Change to Control Types & Objective Clarification of Various Franklin Templeton Funds
08 January 2019
Notification of changes to the underlying funds of the following Franklin Templeton funds:
L39 Franklin Biotechnology Discovery
M84 Franklin US Government
R97 Templeton Asian Bond
L13 Templeton Emerging Markets Bond
Friends Provident International Limited (“Friends Provident International”) has been notified by Franklin Templeton Investments (Asia) Limited (“The Company”) of various changes to the underlying funds of the above named Friends Provident International funds. These changes have come into effect from 30 November 2018 (the “Effective Date”).
Below are the key areas for your attention which we have extracted from the shareholder circular of the underlying funds of the above named funds.
An update on the expected level of exposure to securities lending transactions of the underlying fund of L39 Franklin Biotechnology Discovery
The current investment policy of the underlying fund of L39 Franklin Biotechnology Discovery provides that the expected level of exposure of the underlying funds to securities lending transactions is below or equal to 10% of the underlying fund’s net assets, subject to a maximum of 50%.
It is proposed that the underlying fund’s expected level of exposure to securities lending transactions be increased to 22% of the underlying fund’s net assets. There is no change to the underlying fund’s maximum level of exposure to securities lending transactions, which remains at 50% of the underlying fund’s net assets. For the avoidance of doubt, any securities lending will be an ancillary activity of the underlying fund only.
The increase in the expected level of exposure of the underlying fund to securities lending transactions will not result in any additional risks or impact the investment strategy of the underlying fund. There is no change to the operation and/or manner in which the underlying fund is being managed.
Clarification of the investment policy of the underlying fund of M84 Franklin US Government
The current investment policy of the underlying fund, into which M84 Franklin US Government invests, states that the underlying fund seeks to achieve its investment objective primarily through a policy of investing in debt obligations issued or guaranteed by the United States of America government and its agencies, including purchasing mortgage- and asset-backed securities.
For clarity, it is proposed that the investment policy of the underlying fund be enhanced to state that the underlying fund may invest up to 100% of its assets in transferable securities and money market instruments issued or guaranteed by the U.S. Government, in accordance with the applicable risk diversification requirements contained in the “INVESTMENT RESTRICTIONS” section of the Explanatory Memorandum of the underlying fund.
In addition, the product key facts statement of the underlying fund discloses that the underlying fund may, at its discretion, pay dividends out of capital or out of gross income of the underlying fund while paying all or part of the underlying fund’s fees and expenses out of the capital of the underlying fund. Consistent with this disclosure, it is proposed that the investment policy of the underlying fund be elaborated upon to disclose that the underlying fund may make distribution from capital, net realised and net unrealised capital gains as well as income gross of expenses.
The clarifications above will not result in any additional risks or impact the investment strategy of the underlying fund. There is no change to the operation and/or the manner in which the underlying fund is being managed.
Elaborations on the investment policies of the underlying fund of R97 Templeton Asian Bond and L13 Templeton Emerging Markets Bond
The investment policies of the underlying funds, into which R97 Templeton Asian Bond and L13 Templeton Emerging Markets Bond invests, will be elaborated on to disclose that they may invest up to 10% of their net assets in Mainland China through the Bond Connect or directly (also referred to as CIBM direct).
As a result of the underlying funds’ investments in Mainland China through the Bond Connect or CIBM direct, the following “China Bond Connect risk” will apply to the underlying funds:
“Bond Connect is a mutual market access scheme allowing overseas investors to trade in bonds circulated on the China Interbank Bond Market (CIBM) through connection between the Mainland and Hong Kong financial infrastructure institutions without quota limitations.
The Northbound Trading link commenced on 3 July 2017 with transactions being made possible through mutual access arrangements in respect of trading, custody and settlement. It involves China Foreign Exchange Trading System, China Central Depository & Clearing Co, Shanghai Clearing House, Hong Kong Exchanges & Clearing plus the Central Moneymarkets Unit (CMU). A delivery versus payment (DVP) settlement system for transactions through the Bond Connect scheme was implemented in August 2018 thereby reducing settlement risk.
The ultimate foreign eligible investors are the beneficial owners of the relevant CIBM bonds and may exercise their rights against the bond issuer through CMU as the nominee holder. The nominee holder may exercise its creditor rights and bring actions against bond issuers in Chinese courts.
CIBM securities traded via the Bond Connect can be subject to risks including but not limited to regulatory risks, liquidity risk, operational risk, PRC tax risk and reputational risk.
The Bond Connect encompasses recently developed trading systems. There can be no assurance that those systems will function correctly or will not be subject to further changes or adaptation. The relevant rules and regulations may be subject to change which may have potential retrospective effect. If the relevant mainland Chinese authorities suspend account opening or trading on the CIBM, the Funds' ability to invest in the CIBM will be adversely affected. In such event, the Funds' ability to achieve its investment objective may be negatively affected.
There is no specific written guidance by the Mainland China tax authorities on the treatment of income tax and other tax categories payable in respect of trading in the CIBM by eligible foreign institutional investors via the Bond Connect.
Securities traded through the Bond Connect may be subject to a range of reputational risks such as risks borne by companies being subject to cyber abuses, sanctions concerns and negative accusations over labor and human rights, environmental degradation, ties to high-risk countries and entities overseas.”
In addition to the above China Bond Connect risk, please also refer to the risk disclosures on “Chinese Market risk” under the “RISK CONSIDERATIONS” section of the Explanatory Memorandum of the underlying funds for details of the relevant risks associated with this proposed change.
Other than as disclosed above, the investment manager of the underlying funds believe there will not be any additional risks as a result of the elaboration to the underlying funds’ investment policies. There is no change to the operation and/or the manner in which the underlying funds are being managed.
Should you have any questions regarding these changes, please contact International Funds & Investments.