SEMI-ANNUAL REPORT
FRANKLIN ASSET ALLOCATION FUND
JUNE 30, 1999
SHAREHOLDER LETTER
- --------------------------------------------------------------------------------
Your Fund's Goal: 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 Franklin Asset Allocation
Fund covering the six months ended June 30, 1999. During this period, yields for
30-year Treasury bonds climbed from 5.09% to 5.98%, and the U.S. Federal Reserve
Board (the Fed) raised the federal funds rate one quarter of a percent to 5.00%,
noting that it would maintain a neutral stance in the foreseeable future. The
Dow Jones Industrial Average reached record highs, the Standard & Poor's(R)
(S&P 500(R)) Composite Index posted a +12.38% six-month cumulative total
return and the Lehman Brothers Government/Corporate Bond Index produced a return
of -2.28%.(1) Within this environment, Franklin Asset Allocation Fund - Class A
delivered a +7.88% six-month cumulative total return, as shown in the
Performance Summary on page 5.
During the reporting period, we adhered to a "top-down" investment strategy,
beginning with analysis of economic factors to help us determine the current
stage of the business cycle, allocating our assets among stocks, bonds and cash,
and positioning the portfolio's equity portion in industries that we believed
had the most likely prospects for capital appreciation. However, we based
company selection on a "bottom-up" strategy, analyzing factors such as
price-to-earnings ratio, management quality, and industry leadership.
(1.) Source: Standard & Poor's Micropal. Indices are unmanaged and include
reinvested dividends or interest. One cannot invest directly in an index.
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 ......................... 4
Financial Highlights &
Statement of Investments .................... 6
Financial Statements ........................12
Notes to
Financial Statements ........................15
[FUND CATEGORY PYRAMID GRAPHIC]
ASSET ALLOCATION
Based on Total Net Assets
6/30/99
[PIE CHART]
Equity ......................................69.5%
Fixed-Income Securities .....................15.3%
Cash & Equivalents ..........................15.2%
TOP 10 SECTORS
6/30/99
% OF TOTAL
SECTOR NET ASSETS
------ ----------
Electronic Technology 11.7%
Finance 6.6%
Retail Trade 6.4%
Producer Manufacturing 5.8%
Energy 5.0%
Consumer Non-Durables 4.7%
Telecommunications 4.4%
Health Technology 4.2%
Utilities 3.9%
Technology Services 3.8%
On December 31, 1998, the fund had 67.2% of its total net assets invested in
equities, 17.9% in fixed-income securities and 14.9% in cash and equivalents.
The fund's equity and cash positions remained about the same throughout the
reporting period, but in April our exposure to fixed-income securities declined
to approximately 14% of total net assets as the fund sold a number of bonds for
a profit. When inflation fears drove interest rates over 6% in June, we
purchased more bonds, and on June 30, 1999, they accounted for 15.3% of total
net assets with equities and cash representing 69.5% and 15.2%, respectively.
During the six months under review, we increased our exposure to the
communication sector by initiating positions in service provider companies such
as Qwest Communications International Inc., SBC Communications Inc., GTE Corp.
and BellSouth Corp. Considering ongoing industry consolidation and increasing
demand generated by the Internet, prices of these shares were reasonable in our
opinion. These companies possess what we feel are strong management teams with
well-thought-out business plans, and could rank high among the leaders in their
group.
Because rising economic indicators like the National Association of Purchasing
Managers' Index could translate into increased demand for capital goods, we
added to our positions in that sector by purchasing shares of diversified
manufacturing companies serving a wide range of industries with at least one
third of their sales from foreign sources. These included Illinois Tool Works
Inc., Minnesota Mining & Manufacturing Co., Honeywell Inc. (acquired by
AlliedSignal Inc. near the end of the reporting period), and Parker Hannifin
Corp., a leading manufacturer of motion control products.
After the economy expanded rapidly in 1999's first quarter, we added to our
existing holdings in the energy sector, and sold many of our finance stocks.
During the reporting period, we increased the fund's exposure to the energy
sector from 2.7% of total net assets to 5.0%, and reduced its finance holdings
from 8.3% to 6.6%.
Looking forward, we feel that the fundamental backdrop for equities remains
favorable. A number of companies have reported better-than-expected earnings
this year, prompting many analysts to revise 1999 earnings estimates for S&P 500
companies to 11%, from the 4% predicted in January, and if interest rates remain
stable and global economic activity picks up, we believe U.S. equities may
continue to advance, particularly those in technology, consumer and industrial
sectors. But if the Fed raises interest rates substantially, or inflation rises,
we may have to adjust our economic outlook and reposition the allocation of the
fund's portfolio.
This discussion reflects our views and opinions as of June 30, 1999, the end of
the reporting period. However, market and economic conditions are changing
constantly, which may affect our strategies and portfolio holdings. Although
past performance is not predictive of future results, these insights may lead to
a better understanding of how we pursue our investment goal.
We appreciate your participation in Franklin Asset Allocation Fund and welcome
your comments and suggestions.
Sincerely,
/s/ Lisa A. Costa
Lisa A. Costa
Portfolio Manager
Franklin Asset Allocation Fund
TOP 10 EQUITY HOLDINGS
6/30/99
COMPANY, % OF TOTAL
INDUSTRY NET ASSETS
- -------- ----------
Cisco Systems Inc.
Electronic Technology 2.3%
Motorola Inc.
Electronic Technology 2.2%
Enron Corp.
Utilities 1.9%
Equant NV, N.Y. shs.
Technology Services 1.8%
Lucent Technologies Inc.
Electronic Technology 1.7%
Time Warner Inc.
Consumer Services 1.7%
Bank of America Corp.
Finance 1.7%
Chevron Corp.
Energy 1.7%
Exxon Corp.
Energy 1.6%
American International
Group Inc.
Finance 1.6%
CLASS A (formerly Class I):
Subject to the current, 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 may differ. Effective May 1, 1994, the fund eliminated the sales
charge on reinvested dividends and implemented a Rule 12b-1 Plan, which affects
subsequent performance.
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.
Name and objective changed in August 1996 and May 1991. Formerly Franklin
Premier Return Fund and Franklin Option Fund, respectively.
PERFORMANCE SUMMARY AS OF 6/30/99
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. Past distributions are not indicative of future
trends. All total returns include reinvested distributions at net asset value.
PRICE AND DISTRIBUTION INFORMATION
CLASS A CHANGE 6/30/99 12/31/98
------------------------------------------------------------------------------
Net Asset Value +$0.67 $10.63 $9.96
DISTRIBUTIONS (1/1/99-6/30/99)
----------------------------------------
Dividend Income $0.0800
Long-Term Capital Gain $0.0333
TOTAL $0.1133
CLASS C CHANGE 6/30/99 5/1/99
------------------------------------------------------------------------------
Net Asset Value +$0.13 $10.63 $10.50
DISTRIBUTIONS (5/1/99-6/30/99)
----------------------------------------
Dividend Income $0.0270
Long-Term Capital Gain $0.0333
TOTAL $0.0603
Past performance is not predictive of future results.
PERFORMANCE
<TABLE>
<CAPTION>
OBJECTIVE
CHANGE INCEPTION
CLASS A 6-MONTH 1-YEAR 5-YEAR (5/1/91) 10-YEAR (12/5/51)
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Cumulative
Total Return(1) +7.88% +15.05% +105.31% +194.72% +216.56% +7,931.37%
Average Annual
Total Return(2) +1.66% +8.43% +14.12% +13.32% +11.54% +9.52%
Value of
$ 10,000
Investment(3) $ 10,166 $ 10,843 $ 19,359 $ 27,759 $ 29,819 $ 757,677
30-Day Standardized Yield(4) +1.37%
</TABLE>
<TABLE>
<CAPTION>
6/30/95 6/30/96 6/30/97 6/30/98 6/30/99
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
One-Year Total Return(5) +12.91% +19.27% +17.89% +11.77% +15.05%
</TABLE>
INCEPTION
CLASS C (5/1/99)
-------------------------------------------------------
Cumulative Total Return(1) +1.81%
Aggregate Total Return(2) +0.81%
Value of $10,000 Investment(3) $10,081
30-Day Standardized Yield(4) +0.72%
(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. Since Class C shares have
existed for less than one year, aggregate total return for that class represents
total return since inception, including the maximum sales charge.
(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.
(4.) Yield, calculated as required by the SEC, is based on the earnings of the
fund's portfolio for the 30 days ended June 30, 1999.
(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 sales
charges.
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.
Past performance is not predictive of future results.
FRANKLIN ASSET ALLOCATION FUND
Financial Highlights
<TABLE>
<CAPTION>
CLASS A
------------------------------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED DECEMBER 31,
JUNE 30, 1999 ---------------------------------------------------------
(UNAUDITED)(+) 1998 1997 1996 1995 1994
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period .......... $9.96 $9.05 $8.32 $7.25 $6.11 $6.22
------------------------------------------------------------------------------
Income from investment operations:
Net investment income ........................ .08 .18 .15 .14 .18 .14
Net realized and unrealized gains ............ .70 1.03 1.10 1.11 1.14 (.11)
------------------------------------------------------------------------------
Total from investment operations .............. .78 1.21 1.25 1.25 1.32 .03
------------------------------------------------------------------------------
Less distributions from:
Net investment income ........................ (.08) (.19) (.15) (.15) (.18) (.14)
Net realized gains ........................... (.03) (.11) (.37) (.03) -- --
------------------------------------------------------------------------------
Total distributions ........................... (.11) (.30) (.52) (.18) (.18) (.14)
------------------------------------------------------------------------------
Net asset value, end of period ................ $10.63 $9.96 $9.05 $8.32 $7.25 $6.11
------------------------------------------------------------------------------
Total return(*) ............................... 7.88% 13.54% 15.24% 17.41% 21.79% .46%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) ............. $128,550 $108,268 $89,630 $56,867 $39,319 $25,631
Ratios to average net assets:
Expenses ..................................... 1.11%(**) 1.13% 1.12% 1.21% 1.17% 1.27%
Net investment income ........................ 1.58%(**) 1.91% 1.73% 1.86% 2.86% 2.29%
Portfolio turnover rate ....................... 29.22% 54.28% 54.57% 60.11% 62.01% 45.18%
</TABLE>
(*)Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized for periods less than one year. Prior to May
1, 1994, dividends from net investment income were reinvested at the offering
price.
(**)Annualized.
(+)Based on average shares outstanding.
FRANKLIN ASSET ALLOCATION FUND
Financial Highlights (continued)
<TABLE>
<CAPTION>
CLASS C
---------------------
SIX MONTHS ENDED
JUNE 30, 1999(***)(+)
(UNAUDITED)
--------------------
<S> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period ........................................... $10.50
--------------------
Income from investment operations:
Net investment income ......................................................... .02
Net realized and unrealized gains ............................................. .17
--------------------
Total from investment operations ............................................... .19
--------------------
Less distributions from:
Net investment income ......................................................... (.03)
Net realized gains ............................................................ (.03)
--------------------
Total distributions ............................................................ (.06)
--------------------
Net asset value, end of period ................................................. $10.63
====================
Total return(*) ................................................................ 1.81%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) .............................................. $447
Ratios to average net assets:
Expenses ...................................................................... 1.87%(**)
Net investment income ......................................................... 0.95%(**)
Portfolio turnover rate ........................................................ 29.22%
</TABLE>
(*)Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized for periods less than one year.
(**)Annualized.
(***)For the period May 1,1999 (effective date) to June 30,1999.
(+)Based on average shares outstanding.
See notes to financial statements. 7
FRANKLIN ASSET ALLOCATION FUND
Statement of Investments, June 30, 1999 (unaudited)
<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
LONG TERM INVESTMENTS 84.8%
COMMON STOCKS 67.0%
CONSUMER DURABLES .7%
DaimlerChrysler AG ............................................ Germany 10,000 $888,750
----------
CONSUMER NON-DURABLES 4.7%
Estee Lauder Cos., A .......................................... United States 30,000 1,503,750
Lancaster Colony Corp. ........................................ United States 20,500 707,250
Nestle SA ..................................................... Switzerland 480 864,840
Philip Morris Cos Inc. ........................................ United States 40,000 1,607,500
The Procter & Gamble Co. ...................................... United States 15,000 1,338,750
----------
6,022,090
----------
CONSUMER SERVICES 3.0%
(a)Clear Channel Communications Inc. ........................... United States 10,000 689,375
Time Warner Inc. .............................................. United States 30,000 2,205,000
(a)United Pan-Europe Communications NV (UPC) ................... Netherlands 18,400 998,082
----------
3,892,457
----------
ELECTRONIC TECHNOLOGY 11.7%
(a)Altera Corp. ................................................ United States 20,000 736,250
(a)Cisco Systems Inc. .......................................... United States 45,000 2,902,500
(c)Corning Inc. ................................................ United States 15,000 1,051,875
Hewlett-Packard Co. ........................................... United States 15,000 1,507,500
Intel Corp. ................................................... United States 20,000 1,190,000
(c)Linear Technology Corp. ..................................... United States 20,000 1,345,000
Lucent Technologies Inc. ...................................... United States 33,000 2,225,438
(c)Motorola Inc. ............................................... United States 30,000 2,842,500
Symbol Technologies Inc. ...................................... United States 22,500 829,688
(a)Waters Corp. ................................................ United States 10,000 531,250
----------
15,162,001
----------
ENERGY 5.0%
Burlington Resources Inc. ..................................... United States 20,000 865,000
Chevron Corp. ................................................. United States 22,500 2,141,719
Exxon Corp. ................................................... United States 27,500 2,120,938
Schlumberger Ltd. ............................................. United States 20,000 1,273,750
----------
6,401,407
----------
FINANCE 6.6%
American International Group Inc. ............................. United States 17,500 2,048,594
Bank of America Corp. ......................................... United States 30,000 2,199,375
Bank One Corp. ................................................ United States 20,000 1,191,250
Fannie Mae .................................................... United States 20,000 1,367,500
Merrill Lynch & Co Inc. ....................................... United States 10,000 799,375
Wells Fargo Co. ............................................... United States 20,000 855,000
----------
8,461,094
----------
HEALTH SERVICES 1.2%
IMS Health Inc. ............................................... United States 50,000 1,562,500
----------
HOTEL .7%
Starwood Hotels & Resorts Worldwide Inc. ...................... United States 27,500 840,469
----------
</TABLE>
FRANKLIN ASSET ALLOCATION FUND
Statement of Investments, June 30, 1999 (unaudited) (cont.)
<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS (CONT.)
HEALTH TECHNOLOGY 4.2%
Abbott Laboratories ....................................... United States 35,000 $1,592,500
Bristol-Myers Squibb Co. .................................. United States 15,000 1,056,563
(a),(c)Genzyme Corp., General Division .................... United States 20,000 970,000
(a)Genzyme Surgical Products .............................. United States 3,580 15,775
Novartis AG ............................................... Switzerland 550 803,100
Roche Holding AG .......................................... Switzerland 90 925,125
----------
5,363,063
----------
NON-ENERGY MINERALS 1.2%
Barrick Gold Corp. ........................................ Canada 30,000 581,250
Rio Tinto PLC, ADR ........................................ United Kingdom 5,000 1,008,750
----------
1,590,000
----------
PROCESS INDUSTRIES 2.6%
Bowater Inc. .............................................. United States 20,000 945,000
E.I du Pont de Nemours and Co. ............................ United States 20,000 1,366,250
----------
2,311,250
----------
PRODUCER MANUFACTURING 5.8%
The B.F Goodrich Co. ...................................... United States 25,000 1,062,500
Emerson Electric Co. ...................................... United States 25,000 1,571,875
General Electric Co. ...................................... United States 15,000 1,695,000
Honeywell Inc. ............................................ United States 10,000 1,158,750
Illinois Tool Works Inc. .................................. United States 15,000 1,230,000
Minnesota Mining & Manufacturing Co. ...................... United States 10,000 869,375
Parker-Hannifin Corp. ..................................... United States 20,000 915,000
----------
8,502,500
----------
REAL ESTATE 1.1%
Glenborough Realty Trust Inc. ............................. United States 40,000 700,000
Simon Property Group Inc. ................................. United States 30,000 761,250
----------
1,461,250
----------
RETAIL TRADE 6.4%
Claire's Stores Inc. ...................................... United States 30,000 768,750
(a)Costco Cos Inc. ........................................ United States 15,000 1,200,938
Dayton Hudson Corp. ....................................... United States 25,000 1,625,000
(a)Jones Apparel Group Inc. ............................... United States 30,000 1,029,375
Tiffany & Co. ............................................. United States 18,000 1,737,000
Wal-Mart Stores Inc. ...................................... United States 40,000 1,930,000
----------
8,291,063
----------
TECHNOLOGY SERVICES 3.8%
(a)Computer Sciences Corp. ................................ United States 15,000 1,037,813
(a)Equant NV, N.Y. shs. ................................... Netherlands 25,000 2,353,124
(c)First Data Corp. ....................................... United States 30,000 1,468,124
4,859,061
----------
TELECOMMUNICATIONS 4.4%
AT&T Corp. ................................................ United States 20,000 1,116,250
BellSouth Corp. ........................................... United States 20,000 937,500
</TABLE>
FRANKLIN ASSET ALLOCATION FUND
Statement of Investments, June 30, 1999 (unaudited) (cont.)
<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS (CONT.)
TELECOMMUNICATIONS (CONT.)
GTE Corp. ............................................................ United States 10,000 $ 757,500
(a)Qwest Communications International Inc. ............................ United States 20,000 661,250
SBC Communications Inc. .............................................. United States 20,000 1,160,000
Swisscom AG .......................................................... Switzerland 2,870 1,079,987
-----------
5,712,487
-----------
UTILITIES 3.9%
Duke Energy Corp. .................................................... United States 25,000 1,359,374
Enron Corp. .......................................................... United States 30,000 2,452,500
Montana Power Co. .................................................... United States 17,600 1,240,800
-----------
5,052,674
-----------
TOTAL COMMON STOCKS (COST $59,310,457) ............................... 86,374,116
-----------
CONVERTIBLE PREFERRED STOCKS 2.5%
Apache Corp.,6.50%, cvt. pfd. ......................................... United States 40,300 1,491,100
Canadian National Railway Co., 5.25%, cvt. pfd. ....................... Canada 2,800 149,800
MediaOne Group Inc.,6.25%, cvt. pfd. .................................. United States 16,900 1,529,450
-----------
TOTAL CONVERTIBLE PREFERRED STOCKS (COST $2,401,838) ................. 3,170,350
-----------
PRINCIPAL
AMOUNT
-----------
BONDS .5%
Dayton Hudson Corp., 8.60%,1/15/12 .................................... United States $ 250,000 $277,794
Georgia Pacific Corp., 9.125%,7/01/22 ................................. United States 100,000 104,250
Pan-American Beverage Inc., senior note,8.125%,4/01/03 ............... Mexico 250,000 241,593
-----------
TOTAL BONDS (COST $596,005) .......................................... 623,637
-----------
U.S GOVERNMENT AGENCY SECURITIES 2.2%
Fannie Mae, 6.375%,6/15/09 ............................................ United States 1,000,000 991,253
Freddie Mac, 5.75%,4/15/08 ............................................ United States 2,000,000 1,904,242
-----------
TOTAL U.S GOVERNMENT AGENCY SECURITIES (COST $2,968,562) ............. 2,895,495
-----------
U.S GOVERNMENT SECURITIES 12.6%
U.S Treasury Bond, 8.00%,11/15/21 ..................................... United States 250,000 300,860
U.S Treasury Bond, 6.25%,8/15/23 ...................................... United States 2,900,000 2,903,625
U.S Treasury Bond, 6.875%,8/15/25 ..................................... United States 1,000,000 1,080,000
U.S Treasury Bond, 6.00%,2/15/26 ...................................... United States 3,000,000 2,918,439
U.S Treasury Note, 5.50%,1/31/03 ...................................... United States 2,000,000 1,986,876
U.S Treasury Note, 7.25%,5/15/04 ...................................... United States 1,300,000 1,379,625
U.S Treasury Note, 5.875%,11/15/05 .................................... United States 2,000,000 1,999,376
U.S Treasury Note, 6.125%,8/15/07 ..................................... United States 1,700,000 1,719,125
U.S Treasury Note, Inflation-Indexed, 3.375%,1/15/07 ................... United States 1,000,000 1,006,473
U.S.Treasury, STRIP, 11/15/21 .......................................... United States 4,000,000 989,940
-----------
TOTAL U.S GOVERNMENT SECURITIES (COST $16,349,579) ................... 16,284,339
-----------
TOTAL LONG TERM INVESTMENTS (COST $81,626,441) ....................... 109,347,937
-----------
</TABLE>
FRANKLIN ASSET ALLOCATION FUND
Statement of Investments, June 30, 1999 (unaudited) (cont.)
<TABLE>
<CAPTION>
PRINCIPAL
COUNTRY AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
SHORT TERM INVESTMENTS 2.3%
CERTIFICATE OF DEPOSIT .8%
Rabobank Nederland NV,5.64%,7/30/99 (Cost $1,004,136) .................... Netherlands $1,000,000 $1,000,199
------------
COMMERCIAL PAPERS 1.5%
General Electric Capital Corp.,8/03/99 ................................... United States 1,000,000 995,124
UBS Finance Inc.,8/03/99 ................................................. United States 1,000,000 995,124
------------
TOTAL COMMERCIAL PAPERS (COST $1,991,256) ................................ 1,990,248
------------
TOTAL SHORT TERM INVESTMENTS (COST $2,995,392) ........................... 2,990,447
------------
TOTAL INVESTMENTS BEFORE REPURCHASE AGREEMENT (COST $84,621,833) ......... 112,338,384
------------
(b)REPURCHASE AGREEMENT 13.2%
Joint Repurchase Agreement,4.767%,7/01/99, (Maturity Value $17,062,079)
(COST $17,059,820) ...................................................... United States 17,059,820 17,059,820
Barclays Capital Inc (Maturity Value $2,152,126)
Bear, Stearns Securities Corp (Maturity Value $1,898,935)
Chase Securities Inc (Maturity Value $351,451)
CIBC Oppenheimer Corp (Maturity Value $2,152,126)
Donaldson, Lufkin & Jenrette Securities Corp (Maturity Value $1,519,148)
Dresdner Kleinwort Benson, North America LLC (Maturity Value $1,519,148)
Goldman, Sachs & Co (Maturity Value $759,574)
NationsBanc Montgomery Securities LLC (Maturity Value $1,519,148)
Paine Webber Inc (Maturity Value $1,519,148)
Paribas Corp (Maturity Value $1,519,148)
UBS AG (Maturity Value $2,152,127)
Collateralized by U.S Treasury Bills & Notes
------------
TOTAL INVESTMENTS (COST $101,681,653) 100.3% ............................. 129,398,204
------------
OPEN CALL OPTIONS WRITTEN (PREMIUMS RECEIVED $298,340) (.4%) ............. (563,750)
OTHER ASSETS, LESS LIABILITIES .1% ....................................... 162,639
------------
NET ASSETS 100.0% ........................................................ $128,997,093
============
</TABLE>
<TABLE>
<CAPTION>
EXPIRATION STRIKE SHARES
DATE PRICE OPTIONED VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CALL OPTIONS WRITTEN
Corning Inc. .......................................................... August 99 55 10,000 $158,750
Corning Inc. .......................................................... August 99 60 5,000 56,250
First Data Corp. ...................................................... August 99 45 10,000 52,500
Genzyme Corp., General Division ....................................... July 99 45 10,000 47,500
Linear Technology Corp. ............................................... August 99 55 10,000 141,250
Motorola Inc. ......................................................... July 99 85 10,000 107,500
--------
TOTAL CALL OPTIONS WRITTEN (PREMIUMS RECEIVED $298,340) ............... $563,750
--------
</TABLE>
(a)Non-income producing.
(b)See Note 1(c) regarding joint repurchase agreement.
(c)Portion of the security is segregated as collateral for call options written.
See notes to financial statements.
FRANKLIN ASSET ALLOCATION FUND
Financial Statements
Statement of Assets and Liabilities
June 30, 1999 (unaudited)
<TABLE>
<CAPTION>
<S> <C>
Assets:
Investments in securities, at value (cost $84,621,833) ................... $112,338,384
Repurchase agreements, at value and cost ................................. 17,059,820
Receivables:
Capital shares sold ..................................................... 1,285,138
Dividends and interest .................................................. 485,619
------------
Total assets ........................................................ 131,168,961
------------
Liabilities:
Payables:
Capital shares redeemed ................................................. 1,364,710
Affiliates .............................................................. 69,520
Shareholders ............................................................ 65,484
Distributions to shareholders ............................................ 92,453
Options written, at value (premiums received $298,340) ................... 563,750
Other liabilities ........................................................ 15,951
------------
Total liabilities ................................................... 2,171,868
------------
Net assets, at value ............................................... $128,997,093
Net assets consist of: ============
Undistributed net investment income ...................................... $ 34,943
Net unrealized appreciation .............................................. 27,450,989
Accumulated net realized gain ............................................ 2,645,830
Capital shares ........................................................... 98,865,331
------------
Net assets, at value ................................................ $128,997,093
============
CLASS A:
Net asset value per share ($128,550,060 /12,088,743 shares outstanding)(*) $10.63
============
Maximum offering price per share ($10.63 /94.25%) ........................ $11.28
============
CLASS C:
Net asset value per share ($447,033 /42,041 shares outstanding)(*) ....... $10.63
============
Maximum offering price per share ($10.63 /99.00%) ........................ $10.74
============
</TABLE>
(*)Redemption price is equal to net asset value less any applicable contingent
deferred sales charge.
See notes to financial statements.
FRANKLIN ASSET ALLOCATION FUND
Financial Statements (continued)
Statement of Operations
for the six months ended June 30, 1999 (unaudited)
<TABLE>
<S> <C>
Investment income:
(net of foreign taxes of $20,779)
Dividends .............................................................. $506,503
Interest ............................................................... 1,070,745
----------
Total investment income ........................................... 1,577,248
----------
Expenses:
Management fees (Note 3) ............................................... 359,147
Distribution fees (Note 3)
Class A ............................................................... 145,389
Class C ............................................................... 228
Transfer agent fees (Note 3) ........................................... 87,418
Custodian fees ......................................................... 4,400
Reports to shareholders ................................................ 20,078
Registration and filing fees ........................................... 15,379
Professional fees ...................................................... 11,113
Trustees' fees and expenses ............................................ 4,166
Other .................................................................. 4,470
----------
Total expenses .................................................... 651,788
----------
Net investment income ............................................ 925,460
----------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments ........................................................... 2,771,774
Transactions in written options which expired or were closed (Note 5) . (80,418)
Foreign currency transactions ......................................... (1,300)
----------
Net realized gain ................................................. 2,690,056
Net unrealized appreciation (depreciation) on:
Investments ........................................................... 5,272,018
Translation of assets and liabilities denominated in foreign currencies (152)
----------
Net unrealized appreciation ....................................... 5,271,866
----------
Net realized and unrealized gain ........................................ 7,961,922
----------
Net increase in net assets resulting from operations .................... $8,887,382
==========
</TABLE>
See notes to financial statements.
FRANKLIN ASSET ALLOCATION FUND
Financial Statements (continued)
Statements of Changes in Net Assets for the six months ended June 30, 1999
(unaudited) and the year ended December 31, 1998
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED
JUNE 30, 1999 DECEMBER 31, 1998
------------ -----------------
<S> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income ........................................................................... $925,460 $1,905,517
Net realized gain from investments and foreign currency transactions ............................ 2,690,056 1,166,727
Net unrealized appreciation on investments and translation of assets and liabilities denominated
in foreign currencies .......................................................................... 5,271,866 9,935,854
------------ ------------
Net increase in net assets resulting from operations ........................................ 8,887,382 13,008,098
Distributions to shareholders from:
Net investment income:
Class A ........................................................................................ (925,191) (1,984,332)
Class C ........................................................................................ (1,099) --
Net realized gains:
Class A ........................................................................................ (400,163) (1,213,212)
Class C ........................................................................................ (1,355) --
------------ ------------
Total distributions to shareholders .............................................................. (1,327,808) (3,197,544)
Capital share transactions: (Note 2)
Class A ......................................................................................... 12,730,230 8,827,148
Class C ......................................................................................... 439,403 --
------------ ------------
Total capital share transactions ................................................................. 13,169,633 8,827,148
Net increase in net assets .................................................................. 20,729,207 18,637,702
Net assets
Beginning of period .............................................................................. 108,267,886 89,630,184
------------ ------------
End of period .................................................................................... $128,997,093 $108,267,886
============ ============
Undistributed net investment income included in net assets:
End of period .................................................................................... $34,943 $35,773
============ ============
</TABLE>
See notes to financial statements.
FRANKLIN ASSET ALLOCATION FUND
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. JOINT REPURCHASE AGREEMENT:
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. 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 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 June 30, 1999, all outstanding repurchase agreements had been entered
into on that date.
d. OPTIONS:
In order to produce incremental income or protect against changes in the value
of the underlying securities, the Fund may buy and sell put and call options,
and write put and covered call options.
FRANKLIN ASSET ALLOCATION FUND
Notes to Financial Statements (unaudited) (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (cont.)
d. OPTIONS: (CONT.)
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.
e. 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.
f. 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.
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.
g. 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.
2. SHARES OF BENEFICIAL INTEREST
Effective May 1, 1999, the Fund offers two classes of shares: Class A and Class
C. Outstanding shares before that date were designated as Class A shares. Each
class of shares differs by its initial sales load, distribution fees, voting
rights on matters affecting a single class and its exchange privilege.
FRANKLIN ASSET ALLOCATION FUND
Notes to Financial Statements (unaudited) (continued)
2. SHARES OF BENEFICIAL INTEREST (cont.)
At June 30, 1999, there were an unlimited number of shares authorized (no par
value) for each class. Transactions in the Fund's shares were as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1999 DECEMBER 31, 1998
SHARES AMOUNT SHARES AMOUNT
---------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
CLASS A SHARES:
Shares sold .................................. 3,159,023 $32,632,634 4,374,604 $40,768,517
Shares issued in reinvestment of distributions 112,860 1,182,996 301,346 2,874,984
Shares redeemed .............................. (2,049,965) (21,085,400) (3,711,329) (34,816,353)
---------- ----------- ---------- -----------
Net increase ................................. 1,221,918 $12,730,230 964,621 $8,827,148
========== =========== ========== ===========
CLASS C SHARES:
Shares sold .................................. 41,833 $437,194
Shares issued in reinvestment of distributions 208 2,209
---------- -----------
Net increase ................................. 42,041 $439,403
========== ===========
</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 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% In excess of $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% and 1.00% per year of its average
daily net assets of Class A and Class C, respectively, for costs incurred in
marketing the Fund's shares.
Distributors paid net commissions on sales of Fund shares, and received
contingent deferred sales charges for the period of $5,866 and $4,050,
respectively.
The Fund paid transfer agent fees of $87,418 of which $75,954 was paid to
Investor Services.
FRANKLIN ASSET ALLOCATION FUND
Notes to Financial Statements (unaudited) (continued)
4. INCOME TAXES
At June 30, 1999, the net unrealized appreciation based on the cost of
investments for income tax purposes of $101,717,261 was as follows:
<TABLE>
<S> <C>
Unrealized appreciation ...................$29,076,506
Unrealized depreciation ................... (1,395,563)
-----------
Net unrealized appreciation................$27,680,943
===========
</TABLE>
Net investment income differs for financial statement and tax purposes primarily
due to differing treatments of foreign currency transactions.
Net realized capital gains differ for financial statement and tax purposes
primarily due to differing treatment of wash sales and foreign currency
transactions.
5. INVESTMENT TRANSACTIONS
Purchases and sales of securities (excluding short-term securities) for the
period ended June 30, 1999 aggregated $37,791,260 and $28,613,302, respectively.
Transactions in call options written during the period ended June 30, 1999 were
as follows:
NUMBER OF PREMIUMS
CONTRACTS RECEIVED
--------- ----------
Options outstanding at
December 31,1998 .... 362 $161,759
Options written ...... 1,800 875,471
Options expired ...... (100) (37,199)
Options exercised .... (612) (231,456)
Options closed ....... (900) (470,235)
--------- ----------
Options outstanding at
June 30,1999 ........ 550 $298,340
========= ==========
