The recent dramatic events among multiple financial companies have provoked strong volatility within the broad stock and bond markets and great anxiety among investors. Overall, we believe this volatility will continue in the near term, given the current low in the credit cycle and the developing nature of government plans. The global financial sector, in particular, is dependant on the flow of capital, which at this point has slowed dramatically even for the highest quality firms. Market sentiment has tended to react indiscriminately, at times punishing stronger firms alongside those who have earned their headlines. In the long term, however, these types of conditions provide opportunities to acquire assets inexpensively. They also play to the strengths of asset managers who rely on bottom-up analysis of companies and securities.

Across Franklin Templeton, our investment analysts and portfolio managers use rigorous, bottom-up analysis to construct and manage portfolios, and ongoing conditions have reinforced their commitment to their distinct disciplines. As we face a rapidly changing financial landscape, we would like to provide views from some of our investment groups.

Deepening pessimism surrounding a given sector has traditionally been a good indication that prices are approaching bargain territory, and this could be the case with financials. Templeton global equity portfolios entered this period with underweighted exposure to the financials sector, but our management teams have held lengthy meetings to discuss financial stocks in Europe and elsewhere. That said, we have not had as large an increase in names entering our in-house bargain list as one might have imagined. Our managers and analysts continue to retest their models and assumptions, double checking their understanding of these firms. They are also doing extensive balance sheet analysis to identify companies that they believe could be too dependent on capital markets for funding.

Franklin growth equity managers continue to focus on in-depth company-by-company research, an approach we regard as the best means to separate securities with strong performance potential from those stocks that have become merely cheap. As U.S. financial-sector companies struggle to resolve near-term liquidity and credit problems, something of a bifurcation is taking place among competing firms. The strongest finance-sector companies have been getting stronger, while the weak have continued to struggle. We anticipate that this sector's survivors should emerge with higher market shares, strong rates of return on their investments and the financial wherewithal to make opportunistic acquisitions at attractive prices.

From a bond investor's point of view, the current situation is particularly tricky to gauge because government intervention so far has had both positive and negative aspects. However, the fixed income team's focus remains the same: we are looking for longer-term value. Generally speaking, market events have not made us change our processes a great deal; we still look for high-quality investments across the board. However, in terms of approach, we are digging deeper and trying to forecast scenarios should the current conditions persist for an extended period of time. We are also reviewing individual holdings, company by company, and stress testing even the highest quality names. In some cases, our fixed income managers have weeded out positions in firms that they believed were high-quality names but seemed likely to be challenged by a lengthy credit crisis. And, we have been pushing analysts to proactively identify industries and groups of companies that could falter down the road.

Lastly, as our Templeton, Franklin and Fixed Income teams make their assessments, they are also exercising caution before adjusting portfolios. Although market volatility can create opportunities to acquire assets inexpensively, none of our portfolio managers believes in trying to call a market bottom.

Please do not hesitate to contact your institutional representative with any additional questions or concerns.