Franklin Government Securities Trust Semi-Annual
July 14, 1995
The Franklin Government Securities Trust, posted a gain of
11.44% (net of Investment management and other fund
expenses)for the six months ended June 30, 1995. The Trust's
primary objective is to earn high current income by
investing in obligations of the U.S. government and/or its
affiliated agencies.
Early 1995 saw a weakness in the economy and a decrease in
inflationary pressure. First quarter Gross Domestic Product
(GDP) fell to an annualized rate of 2.7%.1 Retail sales were
lower and activity in interest rate sensitive sectors, such
as housing and automobiles, declined. Meanwhile, fundamental
changes in consumer buying habits and corporate operations
continued to help keep inflation fears in check through to
second quarter of 1995. Consequently, the Federal Reserve,
which moved in February 1995 to raise the federal funds
rate-the interest rate banks charge each other for overnight
loans - did not later change its target for the federal
funds rates during its March or May Federal Open Market
Committee (FOMC) meetings. By the end of the reporting
period, the federal funds rate stood at 6.00%. With some
inflation fears relieved, bond prices moved higher through
the first half of 1995.
Long-term rates have declined recently, and some
acceleration of prepayments should be expected. Ginnie Maes,
which are mortgage-backed bonds, are susceptible to
prepayments when interest rates fall. Prepayments occur when
homeowners refinance their mortgage to take advantage of
lower, more attractive interest rates.
In the past year, investors have been concerned about the
increased use by some funds of exotic derivative securities.
Fortunately for our investors, the Franklin Government
Securities Trust has never invested and does not currently
invest in derivative securities, including options and
futures. The trust invests primarily in obligations of the
Government National Mortgage Association (Ginnie Maes).
Although Ginnie Mae has begun to issue real estate mortgage
investment conduits (REMICs) and collateralized mortgage
obligations (CMOs) - two popular types of mortgage-backed
derivatives - we do not purchase these types of securities
for the trust.
Looking forward, a number of factors will affect the
performance of the overall bond market, as well as the
Ginnie Mae market. Investors appear to have accepted the
"soft landing" scenario, and markets have benefited from
expectations of slower non-inflationary growth. Furthermore,
both U.S. stock and bond markets seem to be ignoring the
potentially inflationary effects of a weak dollar perhaps
because the more pressing concerns in Canada, Sweden, Italy,
and Mexico, as well as other parts of Latin America, have
helped highlight the relative quality and liquidity of the
dollar. However, in order to sustain economic growth,
progress must be made toward reducing the budget and trade
deficits.
AS OF THIS WRITING, THE FEDERAL RESERVE ANNOUNCED AT THE
CONCLUSION OF ITS JULY FOMC MEETING THAT IT HAD REDUCED ITS
TARGET FOR THE FEDERAL FUNDS RATE BY 25 BASIS POINTS TO
5.75%. THIS MOVES TO CUT SHORT-TERM INTEREST RATES WAS THE
FIRST IN NEARLY THREE YEARS AND RESERVES A TREND THAT BEGUN
FEBRUARY 1994, DURING WHICH THE FEDERAL RESERVE MOVED ON
SEVEN OCCASIONS TO RAISE THE FEDERAL FUNDS RATE THREE
PERCENTAGE POINTS.
1. Source: U.S. Commerce Department.
Franklin Government Securities Trust
Statement of Investments in Securities and Net Assets, June 30, 1995 (unaudited)
Face Value
Amount (Note 1)
------- ---------
Government Securities 95.8%
Government National Mortgage Association (GNMA)
$ 988,909 GNMA I, SF, 6.00%, 11/15/23 $ 925,558
2,727,990 GNMA I, SF, 6.50%, 10/15/23 - 03/15/24 2,622,282
682,000c GNMA II, SF, 6.50%, 05/20/24 650,458
3,402,656 GNMA I, SF, 7.00%, 10/15/22 - 10/15/23 3,350,554
2,748,050 GNMA I, SF, 7.50%, 06/15/17 - 04/15/24 2,764,367
458,609 GNMA II, 7.50%, 07/20/23 458,753
3,220,343 GNMA I, SF, 8.00%, 02/15/17 - 11/15/24 3,297,817
59,108 GNMA II, 8.00%, 10/20/16 60,308
499,357 GNMA II, 8.25%, 04/15/25 515,115
1,376,040 GNMA I, SF, 8.50%, 03/15/20 - 07/15/22 1,429,785
375,606 GNMA I, SF, 9.00%, 06/15/16 - 11/15/21 394,854
835,070 GNMA I, SF, 9.50%, 10/15/09 - 10/15/21 885,436
62,217 GNMA I, SF, 10.00%, 03/15/16 - 12/15/20 67,778
95,809 GNMA II, 10.00%, 12/20/18 - 08/20/20 103,054
168,045 GNMA II, 10.50%, 09/20/15 - 02/20/21 182,538
--------------
Total Government National Mortgage
Association (GNMA)
(Cost $17,834,933) $17,708,657
--------------
Short Term Investments
a,b Receivables from Repurchase Agreements 7.2%
1,359,499 Joint Repurchase Agreement, 6.22%, 07/03/95
(Maturity Value $1,328,289) (Cost $1,327,601)
Collateral: U.S. Treasury Bills, 10/19/95-06/27/96
U.S. Treasury Notes, 3.875%- 8.625%,
09/30/95 - 02/15/00 $ 1,327,601
--------------
Total Investments (Cost $19,162,534)
103.0% 19,036,258
Liabilities in Excess of Other Assets,
Net (3.0)% (555,650)
--------------
Net Assets 100.0% $18,480,608
==============
At June 30, 1995, the net unrealized
depreciation based on the
cost of investments for income tax
purposes of $19,162,534 was as follows:
Aggregate gross unrealized
appreciation for all
investments in which there
was an excess of
value over tax cost $ 191,540
Aggregate gross unrealized depreciation for all
investments in which there was an excess of
tax cost over value (317,816)
--------------
Net unrealized depreciation $ (126,276)
==============
PORTFOLIO ABBREVIATION:
SF - Single Family
aFace amount for repurchase agreements is for the underlying collateral.
bSee Note 1 (e) regarding Joint Repurchase Agreement.
cSee Note 1 (f) regarding securities purchased on a when-issued or delayed
delivery basis.
The accompanying notes are an integral part of
these financial statements.
Franklin Government Securities Trust
Statement of Assets and Liabilities
June 30, 1995 (unaudited)
ASSETS:
Investments in securities at value
(identified cost $17,834,933) $17,708,657
Receivables from repurchase agreements, at value and cost 1,327,601
Receivables:
Interest 109,208
Capital shares sold 9,936
--------------
Total assets 19,155,402
--------------
LIABILITIES:
Payables:
Investment securities purchased 657,486
Management fees 8,249
Bank overdraft 211
Accrued expenses and other liabilities 8,848
--------------
Total liabilities 674,794
--------------
NET ASSETS, at value 18,480,608
==============
Net assets consist of:
Undistributed net investment income $ 576,956
Unrealized depreciation on investments (126,276)
Accumulated net realized loss (116,008)
Capital shares 14,622
Additional paid-in-capital 18,131,314
--------------
Net assets, at value $18,480,608
--------------
Shares outstanding 1,462,176
==============
NET ASSET VALUE per share
($18,480,608 O 1,462,176) $12.64
<PAGE>
Statement of Operations
for the six months ended June 30, 1995 (unaudited)
INVESTMENT INCOME:
Interest $ 629,186
Expenses:
Management fees, net (Note 5) $40,243
Professional fees 10,395
Custodian fees 750
Reports to shareholders 318
Other 486
----------
Total expenses 52,192
--------------
Net investment income 576,994
--------------
REALIZED AND UNREALIZED GAIN/(LOSS)
ON INVESTMENTS:
Net realized loss (7,812)
Net unrealized appreciation during the period 1,213,101
--------------
Net realized loss and unrealized gain on investments 1,205,289
--------------
Net increase in net assets resulting from operations $1,782,283
==============
Statement of Changes in Net Assets for the six months ended June 30, 1995
(unaudited) and the year ended December 31, 1994
Six months
ended Year ended
June 30, 1995 Dec. 31, 1994
---------- ---------
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment income $ 576,994 $ 1,086,914
Net realized loss on investments (7,812) (58,583)
Net unrealized appreciation (depreciation) on
investments 1,213,101 (1,667,828)
---------- ---------
Net increase (decrease) in net assets
resulting from operations 1,782,283 (639,497)
Distributions to shareholders:
From undistributed net investment income (1,086,914) (953,810)
Increase in net assets from capital share
transactions (Note 2) 2,542,861 267,789
---------- ---------
Net increase (decrease) in net assets 3,238,230 (1,325,518)
NET ASSETS:
Beginning of period 15,242,378 16,567,896
---------- ---------
End of period (including undistributed net
investment income of $576,956-06/30/95;
and $1,086,876 - 12/31/94) $18,480,608 $15,242,378
=========== ===========
The accompanying notes are an integral part of
these financial statements.
Franklin Government Securities Trust
Notes to Financial Statements (unaudited)
1. Significant Accounting Policies
Franklin Government Securities Trust (the Trust) is an open-end diversified
management investment company (mutual fund) registered under the Investment
Company Act of 1940 as amended. Shares of the Trust are sold only to a separate
account of Aetna Life Insurance and Annuity Company (Aetna) to fund the benefits
of variable annuity contracts issued by Aetna.
The following is a summary of significant accounting policies consistently
followed by the Trust 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 National Market System for which market quotations are readily
available are valued at the last quoted sale price of the day or, if there is no
such reported sale, within the range of the most recent quoted bid and ask
prices. Other securities for which market quotations are readily available are
valued at current market values, obtained from pricing services, which are based
on a variety of factors, including recent trades, institutional size trading in
similar types of securities (considering yield, risk and maturity) and/or
developments related to specific 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. Other securities for which market quotations are not available, if
any, are valued in accordance with procedures established by the Board of
Trustees.
b. Income Taxes: The Trust 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 taxes.
Therefore, no income tax provision is required.
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 for
both financial statement and income tax purposes.
d. Investment Income, Expenses and Distributions: Distributions to shareholders
are recorded on the ex-dividend date. Interest income and estimated expenses are
accrued daily. Bond discount, if any, is amortized as required by the Internal
Revenue Code.
e. Repurchase Agreements: The Trust 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 Trust based on its pro-rata interest.
In a repurchase agreement, the Trust purchases a U.S. government security from a
dealer or bank subject to an agreement to resell it at a mutually agreed upon
price and date. Such a transaction is accounted for as a loan by the Trust to
the seller, collateralized by the underlying security. The transaction requires
the initial collateralization of the seller's obligation by U.S. government
securities with market value, including accrued interest, of at least 102% of
the dollar amount invested by the Trust, with the value of the underlying
security marked to market daily to maintain coverage of at least 100%. The
collateral is delivered to the Trust's custodian and held until resold to the
dealer or bank. At June 30, 1995, all outstanding joint repurchase agreements
held by the Trust had been entered into on that date.
f. Securities Purchased on a When-Issued or Delayed Delivery Basis: The Trust
may trade securities on a when-issued or delayed delivery basis, with payment
and delivery scheduled for a future date. These transactions are subject to
market fluctuations and are subject to the risk that the value at delivery may
be more or less than the trade date purchase price. Although the Trust will
generally purchase these securities with the intention of acquiring such
securities, they may sell such securities before the settlement date. These
securities are identified on the accompanying statement of investments in
securities and net assets. The Trust has set aside sufficient investment
securities as collateral for these purchase commitments.
2. Trust Shares
At June 30, 1995, there was an unlimited number of $.01 par value shares
authorized and capital paid-in aggregated $18,145,936. Transactions in Trust
shares were as follows:
Six Months ended Year ended
June 30, 1995 December 31,1994
----------------- -----------------
Shares Amount Shares Amount
------- --------- ------- ---------
Shares sold 267,252 $ 3,419,501 482,593 $6,053,218
Shares issued in
reinvestment of
distributions 85,651 1,086,914 78,827 953,810
Shares redeemed (155,197) (1,963,554) (542,950) (6,739,239)
------- --------- ------- ---------
Net increase 197,706 $ 2,542,861 18,470 $ 267,789
======= ========= ======= =========
3. Capital Loss Carryovers
At December 31, 1994, for tax purposes, the Trust had capital loss carryovers as
follows:
Expiring in: 2001 $ 49,613
2002 58,583
--------------
$108,196
==============
For tax purposes, the aggregate cost of securities and unrealized depreciation
of the Trust are the same as for financial statement purposes at June 30, 1995.
Notes to Financial Statements (unaudited) (cont.)
4. Purchases and Sales of Securities
Purchases and sales of securities (excluding purchases and sales of short-term
securities) for the six months ended June 30, 1995 aggregated $2,984,234 and
$489,171, respectively.
5. Transactions with Affiliates and Related Parties
Franklin Advisers, Inc., under the terms of an agreement, provides investment
advice, administrative services, office space and facilities to the Trust, and
receives fees computed daily and paid monthly on the net assets of the Trust
based on an annualized rate of 5/8 of 1% of the first $100 million of net
assets, 1/2 of 1% of net assets in excess of $100 million up to $250 million,
45/100 of 1% of net assets in excess of $250 million to $10 billion, 44/100 of
1% of net assets in excess of $10 billion up to $12.5 billion, 42/100 of 1% of
net assets in excess of $12.5 billion up to $15 billion and 40/100 of 1% of net
assets in excess of $15 billion.
The terms of the agreement provide that aggregate annual expenses of the Trust
be limited to the extent necessary to comply with the limitations set forth in
the laws, regulations and administrative interpretations of the states in which
the Trust's shares are registered. The Trust's expenses did not exceed these
limitations; however, for the six months ended June 30, 1995, Franklin Advisers,
Inc. agreed in advance to waive $11,602 of the management fees.
The management agreement between the Trust and Franklin Advisers, Inc. includes
a distribution plan pursuant to Rule 12b-1 under the 1940 Act. However, no
payments were made by the Trust as a result of the plan for the six months ended
June 30, 1995.
6. FINANCIAL HIGHLIGHTS
Selected data for a share of beneficial interest outstanding throughout each
year, except as noted below, are as follows:
<TABLE>
<CAPTION>
Six months
ended
June 30, Year Ended December 31,
1995 1994 1993 1992 1991 1990
-------- -------- -------- -------- -------- --------
Per Share Operating Performance
<S> <C> <C> <C> <C> <C> <C>
Net asset value at beginning of year....... $12.05 $13.30 $13.26 $13.01 $11.72 $10.89
-------- -------- -------- -------- -------- --------
Net investment income...................... 0.33 0.85 0.65 0.80 0.61 0.58
Net realized & unrealized gain
(loss) on securities ................... 1.0516 (1.3463) 0.3385 0.1602 1.1939 0.5068
-------- -------- -------- -------- -------- --------
Total from investment operations....... 1.3816 (0.4963) 0.9885 0.9602 1.8039 1.0868
-------- -------- -------- -------- -------- --------
Less distributions:
Dividends from net investment income....... (0.7916) (0.7537) (0.7459) (0.7102) (0.5139) (0.2560)
Distributions from net capital gains....... -- -- (0.2026) -- -- (0.0008)
-------- -------- -------- -------- -------- --------
Total Distributions ................... (0.7916) (0.7537) (0.9485) (0.7102) (0.5139) (0.2568)
-------- -------- -------- -------- -------- --------
Net asset value at end of year............... $12.64 $12.05 $13.30 $13.26 $13.01 $11.72
======== ======== ======== ======== ======== ========
Total return ................................ 11.44% (3.75)% 7.59% 7.66% 15.87% 10.23%
Ratios/Supplemental Data
Net assets at end of year ( in 000's)...... $18,481 $15,242 $16,568 $11,815 $8,641 $3,922
Ratio of expenses to average net assets .. 0.62%* 0.63% 0.62% 0.29% -- % -- %
Ratio of expenses to average net assets
(excluding waiver and payments
by Manager) (Note 5)........................ 0.76%* 0.78% 0.83% 0.92% 1.22% 0.95%
Ratio of net income to average net assets.. 6.90%* 6.85% 6.68% 7.75% 8.74% 9.17%
Portfolio turnover rate.................... 3.15% 13.97% 39.02% 49.71% 7.00% 6.56%
</TABLE>
Total return measures the change in value of an investment over the periods
indicated. It is not annualized. It assumes reinvestment of dividends and
capital gains, if any, at net asset value.
++During the periods indicated, Franklin Advisers, Inc. agreed to waive in
advance a portion of its management fees.
*Annualized
