MESSAGE FROM THE CHAIRMAN
May 15, 1996
Dear Shareholder:
It's a pleasure to bring you the semi-annual report for the Franklin Strategic
Mortgage Portfolio for the period ended March 31, 1996.
Fluctuating interest rates, moderate growth and mild inflation characterized the
period under review. During late 1995 and early 1996, economic growth continued
to slow significantly, prompting the Federal Reserve Board to lower the federal
funds rate in December 1995, and again in February 1996. Interest rates rose,
however, following stronger-than-expected employment reports released in March
and April. While there was still no clear evidence of increasing inflation,
chances of immediate rate reductions slimmed as the economy began to show signs
of improvement.
This interest-rate volatility and its effects on various financial markets
reinforced our philosophy that shareholders should maintain a long-term
investment perspective. While your fund may experience volatility from time to
time, we believe that the performance of the Franklin Strategic Mortgage
Portfolio will be rewarding over the long term.
Furthermore, we use traditional, time-proven, "plain-vanilla" investment
strategies in our management of the fund, through investing primarily in
agency-backed mortgage securities. In seeking to maximize the fund's total
returns, we rely on extensive research in an effort to uncover the most
attractive values in a fluctuating interest-rate environment.
Looking forward, we anticipate continued moderate growth, mild inflation, and
relatively stable interest rates. More detailed information about these
conditions and their effects on the fund are contained in the Manager's
Discussion on page 2 of this report.
As always, we appreciate your continued support, welcome your comments, and look
forward to serving you in the years to come.
Sincerely,
Charles B. Johnson
Chairman
Franklin Strategic Mortgage Portfolio
To reduce the volume of mail shareholders receive and to reduce expenses, only
one copy of most Fund reports, such as the Fund's annual and semi-annual
reports, may be mailed to a household. Additional reports may be obtained,
without charge, by calling Fund Information at 1-800/DIAL BEN (1-800/342-5236).
MANAGER'S DISCUSSION
Fund Objective:
Seeks to obtain a high level of total return relative to the performance of the
general mortgage securities market by investing primarily in a portfolio of
mortgage securities created from pools of mortgages which are issued or
guaranteed by the U.S. government, its agencies and instrumentalities.*
Economic Overview
During the initial months of this reporting period, interest rates declined
steadily, but then began to rise during the first quarter of 1996. For most of
1995, fixed-income markets rallied as interest rates declined, partially based
on hopes of a balanced federal budget. However, as the budget impasse resulted
in several federal government shut-downs, a balanced budget became unlikely, and
the optimism pervading in October gave way to pessimism in 1996. In response,
yields moved upward, as indicated by the 30-year Treasury bond, whose yield rose
to 6.67% on March 31, 1996, from its six-month low of 5.96% on December 31,
1995.
Furthermore, positive employment reports released in March and April, and rising
commodity and energy prices, led investors to anticipate economic growth and
inflation. These factors also contributed to the upward trend in interest rates.
Portfolio Review
Declining interest rates during the first half of the reporting period led
agency mortgage-backed securities to underperform the U.S. Treasury market. This
weakness was largely due to the increased prepayment risk that usually
accompanies declining interest rates. Lower rates are more attractive to
homeowners, who then refinance their existing mortgages. The higher-yielding
mortgage-backed securities are replaced with those offering the lower, current
yields, which generate less income.
As interest rates began to rise in early 1996, prepayment risk declined and the
yield spread between agency mortgage-backed securities and the 30-year Treasury
began to narrow. In fact, the average yield for mortgage securities, as
indicated by the Salomon Brothers Mortgage Index, was 7.30% on March 31, 1996,
compared with the 30-year Treasury bond's yield of 6.67% on the same date.+
*U.S. government securities owned by the fund or held under repurchase
agreement, but not shares of the fund, are guaranteed by the U.S. government as
to the timely payment of principal and interest. Yields and share price are not
guaranteed and will fluctuate with market conditions.
During the reporting period, we continued to diversify the portfolio across
various coupons and maturities of Government National Mortgage Association
(GNMA), Federal National Mortgage Association (FNMA) and Federal Home Loan
Mortgage Corporation (FHLMC) securities. We concentrated particularly on the
15-year and 30-year sectors, and focused most of our investments on current
coupon securities with competitive yields.
Looking forward, should interest rates continue to rise slowly in response to
threats of increased economic growth and higher inflation, prepayment risk may
wane, making agency mortgage securities increasingly attractive investments. We
will adhere to our long-term, buy-and-hold policy, seeking to maintain a
portfolio of only the most liquid, non-derivative mortgage-backed securities
available. While in the future the fund may invest in less liquid derivatives
and interest-only STRIPS securities, we believe these securities are not
attractive investments at this time. As a result, we expect to maintain our
underweighting in this area.
This discussion reflects the strategies we employed for the fund during the past
six months, and includes our opinions for that period. Since economic and market
conditions are constantly changing, our strategies, and our evaluations,
conclusions and decisions regarding portfolio holdings, will change as new
circumstances arise. Although past performance of a specific investment or
sector cannot guarantee future performance, such information can be useful in
analyzing securities we purchase or sell for the fund.
GRAPHIC MATERIAL 1 OMITTED - SEE APPENDIX AT END OF DOCUMENT
+Source: Micropal
Performance Summary
The Franklin Strategic Mortgage Portfolio paid income distributions totaling
35.6772 cents ($0.356772) per share for the six-month period ended March 31,
1996.* The distribution rate of 6.55% was based on an annualization of the
fund's current monthly dividend of 5.6086 cents ($0.056086) per share and the
maximum offering price of $10.28 on March 31, 1996. Dividends will vary based on
the earnings of the fund's portfolio, and past distributions are not indicative
of future trends. The fund's share price remained fairly constant, with its net
asset value declining seven cents ($0.07), from $9.91 on September 30, 1995, to
$9.84 on March 31, 1996.
The fund posted a total return of +2.90% for the six months, and +10.54% for the
one year, ended March 31, 1996. Total return measures the change in investment
value over the periods indicated, and assumes reinvestment of dividends and any
capital gains. It does not include the maximum initial sales charge. Of course,
past performance is not indicative of future results.
Franklin Strategic Mortgage Portfolio
Dividend Distributions 10/1/95 - 3/31/96
Dividend
Month per Share
October 6.2195 cents
November 5.887 cents
December 5.6022 cents
January 6.3953 cents
February 5.9646 cents
March 5.6086 cents
Total 35.6772 cents
*Assumes shares were purchased and held for the entire accrual period. Since
dividends accrue daily, your actual distributions will vary, depending on the
date you purchased your shares and any account activity during the period.
Franklin Strategic Mortgage Portfolio
Periods ended March 31, 1996
Since
One- Inception
Year (2/1/93)
Cumulative Total Return1 10.54% 21.70%
Average Annual Total Return2 5.89% 4.97%
Distribution Rate3 6.55%
30-Day Standardized Yield4 7.10%
1. Cumulative total returns measure the change in value of an investment over
the periods indicated and do not include the maximum 4.25% initial sales charge.
See Note below.
2. Average annual total return measures the average annual change in value of an
investment over the periods indicated, and includes the maximum 4.25% initial
sales charge. See Note below.
3. Distribution rate is based on an annualization of the current 5.6086 cent per
share monthly dividend and the maximum offering price of $10.28 on March 31,
1996.
4. Yield, calculated as required by the SEC, is based on the earnings of the
fund's portfolio during the 30 days ended March 31, 1996.
Note: Prior to July 1, 1994, fund shares were offered at a higher initial sales
charge. Thus, actual total returns for purchasers of shares during that period
would have been somewhat different than that noted above. Your 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.
The fund's manager has agreed in advance to waive a portion of its management
fees, which reduces operating expenses and increases the distribution rate,
yield and total return to shareholders. If the manager had not taken this
action, the fund's distribution rate and total return would have been lower, and
the 30-day yield would have been 6.04%. The fee waiver may be discontinued at
any time upon notice to the fund's Board of Directors.
<TABLE>
<CAPTION>
FRANKLIN STRATEGIC MORTGAGE PORTFOLIO
Statement of Investments in Securities and Net Assets, March 31, 1996
(unaudited)
Face Value
Amount (Note 1)
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Mortgage-Backed Securities 95.5%
Federal Home Loan Mortgage Corp. (FHLMC), 34.3%
$117,476 9.00%, 06/01/01 ................................................................... $ 122,689
249,065 6.50%, 11/01/01 ................................................................... 247,664
129,224 6.50%, 03/01/09 ................................................................... 126,761
88,718 7.00%, 06/01/09 ................................................................... 88,774
75,000 a6.50%, 01/01/10 .................................................................. 73,477
70,110 8.00%, 01/01/10 ................................................................... 72,213
88,570 7.50%, 04/01/10 ................................................................... 90,065
144,417 6.00%, 07/01/10 ................................................................... 138,731
116,973 9.50%, 12/01/22 ................................................................... 124,795
130,168 7.00%, 06/01/24 ................................................................... 127,240
130,423 7.50%, 07/01/24 ................................................................... 130,545
136,456 8.00%, 07/01/24 ................................................................... 139,143
189,968 8.50%, 12/01/24 ................................................................... 196,617
47,866 8.00%, 06/01/25 ................................................................... 48,809
74,591 7.00%, 09/01/25 ................................................................... 72,913
59,719 7.00%, 10/01/25 ................................................................... 58,375
47,509 7.50%, 10/01/25 ................................................................... 47,554
74,063 7.50%, 01/01/26 ................................................................... 74,133
97,175 8.00%, 01/01/26 ................................................................... 99,088
121,200 7.00%, 03/01/26 ................................................................... 118,472
----------
Total Federal Home Loan Mortgage Corp. (Cost $2,165,962)..................... 2,198,058
----------
Federal National Mortgage Assocation (FNMA), 35.4%
217,416 6.00%, 03/01/01 ................................................................... 213,268
135,379 6.50%, 09/01/08 ................................................................... 132,672
92,848 7.00%, 07/01/09 ................................................................... 92,790
82,428 7.50%, 07/01/09 ................................................................... 83,794
55,000 a6.00%, 01/01/11 .................................................................. 52,731
28,010 6.00%, 12/01/23 ................................................................... 25,936
472,742 6.50%, 06/01/24 ................................................................... 449,694
399,591 7.00%, 06/01/24 ................................................................... 390,224
90,686 8.50%, 07/01/24 ................................................................... 93,860
195,953 8.00%, 01/01/25 ................................................................... 199,688
195,769 9.00%, 01/01/25 ................................................................... 205,618
227,485 7.50%, 08/01/25 ................................................................... 227,485
49,803 7.50%, 11/01/25 ................................................................... 49,804
50,500 7.50%, 03/01/26 ................................................................... 50,500
----------
Total Federal National Mortgage Assocation (Cost $2,190,147)................. 2,268,064
----------
Government National Mortgage Association (GNMA), SF, 25.8%
164,008 9.00%, 12/15/16 ................................................................... 172,824
97,224 10.00%, 10/15/18 .................................................................. 107,190
125,445 9.50%, 10/15/20 ................................................................... 134,540
$219,966 8.00%, 02/15/23 ................................................................... $ 224,983
279,223 7.00%, 06/15/23 ................................................................... 272,503
173,245 7.50%, 06/15/23 ................................................................... 173,353
275,020 6.50%, 01/15/24 ................................................................... 261,010
45,044 8.00%, 01/15/25 ................................................................... 46,072
135,000 a8.50%, 03/15/25 .................................................................. 140,779
49,292 7.50%, 09/15/25 ................................................................... 49,323
74,885 7.50%, 01/15/26 ................................................................... 74,932
Total Government National Mortgage Association (Cost $1,659,418)............. 1,657,509
----------
Total Mortgage-Backed Securities (Cost $6,015,527)........................... 6,123,631
----------
bReceivables from Repurchase Agreements 8.1%
519,782 Joint Repurchase Agreement, 5.423%, 04/01/96 (Maturity Value $517,520)
(Cost $517,287)................................................................... 517,287
B.T. Securities Corp., (Maturity Value $99,877)
Collateral: U.S. Treasury Notes, 6.75% - 7.125%, 09/30/99 - 04/30/00
Daiwa Securities America, Inc., (Maturity Value $118,022)
Collateral: U.S. Treasury Bills, 06/27/96 - 09/26/96
Fuji Securities, Inc., (Maturity Value $99,877)
Collateral: U.S. Treasury Bills, 06/13/96 - 11/14/96
U.S. Treasury Notes, 6.125%, 09/30/00
Lehman Brothers, Inc., (Maturity Value $99,877)
Collateral: U.S. Treasury Notes, 6.125%, 05/31/97
Nikko Securities Co. International, Inc., (Maturity Value $99,877)
Collateral: U.S. Treasury Notes, 5.625% - 8.50%, 04/30/97 - 11/15/00
----------
Total Investments (Cost $6,532,814) 103.6% ............................. 6,640,918
Liabilities in Excess of Other Assets, Net (3.6%)....................... (231,200)
----------
Net Assets 100.0% ...................................................... $6,409,718
==========
At March 31, 1996, the net unrealized appreciation based on the cost of investments
for income tax purposes of $6,015,527 was as follows:
Aggregate gross unrealized appreciation for all investments in which there was an
excess of value over tax cost .................................................... $ 146,121
Aggregate gross unrealized depreciation for all investments in which there was an
excess of tax cost over value..................................................... (38,017)
----------
Net unrealized appreciation...................................................... $ 108,104
==========
PORTFOLIO ABBREVIATION:
SF - Single Family
aSee Note 1(g) regarding securities purchased on a when-issued or delayed
delivery basis.
bFace amount for repurchase agreements is for the underlying collateral. See
Note 1(f) regarding Joint Repurchase Agreement.
The accompanying notes are an integral part of these financial statements.
</TABLE>
FRANKLIN STRATEGIC MORTGAGE PORTFOLIO
Financial Statements
Statement of Assets and Liabilities
March 31, 1996 (unaudited)
Assets:
Investments in securities, at value
(identified cost $6,015,527) $6,123,631
Receivables from repurchase agreements,
at value and cost 517,287
Receivables:
Dividends and interest 35,827
Investment securities sold 1,482
Unamortized organization costs (Note 2) 11,585
-----------
Total assets 6,689,812
-----------
Liabilities:
Payables:
Bank overdraft 362
Investment securities purchased
on a when-issued basis (Note 1) 268,146
Shareholder servicing costs 64
Accrued expenses and other liabilities 11,522
-----------
Total liabilities 280,094
-----------
Net assets, at value $6,409,718
===========
Net assets consist of:
Unrealized appreciation on investments $ 108,104
Accumulated realized loss (191,911)
Capital shares 6,515
Additional paid-in capital 6,487,010
-----------
Net assets, at value $6,409,718
===========
Net asset value per share
($6,409,718 / 651,461 shares
outstanding) $ 9.84
===========
Statement of Operations
for the six months ended March 31, 1996 (unaudited)
Investment income:
Interest (Note 1) $221,198
---------
Total income $221,198
Expenses:
Management fees, (Note 6) 12,413
Registration fees 6,834
Professional fees 6,720
Reports to shareholders 5,031
Amortization of organization costs
(Note 2) 3,474
Custodian fees 276
Shareholder servicing costs
(Note 6) 54
Other 198
Expenses waived by Manager
(Note 6) (35,000)
---------
Total expenses --
-----------
Net investment income 221,198
-----------
Realized and unrealized gain (loss)
on investments:
Net realized gain 878
Net unrealized depreciation (47,350)
-----------
Net realized and unrealized loss on
investments (46,472)
-----------
Net increase in net assets resulting
from operations $174,726
===========
The accompanying notes are an integral part of these
financial statements.
<TABLE>
<CAPTION>
FRANKLIN STRATEGIC MORTGAGE PORTFOLIO
Financial Statements (cont.)
Statements of Changes in Net Assets for the six months ended March 31, 1996
(unaudited) and the year ended September 30, 1995
Six Months Year
Ended Ended
03/31/96 09/30/95
-------- --------
<S> <C> <C>
Increase in net assets:
Operations:
Net investment income.............................................................. $ 221,198 $ 412,210
Net realized gain (loss) on investments............................................ 878 (76,041)
Net unrealized appreciation (depreciation) on investments.......................... (47,350) 355,238
-------- --------
Net increase in net assets resulting from operations.......................... 174,726 691,407
Distributions to shareholders from undistributed net investment income:............. (221,198) (412,210)
Increase in net assets from capital share transactions (Note 4)..................... 476,284 477,399
-------- --------
Net increase in net assets.................................................... 429,812 756,596
Net assets (there is no undistributed net investment income at beginning or end of period):
Beginning of period................................................................ 5,979,906 5,223,310
-------- --------
End of period...................................................................... $6,409,718 $5,979,906
======== ========
The accompanying notes are an integral part of these financial statements.
</TABLE>
FRANKLIN STRATEGIC MORTGAGE PORTFOLIO
Notes to Financial Statements (unaudited)
1. SIGNIFICANT ACCOUNTING POLICIES
Franklin Strategic Mortgage Fund (the Fund) is an open-end, diversified
management investment company (mutual fund), registered under the Investment
Company Act of 1940 as amended. The Fund seeks to provide investors with a high
level of total return, relative to the performance of the general mortgage
securities market.
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. 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. 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
Directors (the Board). Securities for which market quotations are not available
are valued in accordance with procedures established by the Board.
b. Income Taxes:
The Fund 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. Bond
discount is amortized as required by the Internal Revenue Code. The Fund
normally declares dividends from its net investment income daily and distributes
monthly. Daily allocations of net investment income will commence on the day
following receipt of an investor's funds. Dividends are normally declared each
day the New York Stock Exchange is open for business and are equal to an amount
per day set from time to time by the Board, and are payable to shareholders of
record at the beginning of business on the ex-dividend date. Monthly dividends
are reinvested in additional shares of the Fund, or paid in cash as requested by
the shareholders.
e. 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.
f. 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.
1. SIGNIFICANT ACCOUNTING POLICIES (cont.)
f. Repurchase Agreements: (cont.)
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 March 31, 1996, all
outstanding repurchase agreements held by the Fund had been entered into on that
date.
g. Securities Purchased on a When-Issued or Delayed Delivery Basis:
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 them, 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.
h. Mortgage Dollar Rolls:
The Fund may enter into mortgage dollar rolls in which the fund sells
mortgage-backed securities and simultaneously contracts to repurchase
substantially similar, but not identical, securities on a specified future date,
generally at a price lower than the price of the security sold. The counterparty
receives all principal and interest payments, including prepayments, made on the
mortgage-backed security sold while it is the holder. Mortgage dollar rolls may
be renewed with a new sale and repurchase price fixed and a cash settlement made
without physical delivery of the securities subject to the contract, at the
renewal date. Mortgage dollar rolls are accounted for as non-collateralized
financing transactions.
2. UNAMORTIZED ORGANIZATION COSTS
The organization costs of the Fund are amortized on a straight-line basis over a
period of five years from February 1, 1993 (the effective date of registration
under the Securities Act of 1933). In the event that Franklin Resources, Inc.
(which was the sole shareholder prior to the effective date) redeems its seed
money shares within the five-year period, the pro-rata share of the
then-unamortized deferred organization costs will be deducted from the
redemption price paid to Franklin Resources, Inc. New investors purchasing
shares of the Fund subsequent to that date bear such costs during the
amortization period only as such charges are accrued daily against investment
income.
3. CAPITAL LOSS CARRYOVERS
At September 30, 1995, for tax purposes, the Fund had capital loss carryovers as
follows:
Expiring in: 2002............ $116,748
2003............ 76,041
-----------
$192,789
===========
For tax purposes, the aggregate cost of securities and unrealized appreciation
are the same as for financial statement purposes at March 31, 1996.
<TABLE>
<CAPTION>
4. CAPITAL STOCK
At March 31, 1996, there were an unlimited number of $.01 par value shares of
beneficial interest authorized. Transactions for the periods ended March 31,
1996 and September 30, 1995 were as follows:
Six Months Ended Year Ended
March 31, 1996 September 30, 1995
--------------- ---------------
Shares Amount Shares Amount
------ ------- ----- -------
<S> <C> <C> <C> <C>
Shares sold........................................................ 26,160 $260,842 30,048 $295,846
Shares issued in reinvestment of distributions..................... 21,946 218,989 42,581 410,235
Shares redeemed.................................................... (358) (3,547) (23,228) (228,682)
------ ------- ----- -------
Net increase....................................................... 47,748 $476,284 49,401 $477,399
====== ======= ===== =======
</TABLE>
5. PURCHASES AND SALES OF SECURITIES
Purchases and sales of securities (excluding purchases and sales of short-term
securities and mortgage dollar roll transactions) for the period ended March 31,
1996 aggregated $773,623 and $502,586, respectively.
<TABLE>
<CAPTION>
6. TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES
a. Management Agreement:
Under the terms of a management agreement, Franklin Institutional Services
Corporation (FISCO), provides investment advice, administrative services, office
space and facilities to the Fund, and receives fees computed monthly based on
the average daily net assets of the Fund as follows:
Annualized Fee Rate Average Daily Net Assets
-------------------- ------------------------------------------------------
<C> <C>
.400% First $250 million
.380% over $250 million, up to and including $500 million
.360% over $500 million
</TABLE>
The terms of the management agreement provide that aggregate annual expenses of
the Fund 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 Fund's shares are registered. For the period ended March 31, 1996,
the Fund expenses did not exceed these limitations. However, FISCO agreed in
advance to waive management fees in the amount of $35,000, in an effort to
minimize the Fund's expenses.
b. Underwriting Agreement:
In its capacity as underwriter for the shares of the Fund, Franklin/Templeton
Distributors, Inc. (Distributors) received commissions on sales of the Fund's
capital stock for the period ended March 31, 1996, totaling $3,808 of which
$3,524 was paid to other dealers. Commissions are deducted from the gross
proceeds received from the sale of the capital stock of the Fund, and as such
are not expenses of the Fund.
c. Shareholder Services Agreement:
Under the terms of a shareholder services agreement with Franklin/Templeton
Investors Services, Inc. (Investor Services), the Fund pays costs on a per
shareholder account basis. Shareholder servicing costs incurred by the Fund for
the period ended March 31, 1996 aggregated $54, all of which was paid to
Investor Services.
d. Other Affiliated Parties and Transactions:
Certain officers and trustees of the Fund are also officers and/or directors of
FISCO, Distributors, and Investor Services, all wholly-owned subsidiaries of
Franklin Resources, Inc.
At March 31, 1996, Franklin Resources, Inc. owned 94.93% of the Fund's
outstanding shares.
<TABLE>
<CAPTION>
7. FINANCIAL HIGHLIGHTS
Selected data for each share of beneficial interest outstanding throughout each
period are as follows:
Six Months Ended Period ended September 30,
March 31, 1996 1995 1994 1993***
------------ ------ -------- --------
<S> <C> <C> <C> <C>
Per Share Operating Performance:
Net asset value at beginning of period.................... $ 9.91 $ 9.42 $10.24 $10.00
------------ ------ -------- --------
Net investment income..................................... 0.357 0.714 0.553 0.365
Net realized and unrealized gain (loss) on securities..... (0.073) 0.490 (0.711) 0.240
------------ ------ -------- --------
Total from investment operations.......................... 0.284 1.204 (0.158) 0.605
------------ ------ -------- --------
Less distributions:
Dividends from undistributed net investment income........ (0.357) (0.714) (0.553) (0.365)
Distributions from net capital gains...................... -- -- (0.109) --
------------ ------ -------- --------
Total distributions....................................... (0.357) (0.714) (0.662) (0.365)
------------ ------ -------- --------
Net asset value at end of period.......................... $ 9.84 $ 9.91 $ 9.42 $10.24
============ ====== ======== ========
TotalReturn+.............................................. 2.90% 13.27% (1.61)% 6.13%
Ratios/Supplemental Data:
Net assets at end of year (in 000's)...................... $6,410 $5,980 $5,223 $5,306
Ratio of expenses to average net assets++................. --% --% --% --%
Ratio of expenses to average net assets
(excluding waiver and payments by Manager) (Note 6)...... 1.13%* 1.24% 1.28% 1.22%*
Ratio of net income to average net assets................. 7.15%* 7.42% 5.65% 3.59%*
Portfolio turnover rate+++................................ 8.42% 34.20% 86.38%** 104.33%**
Average Commission Rate................................... --% --% --% --%
</TABLE>
+Total return measures the change in value of an investment over the periods
indicated. It is not annualized. It does not include the maximum initial sales
charge and assumes reinvestment of dividends and capital gains, if any, at net
asset value.
++During the year, FISCO agreed in advance to waive the management fees and made
payments of other expenses.
+++The portfolio turnover rate excludes mortgage dollar roll transactions.
*Annualized
**The portfolio turnover rates for these periods have been restated to exclude
purchases and sales of mortgage dollar roll transactions.
***For the period February 1, 1993 (effective date) to September 30, 1993.
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Franklin Strategic Mortgage Portfolio Semi-Annual Report
APPENDIX
DESCRIPTION OF GRAPHIC MATERIAL OMITTED FROM EDGAR FILING (PURSUANT TO ITEM 304
(a) of REGULATION S-T)
GRAPHIC MATERIAL (1)
This chart shows in pie format the portfolio breakdown of the fund based on
total net assets.
Investment Holdings on 3/31/96
Federal National Mortgage Association (FNMA) 35.4%
Federal Home Loan Mortgage Corporation (FHLMC) 34.3%
Government National Mortgage Association (GNMA) 25.8%
Cash & Equivalents 4.5%
