Franklin Government Securities Trust
Statement of Investments in Securities and Net Assets, June 30, 1996 (unaudited)
Face Value
Amount (Note 1)
------- ---------
a,Long Term Investments 93.3%
Government National Mortgage Association
(GNMA)
$ 916,590 GNMA I, SF, 6.00%, 11/15/23 $ 829,509
2,608,847 GNMA I, SF, 6.50%, 10/15/23 - 03/15/24 2,430,288
3,057,537 GNMA II, SF, 6.50%, 05/20/24 - 03/20/26 2,832,979
3,086,985 GNMA I, SF, 7.00%, 10/15/22 - 10/15/23 2,964,450
2,398,699 GNMA II, SF, 7.00%, 09/20/25 - 02/20/26 2,291,491
2,557,747 GNMA I, SF, 7.50%, 06/15/17 - 04/15/24 2,523,362
1,400,166 bGNMA II, SF, 7.50%, 07/20/23 - 06/20/26 1,374,266
2,920,317 GNMA I, SF, 8.00%, 02/15/17 - 11/15/24 2,949,509
58,021 GNMA II, SF, 8.00%, 10/20/16 58,312
398,083 GNMA I, SF, 8.25%, 04/15/25 405,918
1,153,578 GNMA I, SF, 8.50%, 03/15/20 - 07/15/22 1,187,458
329,470 GNMA I, SF, 9.00%, 06/15/16 - 11/15/21 345,120
639,149 GNMA I, SF, 9.50%, 10/15/09 - 10/15/21 683,691
265,202 GNMA II, SF, 9.50%, 04/20/25 281,694
1,069,960 GNMA I, SF, 10.00%, 03/15/16 - 08/15/21 1,166,922
71,154 GNMA II, SF, 10.00%, 12/20/18 - 08/20/20 76,891
142,704 GNMA II, SF, 10.50%, 09/20/15 - 02/20/21 156,085
-----------
Total Long Term Investments
(Cost $23,183,716) 22,557,945
-----------
aReceivables from Repurchase Agreements 7.1%
1,694,164 Joint Repurchase Agreement, 5.439%, 07/01/96
(Maturity Value $1,702,542) (Cost $1,701,771)
Chase Securities, Inc., (Maturity Value $244,681)
Collateral: U.S. Treasury Notes, 5.375%, 11/30/97
Daiwa Securities America, Inc.,
(Maturity Value $244,681)
Collateral: U.S. Treasury Notes,
5.25% - 8.875%, 12/31/97 - 08/31/00
Donaldson, Lufkin & Jenrette Securities Corp.,
(Maturity Value $234,456)
Collateral: U.S. Treasury Bills, 05/29/97
U.S. Treasury Notes, 5.125% - 6.75%,
07/31/97 - 07/31/00
Fuji Securities, Inc., (Maturity Value $244,681)
Collateral: U.S. Treasury Notes,
5.50% - 8.875%, 07/31/97 - 02/15/99
Lehman Government Securities, Inc.,
(Maturity Value $244,681)
Collateral: U.S. Treasury Notes,
5.625% - 11.75%, 09/30/99 - 02/15/01
SBC Capital Markets, Inc.,
(Maturity Value $244,681)
Collateral: U.S. Treasury Notes,
5.75%, 09/30/97
UBS Securities, Inc., (Maturity Value $244,681)
Collateral: U.S. Treasury Notes,
6.50% - 8.875%, 11/15/98 - 11/30/99 1,701,771
-----------
Total Investments
(Cost $24,885,487) 100.4% 24,259,716
Liabilities in Excess of
Other Assets (.4)% (89,100)
-----------
Net Assets 100.0% $24,170,616
===========
At June 30, 1996, the net unrealized depreciation
based on the cost of investments for income
tax purposes of $24,885,487 was as follows:
Aggregate gross unrealized appreciation for
all investments in which there was an
excess of value over tax cost $ 116,571
Aggregate gross unrealized depreciation for
all investments in which there was an
excess of tax cost over value (742,342)
-----------
Net unrealized depreciation $ (625,771)
===========
PORTFOLIO ABBREVIATIONS:
SF - Single Family
aFace amount for repurchase agreements is for the underlying collateral. See
Note 1(e) regarding joint repurchase agreement.
bSee Note 1(f) regarding securities purchased on a when-issued basis.
Franklin Government Securities Trust
Statement of Assets and Liabilities
June 30, 1996 (unaudited)
ASSETS:
Investments in securities, at value
(identified cost $23,183,716) $22,557,945
Receivables from repurchase
agreements, at value and cost 1,701,771
Cash 36,429
Interest Receivable 142,696
-----------
Total assets 24,438,841
-----------
LIABILITIES:
Payables:
Investment securities purchased - delayed delivery 243,438
Management fees 12,132
Accrued expenses and other liabilities 12,655
-----------
Total liabilities 268,225
-----------
NET ASSETS, at value $24,170,616
-----------
Net assets consist of:
Undistributed net investment income 781,570
Net unrealized depreciation on investments (625,771)
Net realized loss (170,599)
Capital shares 24,185,416
-----------
Net assets, at value $24,170,616
-----------
Shares outstanding 1,928,460
-----------
NET ASSET VALUE per share
($24,170,616 / 1,928,460) $12.53
-----------
Statement of Operations
for the six months ended June 30, 1996 (unaudited)
INVESTMENTINCOME:
Interest $865,056
EXPENSES:
Management fees (Note 5) $73,650
Professional fees 9,872
Custodian fees 437
Reports to shareholders 246
Other 250
Management fees waived by manager (Note 5) (1,038)
-----------
Total expenses 83,417
-----------
Net investment income 781,639
-----------
REALIZED AND UNREALIZED LOSS ON INVESTMENTS:
Net realized loss (41,100)
Net unrealized depreciation (948,231)
-----------
Net realized and unrealized loss on investments (989,331)
-----------
Net decrease in net assets resulting from operations $(207,692)
-----------
Statements of Changes in Net Assets
for the six months ended June 30, 1996 (unaudited)
and the year ended December 31, 1995
Six months ended Year ended
June 30, 1996 December 31, 1995
------------ -------------
INCREASE IN NET ASSETS:
Operations:
Net investment income $ 781,639 $ 1,246,624
Net realized loss from security
transactions (41,100) (21,303)
Net unrealized appreciation
(depreciation) on investments (948,231) 1,661,836
------------ -------------
Net increase (decrease)
in net assets resulting
from operations (207,692) 2,887,157
Distributions to shareholders
from undistributed net investment
income (1,246,655) (1,086,914)
Increase in net assets from capital
share transactions (Note 2) 3,133,850 5,448,492
------------ -------------
Net increase in net assets 1,679,503 7,248,735
NET ASSETS:
Beginning of period 22,491,113 15,242,378
------------ -------------
End of period $24,170,616 $22,491,113
------------ -------------
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 Trust seeks to earn income in
obligations of the U.S. government or its agencies or instrumentalities.
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 for which market quotations are readily available are valued at
the last sale price or, if there is no sale price, within the range of the most
recent quoted bid and asked prices. Other securities are valued based on a
variety of factors, including yield, risk, maturity, trade activity and recent
developments related to the securities. The Trust may utilize a pricing service,
bank or broker/dealer experienced in such matters to perform any of the pricing
functions, under procedures approved by the Board of Trustees (the Board).
Securities for which market quotations are not available are valued in
accordance with procedures established by the Board.
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 and excise taxes.
c. Security Transactions: Security transactions are accounted for on the date
the securities are purchased or sold (trade date). Realized gains and losses on
security transactions are determined on the basis of specific identification.
d. Investment Income, Expenses and Distributions: Dividend income and
distributions to shareholders are recorded on the ex-dividend date. Interest
income and estimated expenses are accrued daily.
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. A repurchase agreement is accounted for as a loan by the Trust to the
seller, collateralized by underlying U.S. government securities, which are
delivered to the Trust'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 Trust, with the value of the underlying
securities marked to market daily to maintain coverage of at least 100%. At June
30, 1996, all outstanding repurchase agreements held by the Trust had been
entered into on June 28, 1996.
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 holding the
securities, it may sell the 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.
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. Trust Shares
At June 30, 1996, there was an unlimited number of $.01 par value shares of
beneficial interest authorized. Transactions in the Trust's shares were as
follows:
Six months ended Year ended
June 30, 1996 December 31, 1995
-------------------- --------------------
Shares Amount Shares Amount
------- --------- ------- ---------
Shares sold 261,745 $3,457,050 550,647 $7,098,487
Shares issued
in reinvest-
ment of dis-
tributions 100,618 1,246,655 85,651 1,086,914
Shares
redeemed (119,173) (1,569,855) (215,498) (2,736,909)
------- --------- ------- ---------
Net increase 243,190 $3,133,850 420,800 $5,448,492
======= ========= ======= =========
3. Capital Loss Carryovers
At December 31, 1995, for tax purposes, the Trust had capital loss carryovers as
follows:
Expiring in: 2001 $ 49,613
2002 58,583
2003 21,303
-------
$129,499
=======
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, 1996.
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, 1996 aggregated $ 3,882,487 and
$1,317,567, respectively.
5. Transactions with Affiliates and Related Parties
a. Management Agreement: Under the terms of a management agreement, Franklin
Advisers, Inc. (Advisers) provides investment advice, administrative services,
office space and facilities to the Trust and receives fees computed monthly on
the daily average net assets of the Trust as follows:
Annualized
Fee Rate Average Daily Net Assets
--------- ---------------------------------------
0.625% First $100 million
0.50% Over $100 million, up to and including $250 million
0.45% Over $250 million, up to and including $10 billion
Fees are further reduced on net assets over $10 billion. The terms of the
management 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. For the six months ended June 30, 1996, the
Trust's expenses did not exceed these limitations. However, Advisers agreed in
advance to waive management fees, as noted in the statement of operations.
b. Distribution Plans: The management agreement between the Trust and Advisers
includes a distribution plan pursuant to Rule 12b-1 under the Investment Company
Act of 1940. However, no payments were made by the Trust as a result of the plan
for the six months ended June 30, 1996.
6. Financial Highlights
Selected data for each share of beneficial interest outstanding throughout the
period are as follows:
<TABLE>
<CAPTION>
Six months
ended Year Ended December 31,
June 30, 1996 1995 1994 1993 1992 1991
----------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Per Share Operating Performance
Net asset value at beginning of period $13.35 $12.05 $13.30 $13.26 $13.01 $11.72
----------- -------- -------- -------- -------- --------
Net investment income 0.36 0.67 0.85 0.65 0.80 0.61
Net realized & unrealized gain (loss)
on securities (0.4896) 1.4216 (1.3463) 0.3385 0.1602 1.1939
----------- -------- -------- -------- -------- --------
Total from investment operations (0.1296) 2.0916 (0.4963) 0.9885 0.9602 1.8039
----------- -------- -------- -------- -------- --------
Less distributions from:
Net investment income (0.6904) (0.7916) (0.7537) (0.7459) (0.7102) (0.5139)
Capital gains -- -- -- (0.2026) -- --
----------- -------- -------- -------- -------- --------
Total distributions (0.6904) (0.7916) (0.7537) (0.9485) (0.7102) (0.5139)
----------- -------- -------- -------- -------- --------
Net asset value at end of period $12.53 $13.35 $12.05 $13.30 $13.26 $13.01
=========== ======== ======== ======== ======== ========
Total Return+ (0.91)% 17.70% (3.75)% 7.59% 7.66% 15.87%
Ratios/Supplemental Data
Net assets at end of period (in 000's) $24,171 $22,491 $15,242 $16,568 $11,815 $8,641
Ratio of expenses to average net assets 0.71% 0.62% 0.63% 0.62% 0.29% -- %
Ratio of expenses to average net assets
(excluding waiver by Manager) - Note 5 0.71% 0.76% 0.78% 0.83% 0.92% 1.22%
Ratio of net investment income to
average net assets 6.61% 6.78% 6.85% 6.68% 7.75% 8.74%
Portfolio turnover rate 5.86% 7.50% 13.97% 39.02% 49.71% 7.00%
</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 at net asset value.
Franklin Government Securities Trust
Objective
The investment objective of the Franklin Government Securities Trust (the Trust)
is to earn high current income from obligations of the U.S. government, its
agencies or instrumentalities.
Market Summary
During the six-month period ended June 30, 1996, the economic outlook changed
from one involving concerns about slow economic growth to one involving concerns
about rapid growth. In early 1996, the economy continued to lose momentum. With
prospects for continued slow growth and low inflation, the Federal Reserve
lowered the federal funds target rate to 5.25% in January. Economic reports
turned more positive in the second quarter, as stronger-than-expected growth in
jobs caused inflation expectations to increase.
Gross Domestic Product (GDP) growth for the first quarter
of 1996 rebounded to 2.20%, compared with only 0.50% for the fourth quarter of
1995.1 Since March, the majority of economic data, including the index of
leading economic indicators, consumer confidence, and industrial production,
were all up strongly. As a result, many second quarter GDP growth estimates as
of July 11, have been revised upwardly, to over 4.00%. The 30-Year Treasury,
which started the year yielding 6.03%, rose to over 7.00% in early May and for
most of June before settling at 6.87% by the end of the period.1
Looking forward, the economy appears to be regaining its footing once again,
which has led some to believe that the Federal Reserve may raise short-term
interest rates in an effort to slow growth and decrease prospects for inflation.
We believe any further tightening in monetary policy will depend on the
performance of the economy in the coming months. If reports suggest a weakening,
rate hikes may be unnecessary, but a strengthening may force the Federal Reserve
to raise short-term rates.
Strategy
Despite the market volatility, we continued to do what has worked well for us in
the past. That is, to invest in Government National Mortgage Association (GNMA)
securities that offer the Trust attractive value. Our strategy seeks to generate
high current income with limited price volatility, while maintaining the Trust's
credit quality, and not make "bets" on the direction of interest rates.
Additionally, the Trust does not invest, nor has it ever invested, in risky,
derivative securities. We believe our conservative, "plain vanilla" investment
approach best serves our shareholders.
Performance
For the six month period ended June 30, 1996, accumulation units, based on the
performance of the Trust, showed a total return of -0.91%. The following chart
compares the Fund's performance with the Lehman Brothers Intermediate Government
Bond Index and the Consumer Price Index (CPI), a commonly used measure of
inflation. Since inception, the Trust has closely followed the Lehman Brothers
Intermediate U.S. Government Bond Index, despite the inherent performance
advantages an unmanaged index enjoys. For instance, the index is not subject to
any management fees, while the Trust's total return is shown after these fees
have been deducted. Of course, one cannot invest directly in an index, and past
performance does not guarantee future results. The graph also illustrates that
the Trust's total return has far outpaced the CPI, keeping your purchasing power
well-ahead of inflation -- a primary goal of any investment.
GRAPHIC MATERIAL 1 OMITTED - SEE APPENDIX AT END OF DOCUMENT
Average Annual Total Returns3
Period Ended June 30, 1996
1-Year 4.65%
5-Year 7.50%
Since Inception (2/15/89) 8.37%
Outlook
Going forward, we expect that the Trust's securities should perform well should
the economy maintain its moderate growth pattern. Unless economic growth changes
dramatically, the political environment, as we approach the presidential
election, may add some volatility. Regardless of market activity, we will
continue to position the Trust to take advantage of relative value
opportunities. We appreciate your investment in the Franklin Government
Securities Trust and look forward to serving your investment needs in the months
and years ahead.
1Source: Bloomberg Financial Markets (7/2/96).
2Performance assumes an initial $10,000 investment from the Trust's inception
(2/15/89), reinvestment of dividends and capital gains, and includes the
deduction of Trust expenses. It does not include the deduction of Account C
mortality and expense risk charges, annual maintenance fees, and deferred sales
charges. The unmanaged Lehman Brothers Intermediate Government Bond Index
includes price appreciation or depreciation and distributions as a percentage of
the original investment. The index does not take into account any deductions for
transaction costs and other expenses.
3Average annual total return calculations represent the average annual change in
value of an investment over the specified periods, assuming reinvestment
of dividends and capital gains. Returns do not include the deduction of Account
mortality and expense risk charges, annual maintenance fees and deferred sales
charges. With such charges and fees, average annual total returns would be
lower. Investment return and principal value fluctuate, so that your
accumulation units when redeemed, may be worth more or less than their original
cost. Past performance does not guarantee future results.
Franklin Government Securities Trust Semi-Annual Report
APPENDIX
DESCRIPTION OF GRAPHIC MATERIAL OMITTED FROM EDGAR FILING
(PURSUANT TO ITEM 304 (a) of REGULATION S-T)
GRAPHIC MATERIAL (1)
The following line graph is a total return index comparison of a $10,000
investment in the Franklin Government Securities Trust compared to the
Lehman Brothers Intermediate Government Bond Index and the Consumer Price
Index from 2/15/89 to 6/30/96.
Date Franklin Lehman Brothers CPI
Franklin Lehman Brothers Consumer
Government Intermediate Price
Securities Government Bond Index
Trust Index
2/15/89 $10,000 $10,000 $10,000
2/28/89 $10,030 $9,984 $10,016
3/31/89 $10,100 $10,025 $10,074
4/30/89 $10,160 $10,226 $10,140
5/31/89 $10,240 $10,428 $10,197
6/30/89 $10,310 $10,691 $10,222
7/31/89 $10,480 $10,910 $10,246
8/31/89 $10,410 $10,770 $10,263
9/30/89 $10,480 $10,820 $10,296
10/31/89 $10,720 $11,050 $10,345
11/30/89 $10,820 $11,155 $10,370
12/31/89 $10,890 $11,186 $10,387
1/31/90 $10,810 $11,114 $10,494
2/28/90 $10,870 $11,155 $10,543
3/31/90 $10,887 $11,170 $10,601
4/30/90 $10,785 $11,131 $10,618
5/31/90 $11,102 $11,376 $10,642
6/30/90 $11,276 $11,528 $10,700
7/31/90 $11,471 $11,688 $10,740
8/31/90 $11,368 $11,640 $10,839
9/30/90 $11,461 $11,730 $10,930
10/31/90 $11,594 $11,866 $10,996
11/30/90 $11,829 $12,046 $11,020
12/31/90 $12,003 $12,212 $11,020
1/31/91 $12,167 $12,336 $11,086
2/28/91 $12,259 $12,435 $11,103
3/31/91 $12,341 $12,519 $11,119
4/30/91 $12,464 $12,656 $11,136
5/31/91 $12,567 $12,733 $11,169
6/30/91 $12,593 $12,742 $11,202
7/31/91 $12,796 $12,885 $11,219
8/31/91 $13,032 $13,131 $11,251
9/30/91 $13,256 $13,357 $11,301
10/31/91 $13,449 $13,509 $11,318
11/30/91 $13,523 $13,664 $11,350
12/31/91 $13,908 $13,998 $11,358
1/31/92 $13,684 $13,870 $11,375
2/29/92 $13,833 $13,924 $11,416
3/31/92 $13,759 $13,870 $11,475
4/30/92 $13,876 $13,992 $11,491
5/31/92 $14,143 $14,209 $11,507
6/30/92 $14,364 $14,419 $11,548
7/31/92 $14,567 $14,706 $11,572
8/31/92 $14,759 $14,853 $11,605
9/30/92 $14,883 $15,055 $11,637
10/31/92 $14,702 $14,859 $11,678
11/30/92 $14,759 $14,803 $11,694
12/31/92 $14,973 $15,001 $11,686
1/31/93 $15,244 $15,292 $11,744
2/28/93 $15,425 $15,534 $11,785
3/31/93 $15,481 $15,596 $11,826
4/30/93 $15,538 $15,721 $11,859
5/31/93 $15,628 $15,686 $11,876
6/30/93 $15,843 $15,933 $11,892
7/31/93 $15,940 $15,971 $11,892
8/31/93 $16,049 $16,225 $11,926
9/30/93 $16,024 $16,291 $11,951
10/31/93 $16,109 $16,335 $12,000
11/30/93 $15,940 $16,244 $12,008
12/31/93 $16,109 $16,319 $12,008
1/31/94 $16,279 $16,500 $12,040
2/28/94 $16,061 $16,255 $12,081
3/31/94 $15,504 $15,987 $12,122
4/30/94 $15,370 $15,879 $12,139
5/31/94 $15,419 $15,890 $12,148
6/30/94 $15,324 $15,891 $12,189
7/31/94 $15,672 $16,120 $12,222
8/31/94 $15,684 $16,170 $12,271
9/30/94 $15,401 $16,021 $12,304
10/31/94 $15,324 $16,020 $12,313
11/30/94 $15,311 $15,948 $12,329
12/31/94 $15,504 $16,003 $12,329
1/31/95 $15,852 $16,272 $12,378
2/28/95 $16,276 $16,609 $12,428
3/31/95 $16,341 $16,704 $12,469
4/30/95 $16,572 $16,911 $12,510
5/31/95 $17,177 $17,422 $12,535
6/30/95 $17,278 $17,538 $12,560
7/31/95 $17,264 $17,540 $12,560
8/31/95 $17,469 $17,700 $12,592
9/30/95 $17,647 $17,827 $12,618
10/31/95 $17,825 $18,025 $12,659
11/30/95 $18,016 $18,261 $12,650
12/31/95 $18,248 $18,453 $12,642
1/31/96 $18,358 $18,612 $12,716
2/28/96 $18,153 $18,394 $12,757
3/31/96 $18,030 $18,300 $12,823
4/30/96 $17,948 $18,236 $12,873
5/31/96 $17,866 $18,221 $12,898
6/30/96 $18,082 $18,415 $12,905
