o 157 P-2
SUPPLEMENT DATED SEPTEMBER 1, 2000
TO THE PROSPECTUS OF
FRANKLIN STRATEGIC MORTGAGE PORTFOLIO
DATED FEBRUARY 1, 2000
The prospectus is amended as follows:
I. Under the "Principal Investments" discussion on page 2, the first
paragraph of that section is replaced with the following:
PRINCIPAL INVESTMENTS The fund will normally invest at least 65% of its total
assets in mortgage securities issued or guaranteed by the U.S. government,
its agencies or instrumentalities. The fund focuses on mortgage pass-through
securities, which are securities representing interests in "pools" of
mortgage loans, issued or guaranteed by the Government National Mortgage
Association ("GNMA"), the Federal National Mortgage Association ("FNMA"), and
the Federal Home Loan Mortgage Corporation ("FHLMC"). These securities may be
fixed-rate or adjustable rate mortgage securities (ARMS).
II. Under the "Principal Investments" discussion on page 2, the fourth
paragraph of that section is replaced with the following:
The fund may invest up to 35% of its total assets in potentially higher
income producing mortgage securities including, but not limited to, certain
ARMS, commercial mortgage-backed securities (CMBS), home equity loan asset
backed securities (HELs), manufactured housing asset backed securities (MH)
and collateralized mortgage obligations (CMOs), as well as in other
mortgage-related asset-backed securities. Mortgage-related asset-backed
securities are backed by mortgages or other real property. Higher income
producing mortgage securities may be issued or guaranteed by the U.S.
government, its agencies or instrumentalities or by private issuers.
III. The section "Mortgage Securities" on page 4 is replaced with the
following:
MORTGAGE SECURITIES AND ASSET-BACKED SECURITIES Mortgage securities differ
from conventional debt securities because principal is paid back over the
life of the security rather than at maturity. The Fund may receive
unscheduled prepayments of principal before the security's maturity date due
to voluntary prepayments, refinancing or foreclosure on the underlying
mortgage loans. To the fund this means a loss of anticipated interest, and a
portion of its principal investment represented by any premium the fund may
have paid. Mortgage prepayments generally increase when interest rates fall.
Mortgage securities also are subject to extension risk. An unexpected rise in
interest rates could reduce the rate of prepayments on mortgage securities
and extend their life. This could cause the price of the mortgage securities
and the fund's share price to fall and would make the mortgage securities
more sensitive to interest rate changes.
Issuers of asset-backed securities may have limited ability to enforce the
security interest in the underlying assets, and credit enhancements provided
to support the securities, if any, may be inadequate to protect investors in
the event of default. Like mortgage securities, asset-backed securities are
subject to prepayment and extension risks.
IV. The section "Derivative Securities" on page 5 is revised to read as
follows:
DERIVATIVE SECURITIES Collateralized mortgage obligations (CMOs) are
considered derivative investments, since their value depends on the value of
an underlying asset. Some mortgage-related asset-backed securities may also
be considered derivative investments. These investments are subject to credit
risk and prepayment risk associated with the underlying mortgage assets.
V. All references to Franklin Templeton Trust Company in this prospectus are
replaced with Franklin Templeton Bank & Trust.
VI. All references to the $5.00 exchange fee applicable to market timers are
no longer applicable.
VII. The section "Minimum investments" on page 13 is replaced with the
following:
MINIMUM INVESTMENTS
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INITIAL ADDITIONAL
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Regular accounts $1,000 $50
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Automatic investment plans $50 ($25 for an $50 ($25 for an
Education IRA) Education IRA)
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UGMA/UTMA accounts $100 $50
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Retirement accounts
(other than IRAs, IRA rollovers,
Education IRAs or Roth IRAs) no minimum no minimum
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IRAs, IRA rollovers, Education
IRAs or Roth IRAs $250 $50
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Broker-dealer sponsored wrap
account programs $250 $50
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Full-time employees, officers,
trustees and directors of
Franklin Templeton entities, and
their immediate family members $100 $50
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PLEASE NOTE THAT YOU MAY ONLY BUY SHARES OF A FUND ELIGIBLE FOR SALE IN YOUR
STATE OR JURISDICTION.
Certain Franklin Templeton Funds offer multiple share classes not offered by
this fund. Please note that for selling or exchanging your shares, or for
other purposes, the fund's shares are considered Class A shares.
VIII. The section "Account Application" on page 14 is replaced with the
following:
ACCOUNT APPLICATION If you are opening a new account, please complete and
sign the enclosed account application. To save time, you can sign up now for
services you may want on your account
by completing the appropriate sections of the application (see "Investor
Services" on page 15). For example, if you would like to link one of your
bank accounts to your fund account so that you may use electronic fund
transfers to and from your bank account to buy and sell shares, please
complete the bank information section of the application. We will keep your
bank information on file for future purchases and redemptions.
IX. The following is added to the section "Buying shares" on page 14:
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[Insert graphic of If you have another Before requesting a
phone] Franklin Templeton telephone purchase,
BY PHONE fund account with please make sure we
(Up to $100,000 per your bank account have your bank
day) information on file, account information
1-800/632-2301 you may open a new on file. If we do not
account by phone. have this
information, you will
To make a same day need to send written
investment, please instructions with
call us by 1:00 p.m. your bank's name and
Pacific time or the address, a voided
close of the New York check or savings
Stock Exchange, account deposit slip,
whichever is earlier. and a signature
guarantee if the bank
and fund accounts do
not have at least one
common owner.
To make a same day
investment, please
call us by 1:00 p.m.
Pacific time or the
close of the New York
Stock Exchange,
whichever is earlier.
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X. The section "Automatic Investment Plan" on page 15 is replaced with the
following:
AUTOMATIC INVESTMENT PLAN This plan offers a convenient way for you to invest
in the fund by automatically transferring money from your checking or savings
account each month to buy shares. To sign up, complete the appropriate
section of your account application and mail it to Investor Services.
If you are opening a new account, please include the minimum initial
investment of $50 ($25 for an Education IRA) with your application.
XI. The section "Telephone Privileges" on page 16 is replaced with the
following:
TELEPHONE PRIVILEGES You will automatically receive telephone privileges when
you open your account, allowing you and your investment representative to
buy, sell or exchange your shares and make certain other changes to your
account by phone.
For accounts with more than one registered owner, telephone privileges also
allow the fund to accept written instructions signed by only one owner for
transactions and account changes that could otherwise be made by phone. For
all other transactions and changes, all registered owners must sign the
instructions. In addition, our telephone exchange privilege allows you to
exchange shares by phone from a fund account requiring two or more signatures
into an identically registered money fund account requiring only one
signature for all transactions. This type of telephone exchange is available
as long as you have telephone exchange privileges on your account.
As long as we take certain measures to verify telephone requests, we will not
be responsible for any losses that may occur from unauthorized requests. Of
course, you can decline telephone purchase, exchange or redemption privileges
on your account application.
XII. The last paragraph of the "Exchange Privilege" section on page 16 is
replaced with the following:
Because excessive trading can hurt fund performance, operations and
shareholders, the fund, effective November 1, 2000, reserves the right to
revise or terminate the exchange privilege, limit the amount or number of
exchanges, reject any exchange, or restrict or refuse purchases if (i) the
fund or its manager believes the fund would be harmed or unable to invest
effectively, or (ii) the fund receives or anticipates simultaneous orders
that may significantly affect the fund (please see "Market Timers" on page
21).
XIII. In the Selling Shares table on page 19 the section "By Electronic Funds
Transfer (ACH)" is replaced with the following:
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[Insert graphic of three lightning You can call or write to have
bolts] redemption proceeds sent to a
BY ELECTRONIC FUNDS TRANSFER (ACH) bank account. See the policies
above for selling shares by mail
or phone.
Before requesting to have
redemption proceeds sent to a
bank account, please make sure
we have your bank account
information on file. If we do
not have this information, you
will need to send written
instructions with your bank's
name and address, a voided check
or savings account deposit slip,
and a signature guarantee if the
bank and fund accounts do not
have at least one common owner.
If we receive your request in
proper form by 1:00 p.m. Pacific
time, proceeds sent by ACH
generally will be available
within two to three business
days.
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XV. The section "Market Timers" on page 21 is replaced with the following:
MARKET TIMERS The fund may restrict or refuse purchases or exchanges by
Market Timers. You may be considered a Market Timer if you have (i) requested
an exchange out of any of the Franklin Templeton funds within two weeks of an
earlier exchange request out of any fund, or (ii) exchanged shares out of any
of the Franklin Templeton funds more than twice within a rolling 90 day
period, or (iii) otherwise seem to follow a market timing pattern that may
adversely affect the fund. Accounts under common ownership or control with an
account that is covered by (i), (ii), or (iii) are also subject to these
limits.
Anyone, including the shareholder or the shareholder's agent, who is
considered to be a Market Timer by the fund, its manager or shareholder
services agent, will be issued a written notice of their status and the
fund's policies. Identified Market Timers will be required to register with
the market timing desk of Franklin Templeton Investor Services, Inc., and to
place all purchase and exchange trade requests through the desk. Some funds
do not allow investments by Market Timers.
XVI. The first category in the section "Additional Policies" on page 21 is
revised to read:
o The fund may restrict or refuse any order to buy shares, including any
purchase under the exchange privilege.
XVII. The following paragraph is added to the section "Dealer Compensation"
on page 22:
MARKET TIMERS. Please note that for NAV purchases by market timers, including
purchases of $1 million or more, dealers are not eligible to receive the
dealer commission.
Please keep this supplement for future reference.
