<PAGE> PAGE 1
000 A000000 03/31/98
000 C000000 0000893226
000 D000000 N
000 E000000 NF
000 F000000 Y
000 G000000 N
000 H000000 N
000 I000000 3.0
000 J000000 A
001 A000000 FRANKLIN STRATEGIC MORTGAGE PORTFOLIO
001 B000000 811-7288
001 C000000 6503122000
002 A000000 777 MARINERS ISLAND BOULEVARD
002 B000000 SAN MATEO
002 C000000 CA
002 D010000 94404
002 D020000 1585
003 000000 N
004 000000 N
005 000000 N
006 000000 N
007 A000000 Y
007 B000000 1
007 C010100 1
007 C020100 FRANKLIN STRATEGIC MORTGAGE PORTFOLIO
007 C030100 N
007 C010200 2
007 C010300 3
007 C010400 4
007 C010500 5
007 C010600 6
007 C010700 7
007 C010800 8
007 C010900 9
007 C011000 10
008 A00AA01 FRANKLIN ADVISERS, INC.
008 B00AA01 A
008 C00AA01 801-26292
008 D01AA01 SAN MATEO
008 D02AA01 CA
008 D03AA01 94404
008 D04AA01 1585
010 A00AA01 FRANKLIN TEMPLETON SERVICES, INC.
010 C01AA01 SAN MATEO
010 C02AA01 CA
010 C03AA01 94404
010 C04AA01 1585
011 A00AA01 FRANKLIN/TEMPLETON DISTRIBUTORS, INC.
011 B00AA01 8-5889
011 C01AA01 SAN MATEO
011 C02AA01 CA
<PAGE> PAGE 2
011 C03AA01 94404
011 C04AA01 1585
012 A00AA01 FRANKLIN/TEMPLETON INVESTOR SERVICES, INC.
012 B00AA01 84-1036
012 C01AA01 SAN MATEO
012 C02AA01 CA
012 C03AA01 94404
012 C04AA01 1585
013 A00AA01 COOPERS & LYBRAND L.L.P.
013 B01AA01 SAN FRANCISCO
013 B02AA01 CA
013 B03AA01 94105
013 B04AA01 2119
014 A00AA01 FRANKLIN/TEMPLETON DISTRIBUTORS, INC.
014 B00AA01 8-5889
015 A00AA01 THE BANK OF NEW YORK
015 B00AA01 C
015 C01AA01 NEW YORK
015 C02AA01 NY
015 C03AA01 10286
015 E01AA01 X
015 A00AA02 EUROCLEAR
015 B00AA02 S
015 C01AA02 BRUSSELS
015 D01AA02 BELGIUM
015 E04AA02 X
015 A00AA03 CEDEL BANK, S.A.
015 B00AA03 S
015 C01AA03 LUXEMBOURG CITY
015 D01AA03 LUXEMBOURG
015 E04AA03 X
015 A00AA04 BANKBOSTON
015 B00AA04 S
015 C01AA04 BUENOS AIRES
015 D01AA04 ARGENTINA
015 E04AA04 X
015 A00AA05 NATIONAL AUSTRALIA BANK
015 B00AA05 S
015 C01AA05 MELBOURNE
015 D01AA05 AUSTRALIA
015 E04AA05 X
015 A00AA06 CREDITANSTALT AG
015 B00AA06 S
015 C01AA06 VIENNA
015 D01AA06 AUSTRIA
015 E04AA06 X
015 A00AA07 DELETE
015 A00AA08 BANQUE BRUXELLES LAMBERT
015 B00AA08 S
015 C01AA08 BRUSSELS
015 D01AA08 BELGIUM
<PAGE> PAGE 3
015 E04AA08 X
015 A00AA09 DELETE
015 A00AA10 ROYAL BANK OF CANADA
015 B00AA10 S
015 C01AA10 TORONTO
015 D01AA10 CANADA
015 E04AA10 X
015 A00AA11 DELETE
015 A00AA12 DELETE
015 A00AA13 DELETE
015 A00AA14 DELETE
015 A00AA15 DEN DANSKE BANK
015 B00AA15 S
015 C01AA15 COPENHAGEN
015 D01AA15 DENMARK
015 E04AA15 X
015 A00AA16 BANQUE INTERNATIONALE A LUXEMBOURG
015 B00AA16 S
015 C01AA16 LUXEMBOURG CITY
015 D01AA16 LUXEMBOURG
015 E04AA16 X
015 A00AA17 THE BANK OF NEW YORK
015 B00AA17 S
015 C01AA17 LONDON
015 D01AA17 UNITED KINGDOM
015 E04AA17 X
015 A00AA18 MERITA BANK LTD.
015 B00AA18 S
015 C01AA18 HELSINKI
015 D01AA18 FINLAND
015 E04AA18 X
015 A00AA19 BANQUE PARIBAS
015 B00AA19 S
015 C01AA19 PARIS
015 D01AA19 FRANCE
015 E04AA19 X
015 A00AA20 DRESDNER BANK AG
015 B00AA20 S
015 C01AA20 FRANKFURT
015 D01AA20 GERMANY
015 E04AA20 X
015 A00AA21 DELETE
015 A00AA22 HONGKONG & SHANGHAI BANKING CORP.
015 B00AA22 S
015 C01AA22 HONG KONG
015 D01AA22 HONG KONG
015 E04AA22 X
015 A00AA23 DELETE
015 A00AA24 DELETE
015 A00AA25 HONGKONG & SHANGHAI BANKING CORP. LTD.
015 B00AA25 S
<PAGE> PAGE 4
015 C01AA25 JAKARTA
015 D01AA25 INDONESIA
015 E04AA25 X
015 A00AA26 ALLIED IRISH BANKS, PLC
015 B00AA26 S
015 C01AA26 DUBLIN
015 D01AA26 IRELAND
015 E04AA26 X
015 A00AA27 DELETE
015 A00AA28 DELETE
015 A00AA29 BANK OF TOKYO MITSUBISHI LTD.
015 B00AA29 S
015 C01AA29 TOKYO
015 D01AA29 JAPAN
015 E04AA29 X
015 A00AA30 HONGKONG BANK MALAYSIA BERHAD
015 B00AA30 S
015 C01AA30 KUALA LUMPUR
015 D01AA30 MALAYSIA
015 E04AA30 X
015 A00AA31 BANCO NACIONAL DE MEXICO, S.A. (BANAMEX)
015 B00AA31 S
015 C01AA31 MEXICO CITY
015 D01AA31 MEXICO
015 E04AA31 X
015 A00AA32 MEES PIERSON N.V.
015 B00AA32 S
015 C01AA32 AMSTERDAM
015 D01AA32 NETHERLANDS
015 E04AA32 X
015 A00AA33 AUSTRALIA & NEW ZEALAND BANKING GROUP LTD.
015 B00AA33 S
015 C01AA33 WELLINGTON
015 D01AA33 NEW ZEALAND
015 E04AA33 X
015 A00AA34 DELETE
015 A00AA35 STANDARD CHARTERED BANK
015 B00AA35 S
015 C01AA35 KARACHI
015 D01AA35 PAKISTAN
015 E04AA35 X
015 A00AA36 DELETE
015 A00AA37 HONGKONG & SHANGHAI BANKING CORP.
015 B00AA37 S
015 C01AA37 MANILA
015 D01AA37 PHILIPPINES
015 E04AA37 X
015 A00AA38 DELETE
015 A00AA39 BANCO COMERCIAL PORTUGUES
015 B00AA39 S
015 C01AA39 LISBON
<PAGE> PAGE 5
015 D01AA39 PORTUGAL
015 E04AA39 X
015 A00AA40 UNITED OVERSEAS BANK LTD.
015 B00AA40 S
015 C01AA40 SINGAPORE
015 D01AA40 SINGAPORE
015 E04AA40 X
015 A00AA41 STANDARD BANK OF SOUTH AFRICA LTD.
015 B00AA41 S
015 C01AA41 JOHANNESBURG
015 D01AA41 SOUTH AFRICA
015 E04AA41 X
015 A00AA42 DELETE
015 A00AA43 BANCO BILBAO VIZCAYA
015 B00AA43 S
015 C01AA43 MADRID
015 D01AA43 SPAIN
015 E04AA43 X
015 A00AA44 STANDARD CHARTERED BANK
015 B00AA44 S
015 C01AA44 COLOMBO
015 D01AA44 SRI LANKA
015 E04AA44 X
015 A00AA45 SKANDINAVISKA ENSKILDA BANKEN
015 B00AA45 S
015 C01AA45 STOCKHOLM
015 D01AA45 SWEDEN
015 E04AA45 X
015 A00AA46 UNION BANK OF SWITZERLAND
015 B00AA46 S
015 C01AA46 ZURICH
015 D01AA46 SWITZERLAND
015 E04AA46 X
015 A00AA47 DELETE
015 A00AA48 SIAM COMMERCIAL BANK
015 B00AA48 S
015 C01AA48 BANGKOK
015 D01AA48 THAILAND
015 E04AA48 X
015 A00AA49 OSMANLI BANKASI A.S. (OTTOMAN BANK)
015 B00AA49 S
015 C01AA49 ISTANBUL
015 D01AA49 TURKEY
015 E04AA49 X
015 A00AA50 FIRST CHICAGO
015 B00AA50 S
015 C01AA50 LONDON
015 D01AA50 UNITED KINGDOM
015 E04AA50 X
015 A00AA51 DELETE
015 A00AA52 DELETE
<PAGE> PAGE 6
015 A00AA53 DELETE
015 A00AA54 DELETE
015 A00AA55 DELETE
015 A00AA56 DELETE
015 A00AA57 DELETE
015 A00AA58 DELETE
015 A00AA59 DELETE
015 A00AA60 DELETE
015 A00AA61 DELETE
015 A00AA62 DELETE
015 A00AA63 DELETE
015 A00AA64 DELETE
015 A00AA65 DELETE
015 A00AA66 DELETE
015 A00AA67 STANBIC BANK ZAMBIA LTD.
015 B00AA67 S
015 C01AA67 LUSAKA
015 D01AA67 ZAMBIA
015 E04AA67 X
015 A00AA68 STANBIC BANK ZIMBABWE LTD.
015 B00AA68 S
015 C01AA68 HARARE
015 D01AA68 ZIMBABWE
015 E04AA68 X
015 A00AA69 DELETE
015 A00AA70 DELETE
015 A00AA71 DELETE
015 A00AA72 DELETE
015 A00AA73 DELETE
015 A00AA74 DELETE
018 00AA00 Y
019 A00AA00 Y
019 B00AA00 219
019 C00AA00 FRNKTEMGRP
020 C000001 0
020 C000002 0
020 C000003 0
020 C000004 0
020 C000005 0
020 C000006 0
020 C000007 0
020 C000008 0
020 C000009 0
020 C000010 0
021 000000 0
022 A000001 BARCLAYS DE ZOETE WEDD NY
022 B000001 13-3551367
022 C000001 16163
022 D000001 0
022 A000002 SBCI SWISS BANK CORP INV BANK
022 B000002 13-2639550
<PAGE> PAGE 7
022 C000002 16004
022 D000002 0
022 A000003 DONALDSON LUFKIN & JENRETTE
022 B000003 13-2741729
022 C000003 15783
022 D000003 0
022 A000004 UBS SECURITIES, L.L.C.
022 B000004 13-2932996
022 C000004 15599
022 D000004 0
022 A000005 CIBC WOOD GUNDY SECURITY
022 B000005 13-3639028
022 C000005 15360
022 D000005 0
022 A000006 LEHMAN BROTHERS, INC.
022 B000006 13-2518466
022 C000006 15116
022 D000006 0
022 A000007 DRESDNER U.S. FINANCE, INC.
022 B000007 04-2442748
022 C000007 14710
022 D000007 0
022 A000008 GREENWICH CAPITAL MARKETS, INC.
022 B000008 13-3122275
022 C000008 10462
022 D000008 0
022 A000009 PARIBAS CORP.
022 B000009 13-3235334
022 C000009 9698
022 D000009 0
022 A000010 BA SECURITIES, INC.
022 B000010 95-4035346
022 C000010 8678
022 D000010 0
023 C000000 190954
023 D000000 397
024 00AA00 N
025 D00AA01 0
025 D00AA02 0
025 D00AA03 0
025 D00AA04 0
025 D00AA05 0
025 D00AA06 0
025 D00AA07 0
025 D00AA08 0
025 D00AA09 0
025 D00AA10 0
025 D00AA11 0
025 D00AA12 0
025 D00AA13 0
025 D00AA14 0
<PAGE> PAGE 8
025 D00AA15 0
025 D00AA16 0
025 D00AA17 0
025 D00AA18 0
025 D00AA19 0
025 D00AA20 0
025 D00AA21 0
025 D00AA22 0
025 D00AA23 0
025 D00AA24 0
026 A000000 Y
026 B000000 Y
026 C000000 Y
026 D000000 Y
026 E000000 N
026 F000000 N
026 G010000 N
026 G020000 N
026 H000000 N
027 000000 Y
028 A01AA00 356
028 A02AA00 49
028 A03AA00 0
028 A04AA00 16
028 B01AA00 387
028 B02AA00 48
028 B03AA00 0
028 B04AA00 87
028 C01AA00 524
028 C02AA00 57
028 C03AA00 0
028 C04AA00 58
028 D01AA00 1412
028 D02AA00 50
028 D03AA00 0
028 D04AA00 59
028 E01AA00 419
028 E02AA00 51
028 E03AA00 0
028 E04AA00 74
028 F01AA00 831
028 F02AA00 56
028 F03AA00 0
028 F04AA00 181
028 G01AA00 3929
028 G02AA00 311
028 G03AA00 0
028 G04AA00 475
028 H00AA00 3929
029 00AA00 Y
030 A00AA00 58
<PAGE> PAGE 9
030 B00AA00 4.25
030 C00AA00 0.00
031 A00AA00 4
031 B00AA00 0
032 00AA00 54
033 00AA00 0
034 00AA00 N
035 00AA00 0
036 B00AA00 0
037 00AA00 N
038 00AA00 0
039 00AA00 Y
040 00AA00 N
041 00AA00 N
042 A00AA00 0
042 B00AA00 0
042 C00AA00 0
042 D00AA00 0
042 E00AA00 0
042 F00AA00 0
042 G00AA00 0
042 H00AA00 0
043 00AA00 0
044 00AA00 0
045 00AA00 Y
046 00AA00 N
047 00AA00 Y
048 00AA00 0.000
048 A01AA00 250000
048 A02AA00 0.400
048 B01AA00 250000
048 B02AA00 0.380
048 C01AA00 0
048 C02AA00 0.000
048 D01AA00 0
048 D02AA00 0.000
048 E01AA00 0
048 E02AA00 0.000
048 F01AA00 0
048 F02AA00 0.000
048 G01AA00 0
048 G02AA00 0.000
048 H01AA00 0
048 H02AA00 0.000
048 I01AA00 0
048 I02AA00 0.000
048 J01AA00 0
048 J02AA00 0.000
048 K01AA00 500000
048 K02AA00 0.360
049 00AA00 N
<PAGE> PAGE 10
050 00AA00 N
051 00AA00 N
052 00AA00 N
053 A00AA00 Y
053 B00AA00 Y
053 C00AA00 N
054 A00AA00 Y
054 B00AA00 Y
054 C00AA00 Y
054 D00AA00 Y
054 E00AA00 Y
054 F00AA00 Y
054 G00AA00 Y
054 H00AA00 Y
054 I00AA00 N
054 J00AA00 Y
054 K00AA00 Y
054 L00AA00 Y
054 M00AA00 Y
054 N00AA00 Y
054 O00AA00 Y
055 A00AA00 N
055 B00AA00 N
056 00AA00 N
057 00AA00 N
058 A00AA00 N
059 00AA00 Y
060 A00AA00 Y
060 B00AA00 Y
061 00AA00 100
062 A00AA00 Y
062 B00AA00 0.0
062 C00AA00 0.0
062 D00AA00 15.7
062 E00AA00 0.0
062 F00AA00 0.0
062 G00AA00 0.0
062 H00AA00 0.0
062 I00AA00 0.0
062 J00AA00 0.0
062 K00AA00 0.0
062 L00AA00 0.0
062 M00AA00 18.1
062 N00AA00 62.5
062 O00AA00 0.0
062 P00AA00 0.0
062 Q00AA00 0.0
062 R00AA00 0.0
063 A00AA00 0
063 B00AA00 16.6
064 A00AA00 N
<PAGE> PAGE 11
064 B00AA00 N
066 A00AA00 N
067 00AA00 N
068 A00AA00 N
068 B00AA00 N
069 00AA00 N
070 A01AA00 Y
070 A02AA00 Y
070 B01AA00 N
070 B02AA00 N
070 C01AA00 N
070 C02AA00 N
070 D01AA00 N
070 D02AA00 N
070 E01AA00 N
070 E02AA00 N
070 F01AA00 N
070 F02AA00 N
070 G01AA00 Y
070 G02AA00 N
070 H01AA00 N
070 H02AA00 N
070 I01AA00 N
070 I02AA00 N
070 J01AA00 N
070 J02AA00 N
070 K01AA00 Y
070 K02AA00 N
070 L01AA00 N
070 L02AA00 N
070 M01AA00 N
070 M02AA00 N
070 N01AA00 Y
070 N02AA00 N
070 O01AA00 Y
070 O02AA00 N
070 P01AA00 Y
070 P02AA00 N
070 Q01AA00 N
070 Q02AA00 N
070 R01AA00 N
070 R02AA00 N
071 A00AA00 3852
071 B00AA00 1013
071 C00AA00 9176
071 D00AA00 11
072 A00AA00 6
072 B00AA00 353
072 C00AA00 0
072 D00AA00 0
072 E00AA00 0
<PAGE> PAGE 12
072 F00AA00 21
072 G00AA00 0
072 H00AA00 0
072 I00AA00 1
072 J00AA00 0
072 K00AA00 0
072 L00AA00 1
072 M00AA00 0
072 N00AA00 7
072 O00AA00 0
072 P00AA00 0
072 Q00AA00 0
072 R00AA00 5
072 S00AA00 1
072 T00AA00 0
072 U00AA00 0
072 V00AA00 0
072 W00AA00 0
072 X00AA00 36
072 Y00AA00 36
072 Z00AA00 353
072AA00AA00 3
072BB00AA00 0
072CC01AA00 18
072CC02AA00 0
072DD01AA00 353
072DD02AA00 0
072EE00AA00 0
073 A01AA00 0.3370
073 A02AA00 0.0000
073 B00AA00 0.0000
073 C00AA00 0.0000
074 A00AA00 33
074 B00AA00 2000
074 C00AA00 0
074 D00AA00 10258
074 E00AA00 0
074 F00AA00 0
074 G00AA00 0
074 H00AA00 0
074 I00AA00 0
074 J00AA00 5
074 K00AA00 0
074 L00AA00 427
074 M00AA00 0
074 N00AA00 12723
074 O00AA00 0
074 P00AA00 0
074 Q00AA00 0
074 R01AA00 0
074 R02AA00 0
<PAGE> PAGE 13
074 R03AA00 0
074 R04AA00 3
074 S00AA00 0
074 T00AA00 12720
074 U01AA00 1273
074 U02AA00 0
074 V01AA00 9.99
074 V02AA00 0.00
074 W00AA00 0.0000
074 X00AA00 253
074 Y00AA00 1101
075 A00AA00 0
075 B00AA00 10518
076 00AA00 0.00
077 A000000 Y
077 Q010000 Y
078 000000 N
080 A00AA00 ICI MUTUAL INSURANCE COMPANY
080 B00AA00 NONE
080 C00AA00 0
081 B00AA00 0
082 B00AA00 0
083 B00AA00 0
084 B00AA00 0
086 A010000 0
086 A020000 0
086 B010000 0
086 B020000 0
086 C010000 0
086 C020000 0
086 D010000 0
086 D020000 0
086 E010000 0
086 E020000 0
086 F010000 0
086 F020000 0
086 A01AA00 0
086 A02AA00 0
086 B01AA00 0
086 B02AA00 0
086 C01AA00 0
086 C02AA00 0
086 D01AA00 0
086 D02AA00 0
086 E01AA00 0
086 E02AA00 0
086 F01AA00 0
086 F02AA00 0
SIGNATURE LAURA FERGERSON
TITLE ASSISTANT TREASURER
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FRANKLIN
STRATEGIC MORTGAGE PORTFOLIO MARCH 31, 1998 SEMI-ANNUAL REPORT AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000893226
<NAME> FRANKLIN STRATEGIC MORTGAGE PORTFOLIO
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> MAR-31-1998
<INVESTMENTS-AT-COST> 10,025,249
<INVESTMENTS-AT-VALUE> 10,258,091
<RECEIVABLES> 2,431,972
<ASSETS-OTHER> 33,141
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 12,723,204
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 3,078
<TOTAL-LIABILITIES> 3,078
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 12,675,066
<SHARES-COMMON-STOCK> 1,273,362
<SHARES-COMMON-PRIOR> 896,996
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> (187,782)
<ACCUM-APPREC-OR-DEPREC> 232,842
<NET-ASSETS> 12,720,126
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 352,507
<OTHER-INCOME> 0
<EXPENSES-NET> 0
<NET-INVESTMENT-INCOME> 352,507
<REALIZED-GAINS-CURRENT> 3,325
<APPREC-INCREASE-CURRENT> 18,330
<NET-CHANGE-FROM-OPS> 374,162
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (352,507)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 392,828
<NUMBER-OF-SHARES-REDEEMED> (47,520)
<SHARES-REINVESTED> 31,058
<NET-CHANGE-IN-ASSETS> 3,786,181
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> (191,107)
<GROSS-ADVISORY-FEES> (20,974)
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (35,550)
<AVERAGE-NET-ASSETS> 10,517,590
<PER-SHARE-NAV-BEGIN> 9.960
<PER-SHARE-NII> .337
<PER-SHARE-GAIN-APPREC> .030
<PER-SHARE-DIVIDEND> (.337)
<PER-SHARE-DISTRIBUTIONS> .000
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 9.990
<EXPENSE-RATIO> .000<F1>
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> .000
<FN>
<F1>RATIO OF EXPENSES EXCLUDING WAIVER AND PAYMENTS BY AFFILIATE
AMOUNTED TO .680%.
</FN>
</TABLE>
NAME OF REGISTRANT:
Franklin Strategic Mortgage Portfolio
File No. 811-7288
EXHIBIT ITEM No. 77Q1(e): Copies of any new or amended
investment advisory contract of the registrant.
FRANKLIN STRATEGIC MORTGAGE PORTFOLIO
MANAGEMENT AGREEMENT
THIS MANAGEMENT AGREEMENT made between FRANKLIN
STRATEGIC MORTGAGE PORTFOLIO, a Delaware business trust,
hereinafter called the "Trust", and FRANKLIN ADVISERS, INC.,
a California corporation, hereinafter called the "Manager."
WHEREAS, the Trust has been organized and intends to
operate as an investment company registered under the
Investment Company Act of 1940 (the "1940 Act") for the
purpose of investing and reinvesting its assets in
securities, as set forth in its Agreement and Declaration of
Trust, its By-Laws and its Registration Statements under the
1940 Act and the Securities Act of 1933, all as heretofore
and hereafter amended and supplemented; and the Trust
desires to avail itself of the services, information,
advice, assistance and facilities of an investment manager
and to have an investment manager perform various
management, statistical, research, investment advisory and
other services for the Trust and for funds hereafter
organized as separate series of the Trust (the "Funds");
and,
WHEREAS, the Manager is registered as an investment adviser
under the Investment Advisers Act of 1940, is engaged in the
business of rendering management, investment advisory,
counseling and supervisory services to investment companies
and other investment counseling clients, and desires to
provide these services to the Funds.
NOW THEREFORE, in consideration of the terms and conditions
hereinafter set forth, it is mutually agreed as follows:
l. Employment of the Manager. The Trust hereby
employs the
Manager to manage the investment and reinvestment of the
Funds' assets and to administer its affairs, subject to the
direction of the Board of Trustees and the officers of the
Trust, for the period and on the terms hereinafter set
forth. The Manager hereby accepts such employment and
agrees during such period to render the services and to
assume the obligations herein set forth for the compensation
herein provided. The Manager shall for all purposes herein
be deemed to be an independent contractor and shall, except
as expressly provided or authorized (whether herein or
otherwise), have no authority to act for or represent the
Funds in any way or otherwise be deemed an agent of the
Funds or the Trust.
2. Obligations of and Services to be Provided by the
Manager. The Manager undertakes to provide the services
hereinafter set forth and to assume the following
obligations:
A. Administrative Services. The Manager shall
furnish to the Funds adequate (i) office space, which may be
space within the offices of the Manager or in such other
place as may be agreed upon from time to time, (ii) office
furnishings, facilities and
equipment as may be reasonably required for managing the
affairs and conducting the business of the Funds, including
conducting correspondence and other communications with the
shareholders of the Funds, maintaining all internal
bookkeeping, accounting and auditing services and records in
connection with the Funds' investment and business
activities. The Manager shall employ or provide and
compensate the executive, secretarial and clerical personnel
necessary to provide such services. The Manager shall also
compensate all officers and employees of the Trust who are
officers or employees of the Manager or its affiliates.
B. Investment Management Services.
(a) The Manager shall manage the Funds' assets
subject to and in accordance with the respective investment
objectives and policies of the Funds and any directions
which the Trust's Board of Trustees may issue from time to
time. In pursuance of the foregoing, the Manager shall make
all determinations with respect to the investment of the
Funds' assets and the purchase and sale of their investment
securities, and shall take such steps as may be necessary to
implement the same. Such determinations and services shall
include determining the manner in which any voting rights,
rights to consent to corporate action and any other rights
pertaining to the Funds' investment securities shall be
exercised. The Manager shall render or cause to be rendered
regular reports to the Trust, at regular meetings of its
Board of Trustees and at such other times as may be
reasonably requested by the Trust's Board of Trustees, of
(i) the decisions made with respect to the investment of the
Funds' assets and the purchase and sale of their investment
securities, (ii) the reasons for such decisions and (iii)
the extent to which those decisions have been implemented.
(b) The Manager, subject to and in accordance
with any directions which the Trust's Board of Trustees may
issue from time to time, shall place, in the name of the
Funds, orders for the execution of the Funds' securities
transactions. When placing such orders, the Manager shall
seek to obtain the best net price and execution for the
Funds, but this requirement shall not be deemed to obligate
the Manager to place any order solely on the basis of
obtaining the lowest commission rate if the other standards
set forth in this section have been satisfied. The parties
recognize that there are likely to be many cases in which
different brokers are equally able to provide such best
price and execution and that, in selecting among such
brokers with respect to particular trades, it is desirable
to choose those brokers who furnish research, statistical,
quotations and other information to the Funds and the
Manager in accordance with the standards set forth below.
Moreover, to the extent that it continues to be lawful to do
so and so long as the Board of Trustees determines that the
Funds will benefit, directly or indirectly, by doing so, the
Manager may place orders with a broker who charges a
commission for that transaction which is in excess of the
amount of commission that another broker would have charged
for effecting that transaction, provided that the excess
commission is reasonable in relation to the value of
"brokerage and research services" (as defined in Section
28(e)(3) of the Securities Exchange Act of 1934) provided by
that broker.
Accordingly, the Trust and the Manager agree that the
Manager shall select brokers for the execution of the Funds'
transactions from among:
(i) Those brokers and dealers who provide quotations
and other services to the Funds, specifically including the
quotations necessary to determine the Funds' net assets, in
such amount of total brokerage as may reasonably be required
in light of such
services; and
(ii) Those brokers and dealers who supply research,
statistical and other data to the Manager or its affiliates
which the Manager or its affiliates may lawfully and
appropriately use in their investment advisory capacities,
which relate directly to securities, actual or potential, of
the Funds, or which place the Manager in a better position
to make decisions in connection with the management of the
Funds' assets and securities, whether or not such data may
also be useful to the Manager and its affiliates in managing
other portfolios or advising other clients, in such amount
of total brokerage as may reasonably be required. Provided
that the Trust's officers are satisfied that the best
execution is obtained, the sale of shares of the Funds may
also be considered as a factor in the selection of broker
dealers to execute the Funds' portfolio transactions.
(c) When the Manager has determined that any of the Funds
should tender securities pursuant to a "tender offer
solicitation," Franklin/Templeton Distributors, Inc.
("Distributors") shall be designated as the "tendering
dealer" so long as it is legally permitted to act in such
capacity under the federal securities laws and rules
thereunder and the rules of any securities exchange or
association of which Distributors may be a member. Neither
the Manager nor Distributors shall be obligated to make any
additional commitments of capital, expense or personnel
beyond that already committed (other than normal periodic
fees or payments necessary to maintain its corporate
existence and membership in the National Association of
Securities Dealers, Inc.) as of the date of this Agreement.
This Agreement shall not obligate the Manager or
Distributors (i) to act pursuant to the foregoing
requirement under any circumstances in which they might
reasonably believe that liability might be imposed upon them
as a result of so acting, or (ii) to institute legal or
other proceedings to collect fees which may be considered to
be due from others to it as a result of such a tender,
unless the applicable Fund shall enter into an agreement
with the Manager and/or Distributors to reimburse them for
all such expenses connected with attempting to collect such
fees, including legal fees and expenses and that portion of
the compensation due to their employees which is
attributable to the time involved in attempting to collect
such fees.
(d) The Manager shall render regular reports to the Trust,
not more frequently than quarterly, of how much total
brokerage business has been placed by the Manager with
brokers falling into each of the categories referred to
above and the manner in which the allocation has been
accomplished.
(e) The Manager agrees that no investment
decision will be made or influenced by a desire to provide
brokerage for allocation in accordance with the
foregoing, and that the right to make such
allocation of brokerage shall not interfere with
the Manager's paramount duty to obtain the best
net price and execution for the Funds.
C. Provision of Information
Necessary for
Preparation
of Securities Registration Statements,
Amendments and Other Materials. The Manager,
its officers and employees will make available
and provide accounting and statistical
information required by the Funds in the
preparation of registration statements, reports
and other documents required by federal and
state securities laws and with such information
as the Funds may reasonably request for use in
the preparation of such documents or of other
materials necessary or helpful for the
underwriting and distribution of the Funds'
shares.
D. Other Obligations and Services.
The Manager
shall
make its officers and employees available to the
Board of Trustees and officers of the Trust for
consultation and discussions regarding the
administration and management of the Funds and
their investment activities.
3. Expenses of the Funds. It is
understood that the
Funds
will pay all of their own expenses other than
those expressly assumed by the Manager herein,
which expenses payable by the Funds shall
include:
A. Fees and expenses paid to the
Manager as
provided
herein;
B. Expenses of all audits by
independent public
accountants;
C. Expenses of transfer agent,
registrar,
custodian,
dividend disbursing agent and shareholder record-
keeping services, including the expenses of
issue, repurchase or redemption of their shares;
D. Expenses of obtaining quotations
for
calculating
the value of the Funds' net assets;
E. Salaries and other compensations
of executive
officers of the Trust who are not officers,
directors, stockholders or employees of the
Manager or its affiliates;
F. Taxes levied against the Funds;
G. Brokerage fees and commissions in
connection
with
the purchase and sale of securities for the
Funds;.
H. Costs, including the interest
expense, of
borrowing
money;
I. Costs incident to meetings of
Board of
Trustees and
shareholders of the Funds, reports to the Funds'
shareholders, the filing of reports with
regulatory bodies and the maintenance of the
Funds' and the Trust's legal
existence;
J. Legal fees, including the legal
fees related
to the
registration and continued qualification of the
Funds' shares for sale;
K. Trustees' fees and expenses to
trustees who
are not
directors, officers, employees or stockholders
of the Manager or any of its affiliates;
L. Costs and expense of registering
and
maintaining
the registration of the Funds and their shares
under federal and any applicable state laws;
including the printing and mailing of
prospectuses to their shareholders;
M. Trade association dues; and
N. The Funds' pro rata portion of
fidelity bond,
errors and omissions, and trustees and officer
liability insurance premiums.
4. Compensation of the Manager. Each
Fund shall pay
a
management fee in cash to the Manager based upon
a percentage of the value of the respective
Fund's net assets, calculated as set forth
below, as compensation for the services rendered
and
obligations assumed by the Manager, during the
preceding month, on the first business day of
the month in each year.
A. For purposes of calculating such
fee, the
value of
the net assets of a Fund shall be the average
daily net assets during the month for which the
payment is made, determined in the same manner
as that Fund uses to compute the value of its
net assets in connection with the determination
of the net asset value of its shares, all as set
forth more fully in the Trust's current
prospectus and statement of additional
information. The management fee payable by each
of the Funds shall be calculated daily at an
annual rate of:
40/100 of 1% of the value of its
net assets up to and including $250,000,000;
38/100 of 1% of the value of its
net assets in excess of $250,000,000
up to and including $500,000,000;
36/100 of 1% of the value of its
net assets in excess of $500,000,000.
B. The Management fee payable by a
Fund shall be
reduced or eliminated to the extent that
Distributors has actually received cash payments
of tender offer solicitation fees less certain
costs and expenses incurred in connection
therewith as set forth in paragraph 2.B.(c) of
this Agreement. The Manager may waive all or a
portion of its fees provided for hereunder and
such waiver shall be treated as a reduction in
purchase price of its services. The Manager
shall be contractually bound hereunder by the
terms of any publicly announced waiver of its
fee, or any limitation of a Fund's expenses, as
if such waiver or
limitation were full set forth herein.
C. To the extent that the gross
operating costs and
expenses of the Funds (excluding any interest,
taxes, brokerage, commissions, amortization of
organization expense, and with the prior written
approval of any state securities commission
requiring same, any extraordinary expenses, such
as litigation), exceed the most stringent
expense limitation requirements of the states in
which shares of the Funds are qualified for
sale, the Manager shall reduce its fees by the
amount of such excess.
5. Activities of the Manager. The services of
the
Manager
to the Funds hereunder are not to be deemed
exclusive, and the Manager and any of its
affiliates shall be free to render similar
services to others. Subject to and in
accordance with the Agreement and Declaration of
Trust and By-Laws of the Trust and Section 10(a)
of the 1940 Act, it is understood that trustees,
officers, agents and shareholders of the Trust
are or may be interested in the Manager or its
affiliates as directors, officers, agents or
stockholders; that directors, officers, agents
or stockholders of the Manager or its affiliates
are or may be interested in the Trust as
trustees, officers, agents, shareholders or
otherwise; that the Manager or its affiliates
may be interested in the Funds as shareholders
or otherwise; and that the effect of any such
interests shall be governed by said Agreement
and Declaration of Trust, ByLaws and the 1940
Act.
6. Liabilities of the Manager.
A. In the absence of willful
misfeasance, bad faith,
gross negligence, or reckless disregard of
obligations or duties hereunder on the part of
the Manager, the Manager shall not be
subject to liability to the Trust or to the
Funds or to any shareholder of the Funds for any
act or omission in the course of, or connected
with, rendering services hereunder or for any
losses that may be sustained in the purchase,
holding or sale of any security by any of the
Funds.
B. Notwithstanding the foregoing,
the Manager agrees
to reimburse the Trust for any and all costs,
expenses, and counsel and trustees' fees
reasonably incurred by the Trust in the
preparation, printing and distribution of proxy
statements, amendments to its Registration
Statement, holdings of meetings of its
shareholders or trustees, the conduct of factual
investigations, any legal or administrative
proceedings (including any applications for
exemptions or determinations by the Securities
and Exchange Commission) which the Trust incurs
as the result of action or inaction of the
Manager or any of its affiliates or any of their
officers, directors, employees or stockholders
where the action or inaction necessitating such
expenditures (i) is directly or indirectly
related to any transactions or proposed
transaction in the stock or control of the
Manager or its affiliates (or litigation related
to any pending or proposed or future transaction
in such shares or control) which shall have been
undertaken without the prior, express approval
of the Trust's Board of Trustees; or, (ii) is
within the control of the Manager or any of its
affiliates or any of their officers, directors,
employees or stockholders. The Manager shall
not be obligated pursuant to the provisions of
this Subparagraph 6(B), to reimburse the Trust
for any expenditures related to the institution
of an administrative proceeding or civil
litigation by the Trust or a shareholder seeking
to recover all or a portion of the proceeds
derived by any stockholder of the Manager or any
of its affiliates from the sale of his shares of
the Manager, or similar matters. So long as
this Agreement is in effect, the Manager shall
pay to the Trust the amount due for expenses
subject to this Subparagraph 6(B) within 30 days
after a bill or statement has been received by
the Manager therefor. This provision shall not
be deemed to be a waiver of any claim the Trust
may have or may assert against the Manager or
others for costs, expenses or damages heretofore
incurred by the Trust or for costs, expenses or
damages the Trust may hereafter incur which are
not reimbursable to it hereunder.
C. No provision of this Agreement
shall be
construed
to protect any trustee or officer of the Trust,
or director or officer of the Manager, from
liability in violation of Sections 17(h) and (i)
of the 1940 Act.
7. Renewal and Termination.
A. This Agreement shall become
effective on the
date
written below and shall continue in effect for
two (2) years thereafter, unless sooner
terminated as hereinafter provided and shall
continue in effect thereafter as to each Fund
for periods not exceeding one (1) year so long
as such continuation is approved at least
annually (i) by a vote of a majority of the
outstanding voting securities of each Fund or by
a vote of the Board of Trustees of the Trust,
and (ii) by a vote of a majority of the Trustees
of the Trust who are not parties to the
Agreement (other than as Trustees of the Trust),
cast in person at a meeting called for the
purpose of voting on the Agreement.
B. This Agreement:
(i) may at any time be
terminated with respect to any of the Funds
without the payment of any penalty either by
vote of the Board of Trustees of the Trust or by
vote of a majority of
the outstanding voting securities of the Fund
seeking to terminate the Agreement, on 30 days'
written notice to the Manager;
(ii) shall immediately terminate
with respect to the Funds in the event of its
assignment; and
(iii) may be terminated by
the Manager with respect to the Funds on 60
days' written notice to the applicable Fund.
C. As used in this Paragraph
the terms
"assignment," "interested person" and "vote of a
majority of the outstanding voting securities"
shall have the meanings set forth for any such
terms in the 1940 Act.
D. Any notice under this
Agreement shall be
given
in writing addressed and delivered, or mailed
post-paid, to the other party at any office of
such party.
8. Severability. If any provision of
this Agreement shall
be held or made invalid by a court decision,
statute, rule or otherwise, the remainder of
this Agreement shall not be affected thereby.
9. Governing Law. This Agreement shall
be governed by and
construed in accordance with the laws of the
State of California.
IN WITNESS WHEREOF, the parties hereto have
caused this Agreement to be executed and
effective on the 26th day of February, 1998.
FRANKLIN STRATEGIC MORTGAGE PORTFOLIO
By: /s/ DR Gatzek
Deborah R. Gatzek
Vice President & Secretary
FRANKLIN ADVISERS, INC.
By: /s/ HE Burns
Harmon E. Burns
Executive Vice President
5/11/98
