SHAREHOLDER LETTER
Dear Shareholder:
We are pleased to present the semiannual report for the Franklin Templeton Fund
Allocator Series, composed of the Conservative Target Fund, the Moderate Target
Fund, and the Growth Target Fund, for the six-month period ended January 31,
1999.
The period under review was marked by tremendous levels of volatility, both in
U.S. and world markets. It began with the Russian government defaulting on their
debt obligations in August 1998 and ended with Brazil devaluing its currency in
January 1999. In between, we witnessed the unraveling of several high-profile
hedge funds, three interest rate cuts by the Federal Reserve Board, and a mania
for Internet stocks that will surely figure prominently in any historical
treatise on investing.
In the U.S., major stock market indices declined about 20% in late summer from
their July highs, only to recover that loss and more, reaching record levels in
January 1999. Foreign equity markets generally followed a similar pattern.
Meanwhile, U.S. government bond yields continued their long
CONTENTS
Shareholder Letter .......... 1
Fund Reports
Franklin Templeton
Conservative Target Fund ... 6
Franklin Templeton
Moderate Target Fund ....... 12
Franklin Templeton
Growth Target Fund ......... 18
Financial Highlights &
Statement of Investments .... 24
Financial Statements ........ 33
Notes to
Financial Statements ........ 36
<PAGE>
downward march. These statistics, however, do not capture the broad divergence
in performance among various sectors of the markets.
For example, the flight to quality and liquidity in late August drove up prices
of the highest quality bonds, but lower-rated (i.e., "junk") bonds did not
participate in this rally. Instead, yield spreads between higher and lower
quality bonds widened dramatically. For example, the yield on investment grade
bonds fell from 5.93% in July 1998 to 5.31%(1) at the end of the period, while
the yield on lower-rated bonds increased from 9.68% to 11.23%(2) during the same
period. Similarly, while the leading U.S. stock indices rose sharply in 1998,
most stock funds did not fare as well, with the average domestic stock fund
returning about 8% for the six months under review. This reflects the
increasingly narrow market leadership of a small number of very large
capitalization growth stocks (carrying very high price-to-earnings ratios) that
have dominated the major indices.
Against this unsettled backdrop, performance of the three Target Funds did not
meet our expectations. Performance of each Fund is summarized in the table on
the next page and discussed in more detail in the individual reports that
follow.
1. Source: Standard and Poor's Micropal (Lehman Brothers). The Lehman Brothers
Government/Corporate Bond Index includes fixed rate debt issues rated investment
grade or higher by Moody's, Standard and Poor's, or Fitch.
2. Source: CS First Boston. Credit Suisse First Boston High Yield Index includes
issues rated below investment grade by Moody's or Standard and Poor's.
2
<PAGE>
Total Return*
Class A Shares (7/31/98 - 1/31/99)
- ----------------------------------------------------------------
Franklin Templeton Conservative Target Fund +0.44%
Franklin Templeton Moderate Target Fund -1.51%
Franklin Templeton Growth Target Fund -1.38%
*Total return represents the change in value of an investment during the period
indicated, does not include sales charges, and assumes reinvestment of dividends
and capital gains at net asset value.
In general terms, we can identify two principal factors that contributed to the
disappointing performance. The largest was the continued underperformance of the
major Franklin Templeton equity funds compared with the broad market indices. As
discussed in previous reports, most Franklin Templeton equity funds pursue
value-based investment strategies in one form or another. Value investors
purchase securities at prices they consider to be below a company's intrinsic
value, hoping the general market eventually will recognize this discrepancy and
bid up the price. However, no one can say how long this may take. Likewise, no
one can say how long the market will sustain the very high price-earnings
multiples we have seen on a concentration of large capitalization growth stocks.
Until one or both conditions change, value funds which are actively managed may
continue to have difficulty matching the major indices.
3
<PAGE>
A secondary factor hurting performance was our underweighting of equities from
mid-summer 1998 into early November. Our conservative posture was directed
toward controlling downside risk in the face of unprecedented volatility, and in
this respect it was successful during the stock market's late summer decline.
However, underexposure to equities penalized returns as the market rose in
September and October, which more than offset the earlier benefits.
At the end of the reporting period, each Fund's asset allocation was close to
its respective benchmark allocation. U.S. stocks were weighted somewhat more
heavily than the benchmark, while the international equity exposure was
correspondingly underweighted. Similarly, on the fixed-income side, cash
equivalents were overweighted relative to the benchmark, at the expense of
longer maturity investments.
Looking forward, we do not pretend to know what the remainder of 1999 holds in
store. We shall strive to consider the many possible scenarios for the economy
and the markets, as we construct our portfolios, attempting to balance risk and
return appropriately. Our goal is an asset allocation that should perform
acceptably under a range of possible economic and market conditions.
During the period under review, the Franklin Templeton Fund Allocator Series
increased significantly in terms of assets, and by the end of the period, total
net assets exceeded $140 million.
4
<PAGE>
We appreciate your participation in the Funds and welcome any comments or
suggestions you may have.
Sincerely,
/s/Donald P. Gould
Donald P. Gould
President and Portfolio Manager
Franklin Templeton Fund Allocator Series
- --------------------------------------------------------------------------------
The investment goal of each Fund is the highest level of long-term total return
that is consistent with an acceptable level of risk. Each Fund will pursue its
investment goal through active asset allocation implemented primarily with
investment in a combination of Franklin Templeton Funds.
Each Fund pursues the same investment goal, but with different levels of risk
and return. The Funds are designed to be long-term investments. The goal of each
Fund compares the three Funds' levels of risk and return relative to one another
and is not intended to imply any particular absolute level of risk or return for
any Fund.
- --------------------------------------------------------------------------------
5
<PAGE>
FRANKLIN TEMPLETON
CONSERVATIVE TARGET FUND
ASSET ALLOCATION
Franklin Templeton
Conservative Target Fund
Based on Total Net Assets
1/31/99
[PIE CHART]
U.S. Fixed Income
Securities 35.9%
U.S. Equities 35.2%
International
Equities 14.4%
International Fixed
Income Securities 1.0%
Short-Term
Obligations &
Other Net Assets
13.5%
- --------------------------------------------------------------------------------
Your Fund's Goal: Franklin Templeton Conservative Target Fund seeks the highest
level of long-term total return achievable at a lower level of risk.
- --------------------------------------------------------------------------------
During the six months under review, the Fund's Class A shares provided a +0.44%
cumulative total return, as shown in the Performance Summary on page 11. This
was a result of its allocation between stock funds and bond funds, as well as
securities selection within the various underlying funds.(1)
During early summer 1998, our estimates indicated a rising level of market risk
associated with domestic and foreign equities. In response, we reduced our
equity positions, a trend that we continued well into late summer. Our concerns
about increased volatility were validated, as many equity markets around the
world experienced double-digit declines in August. For example, the Standard &
Poor's(R) 500 Stock Index (S&P 500(R)) fell 14.58%, but more than recovered that
loss in the following five months, and returned +16.06% for the six-month period
ended January 31, 1999.(2) Similarly, the Morgan Stanley Capital
International(R)
1. See Note on page 9.
2. Source: Standard & Poor's Micropal. Index is unmanaged and includes
reinvested dividends. One cannot invest directly in an index.
6
<PAGE>
(MSCI) Europe, Australasia, and Far East (EAFE) Index (which includes stock
markets of industrialized countries outside the U.S.) declined 12.51% in August,
but bounced back dramatically and ended the period with a +1.25% total
return.(3)
Although the Fund's underweighting of equities enhanced performance from
mid-August through mid-October, it adversely affected performance in the ensuing
market recovery through mid-November, by which time the Fund had returned to a
neutral position in equities.
SECURITIES SELECTION(4)
The Fund's largest equity fund investment was in Franklin Growth Fund, which
represented about 24% of the Fund's total net assets at the end of the period.
Franklin Growth Fund turned in a performance of +10.56% for the six months under
review, although it trailed the S&P 500's return for the same period because of
its substantial cash position and focus on smaller capitalization stocks than
those of the S&P 500. In general, the recent underperformance of the underlying
equity funds can be largely attributed to Franklin Templeton's value-driven
investment style during a period in which growth strategies were more
successful.
On the fixed-income side, the Fund's two largest investments were Franklin Bond
Fund and Franklin U.S. Government Securities Fund, together represented about
30% of the Fund's total net assets. Franklin Bond Fund is a new and important
3. Source: Standard & Poor's (MSCI). Index is unmanaged and includes reinvested
dividends. One cannot invest directly in an index.
4. All references to underlying funds refer to Advisor Class or Class Z shares
of such funds, which have no sales charges or Rule 12b-1 fees. Performance
includes reinvested dividends and capital gains, if any.
7
<PAGE>
addition to the Franklin Templeton Group and the Conservative Target Fund,
because it offers access to investment grade, medium duration, domestic and
foreign bonds, which is a core position in a global asset allocation program.
The two funds delivered returns of +5.49% and +3.41%, respectively, as compared
to our U.S. fixed-income benchmark, the Lehman Brothers Government/Corporate
Bond Index, which returned +5.75% for the reporting period.(5) The Fund
benefited during the reporting period from a lower-than-usual allocation to
Franklin's AGE High Income Fund, during a time when the higher-yielding,
lower-rated sector underperformed the investment grade, fixed-income sectors.
CONCLUSION
On balance, the Fund's weak performance compared with its benchmark was
principally due to the underperformance of the underlying funds relative to the
various indices that comprise the benchmark. The Fund's allocation between stock
and bond funds had a modestly negative impact, as well.
Please remember, this discussion reflects our views, opinions and portfolio
holdings as of January 31, 1999, the end of the reporting period. Markets and
economic conditions are, however, changing constantly, which may affect our
strategies and the Fund's portfolio composition. Although past performance is
not predictive of future results, these insights may help you better understand
our investment and management philosophy. The Fund may
5. Source: Standard & Poor's (Lehman Brothers). Index is unmanaged and includes
reinvested interest. One cannot invest directly in an index.
8
<PAGE>
invest a portion of its assets in foreign securities, including emerging
markets. The special risks associated with these types of investments, as well
as other considerations, are discussed in the Fund's prospectus.
Note: The discussion above provides a general overview of the primary sources of
investment return for the Conservative Target Fund for the six-month period
ended January 31, 1999, and is provided for informational purposes only. It is
important for investors to recognize that the Fund, and the underlying funds in
which the Fund invests, generally seek to achieve their investment goals over
longer time horizons than the period under review. Therefore, it is likely that
the performance of the Fund, the underlying funds, and the associated indexes
for any single six-month period will vary considerably from the long-term
objectives and/or expectations of the portfolio managers. Past performance is
not an indication of future performance and, in particular, recent performance
is not a reliable indicator of future, long-term performance. Nor should
investors draw conclusions, positive or negative, from the preceding analysis
regarding the efficacy of the investment strategy of either the Fund or the
underlying funds in which it invests.
9
<PAGE>
FRANKLIN TEMPLETON
CONSERVATIVE TARGET FUND
CLASS A (FORMERLY CLASS I):
Subject to the maximum 5.75% initial sales charge. Prior to August 3, 1998, Fund
shares were offered at a lower initial sales charge; thus, actual total returns
would have been higher.
CLASS C (FORMERLY CLASS II):
Subject to 1% initial sales charge and 1% contingent deferred sales charge for
shares redeemed within 18 months of investment. These shares have higher annual
fees and expenses than Class A shares.
PERFORMANCE SUMMARY AS OF 1/31/99
Distributions will vary based on earnings of the Fund's portfolio and
any profits realized from the sale of the portfolio's securities, and the impact
of these same factors on the underlying funds held in the portfolio. Past
distributions are not indicative of future trends. All total returns include
reinvested distributions at net asset value.
PRICE AND DISTRIBUTION INFORMATION (7/31/98 - 1/31/99)
<TABLE>
<CAPTION>
CLASS A CHANGE 1/31/99 7/31/98
- -----------------------------------------------------------------
<S> <C> <C> <C>
Net Asset Value -$0.45 $10.55 $11.00
Distributions
--------------------------------
Dividend Income $0.2963
Long-Term Capital Gain $0.1500
Short-Term Capital Gain $0.0409
TOTAL $0.4872
<CAPTION>
CLASS C CHANGE 1/31/99 7/31/98
- -----------------------------------------------------------------
<S> <C> <C> <C>
Net Asset Value -$0.45 $10.47 $10.92
Distributions
--------------------------------
Dividend Income $0.2543
Long-Term Capital Gain $0.1500
Short-Term Capital Gain $0.0409
TOTAL $0.4452
</TABLE>
10 Past performance is not predictive of future results.
<PAGE>
PERFORMANCE
<TABLE>
<CAPTION>
INCEPTION
CLASS A 6-MONTHS 1-YEAR (12/31/96)
- ----------------------------------------------------------------
<S> <C> <C> <C>
Cumulative Total Return(1) +0.44% +3.76% +15.63%
Average Annual Total Return(2) -5.32% -2.17% +4.21%
Value of $10,000 Investment(3) $9,783 $10,898
<CAPTION>
INCEPTION
CLASS C 6-MONTHS 1-YEAR (12/31/96)
- ----------------------------------------------------------------
<S> <C> <C> <C>
Cumulative Total Return(1) +0.04% +2.96% +13.48%
Average Annual Total Return(2) -1.91% +0.94% +5.74%
Value of $10,000 Investment(3) $10,094 $11,235
</TABLE>
1. Cumulative total return represents the change in value of an investment over
the periods indicated and does not include sales charges.
2. Average annual total return represents the average annual change in value of
an investment over the periods indicated and includes the current, applicable,
maximum sales charge(s) for that class.
3. These figures represent the value of a hypothetical $10,000 investment in the
Fund over the periods indicated and include the current, applicable, maximum
sales charge(s) for that class.
Since markets can go down as well as up, investment return and principal value
will fluctuate with market conditions, currency volatility and the social,
economic and political climates of countries where the Fund invests. You may
have a gain or loss when you sell your shares.
Past performance is not predictive of future results. 11
<PAGE>
FRANKLIN TEMPLETON
MODERATE TARGET FUND
ASSET ALLOCATION
Franklin Templeton Moderate Target Fund
Based on Total Net Assets
1/31/99
[PIE CHART]
U.S. Equities 45.6%
U.S. Fixed Income
Securities 32.6%
International
Equities 19.1%
International Fixed
Income Securities 2.4%
Short-Term
Obligations &
Other Net Assets
0.3%
- --------------------------------------------------------------------------------
Your Fund's Goal: Franklin Templeton Moderate Target Fund seeks the highest
level of long-term total return achievable at an intermediate level of risk.
- --------------------------------------------------------------------------------
During the six months under review, the Fund's Class A shares provided a -1.51%
cumulative total return, as shown in the Performance Summary on page 17. This
was a result of its allocation between stock funds and bond funds, as well as
securities selection within these underlying funds.(1)
During early summer 1998, our estimates indicated a rising level of market risk
associated with domestic and foreign equities. In response, we reduced our
equity positions, a trend that we continued well into late summer. Our concerns
about increased volatility were validated, as many equity markets around the
world experienced double-digit declines in August. For example, the Standard &
Poor's(R) 500 Stock Index (S&P 500(R)) fell 14.58%, but more than recovered that
loss in the following five months, and returned +16.06% for the six-month period
ended January 31, 1999.(2) Similarly, the Morgan Stanley Capital
International(R)
1. See Note on page 15.
2. Source: Standard & Poor's Micropal. Index is unmanaged and includes
reinvested dividends. One cannot invest directly in an index.
12
<PAGE>
(MSCI) Europe, Australasia, and Far East (EAFE) Index (which includes stock
markets of industrialized countries outside the U.S.) declined 12.51% in August,
but bounced back dramatically and ended the period with a +1.25% total
return.(3)
Although the Fund's underweighting of equities enhanced performance from
mid-August through mid-October, it adversely affected performance in the ensuing
market recovery through mid-November, by which time the Fund had returned to a
neutral position in equities.
SECURITIES SELECTION(4)
The Fund's largest equity fund investments were in Franklin Growth Fund and
Franklin Equity Fund, which represented about 24% and 13%, respectively, of the
Fund's total net assets at the end of the period. The funds turned in
performances for the period of +10.56% for Franklin Growth Fund and +9.23% for
Franklin Equity Fund, both trailing the S&P 500's return for the same period.
The funds underperformed because they had maintained substantial cash positions
and a focus on smaller capitalization stocks than those of the S&P 500. In
general, the recent underperformance of the underlying equity funds can be
largely attributed to Franklin Templeton's value-driven investment style during
a period in which growth strategies were more successful.
On the fixed-income side, the Fund's two largest investments were Franklin Bond
Fund and Franklin U.S. Government Securities Fund, which averaged about 24% and
8%, respectively,
3. Source: Standard & Poor's (MSCI). Index is unmanaged and includes reinvested
dividends. One cannot invest directly in an index.
4. All references to underlying funds refer to Advisor Class or Class Z shares
of such funds, which have no sales charges or Rule 12b-1 fees. Performance
includes reinvested dividends and capital gains, if any.
13
<PAGE>
of the Fund's assets during the period. Franklin Bond Fund is a new and
important addition to the Franklin Templeton Group and the Moderate Target Fund,
because it offers access to investment grade, medium duration, domestic and
foreign bonds, which is a core position in a global asset allocation program.
The two funds delivered returns of +5.49% and +3.41%, respectively, as compared
to our U.S. fixed-income benchmark, the Lehman Brothers Government/Corporate
Bond Index, which returned +5.75% for the reporting period.(5) The Fund
benefited during the reporting period from a lower-than-usual allocation to
Franklin's AGE High Income Fund, during a time when the higher-yielding,
lower-rated sector experienced lower returns and higher volatility than
investment grade, fixed-income sectors.
CONCLUSION
On balance, the Fund's weak performance compared with its benchmark was
principally due to the underperformance of the underlying funds relative to the
various indices that comprise the benchmark. The Fund's allocation between stock
and bond funds had a modestly negative impact, as well.
Please remember, this discussion reflects our views, opinions and portfolio
holdings as of January 31, 1999, the end of the reporting period. Markets and
economic conditions are, however, changing constantly, which may affect our
strategies and the Fund's portfolio composition. Although past performance is
not predictive of future results, these insights may help you better
5. Source: Standard & Poor's (Lehman Brothers). Index is unmanaged and includes
reinvested interest. One cannot invest directly in an index.
14
<PAGE>
understand our investment and management philosophy. The Fund may invest a
portion of its assets in foreign securities, including emerging markets. The
special risks associated with these types of investments, as well as other
considerations, are discussed in the Fund's prospectus.
Note: The discussion above provides a general overview of the primary sources of
investment return for the Moderate Target Fund for the six-month period ended
January 31, 1999, and is provided for informational purposes only. It is
important for investors to recognize that the Fund, and the underlying funds in
which the Fund invests, generally seek to achieve their investment goals over
longer time horizons than the period under review. Therefore, it is likely that
the performance of the Fund, the underlying funds, and the associated indexes
for any single six-month period will vary considerably from the long-term
objectives and/or expectations of the portfolio managers. Past performance is
not an indication of future performance and, in particular, recent performance
is not a reliable indicator of future, long-term performance. Nor should
investors draw conclusions, positive or negative, from the preceding analysis
regarding the efficacy of the investment strategy of either the Fund or the
underlying funds in which it invests.
15
<PAGE>
FRANKLIN TEMPLETON
MODERATE TARGET FUND
CLASS A (FORMERLY CLASS I):
Subject to the maximum 5.75% initial sales charge. Prior to August 3, 1998, Fund
shares were offered at a lower initial sales charge; thus, actual total returns
would have been higher.
CLASS C (FORMERLY CLASS II):
Subject to 1% initial sales charge and 1% contingent deferred sales charge for
shares redeemed within 18 months of investment. These shares have higher annual
fees and expenses than Class A shares.
PERFORMANCE SUMMARY AS OF 1/31/99
Distributions will vary based on earnings of the Fund's portfolio and
any profits realized from the sale of the portfolio's securities, and the impact
of these same factors on the underlying funds held in the portfolio. Past
distributions are not indicative of future trends. All total returns include
reinvested distributions at net asset value.
PRICE AND DISTRIBUTION INFORMATION (7/31/98 - 1/31/99)
CLASS A CHANGE 1/31/99 7/31/98
- ----------------------------------------------------------------
Net Asset Value -$0.59 $10.18 $10.77
DISTRIBUTIONS
------------------------------
Dividend Income $0.2381
Long-Term Capital Gain $0.1276
Short-Term Capital Gain $0.0499
TOTAL $0.4156
CLASS C CHANGE 1/31/99 7/31/98
- ----------------------------------------------------------------
Net Asset Value -$0.59 $10.06 $10.65
DISTRIBUTIONS
------------------------------
Dividend Income $0.1939
Long-Term Capital Gain $0.1276
Short-Term Capital Gain $0.0499
TOTAL $0.3714
16 Past performance is not predictive of future results.
<PAGE>
PERFORMANCE
INCEPTION
CLASS A 6-MONTHS 1-YEAR (12/31/96)
- ----------------------------------------------------------------
Cumulative Total Return(1) -1.51% +1.53% +15.48%
Average Annual Total Return(2) -7.20% -4.31% +4.15%
Value of $10,000 Investment(3) $9,569 $10,884
INCEPTION
CLASS C 6-MONTHS 1-YEAR (12/31/96)
- ----------------------------------------------------------------
Cumulative Total Return(1) -1.97% +0.70% +12.92%
Average Annual Total Return(2) -3.90% -1.22% +5.49%
Value of $10,000 Investment(3) $9,878 $11,180
1. Cumulative total return represents the change in value of an investment over
the periods indicated and does not include sales charges.
2. Average annual total return represents the average annual change in value of
an investment over the periods indicated and includes the current, applicable,
maximum sales charge(s) for that class.
3. These figures represent the value of a hypothetical $10,000 investment in the
Fund over the periods indicated and include the current, applicable, maximum
sales charge(s) for that class.
Since markets can go down as well as up, investment return and principal value
will fluctuate with market conditions, currency volatility and the social,
economic and political climates of countries where the Fund invests. You may
have a gain or loss when you sell your shares.
Past performance is not predictive of future results. 17
<PAGE>
FRANKLIN TEMPLETON
GROWTH TARGET FUND
ASSET ALLOCATION
Franklin Templeton Growth Target Fund
Based on Total Net Assets
1/31/99
[BAR GRAPH]
U.S. Equities ....................... 50.3%
International Equities .............. 29.4%
U.S. Fixed Income Securities ........ 20.3%
- --------------------------------------------------------------------------------
Your Fund's Goal: Franklin Templeton Growth Target Fund seeks the highest level
of long-term total return achievable at a higher level of risk.
- --------------------------------------------------------------------------------
During the six months under review, the Fund's Class A shares provided a -1.38%
cumulative total return, as shown in the Performance Summary on page 23. This
was a result of its allocation between stock funds and bond funds, as well as
securities selection within these various underlying funds.(1)
During early summer 1998, our estimates indicated a rising level of market risk
associated with domestic and foreign equities. In response, we reduced our
equity positions, a trend that we continued well into late summer. Our concerns
about increased volatility were validated, as many equity markets around the
world experienced double-digit declines in August. For example, the Standard &
Poor's(R) 500 Stock Index (S&P 500(R)) fell 14.58%, but more than recovered that
loss in the following five months, and returned +16.06% for the six-month period
ended January 31, 1999.(2) Similarly, the Morgan Stanley Capital
International(R) (MSCI) Europe, Australasia, and Far East (EAFE) Index (which
includes stock markets of industrialized countries outside the
1 See Note on page 21.
2. Source: Standard & Poor's Micropal. Index is unmanaged and includes
reinvested dividends. One cannot invest directly in an index.
18
<PAGE>
U.S.) declined 12.51% in August, but bounced back dramatically in the following
months and ended the period with a +1.25% total return.(3)
Although the Fund's underweighting of equities enhanced performance from
mid-August through mid-October, it adversely affected performance in the ensuing
market recovery through mid-November, by which time the Fund had returned to a
neutral position in equities.
SECURITIES SELECTION(4)
The Fund's largest equity fund investments were in Franklin Growth Fund and
Franklin Equity Fund, which represented about 25% and 22%, respectively, of the
Fund's total net assets at the end of the period. The funds turned in
performances for the period of +10.56% for Franklin Growth Fund and +9.23% for
Franklin Equity Fund, both trailing the S&P 500's return for the same period.
The funds underperformed because they had maintained substantial cash positions
and a focus on smaller capitalization stocks than those of the S&P 500. In
general, the recent underperformance of the underlying equity funds can be
largely attributed to Franklin Templeton's value-driven investment style during
a period in which growth strategies were more successful.
On the fixed-income side, the Fund's largest investment was Franklin Bond Fund,
which averaged about 20% of the Fund's assets at the end of the period. Franklin
Bond Fund is a new
3. Source: Standard & Poor's (MSCI). Index is unmanaged and includes reinvested
dividends. One cannot invest directly in an index.
4. All references to underlying funds refer to Advisor Class or Class Z shares
of such funds, which have no sales charges or Rule 12b-1 fees. Performance
includes reinvested dividends and capital gains, if any.
19
<PAGE>
and important addition to the Franklin Templeton Group and the Growth Target
Fund, because it offers access to investment grade, medium duration, domestic
and foreign bonds, which is a core position in a global asset allocation
program. The fund delivered a return of +5.49%, or slightly below our U.S.
fixed-income benchmark, the Lehman Brothers Government/Corporate Bond Index,
which returned +5.75% for the reporting period.(5) The Fund benefited during the
reporting period from a lower-than-usual allocation to Franklin's AGE High
Income Fund, during a time when the higher-yielding, lower-rated sector
underperformed the investment grade fixed-income sectors.
CONCLUSION
On balance, the Fund's weak performance compared with its benchmark was
principally due to underperformance of the underlying funds relative to the
various indices that comprise the benchmark. The Fund's allocation between stock
and bond funds had a modestly negative impact, as well.
Please remember, this discussion reflects our views, opinions and portfolio
holdings as of January 31, 1999, the end of the reporting period. Markets and
economic conditions are, however, changing constantly, which may affect our
strategies and the Fund's portfolio composition. Although past performance is
not
5. Source: Standard & Poor's (Lehman Brothers). Index is unmanaged and includes
reinvested interest. One cannot invest directly in an index.
20
<PAGE>
predictive of future results, these insights may help you better understand our
investment and management philosophy. The Fund may invest a portion of its
assets in foreign securities, including emerging markets. The special risks
associated with these types of investments, as well as other considerations, are
discussed in the Fund's prospectus.
Note: The discussion above provides a general overview of the primary sources of
investment return for the Growth Target Fund for the six-month period ended
January 31, 1999, and is provided for informational purposes only. It is
important for investors to recognize that the Fund, and the underlying funds in
which the Fund invests, generally seek to achieve their investment goals over
longer time horizons than the period under review. Therefore, it is likely that
the performance of the Fund, the underlying funds, and the associated indexes
for any single six-month period will vary considerably from the long-term
objectives and/or expectations of the portfolio managers. Past performance is
not an indication of future performance and, in particular, recent performance
is not a reliable indicator of future, long-term performance. Nor should
investors draw conclusions, positive or negative, from the preceding analysis
regarding the efficacy of the investment strategy of either the Fund or the
underlying funds in which it invests.
21
<PAGE>
FRANKLIN TEMPLETON
GROWTH TARGET FUND
CLASS A (FORMERLY CLASS I):
Subject to the maximum 5.75% initial sales charge. Prior to August 3, 1998, Fund
shares were offered at a lower initial sales charge; thus, actual total returns
would have been lower.
CLASS C (FORMERLY CLASS II):
Subject to 1% initial sales charge and 1% contingent deferred sales charge for
shares redeemed within 18 months of investment. These shares have higher annual
fees and expenses than Class A shares.
PERFORMANCE SUMMARY AS OF 1/31/99
Distributions will vary based on earnings of the Fund's portfolio and
any profits realized from the sale of the portfolio's securities, and the impact
of these same factors on the underlying funds held in the portfolio. Past
distributions are not indicative of future trends. All total returns include
reinvested distributions at net asset value.
PRICE AND DISTRIBUTION INFORMATION (7/31/98 - 1/31/99)
CLASS A CHANGE 1/31/99 7/31/98
- ----------------------------------------------------------------
Net Asset Value -$0.71 $10.45 $11.16
DISTRIBUTIONS
-------------------------------
Dividend Income $0.2460
Long-Term Capital Gain $0.1796
Short-Term Capital Gain $0.1121
TOTAL $0.5377
CLASS C CHANGE 1/31/99 7/31/98
- ----------------------------------------------------------------
Net Asset Value -$0.67 $10.41 $11.08
DISTRIBUTIONS
-------------------------------
Dividend Income $0.1774
Long-Term Capital Gain $0.1796
Short-Term Capital Gain $0.1121
TOTAL $0.4691
22 Past performance is not predictive of future results.
<PAGE>
PERFORMANCE
INCEPTION
CLASS A 6-MONTHS 1-YEAR (12/31/96)
- ----------------------------------------------------------------
Cumulative Total Return(1) -1.38% +1.82% +14.68%
Average Annual Total Return(2) -7.04% -4.04% +3.80%
Value of $10,000 Investment(3) $9,596 $10,809
INCEPTION
CLASS C 6-MONTHS 1-YEAR (12/31/96)
- ----------------------------------------------------------------
Cumulative Total Return(1) -1.69% +1.04% +13.12%
Average Annual Total Return(2) -3.59% -0.93% +5.59%
Value of $10,000 Investment(3) $9,907 $11,200
1. Cumulative total return represents the change in value of an investment over
the periods indicated and does not include sales charges.
2. Average annual total return represents the average annual change in value of
an investment over the periods indicated and includes the current, applicable,
maximum sales charge(s) for that class.
3. These figures represent the value of a hypothetical $10,000 investment in the
Fund over the periods indicated and include the current, applicable, maximum
sales charge(s) for that class.
Since markets can go down as well as up, investment return and principal value
will fluctuate with market conditions, currency volatility and the social,
economic and political climates of countries where the Fund invests. You may
have a gain or loss when you sell your shares.
Past performance is not predictive of future results. 23
<PAGE>
FRANKLIN TEMPLETON FUND ALLOCATOR SERIES
Financial Highlights
FRANKLIN TEMPLETON CONSERVATIVE TARGET FUND
<TABLE>
<CAPTION>
CLASS A
--------------------------------------------------
SIX MONTHS ENDED YEAR ENDED JULY 31,
JANUARY 31, 1999 --------------------------
(UNAUDITED) 1998 1997***
--------------------------------------------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period $ 11.00 $ 10.87 $ 10.00
Income from investment operations:
Net investment income .25 .39 .12
Net realized and unrealized gains (losses) (.21) .18 .80
--------------------------------------------------
Total from investment operations .04 .57 .92
--------------------------------------------------
Less distributions from:
Net investment income (.30) (.38) (.05)
Net realized gains (.19) (.06) --
--------------------------------------------------
Total distributions (.49) (.44) (.05)
--------------------------------------------------
Net asset value, end of period $ 10.55 $ 11.00 $ 10.87
--------------------------------------------------
Total return* .44% 5.41% 9.21%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) $ 14,964 $ 11,637 $ 1,609
Ratios to average net assets:
Expenses .75%** .76% .59%**
Expenses excluding waiver and payments by affiliate .87%** 1.07% 3.64%**
Net investment income 4.18%** 3.88% 3.93%**
Portfolio turnover rate 101.70% 141.96% 33.30%
</TABLE>
*Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized.
**Annualized
***For the period December 31, 1996 (effective date) to July 31, 1997.
24
<PAGE>
FRANKLIN TEMPLETON FUND ALLOCATOR SERIES
Financial Highlights (continued)
FRANKLIN TEMPLETON CONSERVATIVE TARGET FUND (CONT.)
<TABLE>
<CAPTION>
CLASS C
-----------------------------------------------------
SIX MONTHS ENDED YEAR ENDED JULY 31,
JANUARY 31, 1999 -------------------------
(UNAUDITED) 1998 1997***
-----------------------------------------------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period $ 10.92 $ 10.81 $ 10.00
-----------------------------------------------------
Income from investment operations:
Net investment income .20 .33 .10
Net realized and unrealized gains (losses) (.21) .15 .75
-----------------------------------------------------
Total from investment operations (.01) .48 .85
-----------------------------------------------------
Less distributions from:
Net investment income (.25) (.31) (.04)
Net realized gains (.19) (.06) --
-----------------------------------------------------
Total distributions (.44) (.37) (.04)
-----------------------------------------------------
Net asset value, end of period $ 10.47 $ 10.92 $ 10.81
=====================================================
Total return* .04% 4.56% 8.48%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) $ 13,071 $ 10,218 $ 3,010
Ratios to average net assets:
Expenses 1.50%** 1.50% 1.48%**
Expenses excluding waiver and payments by affiliate 1.62%** 1.81% 4.53%**
Net investment income 3.41%** 3.27% 3.04%**
Portfolio turnover rate 101.70% 141.96% 33.30%
</TABLE>
*Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized.
**Annualized
***For the period December 31, 1996 (effective date) to July 31, 1997.
See notes to financial statements. 25
<PAGE>
FRANKLIN TEMPLETON FUND ALLOCATOR SERIES
STATEMENT OF INVESTMENTS, JANUARY 31, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
FRANKLIN TEMPLETON CONSERVATIVE TARGET FUND SHARES VALUE
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
(a)MUTUAL FUNDS 86.5%
Franklin Bond Fund .................................................................. 665,031 $6,829,877
Franklin Equity Fund ................................................................ 100,616 1,103,761
Franklin Growth Fund ................................................................ 213,620 6,840,138
Franklin Investment Grade Income Fund ............................................... 167,725 1,524,629
Franklin Real Estate Securities Fund ................................................ 72,570 1,008,010
Franklin U.S. Government Securities Fund ............................................ 245,165 1,698,995
Franklin Utilities Fund ............................................................. 88,339 929,333
Mutual Discovery Fund ............................................................... 180,363 3,136,515
Mutual European Fund ................................................................ 49,454 621,645
Templeton Foreign Fund .............................................................. 32,857 271,076
Templeton Global Bond Fund .......................................................... 29,315 282,601
---------- ----------
TOTAL LONG TERM INVESTMENTS (COST $23,893,167) 24,246,580
----------
<CAPTION>
PRINCIPAL
AMOUNT
------
<S> <C> <C>
(b)REPURCHASE AGREEMENT 14.4%
Joint Repurchase Agreement, 4.686%, 2/01/99, (Maturity Value $4,040,907) (COST $4,039,330) $ 4,039,330 4,039,330
Barclays Capital Inc. (Maturity Value $392,534)
Bear, Stearns & Co. Inc. (Maturity Value $71,361)
Chase Securities Inc. (Maturity Value $365,379)
CIBC Oppenheimer Corp. (Maturity Value $392,534)
Deutsche Bank Securities Inc. (Maturity Value $392,534)
Donaldson, Lufkin & Jenrette Securities Corp. (Maturity Value $392,534)
Dresdner Kleinwort Benson, North America LLC (Maturity Value $392,534)
Lehman Brothers Inc. (Maturity Value $71,361)
NationsBanc Montgomery Securities LLC (Maturity Value $392,534)
Paine Webber Inc. (Maturity Value $392,534)
Paribas Corp. (Maturity Value $392,534)
Warburg Dillon Read LLC (Maturity Value $392,534)
Collateralized by U.S. Treasury Bills & Notes ------------
TOTAL INVESTMENTS (COST $27,932,497) 100.9% .............................................. 28,285,910
------------
OTHER ASSETS, LESS LIABILITIES (.9%) ..................................................... (250,873)
------------
NET ASSETS 100.0% ........................................................................ $ 28,035,037
============
</TABLE>
(a) All investments in the underlying funds are in Advisor Class or Class Z
shares of those funds. Such shares carry no sales charges or distribution fees.
(b) See Note 1(b) regarding joint repurchase agreement.
26 See notes to financial statements.
<PAGE>
FRANKLIN TEMPLETON FUND ALLOCATOR SERIES
Financial Highlights
FRANKLIN TEMPLETON MODERATE TARGET FUND
<TABLE>
<CAPTION>
CLASS A
-----------------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED JULY 31,
JANUARY 31, 1999 ------------------------------------
(UNAUDITED) 1998**** 1997***
-----------------------------------------------------------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period ............... $ 10.77 $ 11.26 $ 10.00
-----------------------------------------------------------------
Income from investment operations:
Net investment income ............................. .20 .37 .17
Net realized and unrealized gains (losses) ........ (.37) .01 1.13
-----------------------------------------------------------------
Total from investment operations ................... (.17) .38 1.30
-----------------------------------------------------------------
Less distributions from:
Net investment income ............................. (.24) (.38) (.04)
Net realized gains ................................ (.18) (.49) --
-----------------------------------------------------------------
Total distributions ................................ (.42) (.87) (.04)
-----------------------------------------------------------------
Net asset value, end of period ..................... $ 10.18 $ 10.77 $ 11.26
=================================================================
Total return* ...................................... (1.51%) 3.71% 13.05%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) .................. $ 27,159 $ 23,028 $ 6,498
Ratios to average net assets:
Expenses .......................................... .93%** .77% .67%**
Expenses excluding waiver and payments by affiliate -- .94% 1.26%**
Net investment income ............................. 3.27%** 3.37% 2.69%**
Portfolio turnover rate ............................ 96.03% 124.87% 264.78%
</TABLE>
* Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized.
** Annualized
*** For the period December 31, 1996 (effective date) to July 31, 1997.
**** Per share amounts have been calculated using the daily average shares
outstanding during the period.
27
<PAGE>
FRANKLIN TEMPLETON FUND ALLOCATOR SERIES
Financial Highlights (Continued)
FRANKLIN TEMPLETON MODERATE TARGET FUND (CONT.)
<TABLE>
<CAPTION>
CLASS C
-----------------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED JULY 31,
JANUARY 31, 1999 -------------------------------------
(UNAUDITED) 1998**** 1997***
-----------------------------------------------------------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period ............... $ 10.65 $ 11.16 $ 10.00
-----------------------------------------------------------------
Income from investment operations:
Net investment income ............................. .15 .30 .07
Net realized and unrealized gains (losses) ........ (.37) -- 1.11
-----------------------------------------------------------------
Total from investment operations ................... (.22) .30 1.18
-----------------------------------------------------------------
Less distributions from:
Net investment income ............................. (.19) (.32) (.02)
Net realized gains ................................ (.18) (.49) --
-----------------------------------------------------------------
Total distributions ................................ (.37) (.81) (.02)
-----------------------------------------------------------------
Net asset value, end of period ..................... $ 10.06 $ 10.65 $ 11.16
=================================================================
Total return* ...................................... (1.97%) 2.98% 11.84%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) .................. $ 26,053 $ 19,501 $ 4,695
Ratios to average net assets:
Expenses .......................................... 1.69%** 1.50% 1.50%**
Expenses excluding waiver and payments by affiliate -- 1.68% 2.09%**
Net investment income ............................. 2.56%** 2.75% 1.86%**
Portfolio turnover rate ............................ 96.03% 124.87% 264.78%
</TABLE>
* Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized.
** Annualized
*** For the period December 31, 1996 (effective date) to July 31, 1997.
**** Per share amounts have been calculated using the daily average shares
outstanding during the period.
28 See notes to financial statements.
<PAGE>
FRANKLIN TEMPLETON FUND ALLOCATOR SERIES
STATEMENT OF INVESTMENTS, JANUARY 31, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
FRANKLIN TEMPLETON MODERATE TARGET FUND SHARES VALUE
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
(a)MUTUAL FUNDS 99.7%
Franklin Bond Fund .................................................................. 1,255,139 $12,890,279
Franklin Equity Fund ................................................................ 650,170 7,132,372
Franklin Growth Fund ................................................................ 403,162 12,909,260
Franklin Real Estate Securities Fund ................................................ 99,900 1,387,613
Franklin Templeton Hard Currency Fund ............................................... 76,367 772,080
Franklin U.S. Government Securities Fund ............................................ 640,262 4,437,020
Franklin Utilities Fund ............................................................. 269,672 2,836,959
Mutual Discovery Fund ............................................................... 217,270 3,778,337
Mutual European Fund ................................................................ 197,281 2,479,826
Mutual Shares Fund .................................................................. 101,411 2,013,012
Templeton Foreign Fund .............................................................. 229,436 1,892,851
Templeton Global Bond Fund .......................................................... 55,127 531,432
-----------
TOTAL LONG TERM INVESTMENTS (COST $52,031,773) 53,061,041
-----------
<CAPTION>
PRINCIPAL
AMOUNT
------
<S> <C> <C>
(b)REPURCHASE AGREEMENT .5%
Joint Repurchase Agreement, 4.686%, 2/01/99 (Maturity Value $265,834) (COST $265,730) $ 265,730 265,730
Barclays Capital Inc. (Maturity Value $25,823)
Bear, Stearns & Co. Inc. (Maturity Value $4,695)
Chase Securities Inc. (Maturity Value $24,037)
CIBC Oppenheimer Corp. (Maturity Value $25,823)
Deutsche Bank Securities Inc. (Maturity Value $25,823)
Donaldson, Lufkin & Jenrette Securities Corp. (Maturity Value $25,823)
Dresdner Kleinwort Benson, North America LLC (Maturity Value $25,823)
Lehman Brothers Inc. (Maturity Value $4,695)
NationsBanc Montgomery Securities LLC (Maturity Value $25,823)
Paine Webber Inc. (Maturity Value $25,823)
Paribas Corp. (Maturity Value $25,823)
Warburg Dillon Read LLC (Maturity Value $25,823)
Collateralized by U.S. Treasury Bills & Notes
------------
TOTAL INVESTMENTS (COST $52,297,503) 100.2% ......................................... 53,326,771
------------
OTHER ASSETS, LESS LIABILITIES (.2%) ................................................ (115,043)
------------
NET ASSETS 100.0% ................................................................... $ 53,211,728
============
</TABLE>
(a) All investments in the underlying funds are in Advisor Class or Class Z
shares of those funds. Such shares carry no sales charges or distribution fees.
(b) See Note 1(b) regarding joint repurchase agreement.
See notes to financial statements. 29
<PAGE>
FRANKLIN TEMPLETON FUND ALLOCATOR SERIES
Financial Highlights
FRANKLIN TEMPLETON GROWTH TARGET FUND
<TABLE>
<CAPTION>
CLASS A
-----------------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED JULY 31,
JANUARY 31, 1999 -------------------------------------
(UNAUDITED) 1998 1997***
<S> <C> <C> <C>
-----------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period ............... $ 11.16 $ 11.33 $ 10.00
-----------------------------------------------------------------
Income from investment operations:
Net investment income ............................. .20 .33 .05
Net realized and unrealized gains (losses) ........ (.37) (.05) 1.28
-----------------------------------------------------------------
Total from investment operations ................... (.17) .28 1.33
-----------------------------------------------------------------
Less distributions from:
Net investment income ............................. (.25) (.30) --
Net realized gains ................................ (.29) (.15) --
-----------------------------------------------------------------
Total distributions ................................ (.54) (.45) --
-----------------------------------------------------------------
Net asset value, end of period ..................... $ 10.45 $ 11.16 $ 11.33
=================================================================
Total return* ...................................... (1.38%) 2.63% 13.30%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) .................. $ 35,796 $ 27,042 $ 9,638
Ratios to average net assets:
Expenses .......................................... .75%** .75% .73%**
Expenses excluding waiver and payments by affiliate .90%** .98% 2.19%**
Net investment income ............................. 3.04%** 2.80% 2.65%**
Portfolio turnover rate ............................ 94.47% 118.19% 65.52%
</TABLE>
* Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized.
** Annualized
*** For the period December 31, 1996 (effective date) to July 31, 1997.
30
<PAGE>
FRANKLIN TEMPLETON FUND ALLOCATOR SERIES
Financial Highlights (continued)
FRANKLIN TEMPLETON GROWTH TARGET FUND (CONT.)
<TABLE>
<CAPTION>
CLASS C
-----------------------------------------------------
SIX MONTHS ENDED YEAR ENDED JULY 31,
JANUARY 31, 1999 -----------------------------
(UNAUDITED) 1998 1997***
-----------------------------------------------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period ............... $ 11.08 $ 11.30 $ 10.00
-----------------------------------------------------
Income from investment operations:
Net investment income ............................. .17 .24 .04
Net realized and unrealized gains (losses) ........ (.37) (.05) 1.26
-----------------------------------------------------
Total from investment operations ................... (.20) .19 1.30
-----------------------------------------------------
Less distributions from:
Net investment income ............................. (.18) (.26) --
Net realized gains ................................ (.29) (.15) --
-----------------------------------------------------
Total distributions ................................ (.47) (.41) --
-----------------------------------------------------
Net asset value, end of period ..................... $ 10.41 $ 11.08 $ 11.30
=====================================================
Total return* ...................................... (1.69%) 1.84% 13.00%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) .................. $ 23,501 $ 20,752 $ 4,733
Ratios to average net assets:
Expenses .......................................... 1.50%** 1.50% 1.49%**
Expenses excluding waiver and payments by affiliate 1.66%** 1.73% 2.95%**
Net investment income ............................. 2.28%** 1.97% 1.89%**
Portfolio turnover rate ............................ 94.47% 118.19% 65.52%
</TABLE>
*Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized.
**Annualized
***For the period December 31, 1996 (effective date) to July 31, 1997.
See notes to financial statements. 31
<PAGE>
FRANKLIN TEMPLETON FUND ALLOCATOR SERIES
STATEMENT OF INVESTMENTS, JANUARY 31, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
FRANKLIN TEMPLETON GROWTH TARGET FUND SHARES VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
(a)MUTUAL FUNDS 101.7%
Franklin Bond Fund ........................... 1,174,657 $12,063,732
Franklin Equity Fund ......................... 1,201,601 13,181,570
Franklin Growth Fund ......................... 456,836 14,627,906
Franklin Real Estate Securities Fund ......... 45,988 638,783
Franklin Utilities Fund ...................... 222,211 2,337,668
Mutual Discovery Fund ........................ 164,132 2,854,261
Mutual European Fund ......................... 231,308 2,907,547
Mutual Shares Fund ........................... 441,665 8,767,066
Templeton Foreign Fund ....................... 351,306 2,898,280
-----------
TOTAL LONG TERM INVESTMENTS (COST $58,801,723) 60,276,813
<CAPTION>
PRINCIPAL
AMOUNT
------
<S> <C> <C>
(b)REPURCHASE AGREEMENT
Joint Repurchase Agreement, 4.686%, 2/01/99, (Maturity Value $35,356) (COST $35,342) $ 35,342 35,342
Barclays Capital Inc. (Maturity Value $3,434)
Bear, Stearns & Co. Inc. (Maturity Value $626)
Chase Securities Inc. (Maturity Value $3,198)
CIBC Oppenheimer Corp. (Maturity Value $3,434)
Deutsche Bank Securities Inc. (Maturity Value $3,434)
Donaldson, Lufkin & Jenrette Securities Corp. (Maturity Value $3,434)
Dresdner Kleinwort Benson, North America LLC (Maturity Value $3,434)
Lehman Brothers Inc. (Maturity Value $626)
NationsBanc Montgomery Securities LLC (Maturity Value $3,434)
Paine Webber Inc. (Maturity Value $3,434)
Paribas Corp. (Maturity Value $3,434)
Warburg Dillon Read LLC (Maturity Value $3,434)
Collateralized by U.S. Treasury Bills & Notes
------------
TOTAL INVESTMENTS (COST $58,837,065) 101.7% ........................................ 60,312,155
------------
OTHER ASSETS, LESS LIABILITIES (1.7%) .............................................. (1,014,633)
------------
NET ASSETS 100.0% .................................................................. $ 59,297,522
============
</TABLE>
(a) All investments in the underlying funds are in Advisor Class or Class Z
shares of those funds. Such shares carry no sales charges or distribution fees.
(b) See Note 1(b) regarding joint repurchase agreement.
32 See notes to financial statements.
<PAGE>
FRANKLIN TEMPLETON FUND ALLOCATOR SERIES
Financial Statements
STATEMENTS OF ASSETS AND LIABILITIES
JANUARY 31, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
FRANKLIN TEMPLETON FRANKLIN TEMPLETON FRANKLIN TEMPLETON
CONSERVATIVE MODERATE GROWTH
TARGET FUND TARGET FUND TARGET FUND
------------ ------------ ------------
<S> <C> <C> <C>
Assets:
Investments in securities:
Cost ............................................................... $ 23,893,167 $ 52,031,773 $ 58,801,723
----------------------------------------------------
Value .............................................................. 24,246,580 53,061,041 60,276,813
Repurchase agreements, at value and cost ............................ 4,039,330 265,730 35,342
Receivables from capital shares sold ................................ 32,459 104,830 75,767
Organization costs .................................................. 39,861 39,861 39,861
----------------------------------------------------
Total assets ................................................... 28,358,230 53,471,462 60,427,783
----------------------------------------------------
Liabilities:
Payables:
Capital shares redeemed ............................................ 128,891 92,845 1,017,682
Affiliates ......................................................... 46,610 119,250 67,291
Shareholders ....................................................... 138,722 32,188 26,949
Other liabilities ................................................... 8,970 15,451 18,339
----------------------------------------------------
Total liabilities .............................................. 323,193 259,734 1,130,261
----------------------------------------------------
Net assets, at value .......................................... $ 28,035,037 $ 53,211,728 $ 59,297,522
====================================================
Net assets consist of:
Undistributed net investment income ................................. $ 46,237 $ 56,571 $ 30,627
Net unrealized appreciation ......................................... 353,413 1,029,268 1,475,090
Accumulated net realized loss ....................................... (1,149,449) (3,241,413) (4,154,597)
Capital shares ...................................................... 28,784,836 55,367,302 61,946,402
----------------------------------------------------
Net assets, at value .......................................... $ 28,035,037 $ 53,211,728 $ 59,297,522
====================================================
CLASS A:
Net assets, at value ................................................ $ 14,963,695 $ 27,159,175 $ 35,796,369
====================================================
Shares outstanding .................................................. 1,418,377 2,668,722 3,424,021
====================================================
Net asset value per share* .......................................... $ 10.55 $ 10.18 $ 10.45
====================================================
Maximum offering price per share (net asset value per share / 94.25%) $ 11.19 $ 10.80 $ 11.09
====================================================
CLASS C:
Net assets, at value ................................................ $ 13,071,342 $ 26,052,553 $ 23,501,153
====================================================
Shares outstanding .................................................. 1,247,961 2,589,609 2,256,499
====================================================
Net asset value per share* .......................................... $ 10.47 $ 10.06 $ 10.41
====================================================
Maximum offering price per share (net asset value per share / 99.00%) $ 10.58 $ 10.16 $ 10.52
====================================================
</TABLE>
* Redemption price per share is equal to net asset value less any applicable
contingent deferred sales charge.
See notes to financial statements. 33
<PAGE>
FRANKLIN TEMPLETON FUND ALLOCATOR SERIES
Financial Statements (continued)
STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JANUARY 31, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
FRANKLIN TEMPLETON FRANKLIN TEMPLETON FRANKLIN TEMPLETON
CONSERVATIVE MODERATE GROWTH
TARGET FUND TARGET FUND TARGET FUND
------------------------------------------------------
<S> <C> <C> <C>
Investment income:
Dividends .................................................... $ 619,324 $ 1,182,839 $ 1,289,186
Interest ..................................................... 92,333 34,256 12,948
------------------------------------------------------
Total investment income ................................. 711,657 1,217,095 1,302,134
------------------------------------------------------
Expenses:
Asset allocation fees (Note 3) ............................... 30,741 58,104 65,591
Distribution fees (Note 3)
Class A ..................................................... 16,200 30,775 38,535
Class C ..................................................... 58,217 109,345 108,272
Transfer agent fees (Note 3) ................................. 13,977 36,857 54,597
Reports to shareholders ...................................... 2,914 27,363 13,040
Registration and filing fees ................................. 16,198 20,608 19,010
Professional fees ............................................ 3,669 5,762 8,945
Trustees' fees and expenses .................................. 436 836 950
Amortization of organization costs ........................... 6,833 6,833 6,833
Other ........................................................ 379 615 721
------------------------------------------------------
Total expenses .......................................... 149,564 297,098 316,494
Expenses waived/paid by affiliate (Note 3) .............. (13,719) -- (38,565)
------------------------------------------------------
Net expenses ........................................... 135,845 297,098 277,929
------------------------------------------------------
Net investment income ................................. 575,812 919,997 1,024,205
------------------------------------------------------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments ................................................. (1,111,988) (3,290,367) (4,174,922)
Distributions by underlying funds ........................... 185,988 533,371 913,158
------------------------------------------------------
Net realized loss ..................................... (926,000) (2,756,996) (3,261,764)
Net unrealized appreciation on investments ................... 570,196 1,477,351 2,353,199
------------------------------------------------------
Net realized and unrealized loss .............................. (355,804) (1,279,645) (908,565)
------------------------------------------------------
Net increase (decrease) in net assets resulting from operations $ 220,008 $ (359,648) $ 115,640
======================================================
</TABLE>
See notes to financial statements.
34
<PAGE>
FRANKLIN TEMPLETON FUND ALLOCATOR SERIES
Financial Statements (continued)
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE SIX MONTHS ENDED JANUARY 31, 1999 (UNAUDITED)
AND THE YEAR ENDED JULY 31, 1998
<TABLE>
<CAPTION>
FRANKLIN TEMPLETON FRANKLIN TEMPLETON FRANKLIN TEMPLETON
CONSERVATIVE TARGET FUND MODERATE TARGET FUND GROWTH TARGET FUND
--------------------------------------------------------------------------------------
SIX MONTHS YEAR SIX MONTHS YEAR SIX MONTHS YEAR
ENDED ENDED ENDED ENDED ENDED ENDED
JANUARY 31, JULY 31, JANUARY 31, JULY 31, JANUARY 31, JULY 31,
1999 1998 1999 1998 1999 1998
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income ............. $ 575,812 $ 441,970 $ 919,997 $ 765,924 $ 1,024,205 $ 744,848
Net realized gain (loss) from
investments and distributions
by underlying funds ............. (926,000) 299,473 (2,756,996) 642,901 (3,261,764) 1,002,779
Net unrealized appreciation
(depreciation) on
investments ...................... 570,196 (426,817) 1,477,351 (1,093,493) 2,353,199 (1,648,322)
--------------------------------------------------------------------------------------
Net increase (decrease)
in net assets resulting
from operations ............... 220,008 314,626 (359,648) 315,332 115,640 99,305
Distributions to shareholders from:
Net investment income:
Class A .......................... (372,853) (177,143) (591,415) (351,014) (755,498) (373,894)
Class C .......................... (288,994) (162,713) (459,752) (292,695) (393,541) (263,042)
Net realized gains:
Class A .......................... (252,162) (24,813) (450,571) (429,281) (925,041) (184,015)
Class C .......................... (226,618) (31,332) (436,758) (466,577) (649,542) (149,026)
--------------------------------------------------------------------------------------
Total distributions
to shareholders .................. (1,140,627) (396,001) (1,938,496) (1,539,567) (2,723,622) (969,977)
Capital share transactions: (Note 2)
Class A .......................... 3,824,806 10,102,985 5,376,246 17,160,380 10,183,446 17,845,476
Class C .......................... 3,275,789 7,214,620 7,603,981 15,400,546 3,927,881 16,448,949
--------------------------------------------------------------------------------------
Total capital share transactions ... 7,100,595 17,317,605 12,980,227 32,560,926 14,111,327 34,294,425
Net increase in
net assets .................... 6,179,976 17,236,230 10,682,083 31,336,691 11,503,345 33,423,753
Net assets:
Beginning of period ................ 21,855,061 4,618,831 42,529,645 11,192,954 47,794,177 14,370,424
--------------------------------------------------------------------------------------
End of period ...................... $28,035,037 $21,855,061 $53,211,728 $42,529,645 $59,297,522 $47,794,177
======================================================================================
Undistributed net investment
income included in net assets
End of period ..................... $ 46,237 $ 132,272 $ 56,571 $ 187,741 $ 30,627 $ 155,461
======================================================================================
</TABLE>
See notes to financial statements.
35
<PAGE>
FRANKLIN TEMPLETON FUND ALLOCATOR SERIES
Notes to Financial Statements (unaudited)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Franklin Templeton Fund Allocator Series (the Trust) is registered under the
Investment Company Act of 1940 as an open-end, non-diversified investment
company, consisting of three series (the Funds). The Funds' investment
objectives are to seek the highest level of long-term total return that is
consistent with an acceptable level of risk. The following summarizes the Funds'
significant accounting policies.
The funds will invest primarily in open-end investment companies that are
members of the Franklin Templeton Group of Funds (individually, an "Underlying
Fund" and collectively, the "Underlying Funds").
a. SECURITY VALUATION:
Investments in the Underlying Funds are valued at the closing net asset value
per share of each Underlying Fund on the day of valuation.
b. JOINT REPURCHASE AGREEMENT:
The Funds may enter into a joint repurchase agreement whereby their uninvested
cash balances are deposited into a joint cash account to be used to invest in
one or more repurchase agreements. The value and face amount of the joint
repurchase agreement are allocated to the Funds based on their pro-rata
interest. A repurchase agreement is accounted for as a loan by the Fund to the
seller, collateralized by securities which are delivered to the Fund's
custodian. The market value, including accrued interest, of the initial
collateralization is required to be at least 102% of the dollar amount invested
by the Funds, with the value of the underlying securities marked to market daily
to maintain coverage of at least 100%. At January 31, 1999, all outstanding
repurchase agreements had been entered into on January 29, 1999.
c. INCOME TAXES:
No provision has been made for income taxes because each Fund's policy is to
qualify as a regulated investment company under the Internal Revenue Code and to
distribute all of its taxable income.
36
<PAGE>
FRANKLIN TEMPLETON FUND ALLOCATOR SERIES
Notes to Financial Statements (unaudited) (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONT.)
d. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS:
Investments in the Underlying Funds are accounted for on trade date. Realized
gains and losses on security transactions are determined on a specific
identification basis. Interest income and estimated expenses are accrued daily.
Dividend income and distributions to shareholders are recorded on the
ex-dividend date.
Common expenses incurred by the Trust are allocated among the Funds based on the
ratio of net assets of each Fund to the combined net assets. Other expenses are
charged to each Fund on a specific identification basis.
Distributions received by the Trust from the Underlying Funds may be a return of
capital (ROC). Such distributions reduce the cost basis of the securities, and
any distributions in excess of the cost basis are recognized as capital gains.
Realized and unrealized gains and losses and net investment income, other than
class specific expenses, are allocated daily to each class of shares based upon
the relative proportion of net assets of each class.
e. ORGANIZATION COSTS:
Organization costs are amortized on a straight line basis over five years.
f. ACCOUNTING ESTIMATES:
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the amounts of income and expense during the reporting
period. Actual results could differ from those estimates.
37
<PAGE>
FRANKLIN TEMPLETON FUND ALLOCATOR SERIES
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
2. SHARES OF BENEFICIAL TRUST
During the period ended January 31, 1999, the Funds offered two classes of
shares: Class I and Class II. Effective January 1, 1999, Class I and Class II
were renamed Class A and Class C, respectively. The shares differ by their
initial sales load, distribution fees, voting rights on matters affecting a
single class and the exchange privilege of each class.
At January 31, 1999, there were an unlimited number of shares authorized ($0.01
par value). Transactions in the Funds' shares were as follows:
<TABLE>
<CAPTION>
FRANKLIN TEMPLETON FRANKLIN TEMPLETON FRANKLIN TEMPLETON
CONSERVATIVE MODERATE GROWTH
TARGET FUND TARGET FUND TARGET FUND
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
-------- ---------- -------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
CLASS A SHARES:
Six months ended January 31, 1999
Shares sold .................................. 491,136 $ 5,211,055 839,826 $ 8,517,983 1,450,189 $14,877,310
Shares issued in reinvestment of distributions 59,027 612,389 103,953 1,034,576 163,535 1,659,246
Shares redeemed .............................. (189,597) (1,998,638) (412,571) (4,176,313) (612,156) (6,353,110)
---------------------------------------------------------------------------------
Net increase ................................. 360,566 $ 3,824,806 531,208 $ 5,376,246 1,001,568 $10,183,446
=================================================================================
Year ended July 31, 1998
Shares sold .................................. 1,389,033 $15,382,734 1,909,614 $21,081,332 1,871,216 $21,309,441
Shares issued in reinvestment of distributions 18,639 200,360 73,510 768,110 51,996 553,748
Shares redeemed .............................. (497,910) (5,480,109) (422,808) (4,689,062) (351,545) (4,017,713)
---------------------------------------------------------------------------------
Net increase ................................. 909,762 $10,102,985 1,560,316 $17,160,380 1,571,667 $17,845,476
=================================================================================
CLASS C SHARES:
Six months ended January 31, 1999
Shares sold .................................. 393,981 $ 4,141,565 972,506 $ 9,743,230 692,410 $ 7,116,877
Shares issued in reinvestment of distributions 45,587 470,191 85,894 846,111 98,717 999,876
Shares redeemed .............................. (126,957) (1,335,967) (299,748) (2,985,360) (406,932) (4,188,872)
---------------------------------------------------------------------------------
Net increase ................................. 312,611 $ 3,275,789 758,652 $ 7,603,981 384,195 $ 3,927,881
=================================================================================
Year ended July 31, 1998
Shares sold .................................. 734,164 $ 8,072,065 1,492,882 $16,344,701 1,595,204 $18,081,468
Shares issued in reinvestment of distributions 17,910 190,330 73,194 753,971 38,210 405,331
Shares redeemed .............................. (95,223) (1,047,775) (155,840) (1,698,126) (180,003) (2,037,850)
---------------------------------------------------------------------------------
Net increase ................................. 656,851 $ 7,214,620 1,410,236 $15,400,546 1,453,411 $16,448,949
=================================================================================
</TABLE>
38
<PAGE>
FRANKLIN TEMPLETON FUND ALLOCATOR SERIES
Notes to Financial Statements (unaudited) (continued)
3. TRANSACTIONS WITH AFFILIATES
Certain officers and trustees of the Trust are also officers or directors of the
following entities:
<TABLE>
<CAPTION>
ENTITY AFFILIATION
---------------------------------------------------------------------------------------------------------
<S> <C>
Franklin Advisers, Inc. (Advisers) Investment manager
Franklin Templeton Services, Inc. (FT Services) Administrative manager
Franklin/Templeton Investor Services, Inc. (Investor Services) Transfer agent
Franklin/Templeton Distributors, Inc. (Distributors) Principal underwriter
The Underlying Funds The funds in which the Trust invests
</TABLE>
The Funds pay an asset allocation fee to Advisers of .25% per year of the
average daily net assets of each Fund.
Under an agreement with Advisers, FT Services provides administrative services
to the Funds. The fee is paid by Advisers based on average daily net assets, and
is not an additional expense of the Funds.
Advisers agreed in advance to waive management fees for the Conservative Target
Fund and the Growth Target Fund, as noted in the Statement of Operations.
The Funds reimburse Distributors up to .25% and 1.00% per year of the average
daily net assets of Class A and Class C, respectively, for costs incurred in
marketing the Funds' shares.
Distributors paid net commissions from sales of the Funds' shares, and received
contingent deferred sales charges for the period as follows:
<TABLE>
<CAPTION>
FRANKLIN FRANKLIN FRANKLIN
TEMPLETON TEMPLETON TEMPLETON
CONSERVATIVE MODERATE GROWTH
TARGET FUND TARGET FUND TARGET FUND
--------------------------------------------
<S> <C> <C> <C>
Net commissions paid ............ $47,932 $132,642 $112,398
Contingent deferred sales charges $ 6,998 $ 4,965 $ 9,522
</TABLE>
39
<PAGE>
FRANKLIN TEMPLETON FUND ALLOCATOR SERIES
Notes to Financial Statements (unaudited) (continued)
4. INCOME TAXES
At January 31, 1999, the net unrealized depreciation based on the cost of
investments for income tax purposes was as follows:
<TABLE>
<CAPTION>
FRANKLIN FRANKLIN FRANKLIN
TEMPLETON TEMPLETON TEMPLETON
CONSERVATIVE MODERATE GROWTH
TARGET FUND TARGET FUND TARGET FUND
--------------------------------------------------------------
<S> <C> <C> <C>
Investments at cost ....... $ 28,792,068 $ 54,932,695 $ 62,146,296
==============================================================
Unrealized appreciation ... 403,521 1,048,470 1,380,276
Unrealized depreciation ... (909,679) (2,654,394) (3,214,417)
--------------------------------------------------------------
Net unrealized depreciation $ (506,158) $ (1,605,924) $ (1,834,141)
==============================================================
</TABLE>
Net realized capital losses differ for financial statement and tax purposes
primarily due to differing treatment of wash sales.
5. INVESTMENT TRANSACTIONS
Purchases and sales of Underlying Funds for the period ended January 31, 1999,
were as follows:
<TABLE>
<CAPTION>
FRANKLIN FRANKLIN FRANKLIN
TEMPLETON TEMPLETON TEMPLETON
CONSERVATIVE MODERATE GROWTH
TARGET FUND TARGET FUND TARGET FUND
--------------------------------------------------------------
<S> <C> <C> <C>
Purchases $25,827,200 $56,135,342 $63,520,677
Sales ... $21,363,570 $43,555,024 $49,187,626
</TABLE>
40
