FRANKLIN GOVERNMENT SECURITIES TRUST
Annual Report - December 31, 1995
The Trust's investment objective is to earn high current income by investing in
obligations of the U.S. government, its agencies or instrumentalities. For the
year ended December 31, 1995, accumulation units, based on the performance of
the Franklin Government Securities Trust, showed a total return of 17.7%.
During the Trust's fiscal year, the U.S. Treasury market rallied in response to
market expectations of slower economic growth with sustained, low inflation.
Long-term interest rates, as measured by the 30-year Treasury bond, fell from
7.88% to 5.95%.1 In addition, the Federal Reserve Board responded twice to fears
of recession by lowering the federal funds rate - the interest rate banks charge
each other for overnight loans - by 25 basis points on July 6th, and again by 25
basis points on December 19th.
Looking forward, we believe the recent decline in mortgage rates should
stimulate the housing sector and lead to increased economic activity in the near
future. Provided inflationary pressures remain constrained, we expect the
Federal Reserve's monetary policy to be neutral to more relaxed in the near
term.
With moderate economic growth, and inflation apparently under control, we have a
positive outlook for government and agency securities since the cost of
borrowing should remain low. In addition, bond prices tend to rise when interest
rates fall, making the Trust's older, higher-yielding securities more desirable
compared with newer bonds yielding less.
Political environments also tend to influence financial markets. As we approach
the 1996 presidential election, we believe conservative efforts to balance the
budget may prevail, which would contribute to a continued, positive outlook for
the economy. One budgetary proposal seeks to reduce the Federal Housing
Authority's role, and, if enacted, it could decrease the future supply of
securities issued by the Government National Mortgage Association (commonly
known as Ginnie Maes) over the long term. This change could subsequently add
scarcity value to these securities and enhance their value in relation to other
securities. Under such conditions, we believe the Franklin Government Securities
Trust is poised to perform well in the upcoming year.
Amid market fluctuations, the Franklin Government Securities Trust remained
invested primarily in Ginnie Maes. Investors may be concerned with the increased
use of exotic derivative securities by some Ginnie Mae mutual funds. Derivatives
gained popularity when interest rates declined; however, they quickly lost value
when short-term interest rates rose during 1994. The Franklin Government
Securities Trust does not invest, nor has it ever invested, in derivative
securities, and we continue to employ a conservative, "plain vanilla" investment
strategy. It is important to remember, however, that price fluctuations are
unavoidable, and your account's value will vary with market conditions so that
you may have a gain or loss when you sell units of the Trust.
The graph below compares the performance of the Franklin Government Securities
Trust with the Consumer Price Index (CPI), a commonly used measure of inflation,
and the Lehman Brothers Intermediate U.S. Government Bond Index from the Trust's
inception on February 15, 1989. As the graph illustrates, the Franklin
Government Securities Trust's total return has far outpaced the CPI, keeping
your purchasing power well-ahead of inflation - a primary goal of any
investment. The Trust's performance has closely followed that of the unmanaged
Lehman Brothers Intermediate U.S. Government Bond Index despite the inherent
performance advantages the index enjoys. For instance, the index is not subject
to any management fees, while the fund's total return includes these fees. Of
course, one cannot invest directly in an index, and past performance does not
guarantee future results.
FRANKLIN GOVERNMENT SECURITIES TRUST
Total Return Index Comparison2
$10,000 Investment (2/15/89 - 12/31/95)
[GRAPHIC 1 OMITTED SEE APENDIX AT END OF DOCUMENT]
AVERAGE ANNUAL TOTAL RETURNS3
Period Ended December 31, 1995
1-Year 17.70%
5-Year 8.74%
Since Inception (2/15/89) 9.15%
1 Source: Bloomberg/Generic Government Rates: 30-year U.S. Treasury bond.
2 Fund performance 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.
3 Average 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 C
mortality and expense risk charges, annual maintenance fees and deferred sales
charge. 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 cannot guarantee future results.
Franklin Government Securities Trust
Statement of Investments in Securities and Net Assets, December 31, 1995
Face Value
Amount (Note 1)
------- ---------
Government Securities 93.3%
Government National Mortgage Association (GNMA)
$ 949,379 GNMA I, SF, 6.00%, 11/15/23 $ 922,677
2,679,860 GNMA I, SF, 6.50%, 10/15/23 - 03/15/24 2,661,436
1,064,616 GNMA II, SF, 6.50%, 05/20/24 - 09/20/25 1,049,312
3,250,817 GNMA I, SF, 7.00%, 10/15/22 - 10/15/23 3,292,469
944,178 GNMA II, SF, 7.00%, 09/20/25 - 12/20/25 949,785
2,658,327 GNMA I, SF, 7.50%, 06/15/17 - 04/15/24 2,736,413
939,038 GNMA II, 7.50%, 07/20/23 - 10/20/25 960,753
3,084,555 GNMA I, SF, 8.00%, 02/15/17 - 11/15/24 3,215,648
58,576 GNMA II, 8.00%, 10/20/16 60,626
476,663 GNMA I, SF, 8.25%, 04/15/25 498,858
1,263,518 GNMA I, SF, 8.50%, 03/15/20 - 07/15/22 1,327,485
353,468 GNMA I, SF, 9.00%, 06/15/16 - 11/15/21 374,788
761,269 GNMA I, SF, 9.50%, 10/15/09 - 10/15/21 817,651
420,000 cGNMA II, 9.50%, 04/20/25 443,757
1,290,540 GNMA I, SF, 10.00%, 03/15/16 - 08/15/21 1,418,787
79,974 GNMA II, SF, 10.00%, 12/20/18 - 08/20/20 86,272
152,048 GNMA II, 10.50%, 09/20/15 - 02/20/21 165,639
------------
Total Government National Mortgage
Association (GNMA)
(Cost $20,659,896) 20,982,356
------------
Short Term Investments
a,bReceivables from Repurchase Agreements7.0%
1,514,841 Joint Repurchase Agreement, 5.75%, 01/02/96
(Cost $1,576,650)
Bear Stearns & Co., Inc. (Maturity Value $240,140)
Collateral: U.S. Treasury Notes, 5.75% - 8.875%,
2/29/96 - 08/31/00
Daiwa Securities America, Inc.
(Maturity Value $136,816)
Collateral: U.S. Treasury Bills, 08/22/96
U.S. Treasury Notes, 5.125% -
6.25%, 08/31/96 - 06/30/98
Donaldson, Lufkin & Jenrette
(Maturity Value $240,140)
Collateral: U.S. Treasury Notes, 5.125% -
8.75%, 03/31/97 - 11/30/99
Fuji Government Securities
(Maturity Value $240,140)
Collateral: U.S. Treasury Notes, 7.50%,
12/31/96 - 10/31/99
Lehman Government Securities, Inc
(Maturity Value $240,140)
Collateral: U.S. Treasury Notes, 5.75% -
8.75%, 09/30/97 - 09/30/00
Swiss Bank Corp. (Maturity Value $240,140)
Collateral: U.S. Treasury Notes,
7.50%, 10/31/99
UBS Securities, Inc. (Maturity Value $240,140)
Collateral: U.S. Treasury Notes, 6.75% -
7.75%, 04/30/97 - 01/31/00
Total Short Term Investments 1,576,650
------------
Total Investments
(Cost $22,236,546) 100.3% 22,559,006
Liabilities in Excess of
Other Assets, Net (0.3)% (67,893)
------------
Net Assets 100.0% $22,491,113
------------
At December 31, 1995, the net unrealized
appreciation based on the cost of investments
for income tax purposes of $22,236,546
was as follows:
Aggregate gross unrealized appreciation for
all investments in which there was an excess
of value over tax cost $ 397,575
Aggregate gross unrealized depreciation for
all investments in which there was an excess
of tax cost over value (75,115)
------------
Net unrealized appreciation $ 322,460
------------
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 delayed delivery basis
The accompanying notes are an integral part of these financial statements.
Franklin Government Securities Trust
Statement of Assets and Liabilities
December 31, 1995
ASSETS:
Investments in securities, at value
(identified cost $20,659,896) $20,982,356
Receivables from repurchase
agreements, at value and cost 1,576,650
Cash 4,579
Receivables:
Interest 129,143
Investment securities sold 14,215
Capital shares sold 259,539
------------
Total assets 22,966,482
------------
LIABILITIES:
Payables:
Investment securities purchased - delayed delivery 444,730
Management fees 10,824
Accrued expenses and other liabilities 19,815
------------
Total liabilities 475,369
------------
NET ASSETS, at value $22,491,113
------------
Net assets consist of:
Undistributed net investment income $ 1,246,586
Net unrealized appreciation on investments 322,460
Accumulated net realized loss (129,499)
Capital shares 16,853
Additional paid-in capital 21,034,713
------------
Net assets, at value $22,491,113
------------
Shares outstanding 1,685,270
------------
NET ASSET VALUE per share ($22,491,113 / 1,685,270) $13.35
------------
Statement of Operations
for the year ended December 31, 1995
INVESTMENTINCOME:
Interest $1,361,244
------------
Expenses:
Management fees (Note 5) $114,871
Professional fees 21,756
Custodian fees 1,612
Reports to shareholders 277
Other 849
Payments from Manager (Note 5) (24,745)
------------
Total expenses 114,620
------------
Net investment income 1,246,624
------------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS:
Net realized loss (21,303)
Net unrealized appreciation during the year 1,661,836
------------
Net realized and unrealized gain on investments 1,640,533
------------
Net increase in net assets resulting from operations $2,887,157
------------
Statements of Changes in Net Assets
for the years ended December 31, 1995 and 1994
1995 1994
-------- --------
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment income $ 1,246,624 $ 1,086,914
Net realized loss on investments (21,303) (58,583)
Net unrealized appreciation (depreciation)
on investments 1,661,836 (1,667,828)
-------- --------
Net increase (decrease) in net assets
resulting from operations 2,887,157 (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) 5,448,492 267,789
-------- --------
Net increase (decrease) in net assets 7,248,735 (1,325,518)
Net assets:
Beginning of year 15,242,378 16,567,896
-------- --------
End of year (including undistributed net
investment income of $1,246,586 - 1995;
and $1,086,876 - 1994) $22,491,113 $15,242,378
-------- --------
The accompanying notes are an integral part of these financial statements.
Franklin Government Securities Trust
Notes to Financial Statements
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 Fund in the preparation of its financial statements. The
policies are in conformity with generally accepted accounting principles for
investment companies.
a. Security Valuation:Portfolio securities listed on a securities exchange
or on the NASDAQ for which market quotations are readily available are valued at
the last sale price or, if there is no sale price, within the range of the most
recent quoted bid and asked prices. Other securities are valued based on a
variety of factors, including yield, risk, maturity, trade activity and recent
developments related to the securities. The Fund may utilize a pricing service,
bank or broker/dealer experienced in such matters to perform any of the pricing
functions, under procedures approved by the Board 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 Fund may enter into a joint repurchase
agreement whereby its uninvested cash balance is deposited into a joint cash
account to be used to invest in one or more repurchase agreements with
government securities dealers recognized by the Federal Reserve Board and/or
member banks of the Federal Reserve System. The value and face amount of the
joint repurchase agreement are allocated to the Fund based on its pro-rata
interest. A repurchase agreement is accounted for as a loan by the Fund to the
seller, collateralized by underlying U.S. government securities, which are
delivered to the Fund's custodian. The market value, including accrued interest,
of the initial collateralization is required to be at least 102% of the dollar
amount invested by the Fund, with the value of the underlying securities marked
to market daily to maintain coverage of at least 100%. At December 31, 1995, all
outstanding repurchase agreements held by the Fund had been entered into on
December 29, 1995.
f. Securities Purchased on a When-Issued or Delayed Delivery:The Fund 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 Fund 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
Fund has set aside sufficient investment securities as collateral for these
purchase commitments.
2. Trust Shares
At December 31, 1995, there was an unlimited number of $.01 par value shares
authorized. Transactions in the Trust's shares for the years ended December 31,
1995 and 1994 were as follows:
Year Ended December 31,
--------------------------------------
1995 1994
-------------------- --------------------
Shares Amount Shares Amount
------- --------- ------- ---------
Shares sold 550,647 $7,098,487 482,593 $ 6,053,218
Shares issued
in reinvest-
ment of dis-
tributions 85,651 1,086,914 78,827 953,810
Shares
redeemed (215,498) (2,736,909) (542,950) (6,739,239)
------- --------- ------- ---------
Net increase 420,800 $5,448,492 18,470 $ 267,789
======= ========= ======= =========
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
=======
The aggregate cost of securities and unrealized appreciation of the Trust are
the same for tax purposes as for financial statement purposes at December 31,
1995.
4. Purchases and Sales of Securities
Purchases and sales of securities (excluding purchases and sales of short-term
securities) for the year ended December 31, 1995 aggregated $6,626,682 and
$1,293,165, respectively.
5. Transactions with Affiliates and Related Parties
Franklin Advisers, Inc., (Advisers) under the terms of a management agreement,
provides investment advice, administrative services, office space and facilities
to the Trust, and receives fees computed daily at an annualized rate of 5/8 of
1% of the first $100 million of net assets of the Fund; 1/2 of 1% of the net
assets in excess of $100 million up to $250 million, 45/100 of 1% of net assets
in excess of $250 million up 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 management agreement provide that annual aggregate
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 year ended December 31, 1995, the Trust's expenses did not exceed these
limitations; however, Advisers agreed in advance to waive $24,745 of the
management fees.
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 year ended December 31, 1995.
6. Financial Highlights
Selected data for each share of beneficial interest outstanding throughout each
period are as follows:
<TABLE>
<CAPTION>
Period Ended December 31,
---------------------------------------------------
1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
Per Share Operating Performance
<S> <C> <C> <C> <C> <C>
Net asset value at beginning of period $12.05 $13.30 $13.26 $13.01 $11.72
-------- -------- -------- -------- --------
Net investment income 0.67 0.85 0.65 0.80 0.61
Net realized & unrealized gain (loss)
on securities 1.4216 (1.3463) 0.3385 0.1602 1.1939
-------- -------- -------- -------- --------
Total from investment operations 2.0916 (0.4963) 0.9885 0.9602 1.8039
-------- -------- -------- -------- --------
Less distributions:
Dividends from undistributed net
investment income (0.7916) (0.7537) (0.7459) (0.7102) (0.5139)
Distributions from net capital gains -- -- (0.2026) -- --
-------- -------- -------- -------- --------
Total distributions (0.7916) (0.7537) (0.9485) (0.7102) (0.5139)
-------- -------- -------- -------- --------
Net asset value at end of period $13.35 $12.05 $13.30 $13.26 $13.01
======== ======== ======== ======== ========
Total Return* 17.70% -3.75% 7.59% 7.66% 15.87%
Ratios/Supplemental Data
Net assets at end of period (in 000's) $22,491 $15,242 $16,568 $11,815 $8,641
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%
Ratio of net investment income to
average net assets 6.78% 6.85% 6.68% 7.75% 8.74%
Portfolio turnover rate 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 assumes reinvestment of dividends and capital gains, if any, at
net asset value.
Franklin Government Securities Trust
Report of Independent Auditors
To the Shareholders and Board of Trustees
of Franklin Government Securities Trust:
We have audited the accompanying statement of assets and liabilities of Franklin
Government Securities Trust including the statement of investments in securities
and net assets, as of December 31, 1995, and the related statement of operations
for the year then ended, the statements of changes in net assets for each of the
two years in the period then ended, and the financial highlights for each of the
five years in the period then ended. These financial statements and financial
highlights are the responsibility of the Trust's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1995 by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
Franklin Government Securities Trust as of December 31, 1995, the results of its
operations for the year then ended, the changes in its net assets for each of
the two years in the period then ended, and the financial highlights for each of
the five years in the period then ended, in conformity with generally accepted
accounting principles.
COOPERS & LYBRAND L.L.P.
San Francisco, California
January 26, 1996
Franklin Government Securities Trust
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 hypothetically compares the 7-day yields of Franklin's
Government Securities Trust to that of the Lehman Brothers Intermediate U.S.
Government Bond Index and the Consumer Price Index, from 2/89 to 12/95.
<TABLE>
<CAPTION>
Date Franklin Lehman Bros. CPI
<S> <C> <C> <C>
2/89 $10,030 $10,000 $10,000
3/89 $10,100 $10,047 $10,058
4/89 $10,160 $10,250 $10,123
5/89 $10,240 $10,448 $10,181
6/89 $10,310 $10,714 $10,206
7/89 $10,480 $10,932 $10,230
8/89 $10,410 $10,784 $10,246
9/89 $10,480 $10,836 $10,279
10/89 $10,720 $11,063 $10,329
11/89 $10,820 $11,173 $10,353
12/89 $10,890 $11,205 $10,370
1/90 $10,810 $11,136 $10,477
2/90 $10,870 $11,177 $10,526
3/90 $10,888 $11,191 $10,584
4/90 $10,785 $11,154 $10,601
5/90 $11,103 $11,392 $10,625
6/90 $11,277 $11,543 $10,682
7/90 $11,472 $11,704 $10,723
8/90 $11,369 $11,662 $10,822
9/90 $11,461 $11,766 $10,913
10/90 $11,595 $11,929 $10,978
11/90 $11,830 $12,110 $11,002
12/90 $12,004 $12,277 $11,002
1/91 $12,168 $12,403 $11,068
2/91 $12,260 $12,479 $11,085
3/91 $12,342 $12,547 $11,102
4/91 $12,465 $12,677 $11,118
5/91 $12,568 $12,748 $11,152
6/91 $12,594 $12,758 $11,184
7/91 $12,797 $12,896 $11,201
8/91 $13,033 $13,141 $11,233
9/91 $13,257 $13,364 $11,283
10/91 $13,450 $13,516 $11,299
11/91 $13,524 $13,675 $11,332
12/91 $13,909 $14,007 $11,340
1/92 $13,685 $13,872 $11,357
2/92 $13,834 $13,915 $11,398
3/92 $13,760 $13,860 $11,456
4/92 $13,877 $13,984 $11,472
5/92 $14,145 $14,193 $11,488
6/92 $14,365 $14,397 $11,530
7/92 $14,568 $14,674 $11,554
8/92 $14,760 $14,823 $11,586
9/92 $14,884 $15,028 $11,619
10/92 $14,703 $14,848 $11,659
11/92 $14,760 $14,787 $11,676
12/92 $14,974 $14,977 $11,667
1/93 $15,245 $15,256 $11,725
2/93 $15,426 $15,480 $11,766
3/93 $15,483 $15,538 $11,807
4/93 $15,539 $15,659 $11,840
5/93 $15,629 $15,616 $11,856
6/93 $15,844 $15,843 $11,873
7/93 $15,941 $15,875 $11,873
8/93 $16,050 $16,111 $11,906
9/93 $16,026 $16,177 $11,931
10/93 $16,110 $16,216 $11,980
11/93 $15,941 $16,136 $11,989
12/93 $16,110 $16,203 $11,989
1/94 $16,280 $16,363 $12,021
2/94 $16,062 $16,139 $12,062
3/94 $15,505 $15,903 $12,103
4/94 $15,371 $15,800 $12,120
5/94 $15,420 $15,811 $12,128
6/94 $15,325 $15,814 $12,170
7/94 $15,673 $16,021 $12,202
8/94 $15,686 $16,068 $12,251
9/94 $15,402 $15,934 $12,284
10/94 $15,325 $15,938 $12,293
11/94 $15,312 $15,867 $12,309
12/94 $15,505 $15,920 $12,309
1/95 $15,853 $16,179 $12,358
2/95 $16,277 $16,492 $12,408
3/95 $16,342 $16,582 $12,448
4/95 $16,573 $16,775 $12,490
5/95 $17,178 $17,248 $12,515
6/95 $17,279 $17,358 $12,540
7/95 $17,266 $17,367 $12,540
8/95 $17,471 $17,509 $12,572
9/95 $17,648 $17,626 $12,597
10/95 $17,826 $17,820 $12,639
11/95 $18,017 $18,038 $12,630
12/95 $18,250 $18,216 $12,655
</TABLE>
