1
• Alpha Target: 75–125 basis points (gross of fees)• Tracking Error Target: 75–125 basis points (gross of fees)• Benchmark: Barclays Global Credit Index
PhilosophyWe believe that a portfolio built around a diversified set of active management positions has the potential to generate the most attractive information ratios over a full market cycle. We seek to accomplish this by implementing a large number of small, low-correlated active positions, in order to reduce the risk of poor performance from any single active position. Our global framework, significant bottom-up resources and integrated quantitative group allow us to identify market inefficiencies which we seek to exploit while utilizing a disciplined risk-management process.
Strategy Overview
1. There is no assurance that any investment objective or target will be met.
Global Credit
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CLIENT EDUCATION PROGRAM MATERIALS. NOT FOR PUBLIC DISTRIBUTION.
Investment Objectives1
• Seeks to maximize total return (current income and capital appreciation) subject to expected volatility• Investment universe: Global fixed income across all sectors, global currencies and related derivatives• Performance benchmark: Barclays Multiverse Index• The strategy is managed in a benchmark unconstrained manner, focusing on overall expected volatility and
potential total return, rather than tracking error against an index. Consistent with this approach, the strategy does not have rigid risk constraints or volatility limits
– While we do not manage to the following ranges for the reason described above, under normal market conditions, we would expect that the strategy’s risk and return profile would typically be as follows:
• Absolute volatility: 7–10%1 (annualized, gross of fees)• Tracking error: 4–7%1 (annualized, gross of fees)• Alpha: 4–7%1 (annualized, gross of fees)
Anticipated Sources of Value Added• Both positive and negative directional risk exposures to these sources will be utilized:
– Duration positioning– Currency allocation– Sovereign credit allocation– Spread sector allocation– Security selections/sub-sector allocation
Strategy Overview
1. There is no assurance that the strategy will achieve its investment objectives. As stated above, the strategy is managed in a benchmark unconstrained manner, so the expected risk and return profile is provided solely to illustrate the manager’s expectations with respect to strategy characteristics, based on the strategy’s historical experience during normal market conditions. Past performance does not guarantee future results. Thus, the characteristics do not take into account future market risks or changing economic conditions and are not a prediction or guarantee of future performance. An investor in the strategy may experience significantly different risk and return characteristics including greater volatility, higher tracking error and lower returns than the expected characteristics, including the potential for loss of principal amounts invested. Risk and return characteristics do not take into account management fees or other expenses an investor would incur in the management of its account, which would reduce any returns and affect the risk characteristic measurements.
Global Multisector Plus
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CLIENT EDUCATION PROGRAM MATERIALS. NOT FOR PUBLIC DISTRIBUTION.
Investment PhilosophyWe believe that applying a fundamental, research-driven approach focused on identifying potential sources of total return (current income and capital appreciation) worldwide and seeking to capitalize on ideas across the entire fixed income opportunity set provide the best potential for solid risk-adjusted returns over time. The portfolio is run independently of its benchmark, allowing the manager to hold only the positions it believes have the best potential to maximize risk-adjusted returns. This is a high alpha seeking strategy that invests globally and may include allocations to both developed and emerging markets, with the potential to invest a substantial portion of its assets in developing markets. However, below investment grade exposure is limited to no more than 50% of total assets.
Investment StrategyLong-Term, Opportunistic Value Approach• Long-term, fundamentally driven investment focus• Total return approach that is not benchmark driven• Identify economic imbalances that may lead to value opportunities in:
– Interest rates (duration)– Currencies– Sovereign credit– Corporate/spread sectors– Bottom-up security selection/sub-sector allocation
• Active positioning across these areas– Precisely isolate desired exposures– Risk budget composition will shift based on relative attractiveness during global economic and
credit cycles
Investment Philosophy and Process
There is no assurance that a portfolio will achieve its investment objective. Past performance does not guarantee future results.
Global Multisector Plus (cont’d)
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CLIENT EDUCATION PROGRAM MATERIALS. NOT FOR PUBLIC DISTRIBUTION.
Anticipated Sources of Value Added• Issue selection: 75%• Sector selection: 25%
Investment Objectives1
• Benchmark: JP Morgan Global High Yield Index• Seeking 100 basis points of alpha over a market cycle (gross of fees)• Targeting 250 basis points tracking error over a market cycle (gross of fees)
Portfolio Characteristics2
• 3–5 year investment horizon• 75–125 companies• 25%–75% turnover
Strategy Overview
1. Targets are not intended to represent historical performance. Targets represent the goal the strategy seeks against the JP Morgan Global High Yield Index and do not take into account management fees or other expenses an investor would incur in the management of its account, which would reduce any returns. There is no assurance that employment of the strategy will result in the intended targets being achieved. Our investment strategies and the resulting portfolio holdings are subject to change due to market and economic conditions.2. These are target characteristics for a typical high-yield product portfolio managed by Franklin Advisers, Inc. They do not represent an actual portfolio whose characteristics may vary depending on a variety of factors, including a portfolio’s asset size and specific investment policies and market conditions.
U.S. High Yield
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CLIENT EDUCATION PROGRAM MATERIALS. NOT FOR PUBLIC DISTRIBUTION.
We believe that superior high-yield returns are best sought through the disciplined application of a research-based approach that capitalizes on inefficiencies across the high-yield market. Through diligent bottom-up research, we seek to identify compelling total return opportunities with the potential to add value over a three- to five-year horizon.
Approach
Fundamental Analysis• Conduct independent, bottom-up analysis focusing on critical factors that affect a company’s long-term
performance, such as financial structure, cash flow and earnings prospects, products, market share, and strategic positioning
Long-Term Outlook• Analyze securities whose projected return over three to five years may surpass the risk of adverse price
movements or default
Seek Valuation Inefficiencies• Invest opportunistically in companies within sectors that are infrequently followed or are out of favor with
the marketplace
Disciplined Approach• Adhere to long-term strategy through changing market environments, supported by separate in-house risk
management and quantitative research groups
Philosophy
U.S. High Yield (cont’d)
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CLIENT EDUCATION PROGRAM MATERIALS. NOT FOR PUBLIC DISTRIBUTION.
Anticipated Sources of Value Added• Duration Positioning• Yield Curve Positioning• Sector Allocation• Currency Allocation• Security Selection
Investment Objectives1
• Benchmark: Barclays U.S. Aggregate Index• Alpha Target: 100–150 bps (gross of fees)• Tracking Error Target: 75–150 bps (gross of fees)
PhilosophyWe believe that a portfolio built around a diversified set of active management positions has the potential to generate the most attractive information ratios over a full market cycle. We seek to accomplish this by implementing a large number of small, low-correlated active positions, thus reducing the risk of poor performance from any single active position. Our global framework, significant bottom-up resources and integrated quantitative group support our approach in a disciplined, risk-aware manner.
Strategy Overview
1. Targets represent the goal the strategy seeks against the Barclays U.S. Aggregate Index and do not take into account management fees or other expenses an investor would incur in the management of its account, which would reduce any returns. There is no assurance that employment of the strategy will result in the intended targets being achieved.
U.S. Total Return Core Plus
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CLIENT EDUCATION PROGRAM MATERIALS. NOT FOR PUBLIC DISTRIBUTION.
Anticipated Sources of Value Added• Duration Positioning• Yield Curve Positioning• Sector Allocation• Security Selection• Currency Allocation
Investment Objectives1
• Benchmark: Barclays U.S. Aggregate Index
Core Plus• Alpha Target 100–150 bps (over a full market cycle)• Tracking Error Target 100–150 bps (over a full market cycle)
Strategy Overview
1. There is no assurance that any investment objective or target will be met.
U.S. Opportunistic Core Plus
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CLIENT EDUCATION PROGRAM MATERIALS. NOT FOR PUBLIC DISTRIBUTION.
We believe that a portfolio built around a diversified set of active management positions has the potential to generate the most attractive information ratios over a full market cycle. We seek to accomplish this by implementing a large number of small, low-correlated active positions, in order to reduce the risk of poor performance from any single active position. Our global framework, significant bottom-up resources and integrated quantitative group allow us to implement our approach in a disciplined, risk-controlled manner.
Philosophy and Approach
FT Core Plus
BarclaysU.S. Aggregate2
U.S. Treasuries
0–100%
36%
Government-Related
Agencies
0–30%
11%
0–70%
33%
SecuritizedCorporates
0–50%
21%
Core Sectors
Inflation-Linked
0–20%
Municipals
0–10%
Preferreds
0–10%
Non-US$
0–20%
Emerging Markets
0–20%
Global High Yield
0–20%
BankLoans
0–20%
Plus Sectors1
1. Core Plus portfolios typically have a 30% maximum combined exposure to non-US$ and subinvestment grade.2. Source: Barclays. As of June 30, 2012.Sector allocations may change depending on factors such as market and economic conditions. Percentages may not equal 100% due to rounding.
U.S. Opportunistic Core Plus (cont’d)
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CLIENT EDUCATION PROGRAM MATERIALS. NOT FOR PUBLIC DISTRIBUTION.
Strategy• We apply a risk-controlled, top-down/bottom-up disciplined approach to the active management of
duration, yield curve, sector allocation, and issue selection.
Objective• We strive to achieve attractive risk-adjusted performance.
Franklin Templeton U.S. Low Duration Fixed Income
The above chart is for illustration purposes only. Our investment strategy and resulting portfolio holdings are subject to change due to market and economic conditions. Percentages may not equal 100% due to rounding.1. As of June 30, 2012. Given full discretion, Franklin Templeton will consider each of these sectors in portfolios. The client may also select the sectors they are most comfortable including.2. When client guidelines permit.
Sectors1
BofA ML 1–3 Yr Gov’t/Corp
BofA ML 1–3 Yr Gov’t
BofA ML 1–5 Yr Gov’t/Corp
BofA ML 1–5 Yr Gov’t
Treasury Notes & Inflation Indexed
0–100%
60
84
59
86
Agencies
0–60%
20
16
19
14
MBS
0–60%
0
0
0
0
CMBS
0–20%
0
0
0
0
ABS
0–20%
0
0
0
0
FT Low Duration Ranges 0–60%
20
0
22
0
Corporates Non-USD2
0–15%
0
0
0
0
U.S. Low Duration
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CLIENT EDUCATION PROGRAM MATERIALS. NOT FOR PUBLIC DISTRIBUTION.
© 2012 Franklin Templeton Investments. All rights reserved.Indexes are unmanaged and one cannot invest directly in an index.
Additional Information for Investment Platform Overview Slide:FTI AUM includes AUM for Rensburg Fund Management Limited, a wholly-owned subsidiary of Franklin Resources, Inc. Franklin Equity Group (formerly Franklin Global Advisers), a unit of Franklin, combines the expertise of the Franklin Advisers, Inc., and Fiduciary Global Advisors equity teams (with origin dating back to 1947 and 1931, respectively). Franklin Templeton Fixed Income Group, a unit of Franklin, combines the expertise of the Franklin Advisers, Inc., and Fiduciary Trust Company International fixed income teams (originating in 1970 and 1973, respectively). Franklin Templeton Real Asset Advisors originated in 1984 as the global real estate team of Fiduciary Trust Company International. FTMAS is a global investment management group dedicated to multi-strategy solutions and is comprised of individuals from various registered entities within Franklin Resources, Inc. Certain individuals based in Canada that advise FTMAS mandates are part of the Fiduciary Trust Company of Canada, a wholly-owned subsidiary of Franklin Resources, Inc., that originated in 1982. FTMAS was formed in 2007 to combine the research and oversight of all multi-strategy investment solutions offered by Franklin Resources, Inc.
Important Disclosures
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CLIENT EDUCATION PROGRAM MATERIALS. NOT FOR PUBLIC DISTRIBUTION.
Fixed Income Policy Committee (FIPC)
Name ResponsibilityYears of Investment
ExperienceYears
with Firm Education
Christopher Molumphy, CFA Chief Investment Officer, Co-Chair of FIPC
25 24 B.A., Stanford University; M.B.A., University of Chicago
Michael J. Materasso Co-Chair of FIPC, U.S. Multisector 40 24 B.B.A., Baruch College
Sheila Amoroso Municipals 26 26 M.B.A., College of Notre Dame
Roger Bayston, CFA Mortgages & U.S. Multisector 26 21 B.S., University of Virginia; M.B.A., University of California, Los Angeles
John W. Beck Global & European 25 22 M.A., Oxford University
Michael Hasenstab, Ph.D. Global & Asian 17 13 Ph.D., Asia-Pacific School of Economics and Management at Australian National University
Richard Hsu, CFA Bank Loans 16 16 M.A., Stanford University
Warren A. Keyser U.S. Multisector & U.S. Low Duration 27 26 B.S., Philadelphia University
Marc Kremer, CFA IG Credit 24 9 A.B., Vassar College; M.B.A., Duke University
William F. Ledward Emerging Markets 27 15 M.A., D.Phil., Oxford University
Shawn Lyons, CFA Money Markets & IG Credit 16 16 B.A., University of California, Berkeley
Ronald J. Sanchez, CFA Municipals 25 19 B.S., C.W. Post College
Eric Takaha, CFA High Yield & IG Credit 21 21 B.S., University of California, Berkeley; M.B.A., Stanford University
Robert B. Waldner, CFA Global & U.S. Multisector 25 17 B.S., Princeton University
David Yuen, CFA, FRM Quantitative 24 16 B.S., California Institute of Technology; M.B.A., University of California, Los Angeles
David Zahn, CFA Global & European 18 6 B.S., University of Maine; M.B.A., University of Connecticut
Average Years 24 18
FIPC Contains Both Strategy Leaders and Sector Specialists
CFA® and Chartered Financial Analyst® are trademarks owned by CFA Institute. As of September 30, 2012. 35
CLIENT EDUCATION PROGRAM MATERIALS. NOT FOR PUBLIC DISTRIBUTION.
Summary
36
• Firm and Investment Platform Overview
• Investment Teams and Process
• Strategic Overview and Performance
CLIENT EDUCATION PROGRAM MATERIALS. NOT FOR PUBLIC DISTRIBUTION.
This document has been prepared for circulation to persons reasonably believed to be within one of the professional investor exemptions contained in the Securities and Futures Ordinance, or to whom this document may otherwise lawfully be communicated to give preliminary information about the investment propositions described herein. It is a confidential communication to, and solely for the use of, such persons and is not intended for general public distribution.
The description in this document of our investment management service and other matters are general in nature. The information contained in this document is subject to updating, completion, modification and amendment. It should not be assumed that the approach described will necessarily be followed in a particular case. Such matters will also be subject to any specific arrangements with a particular client.
It is the responsibility of every person receiving a copy of this document to satisfy him or herself as to the full observance of laws of any relevant country, including obtaining any government or other consent which may be required or observing any other formality which needs to be observed in that country. None of the services or other matters described here should be taken as an offer or solicitation of those services or other matters in any jurisdiction where such an offer or solicitation is not permitted under applicable legislation.
Important Information
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