Mutual Global Discovery Fund Annual Report · 2017-06-24 · Not part of the annual report | 3 In 2011 Mutual Global Discovery Fund found value in some new places, including biotechnology

Mutual Global Discovery Fund

DECEMBER 31, 2011

ANNUAL REPORTAND SHAREHOLDER LETTER

GLOBAL

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Not part of the annual report

Not part of the annual report | 1

ContentsAnnual Report

Mutual Global Discovery Fund . . 6

Performance Summary . . . . . . 13

Your Fund’s Expenses . . . . . . . 18

Financial Highlights and Statement of Investments . . . . 20

Financial Statements . . . . . . . 34

Notes to Financial Statements . . . . . . . . . . . . . . . 38

Report of Independent Registered Public Accounting Firm . . . . . . . . . . . 56

Tax Information . . . . . . . . . . . 57

Board Members and Officers . . 58

Shareholder Information . . . . . 63

Shareholder Letter . . . . . . . . 1

Shareholder LetterDear Mutual Global Discovery Fund Shareholder:

In 2011, volatility and uncertainty were dominant themes for investors.Concerns over sovereign credit and a pervasive political stalemate — largelyfocused on Europe but also in the U.S. — stifled the anemic economic recoveryin developed markets. A preference for perceived safety over uncertainty led tobetter relative performance in U.S. equity markets than those in Europe or Asia,albeit at low absolute levels. The 2.11% gain for the Standard & Poor’s® 500Index (S&P 500®) over the calendar year just matched its dividend yield, whilethe MSCI Europe Index in local currency was down 9.34%.1 These uninspiringabsolute returns also belie the underlying market volatility reflected by theapproximate 20 percentage point price swing in the S&P 500 and 35 percent-age point price swing in the MSCI Europe Index in local currency over thesame period.2 By contrast, one of the best performing assets in 2011 was the10-year U.S. Treasury note, which returned 16.14% as a result of its yieldfalling from 3.36% to 1.89% — although one might question how “safe” itwas to own 10-year bonds yielding less than 2% at year-end. Over the courseof 2011, Mutual Global Discovery Fund – Class Z lost 2.68%.

The threat of the eurozone’s collapse and potential ramifications for the globaleconomy highlighted a shift in focus from corporate to sovereign balancesheets. Going back 12 years, the creation of the euro as a common currencyfor a significant portion of Europe was in theory the key to a more unified and

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1. Source: © 2012 Morningstar. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstarand/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete ortimely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use ofthis information. The S&P 500 is a market capitalization-weighted index of 500 stocks designed to measure total U.S.equity market performance. The index is unmanaged and includes reinvested dividends. STANDARD & POOR’S®, S&P®

and S&P 500® are registered trademarks of Standard & Poor’s Financial Services LLC. Standard & Poor’s does not spon-sor, endorse, sell or promote any S&P index-based product. The MSCI Europe Index is a free float-adjusted, marketcapitalization-weighted index designed to measure equity market performance of developed countries in Europe. Theindex includes reinvested daily net dividends. One cannot invest directly in an index, and an index is not representativeof the Fund’s portfolio.

2. Sources: S&P; MSCI, Inc.

Average Annual Total Return

Class Z 12/31/11

1-Year -2.68%

5-Year +1.46%

10-Year +8.17%

Performance data represent past

performance, which does not

guarantee future results.

Investment return and principal

value will fluctuate, and you may

have a gain or loss when you sell

your shares. Current performance

may differ from figures shown.

Please visit franklintempleton.com

or call (800) 342-5236 for most

recent month-end performance.

2 | Not part of the annual report

stronger economic area. A collateral effect was the convergence of interestrates among the euro members, usually through a lowering of borrowing costsin less competitive countries such as Greece, Ireland and Portugal (versusGermany, economically the strongest of the group). Those “peripheral”countries responded by borrowing more and engaging in a boom of con-struction and consumption. After the global slowdown in 2008-2009, theboom times ended. Now these countries are struggling with significantnational debt and severe economic slowdowns. Credit markets have con-cluded that these countries might have unsustainable debt levels, andborrowing costs rose dramatically in 2011. As borrowing costs rise, con-cerns about solvency may become self-fulfilling and require a coordinatedresponse — a bailout or debt restructuring — to avoid a potentially uncon-trolled collapse of a major financial market participant, similar to LehmanBrothers in 2008, or worse.

The year became a painful exercise in watching European leaders attempt toimplement a structure for countries with debt problems to receive assistancewithout rewarding profligate spenders and unduly penalizing those who hadlived within their means. The process was understandably quite messy, withnational leaders engaging in multiple negotiations and operating within andaround the institutional structures of the European Union and their ownnational political constraints. This slow political process added to the market’snervousness and heightened uncertainty. The overall environment also discour-aged business activity and companies became reluctant to invest in the face of apotential eurozone meltdown. Even assuming a favorable outcome to the“European problem,” Europe stood on the brink of a recession and threatenedother markets with potential contagion.

The U.S. was not a model of economic clarity or decisiveness either. The U.S.budget deficit remains significant, and political conflict over the best timeframeand approach to address this deficit led to a showdown in mid-2011 betweenthe Democratic administration and the Republican majority in the House ofRepresentatives. The resulting uncertainty about the U.S. government’s abilityand commitment to cut the structural deficit and restore its balance sheet togood order led to a much publicized U.S. long-term debt downgrade by a majorratings agency.

Markets also seemed to reflect fear and uncertainty surrounding the continu-ing debate over China’s economy. China’s growth eventually will slow, it willhave to address its own bank solvency concerns and it must address increasingdemands for an improved standard of living from its average citizen. Thecountry is trying to address these longer term challenges, but in the short termthe key questions are whether the economic landing will be “hard” or “soft,”and what global ramifications may result.


In 2011 Mutual Global Discovery Fund found value in some new places,including biotechnology pioneer Amgen and Internet search giant Google.3 Inthe past we might not have invested in either company: both historically havebeen valued as high growth companies and, in Amgen’s case, reliant on justone or two products for the vast majority of revenues and profits. However,in 2011 we invested in both.

Amgen’s valuation has declined steadily over the past few years while profitshave been relatively unchanged. The decline in valuation was largely due tobiotech investors being less interested in a slower growth company followingthe negative regulatory action limiting the market size of Amgen’s anemiafranchises. We, however, found several things very interesting about the com-pany. First, the stagnation in aggregate financial performance seemed toreflect one franchise’s decline while masking growth in others. Our analysisindicated this change in the business mix combined with new product intro-ductions from Amgen’s significant research and development investmentsmay position the firm for future growth. Second, its pharmaceutical businessis largely biologics. Revenues typically collapse for traditional pharmaceuti-cals after patents expire, but we believe Amgen’s biologics have the potentialto generate profits for a long time to come because biologics are much morecomplex than traditional pharmaceuticals. Third, in our view, managementcorrectly assessed that a lower level of investment is needed to sustain thebusiness over time and focused on driving efficiencies through the organiza-tion and improving operating profitability. Last, the company historicallygenerated significant free cash flow and management has been committed topaying a substantial portion to shareholders in the form of dividends andshare buybacks. Subsequent to our investment the company initiated its first-ever dividend and also accelerated buybacks by tendering for about 10% ofits shares. We believed we were buying a strong and diverse biopharmaceuti-cal organization whose research investments have positioned it for revenuegrowth, with management focused on improving operating profits andreturning excess free cash flows to benefit shareholders through buybacksand dividends, and a stock trading at a price materially below our estimate of its intrinsic value.

Google’s valuation also declined as profits grew and cash accumulated on thebalance sheet, reflecting market skepticism about future growth and spendingdiscipline. We thought the shares in mid-2011 reached absolute valuation levelswe found interesting, with free cash flow yield comparable to that of otherfirms in which we invest. This low absolute valuation was inconsistent with the

3. Mutual Global Discovery Fund’s holdings are based on total net assets as of 12/31/11: Amgen 1.2% and Google0.8%.

strengths and opportunities we saw in Google. The company’s balance sheethad almost $40 billion of net cash. Growth remained strong and resilient, withrevenues growing well over 20% per year recently and 10% even in therecession of 2009. The firm remained well-positioned competitively, withdominant market share in Internet search despite competition from Yahoo!and Microsoft. And the firm retained interesting options in video withYouTube, and mobile with the Android operating system becoming the mostused smartphone operating system. Our analysis showed these growing areashave the potential to be very significant profit sources for the firm. As aresult, we viewed the shares as trading below the intrinsic value of the firmtoday, even if we assign little value to the huge opportunities that in our viewremain in front of the company.

Distressed debt opportunities in 2011 were unexpectedly limited. Quantitativeeasing and risk aversion have pushed investors into corporate credit markets intheir search for yield. As a result, companies with high leverage, many of themparticipants in the leveraged buyout wave of 2005-2007, were successful inobtaining credit and restructuring their debts to avoid near-term maturities.We found some interesting opportunities but fewer than we would haveexpected at the start of the year. Looking into 2012, we anticipate credit toremain available and opportunities to be idiosyncratic rather than widespread.

Merger and acquisition (M&A) activity remained muted. Economic uncer-tainty reduced many buyers’ willingness to commit to transactions, anddampened valuations reduced many companies’ willingness to sell. A globalrevitalization of regulation, exemplified by the Canadian government’s blockof BHP Billiton’s proposed acquisition of Potash and the U.S. Department ofJustice’s lawsuit to prevent AT&T from acquiring T-Mobile, also increased therisks of major transactions. The year 2011 ended with less M&A activity thananticipated, and 2012 looks to be similarly muted. We anticipate an increasein corporate restructurings via spin-offs or asset sales as alternatives to M&A.

We remain in the thick of the aftermath of the post-financial crisis recession.In the U.S., persistently high unemployment, significant budget deficits atevery level of government, and a potential rise in interest rates following theend of quantitative easing are troubling. In Europe, the sovereign debt crisis,inextricably linked to the survival of the euro as a currency and the need forongoing austerity and fiscal contraction, remains the focus of concern. InAsia, growth continues but at an uncertain pace. Chinese authorities areattempting to keep growth on track while coping with the issues of theirmajor trading partners. Beyond China, the implications of changes in devel-oped world monetary policy and exchange rates ripple through Asianmarkets. In the midst of these cross-currents, we continue to look for thecompany-specific opportunities that can provide attractive returns in a varietyof economic scenarios.

4 | Not part of the annual report


We thank you for your trust and your support.

Sincerely,

Peter A. LangermanChairman, President and Chief Executive OfficerFranklin Mutual Advisers, LLC

This letter reflects our analysis, opinions and portfolio holdings as of December 31, 2011, the end of the reportingperiod. The way we implement our main investment strategies and the resulting portfolio holdings may changedepending on factors such as market and economic conditions. These opinions may not be relied upon as invest-ment advice or an offer for a particular security. The information is not a complete analysis of every aspect ofany market, country, industry, security or the Fund. Statements of fact are from sources considered reliable, butthe investment manager makes no representation or warranty as to their completeness or accuracy. Althoughhistorical performance is no guarantee of future results, these insights may help you understand our investmentmanagement philosophy.

6 | Annual Report

This annual report for Mutual Global Discovery Fund covers the fiscal yearended December 31, 2011.

Performance Overview

Mutual Global Discovery Fund – Class Z had a -2.68% total return for the 12 months ended December 31, 2011. The Fund performed better than the -5.02% total return of the MSCI World Index, which tracks stock perform-ance in global developed markets, but underperformed the +2.11% totalreturn of the Standard & Poor’s 500 Index (S&P 500), which is a broad measure of U.S. stock performance.1 You can find the Fund’s long-term per-formance data in the Performance Summary beginning on page 13.

Economic and Market Overview

Global stocks declined in 2011 as deepening sovereign debt, politicalparalysis and economic growth concerns led to escalating investor anxietyand severe market volatility. Stocks entered the year supported by positivemomentum in corporate earnings and renewed economic stimulus meas-ures in the developed world. However, a number of events interrupted themarket’s rise early in 2011, including a severe natural disaster and nuclearcrisis in Japan and populist uprisings across the oil-and-gas-producingregions of the Middle East and North Africa. Global markets recoveredquickly from these setbacks but soon faced more significant turmoil asEurope’s sovereign debt crisis worsened in the summer. Portugal, Greece

Mutual Global Discovery FundYour Fund’s Goal and Main Investments: Mutual Global Discovery Fund seeks capital

appreciation by investing primarily in equity securities of companies of any nation the Fund’s managers

believe are at prices below their intrinsic value. The Fund may invest up to 100% of its assets in foreign

securities.

Annual Report

1. Source: © 2012 Morningstar. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstarand/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete ortimely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use ofthis information. The indexes are unmanaged and include reinvested dividends. One cannot invest directly in an index,and an index is not representative of the Fund’s portfolio.

The dollar value, number of shares or principal amount, and names of all portfolio holdings are listed in the Fund’sStatement of Investments (SOI). The SOI begins on page 25.

Performance data represent past

performance, which does not

guarantee future results. Investment

return and principal value will

fluctuate, and you may have a gain

or loss when you sell your shares.

Current performance may differ

from figures shown. Please visit

franklintempleton.com or call

(800) 342-5236 for most recent

month-end performance.

Annual Report | 7

and Ireland received bailouts and had their credit ratings slashed to junkgrade, while rising bond yields in the larger economies of Italy and Spain,and eventually in the critical core economies of Germany and France,threatened the survival of the European Monetary Union. The U.S.’s sover-eign debt issues and political dysfunction, accompanied by the downgradeof its AAA credit rating to AA+, further pressured investor sentiment dur-ing the summer months. Additionally, the precarious state of the globalbanking system as well as emerging signs of a renewed global economicslowdown and possible hard landing in China weighed on the markets.

Despite these global challenges, corporate profits remained remarkablyresilient, some signs of U.S. economic improvement emerged toward year-end, and European policymakers ultimately stepped up their response totheir sovereign debt and banking crisis. Greek and Italian prime ministerswere replaced with technocrats tasked with arresting a debt spiral, theEuropean Central Bank cut short-term interest rates and expanded banklending facilities, and six key global central banks agreed to lower dollarfunding costs for Europe’s distressed commercial banks. Meanwhile, theFederal Reserve Board increased purchases of long-dated bonds to reducekey borrowing costs and hinted at “additional policy accommodation.”Chinese policymakers lowered commercial bank reserve requirements andthe International Monetary Fund revamped its credit line and eased itslending terms. Commodities initially rallied due to the coordinated mone-tary stimulus, but most ultimately declined as global economic prospectsweakened. Gold and oil, however, made annual gains. In currency mar-kets, the euro declined with escalating weakness at year-end, while thedollar ultimately rose after a late surge. Amid general global marketdeclines, perceived safe-haven currencies such as the Japanese yen andSwiss franc rallied strongly, and U.S. Treasuries posted their best one-yearreturn since 2008.

Investment Strategy

At Mutual Series, we are committed to our distinctive value approach toinvesting, which we believe can generate above-average risk-adjusted returnsover time for our shareholders. Our major investment strategy is investing inundervalued stocks. When selecting undervalued equities, we are alwaysattracted to fundamentally strong companies with healthy balance sheets,high-quality assets, substantial free cash flow and shareholder-oriented man-agement teams and whose stocks are trading at discounts to our assessmentof the companies’ intrinsic or business value. We also look for asset richcompanies whose shares may be trading at depressed levels due to concernsover short-term earnings disappointments, litigation, management strategyor other perceived negatives. This strict value approach is not only intended

Geographic BreakdownBased on Total Net Assets as of 12/31/11

U.S.

France

U.K.

Germany

Switzerland

Hong Kong

Netherlands

Ireland

Other

Short-Term Investments & Other Net Assets

Denmark

49.7%

13.1%

7.2%

4.5%

4.5%

4.4%

1.6%

1.1%

1.0%

3.0%

9.9%

8 | Annual Report

Top 10 Sectors/IndustriesBased on Equity Securities as of 12/31/11

% of TotalNet Assets

Tobacco 9.8%

Oil, Gas & Consumable Fuels 7.4%

Pharmaceuticals 6.8%

Insurance 6.0%

Media 4.4%

Commercial Banks 4.1%

Food & Staples Retailing 3.4%

Beverages 3.1%

Industrial Conglomerates 2.8%

Diversified Financial Services 2.4%

to improve the likelihood of upside potential, but it is also intended toreduce the risk of substantial declines. While the vast majority of our under-valued equity investments are made in publicly traded companies globally,we may invest occasionally in privately held companies as well.

We complement this more traditional investment strategy with two others. One is distressed investing, a highly specialized, complex field that can takemany forms. The most common distressed investment the Fund undertakesis the purchase of financially troubled or bankrupt companies’ debt at a sub-stantial discount to face value. After the financially distressed company isreorganized, often in bankruptcy court, the old debt is typically replacedwith new securities issued by the financially stronger company.

The other piece of our investment strategy is participating in arbitrage situa-tions, another highly specialized field. When companies announce proposedmergers or takeovers, commonly referred to as “deals,” the target companymay trade at a discount to the bid it ultimately accepts. One form of arbi-trage involves purchasing the target company’s stock when it is tradingbelow the value we believe it would receive in a deal. In keeping with ourcommitment to a relatively conservative investment approach, we typicallyfocus our arbitrage efforts on announced deals, and eschew rumored dealsor other situations we consider relatively risky.

In addition, it is our practice to hedge the Fund’s currency exposure whenwe deem it advantageous for our shareholders.

Manager’s Discussion

Despite the weak performance of global stock markets in 2011, several Fundinvestments increased in value. Three particularly strong performers were U.K.-based tobacco companies British American Tobacco (BAT) and ImperialTobacco Group, and U.S. managed health care provider UnitedHealth Group.

BAT shares were a key contributor to Fund performance as the companyannounced operating results that repeatedly exceeded market expectationsthrough the third quarter of 2011. Management also announced it had com-pleted a five-year goal to realize £800 million in cost savings two years ahead ofschedule, and it laid out a new goal to continue growing operating margins forthe next six to seven years by increasing prices and cutting costs. In 2011, BATand other tobacco stocks also benefited from the defensive nature of their busi-ness models, which include pricing power, reasonably predictable operatingprofits and high dividend payout ratios. BAT has been a long-term Fund hold-ing, and we continue to believe the shares are an attractive investment in amarket fraught with uncertainty.

Annual Report | 9

During the year, Imperial Tobacco reported sufficient progress in deleveragingits balance sheet, and announced a dividend increase and share buyback pro-gram. In light of Imperial’s year-end 2011 stock valuation, we believed theshare buyback was an attractive way for the company to return cash to share-holders while simultaneously enhancing earnings growth. In addition, thecompany announced it intends to increase the dividend payout ratio and moveit closer to that of its competitors. In our analysis, the stock’s attractive valua-tion and the potential for future dividend growth to exceed the pace of its peerscould enable Imperial management to generate meaningful total shareholderreturns in the medium term.

UnitedHealth’s shares rose during the year as its earnings beat management’sinitial guidance in part due to lower-than-expected utilization of medical serv-ices by its members in addition to strong membership growth. The companyincreased its dividend in 2011, while its board of directors re-authorized thecompany’s share repurchase plan. At a UnitedHealth investor day convening inlate November, management reaffirmed its 13% to 15% long-term earningsgrowth rate goal, which it seeks to achieve primarily via high, single-digittopline growth and productivity enhancements.

Given the highly volatile year for global stock markets in general, several hold-ings had a negative effect on the Fund. These included large U.S. financialinstitutions Bank of America and Morgan Stanley, and German industrial con-glomerate ThyssenKrupp.

Bank of America shares declined in 2011 as investors reacted to the com-pany’s potential exposure to large mortgage-related losses. There was also agrowing concern that related losses might force the company into a dilutive,capital-raising scenario. Bank of America also faced a very difficult generaloperating environment in 2011. Low interest rates, weak lending, the impactof new consumer rules on fees, and a drop-off in capital markets activity allpressured earnings and the stock price. Like many other financial stocks,Bank of America was also impacted by contagion fears from Europe, changesin capital requirements and uncertainty over the impact of new regulations,such as Dodd-Frank. Although we still believed this holding held value, weexited our position in Bank of America and reallocated the capital proceedsto companies where we thought better risk-reward characteristics existed.

Morgan Stanley’s stock price decline was driven largely by negative sentimenttoward global investment banks, given economic and regulatory uncertainty,particularly in the U.S. and Europe. Additional fears surfaced during the sec-ond half of 2011 that Morgan Stanley held excessive sovereign exposure to

10 | Annual Report

certain highly leveraged European countries in its accounts, although thisturned out to be false. Morgan Stanley also faced operating challenges in itstwo main business segments, wealth management and institutional securities,due to client risk aversion and weak capital markets activity levels. At year-end, we continued to view Morgan Stanley as an attractive investment givenits low stock valuation and strong earnings potential. We also think the com-pany has made great strides over the past few years in terms of strengtheningits balance sheet while improving funding and capital positions.

ThyssenKrupp is an industrial conglomerate that has two lines of business —materials and technology. The materials segment includes one of the world’slargest non-integrated steel producers, while the technology division is diverseand includes segments that manufacture elevators, produce components forthe automotive industry and build large scale industrial plants, military shipsand submarines. ThyssenKrupp is a restructuring story with new managementworking to deliver on past investments and improve productivity. Its stockprice moved lower in the second half of 2011 due to concerns the global eco-nomic recovery was stalling and as leaders struggled to contain the Europeansovereign debt crisis. German industrial companies, including ThyssenKrupp,suffered as they are generally perceived to be most exposed to a weakeningEurope. The stock also moved lower because of company delays in rampingup a significant steel project in the Americas. Despite the recent pullback, wecontinue to believe the company is in the early stages of transformation andthat the company’s ongoing restructuring efforts could be a positive catalyst instreamlining its businesses.

During the year, the Fund held currency forwards to hedge a significant portionof the currency risk of the portfolio’s non-U.S. dollar investments. The hedgeshad a negligible impact on the Fund’s performance during the period.

Top 10 Equity Holdings12/31/11

Company % of TotalSector/Industry, Country Net Assets

British American Tobacco PLC 3.0% Tobacco, U.K.

Imperial Tobacco Group PLC 2.7%Tobacco, U.K.

CVS Caremark Corp. 2.2%Food & Staples Retailing, U.S.

Vodafone Group PLC 2.1%Wireless Telecommunication Services, U.K.

Merck & Co. Inc. 2.0%Pharmaceuticals, U.S.

Royal Dutch Shell PLC, A 2.0%Oil, Gas & Consumable Fuels, U.K.

Kraft Foods Inc., A 1.9%Food Products, U.S.

Pernod Ricard SA 1.8%Beverages, France

ACE Ltd. 1.8%Insurance, U.S.

Lorillard Inc. 1.8%Tobacco, U.S.

Annual Report | 11

Thank you for your continued participation in Mutual Global DiscoveryFund. We look forward to serving your future investment needs.

Peter A. LangermanCo-Portfolio Manager

Philippe Brugere-TrelatCo-Portfolio Manager

Timothy Rankin, CFAAssistant Portfolio Manager


CFA® is a trademark owned by CFA Institute.

The foregoing information reflects our analysis, opinions and portfolio holdings as of December 31, 2011, the endof the reporting period. The way we implement our main investment strategies and the resulting portfolio holdingsmay change depending on factors such as market and economic conditions. These opinions may not be reliedupon as investment advice or an offer for a particular security. The information is not a complete analysis ofevery aspect of any market, country, industry, security or the Fund. Statements of fact are from sources consid-ered reliable, but the investment manager makes no representation or warranty as to their completeness oraccuracy. Although historical performance is no guarantee of future results, these insights may help you under-stand our investment management philosophy.

12 | Annual Report

Peter Langerman has been portfolio manager for Mutual Global Discovery Fund since 2009.

He has been portfolio manager for Mutual Shares Fund since 2005. He joined Franklin

Templeton Investments in 1996, serving in various capacities, including President and Chief

Executive Officer of Franklin Mutual Advisers and member of the management team of the

Funds, including Mutual Shares Fund. From 2002 to 2005, he served as director of New

Jersey’s Division of Investment, overseeing employee pension funds. Between 1986 and

1996, Mr. Langerman was employed at Heine Securities Corporation, the Fund’s former

manager.

Philippe Brugere-Trelat has been portfolio manager for Mutual Global Discovery Fund since

2009. He has been lead portfolio manager for Mutual European Fund since 2005 and co-

portfolio manager for Mutual International Fund since 2009. He has been a member of the

management team of the Mutual Series Funds since 2004, when he rejoined Franklin

Templeton Investments. Previously, he was president and portfolio manager of Eurovest.

Between 1984 and 1994, Mr. Brugere-Trelat was employed at Heine Securities Corporation,

the Fund’s former manager.

Timothy Rankin rejoined the Mutual Series investment group and assumed assistant port-

folio manager responsibilities for Mutual Global Discovery Fund in 2010. Mr. Rankin had

previously worked at Mutual Series from 1997 through 2004. Most recently, he was

managing director of Blue Harbour Group, LLC, a private investment firm focused on

small- and mid-cap North American companies. Prior to his original employment with

Mutual Series, Mr. Rankin was an equity analyst at Glickenhaus & Co.

Annual Report | 13

Performance Summary as of 12/31/11

Price and Distribution Information

Class Z (Symbol: MDISX) Change 12/31/11 12/31/10

Net Asset Value (NAV) -$2.07 $27.47 $29.54

Distributions (1/1/11–12/31/11)

Dividend Income $0.5516

Short-Term Capital Gain $0.1655

Long-Term Capital Gain $0.5026

Total $1.2197

Class A (Symbol: TEDIX) Change 12/31/11 12/31/10






Total $1.1317

Class B (Symbol: TEDBX) Change 12/31/11 12/31/10






Total $0.8085

Class C (Symbol: TEDSX) Change 12/31/11 12/31/10






Total $0.9203

Class R (Symbol: TEDRX) Change 12/31/11 12/31/10






Total $1.0809

Your dividend income will vary depending on dividends or interest paid by securities in the Fund’sportfolio, adjusted for operating expenses of each class. Capital gain distributions are net profitsrealized from the sale of portfolio securities. The performance table and graphs do not reflect anytaxes that a shareholder would pay on Fund dividends, capital gain distributions, if any, or anyrealized gains on the sale of Fund shares. Total return reflects reinvestment of the Fund’s dividendsand capital gain distributions, if any, and any unrealized gains or losses.

Performance Summary (continued)

14 | Annual Report

Performance data represent past performance, which does not guarantee future results. Investment return and principalvalue will fluctuate, and you may have a gain or loss when you sell your shares. Current performance may differ from figures shown. For most recent month-end performance, go to franklintempleton.com or call (800) 342-5236.

Performance

Cumulative total return excludes sales charges. Average annual total return and value of $10,000 investment includemaximum sales charges. Class Z/R: no sales charges; Class A: 5.75% maximum initial sales charge; Class B: contin-gent deferred sales charge (CDSC) declining from 4% to 1% over six years, and eliminated thereafter; Class C: 1% CDSCin first year only.

Class Z 1-Year 5-Year 10-Year

Cumulative Total Return1 -2.68% +7.50% +119.26%

Average Annual Total Return2 -2.68% +1.46% +8.17%

Value of $10,000 Investment3 $9,732 $10,750 $21,926

Total Annual Operating Expenses4 1.04%

Class A 1-Year 5-Year 10-Year


Average Annual Total Return2 -8.57% -0.04% +7.19%



Class B 1-Year 5-Year 10-Year





Class C 1-Year 5-Year 10-Year





Class R 1-Year 5-Year 10-Year





Annual Report | 15


$15,000

$20,000

$25,000

Class Z (1/1/02–12/31/11)

$15,022

$13,335

$21,926

Mutual Global Discovery Fund S&P 5005 MSCI World Index5

12/1112/0912/0712/0512/031/02

$10,000

$5,000

Total Return Index Comparison for a Hypothetical $10,000 Investment

Total return represents the change in value of an investment over the periods shown. It includes anycurrent, applicable, maximum sales charge, Fund expenses, account fees and reinvested distribu-tions. The unmanaged indexes include reinvestment of any income or distributions. They differfrom the Fund in composition and do not pay management fees or expenses. One cannot investdirectly in an index.


Class Z 12/31/11

1-Year -2.68%

5-Year +1.46%

10-Year +8.17%


Class A 12/31/11

1-Year -8.57%

5-Year -0.04%

10-Year +7.19%

Class A (1/1/02–12/31/11)

$15,022$13,335


12/1112/0912/0712/0512/031/02

$10,000

$15,000

$20,000

$25,000

$5,000

$20,016

16 | Annual Report


$10,000

$15,000

$20,000

$25,000

$5,000

Class B (1/1/02–12/31/11)

$15,022$13,335

$20,128


12/1112/0912/0712/0512/031/02


Class B 12/31/11

1-Year -7.39%

5-Year +0.09%

10-Year +7.25%


Class C 12/31/11

1-Year -4.57%

5-Year +0.45%

10-Year +7.09%

Class C (1/1/02–12/31/11)

$15,022$13,335

$19,843


12/1112/0912/0712/0512/031/02

$15,000

$20,000

$25,000

$10,000

$5,000

Annual Report | 17


Endnotes

All investments involve risks. Value securities may not increase in price as anticipated or may decline further invalue. The Fund’s investments in foreign securities involve certain risks including currency fluctuations, andeconomic and political uncertainties. Smaller company stocks have exhibited greater price volatility than largercompany stocks, particularly over the short term. The Fund’s investments in companies engaged in mergers,reorganizations or liquidations also involve special risks as pending deals may not be completed on time or onfavorable terms. The Fund may invest in lower rated bonds, which entail higher credit risk. The Fund is activelymanaged but there is no guarantee that the manager’s investment decisions will produce the desired results. TheFund’s prospectus also includes a description of the main investment risks.

Class Z: Shares are available to certain eligible investors as described in the prospectus.

Class B: These shares have higher annual fees and expenses than Class A shares.

Class C: Prior to 1/1/04, these shares were offered with an initial sales charge; thus actual total returns would havediffered. These shares have higher annual fees and expenses than Class A shares.

Class R: Shares are available to certain eligible investors as described in the prospectus. These shares have higherannual fees and expenses than Class A shares.

1. Cumulative total return represents the change in value of an investment over the periods indicated.

2. Average annual total return represents the average annual change in value of an investment over the periodsindicated.

3. These figures represent the value of a hypothetical $10,000 investment in the Fund over the periods indicated.

4. Figures are as stated in the Fund’s prospectus current as of the date of this report. In periods of market volatility,assets may decline significantly, causing total annual Fund operating expenses to become higher than the figuresshown.

5. Source: © 2012 Morningstar. The S&P 500 is a market capitalization-weighted index of 500 stocks designed tomeasure total U.S. equity market performance. The MSCI World Index is a free float-adjusted, market capitalization-weighted index designed to measure equity market performance in global developed markets.

$15,000

$20,000

$25,000

$10,000

$5,000

Class R (1/1/02–12/31/11)


12/1112/0912/0712/051/02 12/03

$15,022$13,335

$20,867


Class R 12/31/11

1-Year -3.17%

5-Year +0.95%

10-Year +7.64%

18 | Annual Report

Your Fund’s Expenses

As a Fund shareholder, you can incur two types of costs:

• Transaction costs, including sales charges (loads) on Fund purchases; and

• Ongoing Fund costs, including management fees, distribution and service (12b-1) fees, and otherFund expenses. All mutual funds have ongoing costs, sometimes referred to as operating expenses.

The following table shows ongoing costs of investing in the Fund and can help you understandthese costs and compare them with those of other mutual funds. The table assumes a $1,000investment held for the six months indicated.

Actual Fund Expenses

The first line (Actual) for each share class listed in the table provides actual account values andexpenses. The “Ending Account Value” is derived from the Fund’s actual return, which includesthe effect of Fund expenses.

You can estimate the expenses you paid during the period by following these steps. Of course,your account value and expenses will differ from those in this illustration:

1. Divide your account value by $1,000.If an account had an $8,600 value, then $8,600 ÷ $1,000 = 8.6.

2. Multiply the result by the number under the heading “Expenses Paid During Period.”If Expenses Paid During Period were $7.50, then 8.6 x $7.50 = $64.50.

In this illustration, the estimated expenses paid this period are $64.50.

Hypothetical Example for Comparison with Other Funds

Information in the second line (Hypothetical) for each class in the table can help you compare ongoingcosts of investing in the Fund with those of other mutual funds. This information may not be usedto estimate the actual ending account balance or expenses you paid during the period. The hypothetical“Ending Account Value” is based on the actual expense ratio for each class and an assumed 5%annual rate of return before expenses, which does not represent the Fund’s actual return. The figureunder the heading “Expenses Paid During Period” shows the hypothetical expenses your accountwould have incurred under this scenario. You can compare this figure with the 5% hypotheticalexamples that appear in shareholder reports of other funds.

Annual Report | 19

Your Fund’s Expenses (continued)

Please note that expenses shown in the table are meant to highlight ongoing costs and do not reflectany transaction costs, such as sales charges. Therefore, the second line for each class is useful incomparing ongoing costs only, and will not help you compare total costs of owning differentfunds. In addition, if transaction costs were included, your total costs would have been higher.Please refer to the Fund prospectus for additional information on operating expenses.

Beginning Account Ending Account Expenses Paid During Class Z Value 7/1/11 Value 12/31/11 Period* 7/1/11–12/31/11

Actual $1,000 $ 925.20 $ 5.00

Hypothetical (5% return before expenses) $1,000 $1,020.01 $ 5.24

Class A

Actual $1,000 $ 923.50 $ 6.45


Class B

Actual $1,000 $ 920.50 $ 9.83

Hypothetical (5% return before expenses) $1,000 $1,014.97 $10.31

Class C

Actual $1,000 $ 920.40 $ 9.83

Hypothetical (5% return before expenses) $1,000 $1,014.97 $10.31

Class R

Actual $1,000 $ 922.70 $ 7.41


*Expenses are calculated using the most recent six-month expense ratio, annualized for each class (Z: 1.03%; A: 1.33%; B: 2.03%; C: 2.03%; and R: 1.53%) multiplied by the average account value over the period, multiplied by 184/365 to reflect the one-half year period.

20 | The accompanying notes are an integral part of these financial statements. | Annual Report

Mutual Global Discovery FundFinancial Highlights

Year Ended December 31,Class Z 2011 2010 2009 2008 2007

Per share operating performance(for a share outstanding throughout the year)

Net asset value, beginning of year . . . . . . . . . . . . . . . . . $29.54 $27.03 $22.54 $32.45 $30.45

Income from investment operationsa:

Net investment incomeb . . . . . . . . . . . . . . . . . . . . . . . 0.61 0.53c 0.18d 0.51 0.69

Net realized and unrealized gains (losses) . . . . . . . . . . (1.46) 2.55 4.62 (9.11) 2.76

Total from investment operations . . . . . . . . . . . . . . . . . (0.85) 3.08 4.80 (8.60) 3.45

Less distributions from:

Net investment income . . . . . . . . . . . . . . . . . . . . . . . (0.55) (0.57) (0.30) (0.44) (0.74)

Net realized gains . . . . . . . . . . . . . . . . . . . . . . . . . . . (0.67) — (0.01) (0.87) (0.71)

Total distributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1.22) (0.57) (0.31) (1.31) (1.45)

Redemption feese . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — — —f —f

Net asset value, end of year . . . . . . . . . . . . . . . . . . . . . $27.47 $29.54 $27.03 $22.54 $32.45

Total return . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2.68)% 11.37% 21.31% (26.55)% 11.32%

Ratios to average net assets

Expensesg . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.01% 1.04% 1.12%h 1.02%h 1.01%h

Expenses incurred in connection with securities sold short . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . —%i 0.02% 0.09% —%i —%i

Net investment income . . . . . . . . . . . . . . . . . . . . . . . . 2.11% 1.89%c 0.75%d 1.81% 2.09%

Supplemental data

Net assets, end of year (000’s) . . . . . . . . . . . . . . . . . . . $7,159,033 $7,210,122 $5,897,681 $3,490,622 $4,720,388

Portfolio turnover rate . . . . . . . . . . . . . . . . . . . . . . . . . 33.60% 37.76% 37.26% 25.23% 25.12%

aThe amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases ofthe Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund.bBased on average daily shares outstanding.cNet investment income per share includes approximately $0.05 per share received in the form of a special dividend paid in connection with a corporate real estate investment trust(REIT) conversion. Excluding this non-recurring amount, the ratio of net investment income to average net assets would have been 1.71%.dNet investment income per share includes approximately $(0.05) per share related to an adjustment for uncollectible interest. Excluding the effect of this adjustment, the ratio ofnet investment income to average net assets would have been 0.95%. eEffective September 1, 2008, the redemption fee was eliminated.fAmount rounds to less than $0.01 per share.gIncludes dividend expense on securities sold short and borrowing fees, if any. See below for the ratios of such expenses to average net assets for the periods presented. See Note 1(e).hBenefit of expense reduction rounds to less than 0.01%.iRounds to less than 0.01%.

Mutual Global Discovery FundFinancial Highlights (continued)

Annual Report | The accompanying notes are an integral part of these financial statements. | 21

Year Ended December 31,Class A 2011 2010 2009 2008 2007


Net asset value, beginning of year . . . . . . . . . . . . . . . . . $29.19 $26.72 $22.30 $32.09 $30.14


Net investment incomeb . . . . . . . . . . . . . . . . . . . . . . . 0.52 0.44c 0.11d 0.43 0.58

Net realized and unrealized gains (losses) . . . . . . . . . . (1.44) 2.52 4.55 (8.99) 2.73

Total from investment operations . . . . . . . . . . . . . . . . . (0.92) 2.96 4.66 (8.56) 3.31


Net investment income . . . . . . . . . . . . . . . . . . . . . . . (0.46) (0.49) (0.23) (0.36) (0.65)

Net realized gains . . . . . . . . . . . . . . . . . . . . . . . . . . . (0.67) — (0.01) (0.87) (0.71)

Total distributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1.13) (0.49) (0.24) (1.23) (1.36)

Redemption feese . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — — —f —f

Net asset value, end of year . . . . . . . . . . . . . . . . . . . . . $27.14 $29.19 $26.72 $22.30 $32.09

Total returng . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2.99)% 11.08% 20.89% (26.73)% 10.96%


Expensesh . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.31% 1.34% 1.42%i 1.30%i 1.32%i

Expenses incurred in connection with securities sold short . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . —%j 0.02% 0.09% —%j —%j

Net investment income . . . . . . . . . . . . . . . . . . . . . . . . 1.81% 1.59%c 0.45%d 1.53% 1.78%

Supplemental data

Net assets, end of year (000’s) . . . . . . . . . . . . . . . . . . . $7,617,500 $8,122,714 $7,259,737 $5,900,616 $8,913,527

Portfolio turnover rate . . . . . . . . . . . . . . . . . . . . . . . . . 33.60% 37.76% 37.26% 25.23% 25.12%

aThe amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases ofthe Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund.bBased on average daily shares outstanding.cNet investment income per share includes approximately $0.05 per share received in the form of a special dividend paid in connection with a corporate REIT conversion. Excludingthis non-recurring amount, the ratio of net investment income to average net assets would have been 1.41%.dNet investment income per share includes approximately $(0.05) per share related to an adjustment for uncollectible interest. Excluding the effect of this adjustment, the ratio ofnet investment income to average net assets would have been 0.65%. eEffective September 1, 2008, the redemption fee was eliminated.fAmount rounds to less than $0.01 per share.gTotal return does not reflect sales commissions or contingent deferred sales charges, if applicable.hIncludes dividend expense on securities sold short and borrowing fees, if any. See below for the ratios of such expenses to average net assets for the periods presented. See Note 1(e).iBenefit of expense reduction rounds to less than 0.01%.jRounds to less than 0.01%.



Year Ended December 31,Class BClass B 2011 2010 2009 2008 2007


Net asset value, beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . $28.71 $26.24 $21.89 $31.46 $29.55


Net investment income (loss)b . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.32 0.25c (0.05)d 0.23 0.36

Net realized and unrealized gains (losses) . . . . . . . . . . . . . . . . . . . (1.40) 2.45 4.45 (8.79) 2.67

Total from investment operations . . . . . . . . . . . . . . . . . . . . . . . . . . (1.08) 2.70 4.40 (8.56) 3.03


Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (0.14) (0.23) (0.04) (0.14) (0.41)

Net realized gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (0.67) — (0.01) (0.87) (0.71)

Total distributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (0.81) (0.23) (0.05) (1.01) (1.12)

Redemption feese . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — — —f —f

Net asset value, end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $26.82 $28.71 $26.24 $21.89 $31.46

Total returng . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3.65)% 10.29% 20.08% (27.28)% 10.22%


Expensesh . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.01% 2.04% 2.11%i 2.02%i 2.01%i

Expenses incurred in connection with securities sold short . . . . . . . . —%j 0.02% 0.09% —%j —%j

Net investment income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.11% 0.89%c (0.24)%d 0.81% 1.09%

Supplemental data

Net assets, end of year (000’s) . . . . . . . . . . . . . . . . . . . . . . . . . . . $45,696 $99,734 $147,419 $160,174 $276,175

Portfolio turnover rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33.60% 37.76% 37.26% 25.23% 25.12%

aThe amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases ofthe Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund.bBased on average daily shares outstanding.cNet investment income per share includes approximately $0.05 per share received in the form of a special dividend paid in connection with a corporate REIT conversion. Excludingthis non-recurring amount, the ratio of net investment income to average net assets would have been 0.71%.dNet investment income per share includes approximately $(0.05) per share related to an adjustment for uncollectible interest. Excluding the effect of this adjustment, the ratio ofnet investment income to average net assets would have been (0.04)%. eEffective September 1, 2008, the redemption fee was eliminated.fAmount rounds to less than $0.01 per share.gTotal return does not reflect sales commissions or contingent deferred sales charges, if applicable.hIncludes dividend expense on securities sold short and borrowing fees, if any. See below for the ratios of such expenses to average net assets for the periods presented. See Note 1(e).iBenefit of expense reduction rounds to less than 0.01%.jRounds to less than 0.01%.



Year Ended December 31,Class C 2011 2010 2009 2008 2007


Net asset value, beginning of year . . . . . . . . . . . . . . . . . . . $28.97 $26.53 $22.16 $31.84 $29.93


Net investment income (loss)b . . . . . . . . . . . . . . . . . . . . . 0.32 0.24c (0.06)d 0.23 0.36

Net realized and unrealized gains (losses) . . . . . . . . . . . . . (1.42) 2.49 4.51 (8.89) 2.70

Total from investment operations . . . . . . . . . . . . . . . . . . . . (1.10) 2.73 4.45 (8.66) 3.06


Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . (0.25) (0.29) (0.07) (0.15) (0.44)

Net realized gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (0.67) — (0.01) (0.87) (0.71)

Total distributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (0.92) (0.29) (0.08) (1.02) (1.15)

Redemption feese . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — — —f —f

Net asset value, end of year . . . . . . . . . . . . . . . . . . . . . . . . $26.95 $28.97 $26.53 $22.16 $31.84

Total returng . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3.64)% 10.26% 20.07% (27.27)% 10.24%


Expensesh . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.01% 2.04% 2.12%i 2.01%i 2.01%i

Expenses incurred in connection with securities sold short . . —%j 0.02% 0.09% —%j —%j

Net investment income (loss) . . . . . . . . . . . . . . . . . . . . . . . 1.11% 0.89%c (0.25)%d 0.82% 1.09%

Supplemental data

Net assets, end of year (000’s) . . . . . . . . . . . . . . . . . . . . . . $2,268,995 $2,587,189 $2,460,205 $1,978,793 $3,075,593

Portfolio turnover rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33.60% 37.76% 37.26% 25.23% 25.12%

aThe amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases ofthe Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund.bBased on average daily shares outstanding.cNet investment income per share includes approximately $0.05 per share received in the form of a special dividend paid in connection with a corporate REIT conversion. Excludingthis non-recurring amount, the ratio of net investment income to average net assets would have been 0.71%.dNet investment income per share includes approximately $(0.05) per share related to an adjustment for uncollectible interest. Excluding the effect of this adjustment, the ratio ofnet investment income to average net assets would have been (0.05)%. eEffective September 1, 2008, the redemption fee was eliminated.fAmount rounds to less than $0.01 per share.gTotal return does not reflect sales commissions or contingent deferred sales charges, if applicable.hIncludes dividend expense on securities sold short and borrowing fees, if any. See below for the ratios of such expenses to average net assets for the periods presented. See Note 1(e).iBenefit of expense reduction rounds to less than 0.01%.jRounds to less than 0.01%.



June 30, 2003 Year Ended December 31,Class R 2011 2010 2009 2008 2007


Net asset value, beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . $28.93 $26.50 $22.12 $31.85 $29.93


Net investment incomeb . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.46 0.38c 0.06d 0.36 0.51

Net realized and unrealized gains (losses) . . . . . . . . . . . . . . . . . . . (1.42) 2.49 4.52 (8.92) 2.72

Total from investment operations . . . . . . . . . . . . . . . . . . . . . . . . . . . (0.96) 2.87 4.58 (8.56) 3.23


Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (0.41) (0.44) (0.19) (0.30) (0.60)

Net realized gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (0.67) — (0.01) (0.87) (0.71)

Total distributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1.08) (0.44) (0.20) (1.17) (1.31)

Redemption feese . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — — —f —f

Net asset value, end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $26.89 $28.93 $26.50 $22.12 $31.85

Total returng . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3.17)% 10.84% 20.72% (26.92)% 10.76%


Expensesh . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.51% 1.54% 1.62%i 1.52%i 1.51%i

Expenses incurred in connection with securities sold short . . . . . . . . . —%j 0.02% 0.09% —%j —%j

Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.61% 1.39%c 0.25%d 1.31% 1.59%

Supplemental data

Net assets, end of year (000’s) . . . . . . . . . . . . . . . . . . . . . . . . . . . . $434,893 $422,042 $335,702 $206,858 $275,002

Portfolio turnover rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33.60% 37.76% 37.26% 25.23% 25.12%

aThe amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases ofthe Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund.bBased on average daily shares outstanding.cNet investment income per share includes approximately $0.05 per share received in the form of a special dividend paid in connection with a corporate REIT conversion. Excludingthis non-recurring amount, the ratio of net investment income to average net assets would have been 1.21%.dNet investment income per share includes approximately $(0.05) per share related to an adjustment for uncollectible interest. Excluding the effect of this adjustment, the ratio ofnet investment income to average net assets would have been 0.45%. eEffective September 1, 2008, the redemption fee was eliminated.fAmount rounds to less than $0.01 per share.gTotal return does not reflect sales commissions or contingent deferred sales charges, if applicable.hIncludes dividend expense on securities sold short and borrowing fees, if any. See below for the ratios of such expenses to average net assets for the periods presented. See Note 1(e).iBenefit of expense reduction rounds to less than 0.01%.jRounds to less than 0.01%.

Annual Report | 25

Mutual Global Discovery FundStatement of Investments, December 31, 2011

Country Shares Value

Common Stocks and Other Equity Interests 86.0%Aerospace & Defense 1.6%Goodrich Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 697,280 $ 86,253,536Raytheon Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 4,187,280 202,580,606

288,834,142

Auto Components 0.1%a,b,c Collins & Aikman Products Co., Contingent Distribution . . . . . . United States 1,967,769 6,552

a,d International Automotive Components Group Brazil LLC . . . . . . Brazil 3,819,425 3,099,960d,e International Automotive Components Group North America,

LLC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 26,272,706 11,137,000

14,243,512

Automobiles 0.9%Daimler AG . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Germany 1,882,930 82,295,193

a General Motors Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 3,781,830 76,657,694

158,952,887

Beverages 3.1%Coca-Cola Enterprises Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . United Kingdom 5,537,322 142,752,161Dr. Pepper Snapple Group Inc. . . . . . . . . . . . . . . . . . . . . . . . . United States 2,121,923 83,773,520Pernod Ricard SA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . France 3,492,339 323,912,831

550,438,512

Biotechnology 1.2%Amgen Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 3,156,874 202,702,879

Capital Markets 1.6%Morgan Stanley . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 8,804,610 133,213,749

a UBS AG . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Switzerland 11,963,386 142,538,132

275,751,881

Chemicals 0.9%a,b,c Dow Corning Corp., Contingent Distribution . . . . . . . . . . . . . . . United States 11,430,153 2,857,538

Linde AG . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Germany 1,096,523 163,140,457

165,997,995

Commercial Banks 4.1%BNP Paribas SA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . France 941,432 36,981,337

a CIT Group Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 1,691,104 58,968,797a,d FE Capital Holdings Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . Japan 29,212 —

HSBC Holdings PLC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United Kingdom 11,098,300 84,657,947KB Financial Group Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . South Korea 3,303,039 103,429,213

a,d NCB Warrant Holdings Ltd., A . . . . . . . . . . . . . . . . . . . . . . . . Japan 135,864 —PNC Financial Services Group Inc. . . . . . . . . . . . . . . . . . . . . . United States 3,118,000 179,815,060Wells Fargo & Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 9,007,338 248,242,235

712,094,589

Commercial Services & Supplies 0.2%Edenred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . France 1,622,423 39,940,138

Communications Equipment 1.3%Cisco Systems Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 7,847,650 141,885,512

a Motorola Mobility Holdings Inc. . . . . . . . . . . . . . . . . . . . . . . . United States 2,065,840 80,154,592

222,040,104

26 | Annual Report

Mutual Global Discovery FundStatement of Investments, December 31, 2011 (continued)

Construction & Engineering 0.8%Vinci SA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . France 3,281,974 $ 143,407,719

Construction Materials 1.1%CRH PLC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Ireland 9,071,961 180,354,650Hanil Cement Co. Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . South Korea 151,973 5,296,277

185,650,927

Consumer Finance 0.0%†

a Comdisco Holding Co. Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 929 5,481

Diversified Financial Services 2.4%Citigroup Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 2,872,623 75,578,711

a Deutsche Boerse AG . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Germany 1,539,181 80,702,482a ING Groep NV . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Netherlands 10,617,145 76,404,246

a,f North American Financial Holdings Inc., A, 144A . . . . . . . . . . . United States 866,477 12,997,155a,f North American Financial Holdings Inc., B, 144A, non-voting . . United States 2,980,444 44,706,660

NYSE Euronext . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 4,977,378 129,909,566

420,298,820

Diversified Telecommunication Services 1.2%a AboveNet Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 764,352 49,690,523Cable & Wireless Communication PLC . . . . . . . . . . . . . . . . . . . United Kingdom 39,390,535 23,304,736

a,b,c Global Crossing Holdings Ltd., Contingent Distribution . . . . . . . United States 45,658,716 —a,b,c Marconi Corp., Contingent Distribution . . . . . . . . . . . . . . . . . . United Kingdom 33,909,700 631,454

Vivendi SA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . France 6,100,485 133,597,914

207,224,627

Electric Utilities 2.3%a,d AET&D Holdings No. 1 Pty. Ltd. . . . . . . . . . . . . . . . . . . . . . . . Australia 14,532,996 —

E.ON AG . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Germany 8,730,160 186,779,845Exelon Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 5,081,970 220,405,039

407,184,884

Electrical Equipment 0.3%Alstom SA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . France 1,755,125 53,224,954

Energy Equipment & Services 0.9%Ensco PLC, ADR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 1,364,410 64,018,117

a Petroleum Geo-Services ASA . . . . . . . . . . . . . . . . . . . . . . . . . Norway 1,931,054 21,132,734Transocean Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 1,938,424 74,416,097

159,566,948

Food & Staples Retailing 3.4%CVS Caremark Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 9,397,975 383,249,421Koninklijke Ahold NV . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Netherlands 15,285,499 205,852,743

589,102,164

Food Products 2.0%g Farmer Brothers Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 881,753 6,736,593Kraft Foods Inc., A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 9,075,471 339,059,596

345,796,189


Common Stocks and Other Equity Interests (continued)

Annual Report | 27



Common Stocks and Other Equity Interests (continued)Health Care Equipment & Supplies 1.7%

a Boston Scientific Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 14,865,530 $ 79,381,930Medtronic Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 5,685,000 217,451,250

296,833,180

Health Care Providers & Services 2.5%a Medco Health Solutions Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . United States 3,019,394 168,784,125Rhoen-Klinikum AG . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Germany 4,217,560 80,353,358UnitedHealth Group Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 3,744,120 189,752,002

438,889,485

Hotels, Restaurants & Leisure 0.6%Accor SA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . France 4,348,874 110,239,023

Independent Power Producers & Energy Traders 0.8%a NRG Energy Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 7,323,147 132,695,424

Industrial Conglomerates 2.8%Jardine Matheson Holdings Ltd. . . . . . . . . . . . . . . . . . . . . . . . Hong Kong 4,224,266 198,751,715Jardine Strategic Holdings Ltd. . . . . . . . . . . . . . . . . . . . . . . . . Hong Kong 9,774,205 270,452,252Orkla ASA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Norway 1,753,163 13,088,666

482,292,633

Insurance 6.0%ACE Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 4,552,150 319,196,758

a Alleghany Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 81,228 23,173,536American International Group Inc. . . . . . . . . . . . . . . . . . . . . . . United States 5,818,230 134,982,936E-L Financial Corp. Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Canada 177,619 59,255,713

a,d,g Imagine Group Holdings Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . Bermuda 1,211,855 15,171,940MetLife Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 4,082,420 127,289,856

a,d Olympus Re Holdings Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 47,160 —PartnerRe Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Bermuda 1,813,630 116,453,182White Mountains Insurance Group Ltd. . . . . . . . . . . . . . . . . . . United States 172,815 78,364,690Zurich Financial Services AG . . . . . . . . . . . . . . . . . . . . . . . . . Switzerland 813,000 184,113,071

1,058,001,682

Internet Software & Services 0.8%a,h,i Google Inc., A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 217,770 140,657,643

IT Services 0.0%†

Glodyne Technoserve Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . India 28,863 130,010

Machinery 2.2%Schindler Holding AG, PC . . . . . . . . . . . . . . . . . . . . . . . . . . . Switzerland 2,147,107 250,326,111Schindler Holding AG, Registered . . . . . . . . . . . . . . . . . . . . . . Switzerland 536,905 62,424,826Stanley Black & Decker Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . United States 1,051,360 71,071,936

383,822,873

Marine 1.1%A.P. Moller - Maersk AS, B . . . . . . . . . . . . . . . . . . . . . . . . . . . Denmark 30,011 198,160,706

Media 4.4%British Sky Broadcasting Group PLC . . . . . . . . . . . . . . . . . . . . United Kingdom 12,114,430 137,926,685Daekyo Co. Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . South Korea 3,675,700 19,785,523Eutelsat Communications . . . . . . . . . . . . . . . . . . . . . . . . . . . . France 5,767,875 225,080,623

28 | Annual Report


Media (continued)News Corp., A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 4,194,499 $ 74,829,862News Corp., B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 207,309 3,768,878Time Warner Cable Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 1,720,140 109,349,300Viacom Inc., B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 4,602,500 208,999,525

779,740,396

Metals & Mining 0.7%ThyssenKrupp AG . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Germany 5,553,947 127,609,784

Multi-Utilities 1.2%GDF Suez . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . France 7,408,179 202,507,137

Multiline Retail 0.4%Kohl’s Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 1,389,700 68,581,695

Office Electronics 1.2%Xerox Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 25,408,017 202,247,815

Oil, Gas & Consumable Fuels 7.4%Apache Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 1,972,560 178,674,485BP PLC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United Kingdom 20,882,584 149,253,664El Paso Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 4,033,275 107,164,117Marathon Oil Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 6,460,540 189,100,006Marathon Petroleum Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 2,240,575 74,588,742Murphy Oil Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 1,999,830 111,470,524Royal Dutch Shell PLC, A . . . . . . . . . . . . . . . . . . . . . . . . . . . . United Kingdom 9,598,907 349,731,811The Williams Cos. Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 3,989,183 131,722,822

1,291,706,171

Pharmaceuticals 6.8%Eli Lilly & Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 5,008,410 208,149,520

a Hospira Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 2,687,730 81,626,360Merck & Co. Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 9,354,960 352,681,992Novartis AG, ADR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Switzerland 2,692,791 153,946,861Pfizer Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 13,882,268 300,412,279Teva Pharmaceutical Industries Ltd., ADR . . . . . . . . . . . . . . . . Israel 2,425,910 97,909,728

1,194,726,740

Real Estate Investment Trusts (REITs) 1.4%The Link REIT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Hong Kong 68,809,430 253,386,256

Real Estate Management & Development 0.4%c Canary Wharf Group PLC . . . . . . . . . . . . . . . . . . . . . . . . . . . . United Kingdom 5,400,183 19,824,981Great Eagle Holdings Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . Hong Kong 12,911,868 25,336,295Swire Pacific Ltd., B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Hong Kong 10,866,015 25,547,013

70,708,289

Software 2.2%Microsoft Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 9,666,180 250,934,033Nintendo Co. Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Japan 260,633 35,895,664

a Symantec Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 6,543,971 102,413,146

389,242,843



Annual Report | 29


Textiles, Apparel & Luxury Goods 0.1%Guinness Peat Group PLC . . . . . . . . . . . . . . . . . . . . . . . . . . . United Kingdom 21,777,050 $ 9,919,033

Tobacco 9.8%Altria Group Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 4,717,828 139,883,600British American Tobacco PLC . . . . . . . . . . . . . . . . . . . . . . . . United Kingdom 11,015,043 523,282,269Imperial Tobacco Group PLC . . . . . . . . . . . . . . . . . . . . . . . . . . United Kingdom 12,696,984 480,615,130

h,i Lorillard Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 2,753,451 313,893,414Philip Morris International Inc. . . . . . . . . . . . . . . . . . . . . . . . . United States 2,036,358 159,813,376Reynolds American Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 2,577,161 106,746,009

1,724,233,798

Wireless Telecommunication Services 2.1%Vodafone Group PLC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United Kingdom 133,141,090 370,071,081

Total Common Stocks and Other Equity Interests (Cost $13,401,147,475) . . . . . . . . . . . . . . . . . . . . . . 15,068,863,049

Preferred Stocks 0.5%Automobiles 0.5%Volkswagen AG, pfd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Germany 496,729 74,029,246

Diversified Financial Services 0.0%†

a,d Hightower Holding LLC, pfd., A, Series 2 . . . . . . . . . . . . . . . . . United States 1,563,594 3,275,072

Total Preferred Stocks (Cost $45,255,601) . . . . . . . . 77,304,318

Principal Amount*

Corporate Bonds, Notes and Senior Floating Rate Interests 3.4%

Clear Channel Communications Inc., j,k Delayed Draw 2 Term Loan, 3.946%, 1/29/16 . . . . . . . . . . United States 19,264,746 13,978,981

senior note, 9.00%, 3/01/21 . . . . . . . . . . . . . . . . . . . . . . . United States 10,283,000 8,714,842l senior note, PIK, 11.00%, 8/01/16 . . . . . . . . . . . . . . . . . . United States 40,687,000 25,836,245

j,k Tranche B Term Loan, 3.946%, 1/29/16 . . . . . . . . . . . . . . United States 115,685,000 85,831,792j,k Tranche C Term Loan, 3.946%, 1/29/16 . . . . . . . . . . . . . . United States 22,570,790 16,392,037

j,k iStar Financial Inc., Tranche A1 Term Loan, 5.00%, 6/28/13 . . . . . . . . . . . . . . United States 9,086,235 9,039,178Tranche A2 Term Loan, 7.00%, 6/30/14 . . . . . . . . . . . . . . United States 6,760,000 6,574,100

NRG Energy Inc., senior note, 7.375%, 1/15/17 . . . . . . . . . . . United States 31,620,000 32,884,800Realogy Corp., j,k Extended First Lien Term Loan, 4.691%, 10/10/16 . . . . . . . United States 117,025,627 105,009,553j,k Extended Synthetic Letter of Credit, 4.545%, 10/10/16 . . . United States 7,980,026 7,160,645

Second Lien Term Loan, 13.50%, 10/15/17 . . . . . . . . . . . . United States 17,030,000 17,093,862senior note, 11.50%, 4/15/17 . . . . . . . . . . . . . . . . . . . . . . United States 17,053,000 13,386,605

f senior secured note, 144A, 7.875%, 2/15/19 . . . . . . . . . . . United States 17,372,000 15,200,500Rite Aid Corp., senior note,

8.625%, 3/01/15 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 22,562,000 21,885,1409.375%, 12/15/15 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 28,987,000 28,117,390

j,k Texas Competitive Electric Holdings Co. LLC, Extended Term Loan, 4.776%, 10/10/17 . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 142,325,613 90,614,021



30 | Annual Report


Corporate Bonds, Notes and Senior Floating Rate Interests (continued)

f Texas Competitive Electric Holdings Co. LLC/Texas Competitive Electric Holdings Finance Inc., senior secured note, 144A,

11.50%, 10/01/20 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 118,132,000 $ 100,855,195

Total Corporate Bonds, Notes and Senior Floating Rate Interests (Cost $664,326,227) . . . . . . . . . . . . . 598,574,886

Corporate Notes and Senior Floating Rate Interests in Reorganization 0.8%

d,m Broadband Ventures III LLC, secured promissory note, 5.00%, 2/01/12 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 10,790 —

m NewPage Corp., senior secured note, 11.375%, 12/31/14 . . . . United States 145,817,000 100,340,323j,k,m Tribune Co., 6/04/14,

Incremental Term Loan, 7.25% . . . . . . . . . . . . . . . . . . . . United States 10,211,000 5,813,888n Initial Tranche B Term Loan, 5.25% . . . . . . . . . . . . . . . . . . United States 64,806,000 38,037,493

Corporate Notes and Senior Floating Rate Interestsin Reorganization (Cost $186,161,192) . . . . . . . . . . 144,191,704

Shares

Companies in Liquidation 0.0%†

a Adelphia Recovery Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 45,477,593 45,478a,b Adelphia Recovery Trust, Arahova Contingent Value Vehicle,

Contingent Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 5,538,790 227,090a,b,c Century Communications Corp., Contingent Distribution . . . . . . United States 15,282,000 —

a,d FIM Coinvestor Holdings I, LLC . . . . . . . . . . . . . . . . . . . . . . . . United States 30,279,560 —

Total Companies in Liquidation (Cost $5,237,836) . . 272,568

Total Investments before Short Term Investments (Cost $14,302,128,331) . . . . . . . . . . . . . . . . . . . . . . 15,889,206,525

Principal Amount*

Short Term Investments 6.7%Convertible Notes (Cost $22,098,440) 0.1%

j iStar Financial Inc., cvt., senior note, FRN, 0.872%, 10/01/12 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 23,752,000 21,376,800

U.S. Government and Agency Securities 6.6%o FHLB, 1/03/12 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 400,000 400,000

i,o U.S. Treasury Bills, 1/05/12 - 7/26/12 . . . . . . . . . . . . . . . . . . United States 1,162,500,000 1,162,396,845

Total U.S. Government and Agency Securities (Cost $1,162,782,517) . . . . . . . . . . . . . . . . . . . . . . . . 1,162,796,845

Total Investments (Cost $15,487,009,288) 97.4% . . 17,073,380,170

Options Written (0.0)%† . . . . . . . . . . . . . . . . . . . . . . . . . (2,367,453)

Securities Sold Short (0.6)% . . . . . . . . . . . . . . . . . . . . (109,298,110)

Other Assets, less Liabilities 3.2% . . . . . . . . . . . . . . . . 564,402,547

Net Assets 100.0% . . . . . . . . . . . . . . . . . . . . . . . . . . . . $17,526,117,154

Country Principal Amount* Value

Annual Report | 31


Country Number of Contracts Value

p Options Written (0.0)%†

Calls – Exchange-TradedInternet Software & Services (0.0)%†

Google Inc., A, February Strike Price $645, Expires 2/18/12 . . . United States 409 $ (1,153,380)

Tobacco (0.0)%†

Lorillard Inc., February Strike Price $115, Expires 2/18/12 . . . . United States 2,753 (1,214,073)

Total Options Written (Premiums Received $1,899,771) . . . . . . . . . . . . . . $ (2,367,453)

Shares

q Securities Sold Short (Proceeds $116,304,619) (0.6)%Health Care Providers & Services (0.6)%Express Scripts Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 2,445,695 $ (109,298,110)

†Rounds to less than 0.1% of net assets.*The principal amount is stated in U.S. dollars unless otherwise indicated.aNon-income producing.bContingent distributions represent the right to receive additional distributions, if any, during the reorganization of the underlying company. Shares represent total underlyingprincipal of debt securities.cSecurity has been deemed illiquid because it may not be able to be sold within seven days. At December 31, 2011, the aggregate value of these securities was $23,320,525,representing 0.13% of net assets.dSee Note 10 regarding restricted securities.eAt December 31, 2011, pursuant to the Fund’s policies and the requirements of applicable securities law, the Fund may be restricted from trading this security for a limited orextended period of time due to ownership limits and/or potential possession of material non-public information.fSecurity was purchased pursuant to Rule 144A under the Securities Act of 1933 and may be sold in transactions exempt from registration only to qualified institutional buyers or ina public offering registered under the Securities Act of 1933. These securities have been deemed liquid under guidelines approved by the Trust’s Board of Trustees. At December 31,2011, the aggregate value of these securities was $173,759,510, representing 0.99% of net assets.gSee Note 13 regarding holdings of 5% voting securities.hA portion or all of the security is held in connection with written option contracts open at year end.iSecurity or a portion of the security has been pledged as collateral for securities sold short, open futures and written options contracts. At December 31, 2011, the aggregatevalue of these securities and/or cash pledged as collateral was $230,974,158, representing 1.32% of net assets.jThe coupon rate shown represents the rate at period end.kSee Note 1(g) regarding senior floating rate interests.lIncome may be received in additional securities and/or cash.mSee Note 8 regarding credit risk and defaulted securities.nA portion or all of the security purchased on a delayed delivery basis. See Note 1(c).oThe security is traded on a discount basis with no stated coupon rate.pSee Note 1(d) regarding written options.qSee Note 1(e) regarding securities sold short.

32 | Annual Report


At December 31, 2011, the Fund had the following futures contracts outstanding. See Note 1(d).

Futures Contracts

Number of Notional Expiration Unrealized UnrealizedDescription Type Contracts Value Date Appreciation Depreciation

EUR/USD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Short 2,607 $422,594,700 3/19/12 $3,163,442 $ — GBP/USD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Short 1,160 112,375,000 3/19/12 — (4,086)

Unrealized appreciation (depreciation) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,163,442 (4,086)

Net unrealized appreciation (depreciation) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,159,356

At December 31, 2011, the Fund had the following forward exchange contracts outstanding. See Note 1(d).

Forward Exchange Contracts

Settlement Unrealized UnrealizedCurrency Counterparty Type Quantity Contract Amount Date Appreciation Depreciation

British Pound . . . . . . . . . . BANT Buy 7,000,000 $ 11,281,340 1/17/12 $ — $ (410,439)British Pound . . . . . . . . . . BBU Buy 3,249,432 5,075,418 1/17/12 — (29,096)British Pound . . . . . . . . . . BBU Buy 3,423,898 5,305,329 1/17/12 11,935 — British Pound . . . . . . . . . . HAND Buy 3,423,898 5,307,007 1/17/12 10,258 — British Pound . . . . . . . . . . BBU Sell 143,187,748 224,454,935 1/17/12 2,086,378 — British Pound . . . . . . . . . . HSBC Sell 139,695,135 218,832,429 1/17/12 1,887,851 — British Pound . . . . . . . . . . DBFX Sell 52,512,758 83,360,989 1/17/12 1,809,416 — British Pound . . . . . . . . . . BANT Sell 4,205,647 6,762,466 1/17/12 231,156 — New Zealand Dollar . . . . . . BBU Sell 13,893,363 10,402,864 1/17/12 — (400,075)New Zealand Dollar . . . . . . SSBT Buy 2,141,167 1,651,165 1/17/12 13,723 — Euro . . . . . . . . . . . . . . . . . BBU Buy 32,859,266 42,909,217 1/18/12 — (373,984)Euro . . . . . . . . . . . . . . . . . BANT Buy 59,318,478 77,114,021 1/18/12 — (328,214)Euro . . . . . . . . . . . . . . . . . SSBT Buy 6,140,257 8,224,260 1/18/12 — (275,901)Euro . . . . . . . . . . . . . . . . . SSBT Sell 169,280,754 234,792,406 1/18/12 15,664,070 — Euro . . . . . . . . . . . . . . . . . BANT Sell 223,274,987 309,944,603 1/18/12 20,922,519 — Euro . . . . . . . . . . . . . . . . . HSBC Sell 10,514,414 14,904,151 1/18/12 1,293,589 — Euro . . . . . . . . . . . . . . . . . DBFX Sell 5,241,249 7,434,711 1/18/12 650,088 — Euro . . . . . . . . . . . . . . . . . BBU Sell 10,514,414 14,887,050 1/18/12 1,276,489 — Japanese Yen . . . . . . . . . . BANT Buy 162,730,734 2,131,134 1/20/12 — (16,098)Japanese Yen . . . . . . . . . . BANT Sell 94,100,000 1,208,161 1/20/12 — (14,871)Japanese Yen . . . . . . . . . . HSBC Sell 49,800,000 642,995 1/20/12 — (4,263)Japanese Yen . . . . . . . . . . DBFX Buy 37,661,400 483,504 1/20/12 5,987 — Japanese Yen . . . . . . . . . . BANT Buy 39,876,918 512,623 1/20/12 5,664 — Japanese Yen . . . . . . . . . . DBFX Sell 1,303,751,424 17,011,259 1/20/12 66,206 — Canadian Dollar . . . . . . . . . BANT Buy 5,047,337 4,847,894 1/31/12 100,848 — Canadian Dollar . . . . . . . . . DBFX Buy 6,999,500 6,829,573 1/31/12 33,199 — Canadian Dollar . . . . . . . . . BANT Sell 66,100,911 66,290,834 1/31/12 1,481,129 — Swiss Franc . . . . . . . . . . . . DBFX Buy 94,219,567 110,453,359 2/10/12 — (9,961,535)Swiss Franc . . . . . . . . . . . . BBU Buy 46,110,153 53,958,040 2/10/12 — (4,778,303)Swiss Franc . . . . . . . . . . . . SSBT Buy 9,298,000 12,566,223 2/10/12 — (2,649,250)Swiss Franc . . . . . . . . . . . . BANT Buy 47,409,267 51,892,624 2/10/12 — (1,327,292)Swiss Franc . . . . . . . . . . . . BBU Sell 276,192,896 358,019,591 2/10/12 63,440,355 — Swiss Franc . . . . . . . . . . . . DBFX Sell 279,216,451 360,812,335 2/10/12 63,008,264 — Swiss Franc . . . . . . . . . . . . HSBC Sell 12,871,493 14,161,772 2/10/12 433,415 —



Forward Exchange Contracts (continued)

Settlement Unrealized UnrealizedCurrency Counterparty Type Quantity Contract Amount Date Appreciation Depreciation

Swiss Franc . . . . . . . . . . . . BANT Sell 14,045,508 $ 15,083,752 2/10/12 $ 103,226 $ — British Pound . . . . . . . . . . HSBC Sell 68,529,166 105,877,562 2/21/12 — (511,489)British Pound . . . . . . . . . . BANT Sell 139,417,887 219,862,007 2/21/12 3,420,783 — British Pound . . . . . . . . . . SSBT Sell 3,724,001 5,843,517 2/21/12 62,139 — British Pound . . . . . . . . . . DBFX Sell 12,108,176 18,971,677 2/21/12 174,173 — British Pound . . . . . . . . . . HSBC Sell 3,724,001 5,844,894 2/21/12 63,517 — British Pound . . . . . . . . . . BBU Sell 3,724,001 5,840,508 2/21/12 59,130 — Australian Dollar . . . . . . . . BBU Sell 4,981,879 4,807,912 2/23/12 — (256,344)Australian Dollar . . . . . . . . DBFX Sell 2,004,821 1,934,852 2/23/12 — (103,119)Australian Dollar . . . . . . . . BBU Buy 91,963,468 91,963,468 2/23/12 1,520,642 — Australian Dollar . . . . . . . . BANT Sell 84,976,768 86,931,234 2/23/12 549,351 — Euro . . . . . . . . . . . . . . . . . BBU Sell 200,349,225 287,552,742 2/29/12 28,109,451 — Euro . . . . . . . . . . . . . . . . . BANT Sell 20,000,000 27,544,400 2/29/12 1,645,294 — Euro . . . . . . . . . . . . . . . . . DBFX Sell 174,533,702 236,965,685 2/29/12 10,952,343 — Euro . . . . . . . . . . . . . . . . . BBU Buy 12,382,518 16,418,105 3/15/12 — (380,472)Euro . . . . . . . . . . . . . . . . . SSBT Buy 525,073 734,057 3/15/12 — (53,991)Euro . . . . . . . . . . . . . . . . . BANT Sell 235,266,809 321,412,784 3/15/12 16,699,100 — Euro . . . . . . . . . . . . . . . . . BBU Sell 187,622,614 255,665,321 3/15/12 12,659,611 — Euro . . . . . . . . . . . . . . . . . DBFX Sell 6,019,178 7,905,408 3/15/12 109,468 — British Pound . . . . . . . . . . BBU Sell 134,370,914 207,468,691 3/19/12 — (1,079,152)British Pound . . . . . . . . . . BANT Sell 112,407,399 177,154,060 3/19/12 2,694,277 — British Pound . . . . . . . . . . BANT Sell 71,003,839 109,447,483 4/16/12 — (719,677)British Pound . . . . . . . . . . DBFX Sell 3,665,158 5,680,336 4/16/12 — (6,400)Euro . . . . . . . . . . . . . . . . . BBU Sell 267,230,487 357,552,028 4/16/12 11,282,035 — Euro . . . . . . . . . . . . . . . . . HSBC Sell 31,162,926 42,056,719 4/16/12 1,676,647 — Euro . . . . . . . . . . . . . . . . . SSBT Sell 5,315,481 7,166,066 4/16/12 278,410 — Euro . . . . . . . . . . . . . . . . . DBFX Sell 65,600,539 88,112,661 4/16/12 3,109,268 — Euro . . . . . . . . . . . . . . . . . BANT Sell 53,605,705 72,083,977 4/16/12 2,623,165 — Euro . . . . . . . . . . . . . . . . . HAND Sell 32,382,013 43,592,429 4/16/12 1,632,698 — Norwegian Krone . . . . . . . . HAND Sell 62,587,230 10,405,192 6/19/12 — (100)Norwegian Krone . . . . . . . . HAND Sell 3,620,000 603,283 6/19/12 1,449 —

Unrealized appreciation (depreciation) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 273,858,716 (23,680,065)

Net unrealized appreciation (depreciation) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $250,178,651

See Abbreviations on page 55.


Mutual Global Discovery FundFinancial Statements

Statement of Assets and LiabilitiesDecember 31, 2011

Assets:Investments in securities:

Cost - Unaffiliated issuers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $15,461,462,818Cost - Non-controlled affiliated issuers (Note 13) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,546,470

Total cost of investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $15,487,009,288

Value - Unaffiliated issuers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $17,051,471,637Value - Non-controlled affiliated issuers (Note 13) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,908,533

Total value of investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,073,380,170Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,206,515Restricted Cash (Note 1h) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 185,846,000Foreign currency, at value (cost $201,261,929) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 201,021,269Receivables:

Investment securities sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26,985,297Capital shares sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23,097,042Dividends and interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77,162,211

Due from brokers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102,611,192Unrealized appreciation on forward exchange contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 273,858,716Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 477

Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,974,168,889

Liabilities:Payables:

Investment securities purchased . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52,064,740Capital shares redeemed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45,944,023Affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,180,689Variation margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,539,838

Options written, at value (premiums received $1,899,771) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,367,453Securities sold short, at value (proceeds $116,304,619) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 109,298,110Due to brokers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 185,846,000Unrealized depreciation on forward exchange contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23,680,065Accrued expenses and other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,130,817

Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 448,051,735

Net assets, at value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $17,526,117,154

Net assets consist of:Paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $15,736,396,294Distributions in excess of net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (15,761,985)Net unrealized appreciation (depreciation) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,845,396,529Accumulated net realized gain (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (39,913,684)

Net assets, at value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $17,526,117,154


Mutual Global Discovery FundFinancial Statements (continued)

Statement of Assets and Liabilities (continued)December 31, 2011

Class Z:Net assets, at value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $7,159,033,051

Shares outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 260,608,679

Net asset value and maximum offering price per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $27.47

Class A:Net assets, at value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $7,617,499,863


Net asset value per sharea . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $27.14

Maximum offering price per share (net asset value per share ÷ 94.25%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $28.80

Class B:Net assets, at value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 45,696,194


Net asset value and maximum offering price per sharea . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $26.82

Class C:Net assets, at value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,268,994,717


Net asset value and maximum offering price per sharea . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $26.95

Class R:Net assets, at value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 434,893,329


Net asset value and maximum offering price per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $26.89

aRedemption price is equal to net asset value less contingent deferred sales charges, if applicable.



Statement of Operationsfor the year ended December 31, 2011

Investment income:Dividends: (net of foreign taxes of $27,222,543)

Unaffiliated issuers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 524,468,058Non-controlled affiliated issuers (Note 13) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52,905

Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56,087,710Income from securities loaned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,721

Total investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 580,630,394

Expenses:Management fees (Note 3a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 138,848,542Administrative fees (Note 3b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,196,099Distribution fees: (Note 3c)

Class A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24,388,637Class B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 738,380Class C . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,107,605Class R . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,219,781

Transfer agent fees (Note 3e) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29,357,732Custodian fees (Note 4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,966,804Reports to shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,798,253Registration and filing fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 313,343Professional fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 462,731Trustees’ fees and expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 566,238Dividends on securities sold short . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52,247Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 446,798

Total expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 240,463,190

Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 340,167,204

Realized and unrealized gains (losses):Net realized gain (loss) from:

Investments:Unaffiliated issuers (net of foreign taxes of $7,488,674) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 338,343,506Non-controlled affiliated issuers (Note 13) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,443,038

Written options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 876,779Foreign currency transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (442,039,061)Futures contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41,023,942Securities sold short . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (657,427)

Net realized gain (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (61,009,223)

Net change in unrealized appreciation (depreciation) on:Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,245,265,594)Translation of other assets and liabilities denominated in foreign currencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . 339,496,213

Change in deferred taxes on unrealized appreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,614,710

Net change in unrealized appreciation (depreciation) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (898,154,671)

Net realized and unrealized gain (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (959,163,894)

Net increase (decrease) in net assets resulting from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (618,996,690)



Statements of Changes in Net Assets

Year Ended December 31,

2011 2010Increase (decrease) in net assets:

Operations:Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 340,167,204 $ 267,741,925Net realized gain (loss) from investments, written options, foreign currency transactions,

futures contracts and securities sold short . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (61,009,223) 905,602,873Net change in unrealized appreciation (depreciation) on investments, translation of

other assets and liabilities denominated in foreign currencies and deferred taxes . . . . . (898,154,671) 617,451,867

Net increase (decrease) in net assets resulting from operations . . . . . . . . . . . . . . . (618,996,690) 1,790,796,665

Distributions to shareholders from:Net investment income:

Class Z . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (141,424,426) (135,947,945)Class A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (128,684,642) (132,747,903)Class B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (253,745) (807,879)Class C . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (21,195,741) (25,586,255)Class R . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (6,624,113) (6,310,251)

Net realized gains:Class Z . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (172,951,923) —Class A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (187,086,368) —Class B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,474,496) —Class C . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (57,980,060) —Class R . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (10,418,931) —

Total distributions to shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (728,094,445) (301,400,233)

Capital share transactions: (Note 2)Class Z . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 497,251,143 738,576,359Class A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77,865,667 206,116,556Class B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (50,101,063) (57,605,417)Class C . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (138,988,999) (88,613,831)Class R . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45,380,883 53,185,858

Total capital share transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 431,407,631 851,659,525

Net increase (decrease) in net assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (915,683,504) 2,341,055,957Net assets:

Beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,441,800,658 16,100,744,701

End of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $17,526,117,154 $18,441,800,658

Distributions in excess of net investment income included in net assets:End of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (15,761,985) $ (30,405,321)

38 | Annual Report

Mutual Global Discovery FundNotes to Financial Statements

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

Franklin Mutual Series Funds (Trust) is registered under the Investment Company Act of 1940,as amended, (1940 Act) as an open-end investment company, consisting of seven separate funds.The Mutual Global Discovery Fund (Fund) is included in this report. The financial statements ofthe remaining funds in the Trust are presented separately. The Fund offers five classes of shares:Class Z, Class A, Class B, Class C, and Class R. Each class of shares differs by its initial salesload, contingent deferred sales charges, distribution fees, voting rights on matters affecting a single class and its exchange privilege.

The following summarizes the Fund’s significant accounting policies.

a. Financial Instrument Valuation

The Fund’s investments in securities and other financial instruments are carried at fair valuedaily. Fair value is the price that would be received to sell an asset or paid to transfer a liabilityin an orderly transaction between market participants on the measurement date. Under proce-dures approved by the Trust’s Board of Trustees, the Fund may utilize independent pricingservices, quotations from securities and financial instrument dealers, and other market sourcesto determine fair value.

Equity securities and derivative financial instruments (derivatives) listed on an exchange or on theNASDAQ National Market System are valued at the last quoted sale price or the official closingprice of the day, respectively. Foreign equity securities are valued as of the close of trading on theforeign stock exchange on which the security is primarily traded, or the NYSE, whichever is ear-lier. The value is then converted into its U.S. dollar equivalent at the foreign exchange rate ineffect at the close of the NYSE on the day that the value of the security is determined. Over-the-counter securities are valued within the range of the most recent quoted bid and ask prices.Securities that trade in multiple markets or on multiple exchanges are valued according to thebroadest and most representative market. Certain equity securities are valued based upon funda-mental characteristics or relationships to similar securities.

Debt securities generally trade in the over-the-counter market rather than on a securities exchange.The Fund’s pricing services use multiple valuation techniques to determine fair value. In instanceswhere sufficient market activity exists, the pricing services may utilize a market-based approachthrough which quotes from market makers are used to determine fair value. In instances wheresufficient market activity may not exist or is limited, the pricing services also utilize proprietaryvaluation models which may consider market characteristics such as benchmark yield curves,option-adjusted spreads, credit spreads, estimated default rates, coupon rates, anticipated timing ofprincipal repayments, underlying collateral, and other unique security features in order to estimatethe relevant cash flows, which are then discounted to calculate the fair value. Securities denomi-nated in a foreign currency are converted into their U.S. dollar equivalent at the foreign exchangerate in effect at the close of the NYSE on the date that the values of the foreign debt securities aredetermined.

Annual Report | 39

Mutual Global Discovery FundNotes to Financial Statements (continued)

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)

a. Financial Instrument Valuation (continued)

Certain derivatives trade in the over-the-counter market. The Fund’s pricing services use varioustechniques including industry standard option pricing models and proprietary discounted cashflow models to determine the fair value of those instruments. The Fund’s net benefit or obliga-tion under the derivative contract, as measured by the fair market value of the contract, isincluded in net assets.

The Fund has procedures to determine the fair value of securities and other financial instru-ments for which market prices are not readily available or which may not be reliably priced.Under these procedures, the Fund primarily employs a market-based approach which may userelated or comparable assets or liabilities, recent transactions, market multiples, book values,and other relevant information for the investment to determine the fair value of the investment.The Fund may also use an income-based valuation approach in which the anticipated futurecash flows of the investment are discounted to calculate fair value. Discounts may also beapplied due to the nature or duration of any restrictions on the disposition of the investments.Due to the inherent uncertainty of valuations of such investments, the fair values may differ sig-nificantly from the values that would have been used had an active market existed.

Trading in securities on foreign securities stock exchanges and over-the-counter markets may becompleted before the daily close of business on the NYSE. Occasionally, events occur betweenthe time at which trading in a foreign security is completed and the close of the NYSE thatmight call into question the reliability of the value of a portfolio security held by the Fund. As aresult, differences may arise between the value of the Fund’s portfolio securities as determined atthe foreign market close and the latest indications of value at the close of the NYSE. In order tominimize the potential for these differences, the investment manager monitors price movementsfollowing the close of trading in foreign stock markets through a series of country specific mar-ket proxies (such as baskets of American Depositary Receipts, futures contracts and exchangetraded funds). These price movements are measured against established trigger thresholds foreach specific market proxy to assist in determining if an event has occurred that may call intoquestion the reliability of the values of the foreign securities held by the Fund. If such an eventoccurs, the securities may be valued using fair value procedures, which may include the use ofindependent pricing services.

b. Foreign Currency Translation

Portfolio securities and other assets and liabilities denominated in foreign currencies are trans-lated into U.S. dollars based on the exchange rate of such currencies against U.S. dollars on thedate of valuation. The Fund may enter into foreign currency exchange contracts to facilitatetransactions denominated in a foreign currency. Purchases and sales of securities, income andexpense items denominated in foreign currencies are translated into U.S. dollars at the exchangerate in effect on the transaction date. Portfolio securities and assets and liabilities denominatedin foreign currencies contain risks that those currencies will decline in value relative to the U.S.

40 | Annual Report


b. Foreign Currency Translation (continued)

dollar. Occasionally, events may impact the availability or reliability of foreign exchange ratesused to convert the U.S. dollar equivalent value. If such an event occurs, the foreign exchangerate will be valued at fair value using procedures established and approved by the Trust’s Boardof Trustees.

The Fund does not separately report the effect of changes in foreign exchange rates fromchanges in market prices on securities held. Such changes are included in net realized and unre-alized gain or loss from investments on the Statement of Operations.

Realized foreign exchange gains or losses arise from sales of foreign currencies, currency gainsor losses realized between the trade and settlement dates on securities transactions and the dif-ference between the recorded amounts of dividends, interest, and foreign withholding taxes andthe U.S. dollar equivalent of the amounts actually received or paid. Net unrealized foreignexchange gains and losses arise from changes in foreign exchange rates on foreign denominatedassets and liabilities other than investments in securities held at the end of the reporting period.

c. Securities Purchased on a Delayed Delivery Basis

The Fund purchases securities on a delayed delivery basis, with payment and delivery scheduledfor a future date. These transactions are subject to market fluctuations and are subject to therisk that the value at delivery may be more or less than the trade date purchase price. Althoughthe Fund will generally purchase these securities with the intention of holding the securities, itmay sell the securities before the settlement date. Sufficient assets have been segregated for thesesecurities.

d. Derivative Financial Instruments

The Fund invested in derivatives in order to manage risk or gain exposure to various otherinvestments or markets. Derivatives are financial contracts based on an underlying or notionalamount, require no initial investment or an initial net investment that is smaller than would nor-mally be required to have a similar response to changes in market factors, and require or permitnet settlement. Derivatives contain various risks including the potential inability of the counter-party to fulfill their obligations under the terms of the contract, the potential for an illiquidsecondary market, and/or the potential for market movements which expose the Fund to gainsor losses in excess of the amounts shown on the Statement of Assets and Liabilities. Realizedgain and loss and unrealized appreciation and depreciation on these contracts for the period areincluded in the Statement of Operations.


Annual Report | 41


d. Derivative Financial Instruments (continued)

The Fund entered into futures contracts primarily to manage exposure to certain foreign curren-cies. A futures contract is an agreement between the Fund and a counterparty to buy or sell anasset for a specified price on a future date. Required initial margin deposits of cash or securitiesare pledged by the Fund. Subsequent payments, known as variation margin, are made orreceived by the Fund, depending on fluctuations in the value of the underlying security. Suchvariation margin is accounted for as unrealized appreciation or depreciation until the contract isclosed, at which time the gains or losses are realized.

The Fund entered into forward exchange contracts primarily to manage exposure to certain for-eign currencies. A forward exchange contract is an agreement between the Fund and acounterparty to buy or sell a foreign currency for a specific exchange rate on a future date.Pursuant to the terms of the forward exchange contracts, cash or securities may be required tobe deposited as collateral. Unrestricted cash may be invested according to the Fund’s investmentobjectives.

The Fund purchased or wrote option contracts primarily to manage exposure to equity pricerisk. An option is a contract entitling the holder to purchase or sell a specific amount of sharesor units of an asset or notional amount of a swap (swaption), at a specified price. Options pur-chased are recorded as an asset while options written are recorded as a liability. Upon exerciseof an option, the acquisition cost or sales proceeds of the underlying investment is adjusted byany premium received or paid. Upon expiration of an option, any premium received or paid isrecorded as a realized gain or loss. Upon closing an option other than through expiration orexercise, the difference between the premium and the cost to close the position is recorded as arealized gain or loss. Pursuant to the terms of the written option contract, cash or securities maybe required to be deposited as collateral.

At December 31, 2011, the Fund holds $58,390,235 in United Kingdom Treasury Bonds andU.S. Treasury Bills, Bonds and Notes as collateral for derivatives.

See Notes 7 and 12 regarding investment transactions and other derivative information, respectively.

e. Securities Sold Short

The Fund is engaged in selling securities short, which obligates the Fund to replace a borrowedsecurity with the same security at current market value. The Fund incurs a loss if the price of thesecurity increases between the date of the short sale and the date on which the Fund replaces theborrowed security. The Fund realizes a gain if the price of the security declines between thosedates. Gains are limited to the price at which the Fund sold the security short, while losses arepotentially unlimited in size.


42 | Annual Report


e. Securities Sold Short (continued)

The Fund is required to establish a margin account with the broker lending the security soldshort. While the short sale is outstanding, the broker retains the proceeds of the short sale andthe Fund must maintain a deposit with the broker consisting of cash and/or securities having avalue equal to a specified percentage of the value of the securities sold short. The Fund is obli-gated to pay fees for borrowing the securities sold short and is required to pay the counterpartyany dividends or interest due on securities sold short. Such dividends or interest and any securityborrowing fees are recorded as an expense to the Fund.

f. Securities Lending

The Fund participates in an agency based security lending program. The Fund receives cash col-lateral against the loaned securities in an amount equal to at least 102% of the market value ofthe loaned securities. Collateral is maintained over the life of the loan in an amount not less than100% of the market value of loaned securities, as determined at the close of Fund business eachday; any additional collateral required due to changes in security values is delivered to the Fundon the next business day. The collateral is invested in a non-registered money fund managed bythe Fund’s custodian on the Fund’s behalf. The Fund receives income from the investment of cashcollateral, in addition to lending fees and rebates paid by the borrower. The Fund bears the mar-ket risk with respect to the collateral investment, securities loaned, and the risk that the agentmay default on its obligations to the Fund. The securities lending agent has agreed to indemnifythe Fund in the event of default by a third party borrower. At December 31, 2011, the Fund hadno securities on loan.

g. Senior Floating Rate Interests

The Fund invests in senior secured corporate loans that pay interest at rates which are periodi-cally reset by reference to a base lending rate plus a spread. These base lending rates are generallythe prime rate offered by a designated U.S. bank or the London InterBank Offered Rate (LIBOR).Senior secured corporate loans often require prepayment of principal from excess cash flows or atthe discretion of the borrower. As a result, actual maturity may be substantially less than thestated maturity.

Senior secured corporate loans in which the Fund invests are generally readily marketable, butmay be subject to some restrictions on resale.

h. Restricted Cash

At December 31, 2011, the Fund held restricted cash in connection with investments in certain derivative securities. Restricted cash is held in a segregated account with the Fund’s custodian/counterparty broker and is reflected in the Statement of Assets and Liabilities.


Annual Report | 43


i. Income and Deferred Taxes

It is the Fund’s policy to qualify as a regulated investment company under the Internal RevenueCode. The Fund intends to distribute to shareholders substantially all of its taxable income andnet realized gains to relieve it from federal income and excise taxes. As a result, no provision forU.S. federal income taxes is required.

The Fund may be subject to foreign taxation related to income received, capital gains on the saleof securities and certain foreign currency transactions in the foreign jurisdictions in which itinvests. Foreign taxes, if any, are recorded based on the tax regulations and rates that exist inthe foreign markets in which the Fund invests. When a capital gain tax is determined to applythe Fund records an estimated deferred tax liability in an amount that would be payable if thesecurities were disposed of on the valuation date.

The Fund recognizes the tax benefits of uncertain tax positions only when the position is “morelikely than not” to be sustained upon examination by the tax authorities based on the technicalmerits of the tax position. As of December 31, 2011, and for all open tax years, the Fund hasdetermined that no liability for unrecognized tax benefits is required in the Fund’s financialstatements related to uncertain tax positions taken on a tax return (or expected to be taken onfuture tax returns). Open tax years are those that remain subject to examination and are basedon each tax jurisdiction statute of limitation.

j. Security Transactions, Investment Income, Expenses and Distributions

Security transactions are accounted for on trade date. Realized gains and losses on security trans-actions are determined on a specific identification basis. Interest income and estimated expensesare accrued daily. Amortization of premium and accretion of discount on debt securities areincluded in interest income. Dividend income and dividends declared on securities sold short isrecorded on the ex-dividend date except that certain dividends from foreign securities are recog-nized as soon as the Fund is notified of the ex-dividend date. Distributions to shareholders arerecorded on the ex-dividend date and are determined according to income tax regulations (taxbasis). Distributable earnings determined on a tax basis may differ from earnings recorded inaccordance with accounting principles generally accepted in the United States of America. Thesedifferences may be permanent or temporary. Permanent differences are reclassified among capitalaccounts to reflect their tax character. These reclassifications have no impact on net assets or theresults of operations. Temporary differences are not reclassified, as they may reverse in subsequentperiods.

Common expenses incurred by the Trust are allocated among the funds based on the ratio of netassets of each fund to the combined net assets of the Trust. Fund specific expenses are chargeddirectly to the fund that incurred the expense.


44 | Annual Report



j. Security Transactions, Investment Income, Expenses and Distributions (continued)

Realized and unrealized gains and losses and net investment income, not including class specificexpenses, are allocated daily to each class of shares based upon the relative proportion of net assetsof each class. Differences in per share distributions, by class, are generally due to differences in classspecific expenses.

k. Accounting Estimates

The preparation of financial statements in accordance with accounting principles generallyaccepted in the United States of America requires management to make estimates and assump-tions that affect the reported amounts of assets and liabilities at the date of the financialstatements and the amounts of income and expenses during the reporting period. Actual resultscould differ from those estimates.

l. Guarantees and Indemnifications

Under the Trust’s organizational documents, its officers and trustees are indemnified by the Trustagainst certain liabilities arising out of the performance of their duties to the Trust. Additionally,in the normal course of business, the Trust, on behalf of the Fund, enters into contracts with serv-ice providers that contain general indemnification clauses. The Trust’s maximum exposure underthese arrangements is unknown as this would involve future claims that may be made against theTrust that have not yet occurred. Currently, the Trust expects the risk of loss to be remote.

2. SHARES OF BENEFICIAL INTEREST

At December 31, 2011, there were an unlimited number of shares authorized (without parvalue). Transactions in the Fund’s shares were as follows:

Year Ended December 31,2011 2010

Shares Amount Shares Amount

Class Z Shares:Shares sold . . . . . . . . . . . . . . . . . . . 54,563,171 $ 1,595,291,369 59,387,288 $ 1,658,972,685Shares issued in reinvestment of

distributions . . . . . . . . . . . . . . . . . 10,977,648 293,379,514 4,240,103 124,243,517Shares redeemed . . . . . . . . . . . . . . . (49,048,308) (1,391,419,740) (37,737,189) (1,044,639,843)

Net increase (decrease) . . . . . . . . . . 16,492,511 $ 497,251,143 25,890,202 $ 738,576,359

Class A Shares:Shares sold . . . . . . . . . . . . . . . . . . . 61,709,469 $ 1,794,424,771 66,795,690 $ 1,850,006,963Shares issued in reinvestment of

distributions . . . . . . . . . . . . . . . . . 11,492,463 303,256,561 4,298,810 124,487,746Shares redeemed . . . . . . . . . . . . . . . (70,806,252) (2,019,815,665) (64,514,873) (1,768,378,153)


Annual Report | 45


2. SHARES OF BENEFICIAL INTEREST (continued)

Year Ended December 31,2011 2010

Shares Amount Shares Amount

Class B Shares:Shares sold . . . . . . . . . . . . . . . . . . . 103,205 $ 2,940,782 231,401 $ 6,265,389Shares issued in reinvestment of

distributions . . . . . . . . . . . . . . . . . 60,110 1,556,165 24,728 703,495Shares redeemed . . . . . . . . . . . . . . . (1,932,854) (54,598,010) (2,401,241) (64,574,301)

Net increase (decrease) . . . . . . . . . . (1,769,539) $ (50,101,063) (2,145,112) $ (57,605,417)

Class C Shares:Shares sold . . . . . . . . . . . . . . . . . . . 11,695,007 $ 338,787,653 14,154,149 $ 388,216,620Shares issued in reinvestment of

distributions . . . . . . . . . . . . . . . . . 2,717,648 70,972,144 775,394 22,276,688Shares redeemed . . . . . . . . . . . . . . . (19,527,947) (548,748,796) (18,361,585) (499,107,139)

Net increase (decrease) . . . . . . . . . . (5,115,292) $ (138,988,999) (3,432,042) $ (88,613,831)

Class R Shares:Shares sold . . . . . . . . . . . . . . . . . . . 4,354,075 $ 125,300,029 4,979,794 $ 136,210,296Shares issued in reinvestment of

distributions . . . . . . . . . . . . . . . . . 640,097 16,720,207 215,026 6,172,559Shares redeemed . . . . . . . . . . . . . . . (3,406,934) (96,639,353) (3,276,406) (89,196,997)


3. TRANSACTIONS WITH AFFILIATES

Franklin Resources, Inc. is the holding company for various subsidiaries that together are referredto as Franklin Templeton Investments. Certain officers and trustees of the Fund are also officersand/or directors of the following subsidiaries:

Subsidiary AffiliationFranklin Mutual Advisers, LLC (Franklin Mutual) Investment managerFranklin Templeton Services, LLC (FT Services) Administrative managerFranklin Templeton Distributors, Inc. (Distributors) Principal underwriterFranklin Templeton Investor Services, LLC (Investor Services) Transfer agent

a. Management Fees

Effective June 1, 2011, the Fund pays an investment management fee to Franklin Mutual basedon the average daily net assets of the Fund as follows:

Annualized Fee Rate Net Assets0.800% Up to and including $4 billion0.770% Over $4 billion, up to and including $7 billion0.750% Over $7 billion, up to and including $10 billion0.730% Over $10 billion, up to and including $13 billion0.710% Over $13 billion, up to and including $16 billion0.690% Over $16 billion, up to and including $19 billion0.670% Over $19 billion, up to and including $22 billion0.650% In excess of $22 billion

46 | Annual Report


3. TRANSACTIONS WITH AFFILIATES (continued)

a. Management Fees (continued)

Prior to June 1, 2011, the Fund paid fees to Franklin Mutual based on the average daily netassets of the Fund as follows:

Annualized Fee Rate Net Assets0.800% Up to and including $4 billion0.770% Over $4 billion, up to and including $7 billion0.750% Over $7 billion, up to and including $10 billion0.730% Over $10 billion, up to and including $13 billion0.710% Over $13 billion, up to and including $16 billion0.690% Over $16 billion, up to and including $19 billion0.670% In excess of $19 billion

b. Administrative Fees

The Fund pays its allocated share of an administrative fee to FT Services based on the Trust’saggregate average daily net assets as follows:

Annualized Fee Rate Net Assets0.150% Up to and including $200 million0.135% Over $200 million, up to and including $700 million0.100% Over $700 million, up to and including $1.2 billion0.075% In excess of $1.2 billion

c. Distribution Fees

The Trust’s Board of Trustees has adopted distribution plans for each share class, with the excep-tion of Class Z shares, pursuant to Rule 12b-1 under the 1940 Act. Under the Fund’s Class Areimbursement distribution plan, the Fund reimburses Distributors for costs incurred in connec-tion with the servicing, sale and distribution of the Fund’s shares up to the maximum annual planrate. Under the Class A reimbursement distribution plan, costs exceeding the maximum for thecurrent plan year cannot be reimbursed in subsequent periods.

In addition, under the Fund’s Class B, C, and R compensation distribution plans, the Fund paysDistributors for costs incurred in connection with the servicing, sale and distribution of theFund’s shares up to the maximum annual plan rate for each class.

The maximum annual plan rates, based on the average daily net assets, for each class, are as follows:

Class A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.35%Class B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.00%Class C . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.00%Class R . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.50%

The Board of Trustees has set the current rate at 0.30% per year for Class A shares until furthernotice and approval by the Board.

Annual Report | 47


3. TRANSACTIONS WITH AFFILIATES (continued)

d. Sales Charges/Underwriting Agreements

Front-end sales charges and contingent deferred sales charges (CDSC) do not represent expensesof the Fund. These charges are deducted from the proceeds of sales of Fund shares prior toinvestment or from redemption proceeds prior to remittance, as applicable. Distributors hasadvised the Fund of the following commission transactions related to the sales and redemptionsof the Fund’s shares for the year:

Sales charges retained net of commissions paid to unaffiliated broker/dealers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $6,034,315

CDSC retained . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 269,331

e. Transfer Agent Fees

For the year ended December 31, 2011, the Fund paid transfer agent fees of $29,357,732, ofwhich $12,412,962 was retained by Investor Services.

4. EXPENSE OFFSET ARRANGEMENT

The Fund has entered into an arrangement with its custodian whereby credits realized as a result ofuninvested cash balances are used to reduce a portion of the Fund’s custodian expenses. During theyear ended December 31, 2011, there were no credits earned.

5. INDEPENDENT TRUSTEES’ RETIREMENT PLAN

On January 1, 1993, the Trust adopted an Independent Trustees’ Retirement Plan (Plan). ThePlan is an unfunded defined benefit plan that provides benefit payments to Trustees whose lengthof service and retirement age meets the eligibility requirements of the Plan. Benefits under thePlan are based on years of service and fees paid to each trustee at the time of retirement. Effectivein December 1996, the Plan was closed to new participants.

During the year ended December 31, 2011, the Fund’s projected benefit obligation and benefitpayments under the Plan were as follows:

aProjected benefit obligation at December 31, 2011 . . . . . . . . . . $572,080bIncrease in projected benefit obligation . . . . . . . . . . . . . . . . . . . $104,346

Benefit payments made to retired trustees . . . . . . . . . . . . . . . . . $ 33,568

aThe projected benefit obligation is included in accrued expenses and other liabilities in the Statement of Assets and Liabilities.bThe increase in projected benefit obligation is included in trustees’ fees and expenses in the Statement of Operations.

48 | Annual Report


6. INCOME TAXES

The tax character of distributions paid during the years ended December 31, 2011 and 2010,was as follows:

2011 2010

Distributions paid from:Ordinary income . . . . . . . . . . . . . . . . . . $404,679,299 $301,400,233

Long term capital gain . . . . . . . . . . . . . . 323,415,146 —

$728,094,445 $301,400,233

At December 31, 2011, the cost of investments, net unrealized appreciation (depreciation),undistributed ordinary income and undistributed long term capital gains for income tax pur-poses were as follows:

Cost of investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . $15,515,553,542

Unrealized appreciation . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,083,671,985Unrealized depreciation . . . . . . . . . . . . . . . . . . . . . . . . . (1,525,845,357)Net unrealized appreciation (depreciation) . . . . . . . . . . . . $ 1,557,826,628

Undistributed ordinary income . . . . . . . . . . . . . . . . . . . . $ 31,283,000Undistributed long term capital gains . . . . . . . . . . . . . . . 243,723,464Distributable earnings . . . . . . . . . . . . . . . . . . . . . . . . . . $ 275,006,464

Differences between income and/or capital gains as determined on a book basis and a tax basis areprimarily due to differing treatments of foreign currency transactions and corporate actions.

7. INVESTMENT TRANSACTIONS

Purchases and sales of investments (excluding short term securities and securities sold short) for the year ended December 31, 2011, aggregated $6,197,543,916 and $5,798,707,865,respectively.

Transactions in options written during the year ended December 31, 2011, were as follows:

Number of PremiumsContracts Received

Options outstanding at December 31, 2010 . . . — $ —Options written . . . . . . . . . . . . . . . . . . . . . . . . 5,117 2,944,802Options expired . . . . . . . . . . . . . . . . . . . . . . . . — —Options exercised . . . . . . . . . . . . . . . . . . . . . . — —Options closed . . . . . . . . . . . . . . . . . . . . . . . . (1,955) (1,045,031)

Options outstanding at December 31, 2011 . . . 3,162 $ 1,899,771

Annual Report | 49


7. INVESTMENT TRANSACTIONS (continued)

See Notes 1(d) and 12 regarding derivative financial instruments and other derivative informa-tion, respectively.

8. CREDIT RISK AND DEFAULTED SECURITIES

The Fund may purchase the pre-default or defaulted debt of distressed companies. Distressedcompanies are financially troubled and are about to be or are already involved in financialrestructuring or bankruptcy. Risks associated with purchasing these securities include the possi-bility that the bankruptcy or other restructuring process takes longer than expected, or thatdistributions in restructuring are less than anticipated, either or both of which may result inunfavorable consequences to the Fund. If it becomes probable that the income on debt securi-ties, including those of distressed companies, will not be collected, the Fund discontinuesaccruing income and recognizes an adjustment for uncollectible interest.

At December 31, 2011, the aggregate value of distressed company securities for which interestrecognition has been discontinued was $144,191,704, representing 0.82% of the Fund’s netassets. For information as to specific securities, see the accompanying Statement of Investments.

9. CONCENTRATION OF RISK

Investing in foreign securities may include certain risks and considerations not typically associ-ated with investing in U.S. securities, such as fluctuating currency values and changing local andregional economic, political and social conditions, which may result in greater market volatility.In addition, certain foreign securities may not be as liquid as U.S. securities.

10. RESTRICTED SECURITIES

The Fund invests in securities that are restricted under the Securities Act of 1933 (1933 Act) orwhich are subject to legal, contractual, or other agreed upon restrictions on resale. Restrictedsecurities are often purchased in private placement transactions, and cannot be sold withoutprior registration unless the sale is pursuant to an exemption under the 1933 Act. Disposal ofthese securities may require greater effort and expense, and prompt sale at an acceptable pricemay be difficult. The Fund may have registration rights for restricted securities. The issuer gen-erally incurs all registration costs.

50 | Annual Report


10. RESTRICTED SECURITIES (continued)

At December 31, 2011, the Fund held investments in restricted securities, excluding certain secu-rities exempt from registration under the 1933 Act deemed to be liquid, as follows:

Principal Amount/ AcquisitionShares Issuer Dates Cost Value

14,532,996 AET&D Holdings No. 1 Pty. Ltd. . . . . . 10/13/10 $ — $ —10,790 Broadband Ventures III LLC, secured

promissory note, 5.00%, 2/01/12 . . . 7/01/10 10,790 — 29,212 FE Capital Holdings Ltd. . . . . . . . . . . 8/29/03 - 3/10/08 4,508,158 —

30,279,560 FIM Coinvestor Holdings I, LLC . . . . . . 11/20/06 - 6/02/09 — —1,563,594 Hightower Holding LLC, pfd., A,

Series 2 . . . . . . . . . . . . . . . . . . . . . 6/10/10 - 3/31/11 3,908,984 3,275,072 1,211,855 Imagine Group Holdings Ltd. . . . . . . . 8/31/04 12,411,213 15,171,940 3,819,425 International Automotive Components

Group Brazil LLC . . . . . . . . . . . . . . . 4/13/06 - 12/26/08 2,536,498 3,099,960 26,272,706 International Automotive Components

Group North America, LLC . . . . . . . . 1/12/06 - 10/10/07 32,175,440 11,137,000 135,864 NCB Warrant Holdings Ltd., A . . . . . . . 12/16/05 - 3/10/08 1,279,413 —47,160 Olympus Re Holdings Ltd. . . . . . . . . . 12/19/01 4,445,838 —

Total Restricted Securities (0.19% of Net Assets) . . . . . . $61,276,334 $32,683,972

11. UNFUNDED CAPITAL COMMITMENTS

The Fund enters into certain capital commitments and may be obligated to perform on suchagreements at a future date. The Fund monitors these commitments and assesses the probabilityof required performance. For any agreements whose probability of performance is determined tobe greater than remote, the Fund assesses the fair value of the commitment. In instances wherethe probability of performance is greater than remote and the performance under the commit-ment would result in an unrealized loss, the Fund recognizes such losses on the Statement ofAssets and Liabilities and the Statement of Operations.

At December 31, 2011, the Fund had aggregate unfunded capital commitments of $3,711,016,for which no depreciation has been recognized.

Annual Report | 51


12. OTHER DERIVATIVE INFORMATION

At December 31, 2011, the Fund has invested in derivative contracts which are reflected on theStatement of Assets and Liabilities as follows:

Asset Derivatives Liability Derivatives

Derivative ContractsNot Accounted for as Statement of Assets and Fair Value Statement of Assets and Fair ValueHedging Instruments Liabilities Location Amount Liabilities Location Amount

Foreign exchange contracts . . . . . . . . . . Unrealized appreciation on $277,022,158a Unrealized depreciation on $23,684,151a

forward exchange contracts / forward exchange contracts / Net assets consist of – net Net assets consist of – net unrealized appreciation unrealized appreciation(depreciation) (depreciation)

Equity contracts . . . . . . Options written, at value 2,367,453

aIncludes cumulative appreciation (depreciation) of futures contracts as reported in the Statement of Investments. Only current day’s variation margin is separately reported within the Statement of Assets and Liabilities.

For the year ended December 31, 2011, the effect of derivative contracts on the Fund’sStatement of Operations was as follows:

Change inUnrealized

AppreciationDerivative Contracts Realized Gain (Depreciation)Not Accounted for as Statement of (Loss) for the for theHedging Instruments Operations Locations Year Year

Foreign exchange contracts . . . . . . . . . . . . . . Net realized gain (loss) from foreign currency $(386,220,802) $341,497,351

transactions and futures contracts / Net change in unrealized appreciation (depreciation) on translation of other assets and liabilities denominated in foreign currencies

Equity contracts . . . . . . . . . . Net realized gain (loss) from written options / 876,779 (467,682)Net change in unrealized appreciation (depreciation) on investments

For the year ended December 31, 2011, the average month end market value of derivatives repre-sented 1.09% of average month end net assets. The average month end number of openderivative contracts for the year was 133.

See Notes 1(d) and 7 regarding derivative financial instruments and investment transactions, respectively.

52 | Annual Report


13. HOLDINGS OF 5% VOTING SECURITIES OF PORTFOLIO COMPANIES

The 1940 Act defines “affiliated companies” to include investments in portfolio companies inwhich a fund owns 5% or more of the outstanding voting securities. Investments in “affiliatedcompanies” for the Fund for the year ended December 31, 2011, were as shown below.

Number of Shares Number of Shares Realized Held at Gross Gross Held at Value at Investment Capital

Name of Issuer Beginning of Year Additions Reductions End of Year End of Year Income Gain (Loss)

Non-Controlled Affiliates

Farmer Brothers Co. . . . . . . . . . 881,753 — — 881,753 $ 6,736,593 $52,905 $ —IACNA Investor LLC . . . . . . . . . . 402,771 — 402,771 — — — (99,147)Imagine Group Holdings Ltd. . . 1,736,929 — 525,074 1,211,855 15,171,940 — 1,542,185

Total Affiliated Securities (0.13% of Net Assets) . . . . . . . . . . . . . . . . . . . . . . . . . . . . $21,908,533 $52,905 $1,443,038

14. CREDIT FACILITY

The Fund, together with other U.S. registered and foreign investment funds (collectively,Borrowers), managed by Franklin Templeton Investments, are borrowers in a joint syndicatedsenior unsecured credit facility totaling $750 million (Global Credit Facility) which matured onJanuary 20, 2012. This Global Credit Facility provides a source of funds to the Borrowers fortemporary and emergency purposes, including the ability to meet future unanticipated or unusu-ally large redemption requests. Effective January 20, 2012, the Borrowers renewed the GlobalCredit Facility for a total of $1.5 billion, maturing January 18, 2013.

Under the terms of the Global Credit Facility, the Fund shall, in addition to interest charged onany borrowings made by the Fund and other costs incurred by the Fund, pay its share of feesand expenses incurred in connection with the implementation and maintenance of the GlobalCredit Facility, based upon its relative share of the aggregate net assets of all of the Borrowers,including an annual commitment fee of 0.08% based upon the unused portion of the GlobalCredit Facility, which is reflected in other expenses on the Statement of Operations. During theyear ended December 31, 2011, the Fund did not use the Global Credit Facility.

Annual Report | 53


15. FAIR VALUE MEASUREMENTS

The Fund follows a fair value hierarchy that distinguishes between market data obtained fromindependent sources (observable inputs) and the Fund’s own market assumptions (unobservableinputs). These inputs are used in determining the value of the Fund’s investments and are sum-marized in the following fair value hierarchy:

• Level 1 – quoted prices in active markets for identical securities.

• Level 2 – other significant observable inputs (including quoted prices for similar securities,interest rates, prepayment speed, credit risk, etc.)

• Level 3 – significant unobservable inputs (including the Fund’s own assumptions in deter-mining the fair value of investments)

The inputs or methodology used for valuing securities are not an indication of the risk associ-ated with investing in those securities.

For movements between the levels within the fair value hierarchy, the Fund has adopted a policyof recognizing the transfers as of the date of the underlying event which caused the movement.

The following is a summary of the inputs used as of December 31, 2011, in valuing the Fund’sassets and liabilities carried at fair value:

Level 1 Level 2 Level 3 Total

Assets:

Investments in Securities:Equity Investments:a

Auto Components . . . . . . . . . $ — $ — $14,243,512 $ 14,243,512 Chemicals . . . . . . . . . . . . . . 163,140,457 — 2,857,538 165,997,995 Consumer Finance . . . . . . . . — 5,481 — 5,481 Diversified Financial Services . . . . . . . . . . . . . . . 362,595,005 57,703,815 3,275,072 423,573,892

Diversified Telecommunication Services . . . . . . . . . . . . . . . 206,593,173 — 631,454b 207,224,627

Insurance . . . . . . . . . . . . . . 1,042,829,742 — 15,171,940b 1,058,001,682 Real Estate Management & Development . . . . . . . . . . . . 50,883,308 — 19,824,981 70,708,289

All Other Equity Investmentsc . . . . . . . . . . . 13,206,411,889 — —b 13,206,411,889

Corporate Bonds, Notes and Senior Floating Rate

Interests . . . . . . . . . . . . . . — 598,574,886 — 598,574,886 Corporate Notes and Senior

Floating Rate Interests in Reorganization . . . . . . . — 144,191,704 —b 144,191,704

Companies in Liquidation . . . . . — 272,568 —b 272,568 Short Term Investments . . . . . 1,162,396,845 21,776,800 — 1,184,173,645

Total Investments in Securities . . . . . . . . . . . . . . $16,194,850,419 $822,525,254 $56,004,497 $17,073,380,170

Futures Contracts . . . . . . . . . . . $ 3,163,442 $ — $ — $ 3,163,442 Forward Exchange Contracts . . . — 273,858,716 — 273,858,716

54 | Annual Report


15. FAIR VALUE MEASUREMENTS (continued)

Level 1 Level 2 Level 3 Total

Liabilities:

Options Written . . . . . . . . . . . . $ 2,367,453 $ — $ — $ 2,367,453

Securities Sold Short . . . . . . . . . 109,298,110 — — 109,298,110

Futures Contracts . . . . . . . . . . . 4,086 — — 4,086

Forward Exchange Contracts . . . — 23,680,065 — 23,680,065

aIncludes common and preferred stocks as well as other equity investments.bIncludes securities determined to have no value at December 31, 2011.cFor detailed categories, see the accompanying Statement of Investments.

At December 31, 2011, the reconciliation of assets in which significant unobservable inputs(Level 3) were used in determining fair value, is as follows:

Net Changein Unrealized

Net Net AppreciationBalance at Transfers Transfers Cost Realized Unrealized Balance at (Depreciation)Beginning Into Out of Basis Gain Gain End of on Assets Held

of Year Purchases Sales Level 3 Level 3a Adjustmentsb (Loss) (Loss) Year at Year EndAssets:

Investments in Securities:

Equity Investments:c

Airlines . . . . . . . . . . . . . . . . . $ —d $ — $ — $ — $ — $ (50,460) $(2,198,894) $ 2,249,354 $ — $ —

Auto Components . . . . . . . . . 40,079,881d — (50,913) — — (892,848) (39,022) (24,853,586) 14,243,512 (25,832,342)

Chemicals . . . . . . . . . . . . . . . 2,857,538 — — — — — — — 2,857,538 —

Computers & Peripherals . . . . —d — — — — (60,515) (36,309) 96,824 — —

Consumer Finance . . . . . . . . . 20,511,847 — (20,511,847) — — — (4,734,318) 4,734,318 — —

Diversified Financial Services . . . . . . . . . . . . . . . . 1,626,239d 1,954,492 — — — — — (305,659) 3,275,072 (305,659)

Diversified Telecommunication Services . . . . . . . . . . . . . . . . —d — — — — (1,007) 1,007 631,454 631,454d 631,454

Electric Utilities . . . . . . . . . . . 73,420,696d — (69,119,075) — — — — (4,301,621) —d —

Insurance . . . . . . . . . . . . . . . . 21,601,001 — (6,919,730) — — (16,373) 1,542,185 (1,035,143) 15,171,940d 111,881

IT Services . . . . . . . . . . . . . . . 316,704 — — — (283,327) — — (33,377) — —

Real Estate Management & Development . . . . . . . . . . . . 23,413,593 — — — — — — (3,588,612) 19,824,981 (3,588,612)

Corporate Bonds, Notes and Senior Floating Rate

Interests . . . . . . . . . . . . . . 19,476,990 — (19,476,990) — — — (3,754,210) 3,754,210 — —

Corporate Notes and Senior Floating Rate Interests in Reorganization . . . . . . . . 21,580 — (10,790) — — — — (10,790) —d (10,790)

Companies in Liquidation . . . . . —d — — — — (60,191) 60,191 — —d —

Total . . . . . . . . . . . . . . . . . . . . $203,326,069 $1,954,492 $(116,089,345) $ — $(283,327) $ (1,081,394) $(9,159,370) $(22,662,628) $56,004,497 $(28,994,068)

aThe investment was transferred out of Level 3 as a result of the availability of a quoted price in an active market for identical securities.bMay include accretion, amortization, partnership adjustments, and/or other cost basis adjustments.cIncludes common and preferred stocks as well as other equity investments.dIncludes securities determined to have no value.

Annual Report | 55


16. NEW ACCOUNTING PRONOUNCEMENTS

In May 2011, the Financial Accounting Standards Board (FASB) issued Accounting StandardsUpdate (ASU) No. 2011-04, Fair Value Measurement (Topic 820): Amendments to AchieveCommon Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. Theamendments in the ASU will improve the comparability of fair value measurements presented anddisclosed in financial statements prepared in accordance with U.S. GAAP (Generally AcceptedAccounting Principles) and IFRS (International Financial Reporting Standards) and include newguidance for certain fair value measurement principles and disclosure requirements. The ASU iseffective for interim and annual periods beginning after December 15, 2011. The Fund believesthe adoption of this ASU will not have a material impact on its financial statements.

17. SUBSEQUENT EVENTS

The Fund has evaluated subsequent events through the issuance of the financial statements anddetermined that no events have occurred that require disclosure other than those already dis-closed in the financial statements.

ABBREVIATIONS

Counterparty

BANT - Bank of America N.A.BBU - Barclays Bank PLCDBFX - Deutsche Bank AGHAND - Svenska HandelsbankenHSBC - HSBC Bank USA, N.A.SSBT - State Street Bank and Trust Co.,

N.A.

Selected Portfolio

ADR - American Depositary ReceiptFHLB - Federal Home Loan BankFRN - Floating Rate NotePC - Participation CertificatePIK - Payment-In-Kind

Currency

EUR - EuroGBP - British PoundUSD - United States Dollar

56 | Annual Report

Mutual Global Discovery FundReport of Independent Registered Public Accounting Firm

To the Board of Trustees of Franklin Mutual Series Funds and Shareholders of the Mutual Global Discovery Fund:

We have audited the accompanying statement of assets and liabilities of the Mutual GlobalDiscovery Fund (one of the Funds constituting the Franklin Mutual Series Funds) (the “Fund”),including the statement of investments, as of December 31, 2011, and the related statement ofoperations for the year then ended, the statements of changes in net assets for each of the twoyears in the period then ended, and the financial highlights for each of the five years in the periodthen ended. These financial statements and financial highlights are the responsibility of the Fund’smanagement. Our responsibility is to express an opinion on these financial statements and finan-cial highlights based on our audits.

We conducted our audits in accordance with the standards of the Public Company AccountingOversight Board (United States). Those standards require that we plan and perform the audit toobtain reasonable assurance about whether the financial statements and financial highlights arefree of material misstatement. We were not engaged to perform an audit of the Fund’s internal con-trol over financial reporting. Our audits included consideration of internal control over financialreporting as a basis for designing audit procedures that are appropriate in the circumstances, butnot for the purpose of expressing an opinion on the effectiveness of the Fund’s internal controlover financial reporting. Accordingly, we express no such opinion. An audit also includes examin-ing, on a test basis, evidence supporting the amounts and disclosures in the financial statementsand financial highlights, assessing the accounting principles used and significant estimates made bymanagement, and evaluating the overall financial statement presentation. Our procedures includedconfirmation of securities owned as of December 31, 2011, by correspondence with the custodianand brokers, or by other appropriate auditing procedures where replies from the brokers were notreceived. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements and financial highlights referred to above present fairly, inall material respects, the financial position of the Mutual Global Discovery Fund of the FranklinMutual Series Funds at December 31, 2011, the results of its operations for the year then ended,the changes in its net assets for each of the two years in the period then ended, and the financialhighlights for each of the five years in the period then ended, in conformity with U.S. generallyaccepted accounting principles.

Boston, MassachusettsFebruary 21, 2012

Annual Report | 57

Mutual Global Discovery FundTax Information (unaudited)

Under Section 852(b)(3)(C) of the Internal Revenue Code (Code), the Fund hereby reports themaximum amount allowable but no less than $323,415,146 as a long term capital gain dividendfor the fiscal year ended December 31, 2011.

Under Section 871(k)(2)(C) of the Code, the Fund hereby reports the maximum amount allow-able but no less than $106,496,632 as a short term capital gain dividend for purposes of the taximposed under Section 871(a)(1)(A) of the Code for the fiscal year ended December 31, 2011.

Under Section 854(b)(1)(A) of the Code, the Fund hereby reports 43.64% of the ordinaryincome dividends as income qualifying for the dividends received deduction for the fiscal yearended December 31, 2011.

Under Section 854(b)(1)(B) of the Code, the Fund hereby reports the maximum amount allow-able but no less than $493,978,413 as qualified dividends for purposes of the maximum rateunder Section 1(h)(11) of the Code for the fiscal year ended December 31, 2011. Distributions,including qualified dividend income, paid during calendar year 2011 will be reported to share-holders on Form 1099-DIV by mid-February 2012. Shareholders are advised to check with theirtax advisors for information on the treatment of these amounts on their individual income taxreturns.

Under Section 871(k)(1)(C) of the Code, the Fund hereby reports the maximum amount allow-able but no less than $29,531,901 as interest related dividends for purposes of the tax imposedunder Section 871(a)(1)(A) of the Code for the fiscal year ended December 31, 2011.

58 | Annual Report

Number of Portfolios inName, Year of Birth Length of Fund Complex Overseen Other Directorships Heldand Address Position Time Served by Board Member* During at Least the Past 5 Years

Mutual Global Discovery FundBoard Members and Officers

Independent Board Members

The name, year of birth and address of the officers and board members, as well as their affiliations, positions held withthe Fund, principal occupations during at least the past five years and number of portfolios overseen in the FranklinTempleton Investments fund complex are shown below. Generally, each board member serves until that person’s succes-sor is elected and qualified.

NoneEdward I. Altman, Ph.D. (1941)c/o Franklin Mutual Advisers, LLC101 John F. Kennedy ParkwayShort Hills, NJ 07078-2789

Trustee Since 1987 10

Principal Occupation During at Least the Past 5 Years:Max L. Heine Professor of Finance and Director of The Credit and Debt Markets Research Program, Salomon Center, Stern School ofBusiness, New York University; editor and author of numerous financial publications; financial consultant; an adviser to numerous financialpublishing organizations; and formerly, Vice Director, Salomon Center, Stern School of Business, New York University.

SLM Corporation (Sallie Mae), AresCapital Corporation (specialty financecompany) and Allied CapitalCorporation (financial services) (2003-2010).

Ann Torre Bates (1958)c/o Franklin Mutual Advisers, LLC101 John F. Kennedy ParkwayShort Hills, NJ 07078-2789


Principal Occupation During at Least the Past 5 Years:Independent strategic and financial consultant; and formerly, Executive Vice President and Chief Financial Officer, NHP Incorporated (manager of multifamily housing) (1995-1997); and Vice President and Treasurer, US Airways, Inc. (until 1995).

Franklin Templeton Emerging MarketsDebt Opportunities Fund PLC andFiduciary International IrelandLimited.

Burton J. Greenwald (1929)c/o Franklin Mutual Advisers, LLC101 John F. Kennedy ParkwayShort Hills, NJ 07078-2789


Principal Occupation During at Least the Past 5 Years:Managing Director, B.J. Greenwald Associates (management consultants to the financial services industry); and formerly, Chairman,Fiduciary Trust International Funds; Executive Vice President, L.F Rothschild Fund Management, Inc.; President and Director, Merit MutualFunds; President, Underwriting Division and Director, National Securities & Research Corporation; Governor, Investment Company Instituteand Chairman, ICI Public Information Committee.

Annual Report | 59


NoneKeith E. Mitchell (1954)c/o Franklin Mutual Advisers, LLC101 John F. Kennedy ParkwayShort Hills, NJ 07078-2789


Principal Occupation During at Least the Past 5 Years:Managing Member, Mitchell Hartley Advisers, LLC (formerly, Mitchell Advisers, LLC) (advisory firm); director of various boards of asset management firms; and formerly, Managing Director, Putman Lovell NBF.

NoneCharles Rubens II (1930) c/o Franklin Mutual Advisers, LLC101 John F. Kennedy ParkwayShort Hills, NJ 07078-2789


Principal Occupation During at Least the Past 5 Years:Private investor and president of non-profit organizations; and formerly, an executive of Time, Inc.; and Trustee of Colorado College.

Cbeyond, Inc. (business communica-tions provider), The SouthernCompany (energy company) and TheWashington Post Company (educationand media organization).

Larry D. Thompson (1945)c/o Franklin Mutual Advisers, LLC101 John F. Kennedy ParkwayShort Hills, NJ 07078-2789


Principal Occupation During at Least the Past 5 Years:John A. Sibley Professor of Corporate and Business Law, University of Georgia School of Law (2011); and formerly, Senior Vice President –Government Affairs, General Counsel and Secretary, PepsiCo, Inc. (consumer products) (2004-May 2011); Senior Fellow of The BrookingsInstitution (2003-2004); Visiting Professor, University of Georgia School of Law (2004); and Deputy Attorney General, U.S. Department ofJustice (2001-2003).

NoneJan Hopkins Trachtman (1947)c/o Franklin Mutual Advisers, LLC101 John F. Kennedy ParkwayShort Hills, NJ 07078-2789


Principal Occupation During at Least the Past 5 Years:President and Founder, The Jan Hopkins Group (communications consulting firm); President, Economic Club of New York; serves onAdvisory Board of Knight Bagehot Fellowship; and formerly, Anchor/Correspondent, CNN Financial News (until 2003); Managing Directorand Head of Client Communications, Citigroup Private Bank (until 2005); Off-Air Reporter, ABC News’ World News Tonight and Editor, CBSNetwork News.

El Oro Ltd (investments).Robert E. Wade (1946)c/o Franklin Mutual Advisers, LLC101 John F. Kennedy ParkwayShort Hills, NJ 07078-2789

Trustee andChairman ofthe Board

Trustee since1993 andChairman of theBoard since 2005

42

Principal Occupation During at Least the Past 5 Years:Attorney at law engaged in private practice (1973-2009) and member of various boards.

60 | Annual Report


Interested Board Members and Officers

None**Gregory E. Johnson (1961)One Franklin Parkway San Mateo, CA 94403-1906


Principal Occupation During at Least the Past 5 Years:Director, President and Chief Executive Officer, Franklin Resources, Inc.; officer and/or director or trustee, as the case may be, of some ofthe other subsidiaries of Franklin Resources, Inc. and of 34 of the investment companies in Franklin Templeton Investments; and Chairman,Investment Company Institute.

American International Group, Inc.(AIG) Credit Facility Trust(2010–2011).

**Peter A. Langerman (1955)c/o Franklin Mutual Advisers, LLC101 John F. Kennedy Parkway Short Hills, NJ 07078-2702

Trustee,President andChief ExecutiveOfficer –InvestmentManagement

Trustee since2007, Presidentand ChiefExecutive Officer –InvestmentManagementsince 2005

10

Principal Occupation During at Least the Past 5 Years:Chairman of the Board, Chief Executive Officer and President, Franklin Mutual Advisers, LLC; officer and/or director, as the case may be, offour of the investment companies in Franklin Templeton Investments.

Not ApplicablePhilippe Brugere-Trelat (1949)101 John F. Kennedy ParkwayShort Hills, NJ 07078-2789

Vice President Since 2005 Not Applicable

Principal Occupation During at Least the Past 5 Years:Executive Vice President, Franklin Mutual Advisers, LLC; officer of three of the investment companies in Franklin Templeton Investments;and formerly, Portfolio Manager of Eurovest SA (French registered Investment Company, Sicav).

Not ApplicableJames M. Davis (1952)One Franklin Parkway San Mateo, CA 94403-1906

ChiefComplianceOfficer andVice President– AMLCompliance

Chief ComplianceOfficer since 2004and VicePresident – AMLCompliance since2006

Not Applicable

Principal Occupation During at Least the Past 5 Years:Director, Global Compliance, Franklin Resources, Inc.; and officer of 46 of the investment companies in Franklin Templeton Investments.

Not ApplicableLaura F. Fergerson (1962)One Franklin ParkwaySan Mateo, CA 94403-1906

Chief ExecutiveOfficer –Finance andAdministration

Since 2009 Not Applicable

Principal Occupation During at Least the Past 5 Years:Senior Vice President, Franklin Templeton Services, LLC; officer of 46 of the investment companies in Franklin Templeton Investments; andformerly, Director and member of Audit and Valuation Committees, Runkel Funds, Inc. (2003-2004); Assistant Treasurer of most of theinvestment companies in Franklin Templeton Investments (1997-2003); and Vice President, Franklin Templeton Services, LLC (1997-2003).

Annual Report | 61


Not ApplicableAliya S. Gordon (1973)One Franklin ParkwaySan Mateo, CA 94403-1906


Principal Occupation During at Least the Past 5 Years:Senior Associate General Counsel, Franklin Templeton Investments; officer of 46 of the investment companies in Franklin TempletonInvestments; and formerly, Litigation Associate, Steefel, Levitt & Weiss, LLP (2000-2004).

Not ApplicableDavid P. Goss (1947)One Franklin Parkway San Mateo, CA 94403-1906


Principal Occupation During at Least the Past 5 Years:Senior Associate General Counsel, Franklin Templeton Investments; and officer and/or director, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 46 of the investment companies in Franklin Templeton Investments.

Not ApplicableSteven J. Gray (1955)One Franklin Parkway San Mateo, CA 94403-1906

Secretary andVice President

Secretary since2005 and VicePresident since2009

Not Applicable

Principal Occupation During at Least the Past 5 Years:Senior Associate General Counsel, Franklin Templeton Investments; Vice President, Franklin Templeton Distributors, Inc.; and officer of 46 ofthe investment companies in Franklin Templeton Investments.

Not ApplicableMatthew T. Hinkle (1971)One Franklin ParkwaySan Mateo, CA 94403-1906

Treasurer,Chief FinancialOfficer andChiefAccountingOfficer

Since 2009 Not Applicable

Principal Occupation During at Least the Past 5 Years:Director, Fund Accounting, Franklin Templeton Investments; and officer of five of the investment companies in Franklin TempletonInvestments.

Not ApplicableRobert C. Rosselot (1960)300 S.E. 2nd StreetFort Lauderdale, FL 33301-1923


Principal Occupation During at Least the Past 5 Years:Senior Associate General Counsel, Franklin Templeton Investments; Assistant Secretary, Franklin Resources, Inc.; Vice President andSecretary, Templeton Investment Counsel, LLC; Vice President, Secretary and Trust Officer, Fiduciary Trust International of the South; andofficer of 46 of the investment companies in Franklin Templeton Investments.

Not ApplicableKaren L. Skidmore (1952)One Franklin ParkwaySan Mateo, CA 94403-1906


Principal Occupation During at Least the Past 5 Years:Senior Associate General Counsel, Franklin Templeton Investments; and officer of 46 of the investment companies in Franklin TempletonInvestments.

62 | Annual Report


Not ApplicableCraig S. Tyle (1960)One Franklin Parkway San Mateo, CA 94403-1906


Principal Occupation During at Least the Past 5 Years:General Counsel and Executive Vice President, Franklin Resources, Inc.; officer of some of the other subsidiaries of Franklin Resources, Inc.and of 46 of the investment companies in Franklin Templeton Investments; and formerly, Partner, Shearman & Sterling, LLP (2004-2005);and General Counsel, Investment Company Institute (ICI) (1997-2004).

Not ApplicableLori A. Weber (1964)300 S.E. 2nd StreetFort Lauderdale, FL 33301-1923

Vice President Since June 2011 Not Applicable

Principal Occupation During at Least the Past 5 Years:Associate General Counsel, Franklin Templeton Investments; Assistant Secretary, Franklin Resources, Inc.; Vice President and AssistantSecretary, Templeton Investment Counsel, LLC; and officer of 45 of the investment companies in Franklin Templeton Investments.

*We base the number of portfolios on each separate series of the U.S. registered investment companies within the Franklin Templeton Investments fund complex. These portfolioshave a common investment manager or affiliated investment managers.

**Gregory E. Johnson is considered to be an interested person of the Fund under the federal securities laws due to his position as an officer and director of Franklin Resources, Inc.,which is the parent company of the Fund’s investment manager and distributor. Peter A. Langerman is considered to be an interested person of the Fund under the federal securitieslaws due to his position as an officer of Franklin Mutual Advisers, LLC, the Fund’s investment manager.

Note 1: Officer information is current as of the date of this report. It is possible that after this date, information about officers may change.

The Fund’s Board has determined that certain of the members of the Audit Committee, including Ann Torre Bates, are audit committee financial experts, and “independent,”under those provisions of the Sarbanes-Oxley Act of 2002, and the rules and form amendments adopted by the Securities and Exchange Commission, relating to audit com-mittee financial experts.

The Statement of Additional Information (SAI) includes additional information about the board members and is available, without charge, upon request. Shareholders maycall (800) DIAL BEN/342-5236 to request the SAI.

Annual Report | 63

Mutual Global Discovery FundShareholder Information

Proxy Voting Policies and Procedures

The Fund’s investment manager has established Proxy Voting Policies and Procedures (Policies) thatthe Fund uses to determine how to vote proxies relating to portfolio securities. Shareholders mayview the Fund’s complete Policies online at franklintempleton.com. Alternatively, shareholders mayrequest copies of the Policies free of charge by calling the Proxy Group collect at (954) 527-7678 orby sending a written request to: Franklin Templeton Companies, LLC, 300 S.E. 2nd Street, FortLauderdale, FL 33301, Attention: Proxy Group. Copies of the Fund’s proxy voting records are alsomade available online at franklintempleton.com and posted on the U.S. Securities and ExchangeCommission’s website at sec.gov and reflect the most recent 12-month period ended June 30.

Quarterly Statement of Investments

The Fund files a complete statement of investments with the U.S. Securities and Exchange Commissionfor the first and third quarters for each fiscal year on Form N-Q. Shareholders may view the filed FormN-Q by visiting the Commission’s website at sec.gov. The filed form may also be viewed and copied atthe Commission’s Public Reference Room in Washington, DC. Information regarding the operations ofthe Public Reference Room may be obtained by calling (800) SEC-0330.

Householding of Reports and Prospectuses

You will receive the Fund’s financial reports every six months as well as an annual updated summaryprospectus (prospectus available upon request). To reduce Fund expenses, we try to identify relatedshareholders in a household and send only one copy of the financial reports and summary prospectus.This process, called “householding,” will continue indefinitely unless you instruct us otherwise. If youprefer not to have these documents householded, please call us at (800) 632-2301. At any time youmay view current prospectuses/summary prospectuses and financial reports on our website. If youchoose, you may receive these documents through electronic delivery.


GOF P-1 01/12

SUPPLEMENT DATED JANUARY 3, 2012TO THE CURRENTLY EFFECTIVE PROSPECTUS

OF EACH OF THE LISTED FUNDS

Franklin California Tax-Free Income FundFranklin California Tax-Free TrustFranklin California Insured Tax-FreeIncome FundFranklin California Intermediate-TermTax-Free Income FundFranklin California Tax-Exempt Money FundFranklin Custodian FundsFranklin DynaTech FundFranklin Growth FundFranklin Income FundFranklin U.S. Government Securities FundFranklin Utilities FundFranklin Federal Tax-Free Income FundFranklin Global TrustFranklin Global Real Estate FundFranklin International Growth FundFranklin International Small CapGrowth FundFranklin Large Cap Equity FundFranklin Templeton Emerging Market DebtOpportunities FundFranklin Gold and Precious Metals FundFranklin High Income TrustFranklin High Income FundFranklin Investors Securities TrustFranklin Adjustable U.S. GovernmentSecurities FundFranklin Balanced FundFranklin Convertible Securities FundFranklin Equity Income FundFranklin Floating Rate Daily Access FundFranklin Limited Maturity U.S. GovernmentSecurities FundFranklin Low Duration Total Return FundFranklin Real Return FundFranklin Total Return FundFranklin Managed TrustFranklin Rising Dividends FundFranklin Money FundFranklin Municipal Securities TrustFranklin California High Yield Municipal FundFranklin Tennessee Municipal Bond FundFranklin Mutual Recovery FundFranklin Mutual Series FundsMutual Beacon FundMutual Discovery FundMutual European FundMutual Financial Services FundMutual International FundMutual Quest FundMutual Shares Fund

Franklin New York Tax-Free Income FundFranklin New York Tax-Free TrustFranklin New York Intermediate-TermTax-Free IncomeFranklin Real Estate Securities TrustFranklin Real Estate Securities FundFranklin Strategic Mortgage PortfolioFranklin Strategic SeriesFranklin Biotechnology Discovery FundFranklin Flex Cap Growth FundFranklin Focused Core Equity FundFranklin Growth Opportunities FundFranklin Natural Resources FundFranklin Small-Mid Cap Growth FundFranklin Small Cap Growth FundFranklin Strategic Income FundFranklin Tax-Exempt Money FundFranklin Tax-Free TrustFranklin Alabama Tax-Free Income FundFranklin Arizona Tax-Free Income FundFranklin Colorado Tax-Free Income FundFranklin Connecticut Tax-FreeIncome FundFranklin Double Tax-Free Income FundFranklin Federal Intermediate-TermTax-Free Income FundFranklin Federal Limited-Term Tax-FreeIncome FundFranklin Florida Tax-Free Income FundFranklin Georgia Tax-Free Income FundFranklin High Yield Tax-Free Income FundFranklin Insured Tax-Free Income FundFranklin Kentucky Tax-Free Income FundFranklin Louisiana Tax-Free Income FundFranklin Maryland Tax-Free Income FundFranklin Massachusetts Tax-FreeIncome FundFranklin Michigan Tax-Free Income FundFranklin Minnesota Tax-Free Income FundFranklin Missouri Tax-Free Income FundFranklin New Jersey Tax-Free Income FundFranklin North Carolina Tax-FreeIncome FundFranklin Ohio Tax-Free Income FundFranklin Oregon Tax-Free Income FundFranklin Pennsylvania Tax-FreeIncome FundFranklin Virginia Tax-Free Income Fund

Franklin Templeton Fund Allocator SeriesFranklin Templeton 2015 RetirementTarget FundFranklin Templeton 2025 RetirementTarget FundFranklin Templeton 2035 RetirementTarget FundFranklin Templeton 2045 RetirementTarget FundFranklin Templeton ConservativeAllocation FundFranklin Templeton CorefolioAllocation FundFranklin Templeton Founding FundsAllocation FundFranklin Templeton GrowthAllocation FundFranklin Templeton ModerateAllocation FundFranklin Templeton Global TrustFranklin Templeton Hard Currency FundFranklin Templeton International TrustFranklin India Growth FundFranklin Templeton Global Allocation FundFranklin World Perspectives FundTempleton Foreign Smaller Companies FundFranklin Value Investors TrustFranklin All Cap Value FundFranklin Balance Sheet Investment FundFranklin Large Cap Value FundFranklin MicroCap Value FundFranklin MidCap Value FundFranklin Small Cap Value FundInstitutional Fiduciary TrustMoney Market PortfolioTempleton Developing Markets TrustTempleton Global Investment TrustTempleton Asian Growth FundTempleton BRIC FundTempleton Emerging MarketsBalanced FundTempleton Emerging MarketsSmall Cap FundTempleton Frontier Markets FundTempleton Global Balanced FundTempleton Global Opportunities TrustTempleton Institutional FundsEmerging Markets SeriesForeign Equity SeriesForeign Smaller Companies SeriesGlobal Equity Series

The Prospectus is amended as follows:

I. The paragraph beginning “In considering an investor’s trading patterns…” in the “Exchanging Shares – FrequentTrading Policy” section of the Fund Details is revised as follows:

In considering an investor’s trading patterns, the Fund may consider, among other factors, the investor’s trading historyboth directly and, if known, through financial intermediaries, in the Fund, in other Franklin Templeton funds, in


non-Franklin Templeton mutual funds, or in accounts under common control or ownership (see, for example, “Investmentby asset allocators” in the SAI). The transfer agent may also reject any purchase or redemption request, whether or not itrepresents part of any ongoing trading pattern, if the Fund investment manager or transfer agent reasonably concludesthat the amount of the requested transaction may disrupt or otherwise interfere with the efficient management of theFund’s portfolio. In determining what actions should be taken, the Fund’s transfer agent may consider a variety offactors, including the potential impact of such remedial actions on the Fund and its shareholders. If the Fund is a “fundof funds,” the Fund’s transfer agent may take into account the impact of the trading activity and of any proposed remedialaction on both the Fund and the underlying funds in which the Fund invests.

II. The following replaces the second paragraph of the “Selling Shares – Selling Shares in Writing” section of the Fund Details:

We also may require a signature guarantee when we receive instructions from an agent, not the registered owners; whenyou want to send your proceeds to a bank account that was added or changed on your account within the last 15 days andthe bank and fund accounts have at least one common owner; or when we believe it would protect the Fund againstpotential claims based on the instructions received.

III. The following is added to the “SELLING SHARES” table of the “Selling Shares” section as a third paragraph under “ByElectronic Funds Transfer (ACH)” in the “Selling Shares” table of the Fund Details:

If the bank and Fund accounts have at least one common owner and the bank account was added or changed within thelast 15 days, you may be required to provide written instructions signed by all fund account owners, with a signatureguarantee for each fund account owner.

IV. The paragraph beginning “If you believe there are cumulative quantity discount…” in the “Choosing a Share Class –Sales Charge Reductions and Waivers” section of the Fund Details is replaced with the following:

If you believe there are cumulative quantity discount eligible shares that can be combined with your current purchase toachieve a sales charge breakpoint (for example, shares held in a different broker-dealer’s brokerage account or with a bank or an investment advisor), it is your responsibility to specifically identify those shares to your financial advisor atthe time of your purchase (including at the time of any future purchase). It may be necessary for you to provide yourfinancial advisor with information and records (including account statements) of all relevant accounts invested in theFranklin Templeton Funds. If you have not designated a financial advisor associated with your Franklin Templeton fundshares, it is your responsibility to specifically identify any cumulative quantity discount eligible shares to the Fund’stransfer agent at the time of any purchase.

Please keep this supplement for future reference.

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Franklin Templeton FundsLiterature Request. To receive a summary prospectus and/or prospectus, please call us at (800) DIAL BEN/342-5236 or

visit franklintempleton.com. Investors should carefully consider a fund’s investment goals, risks, charges and expenses

before investing. The prospectus contains this and other information. Please carefully read a prospectus before investing.

To ensure the highest quality of service, we may monitor, record and access telephone calls to or from our service

departments. These calls can be identified by the presence of a regular beeping tone.

VALUEFranklin All Cap Value FundFranklin Balance Sheet Investment FundFranklin Large Cap Value FundFranklin MicroCap Value Fund1

Franklin MidCap Value FundFranklin Small Cap Value FundMutual Beacon FundMutual Quest FundMutual Recovery Fund2

Mutual Shares Fund

BLENDFranklin Focused Core Equity FundFranklin Large Cap Equity FundFranklin Rising Dividends Fund

GROWTHFranklin DynaTech FundFranklin Flex Cap Growth FundFranklin Growth FundFranklin Growth Opportunities FundFranklin Small Cap Growth FundFranklin Small-Mid Cap Growth Fund

SECTORFranklin Biotechnology Discovery FundFranklin Global Real Estate FundFranklin Gold & Precious Metals FundFranklin Natural Resources FundFranklin Real Estate Securities FundFranklin Utilities FundMutual Financial Services Fund

GLOBALFranklin World Perspectives FundMutual Global Discovery FundTempleton Global Opportunities TrustTempleton Global Smaller Companies FundTempleton Growth FundTempleton World Fund

1. The fund is closed to new investors. Existing shareholders and select retirement plans cancontinue adding to their accounts.2. The fund is a continuously offered, closed-end fund. Shares may be purchased daily; thereis no daily redemption. However, each quarter, pending board approval, the fund will authorizethe repurchase of 5%–25% of the outstanding number of shares. Investors may tender all ora portion of their shares during the tender period.3. Effective 7/1/11, Templeton Income Fund changed its name to Templeton Global BalancedFund. Additionally, the fund changed its goal and pricing structure. Under normalcircumstances, the fund will invest: at least 25% of its assets in fixed income senior securities

and at least 25% of its assets in equity securities; at least 40% of its assets in non-U.S.investments; and in issuers located in at least three different countries (including the U.S.).4. An investment in the fund is neither insured nor guaranteed by the U.S. government or byany other entity or institution.5. For investors subject to the alternative minimum tax, a small portion of fund dividends maybe taxable. Distributions of capital gains are generally taxable.6. The fund invests primarily in insured municipal securities.7. The funds of the Franklin Templeton Variable Insurance Products Trust are generally availableonly through insurance company variable contracts.

AlabamaArizonaCalifornia (4 funds)ColoradoConnecticutFloridaGeorgiaKentuckyLouisianaMarylandMassachusettsMichigan

MinnesotaMissouriNew JerseyNew York (2 funds)North CarolinaOhioOregonPennsylvaniaTennesseeVirginia

INSURANCE FUNDSFranklin Templeton Variable Insurance Products Trust7

12/11 Not part of the annual report

INTERNATIONALFranklin India Growth FundFranklin International Growth FundFranklin International Small Cap Growth FundMutual European FundMutual International FundTempleton Asian Growth FundTempleton BRIC FundTempleton China World FundTempleton Developing Markets TrustTempleton Emerging Markets Small Cap FundTempleton Foreign FundTempleton Foreign Smaller Companies FundTempleton Frontier Markets Fund

HYBRIDFranklin Balanced FundFranklin Convertible Securities FundFranklin Equity Income FundFranklin Income FundTempleton Emerging Markets Balanced FundTempleton Global Balanced Fund3

ASSET ALLOCATIONFranklin Templeton Corefolio® Allocation FundFranklin Templeton Founding Funds Allocation FundFranklin Templeton Conservative Allocation FundFranklin Templeton Growth Allocation FundFranklin Templeton Moderate Allocation FundFranklin Templeton 2015 Retirement Target FundFranklin Templeton 2025 Retirement Target FundFranklin Templeton 2035 Retirement Target FundFranklin Templeton 2045 Retirement Target FundFranklin Templeton Global Allocation FundFranklin Templeton Multi-Asset Real Return Fund

FIXED INCOMEFranklin Adjustable U.S. Government Securities Fund4

Franklin Floating Rate Daily Access FundFranklin High Income Fund

Franklin Limited Maturity U.S. GovernmentSecurities Fund4

Franklin Low Duration Total Return FundFranklin Real Return FundFranklin Strategic Income FundFranklin Strategic Mortgage PortfolioFranklin Templeton Hard Currency FundFranklin Total Return FundFranklin U.S. Government Securities Fund4

Templeton Global Bond FundTempleton Global Total Return FundTempleton International Bond Fund

TAX-FREE INCOME5

NationalDouble Tax-Free Income FundFederal Tax-Free Income FundHigh Yield Tax-Free Income FundInsured Tax-Free Income Fund6

Limited-/ Intermediate-TermCalifornia Intermediate-Term Tax-Free Income FundFederal Intermediate-Term Tax-Free Income FundFederal Limited-Term Tax-Free Income FundNew York Intermediate-Term Tax-Free Income Fund

State-Specific

< GAIN FROM OUR PERSPECTIVE® >

VALUE BLEND GROWTH SECTOR GLOBAL INTERNAT IONAL HYBRID ASSET ALLOCAT ION F IXED INCOME TAX-FREE INCOME

© 2012 Franklin Templeton Investments. All rights reserved. 477 A 02/12

Annual Report and Shareholder Letter


Investment ManagerFranklin Mutual Advisers, LLC

DistributorFranklin Templeton Distributors, Inc.(800) DIAL BEN®/342-5236franklintempleton.com

Shareholder Services(800) 632-2301 - (Class A, B, C & R)(800) 448-FUND - (Class Z)

Authorized for distribution only when accompanied or preceded by a summary prospectus and/or prospectus.Investors should carefully consider a fund’s investment goals, risks, charges and expenses before investing. A prospectus contains this and other information; please read it carefully before investing.

To ensure the highest quality of service, telephone calls to or from our service departments may be monitored, recorded and accessed. These calls can be identified by the presence of a regular beeping tone.

Mutual Global Discovery Fund Annual Report · 2017-06-24 · Not part of the annual report | 3 In 2011 Mutual Global Discovery Fund found value in some new places, including biotechnology

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