CONTENTS
Shareholder Letter..................... 1
Performance Summary.................... 5
Statement of Investments............... 7
Financial Statements................... 13
Notes to Financial
Statements............................. 16
SHAREHOLDER LETTER
Your Fund's Objective: The Franklin Asset Allocation Fund seeks to provide total
return through investment in common stocks, investment grade corporate and U.S.
government bonds, short-term money market instruments, securities of foreign
issuers and real estate securities. The fund places secondary emphasis on
reduced risk over time.
Dear Shareholder:
We are pleased to bring you this semi-annual report of the Franklin Asset
Allocation Fund which covers the six months ended June 30, 1997. During the
first half of this period, the U.S. economy grew rapidly, with Gross Domestic
Product
(GDP) registering an annualized 4.9%1 growth rate and consumer confidence
reaching its highest level in over ten years.2 Fearing the possibility of future
inflation, the Federal Reserve Board increased the federal funds rate from 5.25%
to 5.50%
on March 25, 1997.
1. Source: Bloomberg.
2. Source: Bloomberg.
In the second half of the period, the economy slowed down and the GDP growth
rate for the six months under review was a moderate 3.5% annualized. Throughout
the reporting period, U.S. securities markets experienced extreme volatility as
the Standard & Poor's(R) 500 Stock Index (S&P 500(R)) rose 20.61%,3 from 740.74
to 885.14, and long-term bond prices, as measured by the Lehman Brothers
Government/Corporate Bond Index, rose 2.74%.4
3. Source: Micropal. Index is unmanaged and includes reinvested dividends.
One cannot invest directly in an index.
4. Source: Micropal.
GRAPHIC MATERIAL 1 OMITTED - SEE APPENDIX AT END OF DOCUMENT
Within this environment, the fund delivered a six-month total return of 9.78%,
as discussed in the Performance Summary on page 5. It is important to note that
while the S&P 500 dropped nearly 10% from March 10 through April 11, 1997, the
Franklin Asset Allocation Fund's share price slipped less than 5%, which
supports the theory that a diversified portfolio of stocks, bonds, and cash can
help protect investments during volatile periods in the stock market.
Throughout the reporting period, we utilized our "top-down" investment approach,
analyzing various economic factors in seeking to determine the business cycle's
stage. Then we allocated our assets among stocks, bonds, and cash, positioning
the stock portion of the fund's holdings in the sectors, industries, and
companies we believed offered the strongest prospects for capital appreciation.
We emphasized basic materials, energy, and technology because, historically,
these areas perform best when the economy is in the later stages of a business
cycle and is experiencing healthy growth rates.
In the basic materials sector, we found value in paper stocks; therefore, we
initiated positions in Willamette Industries Inc. and Union Camp Corp. With
paper prices starting to firm at the end of the period, we believed this group
offered potential for near-term price appreciation. Both companies participate
in the uncoated free sheet market, as well as other paper goods products. We
also added to our holdings in this sector by initiating a position in
Sigma-Aldrich Corp., a leading producer and distributor of specialty chemicals,
with a strong, debt-free balance sheet and solid earnings expectations.
In the energy sector, we continued to favor established, large capitalization
companies like Exxon Corp. and Chevron Corp., two of the fund's largest
holdings. Following a correction in this sector, we also initiated a position in
Anadarko Petroleum Corp., which explores for and produces oil and natural gas
globally.
In technology, we added to our holdings of Cisco Systems Inc. and Ericsson (LM)
when they underwent some price correction that we considered temporary because
of the strong fundamental outlook for these companies. We also focused on
established biotechnology companies, many of which have exciting products ready
for market. Having already purchased shares in Amgen Inc. (the only
biotechnology company included in the S&P 500), we initiated a position in
Genzyme Corp., which has products aimed at treating cystic fibrosis, detecting
thyroid cancer, and measuring cholesterol levels. We also purchased shares of
Vertex Pharmaceuticals Inc., a company focused on treating HIV and cancer, and
Penederm Inc., a skin-care lotion manufacturer that produces a leading sunscreen
lotion recommended by dermatologists.
This discussion reflects the strategies we employed for the fund throughout the
reporting period, and includes our opinions as of the close of the period.
Although past performance of a specific investment or sector cannot guarantee
future performance, such information can be useful in analyzing securities we
purchase or sell for the fund. During the six months under review, inflation was
low and the economy showed signs of healthy growth. In our opinion, corporate
earnings could continue to expand, supporting higher equity values. However,
economic and market conditions are constantly changing, and our strategies,
evaluations, conclusions, and decisions regarding portfolio holdings may change
as new circumstances arise. We shall continue to monitor economic indicators
closely in an effort to determine the fund's overall asset allocation mix, as
well as the most favorable sectors and industries in which to invest.
We appreciate your participation in the Franklin Asset Allocation Fund and
welcome your comments and suggestions.
Sincerely,
Lisa Costa
Portfolio Manager
Franklin Asset Allocation Fund
Top 10 Sectors on 6/30/97
Based on Total Net Assets
% of Total
Sector Net Assets
- -----------------------------------------------
Basic Materials 12.01%
Technology 10.43%
Energy 9.73%
Consumer Staples 9.27%
Health Care 5.78%
Consumer Cyclicals 5.58%
Real Estate 4.95%
Capital Goods 4.88%
Financial Services 4.44%
Utilities 2.16%
Top 10 Equity Holdings on 6/30/97
Based on Total Net Assets
Company % of Total
INDUSTRY Net Assets
- -------------------------------------------------
Air Products & 2.29%
Chemicals Inc., CHEMICALS
Procter & Gamble Co., 1.99%
HOUSEHOLD PRODUCTS
BankAmerica Corp., 1.82%
BANKS - MONEY CENTER
Exxon Corp., 1.73%
OIL - INTERNATIONAL INTEGRATED
Chevron Corp., 1.56%
OIL - INTERNATIONAL INTEGRATED
Time Warner Inc., 1.53%
ENTERTAINMENT
Intel Corp., 1.50%
ELECTRONICS - SEMICONDUCTORS
Helmerich & Payne Inc., 1.42%
OIL & GAS DRILLING
Cisco Systems Inc., 1.42%
COMPUTERS - NETWORKING
Estee Lauder Cos., 1.41%
PERSONAL CARE
For a complete list of portfolio holdings, please see page 7 of this report.
PERFORMANCE SUMMARY
The Franklin Asset Allocation Fund provided a cumulative total return of 9.78%
for the six-month period ended June 30, 1997. Of course, we believe it is
important for shareholders to view their investments with a long-term
perspective. As you can see from the table on page 6, the fund delivered a
cumulative total return of 102.18% for the five-year period ended June 30, 1997.
Cumulative total return measures the change in value of an investment, assuming
reinvestment of dividends and capital gains, and does not include the initial
sales charge.
The fund's share price, as measured by the net asset value, increased $0.73,
from $8.32 on December 31, 1996, to $9.05 on June 30, 1997. During the reporting
period, shareholders received distributions of 8.0 cents ($0.08) per share in
dividend income. Of course, distributions will vary depending on income earned
by the fund, as well as any profits realized from the sale of securities in the
portfolio.
Periods ended 6/30/97
One- Five- Ten-
Year Year Year
- ------------------------------------------------------------------
Cumulative Total Return1 17.89% 102.18% 187.22%
Average Annual Total Return2 12.57% 14.06% 10.61%
Value of $10,000 Investment3 $11,257 $19,304 $27,420
30-Day Standardized Yield: 41.43%
6/30/93 6/30/94 6/30/95 6/30/96 6/30/97
- --------------------------------------------------------------------
One-Year
Total Return5 18.91% 7.09% 12.91% 19.27% 17.89%
1. Cumulative total return represents the change in value of an investment over
the indicated periods and does not include the initial sales charge.
2. Average annual total return represents the average annual change in value of
an investment over the indicated periods and includes the maximum 4.5% initial
sales charge. See Note below.
3. These figures represent the value of a hypothetical $10,000 investment in the
fund over the indicated periods and include the sales charge.
4. Yield, calculated as required by the SEC, is based on the earnings of the
fund's portfolio during the 30 days ended June 30, 1997.
5. One-year total return represents the change in value of an investment over
the one-year periods ended on the specified dates and does not include the
initial sales charge.
Note: Prior to July 1, 1994, fund shares were offered at a lower initial sales
charge, with dividends reinvested at the offering price. Thus, actual total
returns would differ. Effective May 1, 1994, the fund eliminated the sales
charge on reinvested dividends and implemented a plan of distribution under Rule
12b-1, which affects subsequent performance.
On August 1, 1996, the fund's name was changed from Franklin Premier Return Fund
in order to better reflect its investment strategy and philosophy. The fund's
shareholders also voted to modify the wording of its investment objective from
high current return and relative stability of principal, to total return with a
secondary emphasis on reduced risk over time.
All total return figures assume reinvestment of dividends and capital gains at
net asset value. Investment return and principal value will fluctuate with
market conditions, and you may have a gain or loss when you sell your shares.
Past performance is not predictive of future results.
FRANKLIN ASSET ALLOCATION FUND
Statement of Investments in Securities and Net Assets, June 30, 1997 (unaudited)
<TABLE>
<CAPTION>
VALUE
SHARES (NOTE1)
==================================================================================================================
Common Stocks 70.9%
Aerospace & Defense Electronics 0.7%
<S> <C> <C>
10,000 Boeing Co. $ 530,625
-------------
Aluminum 0.5%
5,000 Aluminum Co. of America (ALCOA) 376,875
-------------
Banks - Major Regiona l0.8%
10,000 Wachovia Corp. 583,125
-------------
Banks - Money Center 1.8%
20,000 BankAmerica Corp. 1,291,250
-------------
Beverages - Non-Alcoholic 0.9%
20,000 Panamerican Beverages, Inc., Class A 657,500
-------------
Biotechnology 2.1%
12,500 a Amgen, Inc. 726,562
17,500 a Genzyme Corp., General Division 485,625
7,500 a Vertex Pharmaceuticals, Inc. 286,875
-------------
1,499,062
-------------
Chemicals 3.2%
20,000 Air Products & Chemicals, Inc. 1,625,000
10,000 Du Pont (E.I.) De Nemours & Co. 628,750
-------------
2,253,750
-------------
Chemicals - Specialty 3.4%
15,000 Betzdearborn, Inc. 990,000
20,000 Hanna (M.A.) Co. 576,250
10,000 International Flavors & Fragrances, Inc. 505,000
10,000 Sigma-Aldrich Corp. 350,625
-------------
2,421,875
-------------
Communication Equipment Manufacturers 1.8%
20,000 Ericsson (LM), Sponsored ADR 787,500
20,000 a General Instrument Corp. 500,000
-------------
1,287,500
-------------
Computer Hardware 2.2%
75,000 d Hitachi, Ltd. (Japan) 837,623
50,000 d NEC Corp. (Japan) 698,019
-------------
1,535,642
-------------
Computer Software 1.0%
12,500 Adobe Systems, Inc. 438,281
5,000 a Oracle Corp. 251,875
-------------
690,156
-------------
Computers - Networking 1.4%
15,000 a Cisco Systems, Inc. 1,006,875
-------------
Containers - Metal & Glass 0.9%
20,000 a Owens-Illinois, Inc. 620,000
-------------
Electric Utility Cos. 1.0%
15,000 Duke Energy Corp. $ 719,063
-------------
Electrical Equipment 0.6%
70,000 d Mitsubishi Electric Corp. (Japan) 391,502
-------------
Electronic Semiconductors 2.6%
7,500 Intel Corp. 1,063,593
10,000 Linear Technology Corp. 517,500
5,000 a Xilinx, Inc. 245,313
-------------
1,826,406
-------------
Entertainment/Broadcast Media 2.2%
30,000 a Tele-Communications, Inc.-TCI Group, Series A 446,250
22,500 Time Warner, Inc. 1,085,625
-------------
1,531,875
-------------
Financial - Diversified 0.7%
24,000 a HomeSide, Inc. 525,000
-------------
Foods 2.8%
20,000 Nabisco Holdings Corp., Class A 797,500
425 d Nestle, SA (Switzerland) 560,459
15,000 Sara Lee Corp. 624,375
-------------
1,982,334
-------------
Gold & Precious Metal Mining 0.8%
15,000 Newmont Mining Corp. 585,000
-------------
Health Care - Diversified 1.4%
15,000 Abbott Laboratories 1,001,250
-------------
Health Care - Pharmaceuticals 2.3%
13,333 d Astra, AB (Sweden) 235,279
350 a,d Novartis, AG (Switzerland) 558,850
20,000 a Penederm, Inc. 270,000
60 d Roche Holding, AG (Switzerland) 542,485
-------------
1,606,614
-------------
Household Products 2.0%
10,000 Procter & Gamble Co. 1,412,500
-------------
Insurance 1.1%
10,000 Arthur J. Gallagher & Co. 377,500
10,000 a Hartford Life, Inc., Class A 375,000
-------------
752,500
-------------
Manufacturing - Specialized 1.8%
5,000 a Thermo Electron Corp. 171,875
20,000 a U.S. Filter Corp. 545,000
15,000 a Waters Corp. 538,125
-------------
1,255,000
-------------
Metals/Mining 1.2%
12,500 Rio Tinto, Plc. $ 885,938
-------------
Natural Gas 1.1%
20,000 Enron Corp. 816,250
-------------
Oil - Domestic Integrated 1.8%
16,000 Phillips Petroleum Co. 700,000
15,000 Unocal Corp. 582,187
-------------
1,282,187
-------------
Oil - Exploration & Production 1.4%
10,000 Anadarko Petroleum Corp. 600,000
5,000 Noble Affiliates, Inc. 193,438
6,700 a Santa Fe International Corp. 227,800
-------------
1,021,238
-------------
Oil - International Integrated 3.3%
15,000 Chevron Corp. 1,109,063
20,000 Exxon Corp. 1,230,000
-------------
2,339,063
-------------
Oil & Gas Drilling 2.7%
17,500 Helmerich & Payne, Inc. 1,008,437
7,500 Schlumberger, Ltd. 937,500
-------------
1,945,937
-------------
Oil & Gas - Refining & Marketing 0.5%
10,000 Ultramar Diamond Shamrock Corp. 326,250
-------------
Paper & Forest Products 2.8%
15,000 Union Camp Corp. 750,000
7,500 Weyerhaeuser Co. 390,000
12,500 Willamette Industries, Inc. 875,000
-------------
2,015,000
-------------
Personal Care 1.4%
20,000 Estee Lauder Cos., Class A 1,005,000
-------------
Real Estate Investment Trusts 5.0%
25,000 FelCor Suite Hotels, Inc. 931,250
20,000 Patriot American Hospitality, Inc. 510,000
20,000 Public Storage, Inc. 585,000
20,000 Simon DeBartolo Group, Inc. 640,000
20,000 Starwood Lodging Trust 853,750
-------------
3,520,000
-------------
Retail - General Merchandise 3.2%
30,000 a Costco Cos., Inc. 986,250
15,000 Dayton Hudson 797,812
15,000 Wal-Mart Stores, Inc. 507,188
-------------
2,291,250
-------------
Retail - Specialty 1.8%
21,000 a Polo Ralph Lauren Corp. $ 574,875
20,000 a Toys R Us, Inc. 700,000
-------------
1,274,875
-------------
Service - Commercial & Consumer 0.6%
15,000 a SABRE Group Holdings, Inc. 406,875
-------------
Service - Data Processing/Computer Systems 1.5%
10,000 First Data Corp. 439,375
10,000 Reuters Holdings, Plc., Sponsored ADR 630,000
-------------
1,069,375
-------------
Telecommunications - Long Distance 1.7%
20,000 Hong Kong Telecommunications, Ltd., Sponsored ADR 467,500
38 d Nippon Telegraph & Telephone Corp. (Japan) 364,715
2,500 Telecomunicacoes Brasileiras, SA -Telebras, Sponsored ADR 379,375
-------------
1,211,590
-------------
Waste Management 0.9%
20,000 Browning-Ferris Industries, Inc. 665,000
-------------
Total Common Stocks (Cost $38,894,309) 50,419,107
-------------
FACE
AMOUNT
Bonds 13.0%
Convertible Bonds 1.8%
$ 500,000 b Thermo Electron Corp., cvt. sub. deb., 4.25%, 01/01/03 550,000
700,000 b Thermo Instrument Systems, Inc., cvt. deb., 4.50%, 10/15/03 714,000
-------------
Total Convertible Bonds (Cost $1,202,000) 1,264,000
-------------
Corporate Bonds 0.9%
250,000 Dayton Hudson Co., deb., 8.60%, 01/15/12 278,149
100,000 Georgia Pacific Corp., deb., 9.125%, 07/01/22 106,583
250,000 Panamerican Beverages, Inc., senior notes, 8.125%, 04/01/03 256,437
-------------
Total Corporate Bonds (Cost $596,005) 641,169
-------------
U.S. Government Securities 10.3%
1,250,000 U.S. Treasury Bonds, 6.875% - 8.00%, 11/15/21 - 08/15/25 1,286,251
5,000,000 U.S. Treasury Notes, 5.875% - 7.25%, 10/31/98 - 05/15/04 5,036,879
1,000,000 U.S. Treasury Notes, Inflation-Indexed, 3.375%, 01/15/07 987,403
-------------
Total U.S. Government Securities (Cost $7,197,315) 7,310,533
-------------
Total Bonds (Cost $8,995,320) 9,215,702
-------------
Total Long Term Investments (Cost $47,889,629) 59,634,809
-------------
c Receivables from Repurchase Agreements 16.2%
$11,532,458 Joint Repurchase Agreement, 5.884%, 07/01/97,
(Maturity Value $11,538,930) (Cost $11,537,044)
Aubrey G. Lanston & Co., Inc., (Maturity Value $1,143,687)
Collateral: U.S. Treasury Notes, 6.00% - 8.25%, 04/15/98 - 08/15/99
Barclays de Zoete Wedd Securities, Inc., (Maturity Value $1,143,687)
Collateral: U.S. Treasury Notes, 5.25% - 7.125%, 12/31/97 - 02/28/01
Chase Securities, Inc., (Maturity Value $673,906)
Collateral: U.S. Treasury Notes, 5.875%, 01/31/99
CIBC Wood Gundy Securities Corp., (Maturity Value $1,143,687)
Collateral: U.S. Treasury Notes, 5.375% - 6.875%, 11/30/97 - 07/31/99
Daiwa Securities America, Inc., (Maturity Value $1,143,687)
Collateral: U.S. Treasury Notes, 5.875% - 7.75%, 03/31/99 - 08/31/01
Donaldson, Lufkin & Jenrette Securities Corp., (Maturity Value $571,841)
Collateral: U.S. Treasury Notes, 5.00% - 6.25%, 09/30/97 - 07/31/98
Fuji Securities, Inc., (Maturity Value $1,143,687)
Collateral: U.S. Treasury Notes, 4.75% - 7.125%, 02/28/98 - 03/31/01
Sanwa Securities (USA) Co., L.P., (Maturity Value $1,143,687)
Collateral: U.S. Treasury Notes, 6.50% - 8.875%, 11/15/98 - 06/30/01
SBC Warburg, Inc., (Maturity Value $1,143,687)
Collateral: U.S. Treasury Notes, 5.50%, 11/15/98
The Nikko Securities Co. International, Inc., (Maturity Value $1,143,687)
Collateral: U.S. Treasury Notes, 5.125% - 7.875%, 12/31/98 - 08/15/01
UBS Securities, L.L.C., (Maturity Value $1,143,687)
Collateral: U.S. Treasury Notes, 5.00% - 6.00%, 07/31/98 - 04/15/00 $11,537,044
-------------
Total Investments (Cost $59,426,673) 100.1% 71,171,853
Open Call Options Written (Premiums Received $144,520) (0.5)%** (335,156)
Other Assets and Liabilities, Net 0.4% 251,596
-------------
Net Assets 100.0% $71,088,293
=============
At June 30, 1997, the net unrealized appreciation based on
the costs of investments for income tax purposes of
$59,426,673 was as follows:
Aggregate gross unrealized appreciation for all investments in which there was
an excess of value over tax cost $12,268,671
Aggregate gross unrealized depreciation for all investments in which there was
an excess of tax cost over value (523,491)
Unrealized depreciation on call options (190,636)
--------------
Net unrealized appreciation $11,554,544
==============
</TABLE>
<TABLE>
<CAPTION>
SHARES EXPIRATION STRIKE VALUE
OPTIONED DATE PRICE (NOTE1)
- ---------------------------------------------------------------------------------------------------------------------
Call Options**
Aerospace & Defense Electronics
<S> <C> <C> <C> <C>
5,000 Boeing Co. July, 97 50 $ 20,625
------------
Banks - Money Center
5,000 BankAmerica Corp. July, 97 58 36,875
------------
Biotechnology
7,500 Amgen, Inc. July, 97 60 7,031
------------
Electronic Semiconductors
2,500 Intel Corp. July, 97 160 1,250
------------
Household Products
5,000 Procter & Gamble Co. July, 97 120 109,375
------------
Manufacturing - Specialized
5,000 Waters Corp. August, 97 30 30,625
------------
Personal Care
5,000 Estee Lauder Cos., Class A July, 97 45 24,375
------------
Telecommunications - Long Distance
2,500 Telecomunicacoes Brasileiras, SA - Telebras, Sponsored ADR July, 97 110 105,000
------------
Total Call Options (Premiums Received $144,520) $ 335,156
============
</TABLE>
PORTFOLIO ABBREVIATIONS:
L.L.C. - Limited Liability Corp.
L.P. - Limited Partnership
**Open call options written at June 30, 1997
aNon-income producing.
bPurchased in a private placement transaction; resale may only be to qualified
institutional buyers.
cFace amount for repurchase agreements is for the underlying collateral. See
Note 1(g) regarding joint repurchase agreement.
dSecurities traded in foreign currency and valued in U.S. dollars.
The accompanying notes are an integral part of these financial statements.
FRANKLIN ASSET ALLOCATION FUND
Financial Statements
Statement of Assets and Liabilities
June 30, 1997 (unaudited)
<TABLE>
<CAPTION>
Assets:
<S> <C>
Investments in securities, at value (identified cost $47,889,629) $59,634,809
Receivables from repurchase agreements, at value and cost 11,537,044
Cash 170,534
Receivables:
Dividends and interest 191,601
Capital shares sold 114,890
-------------
Total assets 71,648,878
-------------
Liabilities:
Open covered call options written, at value (premiums received $144,520) 335,156
Payables:
Distributions to shareholders 48,815
Management fees 36,822
Distribution fees 22,492
Shareholder servicing costs 203
Other payables to shareholders 108,607
Accrued expenses and other liabilities 8,490
Total liabilities 560,585
-------------
Net assets, at value $71,088,293
-------------
Net assets consist of:
Undistributed net investment income $ 2,910
Net unrealized appreciation on investments and translation of
assets and liabilities denominated in foreign currencies 11,555,028
Undistributed net realized gain from investments and foreign currency transactions 1,629,589
Capital shares 57,900,766
-------------
Net assets, at value $71,088,293
=============
Net asset value per share:
($71,088,293 / 7,857,438 shares outstanding)* $9.05
=============
</TABLE>
*Redemption price per share is equal to net asset value less any applicable
contingent deferred sales charge.
The accompanying notes are an integral part of these financial statements.
<TABLE>
<CAPTION>
FRANKLIN ASSET ALLOCATION FUND
Financial Statements (continued)
Statement of Operations
for the six months ended June 30, 1997 (unaudited)
Investment income:
<S> <C>
Dividends, net of foreign taxes withheld of $9,549 $ 363,982
Interest 571,301
-------------
Total Income $ 935,283
Expenses:
Management fees (Note 5) 200,613
Distribution fees (Note 5) 78,959
Shareholder servicing costs (Note 5) 34,077
Reports to shareholders 14,153
Professional fees 13,881
Registration and filing fees 6,503
Trustees' fees and expenses 3,533
Custodian fees 925
Other 2,113
-------------
Total expenses 354,757
-----------
Net investment income 580,526
-----------
Realized and unrealized gain from investments and foreign currency:
Net realized gain from:
Transactions in written options which expired or were closed (Note 4) 154,511
Other investments 1,069,710
Foreign currency transactions 194
-------------
Net realized gain from investments and foreign currency transactions 1,224,415
Net unrealized appreciation on:
Investments 4,246,608
Translation of assets and liabilities denominated in foreign currencies 484
------------
Net realized and unrealized gain from investments and foreign currency 5,471,507
------------
Net increase in net assets resulting from operations $6,052,033
============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<TABLE>
<CAPTION>
FRANKLIN ASSET ALLOCATION FUND
Financial Statements (continued)
Statements of Changes in Net Assets for the six months ended June 30, 1997
(unaudited) and the year ended December 31, 1996
Six Months Year
Ended Ended
6/30/97 12/31/96
--------------------------
Increase (decrease) in net assets:
Operations:
<S> <C> <C>
Net investment income $ 580,526 $ 874,719
Net realized gain from investments and foreign currency transactions 1,224,415 976,320
Net unrealized appreciation on investments and translation of
assets and liabilities denominated in foreign currencies 4,247,092 5,670,859
--------------------------
Net increase in net assets resulting from operations 6,052,033 7,521,898
Distributions to shareholders from:
Undistributed net investment income (606,877) (915,260)
Net realized gain -- (215,956)
Increase in net assets from capital share transactions (Note 2) 8,775,887 11,157,925
--------------------------
Net increase in net assets 14,221,043 17,548,607
Net assets:
Beginning of period 56,867,250 39,318,643
--------------------------
End of period (including undistributed net investment
income of $2,910 - 1997; and $29,261 - 1996) $71,088,293 $56,867,250
==========================
</TABLE>
The accompanying notes are an integral part of these financial statements.
FRANKLIN ASSET ALLOCATION FUND
Notes to Financial Statements (unaudited)
1. SIGNIFICANT ACCOUNTING POLICIES
Franklin Asset Allocation Fund, formerly Franklin Premier Return Fund (Premier
Return) is an open-end, diversified management investment company (mutual fund)
registered under the Investment Company Act of 1940, as amended.
On March 21, 1996, the Board of Directors (the Board) of Premier Return approved
for submission to shareholders an Agreement and Plan of Reorganization (the
Agreement) whereby Premier Return would be reorganized and its domicile changed
from a California corporation to a Delaware business trust; the investment
objective modified from high current return and relative stability of principal
to total return with reduced risk over time; and in this connection, its name
changed to Franklin Asset Allocation Fund (the Fund). Shareholders approved the
change at a special meeting held on July 3, 1996.
These changes became effective on August 1, 1996.
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
policies are in conformity with generally accepted accounting principles for
investment companies.
a. Security Valuation:
Portfolio securities listed on a securities exchange or on the NASDAQ for which
market quotations are readily available are valued at the last sale price or, if
there is no sale price, within the range of the most recent quoted bid and asked
prices. Other securities are valued based on a variety of factors, including
yield, risk, maturity, trade activity and recent developments related to the
securities. Portfolio securities which are traded both in the over-the-counter
market and on a securities exchange are valued according to the broadest and
most representative market as determined by the Manager. The Fund may utilize a
pricing service, bank or broker/dealer experienced in such matters to perform
any of the pricing functions, under procedures approved by the Board. Securities
for which market quotations are not available are valued in accordance with
procedures established by the Board.
The value of a foreign security is determined as of the earlier of the close of
trading on the foreign exchange on which it is traded or the close of trading on
the New York Stock Exchange. That value is then converted into its U.S. dollar
equivalent at the foreign exchange rate in effect at noon, New York time, on the
day the value of the foreign security is determined. If no sale is reported at
that time, the mean between the current bid and asked prices is used.
Occasionally, events which affect the values of foreign securities and foreign
exchange rates may occur between the times at which they are determined and the
close of the exchange and will, therefore, not be reflected in the computation
of the Fund's net asset value, unless material. If events which materially
affect the value of these foreign securities occur during such period, these
securities will be valued in accordance with procedures established by the
Board.
Open option contracts are valued at their last sale price on the relevant
exchange. If there is no sale price, the options will be valued within the range
of the most current quoted bid and asked prices.
b. Income Taxes:
The Fund intends to continue to qualify for the tax treatment applicable to
regulated investment companies under the Internal Revenue Code and to make the
requisite distributions to its shareholders which will be sufficient to relieve
it from income and excise taxes.
c. Security Transactions:
Security transactions are accounted for on the date the securities are purchased
or sold (trade date). Realized gains and losses on security transactions are
determined on the basis of specific identification.
d. Investment Income, Expenses and Distributions:
Dividend income and distributions to shareholders are recorded on the
ex-dividend date. Interest income and estimated expenses are accrued daily.
Original issue discount is amortized as required by the Internal Revenue Code.
Net realized capital gains and losses differ for financial statement and tax
purposes primarily due to differing treatments of foreign currency and option
transactions.
e. 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.
f. Foreign Currency Translation:
The accounting records of the Fund are maintained in U.S. dollars. All assets
and liabilities denominated in foreign currencies are translated into U.S.
dollars at the rate of exchange of the currencies against U.S. dollars on the
valuation date. Purchases and sales of securities, income and expenses are
translated at the rate of exchange quoted on the day that the transactions are
recorded. Differences between income and expense amounts recorded and collected
or paid are recognized when reported by the custodian.
The Fund does not isolate that portion of the results of operations resulting
from changes in foreign exchange rates on investments from fluctuations arising
from changes in market prices of securities held. Such fluctuations are included
with the net realized and unrealized gain or loss from investments.
Realized foreign exchange gains or losses arise from sales and maturities of
short-term securities, sales of foreign currencies, gains or losses realized
between the trade and settlement dates on security transactions, the difference
between the amounts of dividends, interest, and foreign withholding taxes
recorded on the Fund's books and the U.S. dollar equivalent of the amounts
actually received or paid. Net unrealized appreciation or depreciation on
translation of assets and liabilities denominated in foreign currencies arises
from changes in the value of assets and liabilities, other than investments in
securities at the end of the reporting period, resulting from changes in
exchange rates.
g. Joint Repurchase Agreements:
The Fund may enter into a joint repurchase agreement whereby its uninvested cash
balance is deposited into a joint cash account to be used to invest in one or
more repurchase agreements with government securities dealers recognized by the
Federal Reserve Board and/or member banks of the Federal Reserve System. The
value and face amount of the joint repurchase agreement are allocated to the
Fund based on its pro-rata interest. A repurchase agreement is accounted for as
a loan by the Fund to the seller, collateralized by underlying U.S. government
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 Fund, with the value of the
underlying securities marked to market daily to maintain coverage of at least
100%. At June 30, 1997, all outstanding repurchase agreements held by the Fund
had been entered into on that date.
h. Option Transactions:
The Fund writes listed put options and covered call options in which premiums
received are recorded as a liability which is marked to market to reflect the
current value of the options written. A covered call option gives the holder the
right to buy the underlying security, which the Fund owns, at any time during
the option period at a predetermined exercise price. The risk in writing a
covered call option is that the Fund gives up the opportunity to participate in
any increase in the price of the underlying security beyond the exercise price.
Proceeds from call options exercised are increased by the amount of premiums
received. A put option gives the holder the right to sell the underlying
security to the Fund at any time during the option period at a predetermined
exercise price. The risk in writing a put option is that the Fund is exposed to
the risk of loss if the market price of the underlying securities declines. If
the holder of a put option written by the Fund exercises the option, the Fund's
cost basis in the underlying security is the exercise price reduced by the
premium received. If an option expires or is canceled in a closing transaction,
the Fund will realize a gain or loss depending on whether the cost of the
closing transaction, if any, is less than or greater than the premium originally
received.
The Fund purchases listed options on certain securities in order to protect the
securities against a decline in market value. A listed purchased put option
gives the Fund the right to sell the underlying security at the option exercise
price at any time during the option period. The put option on a security allows
the Fund to protect the unrealized gain in an appreciated security without
actually selling the security. Any losses realized by the Fund upon expiration
of the put options are limited to the premiums paid for the purchase of such
options, plus any transaction costs.
The Fund may buy listed call options on securities which it intends to purchase
in order to limit the risk of a substantial increase in the market price of such
securities. A call option gives the Fund the right to buy the underlying
securities from the option writer at a stated exercise price. Any losses
realized by the Fund upon expiration of the call options are limited to the
premiums paid for the purchase of such options, plus any transaction costs.
2. TRUST SHARES
At June 30, 1997, there was an unlimited number of no par value shares of
beneficial interest authorized. Transactions in the Fund's shares were as
follows:
<TABLE>
<CAPTION>
Six Months Ended Year Ended
June 30, 1997 December 31, 1996
-----------------------------------------------------
Shares Amount Shares Amount
-----------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 1,723,343 $14,800,057 2,278,018 $17,832,540
Shares issued in reinvestment of distributions 58,729 510,500 116,229 926,122
Shares redeemed (758,542) (6,534,670) (983,856) (7,600,737)
------------------------------------------------------
Net increase 1,023,530 $ 8,775,887 1,410,391 $11,157,925
======================================================
</TABLE>
3. DISTRIBUTIONS AND CAPITAL LOSS CARRYOVERS
At December 31, 1996, for tax purposes, the Fund had accumulated net realized
gains of $409,396.
For tax purposes, the aggregate cost of securities and unrealized appreciation
of the Fund are the same as for financial statement purposes at June 30, 1997.
4. PURCHASES AND SALES OF SECURITIES
Purchases and sales of securities (excluding purchased and written options, and
purchases and sales of short-term securities) for the six months ended June 30,
1997 aggregated $16,418,959 and $11,266,537, respectively.
Transactions in covered call options written for the six months ended June
30,1997 were as follows:
Number of
Amount of Shares
Premiums Optioned
--------------------------
Options outstanding at December 31, 1996.... $ -- --
Option written.............................. 380,293 100,000
Options expired............................. (48,067) (17,500)
Options closed.............................. (187,706) (45,000)
Options outstanding at June 30, 1997........ $144,520 37,500
The cost of canceling written call options in closing purchase transactions was
$81,263 resulting in a net short-term capital gain of $106,444 for the six
months ended June 30, 1997. Premiums received on expired written call and put
options resulted in a net short-term capital gain of $48,067 for the six months
ended June 30, 1997.
5. TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES
a. Management Agreement:
Under the terms of a management agreement, Franklin Advisers, Inc. (Advisers),
provides investment advice, administrative services, office space and facilities
to the Fund, and receives fees computed monthly on the net assets of the Fund on
the last day of the month as follows:
Annualized Fee Rate Net Assets
- -----------------------------------------------------------------------------
.625% First $100 million
.500% Over $100 million, up to and including $250 million
.450% Over $250 million
Under an agreement with Advisers, Franklin Templeton Services, Inc. (FT
Services) provides administrative services and facilities for the Fund. The fee
is paid by Advisers and computed monthly based on average daily net assets. It
is not a separate expense of the Fund.
b. Shareholder Services Agreement:
Under the terms of a shareholder services agreement with Franklin/Templeton
Investor Services, Inc. (Investor Services), the Fund pays costs on a per
shareholder account basis. Shareholder servicing costs incurred by the Fund for
the six months ended June 30, 1997 aggregated $34,077, all of which was paid to
Investor Services.
c. Distribution Plan and Underwriting Agreement:
Under the terms of a distribution plan pursuant to Rule 12b-1 of the Investment
Company Act of 1940 (the Plan), the Fund reimburses Franklin/Templeton
Distributors, Inc. (Distributors), in an amount up to a maximum of 0.25% per
annum of the Fund's average daily net assets for costs incurred in the
promotion, offering and marketing of the Fund's shares. The Plan does not permit
nor require payments of excess costs after termination.
In its capacity as underwriter for the shares of the Fund, Distributors receives
commissions on sales of the Fund's shares of beneficial interest. Commissions
are deducted from the gross proceeds received from the sale of the shares of the
Fund, and as such are not expenses of the Fund. Distributors may also make
payments, out of its own resources, to dealers for certain sales of the Fund's
shares. Commissions received by Distributors, and the amount paid to other
dealers for the six months ended June 30, 1997, amounted to $177,803 and
$157,455 respectively.
d. Other Affiliates and Related Party Transactions:
Certain officers and trustees of the Fund are also officers and/or directors of
Distributors, Advisers, FT Services, and Investor Services (all wholly-owned
subsidiaries of Franklin Resources, Inc.).
6. FINANCIAL HIGHLIGHTS
Selected data for a share of beneficial interest outstanding throughout the
period are as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1997* 1996 1995 1994 1993 1992
---------------------------------------------------------
Per Share Operating Performance
Net asset value at beginning of period $8.32 $7.25 $6.11 $6.22 $5.40 $4.88
---------------------------------------------------------
Net investment income 0.08 0.14 0.18 0.14 0.13 0.15
Net realized and unrealized gain (loss) on securities 0.73 1.11 1.14 (0.11) 0.86 0.53
---------------------------------------------------------
Total from investment operations 0.81 1.25 1.32 0.03 0.99 0.68
---------------------------------------------------------
Less distributions from:
Net investment income (0.08) (0.15) (0.18) (0.14) (0.17) (0.16)
Realized capital gains -- (0.03) -- -- -- --
---------------------------------------------------------
Total distributions (0.08) (0.18) (0.18) (0.14) (0.17) (0.16)
---------------------------------------------------------
Net asset value at end of period $9.05 $8.32 $7.25 $6.11 $6.22 $5.40
---------------------------------------------------------
Total Return** 9.78% 17.41% 21.79% 0.46% 18.38% 14.02%
Ratios/Supplemental Data
Net assets at end of period (in 000's) $71,088 $56,867 $39,319 $25,631 $22,877 $22,077
Ratio of expenses to average net assets 1.12%+ 1.21% 1.17% 1.27% 1.00% .92%
Ratio of net investment income to average net assets 1.84%+ 1.86% 2.86% 2.29% 2.15% 2.81%
Portfolio turnover rate 21.62% 60.11% 62.01% 45.18% 20.49% 23.17%
Average commission rate*** 0.0677 0.0622 0.0640 -- -- --
</TABLE>
*For the six months ended June 30, 1997.
**Total return measures the change in value of an investment over the periods
indicated. It is not annualized. It does not include the maximum front-end sales
charge or the contingent deferred sales charge, and assumes reinvestment of
dividends and capital gains at net asset value. Prior to May 1, 1994, dividends
were reinvested at the maximum offering price, and capital gains at net asset
value. Effective May 1, 1994, with the implementation of the Rule 12b-1
distribution plan for Class I shares, the sales charge on reinvested dividends
was eliminated.
***Represents the average broker commission rate per share paid by the Fund in
connection with the execution of the Fund's portfolio transactions in equity
securities. +Annualized.
Franklin Asset Allocation Fund Semi-Annual Report June 30, 1997.
APPENDIX
DESCRIPTION OF GRAPHIC MATERIAL OMITTED FROM EDGAR FILING (PURSUANT TO ITEM
304 (a) OF REGULATION S-T)
GRAPHIC MATERIAL (1)
This chart shows in pie format the asset allocation of the fund's securities
on June 30, 1997, based on total net assets.
Asset Allocation on June 30, 1997
Equity 70.4%
Fixed-Income Securities 13.0%
Cash and Equivalents 16.6%
