o 157 P-1
SUPPLEMENT DATED JUNE 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. The section "Minimum investments" on page 13 is replaced with the
following:
MINIMUM INVESTMENTS
- ----------------------------------------------------------------------
INITIAL ADDITIONAL
- ----------------------------------------------------------------------
Regular accounts $1,000 $50
- ----------------------------------------------------------------------
Automatic investment plans $50 ($25 for an $50 ($25 for an
Education IRA) Education IRA)
- ----------------------------------------------------------------------
UGMA/UTMA accounts $100 $50
- ----------------------------------------------------------------------
Retirement accounts
(other than IRAs, IRA
rollovers, Education IRAs or
Roth IRAs) no minimum no minimum
- ----------------------------------------------------------------------
IRAs, IRA rollovers, Education
IRAs or Roth IRAs $250 $50
- ----------------------------------------------------------------------
Broker-dealer sponsored wrap
account programs $250 $50
- ----------------------------------------------------------------------
Full-time employees, officers,
trustees and directors of
Franklin Templeton entities,
and their immediate family
members $100 $50
- ----------------------------------------------------------------------
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.
VII. 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.
VIII. Effective July 3, 2000, the following is added to the section "Buying
shares" on page 14:
[Insert graphic of If you have another Before requesting a
phone] BY PHONE Franklin Templeton telephone purchase,
account with your please make sure we
(Up to $100,000 per bank account have your bank
day) 1-800/632-2301 information on file, account information
you may open a new on file. If we do not
account by phone. The have this
accounts must be information, you will
identically need to send written
registered. instructions with
your bank's name and
To make a same day address, a voided
investment, please check or savings
call us by 1:00 p.m. account deposit slip,
Pacific time or the and a signature
close of the New York guarantee if the
Stock Exchange, ownership of the bank
whichever is earlier. and fund accounts is
different.
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.
IX. 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.
X. 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.
XI. The section "Dealer compensation" on page 22 is replaced with the
following:
DEALER COMPENSATION Qualifying dealers who sell fund shares may receive sales
commissions and other payments. These are paid by Franklin Templeton
Distributors, Inc. (Distributors) from sales charges and its other resources.
COMMISSION (%) -
Investment under $100,000 4.00
$100,000 but under $250,000 3.25
$250,000 but under $500,000 2.25
$500,000 but under $1 million 1.85
$1 million or more None
A dealer commission of up to 0.25% may be paid on NAV purchases by certain
trust companies and bank trust departments, retirement plans, eligible
governmental authorities, and broker-dealers or others on behalf of clients
participating in comprehensive fee programs.
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. If a dealer commission is paid on a NAV purchase that we
later determine was made by a market timer, all commissions paid in
connection with that purchase during the last twelve months must be returned.
Please keep this supplement for future reference.
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o 157 SA-1
SUPPLEMENT DATED JUNE 1, 2000
TO THE STATEMENT OF ADDITIONAL INFORMATION OF
FRANKLIN STRATEGIC MORTGAGE PORTFOLIO
DATED FEBRUARY 1, 2000
The Statement of Additional Information (SAI) is amended as follows:
I. Under the "Goal and Strategies" discussion on page 2, the second and third
paragraphs of that section are replaced with the following:
The fund tries to achieve its investment goal by investing at least 65% of
its total assets in mortgage securities issued or guaranteed by the U.S.
government, its agencies or instrumentalities. The fund normally invests in
mortgage pass-through securities 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").
The fund may invest up to 35% of its total assets in higher income producing
mortgage securities including 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, which may or may not be issued or guaranteed by the
U.S. government, its agencies or its instrumentalities.
II. The section "Stripped mortgage-backed securities" on page 3 is replaced
with the following:
ASSET-BACKED SECURITIES The Fund may invest in mortgage-related asset-backed
securities, including adjustable-rate asset-backed securities that have
interest rates that reset at periodic intervals. Asset-backed securities are
similar to mortgage-backed securities. The underlying assets, however, may
include receivables on home equity loans backed by lien mortgages and loans
that facilitate the purchase of manufactured homes, and other assets.
Asset-backed securities are issued in either a pass-through structure
(similar to a mortgage pass-through structure) or a pay-through structure
(similar to a CMO structure). There may be other types of asset-backed
securities that are developed in the future in which the fund may invest. The
rate of principal payment on asset-backed securities generally depends on the
rate of principal payments received on the underlying assets. The payment
rate may be affected by various economic and other factors. Therefore, the
yield may be difficult to predict, and actual yield to maturity may be more
or less than the anticipated yield to maturity.
The credit quality of most asset-backed securities depends primarily on the
credit quality of the underlying assets, how well the issuers of the
securities are insulated from the credit risk of the originator or affiliated
entities, and the amount of credit support provided to the securities.
Asset-backed securities entail certain risks not presented by mortgage-backed
securities as they do not have the benefit of the same type of security
interests in the underlying collateral.
Asset-backed securities are often backed by a pool of assets representing the
obligations of a number of different parties. To lessen the effect of
failures by obligors on the underlying assets to make payments, asset-backed
securities may contain elements of credit support. Credit support falls into
two categories: (i) liquidity protection and (ii) protection against losses
from the default by an obligor on the underlying assets. Liquidity protection
refers to advances, generally provided by the entity administering the pool
of assets, to ensure that the receipt of payments due on the underlying pool
is timely. Protection against losses from the default by an obligor enhances
the likelihood of payments of the obligations on at least some of the assets
in the pool. This protection may be provided through guarantees, insurance
policies or letters of credit obtained by the issuer or sponsor from third
parties, through various means of structuring the transaction, or through a
combination of these approaches. The fund will not pay any additional fees
for credit support, although the existence of credit support may increase the
price of a security.
Examples of credit support arising out of the structure of the transaction
include "senior subordinated securities" (multiple class securities with one
or more classes that are subordinate to the other classes with respect to the
payment of principal and interest, with the result that defaults on the
underlying assets are borne first by the holders of the subordinated class),
creation of "reserve funds" (where cash or investments, sometimes funded from
a portion of the payments on the underlying assets, are held in reserve
against future losses), and "over-collateralization" (where the scheduled
payments on, or the principal amount of, the underlying assets exceeds that
required to make payments on the securities and pay any servicing or other
fees). The degree of credit support provided is generally based on historical
information respecting the level of credit risk associated with the
underlying assets. Delinquencies or losses in excess of those anticipated
could adversely affect the return on an investment in the securities.
III. The following paragraph is added to the "Risks" section beginning on
page 7:
Asset-backed securities 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 first waiver category in the section "Waivers for certain investors"
on page 17 is revised to read:
o Trust companies and bank trust departments investing assets held in a
fiduciary, agency, advisory, custodial or similar capacity and over which the
trust companies and bank trust departments or other plan fiduciaries or
participants, in the case of certain retirement plans, have full or shared
investment discretion. We may accept orders for these accounts by telephone
or other means of electronic data transfer directly from the bank or trust
company, with payment by federal funds received by the close of business on
the next business day following the order.
V. The section "Systematic withdrawal plan" on page 18 is replaced with the
following:
SYSTEMATIC WITHDRAWAL PLAN Our systematic withdrawal plan allows you to sell
your shares and receive regular payments from your account on a monthly,
quarterly, semiannual or annual basis. The value of your account must be at
least $5,000 and the minimum payment amount for each withdrawal must be at
least $50. For retirement plans subject to mandatory distribution
requirements, the $50 minimum will not apply. There are no service charges
for establishing or maintaining a systematic withdrawal plan.
Each month in which a payment is scheduled, we will redeem an equivalent
amount of shares in your account on the day of the month you have indicated
on your account application or, if no day is indicated, on the 20th day of
the month. If that day falls on a weekend or holiday, we will process the
redemption on the next business day. For plans set up before June 1, 2000, we
will continue to process redemptions on the 25th day of the month (or the
next business day) unless you instruct us to change the processing date.
Available processing dates currently are the 1st, 5th, 10th, 15th, 20th and
25th days of the month. When you sell your shares under a systematic
withdrawal plan, it is a taxable transaction.
To avoid paying sales charges on money you plan to withdraw within a short
period of time, you may not want to set up a systematic withdrawal plan if
you plan to buy shares on a regular basis.
Redeeming shares through a systematic withdrawal plan may reduce or exhaust
the shares in your account if payments exceed distributions received from the
fund. This is especially likely to occur if there is a market decline. If a
withdrawal amount exceeds the value of your account, your account will be
closed and the remaining balance in your account will be sent to you. Because
the amount withdrawn under the plan may be more than your actual yield or
income, part of the payment may be a return of your investment.
To discontinue a systematic withdrawal plan, change the amount and schedule
of withdrawal payments, or suspend one payment, we must receive instructions
from you at least three business days before a scheduled payment.
The fund may discontinue a systematic withdrawal plan by notifying you in
writing and will discontinue a systematic withdrawal plan automatically if
all shares in your account are withdrawn or if the fund receives notification
of the shareholder's death or incapacity.
VI. The following paragraph is added to the section "General information" on
page 19:
There are special procedures for banks and other institutions that wish to
open multiple accounts. An institution may open a single master account by
filing one application form with the fund, signed by personnel authorized to
act for the institution. Individual sub-accounts may be opened when the
master account is opened by listing them on the application, or by providing
instructions to the fund at a later date. These sub-accounts may be
registered either by name or number. The fund's investment minimums apply to
each sub-account. The fund will send confirmation and account statements for
the sub-accounts to the institution.
Please keep this supplement for future reference.
