Semi
Annual
Report
Franklin Asset Allocation Fund
June 30, 1998
Thank you for investing with Franklin Templeton. We encourage our investors to
maintain a long-term perspective and remember that all securities markets move
both up and down, as do mutual fund share prices. We appreciate your past
support and look forward to serving your investment needs in the years ahead.
Lisa A. Costa
Portfolio Manager
Franklin Asset Allocation Fund
SHAREHOLDER LETTER
- --------------------------------------------------------------------------------
Your Fund's Objective: 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.
- --------------------------------------------------------------------------------
Dear Shareholder:
We are pleased to bring you this semiannual report of the Franklin Asset
Allocation Fund for the six months ended June 30, 1998. During the first three
months of the period, the Asian currency crisis only had a minimal effect on
U.S. corporate profits. However, the strength of the U.S. dollar did cause some
U.S. exports to lose their competitiveness and made it difficult for certain
companies to maintain their intended pricing structure. As a result, many
analysts' estimates of second quarter corporate profits were revised downward,
and U.S. stock prices experienced significant volatility. Overall, however, the
U.S. economy exhibited healthy growth for the period, with low unemployment and
inflation. Within this environment, Franklin Asset Allocation Fund provided a
+6.47% six-month cumulative total return, as discussed in the Performance
Summary on page 5. As of June 30, 1998, 65.1% of the fund's total net assets
were in equities, 20.1% in bonds and 14.8% in cash and equivalents.
You will find a complete listing of the Fund's portfolio holdings, including
dollar value and number of shares or principal amount, beginning on page 8 of
this report.
CONTENTS
Shareholder Letter 1
Performance Summary 5
Financial Highlights &
Statement of Investments 7
Financial Statements 13
Notes to Financial
Statements 16
GRAPHIC MATERIAL 1 OMITTED - SEE APPENDIX AT END OF DOCUMENT
Three holdings which contributed to the performance of the fund were leading
retailers Costco Cos., Inc., Dayton Hudson Corp., and Wal-Mart Stores, Inc. We
first purchased shares in these companies in 1996, when retail stocks were out
of favor. Since then, high U.S. employment levels helped improve their sales,
and increase demand for their stocks. During the period, we added Sears Roebuck
& Co. and Saks Holdings, Inc. to the fund. Sears has taken steps to restructure
its ailing credit division, is remodeling many of its stores, and has potential
growth from its "home central" service. Saks Holdings, the parent company of
Saks Fifth Avenue, OFF 5th, and Folio, is a premier retailer that has revamped
its merchandising strategy.
We also added Compaq Computer Corp., Motorola, Inc., and Hewlett-Packard Co. to
the portfolio. We believe these companies have the technological leadership and
strong management to overcome a recent sales slowdown. We also found
attractively priced and competitively positioned companies in the insurance
industry. Marsh & McLennan Cos., Inc. is the number one insurance broker in the
U.S. and Latin America, and has an established base in Europe. And UNUM Corp., a
major provider of individual and group disability insurance, possesses the
largest database of disability statistics in the industry.
Responding to declining oil prices, we sold some second- and third-tier
companies that lack a commanding market share. However, we retained positions in
premier companies such as Exxon Corp., Chevron Corp. and Schlumberger, Ltd.,
which, in our opinion, should do well when worldwide oil production is reduced
and prices rise.
Looking forward, we believe that the Asian economic crisis may increase U.S.
market volatility and impact the earnings of many multinational companies. In
addition, a strong dollar may make U.S. goods expensive for foreign buyers,
causing U.S. exports to decline. And cheap imports might diminish the
competitive pricing power of some U.S. companies. Such an environment would be
bad news for companies that aren't low-cost producers, especially in the paper,
gold, aluminum, and chemicals industries, as well as some capital equipment
industries such as machinery, engineering and construction. We will monitor this
situation closely and attempt to take advantage of any short-term opportunity to
purchase outstanding companies at attractive prices.
TOP 10 EQUITY HOLDINGS
6/30/98
COMPANY, % OF TOTAL
INDUSTRY NET ASSETS
- ------------------------------------------
Time Warner, Inc. 2.3%
ENTERTAINMENT/
BROADCAST MEDIA
Enron Corp. 2.1%
NATURAL GAS
Exxon Corp. 2.1%
OIL - INTERNATIONAL
INTEGRATED
Costco Cos., Inc. 1.9%
RETAIL - GENERAL
MERCHANDISE
Tellabs, Inc. 1.8%
COMMUNICATION
EQUIPMENT
MANUFACTURERS
BankAmerica Corp. 1.7%
BANKS - MONEY CENTERS
Philip Morris Cos., Inc. 1.5%
TOBACCO
Owens-Illinois, Inc. 1.5%
CONTAINERS -
METAL & GLASS
Arthur J. Gallagher & Co. 1.5%
INSURANCE
Cinergy Corp. 1.4%
ELECTRICAL UTILITIES
TOP 10 SECTORS
6/30/98
% OF TOTAL
INDUSTRY NET ASSETS
- --------------------------------
Consumer Staples 9.8%
Technology 9.6%
Consumer Cyclicals 8.6%
Capital Goods 7.8%
Financials 7.2%
Utilities 5.4%
Real Estate 5.3%
Energy 5.1%
Health Care 4.1%
Basic Materials 2.8%
We also will seek to use the fund's combination of equities and bonds to provide
you with risk-adjusted returns that we believe are superior to those available
from a stock-only portfolio.
Please remember, this discussion reflects our views and opinions as of June 30,
1998, the end of the reporting period. However, market and economic conditions
are changing constantly, which may affect our strategies and portfolio holdings.
Although historic performance is no guarantee of future results, these insights
may help you understand our investment and management philosophy.
Your participation in Franklin Asset Allocation Fund is appreciated and we
welcome your comments and suggestions.
Sincerely,
Lisa A. Costa
Portfolio Manager
Franklin Asset Allocation Fund
PERFORMANCE SUMMARY
Franklin Asset Allocation Fund provided a +6.47% cumulative total return for the
six-month period ended June 30, 1998. Cumulative total return measures the
change in value of an investment, assuming reinvestment of all distributions,
and does not include the sales charge. 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
+221.46% for the ten-year period ended on the same date.
The fund's share price, as measured by net asset value, increased 46 cents, from
$9.05 on December 31, 1997, to $9.51 on June 30, 1998. During the reporting
period, shareholders received per-share distributions of 8 cents ($0.08) in
income dividends, 0.58 cents ($0.0058) in short-term capital gains, and 3.93
cents ($0.0393) in long-term capital gains. Distributions will vary depending on
income earned by the fund and any profits realized from the sale of securities
in the portfolio, as well as the level of the fund's operating expenses.
Periods ended 6/30/98
One- Five- Ten-
Year Year Year
- -------------------------------------------------------------------------
Cumulative Total Return1 11.77% 90.03% 221.46%
Average Annual Total Return2 6.70% 12.64% 11.88%
Value of $10,000 Investment3 $10,670 $18,136 $30,716
30-Day Standardized Yield4 1.56%
6/30/94 6/30/95 6/30/96 6/30/97 6/30/98
- -------------------------------------------------------------------------
One-Year
Total Return5 7.09% 12.91% 19.27% 17.89% 11.77%
1. Cumulative total return represents the change in value of an investment over
the periods indicated and does not include the sales charge.
2. Average annual total return represents the average annual change in value of
an investment over the periods indicated and includes the current maximum 4.5%
initial sales charge. 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.
3. These figures represent the value of a hypothetical $10,000 investment in the
fund over the periods indicated and include the sales charge. 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.
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, 1998.
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 sales
charge.
Effective May 1, 1994, the fund eliminated the sales charge on reinvested
dividends and implemented a Rule 12b-1 Plan, which affects subsequent
performance.
On August 1, 1996, the fund's name was changed from Franklin Premier Return Fund
to better reflect its investment strategy and philosophy. The fund's
shareholders also voted to modify 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 calculations assume reinvestment of dividends and capital gains at net asset
value. Since markets can go down as well as up, investment return and principal
value will fluctuate with market conditions, and you may have a gain or loss
when you sell your shares.
<TABLE>
<CAPTION>
FRANKLIN ASSET ALLOCATION FUND
Financial Highlights
SIX MONTHS ENDED
JUNE 30, 1998 YEAR ENDED DECEMBER 31,
-------------------------------------------
(UNAUDITED) 1997 1996 1995 1994 1993
-------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period $9.05 $8.32 $7.25 $6.11 $6.22 $5.40
-------------------------------------------------------------
Income from investment operations:
Net investment income .10 .15 .14 .18 .14 .13
Net realized and unrealized gains (losses) .49 1.10 1.11 1.14 (.11) .86
-------------------------------------------------------------
Total from investment operations .59 1.25 1.25 1.32 .03 .99
-------------------------------------------------------------
Less distributions from:
Net investment income (.08) (.15) (.15) (.18) (.14) (.17)
Net realized gains (.05) (.37) (.03) -- -- --
-------------------------------------------------------------
Total distributions (.13) (.52) (.18) (.18) (.14) (.17)
-------------------------------------------------------------
Net asset value, end of period $9.51 $9.05 $8.32 $7.25 $6.11 $6.22
-------------------------------------------------------------
Total return* 6.47% 15.24% 17.41% 21.79% 0.46% 18.38%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) $101,986 $89,630 $56,867 $39,319 $25,631 $22,877
Ratios to average net assets:
Expenses 1.06%** 1.12% 1.21% 1.17% 1.27% 1.00%
Net investment income 2.08%** 1.73% 1.86% 2.86% 2.29% 2.15%
Portfolio turnover rate 18.64% 54.57% 60.11% 62.01% 45.18% 20.49%
</TABLE>
*Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized. Prior to May 1, 1994, dividends from net
investment income were reinvested at the offering price.
**Annualized
<TABLE>
<CAPTION>
FRANKLIN ASSET ALLOCATION FUND
Statement of Investments, June 30, 1998 (unaudited)
SHARES VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Common Stocks 63.3%
Banks - Money Center 1.7%
BankAmerica Corp. 20,000 $ 1,728,750
----------
Beverages - Non-Alcoholic .9%
Panamerican Beverages, Inc., Class A (Mexico) 30,000 943,125
----------
Biotechnology 1.1%
aGenzyme Corp., General Division 30,000 766,875
aVertex Pharmaceuticals, Inc. 17,500 393,750
----------
1,160,625
----------
Casinos & Gaming .4%
aMirage Resorts, Inc. 20,000 426,250
----------
Chemicals .9%
Du Pont (E.I.) De Nemours & Co. 12,500 932,813
----------
Chemicals - Specialty .5%
Sigma-Aldrich Corp. 15,000 526,875
----------
Communication Equipment Manufacturers 4.1%
aCisco Systems, Inc. 15,000 1,380,938
Motorola, Inc. 20,000 1,051,250
aTellabs, Inc.* 25,000 1,790,625
----------
4,222,813
----------
Computer Hardware 2.7%
Compaq Computer Corp. 20,000 567,500
Hewlett-Packard Co. 10,000 598,750
Hitachi, Ltd. (Japan) 105,000 684,692
NEC Corp. (Japan) 100,000 931,657
----------
2,782,599
----------
Computer Software .9%
aOracle Corp. 37,500 921,094
----------
Conglomerates 1.1%
ITT Industries, Inc. 30,000 1,121,250
----------
Containers - Metal & Glass 1.5%
aOwens-Illinois, Inc. 34,400 1,539,400
----------
Electric Utilities 3.4%
Cinergy Corp. 40,000 1,400,000
Duke Energy Corp. 15,000 888,750
Southern Co. 40,000 1,107,500
----------
3,396,250
----------
Electrical Equipment 1.2%
Symbol Technologies, Inc. 33,150 1,251,413
----------
Electronic Semiconductors 1.7%
Intel Corp.* 15,000 1,111,875
Linear Technology Corp. 10,000 603,125
----------
1,715,000
----------
Entertainment/Broadcast Media 2.4%
Time Warner, Inc.* 28,000 $ 2,392,250
----------
Foods 1.2%
Nestle, SA (Switzerland) 580 1,241,218
----------
Gold & Precious Metal Mining .5%
Newmont Mining Corp. 20,000 472,500
----------
Health Care - Diversified 1.2%
Abbott Laboratories 30,000 1,226,250
----------
Health Care - Pharmaceuticals 1.8%
Novartis, AG (Switzerland) 550 915,216
Roche Holding, AG (Switzerland) 90 883,801
----------
1,799,017
----------
Hotels & Motels .6%
Hilton Hotels Corp. 20,000 570,000
----------
Household Products .9%
Procter & Gamble Co. 10,000 910,625
----------
Insurance 5.5%
American International Group, Inc. 7,500 1,095,000
Arthur J. Gallagher & Co. 35,000 1,566,250
Hartford Life, Inc., Class A 20,000 1,138,750
Marsh & McLennan Cos., Inc. 15,000 906,563
Unum Corp. 15,000 832,500
----------
5,539,063
----------
Manufacturing - Diversified .8%
aThermo Electron Corp. 22,500 769,219
----------
Manufacturing - Specialized 1.7%
aU.S. Filter Corp. 20,000 561,250
aWaters Corp.* 20,000 1,178,750
----------
1,740,000
----------
Metals/Mining .9%
Rio Tinto, Plc., Sponsored ADR (United Kingdom) 20,000 945,000
----------
Natural Gas 2.1%
Enron Corp. 40,000 2,162,500
----------
Oil - International Integrated 3.3%
Chevron Corp. 15,000 1,245,938
Exxon Corp. 30,000 2,139,375
----------
3,385,313
----------
Oil & Gas Drilling 1.7%
aEVI Weatherford, Inc. 20,000 742,500
Schlumberger, Ltd. 15,000 1,024,688
----------
1,767,188
----------
Personal Care 1.0%
Estee Lauder Cos., Class A 15,000 $ 1,045,313
----------
Real Estate Investment Trusts 5.3%
Arden Realty, Inc. 30,000 776,250
Patriot American Hospitality, Inc. 30,000 718,125
Public Storage, Inc. 30,000 840,000
aSecurity Capital Group, Class B 30,000 798,750
Simon DeBartolo Group, Inc. 30,000 975,000
Starwood Hotels & Resorts 27,500 1,328,593
----------
5,436,718
----------
Retail - General Merchandise 5.1%
aCostco Cos., Inc.* 30,000 1,891,874
Dayton Hudson Corp. 25,000 1,212,500
Sears, Roebuck & Co. 20,000 1,221,250
Wal-Mart Stores, Inc. 15,000 911,250
----------
5,236,874
----------
Retail - Specialty .5%
aSaks Holdings, Inc. 20,000 552,500
----------
Service - Non-hazardous Waste Disposal .4%
aRepublic Services, Inc. 15,100 362,400
----------
Telecommunications 2.7%
aChina Telecom, Ltd., ADR (Hong Kong) 15,100 521,893
aLoral Space & Communications, Ltd. 40,000 1,130,000
Portugal Telecom, SA (Portugal) 20,300 1,075,881
----------
2,727,774
----------
Tobacco 1.6%
Philip Morris Cos., Inc. 40,000 1,575,000
----------
Total Common Stocks (Cost $49,979,544) 64,524,979
----------
Preferred Stocks 1.8%
Newell Financial Trust I, 5.25%, cvt. pfd., 144A 15,000 873,750
Ingersoll-Rand, 6.75%, cvt. pfd. 40,000 960,000
----------
Total Preferred Stocks (Cost $1,746,444) 1,833,750
----------
PRINCIPAL
AMOUNT
---------
Bonds 20.1%
Convertible Bonds 1.9%
Interpublic Group Cos., Inc., cvt. sub. deb., 144A, 1.80%, 9/16/04 $ 1,000,000 933,750
Rite Aid Corp., cvt. sub. notes, 144A, 5.25%, 9/15/02 800,000 986,000
----------
Total Convertible Bonds (Cost $1,629,083) 1,919,750
----------
Corporate Bonds .7%
Dayton Hudson Co., deb., 8.60%, 1/15/12 250,000 298,468
Georgia Pacific Corp., deb., 9.125%, 7/01/22 100,000 110,758
Panamerican Beverages, Inc., senior notes, 8.125%, 4/01/03 (Mexico) 250,000 270,304
----------
Total Corporate Bonds (Cost $596,006) 679,530
----------
U.S. Government Securities 17.5%
U.S. Treasury Bonds, 6.00% - 8.00%, 11/15/21 - 2/15/26 $ 6,150,000 $ 6,637,162
U.S. Treasury Notes, 5.500% - 7.25%, 10/31/98 - 8/15/07 10,000,000 10,239,164
U.S. Treasury Notes, Inflation-Indexed, 3.375%, 1/15/07 1,025,590 993,861
----------
Total U.S. Government Securities (Cost $17,146,210) 17,870,187
----------
Total Bonds (Cost $19,371,299) 20,469,467
----------
Total Long Term Investments (Cost $71,097,287) 86,828,196
----------
Short Term Investments 8.8%
Commercial Paper 4.4%
General Electric Capital Corp., 5.45%, 7/27/98 4,500,000 4,481,141
----------
Certificates of Deposit 4.4%
National Westminster Bank, Plc., New York Branch, 5.54%, 7/29/98 4,500,000 4,499,370
----------
Total Short Term Investments (Cost $8,983,186) 8,980,511
----------
bRepurchase Agreement 6.6%
Joint Repurchase Agreement, 5.614%, 7/01/98, (Maturity Value $6,771,841)
(Cost $6,770,785) 6,770,785 6,770,785
BancAmerica Robertson Stephens
Barclays Capital Group, Inc.
Bear, Stearns & Co., Inc.
BT Alex Brown, Inc.
Chase Securities, Inc.
CIBC Wood Gundy Securities Corp.
Donaldson, Lufkin & Jenrette Securities Corp.
Dresdner Kleinwort Benson, North America, L.L.C.
Greenwich Capital Markets, Inc.
Paribas Corp.
SBC Warburg Dillon Reed, Inc.
Collateralized by U.S. Treasury Bills and Notes ----------
Total Investments (Cost $86,851,258) 100.6% 102,579,492
----------
Open Call Options Written (Premiums Received $226,905) ( .3%) (317,813)
Other Assets, less Liabilities (.3%) (275,501)
----------
Net Assets 100.0% $101,986,178
==========
</TABLE>
<TABLE>
<CAPTION>
EXPIRATION STRIKE SHARES
DATE PRICE OPTIONED VALUE
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Call Options Written
Costco Cos., Inc. July 98 55 15,000 $ 121,875
Intel Corp. October 98 75 5,000 30,000
Intel Corp. October 98 80 5,000 19,375
Tellabs, Inc. September 98 75 15,000 60,000
Time Warner, Inc. September 98 80 10,000 76,250
Waters Corp. August 98 60 5,000 10,313
----------
Total Call Options Written (Premiums Received $226,905) $ 317,813
==========
</TABLE>
*Portion of the security is segregated as collateral for call options written.
aNon-income producing.
bInvestment is through participation in a joint account with other funds managed
by the investment advisor. At June 30, 1998, all repurchase agreements had been
entered into on that date.
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
June 30, 1998 (unaudited)
Assets:
Investments in securities, at value (cost $86,851,258) $102,579,492
Cash 222,414
Receivables:
Investment securities sold 331,858
Capital shares sold 101,953
Dividends and interest 492,890
--------
Total assets 103,728,607
--------
Liabilities:
Payables:
Investment securities purchased 855,500
Affiliates 92,331
Shareholders 380,287
Distributions to shareholders 88,418
Options written, at value (premiums received $226,905) 317,813
Other liabilities 8,080
--------
Total liabilities 1,742,429
--------
Net assets, at value $101,986,178
========
Net assets consist of:
Undistributed net investment income $ 258,000
Net unrealized appreciation 15,637,004
Accumulated net realized gain 1,686,624
Capital shares 84,404,550
--------
Net assets, at value $101,986,178
========
Net asset value per share ($101,986,178 / 10,722,805
shares outstanding)* $9.51
========
Maximum offering price per share ($9.51 / 95.5%) $9.96
========
*Redemption price is equal to net asset value less any applicable contingent
deferred sales charge.
STATEMENT OF OPERATIONS
for the six months ended June 30, 1998 (unaudited)
Investment income:
(net of foreign taxes of $17,247)
Dividends $ 490,328
Interest 1,070,274
--------
Total investment income $1,560,602
Expenses:
Management fees (Note 3) 312,001
Distribution fees (Note 3) 114,481
Transfer agent fees (Note 3) 51,672
Custodian fees 1,516
Reports to shareholders 17,444
Registration and filing fees 15,552
Professional fees 9,549
Trustees' fees and expenses 3,109
Other 1,527
--------
Total expenses 526,851
--------
Net investment income 1,033,751
--------
Realized and unrealized gains:
Net realized gain from:
Investments 1,527,221
Transactions in written options which
expired or were closed (Note 5) 191,697
Foreign currency transactions 8,541
--------
Net realized gain 1,727,459
Net unrealized appreciation (depreciation) on:
Investments 3,536,092
Options (142,357)
--------
Net unrealized appreciation 3,393,735
--------
Net realized and unrealized gain 5,121,194
--------
Net increase in net assets resulting from operations $6,154,945
========
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS
for the six months ended June 30, 1998 (unaudited)
and the year ended December 31, 1997
SIX MONTHS
ENDED YEAR ENDED
JUNE 30, 1998 DECEMBER 30, 1997
------------------------------------------------
Increase (decrease) in net assets:
Operations:
<S> <C> <C>
Net investment income $ 1,033,751 $ 1,279,285
Net realized gain from investments, options and foreign currency transactions 1,727,459 3,485,295
Net unrealized appreciation on investments and options 3,393,735 4,935,333
------------------------------------------------
Net increase in net assets resulting from operations 6,154,945 9,699,913
Distributions to shareholders from:
Net investment income (855,057) (1,226,791)
Net realized gains (479,894) (3,456,153)
------------------------------------------------
Total distributions to shareholders (1,334,951) (4,682,944)
Capital share transactions (Note 2 ) 7,536,000 27,745,965
------------------------------------------------
Net increase in net assets 12,355,994 32,762,934
Net assets:
Beginning of period 89,630,184 56,867,250
------------------------------------------------
End of period $101,986,178 $89,630,184
================================================
Undistributed net investment income included in net assets:
End of period $ 258,000 $ 79,306
================================================
</TABLE>
NOTES TO FINANCIAL STATEMENTS (unaudited)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Franklin Asset Allocation Fund (the Trust) is registered under the Investment
Company Act of 1940 as an open-end, diversified investment company. The Trust
consists of one fund (the Fund). The investment objective of the Fund is total
return. The following summarizes the Fund's significant accounting policies.
a. Security Valuation:
Securities listed or traded on a recognized national exchange or NASDAQ are
valued at the latest reported sales price. Over-the-counter securities and
listed securities for which no sale is reported are valued within the range of
the latest quoted bid and asked prices. Securities for which market quotations
are not readily available are valued at fair value as determined by management
in accordance with procedures established by the Board of Trustees.
b. Foreign Currency Translation:
Portfolio securities and other assets and liabilities denominated in foreign
currencies are translated into U.S. dollars based on the exchange rate of such
currencies against U.S. dollars on the date of valuation. Purchases and sales of
securities and income items denominated in foreign currencies are translated
into U.S. dollars at the exchange rate in effect on the transaction date.
The Fund does not separately report the effect of changes in foreign exchange
rates from changes in market prices on securities held. Such changes are
included in net realized and unrealized gain or loss from investments.
Realized foreign exchange gains or losses arise from sales of foreign
currencies, currency gains or losses realized between the trade and settlement
dates on securities transactions and the difference between the recorded amounts
of dividends, interest, and foreign withholding taxes and the U.S. dollar
equivalent of the amounts actually received or paid. Net unrealized foreign
exchange gains and losses arise from changes in foreign exchange rates on
foreign denominated assets and liabilities other than investments in securities
held at the end of the reporting period.
c. Options:
In order to produce incremental income or protect against changes in the value
of the underlying securities, the Fund may buy put and call options, and write
put and covered call options.
The risk in buying an option is that the Fund pays a premium whether or not the
option is exercised. When an option is exercised, the cost of the security for a
purchased put or call option is adjusted by the amount of the premium received
or paid. The Fund also has the risk of not being able to enter into a closing
transaction if a liquid secondary market does not exist.
Premiums received by the Fund upon writing put or covered call options are
recorded as an asset and an equivalent liability which is subsequently adjusted
daily to equal the current market value of the option written. The Fund will
realize a gain or loss upon the expiration or closing of the option transaction.
When an option is exercised, the proceeds on sales for a written call option or
the purchase cost for a written put option is adjusted by the amount of the
premium received or paid. The risk in writing a call option is that the Fund
gives up the opportunity for profit if the market price of the security
increases and the option is exercised. The risk in writing a put option is that
the Fund may incur a loss if the market price of the security decreases and the
option is exercised. All collateral covering written options are held in a
segregated account by the custodian bank.
d. Income Taxes:
No provision has been made for income taxes because the Fund's policy is to
qualify as a regulated investment company under the Internal Revenue Code and to
distribute all of its taxable income.
e. Security Transactions, Investment Income, Expenses and Distributions:
Security transactions 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. Bond discount is
amortized on an income tax basis. Dividend income and distributions to
shareholders are recorded on the ex-dividend date.
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.
<TABLE>
<CAPTION>
2. SHARES OF BENEFICIAL INTEREST
At June 30, 1998, there were an unlimited number of shares authorized (no par
value). Transactions in the Fund's shares were as follows:
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1998 DECEMBER 31, 1997
--------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
--------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 2,462,938 $22,972,227 3,999,853 $36,150,348
Shares issued in reinvestment of distributions 126,084 1,200,193 460,518 4,097,788
Shares redeemed (1,768,421) (16,636,420) (1,392,075) (12,502,171)
--------------------------------------------------------------
Net increase 820,601 $ 7,536,000 3,068,296 $27,745,965
==============================================================
</TABLE>
3. TRANSACTIONS WITH AFFILIATES
Certain officers and trustees of the Fund are also officers or directors of
Franklin Advisers, Inc. (Advisers), Franklin Templeton Services, Inc. (FT
Services), Franklin/Templeton Distributors, Inc. (Distributors), and
Franklin/Templeton Investor Services, Inc. (Investor Services), the Fund's
investment manager, administrative manager, principal underwriter, and transfer
agent, respectively.
The Fund pays an investment management fee to Advisers based on the average net
assets of the Fund as follows:
ANNUALIZED FEE RATE MONTH-END 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, FT Services provides administrative services
to the Fund. The fee is paid by Advisers based on average daily net assets, and
is not an additional expense of the Fund.
The Fund reimburses Distributors up to .25% per year of its average daily net
assets for costs incurred in marketing the Fund's shares.
Distributors paid net commissions on sales of the Fund's shares of $12,786.
4. INCOME TAXES
At June 30, 1998, the net unrealized appreciation based on the cost of
investments for income tax purposes of $86,851,258 was as follows:
Unrealized appreciation $18,094,517
Unrealized depreciation (2,366,283)
----------
Net unrealized appreciation $15,728,234
==========
Net investment income and net realized gains differ for financial statement and
tax purposes primarily due to differing treatments of foreign currency
transactions.
5. INVESTMENT TRANSACTIONS
Purchases and sales of securities (excluding short-term securities) for the
period ended June 30, 1998 aggregated $25,349,782 and $15,162,369, respectively.
Transactions in call options written during the period ended June 30, 1998 were
as follows:
NUMBER OF
SHARES AMOUNT OF
OPTIONED PREMIUMS
---------------------------
Options outstanding at December 31, 1997 40,000 $173,794
Options written 116,300 396,918
Options expired (35,000) (128,321)
Options closed (66,300) (215,486)
--------
Options outstanding at June 30, 1998 $226,905
========
FRANKLIN ASSET ALLOCATION FUND
GRAPHIC MATERIAL (1)
This chart shows, in pie format, the asset-type distribution of total net assets
for the Franklin Asset Allocation Fund, as of June 30, 1998.
Equity 65.1%
Fixed-Income Securities 20.1%
Cash & Equivalents 14.8%
------
100.0%
