six sigma investing

Not FDIC Insured • May Lose Value • No Bank Guarantee

Dealer Use Only / Not for Distribution to the Public


S I X S I G M A I N V E S T I N GW I T H F R A N K L I N T E M P L E T O N


1. “Quantitative Analysis of Investor Behavior,” Dalbar, Inc., 2008. The S&P 500 is an unmanaged index; one cannot invest directly in an index.

20-Year Period Ended December 20071

Investment Return

10.4%

4.5%3.0%

S&P 500 Index Average Equity FundInvestor's Annualized Return

Inflation

Dealer Use Only / Not for Distribution to the Public1. Source: © 2008 Morningstar.

The risk is missing the day the market begins recoveringJumping Out of the Market Could Cost Money

10-Year Period Ended June 30, 20081

Period of Investment

S&P 500 Index

Average Annual

Total Return

Stayed fully invested 2.88%

Missed the best 10 days -1.79%





Agenda

• What Is Six Sigma?

• Six Sigma Investment Process

• Six Sigma and Franklin Templeton


W H A T I S S I X S I G M A ?


Six Sigma

• Uses data and statistical analysis to measure and improve a company’s operational performance

• Identifies and eliminates “defects” in manufacturing and service-related processes

• 3.4 defects per million opportunities or 99.99966% perfection

Six Sigma Statistical Measurement


1. Source: Rath & Strong in Motion; www.rathstrong.com.2. Source: “Feds to Unleash Six Sigma on Terrorism,” USA Today; 10/31/02.

Industries operating at 99% or a level below Six Sigma,could lead to the following results:1, 2

Industry Defects

• 5,000 incorrect surgical procedures per week

• 20,000 articles of mail lost per hour

• 200,000 incorrect drug prescriptions each year

• 1 hour of unsafe drinking water per month

• 2 long or short landings at a major airport each day

• 50 newborn babies dropped each day


50% Improvement

201510305

1725124

Existing Process Improved Process

16 DaysAverage

Cycle

8 DaysAverage

Cycle

1. Source: Jack – Straight From the Gut by Jack Welch with John Byrne. Copyright 2001. Published by Warner Books.

Average vs. Variation1


2 (-6) 8 (+9) 17

Improved Process

1725124

8 Days

6 DaysEarly

9 DaysLate

Customer Expectation: 8 Days1

Customer Complaints Rose

1. Source: Jack – Straight From the Gut by Jack Welch with John Byrne. Copyright 2001. Published by Warner Books.


Success = Results - Expectations

Dealer Use Only / Not for Distribution to the Public1. Source: www.ge.com/sixsigma.

Customers Feel the Variance, Not the AverageThe Idea of Six Sigma

Often, our inside-out view of the business is based on average or mean-based measures of our recent past. Customers don’t judge us on averages, they feel the variance in each transaction. Six Sigma focuses first on reducing process variation and then on improving process capability.

Customers value consistent, predictable business processes that deliver world-class levels of quality. This is what Six Sigma strives to produce.1

Dealer Use Only / Not for Distribution to the Public1. Source: Jack – Straight From the Gut by Jack Welch with John Byrne. Copyright 2001. Published by Warner Books.

79987

8 Days

Reduce the Variance1

Delivery Time (In Days)


Six Sigma Review

• Customer expectations are very difficult to meet

• Customers feel the variance and not the average

• Six Sigma is designed to consistently reduce the variance


S I X S I G M A I N V E S T M E N T P R O C E S S


1. “Quantitative Analysis of Investor Behavior,” Dalbar, Inc., 2008. The S&P 500 is an unmanaged index; one cannot invest directly in an index.

20-Year Period Ended December 20071

Investment Return

10.4%

4.5%3.0%

S&P 500 Index Average Equity FundInvestor's Annualized Return

Inflation


Types of Risk

• Credit risk

• Market risk

• Interest rate risk

• Speculative risk

• Subjective risk

• Objective risk– Variance from expected


Average Annual Total Index Returns Since Inception1

Note: True inception of the index reflects the date the data stream became available in Standard & Poor’s Micropal.1. Standard & Poor’s Micropal. Data as of 12/31/07.2. Asset-allocated portfolio is made up of 60% S&P 500 Index and 40% Lehman Brothers U.S. Aggregate Index.For illustrative purposes only and does not represent the performance of any Franklin, Templeton or Mutual Series fund. Past performance does not guarantee future results.

What Is Expected?

For the Period Ended 12/31/07

InceptionAverage Annual Total

Index Return

S&P 500 Index 1929 9.16%

Russell 2000 Index 1979 12.79%

MSCI EAFE Index 1970 11.57%

Lehman Brothers U.S. Aggregate Index 1976 8.55%

Asset-Allocated Portfolio2 1976 11.24%


1-Year Holding Periods1 Missed Expectations?

Note: True inception of the index reflects the date the data stream became available in Standard & Poor’s Micropal.1. Standard & Poor’s Micropal. Data as of 12/31/07.2. Asset-allocated portfolio is made up of 60% S&P 500 Index and 40% Lehman Brothers U.S. Aggregate Index.For illustrative purposes only and does not represent the performance of any Franklin, Templeton or Mutual Series fund.Past performance does not guarantee future results.

InceptionAverage Annual Total

Index Return+/- 20% of Average Annual

Total Index Return

S&P 500 Index 1929 9.16% 3 of 79

Russell 2000 Index 1979 12.79% 0 of 29

MSCI EAFE Index 1970 11.57% 4 of 38

Lehman Brothers U.S. Aggregate Index 1976 8.55% 10 of 32

Asset-Allocated Portfolio2 1976 11.24% 6 of 32



5- and 10-Year Holding Periods Missed Expectations?

Inception

Average AnnualTotal Index Return

Since Inception

+/- 20% of Average Annual Total Index

Return, 5-Year

+/- 20% of Average Annual Total Index

Return, 10-Year

S&P 500 Index 1929 9.16% 15 of 75 15 of 70

Russell 2000 Index 1979 12.79% 7 of 25 11 of 20

MSCI EAFE Index 1970 11.57% 9 of 34 4 of 29

Lehman Brothers U.S. Aggregate Index 1976 8.55% 13 of 28 11 of 23

Asset-Allocated Portfolio2 1976 11.24% 7 of 28 8 of 23

Note: True inception of the index reflects the date the data stream became available in Standard & Poor’s Micropal.1. Standard & Poor’s Micropal. Data as of 12/31/07.2. Asset-allocated portfolio is made up of 60% S&P 500 Index and 40% Lehman Brothers U.S. Aggregate Index.For illustrative purposes only and does not represent the performance of any Franklin, Templeton or Mutual Series fund.Past performance does not guarantee future results.



The Emotions of Investing

In 2002, Daniel Kahneman was awarded the Nobel Prize for economics based on his findings concerning decision making under uncertainty

– Demonstrated how human decisions may systematically depart from those predicted by shared economic theory

– Discovered how human judgment may take shortcuts that systematicallydepart from basic principles

– Inspired a new generation of researchers in economics and finance toenrich economic theory using insights from cognitive psychology to human intrinsic motivation


Investors Feel the Variance, Not the AverageSix Sigma Investment Process

Often, our inside-out view of the business is based on average or mean-based measures of our recent past. Investors don’t judge us on averages, they feel the variance in each investment. Six Sigma focuses first on reducing investment variation and then on improving investment capability.

Investors value consistent, predictable investments that deliver world-class levels of quality. This is what Six Sigma strives to produce.


• Alpha: Coefficient measuring the portion of an investment’s return arising from aspecific (non-market) risk. Estimates the amount of return expected from an investment’s inherent values, such as the rate of growth in earnings per share.

• Beta: Coefficient measuring a stock’s relative volatility. Beta measures the covariance of a stock in relation to the rest of the stock market.

• Value at Risk (VAR): Technique using the statistical analysis of historical markettrends and volatilities to estimate the likelihood that a given portfolio’s losses will exceed a certain amount.

• Standard Deviation: Statistical measure of risk: the degree to which anindividual value in a probability distribution tends to vary from the mean ofthe distribution.

Types of Risk Management


Six Sigma Risk Analysis

• Risk vs. Return Relationship

• Measuring Consistency


0%5%

10%15%20%25%

30%35%

0% 5% 10% 15% 20% 25% 30% 35%

Risk (Standard Deviation)

Ave

rage

Ann

ual T

otal

Ret

urn

(%)

Mutual Shares–Class ARisk: 10.57%Return: 10.76%

S&P 500 IndexRisk: 13.70%Return: 10.44% Fidelity Growth Company

Risk: 20.79%Return: 13.42%

Top 100 Domestic Equity Funds Based on Net Assets (Without Sales Charges)

1. Sources: Thomson Financial, © 2008 Morningstar. Risk is measured by the annualized standard deviation of monthly total returns. Fund performance does not include sales charges. One cannot invest in an index.

Past performance does not guarantee future results.

Risk vs. Return

20-Year Period Ended June 30, 20081


13% Return, 21% Standard Deviation

Scenario A—Higher Return/Higher RiskFund for 20 Years

68%

-21

+21 34%

-8%

95%

+21

-21

55%

-29%

99.99966%

+21

-21

76%

-50%

13%


11% Return, 11% Standard Deviation

Scenario B—Lower Risk/Lower ReturnFund for 20 Years

68%

-11

+11 22%

0%

95%

+11

-11

33%

-11%

99.99966%

+11

-11

44%

-22%

11%

TESIX

Dealer Use Only / Not for Distribution to the Public1. Source: Morningstar© Advanced Analytics for Principia. “Putting Risk in its Place,” by John Rakenthaler, 5/27/94.

Putting Risk in Its Place1

“It wasn’t even close. Historic returns did a very poor job of predicting future returns. In contrast, the connection between past risk and future risk was very powerful. Despite very different market conditions, the riskiest funds stayed the riskiest, and the safest funds stayed the safest. The pattern held true along the risk spectrum.”


Six Sigma Validation

“Over 10 years, two funds may have gained 12% per year on average, but they may have taken drastically different routes to get there. One might have had a few years of spectacular performance and a few years of low (or negative) returns, while the performance of the other may have been much steadier from year to year.”1

1. Source: www.sec.gov, Mutual Fund Investing: Look at More than a Fund’s Past Performance, 1/24/00


Six Sigma Validation

“Ideally, investors’ sustainable withdrawal in retirement depends not only on expected returns in the future, but also on the variability of returns.”1

1. Source: Financial Planning magazine: “Survival of the Fittest,” by Craig L. Israelsen and Keith Sechler, 1/1/05.

Dealer Use Only / Not for Distribution to the Public1. Source: Morningstar© Advanced Analytics for Principia. “Predicting the Future,” by Catherine V. Sanders, 9/1/95.

Predicting the Future1

“The upper left-hand section of the equity style box, including large-cap value, large-cap blend and mid-cap value, represented the funds with the least historic volatility.

The lower right-hand corner housed the highest risk funds—small-cap growth, mid-cap growth and small-cap blend. And the rest— large-cap growth, mid-cap blend and small-cap value—fell somewhere in between.”


1. Source: Thomson Financial. Data runs from 12/31/72 to 12/31/07. Note: List of funds for the draw-down problem fit was compiled using Lipper funds in the Growth and Income prospectus objective classification with a 12-month dividend yield greater than 2.8 (annual dividend yield for the S&P 500 for 1972) and in business as of 12/31/72. Fund performance does not include sales charges.


Average Annual Total Return %Since 12/31/72

Portfolio Return % Since 12/31/72

IncomePayout

Year Account Depleted

Remaining BalanceAs of 12/31/07

Short Hills, NJ 15.24% 15.75% $589,218 N/A $5,594,980 Valley Forge, PA 13.02% 11.88% $589,218 N/A $323,824 Los Angeles, CA 12.29% 11.73% $589,218 N/A $240,068 Los Angeles, CA 12.86% 11.71% $589,218 N/A $230,149 Boston, MA 11.72% 11.69% $589,218 N/A $215,764 New York, NY 12.26% 11.44% $589,218 N/A $91,044 Philadelphia, PA 11.03% 10.99% $497,958 2004 $0 Montpelier, VT 11.76% 10.56% $399,943 2001 $0 Lisle, IL 11.22% 7.59% $198,196 1990 $0 Boston, MA 10.13% 3.34% $125,969 1985 $0

The Draw-Down Problem1

Assumption: $100,000 investment + 8% initial withdrawal that increases by 4% each year.


Words of Wisdom

If risk is the problem…

reliability and consistency are the solutions.


S I X S I G M A I N V E S T I N GW I T H F R A N K L I N T E M P L E T O N


Average Annual Total Return %Since 12/31/72

Portfolio Return % Since 12/31/72

IncomePayout

Year Account Depleted

Remaining BalanceAs of 12/31/07

15.24% 15.75% $589,218 N/A $5,594,980 Valley Forge, PA 13.02% 11.88% $589,218 N/A $323,824 Los Angeles, CA 12.29% 11.73% $589,218 N/A $240,068 Los Angeles, CA 12.86% 11.71% $589,218 N/A $230,149 Boston, MA 11.72% 11.69% $589,218 N/A $215,764 New York, NY 12.26% 11.44% $589,218 N/A $91,044 Philadelphia, PA 11.03% 10.99% $497,958 2004 $0 Montpelier, VT 11.76% 10.56% $399,943 2001 $0 Lisle, IL 11.22% 7.59% $198,196 1990 $0 Boston, MA 10.13% 3.34% $125,969 1985 $0

Mutual Shares Fund

1. Source: Thomson Financial. Data runs from 12/31/72 to 12/31/07. Note: List of funds for the draw-down problem was compiled using Lipper funds in the Growth & Income prospectus objective category with a 12-month dividend yield greater than 2.8 (annual dividend yield for the S&P 500 for 1972) and in business as of 12/31/72. Fund performance does not include sales charges.


The Draw-Down Problem1

Assumption: $100,000 investment + 8% initial withdrawal that increases by 4% each year.


Mutual Series’ Investment Strategy

We are opportunistic value investors who think and act like company owners and strive to

reduce risk.


0%

5%

10%

15%

20%

0% 5% 10% 15% 20%

Risk (%)

Ret

urn

(%)

Mutual Shares Fund–Class A

S&P 500 Index

1. Source: © 2008 Morningstar, Lipper Inc. Risk is measured by the annualized standard deviation of monthly total returns. Index returns reflect reinvested dividends. Indexes are unmanaged, and one cannot invest directly in an index. Fund and peer group performance does not include sales charges; dividends and capital gains are reinvested at net asset value.


Mutual Shares Fund vs. S&P 500 Index (Without Sales Charge) Low Relative Risk

Risk vs. Return Comparison35-Year Period Ended June 30, 20081


The Value of Active Management

The performance data quoted represents past performance. Past performance does not guarantee future results. An investment’s return and principal value will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. Please call Franklin Templeton Investments at 1-800/223-2141 or visit franklintempleton.com for the fund’s most recent month-end performance.1. Average annual total returns assume reinvestment of dividends and capital gains at net asset value.2. Prior to 11/1/96, only a single class of fund shares was offered without a sales charge and Rule 12b-1 expenses. Returns shown are a

restatement of the original class to include Rule 12b-1 fees as though in effect from the fund’s inception. The fund offers other share classes, subject to different fees and expenses, which will affect their performance.

3. Source: © 2008 Morningstar. Index returns include reinvestment of dividends. Indexes are unmanaged, and one cannot investdirectly in an index.

Performance of Mutual Shares Fund

1-Year 3-Year 5-Year 10-Year 20-Year 35-Year

Mutual Shares Fund–Class A2 -19.47% 3.70% 8.21% 6.51% 10.76% 15.12%

S&P 500 Index3 -13.12% 4.41% 7.58% 2.88% 10.44% 10.92%

Without Sales Charge1



With Maximum 5.75% Sales Charge1

Class A Shares as of June 30, 2008


Without Sales Charge as of June 30, 2008

0.921.00?1.25?

3-Year Beta3…

1. Average annual total returns assume reinvestment of dividends and capital gains at net asset value. Prior to 11/1/96, only a single class of fund shares was offered without a sales charge and Rule 12b-1 expenses. Returns shown are a restatement of the original class to include Rule 12b-1 fees as though in effect from the fund’s inception. The fund offers other share classes, subject to different fees and expenses, which will affect their performance. Please call Franklin Templeton Investments at 1-800/223-2141 or visit franklintempleton.com for the fund’s standardized returns and most recent month-end performance.

2. Source: © 2008 Morningstar. Index returns include reinvestment of dividends. Indexes are unmanaged, and one cannot invest directly in an index.

3. Source for beta: Thomson Financial. Beta is a measure of a fund’s volatility relative to the S&P 500 Index. A beta greater than 1.00 indicates volatility greater than the S&P 500 Index. Based on monthly returns over the last three years.


How Much Risk Is Acceptable?



S&P 500 Index2 -13.12% 4.41% 7.58% 2.88% 10.44% 10.92%




S&P 500 Index2 -13.12% 4.41% 7.58% 2.88% 10.44% 10.92%

Beta3 — 0.92 0.87 0.66 0.63 0.62

Without Sales Charge as of June 30, 2008How Much Risk Is Acceptable?

1. Average annual total returns assume reinvestment of dividends and capital gains at net asset value. Prior to 11/1/96, only a single class of fund shares was offered without a sales charge and Rule 12b-1 expenses. Returns shown are a restatement of the original class to include Rule 12b-1 fees as though in effect from the fund’s inception. The fund offers other share classes, subject to different fees and expenses, which will affect their performance. Please call Franklin Templeton Investments at 1-800/223-2141 or visit franklintempleton.com for the fund’s standardized returns and most recent month-end performance.

2. Source: © 2008 Morningstar. Index returns include reinvestment of dividends. Indexes are unmanaged, and one cannot invest directly in an index.

3. Source for beta: Thomson Financial, 6/30/08. Beta is a measure of a fund’s volatility relative to the S&P 500 Index. A beta greater than 1.00 indicates volatility greater than the S&P 500 Index. Based on monthly returns over the last three years.



Review• What Is Six Sigma?

– A disciplined process focused on eliminating defectsand ensuring quality

• Six Sigma Investment Process– An investment process designed to reduce variance

and meet customer expectations

• Six Sigma and Franklin Templeton– Mutual Shares Fund offers a unique value approach that has provided

strong long-term performance and a record of lower volatility


474 XINV

The Next Step

• Share this brochure with your clients and show them the benefits of a value fund with a historical record of strong long-term performance and lower relative risk.

• NASDAQ Symbols:

Mutual Shares Fund

Class A: TESIX

Class C: TEMTX

To order, please call 1-800/223-2141

Franklin Templeton Distributors, Inc.One Franklin ParkwaySan Mateo, California 94403-19061-800/223-2141franklintempleton.com

Dealer Use Only / Not for Distribution to the Public 6SIG PPT 08/08

Please ask your clients to consider the investment objectives, risks, charges and expenses of the investment carefully before investing. The prospectus contains this and other information about the fund and can be obtained by contacting

you, the financial professional. Instruct your clients to read the prospectus carefully before investing.

six sigma investing

Economy & Finance

aggregate index

unmanaged index

msci eafe index

days average cycle

sigma investment process

s i xs

standard poors micropal

year period