-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, RQEuRV8xG/oZ62Npj3fAe51K/B+Z7J5QWxF4k/EC3tg7Uy9Bnm/5wLZqzv6bI+9w yU5ZnbOKGFnFVxVSYoOfWg== 0000872625-08-000028.txt : 20081231 0000872625-08-000028.hdr.sgml : 20081231 20081231135438 ACCESSION NUMBER: 0000872625-08-000028 CONFORMED SUBMISSION TYPE: N-CSRS PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20081031 FILED AS OF DATE: 20081231 DATE AS OF CHANGE: 20081231 EFFECTIVENESS DATE: 20081231 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FRANKLIN STRATEGIC SERIES CENTRAL INDEX KEY: 0000872625 IRS NUMBER: 000000000 STATE OF INCORPORATION: DE FISCAL YEAR END: 0430 FILING VALUES: FORM TYPE: N-CSRS SEC ACT: 1940 Act SEC FILE NUMBER: 811-06243 FILM NUMBER: 081278500 BUSINESS ADDRESS: STREET 1: ONE FRANKLIN PARKWAY CITY: SAN MATEO STATE: CA ZIP: 94403-1906 BUSINESS PHONE: 650-570-3000 MAIL ADDRESS: STREET 1: ONE FRANKLIN PARKWAY CITY: SAN MATEO STATE: CA ZIP: 94403-1906 FORMER COMPANY: FORMER CONFORMED NAME: FRANKLIN CALIFORNIA 250 GROWTH FUND DATE OF NAME CHANGE: 19911216 FORMER COMPANY: FORMER CONFORMED NAME: FRANKLIN CALIFORNIA 250 GROWTH INDEX FUND DATE OF NAME CHANGE: 19910917 0000872625 S000006878 FRANKLIN GROWTH OPPORTUNITIES FUND C000018615 CLASS A FGRAX C000018616 CLASS B FKABX C000018617 CLASS C FKACX C000018618 ADVISOR CLASS FRAAX C000018619 CLASS R FKARX 0000872625 S000006879 FRANKLIN STRATEGIC INCOME FUND C000018620 CLASS A FRSTX C000018621 CLASS B FKSBX C000018622 CLASS C FSGCX C000018623 ADVISOR CLASS FKSAX C000018624 CLASS R FKSRX 0000872625 S000006880 FRANKLIN TECHNOLOGY FUND C000018625 CLASS B C000018626 CLASS A FTCAX C000018627 CLASS C FFTCX C000018628 ADVISOR CLASS FRTCX C000018629 CLASS R FTERX 0000872625 S000006882 FRANKLIN BIOTECHNOLOGY DISCOVERY FUND C000018631 CLASS A FBDIX 0000872625 S000006884 FRANKLIN FLEX CAP GROWTH FUND C000018636 CLASS A FKCGX C000018637 CLASS B FKCBX C000018638 CLASS C FCIIX C000018639 CLASS R FRCGX C000018640 ADVISOR CLASS FKCAX 0000872625 S000006885 FRANKLIN GLOBAL COMMUNICATIONS FUND C000018641 CLASS B C000018642 CLASS A FRGUX C000018643 CLASS C FRUTX 0000872625 S000006886 FRANKLIN GLOBAL HEALTH CARE FUND C000018644 CLASS A FKGHX C000018645 CLASS B FGHBX C000018646 CLASS C FGIIX 0000872625 S000006887 FRANKLIN NATURAL RESOURCES FUND C000018647 CLASS C C000018648 CLASS A FRNRX C000018649 ADVISOR CLASS FNRAX 0000872625 S000006888 FRANKLIN SMALL-MID CAP GROWTH FUND C000018650 CLASS A FRSGX C000018651 CLASS B FBSMX C000018652 CLASS C FRSIX C000018653 ADVISOR CLASS FSGAX C000018654 CLASS R FSMRX 0000872625 S000006889 FRANKLIN SMALL CAP GROWTH FUND C000018655 CLASS A FSGRX C000018656 CLASS B FBSGX C000018657 CLASS C FCSGX C000018658 ADVISOR CLASS FSSAX C000018659 CLASS R FSSRX 0000872625 S000019837 Franklin Focused Core Equity Fund C000055670 A C000055671 C C000055672 R C000055673 Advisor N-CSRS 1 fsssrp1208.txt FSS SEMI REPORT DTD 10/31/08 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM N-CSRS CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES Investment Company Act file number 811-06243 --------- FRANKLIN STRATEGIC SERIES ---------------------------- (Exact name of registrant as specified in charter) ONE FRANKLIN PARKWAY, SAN MATEO, CA 94403-1906 ----------------------------------------------- (Address of principal executive offices) (Zip code) CRAIG S. TYLE, ONE FRANKLIN PARKWAY, SAN MATEO, CA 94403-1906 ------------------------------------------------------------- (Name and address of agent for service) Registrant's telephone number, including area Code: (650) 312-2000 -------------- Date of fiscal year end: 4/30 ---- Date of reporting period: 10/31/08 --------- ITEM 1. REPORTS TO STOCKHOLDERS. (GRAPHIC) OCTOBER 31, 2008 Franklin Flex Cap Growth Fund Franklin Focused Core Equity Fund Franklin Growth Opportunities Fund Franklin Small Cap Growth Fund (formerly, Franklin Small Cap Growth Fund II) Franklin Small-Mid Cap Growth Fund SEMIANNUAL REPORT AND SHAREHOLDER LETTER FRANKLIN STRATEGIC SERIES WANT TO RECEIVE THIS DOCUMENT FASTER VIA EMAIL? Eligible shareholders can sign up for eDelivery at franklintempleton.com. See inside for details. (FRANKLIN TEMPLETON INVESTMENTS(R) LOGO) FRANKLIN - Templeton - Mutual Series Franklin Templeton Investments GAIN FROM OUR PERSPECTIVE(R) Franklin Templeton's distinct multi-manager structure combines the specialized expertise of three world-class investment management groups-- Franklin, Templeton and Mutual Series. SPECIALIZED EXPERTISE Each of our portfolio management groups operates autonomously, relying on its own research and staying true to the unique investment disciplines that underlie its success. FRANKLIN. Founded in 1947, Franklin is a recognized leader in fixed income investing and also brings expertise in growth- and value-style U.S. equity investing. TEMPLETON. Founded in 1940, Templeton pioneered international investing and, in 1954, launched what has become the industry's oldest global fund. Today, with offices in over 25 countries, Templeton offers investors a truly global perspective. MUTUAL SERIES. Founded in 1949, Mutual Series is dedicated to a unique style of value investing, searching aggressively for opportunity among what it believes are undervalued stocks, as well as arbitrage situations and distressed securities. TRUE DIVERSIFICATION Because our management groups work independently and adhere to different investment approaches, Franklin, Templeton and Mutual Series funds typically have distinct portfolios. That's why our funds can be used to build truly diversified allocation plans covering every major asset class. RELIABILITY YOU CAN TRUST At Franklin Templeton Investments, we seek to consistently provide investors with exceptional risk-adjusted returns over the long term, as well as the reliable, accurate and personal service that has helped us become one of the most trusted names in financial services. MUTUAL FUNDS | RETIREMENT PLANS | 529 COLLEGE SAVINGS PLANS | SEPARATE ACCOUNTS (GRAPHIC) Not part of the semiannual report CONTENTS CEO'S MESSAGE ............................................................ 1 SEMIANNUAL REPORT Economic and Market Overview ............................................. 4 Franklin Flex Cap Growth Fund ............................................ 6 Franklin Focused Core Equity Fund ........................................ 14 Franklin Growth Opportunities Fund ....................................... 22 Franklin Small Cap Growth Fund ........................................... 30 Franklin Small-Mid Cap Growth Fund ....................................... 38 Financial Highlights and Statements of Investments ....................... 46 Financial Statements ..................................................... 85 Notes to Financial Statements ............................................ 94 Shareholder Information .................................................. 111
A Message from Gregory E. Johnson, President and Chief Executive Officer of Franklin Resources, Inc. October 31, 2008 Dear Shareholder: The enclosed semiannual report for Franklin Strategic Series covers the six months ended October 31, 2008, and I would like to add some comments on market events during this time. Recent market volatility has been jarring to everyone, including those of us who have worked in financial markets for many years. Bank lending around the world seized up, and the fallout impacted venerable firms alongside broader stock and bond indexes. This environment is bound to provoke great concern, but it's equally important to put the latest market developments in perspective. That's why I'd like to offer a few thoughts on these events, our company's approach to investing and the strong health of our organization. A key point to recognize is that global financial turmoil is being addressed by global action. Central banks around the world have coordinated their efforts to cut interest rates and supply liquidity to frozen funding markets. A number of governments have also intervened to rescue major financial institutions or find an orderly way for them to be acquired. Here in the U.S., the Federal Sign up for EDELIVERY of your Shareholder Report Shareholders who are registered at franklintempleton.com can receive this report via email by selecting eDelivery options under "My Profile." Not all accounts are eligible for eDelivery. NOT FDIC INSURED | MAY LOSE VALUE | NO BANK GUARANTEE Not part of the semiannual report | 1 Reserve and Treasury Department have moved rapidly to establish new programs for easing money market pressures and handling troubled financial assets. The outcome of all these efforts may take a while to be realized, but I believe the latest actions here and abroad mark a significant turning point for global capital markets. It's also important to remember that as daunting as current market conditions may be, we have navigated through other periods of market volatility. U.S. stock markets recorded three bear markets during the 1960s as the nation grappled with the Vietnam War and a turbulent economy. (1) The quintupling of oil prices in 1973 led to a deep U.S. recession and a stock market plunge of 45.1% from January 1973 through December 1974.(1) And the "Black Monday" stock market crash of 1987 remains the largest single-day percentage decline in the history of the Dow Jones Industrial Average.(2) Advice applicable throughout these upheavals remains true today. The late Sir John Templeton, writing 15 years ago, ended a list of his core investment principles with these thoughts: "Do not be fearful or negative too often.... For 100 years optimists have carried the day in U.S. stocks. Even in the dark '70s, many professional money managers -- and many individual investors too -- made money in stocks....In this century or the next it's still `Buy low, sell high.'"(3) Sir John knew these simple concepts were difficult to execute in the face of pessimism. Nonetheless, that is precisely how our Franklin, Templeton and Mutual Series portfolio managers are contending with today's challenging environment. They are using their expertise to sort through investment opportunities, avoiding those firms that have become merely cheap and identifying those firms best positioned to be eventual winners. This kind of rigorous, bottom-up, security-by-security analysis is the fundamental investment discipline practiced across our global platform. These asset management strengths are also the core of our business. Unlike financial firms that have dominated recent headlines, Franklin Templeton derives its revenue primarily from investment management, not investment banking or securities brokerage. Additionally, our assets under management are diversified by investment objective, clientele and geographic region. Diversified positioning helps our firm maintain healthy operating margins even when volatile markets reduce assets under management. It is also important (1.) Source: Ned Davis Research, Inc. (2.) Source: NYSE Euronext. The Dow Jones Industrial Average is price weighted based on the average market price of 30 blue chip stocks of companies that are generally industry leaders. (3.) Source: "16 Rules for Investment Success" by Sir John Templeton. 2 | Not part of the semiannual report to note that maintaining a strong balance sheet has been a pillar of our management strategy. We have a substantial pool of cash and investments and low levels of debt, and we are in the enviable position of not having to depend on credit to meet our operating needs. In fact, our strong franchise, sound capitalization and minimal leverage recently led Standard & Poor's to raise its credit ratings on Franklin Resources, Inc. (BEN) to the highest level currently applied to a publicly traded asset manager.(4) Franklin Templeton's six-decade growth into a premier global asset manager has given us the conviction that although conditions remain challenging, there are ample reasons to be optimistic about eventual market stabilization and recovery. Being able to take advantage of markets shaken by maximum pessimism has helped our firm develop into an organization that stretches across 29 countries and manages assets for more than 20 million shareholder accounts. In the enclosed semiannual report for Franklin Strategic Series, the portfolio managers discuss market conditions, investment decisions and Fund performance during the six months ended October 31, 2008. The report contains additional performance data and financial information. Our website, franklintempleton.com, offers more timely discussions, daily prices, portfolio holdings and other information. We encourage you to discuss your concerns with your financial advisor, who can review your overall portfolio, reassess your goals and help you stay focused on the long term. As times like these illustrate, all securities markets fluctuate, as do fund share prices. We are grateful for the trust you have placed in Franklin Templeton and remain focused on serving your investment needs. Sincerely, /s/ Gregory E. Johnson Gregory E. Johnson President and Chief Executive Officer Franklin Resources, Inc. THIS LETTER REFLECTS OUR ANALYSIS AND OPINIONS AS OF OCTOBER 31, 2008. THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET, COUNTRY, INDUSTRY, SECURITY OR FUND. STATEMENTS OF FACT ARE FROM SOURCES CONSIDERED RELIABLE. (4.) Source: Standard & Poor's press release, 10/6/08. Not part of the semiannual report | 3 Semiannual Report Economic and Market Overview For the six months ended October 31, 2008, the decelerating U.S. economy contended with a staggering financial markets crisis amid a wave of government interventions and emergency funding. In addition, high oil prices, the worst housing market contraction in decades, a severe credit crunch and rising joblessness weighed on the economy. Economic growth, as measured by gross domestic product (GDP), rebounded from a 0.9% first quarter 2008 annualized rate to a 2.8% annualized pace in the second quarter, based largely on strong exports and government spending. However, GDP fell an annualized estimated 0.5% in 2008's third quarter as the subprime financial crisis deepened and spread into all aspects of the economy. The U.S. dollar appreciated against most foreign currencies during the period, breaking a six-year downward trend as commodity prices fell, inflationary concerns abated and global economic growth began to subside. Supports to the economy included an inventory buildup, expanding government spending and a boost to household finances from a fiscal stimulus package. Although tax rebate checks lifted spending temporarily, retail sales remained weak and new vehicle sales hit a 15-year low. The U.S. labor market contracted and the unemployment rate grew from 5.0% at the beginning of the period to 6.5% in October, the highest level since June 2003.(1) In September, mass layoff (50 or more for a single employer) initial claims reached their highest level since September 2005 when high layoff activity resulted from Hurricane Katrina.(1) Volatile oil prices soared to an all-time trading high of $145 per barrel in July 2008, and dropped dramatically by period-end, settling at $68. In October, amid concerns of reduced demand due to a slowing global economy, oil prices plummeted 33%, bringing the drop since the peak in mid-July to 53%. Many other commodity prices -- including those for coal, natural gas, precious metals, raw materials and agricultural commodities - -- also neared or surpassed all-time highs due to increased worldwide demand and investors seeking alternatives to shaky stocks and corporate bonds. These prices fell through much of the third quarter as global demand subsided. For the 12 months ended October 31, 2008, inflation as measured by the core Consumer Price Index (CPI), which excludes food and energy costs, rose 2.2%; this matched its 10-year average rate.(1) (1.) Source: Bureau of Labor Statistics. 4 | Semiannual Report Seeking to stimulate the sagging economy without stoking inflation, the Federal Reserve Board made two cuts to its key federal funds target rate during the period, lowering it from 2.00% to a four-year low of 1.00%. In this uncertain environment, short-term U.S. Treasury prices generally increased (and yields declined) as many investors sought safer alternatives to stocks and corporate bonds. The 10-year Treasury note, however, received less investor attention, and its yield increased from 3.77% at the beginning of the period to 4.01% on October 31, 2008. U.S. stock markets endured high volatility and suffered losses during this challenging period. For the six months under review, the blue chip stocks of the Dow Jones Industrial Average had a total return of -26.23%, the broader Standard & Poor's 500 Index (S&P 500) a -29.28% total return, and the technology-heavy NASDAQ Composite Index a -28.40% total return.(2) All sectors lost value, and the materials, financials and energy sectors had the largest declines. THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS AND OPINIONS AS OF OCTOBER 31, 2008. THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET, COUNTRY, INDUSTRY, SECURITY OR FUND. STATEMENTS OF FACT ARE FROM SOURCES CONSIDERED RELIABLE. (2.) Source: (C) 2008 Morningstar. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results. The Dow Jones Industrial Average is price weighted based on the average market price of 30 blue chip stocks of companies that are generally industry leaders. The S&P 500 consists of 500 stocks chosen for market size, liquidity and industry group representation. Each stock's weight in the index is proportionate to its market value. The S&P 500 is one of the most widely used benchmarks of U.S. equity performance. The NASDAQ Composite Index measures all NASDAQ domestic and international based common type stocks listed on The NASDAQ Stock Market. The index is market value weighted and includes more than 3,000 companies. Semiannual Report | 5 Franklin Flex Cap Growth Fund YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin Flex Cap Growth Fund seeks capital appreciation. The Fund invests predominantly in equity securities of companies that the manager believes have the potential for capital appreciation. The Fund has flexibility to invest in companies located, headquartered or operating inside and outside the U.S., across the entire market capitalization spectrum from small, emerging growth companies to well-established, large cap companies. PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM FIGURES SHOWN. PLEASE VISIT franklintempleton.com OR CALL (800) 342-5236 FOR MOST RECENT MONTH-END PERFORMANCE. This semiannual report for Franklin Flex Cap Growth Fund covers the period ended October 31, 2008. PERFORMANCE OVERVIEW For the six months under review, Franklin Flex Cap Growth Fund - Class A had a - -27.31% cumulative total return. The Fund performed better than its narrow benchmark, the Russell 3000(R) Growth Index, which had a -30.29% total return, and its broad benchmark, the Standard & Poor's 500 Index (S&P 500), which had a - -29.28% return for the same period.(1) The Fund also performed better than the - -32.95% total return of its peers in the Lipper Multi-Cap Growth Funds Classification Average.(2) You can find the Fund's long-term performance data in the Performance Summary beginning on page 9. (1.) Source: (C) 2008 Morningstar. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. The Russell 3000 Growth Index is market capitalization weighted and measures performance of those Russell 3000 Index companies with higher price-to-book ratios and higher forecasted growth values. The S&P 500 consists of 500 stocks chosen for market size, liquidity and industry group representation. Each stock's weight in the index is proportionate to its market value. The S&P 500 is one of the most widely used benchmarks of U.S. equity performance. The indexes are unmanaged and include reinvested dividends. One cannot invest directly in an index, nor is an index representative of the Fund's portfolio. (2.) Source: Lipper Inc. The Lipper Multi-Cap Growth Funds Classification Average is calculated by averaging the total returns of all funds within the Lipper Multi-Cap Growth Funds classification in the Lipper Open-End underlying funds universe for the period indicated. Lipper Multi-Cap Growth Funds are defined as funds that normally invest in companies, of any size, with long-term earnings expected to grow significantly faster than the earnings of the stocks represented in the major unmanaged stock indexes. For the six-month period ended 10/31/08, there were 536 funds in this category. Lipper calculations do not include sales charges or subsidization by a fund's manager. The Fund's performance relative to the average may have differed if these or other factors had been considered. The average includes reinvestment of any income or distributions. One cannot invest directly in the average, nor is the average representative of the Fund's portfolio. THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND NAMES OF ALL PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE SOI BEGINS ON PAGE 51. 6 | Semiannual Report INVESTMENT STRATEGY We are research-driven, fundamental investors pursuing a growth strategy. As "bottom-up" investors we focus primarily on finding individual securities that meet our criteria for growth potential, quality and valuation. We search for high-quality companies that have identifiable drivers of future earnings growth. We rely on our team of analysts to help provide in-depth industry expertise and use both qualitative and quantitative analysis to evaluate companies. Our analysts identify each company's market opportunity, competitive position, management and financial strength, business and financial risks, and valuation. We choose to invest in those companies that, in our opinion, offer the best trade-off between growth opportunity, business and financial risk, and valuation. MANAGER'S DISCUSSION During the six months under review, among the holdings that detracted most from Fund performance relative to the Russell 3000 Growth Index were Research In Motion (RIM),(3) a Canadian wireless equipment and services company that produces the popular BlackBerry smart phone; Smith International, a U.S.-based provider of drilling equipment and services to the oil and gas industries; and Covance, a drug research, development and testing laboratory. From a sector perspective, our underweighted allocation to the consumer staples sector was a major detractor from the Fund's relative performance because this sector held up relatively well as the economy decelerated throughout the reporting period.(4) Within consumer staples, stock selection and underweighting in the food and staples retailing industry were primary detractors. In the information technology sector, our stock selection hurt relative returns, particularly holdings such as graphics card manufacturer NVIDIA (sold by period-end), payment system operator MasterCard, and customer relationship management software provider Salesforce.com.(5) The Fund's overweighting in the telecommunication services sector also hurt relative performance, where wireless telecommunication industry holdings NII Holdings and America Movil(3) (sold by period-end) were significant detractors. During a period marred by financial crises and a broad-based sell-off for stocks globally, the Fund's small cash position helped performance relative to the index. Top contributors by individual security included specialized imaging (3.) This holding is not an index component. (4.) The consumer staples sector comprises household and personal products; food and staples retailing; and food, beverage and tobacco in the SOI. (5.) The information technology sector comprises technology hardware and equipment, semiconductors and semiconductor equipment, and software and services in the SOI. PORTFOLIO BREAKDOWN Franklin Flex Cap Growth Fund Based on Total Net Assets as of 10/31/08 (BAR CHART) Software & Services* 17.9% Technology Hardware & Equipment* 14.3% Pharmaceuticals, Biotechnology & Life Sciences 12.9% Health Care Equipment & Services 7.9% Capital Goods 5.7% Energy 5.2% Transportation 4.6% Telecommunication Services 3.5% Semiconductors & Semiconductor Equipment* 3.5% Materials 3.4% Household & Personal Products 3.3% Food, Beverage & Tobacco 2.5% Diversified Financials 2.4% Retailing 2.3% Other 7.7% Short-Term Investments & Other Net Assets 2.9%
* Significant exposure to a single sector may result in greater volatility for the Fund than a more broadly diversified portfolio. There are specific risks to investing in technology company stocks, which can be subject to abrupt or erratic price movements and have been volatile, especially over the short term. Semiannual Report | 7 TOP 10 HOLDINGS Franklin Flex Cap Growth Fund 10/31/08
COMPANY % OF TOTAL SECTOR/INDUSTRY NET ASSETS - --------------- ---------- Gilead Sciences Inc. 3.0% PHARMACEUTICALS, BIOTECHNOLOGY & LIFE SCIENCES FLIR Systems Inc. 2.9% TECHNOLOGY HARDWARE & EQUIPMENT QUALCOMM Inc. 2.7% TECHNOLOGY HARDWARE & EQUIPMENT Cisco Systems Inc. 2.5% TECHNOLOGY HARDWARE & EQUIPMENT Apple Inc. 2.4% TECHNOLOGY HARDWARE & EQUIPMENT American Tower Corp., A 2.3% TELECOMMUNICATION SERVICES Genentech Inc. 2.2% PHARMACEUTICALS, BIOTECHNOLOGY & LIFE SCIENCES Praxair Inc. 2.2% MATERIALS Celgene Corp. 2.0% PHARMACEUTICALS, BIOTECHNOLOGY & LIFE SCIENCES Activision Blizzard Inc. 2.0% SOFTWARE & SERVICES
systems manufacturer FLIR Systems and biotechnology companies Genentech, Celgene and Gilead Sciences.(3) From a sector perspective, industrials was a major positive contributor to performance relative to the benchmark index, due to our underweighted allocation and stock selection.(6) Most notably, our significantly underweighted position and stock selection in capital goods companies aided the Fund's relative results, as did stock selection among commercial services and supplies companies, where Stericycle was a notable contributor. Additionally, underweightings and stock selection in the energy and materials sectors also contributed to relative returns. Our decision to avoid metals and mining and to invest only sparingly in oil, gas and consumable fuels -- two commodity-driven industries -- was beneficial to relative results as these areas were hard hit by the precipitous decline in commodity prices during the latter half of the reporting period. Thank you for your continued participation in Franklin Flex Cap Growth Fund. We look forward to serving your future investment needs. (PHOTO OF CONRAD B. HERRMANN) /s/ Conrad B. Herrmann Conrad B. Herrmann, CFA Portfolio Manager Franklin Flex Cap Growth Fund THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS AS OF OCTOBER 31, 2008, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT OUR MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE DEPENDING ON FACTORS SUCH AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY. THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET, COUNTRY, INDUSTRY, SECURITY OR THE FUND. STATEMENTS OF FACT ARE FROM SOURCES CONSIDERED RELIABLE, BUT THE INVESTMENT MANAGER MAKES NO REPRESENTATION OR WARRANTY AS TO THEIR COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR INVESTMENT MANAGEMENT PHILOSOPHY. (6.) The industrials sector comprises capital goods, commercial and professional services, and transportation in the SOI. 8 | Semiannual Report Performance Summary as of 10/31/08 FRANKLIN FLEX CAP GROWTH FUND Your dividend income will vary depending on dividends or interest paid by securities in the Fund's portfolio, adjusted for operating expenses of each class. Capital gain distributions are net profits realized from the sale of portfolio securities. The performance table does not reflect any taxes that a shareholder would pay on Fund dividends, capital gain distributions, if any, or any realized gains on the sale of Fund shares. Total return reflects reinvestment of the Fund's dividends and capital gain distributions, if any, and any unrealized gains or losses. PRICE INFORMATION
CLASS A (SYMBOL: FKCGX) CHANGE 10/31/08 4/30/08 - ----------------------- ------- -------- ------- Net Asset Value (NAV) -$12.50 $33.27 $45.77
CLASS B (SYMBOL: FKCBX) CHANGE 10/31/08 4/30/08 - ----------------------- ------- -------- ------- Net Asset Value (NAV) -$11.76 $30.90 $42.66
CLASS C (SYMBOL: FCIIX) CHANGE 10/31/08 4/30/08 - ----------------------- ------- -------- ------- Net Asset Value (NAV) -$11.79 $30.97 $42.76
CLASS R (SYMBOL: FRCGX) CHANGE 10/31/08 4/30/08 - ----------------------- ------- -------- ------- Net Asset Value (NAV) -$12.35 $32.75 $45.10
ADVISOR CLASS (SYMBOL: FKCAX) CHANGE 10/31/08 4/30/08 - ----------------------------- ------- -------- ------- Net Asset Value (NAV) -$12.55 $33.60 $46.15
Semiannual Report | 9 Performance Summary (CONTINUED) PERFORMANCE CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETURNS AND VALUE OF $10,000 INVESTMENT INCLUDE MAXIMUM SALES CHARGES. CLASS A: 5.75% MAXIMUM INITIAL SALES CHARGE; CLASS B: CONTINGENT DEFERRED SALES CHARGE (CDSC) DECLINING FROM 4% TO 1% OVER SIX YEARS, AND ELIMINATED THEREAFTER; CLASS C: 1% CDSC IN FIRST YEAR ONLY; CLASS R/ADVISOR CLASS: NO SALES CHARGES.
CLASS A 6-MONTH 1-YEAR 5-YEAR 10-YEAR - ------- ------- ------- ------- --------- Cumulative Total Return(1) -27.31% -34.96% +6.29% +71.52% Average Annual Total Return(2) -31.49% -38.70% +0.04% +4.92% Value of $10,000 Investment(3) $ 6,851 $ 6,130 $10,018 $16,165 Avg. Ann. Total Return (9/30/08)(4) -24.69% +5.40% +7.38% Total Annual Operating Expenses(5) 0.96%
INCEPTION CLASS B 6-MONTH 1-YEAR 5-YEAR (1/1/99) - ------- ------- ------- ------- --------- Cumulative Total Return(1) -27.57% -35.44% +2.40% +39.70% Average Annual Total Return(2) -30.46% -37.98% +0.08% +3.46% Value of $10,000 Investment(3) $ 6,954 $ 6,202 $10,040 $13,970 Avg. Ann. Total Return (9/30/08)(4) -23.81% +5.55% +5.40% Total Annual Operating Expenses(5) 1.71%
CLASS C 6-MONTH 1-YEAR 5-YEAR 10-YEAR - ------- ------- ------- ------- --------- Cumulative Total Return(1) -27.57% -35.44% +2.43% +59.16% Average Annual Total Return(2) -28.30% -36.08% +0.48% +4.76% Value of $10,000 Investment(3) $ 7,170 $ 6,392 $10,243 $15,916 Avg. Ann. Total Return (9/30/08)(4) -21.47% +5.87% +7.22% Total Annual Operating Expenses(5) 1.71%
INCEPTION CLASS R 6-MONTH 1-YEAR 5-YEAR (1/1/02) - ------- ------- ------- ------- --------- Cumulative Total Return(1) -27.38% -35.12% +5.01% +4.55% Average Annual Total Return(2) -27.38% -35.12% +0.98% +0.65% Value of $10,000 Investment(3) $ 7,262 $ 6,488 $10,501 $10,455 Avg. Ann. Total Return (9/30/08)(4) -20.28% +6.39% +3.36% Total Annual Operating Expenses(5) 1.21%
ADVISOR CLASS(6) 6-MONTH 1-YEAR 5-YEAR 10-YEAR - ---------------- ------- ------- ------- --------- Cumulative Total Return(1) -27.19% -34.78% +7.42% +73.34% Average Annual Total Return(2) -27.19% -34.78% +1.44% +5.66% Value of $10,000 Investment(3) $ 7,281 $ 6,522 $10,742 $17,334 Avg. Ann. Total Return (9/30/08)(4) -19.88% +6.88% +8.13% Total Annual Operating Expenses(5) 0.71%
PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM FIGURES SHOWN. FOR MOST RECENT MONTH-END PERFORMANCE, SEE "FUNDS AND PERFORMANCE" AT FRANKLINTEMPLETON.COM OR CALL (800) 342-5236. 10 | Semiannual Report Performance Summary (CONTINUED) ENDNOTES SMALL- AND MIDSIZED-COMPANY STOCKS CAN BE VOLATILE, ESPECIALLY OVER THE SHORT TERM. SMALLER, MIDSIZED AND RELATIVELY NEW OR UNSEASONED COMPANIES CAN BE PARTICULARLY SENSITIVE TO CHANGING ECONOMIC CONDITIONS, AND THEIR PROSPECTS FOR GROWTH ARE LESS CERTAIN THAN THOSE OF LARGER, MORE ESTABLISHED COMPANIES. THE FUND ALSO INVESTS IN TECHNOLOGY STOCKS, WHICH CAN BE HIGHLY VOLATILE. THE FUND'S PROSPECTUS ALSO INCLUDES A DESCRIPTION OF THE MAIN INVESTMENT RISKS. CLASS B: These shares have higher annual fees and expenses than Class A shares. CLASS C: Prior to 1/1/04, these shares were offered with an initial sales charge; thus actual total returns would have differed. These shares have higher annual fees and expenses than Class A shares. CLASS R: Shares are available to certain eligible investors as described in the prospectus. These shares have higher annual fees and expenses than Class A shares. ADVISOR CLASS: Shares are available to certain eligible investors as described in the prospectus. (1.) Cumulative total return represents the change in value of an investment over the periods indicated. (2.) Average annual total return represents the average annual change in value of an investment over the periods indicated. Six-month return has not been annualized. (3.) These figures represent the value of a hypothetical $10,000 investment in the Fund over the periods indicated. (4.) In accordance with SEC rules, we provide standardized average annual total return information through the latest calendar quarter. (5.) Figures are as stated in the Fund's prospectus current as of the date of this report. (6.) Effective 8/2/04, the Fund began offering Advisor Class shares, which do not have sales charges or a Rule 12b-1 plan. Performance quotations for this class reflect the following methods of calculation: (a) For periods prior to 8/2/04, a restated figure is used based upon the Fund's Class A performance, excluding the effect of Class A's maximum initial sales charge, but reflecting the effect of the Class A Rule 12b-1 fees; and (b) for periods after 8/1/04, actual Advisor Class performance is used reflecting all charges and fees applicable to that class. Since 8/2/04 (commencement of sales), the cumulative and average annual total returns of Advisor Class shares were +2.56% and +0.60%. Semiannual Report | 11 Your Fund's Expenses FRANKLIN FLEX CAP GROWTH FUND As a Fund shareholder, you can incur two types of costs: - - Transaction costs, including sales charges (loads) on Fund purchases and redemption fees; and - - Ongoing Fund costs, including management fees, distribution and service (12b-1) fees, and other Fund expenses. All mutual funds have ongoing costs, sometimes referred to as operating expenses. The following table shows ongoing costs of investing in the Fund and can help you understand these costs and compare them with those of other mutual funds. The table assumes a $1,000 investment held for the six months indicated. ACTUAL FUND EXPENSES The first line (Actual) for each share class listed in the table provides actual account values and expenses. The "Ending Account Value" is derived from the Fund's actual return, which includes the effect of Fund expenses. You can estimate the expenses you paid during the period by following these steps. OF COURSE, YOUR ACCOUNT VALUE AND EXPENSES WILL DIFFER FROM THOSE IN THIS ILLUSTRATION: 1. Divide your account value by $1,000. IF AN ACCOUNT HAD AN $8,600 VALUE, THEN $8,600 / $1,000 = 8.6. 2. Multiply the result by the number under the heading "Expenses Paid During Period." IF EXPENSES PAID DURING PERIOD WERE $7.50, THEN 8.6 X $7.50 = $64.50. In this illustration, the estimated expenses paid this period are $64.50. HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS Information in the second line (Hypothetical) for each class in the table can help you compare ongoing costs of investing in the Fund with those of other mutual funds. This information may not be used to estimate the actual ending account balance or expenses you paid during the period. The hypothetical "Ending Account Value" is based on the actual expense ratio for each class and an assumed 5% annual rate of return before expenses, which does not represent the Fund's actual return. The figure under the heading "Expenses Paid During Period" shows the hypothetical expenses your account would have incurred under this scenario. You can compare this figure with the 5% hypothetical examples that appear in shareholder reports of other funds. 12 | Semiannual Report Your Fund's Expenses (CONTINUED) PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES OR REDEMPTION FEES. Therefore, the second line for each class is useful in comparing ongoing costs only, and will not help you compare total costs of owning different funds. In addition, if transaction costs were included, your total costs would have been higher. Please refer to the Fund prospectus for additional information on operating expenses.
BEGINNING ACCOUNT ENDING ACCOUNT EXPENSES PAID DURING VALUE 5/1/08 VALUE 10/31/08 PERIOD* 5/1/08-10/31/08 ----------------- -------------- ----------------------- CLASS A Actual $1,000 $ 726.90 $4.14 Hypothetical (5% return before expenses) $1,000 $1,020.42 $4.84 CLASS B Actual $1,000 $ 724.30 $7.39 Hypothetical (5% return before expenses) $1,000 $1,016.64 $8.64 CLASS C Actual $1,000 $ 724.30 $7.39 Hypothetical (5% return before expenses) $1,000 $1,016.64 $8.64 CLASS R Actual $1,000 $ 726.20 $5.22 Hypothetical (5% return before expenses) $1,000 $1,019.16 $6.11 ADVISOR CLASS Actual $1,000 $ 728.10 $3.05 Hypothetical (5% return before expenses) $1,000 $1,021.68 $3.07
* Expenses are calculated using the most recent six-month expense ratio, annualized for each class (A: 0.95%; B: 1.70%; C: 1.70%; R: 1.20%; and Advisor: 0.70%), multiplied by the average account value over the period, multiplied by 184/365 to reflect the one-half year period. Semiannual Report | 13 Franklin Focused Core Equity Fund YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin Focused Core Equity Fund seeks capital appreciation by investing at least 80% of its net assets in equity securities. The Fund will invest primarily in equity securities of large capitalization companies, which are similar in size to those in the Standard & Poor's 500 Index (S&P 500).(1) PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM FIGURES SHOWN. PLEASE VISIT franklintempleton.com OR CALL (800) 342-5236 FOR MOST RECENT MONTH-END PERFORMANCE. This semiannual report for Franklin Focused Core Equity Fund covers the period ended October 31, 2008. PERFORMANCE OVERVIEW For the six months under review, Franklin Focused Core Equity Fund - Class A had a -31.80% cumulative total return. The Fund underperformed its benchmark, the S&P 500, which had a -29.28% total return for the same period.(2) You can find more of the Fund's performance data in the Performance Summary beginning on page 17. INVESTMENT STRATEGY We are research-driven, fundamental investors pursuing a growth strategy. As "bottom-up" investors focusing primarily on individual securities, we seek to invest in financially strong companies with favorable growth potential and sustainable competitive advantages and that present, in our opinion, the most compelling trade-off between growth potential, valuation and risk. We rely on (1.) The S&P 500 consists of 500 stocks chosen for market size, liquidity and industry group representation. Each stock's weight in the index is proportionate to its market value. The S&P 500 is one of the most widely used benchmarks of U.S. equity performance. (2.) Source: (C) 2008 Morningstar. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. See footnote 1 for a description of the S&P 500. The index is unmanaged and includes reinvested dividends. One cannot invest directly in an index, nor is an index representative of the Fund's portfolio. THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND NAMES OF ALL PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE SOI BEGINS ON PAGE 58. 14 | Semiannual Report a team of analysts to help provide in-depth industry expertise and use both qualitative and quantitative analysis to evaluate companies. We will generally seek to maintain a portfolio of securities representing approximately 30-40 companies, and we will apply a long-term perspective through market and business cycles. MANAGER'S DISCUSSION For the six months under review, significant detractors from the Fund's absolute performance included Petroplus Holdings, which specializes in oil refining, storage and marketing; Celanese, a chemicals company; and Legg Mason, an asset management company. In a difficult environment for equities, all sectors declined in value. Financials, energy and information technology holdings particularly weighed on Fund performance during the period. In the financials sector, real estate investment trust iStar Financial and American Express were significant detractors. American Express, well known for its charge and credit cards, is one of the world's largest travel agencies. Oil and gas company Marathon Oil in the energy sector and computer-aided design (CAD) software provider Autodesk in the information technology sector also underperformed. On a more positive note, certain individual holdings had positive results for the period. The Sherwin-Williams Company, the largest paint manufacturer in the U.S., and Apple, a computer hardware, software and electronics device maker, helped absolute performance. Health care holdings Genentech, a biotechnology company, and Wyeth, a pharmaceuticals manufacturer, also appreciated in value. We sold the Fund's position in Wyeth by period-end. PORTFOLIO BREAKDOWN Franklin Focused Core Equity Fund Based on Total Net Assets as of 10/31/08 (BAR CHART) Health Care 20.6% Information Technology 16.0% Consumer Discretionary 12.1% Energy 11.4% Consumer Staples 11.1% Industrials 10.1% Financials 7.2% Materials 5.3% Telecommunication Services 3.6% Short-Term Investments & Other Net Assets 2.6%
Semiannual Report | 15 TOP 10 EQUITY HOLDINGS Franklin Focused Core Equity Fund 10/31/08
COMPANY % OF TOTAL SECTOR/INDUSTRY NET ASSETS - --------------- ---------- Schering-Plough Corp. 5.1% HEALTH CARE Marathon Oil Corp. 4.9% ENERGY Petroplus Holdings AG (Switzerland) 4.8% ENERGY Celanese Corp., A 4.8% MATERIALS Roche Holding AG (Switzerland) 4.6% HEALTH CARE Bunge Ltd. 4.4% CONSUMER STAPLES Merck & Co. Inc. 3.8% HEALTH CARE NII Holdings Inc. 3.6% TELECOMMUNICATION SERVICES Maxim Integrated Products Inc. 3.5% INFORMATION TECHNOLOGY Genentech Inc. 3.5% HEALTH CARE
Thank you for your participation in Franklin Focused Core Equity Fund. We look forward to serving your future investment needs. (PHOTO OF STEVEN KORNFELD) /s/ Steven Kornfeld Steven Kornfeld, CFA (PHOTO OF EDWARD PERKS) /s/ Edward Perks Edward Perks, CFA Portfolio Management Team Franklin Focused Core Equity Fund THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS AS OF OCTOBER 31, 2008, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT OUR MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE DEPENDING ON FACTORS SUCH AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY. THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET, COUNTRY, INDUSTRY, SECURITY OR THE FUND. STATEMENTS OF FACT ARE FROM SOURCES CONSIDERED RELIABLE, BUT THE INVESTMENT MANAGER MAKES NO REPRESENTATION OR WARRANTY AS TO THEIR COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR INVESTMENT MANAGEMENT PHILOSOPHY. 16 | Semiannual Report Performance Summary as of 10/31/08 FRANKLIN FOCUSED CORE EQUITY FUND Your dividend income will vary depending on dividends or interest paid by securities in the Fund's portfolio, adjusted for operating expenses of each class. Capital gain distributions are net profits realized from the sale of portfolio securities. The performance table does not reflect any taxes that a shareholder would pay on Fund dividends, capital gain distributions, if any, or any realized gains on the sale of Fund shares. Total return reflects reinvestment of the Fund's dividends and capital gain distributions, if any, and any unrealized gains or losses. PRICE INFORMATION
CLASS A (SYMBOL: N/A) CHANGE 10/31/08 4/30/08 - --------------------- ------ -------- ------- Net Asset Value (NAV) -$2.77 $5.92 $8.69
CLASS C (SYMBOL: N/A) CHANGE 10/31/08 4/30/08 - --------------------- ------ -------- ------- Net Asset Value (NAV) -$2.78 $5.89 $8.67
CLASS R (SYMBOL: N/A) CHANGE 10/31/08 4/30/08 - --------------------- ------ -------- ------- Net Asset Value (NAV) -$2.77 $5.91 $8.68
ADVISOR CLASS (SYMBOL: N/A) CHANGE 10/31/08 4/30/08 - --------------------------- ------ -------- ------- Net Asset Value (NAV) -$2.76 $5.94 $8.70
Semiannual Report | 17 Performance Summary (CONTINUED) PERFORMANCE(1) CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AGGREGATE TOTAL RETURNS AND VALUE OF $10,000 INVESTMENT INCLUDE MAXIMUM SALES CHARGES. CLASS A: 5.75% MAXIMUM INITIAL SALES CHARGE; CLASS C: 1% CONTINGENT DEFERRED SALES CHARGE IN FIRST YEAR ONLY; CLASS R/ADVISOR CLASS: NO SALES CHARGES.
CLASS A 6-MONTH INCEPTION (12/13/07) - ------- ------- -------------------- Cumulative Total Return(2) -31.80% -40.80% Aggregate Total Return(3) -35.72% -44.20% Value of $10,000 Investment(4) $ 6,428 $ 5,580 Aggregate Total Return (9/30/08)(5) -27.80% Total Annual Operating Expenses(6) Without Waiver 5.53% With Waiver 1.25%
CLASS C 6-MONTH INCEPTION (12/13/07) - ------- ------- -------------------- Cumulative Total Return(2) -32.06% -41.10% Aggregate Total Return(3) -32.74% -41.69% Value of $10,000 Investment(4) $ 6,726 $ 5,831 Aggregate Total Return (9/30/08)(5) -24.56% Total Annual Operating Expenses(6) Without Waiver 6.16% With Waiver 1.88%
CLASS R 6-MONTH INCEPTION (12/13/07) - ------- ------- -------------------- Cumulative Total Return(2) -31.91% -40.90% Aggregate Total Return(3) -31.91% -40.90% Value of $10,000 Investment(4) $ 6,809 $ 5,910 Aggregate Total Return (9/30/08)(5) -23.50% Total Annual Operating Expenses(6) Without Waiver 5.70% With Waiver 1.42%
ADVISOR CLASS 6-MONTH INCEPTION (12/13/07) - ------------- ------- -------------------- Cumulative Total Return(2) -31.72% -40.60% Aggregate Total Return(3) -31.72% -40.60% Value of $10,000 Investment(4) $ 6,828 $ 5,940 Aggregate Total Return (9/30/08)(5) -23.20% Total Annual Operating Expenses(6) Without Waiver 5.20% With Waiver 0.92%
PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM FIGURES SHOWN. FOR MOST RECENT MONTH-END PERFORMANCE, SEE "FUNDS AND PERFORMANCE" AT franklintempleton.com OR CALL (800) 342-5236. THE INVESTMENT MANAGER AND ADMINISTRATOR HAVE CONTRACTUALLY AGREED TO WAIVE OR LIMIT THEIR RESPECTIVE FEES AND TO ASSUME AS THEIR OWN EXPENSE CERTAIN EXPENSES OTHERWISE PAYABLE BY THE FUND SO THAT COMMON EXPENSES (I.E., A COMBINATION OF INVESTMENT MANAGEMENT FEES, FUND ADMINISTRATION FEES, AND OTHER EXPENSES, BUT EXCLUDING RULE 12B-1 FEES AND ACQUIRED FUND FEES AND EXPENSES) FOR EACH CLASS OF THE FUND DO NOT EXCEED 0.89% (OTHER THAN CERTAIN NON-ROUTINE EXPENSES OR COSTS, INCLUDING THOSE RELATING TO LITIGATION, INDEMNIFICATION, REORGANIZATIONS AND LIQUIDATIONS) UNTIL 8/31/09. 18 | Semiannual Report Performance Summary (CONTINUED) ENDNOTES WHILE STOCKS HAVE HISTORICALLY OUTPERFORMED OTHER ASSET CLASSES OVER THE LONG TERM, THEY TEND TO FLUCTUATE MORE DRAMATICALLY OVER THE SHORT TERM. THERE ARE SPECIAL RISKS INVOLVED WITH SIGNIFICANT EXPOSURE TO A PARTICULAR SECTOR, INCLUDING INCREASED SUSCEPTIBILITY RELATED TO ECONOMIC, BUSINESS, OR OTHER DEVELOPMENTS AFFECTING THAT SECTOR, WHICH MAY RESULT IN INCREASED VOLATILITY. THE FUND ALSO HAS THE POTENTIAL TO INVEST IN FOREIGN COMPANY STOCKS, WHICH INVOLVE EXPOSURE TO CURRENCY VOLATILITY AND POLITICAL UNCERTAINTY. THE FUND'S PROSPECTUS ALSO INCLUDES A DESCRIPTION OF THE MAIN INVESTMENT RISKS. CLASS C: These shares have higher annual fees and expenses than Class A shares. CLASS R: Shares are available to certain eligible investors as described in the prospectus. These shares have higher annual fees and expenses than Class A shares. ADVISOR CLASS: Shares are available to certain eligible investors as described in the prospectus. (1.) If the manager and administrator had not waived fees, the Fund's total returns would have been lower. (2.) Cumulative total return represents the change in value of an investment over the periods indicated. (3.) Aggregate total return represents the change in value of an investment over the periods indicated. Six-month return has not been annualized. Because the Fund has existed for less than one year, average annual total returns are not available. (4.) These figures represent the value of a hypothetical $10,000 investment in the Fund over the periods indicated. (5.) In accordance with SEC rules, we provide standardized total return information through the latest calendar quarter. (6.) Figures are as stated in the Fund's prospectus current as of the date of this report. Semiannual Report | 19 Your Fund's Expenses FRANKLIN FOCUSED CORE EQUITY FUND As a Fund shareholder, you can incur two types of costs: - - Transaction costs, including sales charges (loads) on Fund purchases and redemption fees; and - - Ongoing Fund costs, including management fees, distribution and service (12b-1) fees, and other Fund expenses. All mutual funds have ongoing costs, sometimes referred to as operating expenses. The following table shows ongoing costs of investing in the Fund and can help you understand these costs and compare them with those of other mutual funds. The table assumes a $1,000 investment held for the six months indicated. ACTUAL FUND EXPENSES The first line (Actual) for each share class listed in the table provides actual account values and expenses. The "Ending Account Value" is derived from the Fund's actual return, which includes the effect of Fund expenses. You can estimate the expenses you paid during the period by following these steps. OF COURSE, YOUR ACCOUNT VALUE AND EXPENSES WILL DIFFER FROM THOSE IN THIS ILLUSTRATION: 1 Divide your account value by $1,000. IF AN ACCOUNT HAD AN $8,600 VALUE, THEN $8,600 / 1,000 = 8.6. 2. Multiply the result by the number under the heading "Expenses Paid During Period." IF EXPENSES PAID DURING PERIOD WERE $7.50, THEN 8.6 X $7.50 = $64.50. In this illustration, the estimated expenses paid this period are $64.50. HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS Information in the second line (Hypothetical) for each class in the table can help you compare ongoing costs of investing in the Fund with those of other mutual funds. This information may not be used to estimate the actual ending account balance or expenses you paid during the period. The hypothetical "Ending Account Value" is based on the actual expense ratio for each class and an assumed 5% annual rate of return before expenses, which does not represent the Fund's actual return. The figure under the heading "Expenses Paid During Period" shows the hypothetical expenses your account would have incurred under this scenario. You can compare this figure with the 5% hypothetical examples that appear in shareholder reports of other funds. 20 | Semiannual Report Your Fund's Expenses (CONTINUED) PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES OR REDEMPTION FEES. Therefore, the second line for each class is useful in comparing ongoing costs only, and will not help you compare total costs of owning different funds. In addition, if transaction costs were included, your total costs would have been higher. Please refer to the Fund prospectus for additional information on operating expenses.
BEGINNING ACCOUNT ENDING ACCOUNT EXPENSES PAID DURING VALUE 5/1/08 VALUE 10/31/08 PERIOD* 5/1/08-10/31/08 ----------------- -------------- ----------------------- CLASS A Actual $1,000 $ 682.00 $5.00 Hypothetical (5% return before expenses) $1,000 $1,019.26 $6.01 CLASS C Actual $1,000 $ 679.40 $8.00 Hypothetical (5% return before expenses) $1,000 $1,015.68 $9.60 CLASS R Actual $1,000 $ 680.90 $5.89 Hypothetical (5% return before expenses) $1,000 $1,018.20 $7.07 ADVISOR CLASS Actual $1,000 $ 682.80 $3.78 Hypothetical (5% return before expenses) $1,000 $1,020.72 $4.53
* Expenses are calculated using the most recent six-month expense ratio, net of expense waivers, annualized for each class (A: 1.18%; C: 1.89%; R: 1.39%; and Advisor: 0.89%;), multiplied by the average account value over the period, multiplied by 184/365 to reflect the one-half year period. Semiannual Report | 21 Franklin Growth Opportunities Fund YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin Growth Opportunities Fund seeks capital appreciation by investing substantially in equity securities of companies demonstrating accelerating growth, increasing profitability, or above-average growth or growth potential, when compared with the overall economy. PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM FIGURES SHOWN. PLEASE VISIT franklintempleton.com OR CALL (800) 342-5236 FOR MOST RECENT MONTH-END PERFORMANCE. This semiannual report for Franklin Growth Opportunities Fund covers the period ended October 31, 2008. PERFORMANCE OVERVIEW For the six months under review, Franklin Growth Opportunities Fund - Class A had a -31.56% cumulative total return. The Fund performed comparably to its narrow benchmark, the Russell 3000 Growth Index, which had a -30.29% total return, and underperformed its broad benchmark, the Standard & Poor's 500 Index (S&P 500), which had a -29.28% total return for the same period.(1) You can find the Fund's long-term performance data in the Performance Summary beginning on page 25. INVESTMENT STRATEGY We are research-driven, fundamental investors pursuing a growth strategy. As "bottom-up" investors we focus primarily on finding individual securities that meet our criteria for growth potential, quality and valuation. We search for high-quality companies that have identifiable drivers of future earnings growth. We rely on our team of analysts to help provide in-depth industry expertise and use both qualitative and quantitative analysis to evaluate companies. Our analysts identify each company's market opportunity, competitive position, management and financial strength, business and financial risks, and valuation. We choose to (1.) Source: (C) 2008 Morningstar. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. The Russell 3000 Growth Index is market capitalization weighted and measures performance of those Russell 3000 Index companies with higher price-to-book ratios and higher forecasted growth values. The S&P 500 consists of 500 stocks chosen for market size, liquidity and industry group representation. Each stock's weight in the index is proportionate to its market value. The S&P 500 is one of the most widely used benchmarks of U.S. equity performance. The indexes are unmanaged and include reinvested dividends. One cannot invest directly in an index, nor is an index representative of the Fund's portfolio. THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND NAMES OF ALL PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE SOI BEGINS ON PAGE 65. 22 | Semiannual Report invest in those companies that, in our opinion, offer the best trade-off between growth opportunity, business and financial risk, and valuation. MANAGER'S DISCUSSION Among the most significant detractors from the Fund's absolute performance during the six months under review were MasterCard and Google in the information technology sector, ABB in the industrials sector, and Covance in the health care sector. MasterCard is the world's second-largest consumer payment system operator. Google operates the world's leading Internet search engine. ABB is a Swiss developer and manufacturer of power and automation technologies for a broad base of utilities, industrial and commercial customers. Covance is a contract research organization for the pharmaceutical, biotechnology and medical devices industries. From a sector perspective, our investments in the information technology, industrials and energy sectors detracted the most from the Fund's total returns. Key information technology underperformers included computer and software maker Apple and Visa, the world's largest consumer payment system operator. In the industrials sector, the Fund was negatively impacted by investments in Precision Castparts, which makes tools and parts used primarily in aerospace and power generation applications; international engineering and construction contractor Foster Wheeler (sold by period-end); and Terex (sold by period-end), which manufactures heavy trucks and machinery such as cranes and construction equipment, roadbuilding equipment, aerial platforms and mining equipment. In the energy sector, energy equipment and services providers such as Weatherford International, Schlumberger and FMC Technologies were notable detractors. During a period when every sector represented in the Fund depreciated in tandem with the overall equity market, we had some contributors. Individual securities that aided the Fund's absolute performance included Myriad Genetics, which produces drugs and diagnostic testing systems aimed at finding and treating specific cancers and AIDS; Celgene, which develops and markets therapeutic and molecular diagnostic products; and communications equipment maker F5 Networks (sold by period-end), which specializes in network traffic management and routing solutions. PORTFOLIO BREAKDOWN Franklin Growth Opportunities Fund Based on Total Net Assets as of 10/31/08 (BAR CHART) Information Technology* 31.7% Health Care 23.9% Industrials 13.1% Telecommunication Services 8.3% Energy 7.9% Consumer Discretionary 7.2% Financials 2.9% Consumer Staples 1.3% Materials 1.0% Short-Term Investments & Other Net Assets 2.7%
* Significant exposure to a single sector may result in greater volatility for the Fund than a more broadly diversified portfolio. There are specific risks to investing in technology company stocks, which can be subject to abrupt or erratic price movements and have been volatile, especially over the short term. Semiannual Report | 23 TOP 10 HOLDINGS Franklin Growth Opportunities Fund 10/31/08
COMPANY % OF TOTAL SECTOR/INDUSTRY NET ASSETS - --------------- ---------- Celgene Corp. 4.5% HEALTH CARE SBA Communications Corp. 4.2% TELECOMMUNICATION SERVICES QUALCOMM Inc. 4.0% INFORMATION TECHNOLOGY Gilead Sciences Inc. 3.9% HEALTH CARE FLIR Systems Inc. 3.5% INFORMATION TECHNOLOGY Apple Inc. 3.4% INFORMATION TECHNOLOGY NII Holdings Inc. 3.0% TELECOMMUNICATION SERVICES Genentech Inc. 3.0% HEALTH CARE Strayer Education Inc. 2.9% CONSUMER DISCRETIONARY Activision Blizzard Inc. 2.6% INFORMATION TECHNOLOGY
Certain industries performed well for the Fund and delivered positive results. In diversified consumer services, our investments in education service companies Strayer Education and ITT Educational Services boosted Fund performance. The commercial services and supplies industry, led by financial consultancy Huron Consulting Group, was another contributor. The Fund also benefited from investments in health care providers and services due to our position in Psychiatric Solutions, which owns a franchise of 90 psychiatric hospitals and residential treatment facilities across the U.S. and the Caribbean. Thank you for your continued participation in Franklin Growth Opportunities Fund. We look forward to serving your future investment needs. (PHOTO OF GRANT BOWERS) /s/ Grant Bowers Grant Bowers Portfolio Manager Franklin Growth Opportunities Fund THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS AS OF OCTOBER 31, 2008, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT OUR MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE DEPENDING ON FACTORS SUCH AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY. THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET, COUNTRY, INDUSTRY, SECURITY OR THE FUND. STATEMENTS OF FACT ARE FROM SOURCES CONSIDERED RELIABLE, BUT THE INVESTMENT MANAGER MAKES NO REPRESENTATION OR WARRANTY AS TO THEIR COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR INVESTMENT MANAGEMENT PHILOSOPHY. 24 | Semiannual Report Performance Summary as of 10/31/08 FRANKLIN GROWTH OPPORTUNITIES FUND Your dividend income will vary depending on dividends or interest paid by securities in the Fund's portfolio, adjusted for operating expenses of each class. Capital gain distributions are net profits realized from the sale of portfolio securities. The performance table does not reflect any taxes that a shareholder would pay on Fund dividends, capital gain distributions, if any, or any realized gains on the sale of Fund shares. Total return reflects reinvestment of the Fund's dividends and capital gain distributions, if any, and any unrealized gains or losses. PRICE INFORMATION
CLASS A (SYMBOL: FGRAX) CHANGE 10/31/08 4/30/08 - ----------------------- ------ -------- ------- Net Asset Value (NAV) -$6.33 $13.73 $20.06
CLASS B (SYMBOL: FKABX) CHANGE 10/31/08 4/30/08 - ----------------------- ------ -------- ------- Net Asset Value (NAV) -$6.02 $12.93 $18.95
CLASS C (SYMBOL: FKACX) CHANGE 10/31/08 4/30/08 - ----------------------- ------ -------- ------- Net Asset Value (NAV) -$6.01 $12.90 $18.91
CLASS R (SYMBOL: FKARX) CHANGE 10/31/08 4/30/08 - ----------------------- ------ -------- ------- Net Asset Value (NAV) -$6.26 $13.54 $19.80
ADVISOR CLASS (SYMBOL: FRAAX) CHANGE 10/31/08 4/30/08 - ----------------------------- ------ -------- ------- Net Asset Value (NAV) -$6.46 $14.14 $20.60
Semiannual Report | 25 Performance Summary (CONTINUED) PERFORMANCE CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETURNS AND VALUE OF $10,000 INVESTMENT INCLUDE MAXIMUM SALES CHARGES. CLASS A: 5.75% MAXIMUM INITIAL SALES CHARGE; CLASS B: CONTINGENT DEFERRED SALES CHARGE (CDSC) DECLINING FROM 4% TO 1% OVER SIX YEARS, AND ELIMINATED THEREAFTER; CLASS C: 1% CDSC IN FIRST YEAR ONLY; CLASS R/ADVISOR CLASS: NO SALES CHARGES.
CLASS A 6-MONTH 1-YEAR 5-YEAR INCEPTION (6/23/99) - ------- ------- ------- ------- ------------------- Cumulative Total Return(1) -31.56% -40.72% +13.56% +40.59% Average Annual Total Return(2) -35.48% -44.12% +1.37% +3.05% Value of $10,000 Investment(3) $ 6,452 $ 5,588 $10,701 $13,250 Avg. Ann. Total Return (9/30/08)(4) -30.19% +6.62% +4.96% Total Annual Operating Expenses(5) 1.29%
CLASS B 6-MONTH 1-YEAR 5-YEAR INCEPTION (6/23/99) - ------- ------- ------- ------- ------------------- Cumulative Total Return(1) -31.82% -41.14% +9.58% +33.53% Average Annual Total Return(2) -34.55% -43.49% +1.47% +3.14% Value of $10,000 Investment(3) $ 6,545 $ 5,651 $10,758 $13,353 Avg. Ann. Total Return (9/30/08)(4) -29.36% +6.84% +5.05% Total Annual Operating Expenses(5) 2.01%
CLASS C 6-MONTH 1-YEAR 5-YEAR INCEPTION (6/23/99) - ------- ------- ------- ------- ------------------- Cumulative Total Return(1) -31.83% -41.17% +9.52% +31.87% Average Annual Total Return(2) -32.52% -41.76% +1.83% +3.00% Value of $10,000 Investment(3) $ 6,748 $ 5,824 $10,952 $13,187 Avg. Ann. Total Return (9/30/08)(4) -27.21% +7.12% +4.91% Total Annual Operating Expenses(5) 2.01%
CLASS R 6-MONTH 1-YEAR 5-YEAR INCEPTION (1/1/02) - ------- ------- ------- ------- ------------------- Cumulative Total Return(1) -31.67% -40.81% +12.38% -1.60% Average Annual Total Return(2) -31.67% -40.81% +2.36% -0.24% Value of $10,000 Investment(3) $ 6,833 $ 5,919 $11,238 $ 9,840 Avg. Ann. Total Return (9/30/08)(4) -26.03% +7.68% +2.27% Total Annual Operating Expenses(5) 1.51%
ADVISOR CLASS 6-MONTH 1-YEAR 5-YEAR INCEPTION (6/23/99) - ------------- ------- ------- ------- ------------------- Cumulative Total Return(1) -31.41% -40.51% +15.25% +44.75% Average Annual Total Return(2) -31.41% -40.51% +2.88% +4.03% Value of $10,000 Investment(3) $ 6,859 $ 5,949 $11,525 $14,475 Avg. Ann. Total Return (9/30/08)(4) -25.69% +8.21% +5.96% Total Annual Operating Expenses(5) 1.01%
PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM FIGURES SHOWN. FOR MOST RECENT MONTH-END PERFORMANCE, SEE "FUNDS AND PERFORMANCE" AT franklintempleton.com OR CALL (800) 342-5236. 26 | Semiannual Report Performance Summary (CONTINUED) ENDNOTES THE MANAGER OF THE FUND USES AN AGGRESSIVE GROWTH STRATEGY SO AN INVESTMENT IN THE FUND INVOLVES A GREATER DEGREE OF RISK. THE FUND MAY BE MORE VOLATILE THAN A MORE CONSERVATIVE EQUITY FUND, AND IT MAY BE BEST SUITED FOR LONG-TERM INVESTORS. THE FUND'S INVESTMENTS IN SMALLER- AND MIDSIZED-COMPANY STOCKS INVOLVE SPECIAL RISKS SUCH AS RELATIVELY SMALLER REVENUES, LIMITED PRODUCT LINES AND SMALLER MARKET SHARE. SMALLER-AND MIDSIZED-COMPANY STOCKS HISTORICALLY HAVE EXHIBITED GREATER PRICE VOLATILITY THAN LARGER-COMPANY STOCKS, PARTICULARLY OVER THE SHORT TERM. THE FUND'S PORTFOLIO INCLUDES TECHNOLOGY STOCKS, A SECTOR THAT HAS BEEN ONE OF THE MOST VOLATILE AND INVOLVES SPECIAL RISKS. THE FUND'S PROSPECTUS ALSO INCLUDES A DESCRIPTION OF THE MAIN INVESTMENT RISKS. CLASS B: These shares have higher annual fees and expenses than Class A shares. CLASS C: Prior to 1/1/04, these shares were offered with an initial sales charge; thus actual total returns would have differed. These shares have higher annual fees and expenses than Class A shares. CLASS R: Shares are available to certain eligible investors as described in the prospectus. These shares have higher annual fees and expenses than Class A shares. ADVISOR CLASS: Shares are available to certain eligible investors as described in the prospectus. (1.) Cumulative total return represents the change in value of an investment over the periods indicated. (2.) Average annual total return represents the average annual change in value of an investment over the periods indicated. Six-month return has not been annualized. (3.) These figures represent the value of a hypothetical $10,000 investment in the Fund over the periods indicated. (4.) In accordance with SEC rules, we provide standardized average annual total return information through the latest calendar quarter. (5.) Figures are as stated in the Fund's prospectus current as of the date of this report. Semiannual Report | 27 Your Fund's Expenses FRANKLIN GROWTH OPPORTUNITIES FUND As a Fund shareholder, you can incur two types of costs: - - Transaction costs, including sales charges (loads) on Fund purchases and redemption fees; and - - Ongoing Fund costs, including management fees, distribution and service (12b-1) fees, and other Fund expenses. All mutual funds have ongoing costs, sometimes referred to as operating expenses. The following table shows ongoing costs of investing in the Fund and can help you understand these costs and compare them with those of other mutual funds. The table assumes a $1,000 investment held for the six months indicated. ACTUAL FUND EXPENSES The first line (Actual) for each share class listed in the table provides actual account values and expenses. The "Ending Account Value" is derived from the Fund's actual return, which includes the effect of Fund expenses. You can estimate the expenses you paid during the period by following these steps. OF COURSE, YOUR ACCOUNT VALUE AND EXPENSES WILL DIFFER FROM THOSE IN THIS ILLUSTRATION: 1. Divide your account value by $1,000. IF AN ACCOUNT HAD AN $8,600 VALUE, THEN $8,600 / $1,000 = 8.6. 2. Multiply the result by the number under the heading "Expenses Paid During Period." IF EXPENSES PAID DURING PERIOD WERE $7.50, THEN 8.6 X $7.50 = $64.50. In this illustration, the estimated expenses paid this period are $64.50. HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS Information in the second line (Hypothetical) for each class in the table can help you compare ongoing costs of investing in the Fund with those of other mutual funds. This information may not be used to estimate the actual ending account balance or expenses you paid during the period. The hypothetical "Ending Account Value" is based on the actual expense ratio for each class and an assumed 5% annual rate of return before expenses, which does not represent the Fund's actual return. The figure under the heading "Expenses Paid During Period" shows the hypothetical expenses your account would have incurred under this scenario. You can compare this figure with the 5% hypothetical examples that appear in shareholder reports of other funds. 28 | Semiannual Report Your Fund's Expenses (CONTINUED) PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES OR REDEMPTION FEES. Therefore, the second line for each class is useful in comparing ongoing costs only, and will not help you compare total costs of owning different funds. In addition, if transaction costs were included, your total costs would have been higher. Please refer to the Fund prospectus for additional information on operating expenses.
BEGINNING ACCOUNT ENDING ACCOUNT EXPENSES PAID DURING VALUE 5/1/08 VALUE 10/31/08 PERIOD* 5/1/08-10/31/08 ----------------- -------------- ----------------------- CLASS A Actual $1,000 $ 684.40 $ 5.43 Hypothetical (5% return before expenses) $1,000 $1,018.75 $ 6.51 CLASS B Actual $1,000 $ 681.80 $ 8.35 Hypothetical (5% return before expenses) $1,000 $1,015.27 $10.01 CLASS C Actual $1,000 $ 681.70 $ 8.44 Hypothetical (5% return before expenses) $1,000 $1,015.17 $10.11 CLASS R Actual $1,000 $ 683.30 $ 6.32 Hypothetical (5% return before expenses) $1,000 $1,017.69 $ 7.58 ADVISOR CLASS Actual $1,000 $ 685.90 $ 4.21 Hypothetical (5% return before expenses) $1,000 $1,020.21 $ 5.04
* Expenses are calculated using the most recent six-month expense ratio, annualized for each class (A: 1.28%; B: 1.97%; C: 1.99%; R: 1.49%; and Advisor: 0.99%), multiplied by the average account value over the period, multiplied by 184/365 to reflect the one-half year period. Semiannual Report | 29 Franklin Small Cap Growth Fund (formerly, Franklin Small Cap Growth Fund II) YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin Small Cap Growth Fund seeks long-term capital growth by investing at least 80% of its net assets in equity securities of small-capitalization companies with market capitalizations not exceeding that of the highest market capitalization in the Russell 2000(R) Index or $1.5 billion, whichever is greater, at the time of purchase.(1) PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM FIGURES SHOWN. PLEASE VISIT franklintempleton.com OR CALL (800) 342-5236 FOR MOST RECENT MONTH-END PERFORMANCE. This semiannual report for Franklin Small Cap Growth Fund covers the period ended October 31, 2008. PERFORMANCE OVERVIEW For the six months under review, Franklin Small Cap Growth Fund - Class A had a - -28.27% cumulative total return. The Fund performed comparably to its narrow benchmark, the Russell 2000 Growth Index, which had a -27.63% return, and its broad benchmark, the Standard & Poor's 500 Index (S&P 500), which had a -29.28% return for the same period.(2) You can find the Fund's long-term performance data in the Performance Summary beginning on page 33. INVESTMENT STRATEGY We are research-driven, fundamental investors pursuing a growth strategy. As "bottom-up" investors we focus primarily on finding individual securities that meet our criteria for growth potential, quality and valuation. We search for high-quality companies that have identifiable drivers of future earnings growth. We rely on our team of analysts to help provide in-depth industry expertise and use both qualitative and quantitative analysis to evaluate companies. Our analysts identify each company's market opportunity, competitive position, management (1.) The Russell 2000 Index is market capitalization weighted and measures performance of the 2,000 smallest companies in the Russell 3000 Index, which represent approximately 8% of total market capitalization of the Russell 3000 Index. (2.) Source: (C) 2008 Morningstar. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. The Russell 2000 Growth Index is market capitalization weighted and measures performance of those Russell 2000 Index companies with higher price-to-book ratios and higher forecasted growth values. The S&P 500 consists of 500 stocks chosen for market size, liquidity and industry group representation. Each stock's weight in the index is proportionate to its market value. The S&P 500 is one of the most widely used benchmarks of U.S. equity performance. The indexes are unmanaged and include reinvested dividends. One cannot invest directly in an index, nor is an index representative of the Fund's portfolio. THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND NAMES OF ALL PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE SOI BEGINS ON PAGE 73. 30 | Semiannual Report and financial strength, business and financial risks, and valuation. We choose to invest in those companies that, in our opinion, offer the best trade-off between growth opportunity, business and financial risk, and valuation. MANAGER'S DISCUSSION Among the most significant detractors from Fund performance relative to the Russell 2000 Growth Index for the six months under review were iStar Financial,(3) a real estate investment trust; Tenneco, an auto parts company; and Helix Energy Solutions Group,(3) an operator of offshore oil and gas properties and production facilities. Stock selection in the health care, financials and energy sectors hurt relative Fund performance. An underweighted position in the health care sector as well as holdings Angiotech Pharmaceuticals,(3) a medical products company, and PAREXEL International, a clinical and non-clinical research organization, hindered returns. Real estate investment trust FelCor Lodging Trust in the financials sector was another key detractor during the period. In the energy sector, oil and gas exploration and production stocks Mariner Energy and Bill Barrett were among holdings that declined in value. On a more positive note, major contributors during the reporting period included Allegiant Travel, a charter flight operator; Strayer Education, a university that serves mostly working adults seeking college degrees; and Huron Consulting Group, which offers financial consulting services to companies in financial distress or under litigation. Driven by stock selection, our investments in the industrials, consumer discretionary and information technology sectors supported the Fund's relative performance. Contributors in the industrials sector included Mobile Mini, which manufactures, leases and sells portable storage containers and mobile offices, and Force Protection, which makes military armored land vehicles. Consumer discretionary holdings Universal Technical Institute, an automotive technician training school, and Tractor Supply, a retail tractor parts and farm supplies store chain operator, appreciated in value during the period. In the information technology sector, key contributors included Quest Software, which makes database management software, and Ixia, which designs interface cards that transmit and analyze signals over networks. (3.) This holding is not an index component. PORTFOLIO BREAKDOWN Franklin Small Cap Growth Fund Based on Total Net Assets as of 10/31/08 (BAR CHART) Information Technology* 39.4% Health Care 15.0% Consumer Discretionary 12.8% Industrials 11.4% Energy 7.2% Consumer Staples 4.0% Financials 3.2% Telecommunication Services 2.1% Materials 1.2% Short-Term Investments & Other Net Assets 3.7%
* Significant exposure to a single sector may result in greater volatility for the Fund than a more broadly diversified portfolio. There are specific risks to investing in technology company stocks, which can be subject to abrupt or erratic price movements and have been volatile, especially over the short term. Semiannual Report | 31 TOP 10 HOLDINGS Franklin Small Cap Growth Fund 10/31/08
COMPANY % OF TOTAL SECTOR/INDUSTRY NET ASSETS - --------------- ---------- Psychiatric Solutions Inc. 2.7% HEALTH CARE Quest Software Inc. 2.4% INFORMATION TECHNOLOGY Microsemi Corp. 2.1% INFORMATION TECHNOLOGY Huron Consulting Group Inc. 2.1% INDUSTRIALS SBA Communications Corp. 2.1% TELECOMMUNICATION SERVICES Hain Celestial Group Inc. 2.0% CONSUMER STAPLES ViaSat Inc. 2.0% INFORMATION TECHNOLOGY Allegiant Travel Co. 1.9% INDUSTRIALS Sequenom Inc. 1.8% HEALTH CARE Myriad Genetics Inc. 1.8% HEALTH CARE
Thank you for your continued participation in Franklin Small Cap Growth Fund. We look forward to serving your future investment needs. (PHOTO OF MICHAEL P. MCCARTHY) /s/ Michael P. McCarthy Michael P. McCarthy, CFA Portfolio Manager Franklin Small Cap Growth Fund THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS AS OF OCTOBER 31, 2008, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT OUR MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE DEPENDING ON FACTORS SUCH AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY. THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET, COUNTRY, INDUSTRY, SECURITY OR THE FUND. STATEMENTS OF FACT ARE FROM SOURCES CONSIDERED RELIABLE, BUT THE INVESTMENT MANAGER MAKES NO REPRESENTATION OR WARRANTY AS TO THEIR COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR INVESTMENT MANAGEMENT PHILOSOPHY. 32 | Semiannual Report Performance Summary as of 10/31/08 FRANKLIN SMALL CAP GROWTH FUND Your dividend income will vary depending on dividends or interest paid by securities in the Fund's portfolio, adjusted for operating expenses of each class. Capital gain distributions are net profits realized from the sale of portfolio securities. The performance table does not reflect any taxes that a shareholder would pay on Fund dividends, capital gain distributions, if any, or any realized gains on the sale of Fund shares. Total return reflects reinvestment of the Fund's dividends and capital gain distributions, if any, and any unrealized gains or losses. PRICE INFORMATION
CLASS A (SYMBOL: FSGRX) CHANGE 10/31/08 4/30/08 - ----------------------- ------ -------- ------- Net Asset Value (NAV) -$2.57 $6.52 $9.09
CLASS B (SYMBOL: FBSGX) CHANGE 10/31/08 4/30/08 - ----------------------- ------ -------- ------- Net Asset Value (NAV) -$2.41 $6.02 $8.43
CLASS C (SYMBOL: FCSGX) CHANGE 10/31/08 4/30/08 - ----------------------- ------ -------- ------- Net Asset Value (NAV) -$2.40 $6.03 $8.43
CLASS R (SYMBOL: FSSRX) CHANGE 10/31/08 4/30/08 - ----------------------- ------ -------- ------- Net Asset Value (NAV) -$2.53 $6.38 $8.91
ADVISOR CLASS (SYMBOL: FSSAX) CHANGE 10/31/08 4/30/08 - ----------------------------- ------ -------- ------- Net Asset Value (NAV) -$2.64 $6.73 $9.37
Semiannual Report | 33 Performance Summary (CONTINUED) PERFORMANCE CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETURNS AND VALUE OF $10,000 INVESTMENT INCLUDE MAXIMUM SALES CHARGES. CLASS A: 5.75% MAXIMUM INITIAL SALES CHARGE; CLASS B: CONTINGENT DEFERRED SALES CHARGE (CDSC) DECLINING FROM 4% TO 1% OVER SIX YEARS, AND ELIMINATED THEREAFTER; CLASS C: 1% CDSC IN FIRST YEAR ONLY; CLASS R/ADVISOR CLASS: NO SALES CHARGES.
CLASS A 6-MONTH 1-YEAR 5-YEAR INCEPTION (5/1/00) - ------- ------- ------- ------- ------------------ Cumulative Total Return(1) -28.27% -42.37% -13.13% -11.56% Average Annual Total Return(2) -32.37% -45.67% -3.92% -2.12% Value of $10,000 Investment(3) $ 6,763 $ 5,433 $ 8,189 $ 8,335 Avg. Ann. Total Return (9/30/08)(4) -29.36% +2.68% +0.46% Total Annual Operating Expenses(5) 1.17%
CLASS B 6-MONTH 1-YEAR 5-YEAR INCEPTION (5/1/00) - ------- ------- ------- ------- ------------------ Cumulative Total Return(1) -28.59% -42.78% -16.35% -16.50% Average Annual Total Return(2) -31.44% -44.63% -3.79% -2.10% Value of $10,000 Investment(3) $ 6,856 $ 5,537 $ 8,244 $ 8,350 Avg. Ann. Total Return (9/30/08)(4) -28.00% +2.83% +0.48% Total Annual Operating Expenses(5) 1.92%
CLASS C 6-MONTH 1-YEAR 5-YEAR INCEPTION (5/1/00) - ------- ------- ------- ------- ------------------ Cumulative Total Return(1) -28.59% -42.84% -16.46% -16.79% Average Annual Total Return(2) -29.30% -43.30% -3.53% -2.14% Value of $10,000 Investment(3) $ 7,070 $ 5,670 $ 8,354 $ 8,321 Avg. Ann. Total Return (9/30/08)(4) -26.18% +3.13% +0.46% Total Annual Operating Expenses(5) 1.92%
CLASS R 6-MONTH 1-YEAR 5-YEAR INCEPTION (1/1/02) - ------- ------- ------- ------- ------------------ Cumulative Total Return(1) -28.40% -42.49% -14.22% -11.97% Average Annual Total Return(2) -28.40% -42.49% -3.02% -1.85% Value of $10,000 Investment(3) $ 7,160 $ 5,751 $ 8,578 $ 8,803 Avg. Ann. Total Return (9/30/08)(4) -25.23% +3.65% +1.40% Total Annual Operating Expenses(5) 1.42%
ADVISOR CLASS 6-MONTH 1-YEAR 5-YEAR INCEPTION (5/1/00) - ------------- ------- ------- ------- ------------------ Cumulative Total Return(1) -28.18% -42.20% -12.11% -9.38% Average Annual Total Return(2) -28.18% -42.20% -2.55% -1.15% Value of $10,000 Investment(3) $ 7,182 $ 5,780 $ 8,789 $ 9,062 Avg. Ann. Total Return (9/30/08)(4) -24.87% +4.15% +1.46% Total Annual Operating Expenses(5) 0.92%
PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM FIGURES SHOWN. FOR MOST RECENT MONTH-END PERFORMANCE, SEE "FUNDS AND PERFORMANCE" AT franklintempleton.com OR CALL (800) 342-5236. 34 | Semiannual Report Performance Summary (CONTINUED) ENDNOTES SMALLER AND NEWER COMPANIES CAN BE PARTICULARLY SENSITIVE TO CHANGING ECONOMIC CONDITIONS. THEIR GROWTH PROSPECTS ARE LESS CERTAIN THAN THOSE OF LARGER, MORE ESTABLISHED COMPANIES, AND THEY CAN BE VOLATILE. THE FUND IS INTENDED FOR LONG-TERM INVESTORS WHO ARE COMFORTABLE WITH SHORT-TERM FLUCTUATIONS IN SHARE PRICE. THERE ARE SPECIAL RISKS INVOLVED WITH SIGNIFICANT EXPOSURE TO A PARTICULAR SECTOR, INCLUDING INCREASED SUSCEPTIBILITY RELATED TO ECONOMIC, BUSINESS, OR OTHER DEVELOPMENTS AFFECTING THAT SECTOR. THE FUND INCLUDES INVESTMENTS IN THE TECHNOLOGY SECTOR, WHICH HAS BEEN HIGHLY VOLATILE AND INVOLVES SPECIAL RISKS. THE FUND'S PROSPECTUS ALSO INCLUDES A DESCRIPTION OF THE MAIN INVESTMENT RISKS. CLASS B: These shares have higher annual fees and expenses than Class A shares. CLASS C: Prior to 1/1/04, these shares were offered with an initial sales charge; thus actual total returns would have differed. These shares have higher annual fees and expenses than Class A shares. CLASS R: Shares are available to certain eligible investors as described in the prospectus. These shares have higher annual fees and expenses than Class A shares. ADVISOR CLASS: Shares are available to certain eligible investors as described in the prospectus. (1.) Cumulative total return represents the change in value of an investment over the periods indicated. (2.) Average annual total return represents the average annual change in value of an investment over the periods indicated. Six-month return has not been annualized. (3.) These figures represent the value of a hypothetical $10,000 investment in the Fund over the periods indicated. (4.) In accordance with SEC rules, we provide standardized average annual total return information through the latest calendar quarter. (5.) Figures are as stated in the Fund's prospectus current as of the date of this report. Semiannual Report | 35 Your Fund's Expenses FRANKLIN SMALL CAP GROWTH FUND As a Fund shareholder, you can incur two types of costs: - - Transaction costs, including sales charges (loads) on Fund purchases and redemption fees; and - - Ongoing Fund costs, including management fees, distribution and service (12b-1) fees, and other Fund expenses. All mutual funds have ongoing costs, sometimes referred to as operating expenses. The following table shows ongoing costs of investing in the Fund and can help you understand these costs and compare them with those of other mutual funds. The table assumes a $1,000 investment held for the six months indicated. ACTUAL FUND EXPENSES The first line (Actual) for each share class listed in the table provides actual account values and expenses. The "Ending Account Value" is derived from the Fund's actual return, which includes the effect of Fund expenses. You can estimate the expenses you paid during the period by following these steps. OF COURSE, YOUR ACCOUNT VALUE AND EXPENSES WILL DIFFER FROM THOSE IN THIS ILLUSTRATION: 1. Divide your account value by $1,000. IF AN ACCOUNT HAD AN $8,600 VALUE, THEN $8,600 / $1,000 = 8.6. 2. Multiply the result by the number under the heading "Expenses Paid During Period." IF EXPENSES PAID DURING PERIOD WERE $7.50, THEN 8.6 X $7.50 = $64.50. In this illustration, the estimated expenses paid this period are $64.50. HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS Information in the second line (Hypothetical) for each class in the table can help you compare ongoing costs of investing in the Fund with those of other mutual funds. This information may not be used to estimate the actual ending account balance or expenses you paid during the period. The hypothetical "Ending Account Value" is based on the actual expense ratio for each class and an assumed 5% annual rate of return before expenses, which does not represent the Fund's actual return. The figure under the heading "Expenses Paid During Period" shows the hypothetical expenses your account would have incurred under this scenario. You can compare this figure with the 5% hypothetical examples that appear in shareholder reports of other funds. 36 | Semiannual Report Your Fund's Expenses (CONTINUED) PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES OR REDEMPTION FEES. Therefore, the second line for each class is useful in comparing ongoing costs only, and will not help you compare total costs of owning different funds. In addition, if transaction costs were included, your total costs would have been higher. Please refer to the Fund prospectus for additional information on operating expenses.
BEGINNING ACCOUNT ENDING ACCOUNT EXPENSES PAID DURING VALUE 5/1/08 VALUE 10/31/08 PERIOD* 5/1/08-10/31/08 ----------------- -------------- ----------------------- CLASS A Actual $1,000 $ 717.30 $ 5.76 Hypothetical (5% return before expenses) $1,000 $1,018.50 $ 6.77 CLASS B Actual $1,000 $ 714.10 $ 8.77 Hypothetical (5% return before expenses) $1,000 $1,014.97 $10.31 CLASS C Actual $1,000 $ 714.10 $ 8.77 Hypothetical (5% return before expenses) $1,000 $1,014.97 $10.31 CLASS R Actual $1,000 $ 716.00 $ 6.62 Hypothetical (5% return before expenses) $1,000 $1,017.49 $ 7.78 ADVISOR CLASS Actual $1,000 $ 718.20 $ 4.46 Hypothetical (5% return before expenses) $1,000 $1,020.01 $ 5.24
* Expenses are calculated using the most recent six-month expense ratio, annualized for each class (A: 1.33%; B: 2.03%; C: 2.03%; R: 1.53%; and Advisor: 1.03%), multiplied by the average account value over the period, multiplied by 184/365 to reflect the one-half year period. Semiannual Report | 37 Franklin Small-Mid Cap Growth Fund YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin Small-Mid Cap Growth Fund seeks long-term capital growth by investing at least 80% of its net assets in equity securities of small-cap and mid-cap companies. The Fund defines small-cap companies as those within the market capitalization range of companies in the Russell 2500(TM) Index at the time of purchase, and mid-cap companies as those within the market capitalization range of the Russell Midcap(R) Index at the time of purchase.(1) PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM FIGURES SHOWN. PLEASE VISIT franklintempleton.com OR CALL (800) 342-5236 FOR MOST RECENT MONTH-END PERFORMANCE. This semiannual report for Franklin Small-Mid Cap Growth Fund covers the period ended October 31, 2008. PERFORMANCE OVERVIEW For the six months under review, Franklin Small-Mid Cap Growth Fund - Class A had a -32.05% cumulative total return. The Fund performed better than its narrow benchmark, the Russell Midcap Growth Index, which had a -37.36% total return, but underperformed its broad benchmark, the Standard & Poor's 500 Index (S&P 500), which had a -29.28% total return for the same period.(2) You can find the Fund's long-term performance data in the Performance Summary beginning on page 41. INVESTMENT STRATEGY We are research-driven, fundamental investors pursuing a growth strategy. As "bottom-up" investors we focus primarily on finding individual securities that meet our criteria for growth potential, quality and valuation. We search for high-quality companies that have identifiable drivers of future earnings growth. We rely on our team of analysts to help provide in-depth industry expertise and use (1.) The Russell 2500 Index is market capitalization weighted and measures performance of the 2,500 smallest companies in the Russell 3000 Index, which represent approximately 17% of total market capitalization of the Russell 3000 Index. The Russell Midcap Index is market capitalization weighted and measures performance of the 800 smallest companies in the Russell 1000(R) Index, which represent approximately 26% of total market capitalization of the Russell 1000 Index. (2.) Source: (C) 2008 Morningstar. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. The Russell Midcap Growth Index is market capitalization weighted and measures performance of those Russell Midcap Index companies with higher price-to-book ratios and higher forecasted growth values. The S&P 500 consists of 500 stocks chosen for market size, liquidity and industry group representation. Each stock's weight in the index is proportionate to its market value. The S&P 500 is one of the most widely used benchmarks of U.S. equity performance. The indexes are unmanaged and include reinvested dividends. One cannot invest directly in an index, nor is an index representative of the Fund's portfolio. THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND NAMES OF ALL PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE SOI BEGINS ON PAGE 81. 38 | Semiannual Report both qualitative and quantitative analysis to evaluate companies. Our analysts identify each company's market opportunity, competitive position, management and financial strength, business and financial risks, and valuation. We choose to invest in those companies that, in our opinion, offer the best trade-off between growth opportunity, business and financial risk, and valuation. MANAGER'S DISCUSSION In a difficult environment for equities, major detractors relative to the Russell Midcap Growth Index during the six-month reporting period included real estate investment trust iStar Financial,(3) asset management company Affiliated Managers Group, and speech and digital imaging software maker Nuance Communications. On a sector basis, stock selection in financials constrained relative Fund performance. Real estate investment trust FelCor Lodging Trust(3) was a notable detractor. Stock selection also weighed on the consumer discretionary sector, where our positions in fast-food operator Chipotle Mexican Grill(3) (sold by period-end) and apparel retailer Guess? declined in value for the six months under review. Additionally, underweighted positions in the consumer discretionary and consumer staples sectors hurt relative Fund results. In contrast, among holdings that contributed most to relative Fund performance for the six months under review were specialized imaging systems manufacturer FLIR Systems, molecular diagnostic test designer Myriad Genetics,(3) and oil and gas exploration and production company Southwestern Energy. Driven mainly by stock selection, our investments in the information technology, energy and industrials sectors benefited relative Fund performance during the period. Semiconductor companies Microsemi(3) and FormFactor3 were contributors in the information technology sector, while an overweighted sector position further supported relative Fund performance. In the energy sector, oil and gas exploration and production companies that helped relative returns were Petrohawk Energy and Range Resources. Industrials holdings with a positive impact on relative performance included C.H. Robinson Worldwide, a freight and logistics company, and Ryanair Holdings,(3) a European discount airline. (3.) This holding is not an index component. PORTFOLIO BREAKDOWN Franklin Small-Mid Cap Growth Fund Based on Total Net Assets as of 10/31/08 (BAR CHART) Information Technology* 32.4% Health Care 19.1% Industrials 14.9% Energy 10.8% Consumer Discretionary 8.7% Telecommunication Services 4.9% Consumer Staples 2.8% Financials 2.4% Utilities 0.7% Short-Term Investments & Other Net Assets 3.3%
* Significant exposure to a single sector may result in greater volatility for the Fund than a more broadly diversified portfolio. There are specific risks to investing in technology company stocks, which can be subject to abrupt or erratic price movements and have been volatile, especially over the short term. Semiannual Report | 39 TOP 10 HOLDINGS Franklin Small-Mid Cap Growth Fund 10/31/08
% OF TOTAL COMPANY SECTOR/INDUSTRY NET ASSETS - ----------------------- ---------- FLIR Systems Inc. 3.8% INFORMATION TECHNOLOGY Microsemi Corp. 3.2% INFORMATION TECHNOLOGY Southwestern Energy Co. 3.2% ENERGY C.H. Robinson Worldwide Inc. 2.8% INDUSTRIALS Precision Castparts Corp. 2.3% INDUSTRIALS Waters Corp. 2.1% HEALTH CARE AMETEK Inc. 2.1% INDUSTRIALS Activision Blizzard Inc. 2.0% INFORMATION TECHNOLOGY MasterCard Inc., A 2.0% INFORMATION TECHNOLOGY Express Scripts Inc. 2.0% HEALTH CARE
Thank you for your continued participation in Franklin Small-Mid Cap Growth Fund. We look forward to serving your future investment needs. (PHOTO OF EDWARD B. JAMIESON) /s/ Edward B. Jamieson Edward B. Jamieson Portfolio Manager Franklin Small-Mid Cap Growth Fund THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS AS OF OCTOBER 31, 2008, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT OUR MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE DEPENDING ON FACTORS SUCH AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY. THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET, COUNTRY, INDUSTRY, SECURITY OR THE FUND. STATEMENTS OF FACT ARE FROM SOURCES CONSIDERED RELIABLE, BUT THE INVESTMENT MANAGER MAKES NO REPRESENTATION OR WARRANTY AS TO THEIR COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR INVESTMENT MANAGEMENT PHILOSOPHY. 40 | Semiannual Report Performance Summary as of 10/31/08 FRANKLIN SMALL-MID CAP GROWTH FUND Your dividend income will vary depending on dividends or interest paid by securities in the Fund's portfolio, adjusted for operating expenses of each class. Capital gain distributions are net profits realized from the sale of portfolio securities. The performance table does not reflect any taxes that a shareholder would pay on Fund dividends, capital gain distributions, if any, or any realized gains on the sale of Fund shares. Total return reflects reinvestment of the Fund's dividends and capital gain distributions, if any, and any unrealized gains or losses. PRICE INFORMATION
CLASS A (SYMBOL: FRSGX) CHANGE 10/31/08 4/30/08 - ----------------------- ------- -------- ------- Net Asset Value (NAV) -$10.48 $22.22 $32.70
CLASS B (SYMBOL: FBSMX) CHANGE 10/31/08 4/30/08 - ----------------------- ------- -------- ------- Net Asset Value (NAV) -$10.02 $20.98 $31.00
CLASS C (SYMBOL: FRSIX) CHANGE 10/31/08 4/30/08 - ----------------------- ------- -------- ------- Net Asset Value (NAV) -$ 9.67 $20.25 $29.92
CLASS R (SYMBOL: FSMRX) CHANGE 10/31/08 4/30/08 - ----------------------- ------- -------- ------- Net Asset Value (NAV) -$10.31 $21.75 $32.06
ADVISOR CLASS (SYMBOL: FSGAX) CHANGE 10/31/08 4/30/08 - ----------------------------- ------- -------- ------- Net Asset Value (NAV) -$10.69 $22.74 $33.43
Semiannual Report | 41 Performance Summary (CONTINUED) PERFORMANCE CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETURNS AND VALUE OF $10,000 INVESTMENT INCLUDE MAXIMUM SALES CHARGES. CLASS A: 5.75% MAXIMUM INITIAL SALES CHARGE; CLASS B: CONTINGENT DEFERRED SALES CHARGE (CDSC) DECLINING FROM 4% TO 1% OVER SIX YEARS, AND ELIMINATED THEREAFTER; CLASS C: 1% CDSC IN FIRST YEAR ONLY; CLASS R/ADVISOR CLASS: NO SALES CHARGES.
CLASS A 6-MONTH 1-YEAR 5-YEAR 10-YEAR - ------- ------- ------- ------- ------------------- Cumulative Total Return(1) -32.05% -42.68% -0.83% +49.61% Average Annual Total Return(2) -35.95% -45.97% -1.34% +3.49% Value of $10,000 Investment(3) $ 6,405 $ 5,403 $ 9,347 $14,098 Avg. Ann. Total Return (9/30/08)(4) -31.07% +4.63% +6.42% Total Annual Operating Expenses(5) 1.04%
CLASS B 6-MONTH 1-YEAR 5-YEAR INCEPTION (7/1/02) - ------- ------- ------- ------- ------------------- Cumulative Total Return(1) -32.32% -43.11% -4.49% +11.48% Average Annual Total Return(2) -35.03% -45.00% -1.22% +1.73% Value of $10,000 Investment(3) $ 6,497 $ 5,500 $ 9,403 $11,148 Avg. Ann. Total Return (9/30/08)(4) -29.83% +4.77% +5.37% Total Annual Operating Expenses(5) 1.79%
CLASS C 6-MONTH 1-YEAR 5-YEAR 10-YEAR - ------- ------- ------- ------- ------------------- Cumulative Total Return(1) -32.32% -43.12% -4.47% +38.82% Average Annual Total Return(2) -33.00% -43.59% -0.91% +3.33% Value of $10,000 Investment(3) $ 6,700 $ 5,641 $ 9,553 $13,882 Avg. Ann. Total Return (9/30/08)(4) -28.02% +5.09% +6.25% Total Annual Operating Expenses(5) 1.79%
CLASS R 6-MONTH 1-YEAR 5-YEAR INCEPTION (1/1/02) - ------- ------- ------- ------- ------------------- Cumulative Total Return(1) -32.16% -42.84% -2.11% -10.31% Average Annual Total Return(2) -32.16% -42.84% -0.43% -1.58% Value of $10,000 Investment(3) $ 6,784 $ 5,716 $ 9,789 $ 8,969 Avg. Ann. Total Return (9/30/08)(4) -27.06% +5.61% +1.63% Total Annual Operating Expenses(5) 1.29%
ADVISOR CLASS 6-MONTH 1-YEAR 5-YEAR 10-YEAR - ------------- ------- ------- ------- ------------------- Cumulative Total Return(1) -31.98% -42.55% +0.39% +53.31% Average Annual Total Return(2) -31.98% -42.55% +0.08% +4.37% Value of $10,000 Investment(3) $ 6,802 $ 5,745 $10,039 $15,331 Avg. Ann. Total Return (9/30/08)(4) -26.69% +6.15% +7.32% Total Annual Operating Expenses(5) 0.79%
PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM FIGURES SHOWN. FOR MOST RECENT MONTH-END PERFORMANCE, SEE "FUNDS AND PERFORMANCE" AT FRANKLINTEMPLETON.COM OR CALL (800) 342-5236. 42 | Semiannual Report Performance Summary (CONTINUED) ENDNOTES SMALL- AND MIDSIZE-COMPANY STOCKS CAN BE VOLATILE, ESPECIALLY OVER THE SHORT TERM. SMALLER OR RELATIVELY NEW COMPANIES CAN BE PARTICULARLY SENSITIVE TO CHANGING ECONOMIC CONDITIONS AND THEIR GROWTH PROSPECTS ARE LESS CERTAIN THAN THOSE OF LARGER, MORE ESTABLISHED COMPANIES. THE FUND INCLUDES INVESTMENTS IN THE TECHNOLOGY SECTOR, WHICH HAS BEEN HIGHLY VOLATILE AND INVOLVES SPECIAL RISKS. THE FUND'S PROSPECTUS ALSO INCLUDES A DESCRIPTION OF THE MAIN INVESTMENT RISKS. CLASS B: These shares have higher annual fees and expenses than Class A shares. CLASS C: Prior to 1/1/04, these shares were offered with an initial sales charge; thus actual total returns would have differed. These shares have higher annual fees and expenses than Class A shares. CLASS R: Shares are available to certain eligible investors as described in the prospectus. These shares have higher annual fees and expenses than Class A shares. ADVISOR CLASS: Shares are available to certain eligible investors as described in the prospectus. (1.) Cumulative total return represents the change in value of an investment over the periods indicated. (2.) Average annual total return represents the average annual change in value of an investment over the periods indicated. Six-month return has not been annualized. (3.) These figures represent the value of a hypothetical $10,000 investment in the Fund over the periods indicated. (4.) In accordance with SEC rules, we provide standardized average annual total return information through the latest calendar quarter. (5.) Figures are as stated in the Fund's prospectus current as of the date of this report. Semiannual Report | 43 Your Fund's Expenses FRANKLIN SMALL-MID CAP GROWTH FUND As a Fund shareholder, you can incur two types of costs: - - Transaction costs, including sales charges (loads) on Fund purchases and redemption fees; and - - Ongoing Fund costs, including management fees, distribution and service (12b-1) fees, and other Fund expenses. All mutual funds have ongoing costs, sometimes referred to as operating expenses. The following table shows ongoing costs of investing in the Fund and can help you understand these costs and compare them with those of other mutual funds. The table assumes a $1,000 investment held for the six months indicated. ACTUAL FUND EXPENSES The first line (Actual) for each share class listed in the table provides actual account values and expenses. The "Ending Account Value" is derived from the Fund's actual return, which includes the effect of Fund expenses. You can estimate the expenses you paid during the period by following these steps. OF COURSE, YOUR ACCOUNT VALUE AND EXPENSES WILL DIFFER FROM THOSE IN THIS ILLUSTRATION: 1. Divide your account value by $1,000. IF AN ACCOUNT HAD AN $8,600 VALUE, THEN $8,600 / $1,000 = 8.6. 2. Multiply the result by the number under the heading "Expenses Paid During Period." IF EXPENSES PAID DURING PERIOD WERE $7.50, THEN 8.6 X $7.50 = $64.50. In this illustration, the estimated expenses paid this period are $64.50. HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS Information in the second line (Hypothetical) for each class in the table can help you compare ongoing costs of investing in the Fund with those of other mutual funds. This information may not be used to estimate the actual ending account balance or expenses you paid during the period. The hypothetical "Ending Account Value" is based on the actual expense ratio for each class and an assumed 5% annual rate of return before expenses, which does not represent the Fund's actual return. The figure under the heading "Expenses Paid During Period" shows the hypothetical expenses your account would have incurred under this scenario. You can compare this figure with the 5% hypothetical examples that appear in shareholder reports of other funds. 44 | Semiannual Report Your Fund's Expenses (CONTINUED) PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES OR REDEMPTION FEES. Therefore, the second line for each class is useful in comparing ongoing costs only, and will not help you compare total costs of owning different funds. In addition, if transaction costs were included, your total costs would have been higher. Please refer to the Fund prospectus for additional information on operating expenses.
BEGINNING ACCOUNT ENDING ACCOUNT EXPENSES PAID DURING VALUE 5/1/08 VALUE 10/31/08 PERIOD* 5/1/08-10/31/08 ----------------- -------------- ----------------------- CLASS A Actual $1,000 $ 679.50 $4.61 Hypothetical (5% return before expenses) $1,000 $1,019.71 $5.55 CLASS B Actual $1,000 $ 676.80 $7.78 Hypothetical (5% return before expenses) $1,000 $1,015.93 $9.35 CLASS C Actual $1,000 $ 676.80 $7.78 Hypothetical (5% return before expenses) $1,000 $1,015.93 $9.35 CLASS R Actual $1,000 $ 678.40 $5.67 Hypothetical (5% return before expenses) $1,000 $1,018.45 $6.82 ADVISOR CLASS Actual $1,000 $ 680.20 $3.56 Hypothetical (5% return before expenses) $1,000 $1,020.97 $4.28
* Expenses are calculated using the most recent six-month expense ratio, annualized for each class (A: 1.09%; B: 1.84%; C: 1.84%; R: 1.34%; and Advisor: 0.84%), multiplied by the average account value over the period, multiplied by 184/365 to reflect the one-half year period. Semiannual Report | 45 Franklin Strategic Series FINANCIAL HIGHLIGHTS FRANKLIN FLEX CAP GROWTH FUND
SIX MONTHS ENDED YEAR ENDED APRIL 30, OCTOBER 31, 2008 ------------------------------------------------------------------------- CLASS A (UNAUDITED) 2008 2007 2006 2005 2004 - ------- ---------------- ---------------- ------------- ------------- ------------- ---------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ........................... $ 45.77 $ 45.15 $ 42.45 $ 35.26 $ 33.76 $ 25.56 ---------- ---------- ---------- ---------- ---------- ---------- Income from investment operations(a): Net investment income (loss)(b) .. (0.03) (0.05) 0.06 0.11 (0.10) (0.09) Net realized and unrealized gains (losses) ...................... (12.47) 1.43 2.70 7.08 1.60 8.29 ---------- ---------- ---------- ---------- ---------- ---------- Total from investment operations .... (12.50) 1.38 2.76 7.19 1.50 8.20 ---------- ---------- ---------- ---------- ---------- ---------- Less distributions from: Net investment income ............ -- (0.02) (0.06) -- -- -- Net realized gains ............... -- (0.74) -- -- -- -- ---------- ---------- ---------- ---------- ---------- ---------- Total distributions ................. -- (0.76) (0.06) -- -- -- ---------- ---------- ---------- ---------- ---------- ---------- Redemption fees(c) .................. --(d) --(d) --(d) --(d) --(d) -- ---------- ---------- ---------- ---------- ---------- ---------- Net asset value, end of period ...... $ 33.27 $ 45.77 $ 45.15 $ 42.45 $ 35.26 $ 33.76 ========== ========== ========== ========== ========== ========== Total return(e) ..................... (27.31)% 2.98% 6.50% 20.39% 4.44% 32.08% RATIOS TO AVERAGE NET ASSETS(f) Expenses ............................ 0.95%(g) 0.93%(g, h) 0.96%(g) 0.93%(g) 0.96%(g) 1.01% Net investment income (loss) ........ (0.16)% (0.10)% 0.15% 0.27% (0.29)% (0.29)% SUPPLEMENTAL DATA Net assets, end of period (000's) ... $1,433,974 $2,011,348 $1,977,605 $2,070,364 $1,505,342 $1,456,685 Portfolio turnover rate ............. 22.01% 36.70% 62.54% 66.63% 41.91% 39.92%
(a) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (b) Based on average daily shares outstanding. (c) Effective September 1, 2008, the redemption fee was eliminated. (d) Amount rounds to less than $0.01 per share. (e) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. (f) Ratios are annualized for periods less than one year. (g) Benefit of expense reduction rounds to less than 0.01% (h) Ratio of expenses to average net assets, excluding payments by affiliate, was 0.94%. The accompanying notes are an integral part of these financial statements. 46 | Semiannual Report Franklin Strategic Series FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN FLEX CAP GROWTH FUND
SIX MONTHS ENDED YEAR ENDED APRIL 30, OCTOBER 31, 2008 ------------------------------------------------------------------------- CLASS B (UNAUDITED) 2008 2007 2006 2005 2004 - ------- ---------------- ---------------- ------------- ------------- ------------- ---------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ........................... $ 42.66 $ 42.43 $ 40.14 $ 33.59 $ 32.40 $ 24.72 ---------- ---------- ---------- ---------- ---------- ---------- Income from investment operations(a): Net investment income (loss)(b) .. (0.18) (0.37) (0.23) (0.19) (0.35) (0.31) ---------- ---------- ---------- ---------- ---------- ---------- Net realized and unrealized gains (losses) ...................... (11.58) 1.34 2.52 6.74 1.54 7.99 ---------- ---------- ---------- ---------- ---------- ---------- Total from investment operations .... (11.76) 0.97 2.29 6.55 1.19 7.68 ---------- ---------- ---------- ---------- ---------- ---------- Less distributions from net realized gains ............................ -- (0.74) -- -- -- -- ---------- ---------- ---------- ---------- ---------- ---------- Redemption fees(c) .................. --(d) --(d) --(d) --(d) --(d) -- ---------- ---------- ---------- ---------- ---------- ---------- Net asset value, end of period ...... $ 30.90 $ 42.66 $ 42.43 $ 40.14 $ 33.59 $ 32.40 ========== ========== ========== ========== ========== ========== Total return(e) ..................... (27.57)% 2.19% 5.71% 19.50% 3.67% 31.07% RATIOS TO AVERAGE NET ASSETS(f) Expenses ............................ 1.70%(g) 1.68%(g, h) 1.71%(g) 1.68%(g) 1.70%(g) 1.76% Net investment income (loss) ........ (0.91)% (0.85)% (0.60)% (0.48)% (1.03)% (1.04)% SUPPLEMENTAL DATA Net assets, end of period (000's) ... $ 57,169 $ 95,600 $ 118,806 $ 143,477 $ 136,052 $ 134,589 Portfolio turnover rate ............. 22.01% 36.70% 62.54% 66.63% 41.91% 39.92%
(a) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (b) Based on average daily shares outstanding. (c) Effective September 1, 2008, the redemption fee was eliminated. (d) Amount rounds to less than $0.01 per share. (e) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. (f) Ratios are annualized for periods less than one year. (g) Benefit of expense reduction rounds to less than 0.01%. (h) Ratio of expenses to average net assets, excluding payments by affiliate, was 1.69%. The accompanying notes are an integral part of these financial statements. Semiannual Report | 47 Franklin Strategic Series FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN FLEX CAP GROWTH FUND
SIX MONTHS ENDED YEAR ENDED APRIL 30, OCTOBER 31, 2008 ------------------------------------------------------------------------- CLASS C (UNAUDITED) 2008 2007 2006 2005 2004 - ------- ---------------- ---------------- ------------- ------------- ------------- ---------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ........................... $ 42.76 $ 42.52 $ 40.22 $ 33.66 $ 32.47 $ 24.77 -------- -------- -------- -------- -------- -------- Income from investment operations(a): Net investment income (loss)(b) .. (0.18) (0.37) (0.23) (0.18) (0.35) (0.31) Net realized and unrealized gains (losses) ...................... (11.61) 1.35 2.53 6.74 1.54 8.01 -------- -------- -------- -------- -------- -------- Total from investment operations .... (11.79) 0.98 2.30 6.56 1.19 7.70 -------- -------- -------- -------- -------- -------- Less distributions from net realized gains ............................ -- (0.74) -- -- -- -- -------- -------- -------- -------- -------- -------- Redemption fees(c) .................. --(d) --(d) --(d) --(d) --(d) -- -------- -------- -------- -------- -------- -------- Net asset value, end of period ...... $ 30.97 $ 42.76 $ 42.52 $ 40.22 $ 33.66 $ 32.47 ======== ======== ======== ======== ======== ======== Total return(e) ..................... (27.57)% 2.21% 5.72% 19.49% 3.67% 31.09% RATIOS TO AVERAGE NET ASSETS(f) Expenses ............................ 1.70%(g) 1.68%(g, h) 1.69%(g) 1.68%(g) 1.71%(g) 1.76% Net investment income (loss) ........ (0.91)% (0.85)% (0.58)% (0.48)% (1.04)% (1.04)% SUPPLEMENTAL DATA Net assets, end of period (000's) ... $266,196 $375,822 $371,164 $388,478 $296,868 $298,114 Portfolio turnover rate ............. 22.01% 36.70% 62.54% 66.63% 41.91% 39.92%
(a) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (b) Based on average daily shares outstanding. (c) Effective September 1, 2008, the redemption fee was eliminated. (d) Amount rounds to less than $0.01 per share. (e) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. (f) Ratios are annualized for periods less than one year. (g) Benefit of expense reduction rounds to less than 0.01%. (h) Ratio of expenses to average net assets, excluding payments by affiliate, was 1.69%. The accompanying notes are an integral part of these financial statements. 48 | Semiannual Report Franklin Strategic Series FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN FLEX CAP GROWTH FUND
SIX MONTHS ENDED YEAR ENDED APRIL 30, OCTOBER 31, 2008 ------------------------------------------------------------------------- CLASS R (UNAUDITED) 2008 2007 2006 2005 2004 - ------- ---------------- ---------------- ------------- ------------- ------------- ---------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period .......................... $ 45.10 $ 44.61 $ 42.01 $ 34.98 $ 33.57 $ 25.49 ------- ------- ------- ------- ------- ------- Income from investment operations(a): Net investment income (loss)(b) .. (0.09) (0.16) (0.04) 0.01 (0.19) (0.18) Net realized and unrealized gains (losses) ...................... (12.26) 1.41 2.66 7.02 1.60 8.26 ------- ------- ------- ------- ------- ------- Total from investment operations .... (12.35) 1.25 2.62 7.03 1.41 8.08 ------- ------- ------- ------- ------- ------- Less distributions from: Net investment income ............ -- (0.02) (0.02) -- -- -- Net realized gains ............... -- (0.74) -- -- -- -- ------- ------- ------- ------- ------- ------- Total distributions ................. -- (0.76) (0.02) -- -- -- ------- ------- ------- ------- ------- ------- Redemption fees(c) .................. --(d) --(d) --(d) --(d) --(d) -- ------- ------- ------- ------- ------- ------- Net asset value, end of period ...... $ 32.75 $ 45.10 $ 44.61 $ 42.01 $ 34.98 $ 33.57 ======= ======= ======= ======= ======= ======= Total return(e) ..................... (27.38)% 2.73% 6.25% 20.07% 4.20% 31.70% RATIOS TO AVERAGE NET ASSETS(f) Expenses ............................ 1.20%(g) 1.18%(g, h) 1.21%(g) 1.18%(g) 1.21%(g) 1.26% Net investment income (loss) ........ (0.41)% (0.35)% (0.10)% 0.02% (0.54)% (0.54)% SUPPLEMENTAL DATA Net assets, end of period (000's) ... $45,126 $66,250 $81,398 $91,229 $69,103 $44,988 Portfolio turnover rate ............. 22.01% 36.70% 62.54% 66.63% 41.91% 39.92%
(a) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (b) Based on average daily shares outstanding. (c) Effective September 1, 2008, the redemption fee was eliminated. (d) Amount rounds to less than $0.01 per share. (e) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. (f) Ratios are annualized for periods less than one year. (g) Benefit of expense reduction rounds to less than 0.01%. (h) Ratio of expenses to average net assets, excluding payments by affiliate, was 1.19%. The accompanying notes are an integral part of these financial statements. Semiannual Report | 49 Franklin Strategic Series FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN FLEX CAP GROWTH FUND
SIX MONTHS ENDED YEAR ENDED APRIL 30, OCTOBER 31, 2008 ------------------------------------------------------------- ADVISOR CLASS (UNAUDITED) 2008 2007 2006 2005(a) - ------------- ---------------- ---------------- ------------- ------------- ------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ........................... $ 46.15 $ 45.41 $ 42.63 $ 35.32 $ 33.35 -------- -------- -------- -------- ------- Income from investment operations(b): Net investment income (loss)(c) .. 0.02 0.07 0.16 0.23 (0.01) Net realized and unrealized gains (losses) ...................... (12.57) 1.43 2.71 7.08 1.98 -------- -------- -------- -------- ------- Total from investment operations .... (12.55) 1.50 2.87 7.31 1.97 -------- -------- -------- -------- ------- Less distributions from: Net investment income ............ -- (0.02) (0.09) -- -- Net realized gains ............... -- (0.74) -- -- -- -------- -------- -------- -------- ------- Total distributions ................. -- (0.76) (0.09) -- -- -------- -------- -------- -------- ------- Redemption fees(d, e) ............... -- -- -- -- -- -------- -------- -------- -------- ------- Net asset value, end of period ...... $ 33.60 $ 46.15 $ 45.41 $ 42.63 $ 35.32 ======== ======== ======== ======== ======= Total return(f) ..................... (27.19)% 3.23% 6.77% 20.67% 5.91% RATIOS TO AVERAGE NET ASSETS(g) Expenses(h) ......................... 0.70% 0.68%(i) 0.71% 0.68% 0.71% Net investment income (loss) ........ 0.09% 0.15% 0.40% 0.52% (0.04)% SUPPLEMENTAL DATA Net assets, end of period (000's) ... $303,931 $348,245 $297,856 $209,680 $71,193 Portfolio turnover rate ............. 22.01% 36.70% 62.54% 66.63% 41.91%
(a) For the period August 2, 2004 (effective date) to April 30, 2005. (b) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (c) Based on average daily shares outstanding. (d) Effective September 1, 2008, the redemption fee was eliminated. (e) Amount rounds to less than $0.01 per share. (f) Total return is not annualized for periods less than one year. (g) Ratios are annualized for periods less than one year. (h) Benefit of expense reduction rounds to less than 0.01%. (i) Ratio of expenses to average net assets, excluding payments by affiliate, was 0.69%. The accompanying notes are an integral part of these financial statements. 50 | Semiannual Report Franklin Strategic Series STATEMENT OF INVESTMENTS, OCTOBER 31, 2008 (UNAUDITED)
FRANKLIN FLEX CAP GROWTH FUND SHARES VALUE ----------------------------- -------------- --------------- COMMON STOCKS 96.6% AUTOMOBILES & COMPONENTS 0.4% BorgWarner Inc. ........................................................ 350,000 $ 7,864,500 --------------- BANKS 1.0% Wells Fargo & Co. ...................................................... 600,000 20,430,000 --------------- CAPITAL GOODS 5.7% AMETEK Inc. ............................................................ 600,000 19,950,000 Danaher Corp. .......................................................... 600,000 35,544,000 Precision Castparts Corp. .............................................. 573,500 37,168,535 (a) SunPower Corp., A ...................................................... 350,000 13,671,000 United Technologies Corp. .............................................. 250,000 13,740,000 --------------- 120,073,535 --------------- COMMERCIAL & PROFESSIONAL SERVICES 1.6% (a) Stericycle Inc. ........................................................ 600,000 35,058,000 --------------- DIVERSIFIED FINANCIALS 2.4% BlackRock Inc. ......................................................... 175,000 22,984,500 T. Rowe Price Group Inc. ............................................... 725,000 28,666,500 --------------- 51,651,000 --------------- ENERGY 5.2% Devon Energy Corp. ..................................................... 425,000 34,365,500 (a) Mariner Energy Inc. .................................................... 600,000 8,634,000 (a) Petrohawk Energy Corp. ................................................. 1,350,000 25,582,500 Schlumberger Ltd. ...................................................... 350,000 18,077,500 Smith International Inc. ............................................... 650,000 22,412,000 --------------- 109,071,500 --------------- FOOD & STAPLES RETAILING 1.9% CVS Caremark Corp. ..................................................... 1,300,000 39,845,000 --------------- FOOD, BEVERAGE & TOBACCO 2.5% (a) Hansen Natural Corp. ................................................... 600,000 15,192,000 PepsiCo Inc. ........................................................... 650,000 37,056,500 --------------- 52,248,500 --------------- HEALTH CARE EQUIPMENT & SERVICES 7.9% Baxter International Inc. .............................................. 400,000 24,196,000 C. R. Bard Inc. ........................................................ 368,300 32,502,475 (a) Express Scripts Inc. ................................................... 475,000 28,789,750 (a) Masimo Corp. ........................................................... 600,000 19,194,000 Stryker Corp. .......................................................... 500,000 26,730,000 (a) Varian Medical Systems Inc. ............................................ 300,000 13,653,000 (a) VCA Antech Inc. ........................................................ 1,150,000 20,815,000 --------------- 165,880,225 --------------- HOUSEHOLD & PERSONAL PRODUCTS 3.3% Clorox Co. ............................................................. 500,000 30,405,000 The Procter & Gamble Co. ............................................... 600,000 38,724,000 --------------- 69,129,000 ---------------
Semiannual Report | 51 Franklin Strategic Series STATEMENT OF INVESTMENTS, OCTOBER 31, 2008 (UNAUDITED) (CONTINUED)
FRANKLIN FLEX CAP GROWTH FUND SHARES VALUE ----------------------------- -------------- --------------- COMMON STOCKS (CONTINUED) INSURANCE 1.6% AFLAC Inc. ............................................................. 575,000 $ 25,461,000 Assurant Inc. .......................................................... 325,000 8,281,000 --------------- 33,742,000 --------------- MATERIALS 3.4% Ecolab Inc. ............................................................ 700,000 26,082,000 Praxair Inc. ........................................................... 700,000 45,605,000 --------------- 71,687,000 --------------- MEDIA 1.2% (a) The DIRECTV Group Inc. ................................................. 550,000 12,039,500 The Walt Disney Co. .................................................... 500,000 12,950,000 --------------- 24,989,500 --------------- PHARMACEUTICALS, BIOTECHNOLOGY & LIFE SCIENCES 12.4% (a) Celgene Corp. .......................................................... 650,000 41,769,000 (a) Covance Inc. ........................................................... 560,000 28,000,000 (a) Genentech Inc. ......................................................... 550,000 45,617,000 (a) Gilead Sciences Inc. ................................................... 1,375,000 63,043,750 Johnson & Johnson ...................................................... 650,000 39,871,000 Schering-Plough Corp. .................................................. 1,800,000 26,082,000 (a) Waters Corp. ........................................................... 400,000 17,520,000 --------------- 261,902,750 --------------- RETAILING 2.3% (a) Amazon.com Inc. ........................................................ 200,000 11,448,000 PetSmart Inc. .......................................................... 1,100,000 21,659,000 Target Corp. ........................................................... 400,000 16,048,000 --------------- 49,155,000 --------------- SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT 3.5% (a) Lam Research Corp. ..................................................... 350,000 7,826,000 Microchip Technology Inc. .............................................. 1,250,000 30,787,500 (a) Microsemi Corp. ........................................................ 1,600,000 34,784,000 --------------- 73,397,500 --------------- SOFTWARE & SERVICES 17.9% Accenture Ltd., A ...................................................... 800,000 26,440,000 (a) Activision Blizzard Inc. ............................................... 3,300,000 41,118,000 (a) Adobe Systems Inc. ..................................................... 939,200 25,020,288 (a) Alliance Data Systems Corp. ............................................ 400,000 20,064,000 (a) Autodesk Inc. .......................................................... 600,000 12,786,000 (a) Concur Technologies Inc. ............................................... 475,000 11,984,250 FactSet Research Systems Inc. .......................................... 725,000 28,122,750 (a) Google Inc., A ......................................................... 105,000 37,732,800 MasterCard Inc., A ..................................................... 244,800 36,186,336 (a) Nuance Communications Inc. ............................................. 1,550,000 14,182,500 (a) Oracle Corp. ........................................................... 2,175,000 39,780,750 Paychex Inc. ........................................................... 1,050,000 29,967,000
52 | Semiannual Report Franklin Strategic Series STATEMENT OF INVESTMENTS, OCTOBER 31, 2008 (UNAUDITED) (CONTINUED)
FRANKLIN FLEX CAP GROWTH FUND SHARES VALUE ----------------------------- -------------- --------------- COMMON STOCKS (CONTINUED) SOFTWARE & SERVICES (CONTINUED) (a) Salesforce.com Inc. .................................................... 550,000 $ 17,028,000 Visa Inc., A ........................................................... 650,000 35,977,500 --------------- 376,390,174 --------------- TECHNOLOGY HARDWARE & EQUIPMENT 14.3% (a) Apple Inc. ............................................................. 467,600 50,309,084 (a) Cisco Systems Inc. ..................................................... 3,000,000 53,310,000 (a) FLIR Systems Inc. ...................................................... 1,933,500 62,065,350 Hewlett-Packard Co. .................................................... 1,000,000 38,280,000 QUALCOMM Inc. .......................................................... 1,500,000 57,390,000 (a) Research In Motion Ltd. (Canada) ....................................... 350,000 17,650,500 (a) Trimble Navigation Ltd. ................................................ 1,050,000 21,598,500 --------------- 300,603,434 --------------- TELECOMMUNICATION SERVICES 3.5% (a) American Tower Corp., A ................................................ 1,500,000 48,465,000 (a,b) Anda Networks .......................................................... 36,443 56,487 (a) NII Holdings Inc. ...................................................... 1,000,000 25,760,000 --------------- 74,281,487 --------------- TRANSPORTATION 4.6% C.H. Robinson Worldwide Inc. ........................................... 741,500 38,394,870 Canadian National Railway Co. (Canada) ................................. 550,000 23,793,000 Expeditors International of Washington Inc. ............................ 1,050,000 34,282,500 --------------- 96,470,370 --------------- TOTAL COMMON STOCKS (COST $2,079,342,133) .............................. 2,033,870,475 --------------- PREFERRED STOCKS (COST $9,999,998) 0.5% PHARMACEUTICALS, BIOTECHNOLOGY & LIFE SCIENCES 0.5% (a,b) FibroGen Inc., pfd., E ................................................. 2,227,171 11,224,942 --------------- TOTAL INVESTMENTS BEFORE SHORT TERM INVESTMENTS (COST $2,089,342,131) .. 2,045,095,417 --------------- SHORT TERM INVESTMENTS (COST $86,841,881) 4.1% MONEY MARKET FUNDS 4.1% (c) Franklin Institutional Fiduciary Trust Money Market Portfolio, 1.56% ... 86,841,881 86,841,881 --------------- TOTAL INVESTMENTS (COST $2,176,184,012) 101.2% ......................... 2,131,937,298 OTHER ASSETS, LESS LIABILITIES (1.2)% .................................. (25,540,353) --------------- NET ASSETS 100.0% ...................................................... $ 2,106,396,945 ===============
(a) Non-income producing for the twelve months ended October 31, 2008. (b) See Note 8 regarding restricted and illiquid securities. (c) See Note 7 regarding investments in the Franklin Institutional Fiduciary Trust Money Market Portfolio. The rate shown is the annualized seven-day yield at period end. The accompanying notes are an integral part of these financial statements. Semiannual Report | 53 Franklin Strategic Series FINANCIAL HIGHLIGHTS FRANKLIN FOCUSED CORE EQUITY FUND
SIX MONTHS ENDED PERIOD ENDED OCTOBER 31, 2008 APRIL 30, CLASS A (UNAUDITED) 2008(a) - ------- ---------------- ------------ PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ................. $ 8.69 $ 10.00 ------- ------- Income from investment operations(b): Net investment income(c) .......................... 0.04 0.03 Net realized and unrealized gains (losses) ........ (2.81) (1.34) ------- ------- Total from investment operations ..................... (2.77) (1.31) ------- ------- Net asset value, end of period ....................... $ 5.92 $ 8.69 ======= ======= Total return(d) ...................................... (31.80)% (13.10)% RATIOS TO AVERAGE NET ASSETS(e) Expenses before waiver and payments by affiliates .... 4.27% 5.48% Expenses net of waiver and payments by affiliates .... 1.18% 1.22% Net investment income ................................ 1.05% 0.91% SUPPLEMENTAL DATA Net assets, end of period (000's) .................... $ 4,184 $ 4,652 Portfolio turnover rate .............................. 28.68% 35.64%
(a) For the period December 13, 2007 (commencement of operations) to April 30, 2008. (b) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (c) Based on average daily shares outstanding. (d) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. (e) Ratios are annualized for periods less than one year. The accompanying notes are an integral part of these financial statements. 54 | Semiannual Report Franklin Strategic Series FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN FOCUSED CORE EQUITY FUND
SIX MONTHS ENDED PERIOD ENDED OCTOBER 31, 2008 APRIL 30, CLASS C (UNAUDITED) 2008(a) - ------- ---------------- ------------ PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ................. $ 8.67 $ 10.00 ------- ------- Income from investment operations(b): Net investment income(c) .......................... --(d) 0.01 Net realized and unrealized gains (losses) ........ (2.78) (1.34) ------- ------- Total from investment operations ..................... (2.78) (1.33) ------- ------- Net asset value, end of period ....................... $ 5.89 $ 8.67 ======= ======= Total return(e) ...................................... (32.06)% (13.30)% RATIOS TO AVERAGE NET ASSETS(f) Expenses before waiver and payments by affiliates .... 4.98% 6.11% Expenses net of waiver and payments by affiliates .... 1.89% 1.85% Net investment income ................................ 0.34% 0.28% SUPPLEMENTAL DATA Net assets, end of period (000's) .................... $ 110 $ 41 Portfolio turnover rate .............................. 28.68% 35.64%
(a) For the period December 13, 2007 (commencement of operations) to April 30, 2008. (b) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (c) Based on average daily shares outstanding. (d) Amount rounds to less than $0.01 per share. (e) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. (f) Ratios are annualized for periods less than one year. The accompanying notes are an integral part of these financial statements. Semiannual Report | 55 Franklin Strategic Series FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN FOCUSED CORE EQUITY FUND
SIX MONTHS ENDED PERIOD ENDED OCTOBER 31, 2008 APRIL 30, CLASS R (UNAUDITED) 2008(a) - ------- ---------------- ------------ PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ................. $ 8.68 $ 10.00 ------- ------- Income from investment operations(b): Net investment income(c) .......................... 0.04 0.03 Net realized and unrealized gains (losses) ........ (2.81) (1.35) ------- ------- Total from investment operations ..................... (2.77) (1.32) ------- ------- Net asset value, end of period ....................... $ 5.91 $ 8.68 ======= ======= Total return(d) ...................................... (31.91)% (13.20)% RATIOS TO AVERAGE NET ASSETS(e) Expenses before waiver and payments by affiliates .... 4.48% 5.65% Expenses net of waiver and payments by affiliates .... 1.39% 1.39% Net investment income 0.84% 0.74% SUPPLEMENTAL DATA Net assets, end of period (000's) .................... $ 6 $ 9 Portfolio turnover rate .............................. 28.68% 35.64%
(a) For the period December 13, 2007 (commencement of operations) to April 30, 2008. (b) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (c) Based on average daily shares outstanding. (d) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. (e) Ratios are annualized for periods less than one year. The accompanying notes are an integral part of these financial statements. 56 | Semiannual Report Franklin Strategic Series FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN FOCUSED CORE EQUITY FUND
SIX MONTHS ENDED PERIOD ENDED OCTOBER 31, 2008 APRIL 30, ADVISOR CLASS (UNAUDITED) 2008(a) - ------------- ---------------- ------------ PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ................. $ 8.70 $ 10.00 ------- ------- Income from investment operations(b): Net investment income(c) .......................... 0.06 0.04 Net realized and unrealized gains (losses) ........ (2.82) (1.34) ------- ------- Total from investment operations ..................... (2.76) (1.30) ------- ------- Net asset value, end of period ....................... $ 5.94 $ 8.70 ======= ======= Total return(d) ...................................... (31.72)% (13.00)% RATIOS TO AVERAGE NET ASSETS(e) Expenses before waiver and payments by affiliates .... 3.98% 5.15% Expenses net of waiver and payments by affiliates .... 0.89% 0.89% Net investment income ................................ 1.34% 1.24% SUPPLEMENTAL DATA Net assets, end of period (000's) .................... $ 109 $ 171 Portfolio turnover rate .............................. 28.68% 35.64%
(a) For the period December 13, 2007 (commencement of operations) to April 30, 2008. (b) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (c) Based on average daily shares outstanding. (d) Total return is not annualized for periods less than one year. (e) Ratios are annualized for periods less than one year. The accompanying notes are an integral part of these financial statements. Semiannual Report | 57 Franklin Strategic Series STATEMENT OF INVESTMENTS, OCTOBER 31, 2008 (UNAUDITED)
FRANKLIN FOCUSED CORE EQUITY FUND COUNTRY SHARES VALUE --------------------------------- ------------- ------ ---------- COMMON STOCKS 97.4% CONSUMER DISCRETIONARY 12.1% Abercrombie & Fitch Co., A ...................... United States 2,960 $ 85,722 CBS Corp., B .................................... United States 4,920 47,773 Harley-Davidson Inc. ............................ United States 4,080 99,878 Harman International Industries Inc. ............ United States 3,800 69,806 (a) R.H. Donnelley Corp. ............................ United States 13,440 11,424 The Sherwin-Williams Co. ........................ United States 1,500 85,365 Target Corp. .................................... United States 3,340 134,001 ---------- 533,969 ---------- CONSUMER STAPLES 11.1% Bunge Ltd. ...................................... United States 5,080 195,123 CVS Caremark Corp. .............................. United States 1,450 44,443 (a) Hansen Natural Corp. ............................ United States 4,370 110,648 Walgreen Co. .................................... United States 5,520 140,539 ---------- 490,753 ---------- ENERGY 11.4% Chesapeake Energy Corp. ......................... United States 1,190 26,144 Marathon Oil Corp. .............................. United States 7,370 214,467 Petroplus Holdings AG ........................... Switzerland 8,033 212,726 (a) SEACOR Holdings Inc. ............................ United States 700 47,019 ---------- 500,356 ---------- FINANCIALS 7.2% American Express Co. ............................ United States 3,150 86,625 CapitalSource Inc. .............................. United States 8,200 60,680 Discover Financial Services ..................... United States 9,160 112,210 iStar Financial Inc. ............................ United States 5,400 5,832 Legg Mason Inc. ................................. United States 2,340 51,925 ---------- 317,272 ---------- HEALTH CARE 20.6% (a) Advanced Medical Optics Inc. .................... United States 4,010 24,742 (a) Genentech Inc. .................................. United States 1,840 152,609 Merck & Co. Inc. ................................ United States 5,370 166,201 (a) Mylan Inc. ...................................... United States 16,040 137,463 Roche Holding AG ................................ Switzerland 1,340 204,358 Schering-Plough Corp. ........................... United States 15,400 223,146 ---------- 908,519 ---------- INDUSTRIALS 10.1% 3M Co. .......................................... United States 1,350 86,805 Avery Dennison Corp. ............................ United States 1,650 57,783 The Boeing Co. .................................. United States 1,430 74,746 Precision Castparts Corp. ....................... United States 2,140 138,693 Rockwell Collins Inc. ........................... United States 2,320 86,374 ---------- 444,401 ----------
58 | Semiannual Report Franklin Strategic Series STATEMENT OF INVESTMENTS, OCTOBER 31, 2008 (UNAUDITED) (CONTINUED)
FRANKLIN FOCUSED CORE EQUITY FUND COUNTRY SHARES VALUE --------------------------------- ------------- ------ ---------- COMMON STOCKS (CONTINUED) INFORMATION TECHNOLOGY 16.0% (a) Apple Inc. ...................................... United States 420 $ 45,188 (a) Autodesk Inc. ................................... United States 5,970 127,221 Corning Inc. .................................... United States 3,580 38,771 (a) Lam Research Corp. .............................. United States 5,190 116,048 MasterCard Inc., A .............................. United States 560 82,779 Maxim Integrated Products Inc. .................. United States 11,500 156,400 Nokia Corp., ADR ................................ Finland 5,220 79,240 (a) VeriFone Holdings Inc. .......................... United States 5,170 58,731 ---------- 704,378 ---------- MATERIALS 5.3% Alcoa Inc. ...................................... United States 1,870 21,524 Celanese Corp., A ............................... United States 15,190 210,533 (a) Intrepid Potash Inc. ............................ United States 90 1,957 ---------- 234,014 ---------- TELECOMMUNICATION SERVICES 3.6% (a) NII Holdings Inc. ............................... United States 6,200 159,712 ---------- TOTAL COMMON STOCKS (COST $6,651,842) ........... 4,293,374 ---------- SHORT TERM INVESTMENTS (COST $75,345) 1.7% MONEY MARKET FUNDS 1.7% (b) Franklin Institutional Fiduciary Trust Money Market Portfolio, 1.56% ...................... United States 75,345 75,345 ---------- TOTAL INVESTMENTS (COST $6,727,187) 99.1% ....... 4,368,719 OTHER ASSETS, LESS LIABILITIES 0.9% ............. 40,230 ---------- NET ASSETS 100.0% ............................... $4,408,949 ==========
See Selected Portfolio Abbreviations on page 84. (a) Non-income producing for the twelve months ended October 31, 2008. (b) See Note 7 regarding investments in the Franklin Institutional Fiduciary Trust Money Market Portfolio. The rate shown is the annualized seven-day yield at period end. The accompanying notes are an integral part of these financial statements. Semiannual Report | 59 Franklin Strategic Series FINANCIAL HIGHLIGHTS FRANKLIN GROWTH OPPORTUNITIES FUND
SIX MONTHS ENDED OCTOBER 31, YEAR ENDED APRIL 30, 2008 -------------------------------------------------------------- CLASS A (UNAUDITED) 2008 2007 2006 2005 2004 - ------- ----------- -------- -------- -------- ------- --------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ................ $ 20.06 $ 18.54 $ 18.30 $ 13.33 $ 12.57 $ 9.50 -------- -------- -------- -------- ------- ------- Income from investment operations(a): Net investment income (loss)(b) .................. (0.08) (0.15) (0.12) (0.15) (0.14) (0.15) Net realized and unrealized gains (losses) ....... (6.25) 1.67 0.36 5.12 0.90 3.22 -------- -------- -------- -------- ------- ------- Total from investment operations .................... (6.33) 1.52 0.24 4.97 0.76 3.07 Redemption fees(c) .................................. --(d) --(d) --(d) --(d) --(d) -- -------- -------- -------- -------- ------- ------- Net asset value, end of period ...................... $ 13.73 $ 20.06 $ 18.54 $ 18.30 $ 13.33 $ 12.57 Total return(e) ..................................... (31.56)% 8.20% 1.31% 37.28% 6.05% 32.32% ======== ======== ======== ======== ======= ======= RATIOS TO AVERAGE NET ASSETS(f) Expenses ............................................ 1.28%(g) 1.27%(g) 1.38%(g) 1.39%(g) 1.51%(g) 1.62% Net investment income (loss) ........................ (0.82)% (0.77)% (0.70)% (0.92)% (1.05)% (1.26)% SUPPLEMENTAL DATA Net assets, end of period (000's) ................... $102,140 $137,313 $105,407 $113,713 $80,611 $86,983 Portfolio turnover rate ............................. 46.03% 133.58% 176.15% 183.31% 157.48% 114.66%
(a) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (b) Based on average daily shares outstanding. (c) Effective September 1, 2008, the redemption fee was eliminated. (d) Amount rounds to less than $0.01 per share. (e) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. (f) Ratios are annualized for periods less than one year. (g) Benefit of expense reduction rounds to less than 0.01%. The accompanying notes are an integral part of these financial statements. 60 | Semiannual Report Franklin Strategic Series FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN GROWTH OPPORTUNITIES FUND
SIX MONTHS ENDED OCTOBER 31, YEAR ENDED APRIL 30, 2008 -------------------------------------------------------------- CLASS B (UNAUDITED) 2008 2007 2006 2005 2004 - ------- ----------- -------- -------- -------- ------- --------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ................ $ 18.95 $ 17.64 $ 17.53 $ 12.87 $ 12.22 $ 9.30 --------- -------- -------- -------- ------- ------- Income from investment operations(a): Net investment income (loss)(b) .................. (0.13) (0.28) (0.23) (0.26) (0.23) (0.22) Net realized and unrealized gains (losses) ....... (5.89) 1.59 0.34 4.92 0.88 3.14 --------- -------- -------- ------- ------- ------- Total from investment operations .................... (6.02) 1.31 0.11 4.66 0.65 2.92 --------- -------- -------- ------- ------- ------- Redemption fees(c) .................................. --(d) --(d) --(d) --(d) --(d) -- --------- -------- -------- ------- ------- ------- Net asset value, end of period ...................... $ 12.93 $ 18.95 $ 17.64 $ 17.53 $ 12.87 ($12.22) --------- -------- -------- ------- ------- ------- Total return(e) ..................................... (31.82)% 7.43% 0.63% 36.21% 5.32% 31.40% RATIOS TO AVERAGE NET ASSETS(f) Expenses ............................................ 1.97%(g) 1.99%(g) 2.08%(g) 2.13%(g) 2.21%(g) 2.28% Net investment income (loss) ........................ (1.51)% (1.49)% (1.40)% (1.66)% (1.75)% (1.92)% SUPPLEMENTAL DATA Net assets, end of period (000's) ................... $ 6,640 $11,528 $15,638 $19,508 $17,017 $18,059 Portfolio turnover rate ............................. 46.03% 133.58% 176.15% 183.31% 157.48% 114.66%
(a) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (b) Based on average daily shares outstanding. (c) Effective September 1, 2008, the redemption fee was eliminated. (d) Amount rounds to less than $0.01 per share. (e) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. (f) Ratios are annualized for periods less than one year. (g) Benefit of expense reduction rounds to less than 0.01%. The accompanying notes are an integral part of these financial statements. Semiannual Report | 61 Franklin Strategic Series FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN GROWTH OPPORTUNITIES FUND
SIX MONTHS ENDED OCTOBER 31, YEAR ENDED APRIL 30, 2008 -------------------------------------------------------------- CLASS C (UNAUDITED) 2008 2007 2006 2005 2004 - ------- ----------- -------- -------- -------- ------- --------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ................ $ 18.91 $ 17.61 $ 17.49 $ 12.84 $ 12.19 $ 9.28 ------- ------- ------- ------- ------- ------- Income from investment operations(a): Net investment income (loss)(b) .................. (0.13) (0.28) (0.23) (0.26) (0.23) (0.22) Net realized and unrealized gains (losses) ....... (5.88) 1.58 0.35 4.91 0.88 3.13 ------- ------- ------- ------- ------- ------- Total from investment operations .................... (6.01) 1.30 0.12 4.65 0.65 2.91 ------- ------- ------- ------- ------- ------- Redemption fees(c) .................................. --(d) --(d) --(d) --(d) --(d) -- ------- ------- ------- ------- ------- ------- Net asset value, end of period ...................... $ 12.90 $ 18.91 $ 17.61 $ 17.49 $ 12.84 $ 12.19 ======= ======= ======= ======= ======= ======= Total return(e) ..................................... (31.83)% 7.38% 0.69% 36.21% 5.33% 31.36% RATIOS TO AVERAGE NET ASSETS(f) Expenses ............................................ 1.99%(g) 1.99%(g) 2.09%(g) 2.14%(g) 2.22%(g) 2.29% Net investment income (loss) ........................ (1.53)% (1.49)% (1.41)% (1.67)% (1.76)% (1.93)% SUPPLEMENTAL DATA Net assets, end of period (000's) ................... $28,672 $40,253 $31,518 $31,167 $24,450 $30,054 Portfolio turnover rate ............................. 46.03% 133.58% 176.15% 183.31% 157.48% 114.66%
(a) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (b) Based on average daily shares outstanding. (c) Effective September 1, 2008, the redemption fee was eliminated. (d) Amount rounds to less than $0.01 per share. (e) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. (f) Ratios are annualized for periods less than one year. (g) Benefit of expense reduction rounds to less than 0.01%. The accompanying notes are an integral part of these financial statements. 62 | Semiannual Report Franklin Strategic Series FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN GROWTH OPPORTUNITIES FUND
SIX MONTHS ENDED OCTOBER 31, YEAR ENDED APRIL 30, 2008 -------------------------------------------------------------- CLASS R (UNAUDITED) 2008 2007 2006 2005 2004 - ------- ----------- -------- -------- -------- ------- --------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ................ $ 19.80 $ 18.33 $ 18.12 $ 13.24 $ 12.51 $ 9.47 ------- ------- ------- ------- ------- ------- Income from investment operations(a): Net investment income (loss)(b) .................. (0.09) (0.20) (0.16) (0.19) (0.17) (0.17) Net realized and unrealized gains (losses) ....... (6.17) 1.67 0.37 5.07 0.90 3.21 ------- ------- ------- ------- ------- ------- Total from investment operations .................... (6.26) 1.47 0.21 4.88 0.73 3.04 ------- ------- ------- ------- ------- ------- Redemption fees(c) .................................. --(d) --(d) --(d) --(d) --(d) -- ------- ------- ------- ------- ------- ------- Net asset value, end of period ...................... $ 13.54 $ 19.80 $ 18.33 $ 18.12 $ 13.24 $ 12.51 ======= ======= ======= ======= ======= ======= Total return(e) ..................................... (31.67)% 8.02% 1.16% 36.86% 5.84% 32.10% RATIOS TO AVERAGE NET ASSETS(f) Expenses ............................................ 1.49%(g) 1.49%(g) 1.59%(g) 1.64%(g) 1.72%(g) 1.79% Net investment income (loss) ........................ (1.03)% (0.99)% (0.91)% (1.17)% (1.26)% (1.43)% SUPPLEMENTAL DATA Net assets, end of period (000's) ................... $ 5,911 $ 7,863 $ 7,413 $ 5,171 $ 3,041 $ 1,761 Portfolio turnover rate ............................. 46.03% 133.58% 176.15% 183.31% 157.48% 114.66%
(a) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (b) Based on average daily shares outstanding. (c) Effective September 1, 2008, the redemption fee was eliminated. (d) Amount rounds to less than $0.01 per share. (e) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. (f) Ratios are annualized for periods less than one year. (g) Benefit of expense reduction rounds to less than 0.01%. The accompanying notes are an integral part of these financial statements. Semiannual Report | 63 Franklin Strategic Series FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN GROWTH OPPORTUNITIES FUND
SIX MONTHS ENDED OCTOBER 31, YEAR ENDED APRIL 30, 2008 -------------------------------------------------------------- ADVISOR CLASS (UNAUDITED) 2008 2007 2006 2005 2004 - ------------- ----------- -------- -------- -------- ------- --------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ................ $ 20.60 $ 18.99 $ 18.68 $ 13.58 $ 12.77 $ 9.62 ------- -------- ------- ------- ------- ------- Income from investment operations(a): Net investment income (loss)(b) .................. (0.05) (0.10) (0.07) (0.11) (0.10) (0.11) Net realized and unrealized gains (losses) ....... (6.41) 1.71 0.38 5.21 0.91 3.26 ------- -------- ------- ------- ------- ------- Total from investment operations .................... (6.46) 1.61 0.31 5.10 0.81 3.15 ------- -------- ------- ------- ------- ------- Redemption fees(c) .................................. --(d) --(d) --(d) --(d) --(d) -- ------- -------- ------- ------- ------- ------- Net asset value, end of period ...................... $ 14.14 $ 20.60 $ 18.99 $ 18.68 $ 13.58 $ 12.77 ======= ======== ======= ======= ======= ======= Total return(e) ..................................... (31.41)% 8.48% 1.66% 37.56% 6.34% 32.74% RATIOS TO AVERAGE NET ASSETS(f) Expenses ............................................ 0.99%(g) 0.99%(g) 1.09%(g) 1.14%(g) 1.22%(g) 1.29% Net investment income (loss) (0.53)% (0.49)% (0.41)% (0.67)% (0.76)% (0.93)% SUPPLEMENTAL DATA Net assets, end of period (000's) ................... $78,881 $101,885 $85,486 $36,744 $22,731 $22,374 Portfolio turnover rate ............................. 46.03% 133.58% 176.15% 183.31% 157.48% 114.66%
(a) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (b) Based on average daily shares outstanding. (c) Effective September 1, 2008, the redemption fee was eliminated. (d) Amount rounds to less than $0.01 per share. (e) Total return is not annualized for periods less than one year. (f) Ratios are annualized for periods less than one year. (g) Benefit of expense reduction rounds to less than 0.01%. The accompanying notes are an integral part of these financial statements. 64 | Semiannual Report Franklin Strategic Series STATEMENT OF INVESTMENTS, OCTOBER 31, 2008 (UNAUDITED)
FRANKLIN GROWTH OPPORTUNITIES FUND COUNTRY SHARES/WARRANTS VALUE ---------------------------------- ------------- --------------- ------------- COMMON STOCKS AND WARRANTS 96.9% CONSUMER DISCRETIONARY 7.2% (a) Amazon.com Inc. ..................................................... United States 18,400 $ 1,053,216 (a) Chipotle Mexican Grill Inc., B ...................................... United States 21,000 898,170 Guess? Inc. ......................................................... United States 92,100 2,005,017 (a) ITT Educational Services Inc. ....................................... United States 53,200 4,662,980 Strayer Education Inc. .............................................. United States 28,700 6,493,949 (a) WMS Industries Inc. ................................................. United States 31,000 775,000 ------------- 15,888,332 ------------- CONSUMER STAPLES 1.3% Bunge Ltd. .......................................................... United States 25,000 960,250 (a) Hansen Natural Corp. ................................................ United States 77,300 1,957,236 ------------- 2,917,486 ------------- ENERGY 7.9% (a) FMC Technologies Inc. ............................................... United States 79,880 2,795,001 (a) McMoRan Exploration Co. ............................................. United States 101,300 1,437,447 (a) Petrohawk Energy Corp. .............................................. United States 162,100 3,071,795 Schlumberger Ltd. ................................................... United States 40,980 2,116,617 (a) Southwestern Energy Co. ............................................. United States 64,000 2,279,680 (a) T-3 Energy Services Inc. ............................................ United States 63,500 1,530,985 (a) Weatherford International Ltd. ...................................... United States 182,900 3,087,352 XTO Energy Inc. ..................................................... United States 31,100 1,118,045 ------------- 17,436,922 ------------- FINANCIALS 2.9% BlackRock Inc. ...................................................... United States 32,580 4,279,057 (a) MSCI Inc. Class A ................................................... United States 130,500 2,249,820 ------------- 6,528,877 ------------- HEALTH CARE 23.9% Alcon Inc. .......................................................... Switzerland 10,500 925,260 (a) Celgene Corp. ....................................................... United States 156,600 10,063,116 (a) Covance Inc. ........................................................ United States 39,160 1,958,000 (a) Genentech Inc. ...................................................... United States 79,400 6,585,436 (a) Genzyme Corp. ....................................................... United States 31,800 2,317,584 (a) Gilead Sciences Inc. ................................................ United States 189,660 8,695,911 (a) Illumina Inc. ....................................................... United States 66,000 2,034,780 (a) MWI Veterinary Supply Inc. .......................................... United States 34,744 1,203,185 (a) Myriad Genetics Inc. ................................................ United States 88,090 5,557,598 (a) NuVasive Inc. ....................................................... United States 34,500 1,624,605 Perrigo Co. ......................................................... United States 87,900 2,988,600 (a) Psychiatric Solutions Inc. .......................................... United States 75,200 2,503,408 Roche Holding AG, ADR ............................................... Switzerland 42,800 3,244,240 (a) Sequenom Inc. ....................................................... United States 194,900 3,508,200 ------------- 53,209,923 ------------- INDUSTRIALS 13.1% ABB Ltd., ADR ....................................................... Switzerland 173,100 2,276,265 AMETEK Inc. ......................................................... United States 75,600 2,513,700 (a) BE Aerospace Inc. ................................................... United States 93,800 1,207,206
Semiannual Report | 65 Franklin Strategic Series STATEMENT OF INVESTMENTS, OCTOBER 31, 2008 (UNAUDITED) (CONTINUED)
FRANKLIN GROWTH OPPORTUNITIES FUND COUNTRY SHARES/WARRANTS VALUE ---------------------------------- ------------- --------------- ------------- COMMON STOCKS AND WARRANTS (CONTINUED) INDUSTRIALS (CONTINUED) C.H. Robinson Worldwide Inc. ........................................ United States 102,030 $ 5,283,113 Copa Holdings SA .................................................... Panama 15,486 392,880 (a) Energy Conversion Devices Inc. ...................................... United States 28,800 983,232 (a) First Solar Inc. .................................................... United States 7,700 1,106,490 (a) FTI Consulting Inc. ................................................. United States 16,600 966,950 (a) Huron Consulting Group Inc. ......................................... United States 58,300 3,169,771 (a) Jacobs Engineering Group Inc. ....................................... United States 60,234 2,194,325 Precision Castparts Corp. ........................................... United States 84,830 5,497,832 (a) Ryanair Holdings PLC, ADR ........................................... Ireland 120,900 2,692,443 (a) SunPower Corp., A ................................................... United States 22,900 894,474 ------------- 29,178,681 ------------- INFORMATION TECHNOLOGY 31.3% (a) Activision Blizzard Inc. ............................................ United States 464,100 5,782,686 (a) Adobe Systems Inc. .................................................. United States 79,300 2,112,552 (a) Alliance Data Systems Corp. ......................................... United States 38,505 1,931,411 (a) ANSYS Inc. .......................................................... United States 68,000 1,946,840 (a) Apple Inc. .......................................................... United States 69,900 7,520,541 (a) Cisco Systems Inc. .................................................. United States 133,000 2,363,410 (a) Concur Technologies Inc. ............................................ United States 131,350 3,313,960 (a) DealerTrack Holdings Inc. ........................................... United States 73,100 784,363 (a,b) Dilithium Networks Inc., wts., 3/20/09 .............................. United States 12,447 -- (a) Dolby Laboratories Inc., A .......................................... United States 38,200 1,205,974 (a) Equinix Inc. ........................................................ United States 27,700 1,729,034 (a) FLIR Systems Inc. ................................................... United States 245,600 7,883,760 (a) FormFactor Inc. ..................................................... United States 104,400 1,818,648 (a) Google Inc., A ...................................................... United States 14,590 5,243,062 Harris Corp. ........................................................ United States 57,130 2,053,824 (a) Infinera Corp. ...................................................... United States 70,600 549,268 MasterCard Inc., A .................................................. United States 29,400 4,345,908 (a) MercadoLibre Inc. ................................................... Argentina 57,600 787,392 QUALCOMM Inc. ....................................................... United States 230,180 8,806,687 (a) Riverbed Technology Inc. ............................................ United States 154,385 1,934,444 (a) Tandberg ASA ........................................................ Norway 97,000 1,193,190 (a) Trimble Navigation Ltd. ............................................. United States 96,640 1,987,885 Visa Inc., A ........................................................ United States 77,200 4,273,020 ------------- 69,567,859 ------------- MATERIALS 1.0% Monsanto Co. ........................................................ United States 25,500 2,268,990 ------------- TELECOMMUNICATION SERVICES 8.3% (a) MetroPCS Communications Inc. ........................................ United States 166,200 2,283,588 (a) NII Holdings Inc. ................................................... United States 259,580 6,686,781 (a) SBA Communications Corp. ............................................ United States 446,560 9,373,294 ------------- 18,343,663 ------------- TOTAL COMMON STOCKS AND WARRANTS (COST $227,308,657) ................ 215,340,733 -------------
66 | Semiannual Report Franklin Strategic Series STATEMENT OF INVESTMENTS, OCTOBER 31, 2008 (UNAUDITED) (CONTINUED)
FRANKLIN GROWTH OPPORTUNITIES FUND COUNTRY SHARES/WARRANTS VALUE ---------------------------------- ------------- --------------- ------------- PREFERRED STOCKS 0.4% INFORMATION TECHNOLOGY 0.4% (a,b) Dilithium Networks Inc., depository receipt, D, pfd., 144A, PIPES ... United States 374,806 $ 873,298 (a,b) Dilithium Networks Inc., pfd., D, 11.00%, 3/20/09 ................... United States 14,501 14,501 ------------- TOTAL PREFERRED STOCKS (COST $887,801) .............................. 887,799 ------------- TOTAL INVESTMENTS BEFORE SHORT TERM INVESTMENTS (COST $228,196,458) .............................................. 216,228,532 ------------- SHORT TERM INVESTMENTS (COST $12,323,055) 5.5% MONEY MARKET FUNDS 5.5% (c) Franklin Institutional Fiduciary Trust Money Market Portfolio, 1.56% ............................................................ United States 12,323,055 12,323,055 ------------- TOTAL INVESTMENTS (COST $240,519,513) 102.8% ........................ 228,551,587 OTHER ASSETS, LESS LIABILITIES (2.8)% ............................... (6,307,190) ------------- NET ASSETS 100.0% ................................................... $ 222,244,397 =============
See Selected Portfolio Abbreviations on page 84. (a) Non-income producing for the twelve months ended October 31, 2008. (b) See Note 8 regarding restricted and illiquid securities. (c) See Note 7 regarding investments in the Franklin Institutional Fiduciary Trust Money Market Portfolio. The rate shown is the annualized seven-day yield at period end. The accompanying notes are an integral part of these financial statements. Semiannual Report | 67 Franklin Strategic Series FINANCIAL HIGHLIGHTS FRANKLIN SMALL CAP GROWTH FUND
SIX MONTHS ENDED OCTOBER YEAR ENDED APRIL 30, 31, 2008 ---------------------------------------------------------------- CLASS A (UNAUDITED) 2008 2007 2006 2005 2004 - ------- ----------- -------- -------- -------- -------- -------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ........... $ 9.09 $ 13.05 $ 13.90 $ 10.63 $ 10.55 $ 7.46 -------- -------- -------- -------- -------- -------- Income from investment operations(a): Net investment income (loss)(b) ............. (0.04) (0.09) (0.10) (0.08) (0.09) (0.07) Net realized and unrealized gains (losses) .. (2.53) (1.59) 0.58 3.35 0.17 3.16 -------- -------- -------- -------- -------- -------- Total from investment operations ............... (2.57) (1.68) 0.48 3.27 0.08 3.09 -------- -------- -------- -------- -------- -------- Less distributions from net realized gains ..... -- (2.28) (1.33) -- -- -- -------- -------- -------- -------- -------- -------- Redemption fees(c) ............................. --(d) --(d) --(d) --(d) --(d) -- -------- -------- -------- -------- -------- -------- Net asset value, end of period ................. $ 6.52 $ 9.09 $ 13.05 $ 13.90 $ 10.63 $ 10.55 ======== ======== ======== ======== ======== ======== Total return(e) ................................ (28.27)% (14.73)% 4.02% 30.76% 0.76% 41.42% RATIOS TO AVERAGE NET ASSETS(f) Expenses ....................................... 1.33%(g) 1.17%(g) 1.20%(g) 1.16%(g) 1.15%(g) 1.08% Net investment income (loss) ................... (0.91)% (0.72)% (0.77)% (0.61)% (0.84)% (0.70)% SUPPLEMENTAL DATA Net assets, end of period (000's) .............. $166,308 $274,142 $549,733 $693,084 $765,216 $908,599 Portfolio turnover rate ........................ 21.36% 48.52% 51.49% 44.34% 46.35% 47.08%
(a) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (b) Based on average daily shares outstanding. (c) Effective September 1, 2008, the redemption fee was eliminated. (d) Amount rounds to less than $0.01 per share. (e) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. (f) Ratios are annualized for periods less than one year. (g) Benefit of expense reduction rounds to less than 0.01%. The accompanying notes are an integral part of these financial statements. 68 | Semiannual Report Franklin Strategic Series FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN SMALL CAP GROWTH FUND
SIX MONTHS ENDED OCTOBER YEAR ENDED APRIL 30, 31, 2008 -------------------------------------------------------------- CLASS B (UNAUDITED) 2008 2007 2006 2005 2004 - ------- ----------- -------- ------- -------- -------- -------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ........... $ 8.43 $ 12.35 $ 13.32 $ 10.26 $ 10.27 $7.33 ------- ------- ------- -------- -------- -------- Income from investment operations(a): Net investment income (loss)(b) ............. (0.06) (0.16) (0.18) (0.16) (0.17) (0.15) Net realized and unrealized gains (losses) .. (2.35) (1.48) 0.54 3.22 0.16 3.09 ------- ------- ------- -------- -------- -------- Total from investment operations ............... (2.41) (1.64) 0.36 3.06 (0.01) 2.94 ------- ------- ------- -------- -------- -------- Less distributions from net realized gains ..... -- (2.28) (1.33) -- -- -- ------- ------- ------- -------- -------- -------- Redemption fees(c) ............................. --(d) --(d) --(d) --(d) --(d) -- ------- ------- ------- -------- -------- -------- Net asset value, end of period ................. $ 6.02 $ 8.43 $ 12.35 $ 13.32 $ 10.26 $ 10.27 ======= ======= ======= ======== ======== ======== Total return(e) ................................ (28.59)% (15.27)% 3.27% 29.82% (0.10)% 40.11% RATIOS TO AVERAGE NET ASSETS(f) Expenses ....................................... 2.03%(g) 1.92%(g) 1.96%(g) 1.91%(g) 1.91%(g) 1.92% Net investment income (loss) ................... (1.61)% (1.47)% (1.53)% (1.36)% (1.60)% (1.54)% SUPPLEMENTAL DATA Net assets, end of period (000's) .............. $26,016 $52,465 $85,684 $111,458 $105,070 $122,004 Portfolio turnover rate ........................ 21.36% 48.52% 51.49% 44.34% 46.35% 47.08%
(a) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (b) Based on average daily shares outstanding. (c) Effective September 1, 2008, the redemption fee was eliminated. (d) Amount rounds to less than $0.01 per share. (e) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. (f) Ratios are annualized for periods less than one year. (g) Benefit of expense reduction rounds to less than 0.01%. The accompanying notes are an integral part of these financial statements. Semiannual Report | 69 Franklin Strategic Series FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN SMALL CAP GROWTH FUND
SIX MONTHS ENDED OCTOBER YEAR ENDED APRIL 30, 31, 2008 --------------------------------------------------------------- CLASS C (UNAUDITED) 2008 2007 2006 2005 2004 - ------- ----------- ------- -------- -------- -------- -------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ........... $ 8.43 $ 12.36 $ 13.33 $ 10.27 $ 10.27 $ 7.33 ------- ------- -------- -------- -------- -------- Income from investment operations(a): Net investment income (loss)(b) ............. (0.07) (0.16) (0.18) (0.16) (0.17) (0.15) Net realized and unrealized gains (losses) .. (2.33) (1.49) 0.54 3.22 0.17 3.09 ------- ------- -------- -------- -------- -------- Total from investment operations ............... (2.40) (1.65) 0.36 3.06 -- 2.94 ------- ------- -------- -------- -------- -------- Less distributions from net realized gains ..... -- (2.28) (1.33) -- -- -- ------- ------- -------- -------- -------- -------- Redemption fees(c) ............................. --(d) --(d) --(d) --(d) --(d) -- ------- ------- -------- -------- -------- -------- Net asset value, end of period ................. $ 6.03 $ 8.43 $ 12.36 $ 13.33 $ 10.27 $ 10.27 ======= ======= ======== ======== ======== ======== Total return(e) ................................ (28.59)% (15.35)% 3.27% 29.80% --% 40.11% RATIOS TO AVERAGE NET ASSETS(f) Expenses ....................................... 2.03%(g) 1.92%(g) 1.95%(g) 1.92%(g) 1.91%(g) 1.92% Net investment income (loss) ................... (1.61)% (1.47)% (1.52)% (1.37)% (1.60)% (1.54)% SUPPLEMENTAL DATA Net assets, end of period (000's) .............. $46,473 $75,846 $120,900 $170,159 $164,117 $200,037 Portfolio turnover rate ........................ 21.36% 48.52% 51.49% 44.34% 46.35% 47.08%
(a) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (b) Based on average daily shares outstanding. (c) Effective September 1, 2008, the redemption fee was eliminated. (d) Amount rounds to less than $0.01 per share. (e) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. (f) Ratios are annualized for periods less than one year. (g) Benefit of expense reduction rounds to less than 0.01%. The accompanying notes are an integral part of these financial statements. 70 | Semiannual Report Franklin Strategic Series FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN SMALL CAP GROWTH FUND
SIX MONTHS ENDED OCTOBER YEAR ENDED APRIL 30, 31, 2008 ------------------------------------------------------- CLASS R (UNAUDITED) 2008 2007 2006 2005 2004 - ------- ----------- ------- ------ ------ ------ ------ PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ........... $ 8.91 $ 12.86 $13.75 $10.54 $10.49 $ 7.45 ------- ------- ------ ------ ------ ------ Income from investment operations(a): Net investment income (loss)(b) ............. (0.05) (0.11) (0.13) (0.11) (0.12) (0.10) Net realized and unrealized gains (losses) .. (2.48) (1.56) 0.57 3.32 0.17 3.14 ------- ------- ------ ------ ------ ------ Total from investment operations ............... (2.53) (1.67) 0.44 3.21 0.05 3.04 ------- ------- ------ ------ ------ ------ Less distributions from net realized gains ..... -- (2.28) (1.33) -- -- -- ------- ------- ------ ------ ------ ------ Redemption fees(c) ............................. --(d) --(d) --(d) --(d) --(d) -- ------- ------- ------ ------ ------ ------ Net asset value, end of period ................. $ 6.38 $ 8.91 $12.86 $13.75 $10.54 $10.49 ======= ======= ====== ====== ====== ====== Total return(e) ................................ (28.40)% (14.87)% 3.77% 30.46% 0.48% 40.81% RATIOS TO AVERAGE NET ASSETS(f) Expenses ....................................... 1.53%(g) 1.42%(g) 1.46%(g) 1.42%(g) 1.41%(g) 1.42% Net investment income (loss) ................... (1.11)% (0.97)% (1.03)% (0.87)% (1.10)% (1.04)% SUPPLEMENTAL DATA Net assets, end of period (000's) .............. $ 1,901 $ 3,166 $5,759 $6,328 $4,392 $4,542 Portfolio turnover rate ........................ 21.36% 48.52% 51.49% 44.34% 46.35% 47.08%
(a) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (b) Based on average daily shares outstanding. (c) Effective September 1, 2008, the redemption fee was eliminated. (d) Amount rounds to less than $0.01 per share. (e) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. (f) Ratios are annualized for periods less than one year. (g) Benefit of expense reduction rounds to less than 0.01%. The accompanying notes are an integral part of these financial statements. Semiannual Report | 71 Franklin Strategic Series FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN SMALL CAP GROWTH FUND
SIX MONTHS ENDED OCTOBER YEAR ENDED APRIL 30, 31, 2008 ---------------------------------------------------------------- ADVISOR CLASS (UNAUDITED) 2008 2007 2006 2005 2004 - ------------- ----------- -------- -------- -------- -------- -------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ........... $ 9.37 $ 13.34 $ 14.15 $ 10.79 $ 10.69 $ 7.55 -------- -------- -------- -------- -------- -------- Income from investment operations(a): Net investment income (loss)(b) ............. (0.03) (0.05) (0.07) (0.05) (0.07) (0.05) Net realized and unrealized gains (losses) .. (2.61) (1.64) 0.59 3.41 0.17 3.19 -------- -------- -------- -------- -------- -------- Total from investment operations ............... (2.64) (1.69) 0.52 3.36 0.10 3.14 -------- -------- -------- -------- -------- -------- Less distributions from net realized gains ..... -- (2.28) (1.33) -- -- -- -------- -------- -------- -------- -------- -------- Redemption fees(c) ............................. --(d) --(d) --(d) --(d) --(d) -- -------- -------- -------- -------- -------- -------- Net asset value, end of period ................. $ 6.73 $ 9.37 $ 13.34 $ 14.15 $ 10.79 $ 10.69 ======== ======== ======== ======== ======== ======== Total return(e) ................................ (28.18)% (14.46)% 4.24% 31.14% 0.94% 41.59% RATIOS TO AVERAGE NET ASSETS(f) Expenses ....................................... 1.03%(g) 0.92%(g) 0.96%(g) 0.92%(g) 0.91%(g) 0.92% Net investment income (loss) ................... (0.61)% (0.47)% (0.53)% (0.37)% (0.60)% (0.54)% SUPPLEMENTAL DATA Net assets, end of period (000's) .............. $145,040 $220,857 $325,425 $326,475 $235,101 $211,271 Portfolio turnover rate ........................ 21.36% 48.52% 51.49% 44.34% 46.35% 47.08%
(a) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (b) Based on average daily shares outstanding. (c) Effective September 1, 2008, the redemption fee was eliminated. (d) Amount rounds to less than $0.01 per share. (e) Total return is not annualized for periods less than one year. (f) Ratios are annualized for periods less than one year. (g) Benefit of expense reduction rounds to less than 0.01%. The accompanying notes are an integral part of these financial statements. 72 | Semiannual Report Franklin Strategic Series STATEMENT OF INVESTMENTS, OCTOBER 31, 2008 (UNAUDITED)
FRANKLIN SMALL CAP GROWTH FUND SHARES VALUE ------------------------------ ---------- ------------ COMMON STOCKS 96.3% CONSUMER DISCRETIONARY 12.8% (a) Drew Industries Inc. ..................................... 266,500 $ 3,224,651 (a) FGX International Holdings Ltd. (Virgin Islands (British)) ............................ 602,100 6,623,100 (a) Gaiam Inc., A ............................................ 310,200 2,543,640 (a) K12 Inc. ................................................. 150,200 4,130,500 (a) Lions Gate Entertainment Corp. ........................... 801,400 5,609,800 (a) Panera Bread Co. ......................................... 44,800 2,021,376 (a) Shuffle Master Inc. ...................................... 1,315,000 5,075,900 (a) Shutterfly Inc. .......................................... 39,756 303,338 Strayer Education Inc. ................................... 29,000 6,561,830 (a) Tenneco Inc. ............................................. 290,700 1,427,337 (a) Tractor Supply Co. ....................................... 136,600 5,677,096 (a) Universal Technical Institute Inc. ....................... 372,400 6,144,600 ------------ 49,343,168 ------------ CONSUMER STAPLES 4.0% (a) Hain Celestial Group Inc. ................................ 333,200 7,743,568 (a) Hansen Natural Corp. ..................................... 236,300 5,983,116 (a) TreeHouse Foods Inc. ..................................... 56,700 1,715,742 ------------ 15,442,426 ------------ ENERGY 7.2% (a) Bill Barrett Corp. ....................................... 170,700 3,482,280 (a) Carrizo Oil & Gas Inc. ................................... 202,400 4,734,136 (a) Dril-Quip Inc. ........................................... 111,800 2,761,460 (a) Helix Energy Solutions Group Inc. ........................ 204,800 2,162,688 (a) Mariner Energy Inc. ...................................... 453,500 6,525,865 (a) McMoRan Exploration Co. .................................. 323,100 4,584,789 (a) Superior Energy Services Inc. ............................ 160,500 3,421,860 ------------ 27,673,078 ------------ FINANCIALS 3.2% Assured Guaranty Ltd. .................................... 178,500 2,004,555 FelCor Lodging Trust Inc. ................................ 563,100 1,694,931 iStar Financial Inc. ..................................... 467,400 504,792 (a) MSCI Inc. Class A ........................................ 195,200 3,365,248 optionsXpress Holdings Inc. .............................. 210,600 3,740,256 Waddell & Reed Financial Inc., A ......................... 82,600 1,199,352 ------------ 12,509,134 ------------ HEALTH CARE 15.0% (a) American Medical Systems Holdings Inc. ................... 595,600 6,444,392 (a) Angiotech Pharmaceuticals Inc. ........................... 1,059,182 307,163 (a) Cadence Pharmaceuticals Inc. ............................. 438,700 2,864,711 (a) Dexcom Inc. .............................................. 577,400 2,609,848 (a, b) Impax Laboratories Inc. .................................. 257,100 1,828,495 (a) K-V Pharmaceutical Co., A ................................ 301,200 5,120,400 (a) MWI Veterinary Supply Inc. ............................... 109,300 3,785,059 (a) Myriad Genetics Inc. ..................................... 110,300 6,958,827
Semiannual Report | 73 Franklin Strategic Series STATEMENT OF INVESTMENTS, OCTOBER 31, 2008 (UNAUDITED) (CONTINUED)
FRANKLIN SMALL CAP GROWTH FUND SHARES VALUE ------------------------------ ---------- ------------ COMMON STOCKS (CONTINUED) HEALTH CARE (CONTINUED) (a) PAREXEL International Corp. .............................. 324,300 $ 3,372,720 (a) Penwest Pharmaceuticals Co. .............................. 547,800 684,750 (a) Psychiatric Solutions Inc. ............................... 314,400 10,466,376 (a) Sequenom Inc. ............................................ 394,800 7,106,400 (a) Varian Inc. .............................................. 50,600 1,864,610 (a) VCA Antech Inc. .......................................... 244,000 4,416,400 ------------ 57,830,151 ------------ INDUSTRIALS 11.4% (a) Allegiant Travel Co. ..................................... 184,200 7,336,686 Applied Signal Technology Inc. ........................... 52,900 947,968 (a) BE Aerospace Inc. ........................................ 301,600 3,881,592 (a) Force Protection Inc. .................................... 952,900 2,658,591 (a) FTI Consulting Inc. ...................................... 72,000 4,194,000 (a) Huron Consulting Group Inc. .............................. 146,100 7,943,457 (a) Mobile Mini Inc. ......................................... 347,000 5,829,600 (a) Orbital Sciences Corp. ................................... 206,800 4,237,332 Pacer International Inc. ................................. 119,100 1,344,639 (a) Stanley Inc. ............................................. 135,400 4,638,804 (a) Yingli Green Energy Holding Co Ltd., ADR (China) ......... 199,000 1,048,730 ------------ 44,061,399 ------------ INFORMATION TECHNOLOGY 39.4% (a) Advanced Analogic Technologies Inc. ...................... 541,200 1,629,012 (a) ANSYS Inc. ............................................... 202,400 5,794,712 (a) Atheros Communications ................................... 291,900 5,245,443 (a) Bottomline Technologies Inc. ............................. 868,896 6,846,900 (a) Coherent Inc. ............................................ 235,700 5,963,210 (a) Compellent Technologies Inc. ............................. 309,036 3,368,492 (a) CyberSource Corp. ........................................ 361,900 4,397,085 (a) DealerTrack Holdings Inc. ................................ 297,600 3,193,248 DivX Inc. ................................................ 29,970 209,191 (a) EPIQ Systems Inc. ........................................ 219,700 2,985,723 (a) FARO Technologies Inc. ................................... 286,800 4,350,756 (a) FLIR Systems Inc. ........................................ 215,100 6,904,710 (a) FormFactor Inc. .......................................... 370,000 6,445,400 Global Payments Inc. ..................................... 44,600 1,806,746 Heartland Payment Systems Inc. ........................... 176,933 3,080,404 (a) Ixia ..................................................... 921,900 6,139,854 (a) Microsemi Corp. .......................................... 377,400 8,204,676 (a) Microtune Inc. ........................................... 1,263,800 3,159,500 National Instruments Corp. ............................... 140,902 3,578,911 (a) Netlogic Microsystems Inc. ............................... 277,400 5,858,688 (a) Nuance Communications Inc. ............................... 554,100 5,070,015 (a) Omniture Inc. ............................................ 291,200 3,348,800 (a) Power Integrations Inc. .................................. 310,200 6,511,098 (a) Quest Software Inc. ...................................... 705,700 9,350,525 (a) Riverbed Technology Inc. ................................. 425,700 5,334,021
74 | Semiannual Report Franklin Strategic Series STATEMENT OF INVESTMENTS, OCTOBER 31, 2008 (UNAUDITED) (CONTINUED)
FRANKLIN SMALL CAP GROWTH FUND SHARES VALUE ------------------------------ ---------- ------------ COMMON STOCKS (CONTINUED) INFORMATION TECHNOLOGY (CONTINUED) (a) Sapient Corp. ............................................ 1,179,600 $ 6,476,004 (a) Silicon Laboratories Inc. ................................ 215,600 5,596,976 (a) Trimble Navigation Ltd. .................................. 248,400 5,109,588 (a) Varian Semiconductor Equipment Associates Inc. ........... 215,075 4,219,771 (a) VeriFone Holdings Inc. ................................... 244,100 2,772,976 (a) ViaSat Inc. .............................................. 416,100 7,581,342 (a) Xyratex Ltd. (Bermuda) ................................... 244,900 1,371,440 ------------ 151,905,217 ------------ MATERIALS 1.2% FMC Corp. ................................................ 107,400 4,676,196 ------------ TELECOMMUNICATION SERVICES 2.1% (a) SBA Communications Corp. ................................. 378,200 7,938,418 ------------ TOTAL COMMON STOCKS (COST $458,053,078)................... 371,379,187 ------------ SHORT TERM INVESTMENTS (COST $13,675,448) 3.5% MONEY MARKET FUNDS 3.5% (c) Franklin Institutional Fiduciary Trust Money Market Portfolio, 1.56% ...................................... 13,675,448 13,675,448 ------------ TOTAL INVESTMENTS (COST $471,728,526) 99.8% .............. 385,054,635 OTHER ASSETS, LESS LIABILITIES 0.2% ...................... 682,934 ------------ NET ASSETS 100.0% ........................................ $385,737,569 ============
See Selected Portfolio Abbreviations on page 84. (a) Non-income producing for the twelve months ended October 31, 2008. (b) See Note 8 regarding restricted and illiquid securities. (c) See Note 7 regarding investments in the Franklin Institutional Fiduciary Trust Money Market Portfolio. The rate shown is the annualized seven-day yield at period end. The accompanying notes are an integral part of these financial statements. Semiannual Report | 75 Franklin Strategic Series FINANCIAL HIGHLIGHTS FRANKLIN SMALL-MID CAP GROWTH FUND
SIX MONTHS ENDED OCTOBER 31, YEAR ENDED APRIL 30, 2008 --------------------------------------------------------------------- CLASS A (UNAUDITED) 2008 2007 2006 2005 2004 - ------- ----------- ---------- ---------- ---------- ---------- ---------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ..... $ 32.70 $ 41.54 $ 40.42 $ 31.31 $ 29.69 $ 23.14 ---------- ---------- ---------- ---------- ---------- ---------- Income from investment operations(a): Net investment income (loss)(b) ....... 0.03 (0.19) (0.13) --(c) (0.08) (0.14) Net realized and unrealized gains (losses) ........................... (10.51) (1.93) 4.09 9.15 1.70 6.69 ---------- ---------- ---------- ---------- ---------- ---------- Total from investment operations ......... (10.48) (2.12) 3.96 9.15 1.62 6.55 ---------- ---------- ---------- ---------- ---------- ---------- Less distributions from: Net investment income ................. -- -- -- (0.04) -- -- Net realized gains .................... -- (6.72) (2.84) -- -- -- ---------- ---------- ---------- ---------- ---------- ---------- Total distributions ...................... -- (6.72) (2.84) (0.04) -- -- ---------- ---------- ---------- ---------- ---------- ---------- Redemption fees(c, d) .................... -- -- -- -- -- -- ---------- ---------- ---------- ---------- ---------- ---------- Net asset value, end of period ........... $ 22.22 $ 32.70 $ 41.54 $ 40.42 $ 31.31 $ 29.69 ========== ========== ========== ========== ========== ========== Total return(e) .......................... (32.05)% (6.24)% 10.38% 29.21% 5.46% 28.31% RATIOS TO AVERAGE NET ASSETS(f) Expenses ................................. 1.09%(g) 1.02%(g) 0.98%(g) 0.96%(g) 0.97%(g) 0.98% Net investment income (loss) ............. 0.19% (0.50)% (0.33)% --%(h) (0.27)% (0.51)% SUPPLEMENTAL DATA Net assets, end of period (000's) ........ $2,426,982 $4,331,657 $5,619,694 $6,532,284 $6,636,792 $7,355,269 Portfolio turnover rate .................. 24.76% 55.09% 52.76% 39.84% 42.96% 52.84%
(a) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (b) Based on average daily shares outstanding. (c) Amount rounds to less than $0.01 per share. (d) Effective September 1, 2008, the redemption fee was eliminated. (e) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. (f) Ratios are annualized for periods less than one year. (g) Benefit of expense reduction rounds to less than 0.01%. (h) Rounds to less than 0.01%. The accompanying notes are an integral part of these financial statements. 76 | Semiannual Report Franklin Strategic Series FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN SMALL-MID CAP GROWTH FUND
SIX MONTHS ENDED OCTOBER 31, YEAR ENDED APRIL 30, 2008 --------------------------------------------------------------------- CLASS B (UNAUDITED) 2008 2007 2006 2005 2004 - ------- ----------- ---------- ---------- ---------- ---------- ---------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ..... $ 31.00 $ 40.00 $ 39.31 $ 30.65 $ 29.28 $ 23.00 ------- ------- ------- ------- ------- ------- Income from investment operations(a): Net investment income (loss)(b) ....... (0.08) (0.46) (0.40) (0.27) (0.31) (0.36) Net realized and unrealized gains (losses) ........................... (9.94) (1.82) 3.93 8.93 1.68 6.64 ------- ------- ------- ------- ------- ------- Total from investment operations ......... (10.02) (2.28) 3.53 8.66 1.37 6.28 ------- ------- ------- ------- ------- ------- Less distributions from net realized gains ................................. -- (6.72) (2.84) -- -- -- ------- ------- ------- ------- ------- ------- Redemption fees(c, d) .................... -- -- -- -- -- -- ------- ------- ------- ------- ------- ------- Net asset value, end of period ........... $ 20.98 $ 31.00 $ 40.00 $ 39.31 $ 30.65 $ 29.28 ======= ======= ======= ======= ======= ======= Total return(e) .......................... (32.32)% (6.92)% 9.53% 28.25% 4.68% 27.30% RATIOS TO AVERAGE NET ASSETS(f) Expenses ................................. 1.84%(g) 1.77%(g) 1.73%(g) 1.71%(g) 1.72%(g) 1.73% Net investment income (loss) ............. (0.56)% (1.25)% (1.08)% (0.75)% (1.02)% (1.26)% SUPPLEMENTAL DATA Net assets, end of period (000's) ........ $14,971 $25,457 $32,570 $36,911 $31,733 $26,161 Portfolio turnover rate .................. 24.76% 55.09% 52.76% 39.84% 42.76% 52.84%
(a) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (b) Based on average daily shares outstanding. (c) Effective September 1, 2008, the redemption fee was eliminated. (d) Amount rounds to less than $0.01 per share. (e) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. (f) Ratios are annualized for periods less than one year. (g) Benefit of expense reduction rounds to less than 0.01%. The accompanying notes are an integral part of these financial statements. Semiannual Report | 77 Franklin Strategic Series FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN SMALL-MID CAP GROWTH FUND
SIX MONTHS ENDED YEAR ENDED APRIL 30, OCTOBER 31, 2008 ------------------------------------------------------------ CLASS C (UNAUDITED) 2008 2007 2006 2005 2004 - ------- ---------------- -------- -------- -------- -------- -------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ............. $ 29.92 $ 38.85 $ 38.25 $ 29.82 $ 28.49 $ 22.37 -------- -------- -------- -------- -------- -------- Income from investment operations(a): Net investment income (loss)(b) ............... (0.08) (0.45) (0.39) (0.26) (0.31) (0.34) Net realized and unrealized gains (losses) .... (9.59) (1.76) 3.83 8.69 1.64 6.46 -------- -------- -------- -------- -------- -------- Total from investment operations ................. (9.67) (2.21) 3.44 8.43 1.33 6.12 -------- -------- -------- -------- -------- -------- Less distributions from net realized gains ....... -- (6.72) (2.84) -- -- -- -------- -------- -------- -------- -------- -------- Redemption fees(c, d) ............................ -- -- -- -- -- -- -------- -------- -------- -------- -------- -------- Net asset value, end of period ................... $ 20.25 $ 29.92 $ 38.85 $ 38.25 $ 29.82 $ 28.49 -------- -------- -------- -------- -------- -------- Total return(e) .................................. (32.32)% (6.94)% 9.56% 28.27% 4.67% 27.36% RATIOS TO AVERAGE NET ASSETS(f) Expenses ......................................... 1.84%(g) 1.77%(g) 1.72%(g) 1.71%(g) 1.72%(g) 1.71% Net investment income (loss) ..................... (0.56)% (1.25)% (1.07)% (0.75)% (1.02)% (1.24)% SUPPLEMENTAL DATA Net assets, end of period (000's) ................ $319,179 $523,040 $653,529 $728,710 $654,549 $762,602 Portfolio turnover rate .......................... 24.76% 55.09% 52.76% 39.84% 42.96% 52.84%
(a) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (b) Based on average daily shares outstanding. (c) Effective September 1, 2008, the redemption fee was eliminated. (d) Amount rounds to less than $0.01 per share. (e) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. (f) Ratios are annualized for periods less than one year. (g) Benefit of expense reduction rounds to less than 0.01%. The accompanying notes are an integral part of these financial statements. 78 | Semiannual Report Franklin Strategic Series FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN SMALL-MID CAP GROWTH FUND
SIX MONTHS ENDED YEAR ENDED APRIL 30, OCTOBER 31, 2008 --------------------------------------------------------- CLASS R (UNAUDITED) 2008 2007 2006 2005 2004 - ------- ---------------- -------- -------- ------- ------- ------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ............. $ 32.06 $ 40.96 $ 39.98 $ 31.04 $ 29.50 $ 23.06 ------- ------- -------- ------- ------- ------- Income from investment operations(a): Net investment income (loss)(b) ............... (0.01) (0.29) (0.23) (0.08) (0.15) (0.22) Net realized and unrealized gains (losses) .... (10.30) (1.89) 4.05 9.04 1.69 6.66 ------- ------- -------- ------- ------- ------- Total from investment operations ................. (10.31) (2.18) 3.82 8.96 1.54 6.44 ------- ------- -------- ------- ------- ------- Less distributions from: Net investment income ......................... -- -- -- (0.02) -- -- Net realized gains ............................ -- (6.72) (2.84) -- -- -- ------- ------- -------- ------- ------- ------- Total distributions .............................. -- (6.72) (2.84) (0.02) -- -- ------- ------- -------- ------- ------- ------- Redemption fees(c, d) ............................ -- -- -- -- -- -- ------- ------- -------- ------- ------- ------- Net asset value, end of period ................... $ 21.75 $ 32.06 $ 40.96 $ 39.98 $ 31.04 $ 29.50 ------- ------- -------- ------- ------- ------- Total return(e) .................................. (32.16)% (6.48)% 10.11% 28.88% 5.22% 27.93% RATIOS TO AVERAGE NET ASSETS(f) Expenses ......................................... 1.34%(g) 1.27%(g) 1.23%(g) 1.21%(g) 1.22%(g) 1.23% Net investment income (loss) ..................... (0.06)% (0.75)% (0.58)% (0.25)% (0.52)% (0.76)% SUPPLEMENTAL DATA Net assets, end of period (000's) ................ $57,504 $94,334 $118,387 $93,916 $54,139 $41,404 Portfolio turnover rate .......................... 24.76% 55.09% 52.76% 39.84% 42.96% 52.84%
(a) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (b) Based on average daily shares outstanding. (c) Effective September 1, 2008, the redemption fee was eliminated. (d) Amount rounds to less than $0.01 per share. (e) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. (f) Ratios are annualized for periods less than one year. (g) Benefit of expense reduction rounds to less than 0.01%. The accompanying notes are an integral part of these financial statements. Semiannual Report | 79 Franklin Strategic Series FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN SMALL-MID CAP GROWTH FUND
SIX MONTHS ENDED YEAR ENDED APRIL 30, OCTOBER 31, 2008 ----------------------------------------------------------- ADVISOR CLASS (UNAUDITED) 2008 2007 2006 2005 2004 - ------------- ---------------- -------- -------- -------- -------- -------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ............. $ 33.43 $ 42.22 $ 40.93 $ 31.71 $ 29.99 $ 23.32 -------- -------- -------- -------- -------- -------- Income from investment operations(a): Net investment income (loss)(b) ............... 0.07 (0.10) (0.03) 0.10 --(c) (0.07) Net realized and unrealized gains (losses) .... (10.76) (1.97) 4.16 9.26 1.72 6.74 -------- -------- -------- -------- -------- -------- Total from investment operations ................. (10.69) (2.07) 4.13 9.36 1.72 6.67 -------- -------- -------- -------- -------- -------- Less distributions from: Net investment income ......................... -- -- -- (0.14) -- -- Net realized gains ............................ -- (6.72) (2.84) -- -- -- -------- -------- -------- -------- -------- -------- Total distributions .............................. -- (6.72) (2.84) (0.14) -- -- -------- -------- -------- -------- -------- -------- Redemption fees(c, d) ............................ -- -- -- -- -- -- -------- -------- -------- -------- -------- -------- Net asset value, end of period ................... $ 22.74 $ 33.43 $ 42.22 $ 40.93 $ 31.71 $ 29.99 -------- -------- -------- -------- -------- -------- Total return(e) .................................. (31.98)% (6.00)% 10.65% 29.55% 5.74% 28.60% RATIOS TO AVERAGE NET ASSETS(f) Expenses ......................................... 0.84%(g) 0.77%(g) 0.73%(g) 0.71%(g) 0.72%(g) 0.73% Net investment income (loss) ..................... 0.44% (0.25)% (0.08)% 0.25% (0.02)% (0.26)% SUPPLEMENTAL DATA Net assets, end of period (000's) ................ $486,909 $812,503 $803,365 $794,395 $347,518 $320,154 Portfolio turnover rate .......................... 24.76% 55.09% 52.76% 39.84% 42.96% 52.84%
(a) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (b) Based on average daily shares outstanding. (c) Amount rounds to less than $0.01 per share. (d) Effective September 1, 2008, the redemption fee was eliminated. (e) Total return is not annualized for periods less than one year. (f) Ratios are annualized for periods less than one year. (g) Benefit of expense reduction rounds to less than 0.01%. The accompanying notes are an integral part of these financial statements. 80 | Semiannual Report Franklin Strategic Series STATEMENT OF INVESTMENTS, OCTOBER 31, 2008 (UNAUDITED)
FRANKLIN SMALL-MID CAP GROWTH FUND COUNTRY SHARES VALUE ------------------------------------------------------------------------- -------------- ------------- -------------- COMMON STOCKS 96.5% CONSUMER DISCRETIONARY 8.7% Abercrombie & Fitch Co., A .............................................. United States 466,600 $ 13,512,736 BorgWarner Inc. ......................................................... United States 1,347,100 30,269,337 (a) Dick's Sporting Goods Inc. .............................................. United States 1,651,800 25,305,576 Guess? Inc. ............................................................. United States 2,466,100 53,686,997 The Men's Wearhouse Inc ................................................. United States 1,524,220 23,305,324 Nordstrom Inc ........................................................... United States 1,385,300 25,060,077 PetSmart Inc. ........................................................... United States 1,319,460 25,980,167 (a) Tractor Supply Co. ...................................................... United States 939,200 39,033,152 Wolverine World Wide Inc ................................................ United States 2,269,075 53,323,263 -------------- 289,476,629 -------------- CONSUMER STAPLES 2.8% Clorox Co. .............................................................. United States 298,700 18,163,947 (a) Hain Celestial Group Inc. ............................................... United States 1,437,200 33,400,528 (a) Hansen Natural Corp. .................................................... United States 1,621,200 41,048,784 -------------- 92,613,259 -------------- ENERGY 10.8% (a) Cameron International Corp. ............................................. United States 1,054,200 25,574,892 (a) FMC Technologies Inc. ................................................... United States 1,165,556 40,782,804 (a) Mariner Energy Inc. ..................................................... United States 1,725,600 24,831,384 (a) Petrohawk Energy Corp. .................................................. United States 3,026,100 57,344,595 Range Resources Corp. ................................................... United States 1,269,800 53,610,956 Smith International Inc. ................................................ United States 1,456,700 50,227,016 (a) Southwestern Energy Co. ................................................. United States 2,923,400 104,131,508 -------------- 356,503,155 -------------- FINANCIALS 2.4% (a) Affiliated Managers Group Inc. .......................................... United States 781,200 36,232,056 FelCor Lodging Trust Inc. ............................................... United States 2,072,500 6,238,225 iStar Financial Inc. .................................................... United States 3,968,090 4,285,537 T. Rowe Price Group Inc. ................................................ United States 863,200 34,130,928 -------------- 80,886,746 -------------- HEALTH CARE 19.1% Allscripts-Misys Healthcare Solutions Inc. .............................. United States 2,106,600 13,692,900 (a, b) American Medical Systems Holdings Inc. .................................. United States 3,689,900 39,924,718 C. R. Bard Inc. ......................................................... United States 648,800 57,256,600 (a) Cerner Corp. ............................................................ United States 1,503,512 55,975,752 (a) Community Health Systems Inc. ........................................... United States 1,627,364 33,360,962 (a) DaVita Inc. ............................................................. United States 335,700 19,050,975 (a) Express Scripts Inc. .................................................... United States 1,071,000 64,913,310 (a) Henry Schein Inc. ....................................................... United States 1,185,500 55,493,255 (a) Illumina Inc. ........................................................... United States 536,200 16,531,046 (a) Masimo Corp ............................................................. United States 5,068 162,125 (a) Myriad Genetics Inc. .................................................... United States 841,600 53,096,544 Pharmaceutical Product Development Inc. ................................. United States 1,265,100 39,192,798 (a) Phase Forward Inc. ...................................................... United States 52,700 752,029 (a) QIAGEN NV ............................................................... Netherlands 2,294,117 32,714,109
Semiannual Report | 81 Franklin Strategic Series STATEMENT OF INVESTMENTS, OCTOBER 31, 2008 (UNAUDITED) (CONTINUED)
FRANKLIN SMALL-MID CAP GROWTH FUND COUNTRY SHARES VALUE ------------------------------------------------------------------------- -------------- ------------- -------------- COMMON STOCKS (CONTINUED) HEALTH CARE (CONTINUED) (a) Sequenom Inc. ........................................................... United States 1,017,000 $ 18,306,000 (a, c) Stereotaxis Inc. ........................................................ United States 1,463,200 5,896,696 (a) Varian Medical Systems Inc. ............................................. United States 1,214,500 55,271,895 (a) Waters Corp. ............................................................ United States 1,569,600 68,748,480 -------------- 630,340,194 -------------- INDUSTRIALS 14.9% AMETEK Inc. ............................................................. United States 2,055,100 68,332,075 C.H. Robinson Worldwide Inc. ............................................ United States 1,776,000 91,961,280 Expeditors International of Washington Inc. ............................. United States 788,100 25,731,465 (a) Force Protection Inc. ................................................... United States 3,289,200 9,176,868 (a) Foster Wheeler Ltd. ..................................................... United States 1,080,000 29,592,000 (a) Orbital Sciences Corp. .................................................. United States 2,339,500 47,936,355 Precision Castparts Corp. ............................................... United States 1,183,510 76,703,283 Robert Half International Inc. .......................................... United States 2,036,800 38,434,416 Rockwell Collins Inc. ................................................... United States 915,400 34,080,342 (a) Ryanair Holdings PLC, ADR ............................................... Ireland 1,549,500 34,507,365 (a, c) SunPower Corp., A ....................................................... United States 913,100 35,665,686 -------------- 492,121,135 -------------- INFORMATION TECHNOLOGY 32.2% (a) Activision Blizzard Inc. ................................................ United States 5,419,600 67,528,216 (a) Alliance Data Systems Corp. ............................................. United States 1,150,100 57,689,016 (a) ANSYS Inc. .............................................................. United States 579,900 16,602,537 (a) Concur Technologies Inc. ................................................ United States 559,600 14,118,708 FactSet Research Systems Inc. ........................................... United States 826,200 32,048,298 (a) FLIR Systems Inc. ....................................................... United States 3,900,300 125,199,630 (a, b) FormFactor Inc. ......................................................... United States 3,689,300 64,267,606 Global Payments Inc. .................................................... United States 1,504,200 60,935,142 Harris Corp. ............................................................ United States 1,700,500 61,132,975 (a) Hittite Microwave Corp .................................................. United States 300,334 9,841,945 (a) Lam Research Corp. ...................................................... United States 1,088,000 24,327,680 (a) Logitech International SA. .............................................. Switzerland 618,177 9,142,838 MasterCard Inc., A ...................................................... United States 452,000 66,814,640 (a) Mettler-Toledo International Inc. ....................................... United States 702,727 53,786,725 Microchip Technology Inc ................................................ United States 1,062,600 26,171,838 (a, b) Microsemi Corp .......................................................... United States 4,811,500 104,602,010 (a) Nuance Communications Inc. .............................................. United States 5,804,500 53,111,175 (a) Riverbed Technology Inc. ................................................ United States 2,066,000 25,886,980 (a) SAIC Inc. ............................................................... United States 1,925,400 35,562,138 (a) Salesforce.com Inc. ..................................................... United States 497,400 15,399,504 (a, b) Silicon Laboratories Inc. ............................................... United States 2,423,900 62,924,444 (a) Tandberg ASA ............................................................ Norway 1,036,500 12,749,911 (a) Trimble Navigation Ltd .................................................. United States 2,159,660 44,424,206 (a) UbiSoft Entertainment SA ................................................ France 422,400 22,168,169 -------------- 1,066,436,331 --------------
82 | Semiannual Report Franklin Strategic Series STATEMENT OF INVESTMENTS, OCTOBER 31, 2008 (UNAUDITED) (CONTINUED)
FRANKLIN SMALL-MID CAP GROWTH FUND COUNTRY SHARES VALUE ------------------------------------------------------------------------- -------------- ------------- -------------- COMMON STOCKS (CONTINUED) TELECOMMUNICATION SERVICES 4.9% (a, d) Anda Networks ........................................................... United States 91,107 $ 141,216 (a) CrownCastle International Corp. ......................................... United States 1,257,800 26,627,626 (a) MetroPCS Communications Inc. ............................................ United States 4,018,200 55,210,068 (a) NII Holdings Inc. ....................................................... United States 1,950,140 50,235,606 (a) SBA Communications Corp. ................................................ United States 1,396,800 29,318,832 (a, d) TeleCorp PCS Inc., Escrow Account ....................................... United States 4,569,500 -- -------------- 161,533,348 -------------- UTILITIES 0.7% International Power PLC ................................................. United Kingdom 6,343,700 22,687,561 -------------- TOTAL COMMON STOCKS (COST $3,722,417,708) ............................... 3,192,598,358 -------------- CONVERTIBLE PREFERRED STOCKS 0.0% CONSUMER DISCRETIONARY 0.0% (a, d) Foveon Inc., cvt. pfd., D, 144A ......................................... United States 1,792,573 -- (a, d) Foveon Inc., cvt. pfd., E, 144A ......................................... United States 2,597,593 -- -------------- TOTAL CONVERTIBLE PREFERRED STOCKS (COST $16,635,020) ................... -- --------------
PRINCIPAL AMOUNT ------------- CONVERTIBLE BONDS (COST $6,442,139) 0.2% INFORMATION TECHNOLOGY 0.2% Microchip Technology Inc., cvt., 2.125%, 12/15/37 ....................... United States $ 8,161,000 6,243,165 -------------- TOTAL INVESTMENTS BEFORE SHORT TERM INVESTMENTS (COST $3,745,494,867) ................................................ 3,198,841,523 --------------
SHARES ------------- SHORT TERM INVESTMENTS 4.1% MONEY MARKET FUNDS (COST $101,422,744) 3.1% (e) Franklin Institutional Fiduciary Trust Money Market Portfolio, 1.56% .... 101,422,744 101,422,744 -------------- (f) INVESTMENTS FROM CASH COLLATERAL RECEIVED FOR LOANED SECURITIES 1.0% MONEY MARKET FUNDS (COST $33,549,221) 1.0% (g) Bank of New York Institutional Cash Reserve Fund, 1.34% ................. 33,549,221 33,213,728 -------------- TOTAL INVESTMENTS (COST $3,880,466,832) 100.8% .......................... 3,333,477,995 OTHER ASSETS, LESS LIABILITIES (0.8)% ................................... (27,934,247) -------------- NET ASSETS 100.0% ....................................................... $3,305,543,748 ==============
See Selected Portfolio Abbreviations on page 84. (a) Non-income producing for the twelve months ended October 31, 2008. (b) See Note 9 regarding holdings of 5% voting securities. (c) A portion or all of the security is on loan at October 31, 2008. See Note 1(d). (d) See Note 8 regarding restricted and illiquid securities. (e) See Note 7 regarding investments in the Franklin Institutional Fiduciary Trust Money Market Portfolio. The rate shown is the annualized seven-day yield at period end. (f) See Note 1(d) regarding securities on loan. (g) The rate shown is the annualized seven-day yield at period end. The accompanying notes are an integral part of these financial statements. Semiannual Report | 83 Franklin Strategic Series STATEMENT OF INVESTMENTS, OCTOBER 31, 2008 (UNAUDITED) SELECTED PORTFOLIO ABBREVIATIONS ADR - American Depository Receipt PIPES - Private Investment in Public Equity Security The accompanying notes are an integral part of these financial statements. 84 | Semiannual Report Franklin Strategic Series FINANCIAL STATEMENTS STATEMENTS OF ASSETS AND LIABILITIES October 31, 2008 (unaudited)
FRANKLIN FRANKLIN FRANKLIN GROWTH FLEX CAP FOCUSED CORE OPPORTUNITIES GROWTH FUND EQUITY FUND FUND -------------- ------------ ------------- Assets: Investments in securities: Cost - Unaffiliated issuers .............. $2,089,342,131 $ 6,651,842 $ 228,196,458 Cost - Sweep Money Fund (Note 7) ......... 86,841,881 75,345 12,323,055 -------------- ----------- ------------- Total cost of investments ................ $2,176,184,012 $ 6,727,187 $ 240,519,513 ============== =========== ============= Value - Unaffiliated issuers ............. $2,045,095,417 $ 4,293,374 $ 216,228,532 Value - Sweep Money Fund (Note 7) ........ 86,841,881 75,345 12,323,055 -------------- ----------- ------------- Total value of investments ............... 2,131,937,298 4,368,719 228,551,587 Cash ........................................ -- -- 14,501 Receivables: Investment securities sold ............... -- 63,023 1,932,562 Capital shares sold ...................... 2,361,513 1,263 407,549 Dividends ................................ 1,368,420 2,457 28,916 Affiliates ............................... -- 50,705 -- Offering costs ........................... -- 8,114 -- -------------- ----------- ------------- Total assets .......................... 2,135,667,231 4,494,281 230,935,115 -------------- ----------- ------------- Liabilities: Payables: Investment securities purchased .......... 23,351,939 70,184 8,216,535 Capital shares redeemed .................. 3,683,700 1,258 240,145 Affiliates ............................... 1,707,913 -- 187,886 Professional fees ........................ 22,353 9,904 15,497 Unaffiliated transfer agent fees ............ 489,461 1,803 25,581 Accrued expenses and other liabilities ...... 14,920 2,183 5,074 -------------- ----------- ------------- Total liabilities ..................... 29,270,286 85,332 8,690,718 -------------- ----------- ------------- Net assets, at value ............... $2,106,396,945 $ 4,408,949 $ 222,244,397 -------------- ----------- ------------- Net assets consist of: Paid-in capital ............................. $2,158,356,637 $ 6,798,200 $ 405,686,540 Undistributed net investment income (loss) .. (3,428,872) 54,131 (1,234,746) Net unrealized appreciation (depreciation) .. (44,246,714) (2,358,673) (11,966,233) Accumulated net realized gain (loss) ........ (4,284,106) (84,709) (170,241,164) -------------- ----------- ------------- Net assets, at value ............... $2,106,396,945 $ 4,408,949 $ 222,244,397 ============== =========== =============
The accompanying notes are an integral part of these financial statements. Semiannual Report | 85 Franklin Strategic Series FINANCIAL STATEMENTS (CONTINUED) STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED) October 31, 2008 (unaudited)
FRANKLIN FRANKLIN FRANKLIN GROWTH FLEX CAP FOCUSED CORE OPPORTUNITIES GROWTH FUND EQUITY FUND FUND -------------- ------------ ------------- CLASS A: Net assets, at value ........................ $1,433,974,460 $4,183,988 $102,139,756 -------------- ---------- ------------ Shares outstanding .......................... 43,094,730 706,687 7,436,682 -------------- ---------- ------------ Net asset value per share(a) ................ $ 33.27 $ 5.92 $ 13.73 -------------- ---------- ------------ Maximum offering price per share (net asset value per share / 94.25%) ..... $ 35.30 $ 6.28 $ 14.57 -------------- ---------- ------------ CLASS B: Net assets, at value ........................ $ 57,168,827 -- $ 6,640,344 -------------- ---------- ------------ Shares outstanding .......................... 1,849,890 -- 513,518 -------------- ---------- ------------ Net asset value and maximum offering price per share(a) ............................. $ 30.90 -- $ 12.93 -------------- ---------- ------------ CLASS C: Net assets, at value ........................ $ 266,195,971 $ 110,402 $ 28,671,652 -------------- ---------- ------------ Shares outstanding .......................... 8,595,802 18,748 2,222,649 -------------- ---------- ------------ Net asset value and maximum offering price per share(a) ............................. $ 30.97 $ 5.89 $ 12.90 -------------- ---------- ------------ CLASS R: Net assets, at value ........................ $ 45,126,227 $ 5,910 $ 5,911,251 -------------- ---------- ------------ Shares outstanding .......................... 1,378,057 1,000 436,517 -------------- ---------- ------------ Net asset value and maximum offering price per share ................................ $ 32.75 $ 5.91 $ 13.54 -------------- ---------- ------------ ADVISOR CLASS: Net assets, at value ........................ $ 303,931,460 $ 108,649 $ 78,881,394 -------------- ---------- ------------ Shares outstanding .......................... 9,044,895 18,295 5,580,556 -------------- ---------- ------------ Net asset value and maximum offering price per share ................................ $ 33.60 $ 5.94 $ 14.14 -------------- ---------- ------------
(a) Redemption price is equal to net asset value less contingent deferred sales charges, if applicable. The accompanying notes are an integral part of these financial statements. 86 | Semiannual Report Franklin Strategic Series FINANCIAL STATEMENTS (CONTINUED) STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED) October 31, 2008 (unaudited)
FRANKLIN FRANKLIN SMALL CAP SMALL-MID CAP GROWTH FUND GROWTH FUND ------------ -------------- Assets: Investments in securities: Cost - Unaffiliated issuers .............. $458,053,078 $3,432,820,214 Cost - Non-controlled affiliated issuers (Note 9) ...................... -- 346,223,874 Cost - Sweep Money Fund (Note 7) ......... 13,675,448 101,422,744 ------------ -------------- Total cost of investments ................ $471,728,526 $3,880,466,832 ------------ -------------- Value - Unaffiliated issuers ............. $371,379,187 $2,960,336,473 Value - Non-controlled affiliated issuers (Note 9) ...................... -- 271,718,778 Value - Sweep Money Fund (Note 7) ........ 13,675,448 101,422,744 ------------ -------------- Total value of investments(a) ............ 385,054,635 3,333,477,995 Receivables: Investment securities sold ............... 4,679,795 71,478,520 Capital shares sold ...................... 610,701 2,671,475 Dividends and interest ................... 16,892 876,843 Foreign tax .............................. 4,746 -- Other assets ............................. -- 10,626 ------------ -------------- Total assets .......................... 390,366,769 3,408,515,459 ------------ -------------- Liabilities: Payables: Investment securities purchased .......... 3,314,065 26,007,334 Capital shares redeemed .................. 586,393 37,418,514 Affiliates ............................... 404,826 2,693,285 Professional fees ........................ 16,069 34,953 Unaffiliated transfer agent fees ......... 260,074 3,155,445 Payable upon return of securities loaned .... -- 33,549,221 Accrued expenses and other liabilities ...... 47,773 112,959 ------------ -------------- Total liabilities ..................... 4,629,200 102,971,711 ------------ -------------- Net assets, at value ............... $385,737,569 $3,305,543,748 ============ ============== Net assets consist of: Paid-in capital ............................. $508,744,298 $3,927,100,513 Undistributed net investment income (loss) .. (2,590,329) 3,596,090 Net unrealized appreciation (depreciation) .. (86,673,891) (546,988,837) Accumulated net realized gain (loss) ........ (33,742,509) (78,164,018) ------------ -------------- Net assets, at value ............... $385,737,569 $3,305,543,748 ============ ============== (a) Includes securities loaned ................. -- $ 32,940,197
The accompanying notes are an integral part of these financial statements. Semiannual Report | 87 Franklin Strategic Series FINANCIAL STATEMENTS (CONTINUED) STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED) October 31, 2008 (unaudited)
FRANKLIN FRANKLIN SMALL CAP SMALL-MID CAP GROWTH FUND GROWTH FUND ------------ -------------- CLASS A: Net assets, at value ................................................... $166,308,080 $2,426,981,684 ------------ -------------- Shares outstanding ..................................................... 25,505,148 109,249,164 ------------ -------------- Net asset value per share(a) ........................................... $ 6.52 $ 22.22 ------------ -------------- Maximum offering price per share (net asset value per share / 94.25%) .. $ 6.92 $ 23.58 ------------ -------------- CLASS B: Net assets, at value ................................................... $ 26,015,672 $ 14,970,523 ------------ -------------- Shares outstanding ..................................................... 4,323,461 713,711 ------------ -------------- Net asset value and maximum offering price per share(a) ................ $ 6.02 $ 20.98 ------------ -------------- CLASS C: Net assets, at value ................................................... $ 46,472,920 $ 319,178,692 ------------ -------------- Shares outstanding ..................................................... 7,713,296 15,762,062 ------------ -------------- Net asset value and maximum offering price per share(a) ................ $ 6.03 $ 20.25 ------------ -------------- CLASS R: Net assets, at value ................................................... $ 1,900,874 $ 57,503,893 ------------ -------------- Shares outstanding ..................................................... 297,988 2,643,468 ------------ -------------- Net asset value and maximum offering price per share ................... $ 6.38 $ 21.75 ------------ -------------- ADVISOR CLASS: Net assets, at value ................................................... $145,040,023 $ 486,908,956 ------------ -------------- Shares outstanding ..................................................... 21,547,481 21,410,808 ------------ -------------- Net asset value and maximum offering price per share ................... $ 6.73 $ 22.74 ------------ --------------
(a) Redemption price is equal to net asset value less contingent deferred sales charges, if applicable. The accompanying notes are an integral part of these financial statements. 88 | Semiannual Report Franklin Strategic Series FINANCIAL STATEMENTS (CONTINUED) STATEMENTS OF OPERATIONS for the six months ended October 31, 2008 (unaudited)
FRANKLIN FRANKLIN FRANKLIN GROWTH FLEX CAP FOCUSED CORE OPPORTUNITIES GROWTH FUND EQUITY FUND FUND ------------- ------------ -------------- Investment income: Dividends: Unaffiliated issuers ........................................................... $ 9,735,304 $ 51,430 $ 589,299 Sweep Money Fund (Note 7) ...................................................... 1,055,761 2,985 73,819 Interest .......................................................................... 171 -- -- Income from securities loaned ..................................................... 40,098 -- 7,864 ------------- ----------- ------------- Total investment income ..................................................... 10,831,334 54,415 670,982 ------------- ----------- ------------- Expenses: Management fees (Note 3a) ......................................................... 6,120,806 17,774 716,484 Administrative fees (Note 3b) ..................................................... -- 4,874 291,636 Distribution fees: (Note 3c) Class A ........................................................................ 2,369,069 6,765 199,959 Class B ........................................................................ 422,468 -- 49,308 Class C ........................................................................ 1,764,578 370 196,299 Class R ........................................................................ 151,586 20 18,549 Transfer agent fees (Note 3e) ..................................................... 3,067,800 1,881 345,000 Custodian fees (Note 4) ........................................................... 23,569 122 4,701 Reports to shareholders ........................................................... 195,301 2,359 26,705 Registration and filing fees ...................................................... 73,895 20,977 34,568 Professional fees ................................................................. 24,631 12,008 15,498 Trustees' fees and expenses ....................................................... 17,595 40 2,311 Amortization of offering costs .................................................... -- 35,551 -- Other ............................................................................. 29,165 1,411 5,341 ------------- ----------- ------------- Total expenses .............................................................. 14,260,463 104,152 1,906,359 Expense reductions (Note 4) ................................................. (257) (25) (631) Expenses waived/paid by affiliates (Note 3f) ................................ -- (75,277) -- ------------- ----------- ------------- Net expenses ............................................................. 14,260,206 28,850 1,905,728 ------------- ----------- ------------- Net investment income (loss) .......................................... (3,428,872) 25,565 (1,234,746) ------------- ----------- ------------- Realized and unrealized gains (losses): Net realized gain (loss) from: Investments .................................................................... 5,623,589 (92,063) (36,080,739) Foreign currency transactions .................................................. 9,259 (2,468) 12,063 ------------- ----------- ------------- Net realized gain (loss) .............................................. 5,632,848 (94,531) (36,068,676) ------------- ----------- ------------- Net change in unrealized appreciation (depreciation) on: Investments .................................................................... (800,820,251) (1,646,823) (64,440,999) Translation of other assets and liabilities denominated in foreign currencies .. -- (1,037) 4,114 ------------- ----------- ------------- Net change in unrealized appreciation (depreciation) .................. (800,820,251) (1,647,860) (64,436,885) ------------- ----------- ------------- Net realized and unrealized gain (loss) .............................................. (795,187,403) (1,742,391) (100,505,561) ------------- ----------- ------------- Net increase (decrease) in net assets resulting from operations ...................... $(798,616,275) $(1,716,826) $(101,740,307) ============= =========== =============
The accompanying notes are an integral part of these financial statements. Semiannual Report | 89 Franklin Strategic Series FINANCIAL STATEMENTS (CONTINUED) STATEMENTS OF OPERATIONS (CONTINUED) for the six months ended October 31, 2008 (unaudited)
FRANKLIN FRANKLIN SMALL CAP SMALL-MID CAP GROWTH FUND GROWTH FUND ------------- --------------- Investment income: Dividends: Unaffiliated issuers ........................................................... $ 836,640 $ 25,590,652 Sweep Money Fund (Note 7) ...................................................... 93,589 2,193,819 Interest .......................................................................... 68 1,029,504 Income from securities loaned ..................................................... 219,328 3,095,234 ------------- --------------- Total investment income .................................................. 1,149,625 31,909,209 ------------- --------------- Expenses: Management fees (Note 3a) ......................................................... 1,464,787 11,044,517 Administrative fees (Note 3b) ..................................................... 550,632 -- Distribution fees: (Note 3c) Class A ........................................................................ 356,376 4,652,693 Class B ........................................................................ 216,079 111,222 Class C ........................................................................ 335,794 2,308,244 Class R ........................................................................ 7,103 210,988 Transfer agent fees (Note 3e) ..................................................... 659,346 9,385,457 Custodian fees (Note 4) ........................................................... 10,936 61,220 Reports to shareholders ........................................................... 56,400 280,650 Registration and filing fees ...................................................... 46,980 106,850 Professional fees ................................................................. 16,282 40,605 Trustees' fees and expenses ....................................................... 8,845 46,213 Other ............................................................................. 10,968 64,763 ------------- --------------- Total expenses ........................................................... 3,740,528 28,313,422 Expense reductions (Note 4) .............................................. (574) (303) ------------- --------------- Net expenses .......................................................... 3,739,954 28,313,119 ------------- --------------- Net investment income (loss) ....................................... (2,590,329) 3,596,090 ------------- --------------- Realized and unrealized gains (losses): Net realized gain (loss) from: Investments: Unaffiliated issuers ........................................................ (17,083,853) (86,023,729) Non-controlled affiliated issuers (Note 9) .................................. -- 2,153,225 Foreign currency transactions .................................................. -- (144,268) ------------- --------------- Net realized gain (loss) ........................................... (17,083,853) (84,014,772) ------------- --------------- Net change in unrealized appreciation (depreciation) on: Investments .................................................................... (132,225,663) (1,574,134,504) Translation of other assets and liabilities denominated in foreign currencies .. -- (16,060) ------------- --------------- Net change in unrealized appreciation (depreciation) ............... (132,225,663) (1,574,150,564) ------------- --------------- Net realized and unrealized gain (loss) .............................................. (149,309,516) (1,658,165,336) ------------- --------------- Net increase (decrease) in net assets resulting from operations ...................... $(151,899,845) $(1,654,569,246) ============= ===============
The accompanying notes are an integral part of these financial statements. 90 | Semiannual Report Franklin Strategic Series FINANCIAL STATEMENTS (CONTINUED) STATEMENTS OF CHANGES IN NET ASSETS
FRANKLIN FLEX CAP FRANKLIN FOCUSED CORE GROWTH FUND EQUITY FUND --------------------------------- ------------------------------------ SIX MONTHS ENDED SIX MONTHS ENDED OCTOBER 31, 2008 YEAR ENDED OCTOBER 31, 2008 PERIOD ENDED (UNAUDITED) APRIL 30, 2008 (UNAUDITED) APRIL 30, 2008(a) ---------------- -------------- ---------------- ----------------- Increase (decrease) in net assets: Operations: Net investment income (loss) ..................... $ (3,428,872) $ (6,082,319) $ 25,565 $ 16,737 Net realized gain (loss) from investments and foreign currency transactions ................. 5,632,848 73,881,873 (94,531) 8,991 Net change in unrealized appreciation (depreciation) on investments and translation of other assets and liabilities denominated in foreign currencies ............................ (800,820,251) 11,048,494 (1,647,860) (710,813) -------------- -------------- ----------- ---------- Net increase (decrease) in net assets resulting from operations ............... (798,616,275) 78,848,048 (1,716,826) (685,085) -------------- -------------- ----------- ---------- Distributions to shareholders from: Net investment income: Class A ....................................... -- (1,062,345) -- -- Class R ....................................... -- (43,876) -- -- Advisor Class ................................. -- (161,537) -- -- Net realized gains: Class A ....................................... -- (32,084,220) -- -- Class B ....................................... -- (1,853,887) -- -- Class C ....................................... -- (6,486,834) -- -- Class R ....................................... -- (1,221,188) -- -- Advisor Class ................................. -- (5,050,987) -- -- -------------- -------------- ----------- ---------- Total distributions to shareholders ................. -- (47,964,874) -- -- -------------- -------------- ----------- ---------- Capital share transactions: (Note 2) Class A ....................................... (28,635,947) 10,019,089 1,162,567 5,311,800 Class B ....................................... (14,846,992) (23,776,783) -- -- Class C ....................................... (5,736,451) 4,256,506 101,232 41,349 Class R ....................................... (3,926,637) (15,994,000) -- 10,000 Advisor Class ................................. 60,892,345 45,026,229 (10,326) 194,238 -------------- -------------- ----------- ---------- Total capital share transactions .................... 7,746,318 19,531,041 1,253,473 5,557,387 -------------- -------------- ----------- ---------- Redemption fees ..................................... 2,252 20,391 -- -- -------------- -------------- ----------- ---------- Net increase (decrease) in net assets ...... (790,867,705) 50,434,606 (463,353) 4,872,302 Net assets: Beginning of period ................................. 2,897,264,650 2,846,830,044 4,872,302 -- -------------- -------------- ----------- ---------- End of period ....................................... $2,106,396,945 $2,897,264,650 $ 4,408,949 $4,872,302 ============== ============== =========== ========== Undistributed net investment income (loss) included in net assets: End of period .................................... $ (3,428,872) $ -- $ 54,131 $ 28,566 ============== ============== =========== ==========
(a) For the period December 13, 2007 (commencement of operations) to April 30, 2008. The accompanying notes are an integral part of these financial statements. Semiannual Report | 91 Franklin Strategic Series FINANCIAL STATEMENTS (CONTINUED) STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
FRANKLIN GROWTH FRANKLIN SMALL CAP OPPORTUNITIES FUND GROWTH FUND --------------------------------- --------------------------------- SIX MONTHS ENDED SIX MONTHS ENDED OCTOBER 31, 2008 YEAR ENDED OCTOBER 31, 2008 YEAR ENDED (UNAUDITED) APRIL 30, 2008 (UNAUDITED) APRIL 30, 2008 ---------------- -------------- ---------------- -------------- Increase (decrease) in net assets: Operations: Net investment income (loss) ...................... $ (1,234,746) $ (2,243,513) $ (2,590,329) $ (7,026,827) Net realized gain (loss) from investments and foreign currency transactions .................. (36,068,676) 12,002,488 (17,083,853) 89,522,745 Net change in unrealized appreciation (depreciation) on investments and translation of other assets and liabilities denominated in foreign currencies ............................. (64,436,885) 7,496,019 (132,225,663) (204,815,321) ------------- ------------ ------------- -------------- Net increase (decrease) in net assets resulting from operations ................ (101,740,307) 17,254,994 (151,899,845) (122,319,403) ------------- ------------ ------------- -------------- Distributions to shareholders from net realized gains: Class A ........................................... -- -- -- (80,597,900) Class B ........................................... -- -- -- (13,185,309) Class C ........................................... -- -- -- (19,085,424) Class R ........................................... -- -- -- (619,705) Advisor Class ..................................... -- -- -- (40,266,927) ------------- ------------ ------------- -------------- Total distributions to shareholders .................. -- -- -- (153,755,265) ------------- ------------ ------------- -------------- Capital share transactions: (Note 2) Class A ........................................... 13,068,665 25,504,203 (41,335,318) (131,750,498) Class B ........................................... (1,535,964) (5,044,139) (15,040,301) (9,331,447) Class C ........................................... 2,311,273 6,765,860 (10,099,835) (10,395,508) Class R ........................................... 647,748 (69,825) (519,294) (1,529,576) Advisor Class ..................................... 10,650,595 8,963,605 (21,845,121) (31,944,950) ------------- ------------ ------------- -------------- Total capital share transactions ..................... 25,142,317 36,119,704 (88,839,869) (184,951,979) ------------- ------------ ------------- -------------- Redemption fees ...................................... 966 3,208 1,045 3,008 ------------- ------------ ------------- -------------- Net increase (decrease) in net assets ....... (76,597,024) 53,377,906 (240,738,669) (461,023,639) Net assets: Beginning of period .................................. 298,841,421 245,463,515 626,476,238 1,087,499,877 ------------- ------------ ------------- -------------- End of period ........................................ $ 222,244,397 $298,841,421 $ 385,737,569 $ 626,476,238 ============= ============ ============= ============== Undistributed net investment income (loss) included in net assets: End of period ..................................... $ (1,234,746) $ -- $ (2,590,329) $ -- ============= ============ ============= ==============
The accompanying notes are an integral part of these financial statements. 92 | Semiannual Report Franklin Strategic Series FINANCIAL STATEMENTS (CONTINUED) STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
FRANKLIN SMALL-MID CAP GROWTH FUND ---------------------------------- SIX MONTHS ENDED OCTOBER 31, 2008 YEAR ENDED (UNAUDITED) APRIL 30, 2008 ---------------- --------------- Increase (decrease) in net assets: Operations: Net investment income (loss) ......................................................... $ 3,596,090 $ (35,942,600) Net realized gain (loss) from investments and foreign currency transactions .......... (84,014,772) 535,546,104 Net change in unrealized appreciation (depreciation) on investments and translation of other assets and liabilities denominated in foreign currencies .................... (1,574,150,564) (898,481,620) --------------- --------------- Net increase (decrease) in net assets resulting from operations ................ (1,654,569,246) (398,878,116) --------------- --------------- Distributions to shareholders from net realized gains: Class A .............................................................................. -- (790,889,652) Class B .............................................................................. -- (5,111,384) Class C .............................................................................. -- (105,273,976) Class R .............................................................................. -- (16,775,519) Advisor Class ........................................................................ -- (160,138,265) --------------- --------------- Total distributions to shareholders ..................................................... -- (1,078,188,796) --------------- --------------- Capital share transactions: (Note 2) Class A .............................................................................. (685,509,332) (221,023,942) Class B .............................................................................. (2,946,796) 132,361 Class C .............................................................................. (45,747,729) 16,278,421 Class R .............................................................................. (8,295,876) (1,881,624) Advisor Class ........................................................................ (84,414,192) 242,909,931 --------------- --------------- Total capital share transactions ........................................................ (826,913,925) 36,415,147 --------------- --------------- Redemption fees ......................................................................... 35,884 97,409 --------------- --------------- Net increase (decrease) in net assets .......................................... (2,481,447,287) $(1,440,554,356) Net assets: Beginning of period ..................................................................... 5,786,991,035 7,227,545,391 --------------- --------------- End of period ........................................................................... $ 3,305,543,748 $ 5,786,991,035 =============== =============== Undistributed net investment income included in net assets: End of period ........................................................................... $ 3,596,090 $ -- =============== ===============
The accompanying notes are an integral part of these financial statements. Semiannual Report | 93 Franklin Strategic Series NOTES TO FINANCIAL STATEMENTS (UNAUDITED) 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES Franklin Strategic Series (Trust) is registered under the Investment Company Act of 1940, as amended, (1940 Act) as an open-end investment company, consisting of eleven separate funds. All funds included in this report (Funds) are diversified. The financial statements of the remaining funds in the Trust are presented separately. The classes of shares offered within each of the Funds are indicated below. Each class of shares differs by its initial sales load, contingent deferred sales charges, distribution fees, voting rights on matters affecting a single class and its exchange privilege. CLASS A, CLASS C, CLASS R & ADVISOR CLASS Franklin Focused Core Equity Fund CLASS A, CLASS B, CLASS C, CLASS R & ADVISOR CLASS Franklin Growth Opportunities Fund Franklin Flex Cap Growth Fund Franklin Small Cap Growth Fund Franklin Small-Mid Cap Growth Fund The following summarizes the Funds' significant accounting policies. A. SECURITY VALUATION Securities listed on a securities exchange or on the NASDAQ National Market System are valued at the last quoted sale price or the official closing price of the day, respectively. Over-the-counter securities and listed securities for which there is no reported sale are valued within the range of the most recent quoted bid and ask prices. Securities that trade in multiple markets or on multiple exchanges are valued according to the broadest and most representative market. Investments in open-end mutual funds are valued at the closing net asset value. Foreign securities are valued as of the close of trading on the foreign stock exchange on which the security is primarily traded, or the NYSE, whichever is earlier. If no sale is reported at that time, the foreign security will be valued within the range of the most recent quoted bid and ask prices. The value is then converted into its U.S. dollar equivalent at the foreign exchange rate in effect at the close of the NYSE on the day that the value of the foreign security is determined. The Trust has procedures to determine the fair value of individual securities and other assets for which market prices are not readily available or which may not be reliably priced. Methods for valuing these securities may include: fundamental analysis, matrix pricing, discounts from market prices of similar securities, or discounts applied due to the nature and duration of restrictions on the disposition of the securities. Due to the inherent uncertainty of valuations of such securities, the fair values may differ significantly from the values that would have been used had a ready market for such investments existed. Occasionally, events occur between the time at which trading in a security is completed and the close of the NYSE that might call into question the availability (including the reliability) of the value of a portfolio security held by the fund. The investment manager monitors price movements following the close of trading in foreign stock markets through a series of country specific market proxies (such as baskets of American Depository Receipts, futures contracts and exchange traded funds). These price 94 | Semiannual Report Franklin Strategic Series NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) A. SECURITY VALUATION (CONTINUED) movements are measured against established trigger thresholds for each specific market proxy to assist in determining if an event has occurred. If such an event occurs, the securities may be valued using fair value procedures, which may include the use of independent pricing services. All security valuation procedures are approved by the Trust's Board of Trustees. B. FOREIGN CURRENCY TRANSLATION Portfolio securities and other assets and liabilities denominated in foreign currencies are translated into U.S. dollars based on the exchange rate of such currencies against U.S. dollars on the date of valuation. Purchases and sales of securities, income and expense items denominated in foreign currencies are translated into U.S. dollars at the exchange rate in effect on the transaction date. Occasionally, events may impact the availability or reliability of foreign exchange rates used to convert the U.S. dollar equivalent value. If such an event occurs, the foreign exchange rate will be valued at fair value using procedures established and approved by the Trust's Board of Trustees. The Funds do not separately report the effect of changes in foreign exchange rates from changes in market prices on securities held. Such changes are included in net realized and unrealized gain or loss from investments on the Statement of Operations. Realized foreign exchange gains or losses arise from sales of foreign currencies, currency gains or losses realized between the trade and settlement dates on securities transactions and the difference between the recorded amounts of dividends, interest, and foreign withholding taxes and the U.S. dollar equivalent of the amounts actually received or paid. Net unrealized foreign exchange gains and losses arise from changes in foreign exchange rates on foreign denominated assets and liabilities other than investments in securities held at the end of the reporting period. C. FOREIGN CURRENCY CONTRACTS When the Funds purchase or sell foreign securities they may enter into foreign exchange contracts to minimize foreign exchange risk from the trade date to the settlement date of the transactions. A foreign exchange contract is an agreement between two parties to exchange different currencies at an agreed upon exchange rate at a future date. Realized and unrealized gains and losses on these contracts are included in the Statement of Operations. The risks of these contracts include movement in the values of the foreign currencies relative to the U.S. dollar and the possible inability of the counterparties to fulfill their obligations under the contracts, which may be in excess of the amount reflected in the Statement of Assets and Liabilities. Semiannual Report | 95 Franklin Strategic Series NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) D. SECURITIES LENDING The Funds may loan securities to certain brokers through a securities lending agent for which they receive initial cash collateral against the loaned securities in an amount equal to at least 102% of the market value of the loaned securities. Collateral is maintained over the life of the loan in an amount not less than 100% of the market value of loaned securities, as determined at the close of fund business each day; any additional collateral required due to changes in security values is delivered to the fund on the next business day. The collateral is invested in short-term instruments as noted in the Statement of Investments. The fund receives interest income from the investment of cash collateral, adjusted by lender fees and broker rebates. The fund bears the risk of loss with respect to the investment of the collateral and the securities loaned. The securities lending agent has agreed to indemnify the fund in the case of default of any securities borrower. E. INCOME TAXES No provision has been made for U.S. income taxes because it is each fund's policy to qualify as a regulated investment company under the Internal Revenue Code and to distribute to shareholders substantially all of its taxable income and net realized gains. The Funds have reviewed the tax positions, taken on federal income tax returns, for each of the three open tax years and as of October 31, 2008, and have determined that no provision for income tax is required in the Funds' financial statements. F. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS Security transactions are accounted for on trade date. Realized gains and losses on security transactions are determined on a specific identification basis. Interest income and estimated expenses are accrued daily. Dividend income is recorded on the ex-dividend date except that certain dividends from foreign securities are recognized as soon as the Funds are notified of the ex-dividend date. Distributions to shareholders are recorded on the ex-dividend date and are determined according to income tax regulations (tax basis). Distributable earnings determined on a tax basis may differ from earnings recorded in accordance with accounting principles generally accepted in the United States of America. These differences may be permanent or temporary. Permanent differences are reclassified among capital accounts to reflect their tax character. These reclassifications have no impact on net assets or the results of operations. Temporary differences are not reclassified, as they may reverse in subsequent periods. 96 | Semiannual Report Franklin Strategic Series NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) F. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS (CONTINUED) Common expenses incurred by the Trust are allocated among the Funds based on the ratio of net assets of each fund to the combined net assets of the Trust. Fund specific expenses are charged directly to the fund that incurred the expense. Realized and unrealized gains and losses and net investment income, other than class specific expenses, are allocated daily to each class of shares based upon the relative proportion of net assets of each class. Differences in per share distributions, by class, are generally due to differences in class specific expenses. G. OFFERING COSTS Offering costs are amortized on a straight line basis over twelve months. H. ACCOUNTING ESTIMATES The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America 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 expenses during the reporting period. Actual results could differ from those estimates. I. REDEMPTION FEES A short term trading redemption fee was imposed, with some exceptions, on any fund shares that were redeemed or exchanged within seven calendar days following their purchase date. The redemption fee was 2% of the amount redeemed. Such fees were retained by the fund and accounted for as an addition to paid-in capital. Effective September 1, 2008, the redemption fee was eliminated. J. GUARANTEES AND INDEMNIFICATIONS Under the Trust's organizational documents, its officers and trustees are indemnified by the Trust against certain liabilities arising out of the performance of their duties to the Trust. Additionally, in the normal course of business, the Trust, on behalf of the Funds, enters into contracts with service providers that contain general indemnification clauses. The Trust's maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Trust that have not yet occurred. Currently, the Trust expects the risk of loss to be remote. Semiannual Report | 97 Franklin Strategic Series NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 2. SHARES OF BENEFICIAL INTEREST At October 31, 2008, there were an unlimited number of shares authorized (without par value). Transactions in the Funds' shares were as follows:
FRANKLIN FRANKLIN FOCUSED FLEX CAP GROWTH FUND CORE EQUITY FUND -------------------------- -------------------- SHARES AMOUNT SHARES AMOUNT ---------- ------------- ------- ---------- CLASS A SHARES: Six Months ended October 31, 2008 Shares sold .................. 4,606,805 $ 194,438,305 179,538 $1,231,577 Shares redeemed .............. (5,458,511) (223,074,252) (8,439) (69,010) ---------- ------------- ------- ---------- Net increase (decrease) ...... (851,706) $ (28,635,947) 171,099 $1,162,567 ========== ============= ======= ========== Year ended April 30, 2008(a) Shares sold .................. 8,860,704 $ 412,850,677 539,141 $5,341,810 Shares issued in reinvestment of distributions .......... 564,076 27,302,324 -- -- Shares redeemed .............. (9,275,872) (430,133,912) (3,553) (30,010) ---------- ------------- ------- ---------- Net increase (decrease) ...... 148,908 $ 10,019,089 535,588 $5,311,800 ========== ============= ======= ========== CLASS B SHARES: Six Months ended October 31, 2008 Shares sold .................. 111,044 $ 4,491,948 Shares redeemed .............. (501,917) (19,338,940) ---------- ------------- Net increase (decrease) ...... (390,873) $ (14,846,992) ========== ============= Year ended April 30, 2008 Shares sold .................. 185,826 $ 8,281,945 Shares issued in reinvestment of distributions .......... 38,247 1,733,727 Shares redeemed .............. (783,309) (33,792,455) ---------- ------------- Net increase (decrease) ...... (559,236) $ (23,776,783) ========== ============= CLASS C SHARES: Six Months ended October 31, 2008 Shares sold .................. 969,537 $ 37,914,583 14,879 $ 107,987 Shares redeemed .............. (1,163,257) (43,651,034) (826) (6,755) ---------- ------------- ------- ---------- Net increase (decrease) ...... (193,720) $ (5,736,451) 14,053 $ 101,232 ========== ============= ======= ========== Year ended April 30, 2008(a) Shares sold .................. 1,643,470 $ 72,227,327 4,695 $ 41,349 Shares issued in reinvestment of distributions .......... 131,515 5,973,410 -- -- Shares redeemed .............. (1,714,226) (73,944,231) -- -- ---------- ------------- ------- ---------- Net increase (decrease) ...... 60,759 $ 4,256,506 4,695 $ 41,349 ========== ============= ======= ==========
98 | Semiannual Report Franklin Strategic Series NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 2. SHARES OF BENEFICIAL INTEREST (CONTINUED)
FRANKLIN FRANKLIN FOCUSED FLEX CAP GROWTH FUND CORE EQUITY FUND ------------------------ ------------------ SHARES AMOUNT SHARES AMOUNT --------- ------------ ------ --------- CLASS R SHARES: Six Months ended October 31, 2008 Shares sold .................. 201,709 $ 8,140,621 -- $ -- Shares redeemed .............. (292,601) (12,067,258) -- -- --------- ------------ ------ --------- Net increase (decrease) ...... (90,892) $ (3,926,637) -- $ -- ========= ============ ====== ========= Year ended April 30, 2008(a) Shares sold .................. 357,376 $ 16,514,361 1,000 $ 10,000 Shares issued in reinvestment of distributions .......... 26,436 1,261,987 -- -- Shares redeemed .............. (739,403) (33,770,348) -- -- --------- ------------ ------ --------- Net increase (decrease) ...... (355,591) $(15,994,000) 1,000 $ 10,000 ========= ============ ====== ========= ADVISOR CLASS SHARES: Six Months ended October 31, 2008 Shares sold .................. 1,957,854 $ 80,273,253 987 $ 6,855 Shares redeemed .............. (458,630) (19,380,908) (2,359) (17,181) --------- ------------ ------ --------- Net increase (decrease) ...... 1,499,224 $ 60,892,345 (1,372) $ (10,326) ========= ============ ====== ========= Year ended April 30, 2008(a) Shares sold .................. 1,150,962 $ 52,420,394 19,731 $ 194,788 Shares issued in reinvestment of distributions .......... 106,767 5,206,091 -- -- Shares redeemed .............. (270,893) (12,600,256) (64) (550) --------- ------------ ------ --------- Net increase (decrease) ...... 986,836 $ 45,026,229 19,667 $ 194,238 ========= ============ ====== =========
(a) For the period December 13, 2007 (commencement of operations) to April 30, 2008, for the Franklin Focused Core Equity Fund.
FRANKLIN GROWTH FRANKLIN OPPORTUNITIES FUND SMALL CAP GROWTH FUND ------------------------- --------------------------- SHARES AMOUNT SHARES AMOUNT ---------- ------------ ----------- ------------- CLASS A SHARES: Six Months ended October 31, 2008 Shares sold .................. 1,892,833 $ 35,545,336 3,043,579 $ 25,675,736 Shares redeemed .............. (1,300,945) (22,476,671) (7,681,396) (67,011,054) ---------- ------------ ----------- ------------- Net increase (decrease) ...... 591,888 $ 13,068,665 (4,637,817) $ (41,335,318) ========== ============ =========== ============= Year ended April 30, 2008 Shares sold .................. 3,288,291 $ 67,103,617 5,142,888 $ 57,782,843 Shares issued inreinvestment of distributions .......... -- -- 7,209,636 73,177,801 Shares redeemed .............. (2,127,947) (41,599,414) (24,350,461) (262,711,142) ---------- ------------ ----------- ------------- Net increase (decrease) ...... 1,160,344 $ 25,504,203 (11,997,937) $(131,750,498) ========== ============ =========== =============
Semiannual Report | 99 Franklin Strategic Series NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 2. SHARES OF BENEFICIAL INTEREST (CONTINUED)
FRANKLIN GROWTH FRANKLIN OPPORTUNITIES FUND SMALL CAP GROWTH FUND ---------------------- --------------------------- SHARES AMOUNT SHARES AMOUNT -------- ----------- ----------- ------------- CLASS B SHARES: Six Months ended October 31, 2008 Shares sold .................. 65,566 $ 1,173,255 55,850 $ 415,389 Shares redeemed .............. (160,351) (2,709,219) (1,959,304) (15,455,690) -------- ----------- ----------- ------------- Net increase (decrease) ...... (94,785) $(1,535,964) (1,903,454) $ (15,040,301) ======== =========== =========== ============= Year ended April 30, 2008 Shares sold .................. 82,357 $ 1,608,358 123,014 $ 1,243,897 Shares issued in reinvestment of distributions .......... -- -- 1,228,476 11,584,529 Shares redeemed .............. (360,405) (6,652,497) (2,064,247) (22,159,873) -------- ----------- ----------- ------------- Net increase (decrease) ...... (278,048) $(5,044,139) (712,757) $ (9,331,447) ======== =========== =========== ============= CLASS C SHARES: Six Months ended October 31, 2008 Shares sold .................. 510,146 $ 9,025,541 174,636 $ 1,348,795 Shares redeemed .............. (416,279) (6,714,268) (1,454,812) (11,448,630) -------- ----------- ----------- ------------- Net increase (decrease) ...... 93,867 $ 2,311,273 (1,280,176) $ (10,099,835) ======== =========== =========== ============= Year ended April 30, 2008 Shares sold .................. 767,351 $14,696,919 305,315 $ 3,089,377 Shares issued in reinvestment of distributions .......... -- -- 1,822,62 217,205,554 Shares redeemed .............. (428,732) (7,931,059) (2,919,162) (30,690,439) -------- ----------- ----------- ------------- Net increase (decrease) ...... 338,619 $ 6,765,860 (791,225) $ (10,395,508) ======== =========== =========== ============= CLASS R SHARES: Six Months ended October 31, 2008 Shares sold .................. 141,170 $ 2,482,590 65,494 $ 557,275 Shares redeemed .............. (101,743) (1,834,842) (122,972) (1,076,569) -------- ----------- ----------- ------------- Net increase (decrease) ...... 39,427 $ 647,748 (57,478) $ (519,294) ======== =========== =========== ============= Year ended April 30, 2008 Shares sold .................. 174,256 $ 3,443,236 102,048 $ 1,100,387 Shares issued in reinvestment of distributions .......... -- -- 62,282 619,705 Shares redeemed .............. (181,695) (3,513,061) (256,839) (3,249,668) -------- ----------- ----------- ------------- Net increase (decrease) ...... (7,439) $ (69,825) (92,509) $ (1,529,576) ======== =========== =========== ============= ADVISOR CLASS SHARES: Six Months ended October 31, 2008 Shares sold .................. 766,239 $12,953,529 2,605,644 $ 19,940,568 Shares redeemed .............. (130,769) (2,302,934) (4,616,743) (41,785,689) -------- ----------- ----------- ------------- Net increase (decrease) ...... 635,470 $10,650,595 (2,011,099) $ (21,845,121) ======== =========== =========== ============= Year ended April 30, 2008 Shares sold .................. 780,151 $15,851,341 7,904,170 $ 87,488,790 Shares issued in reinvestment of distributions .......... -- -- 3,652,414 38,167,731 Shares redeemed .............. (335,773) (6,887,736) (12,389,907) (157,601,471) -------- ----------- ----------- ------------- Net increase (decrease) ...... 444,378 $ 8,963,605 (833,323) $ (31,944,950) ======== =========== =========== =============
100 | Semiannual Report Franklin Strategic Series NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 2. SHARES OF BENEFICIAL INTEREST (CONTINUED)
FRANKLIN SMALL-MID CAP GROWTH FUND ------------------------------ SHARES AMOUNT ----------- ---------------- CLASS A SHARES: Six Months ended October 31, 2008 Shares sold................................... 8,189,401 $ 247,047,616 Shares redeemed............................... (31,398,352) (932,556,948) ----------- --------------- Net increase (decrease)....................... (23,208,951) $ (685,509,332) =========== =============== Year ended April 30, 2008 Shares sold................................... 27,344,993 $ 1,030,832,137 Shares issued in reinvestment of distributions 17,940,000 630,770,384 Shares redeemed............................... (48,105,487) (1,882,626,463) ----------- --------------- Net increase (decrease)....................... (2,820,494) $ (221,023,942) =========== =============== CLASS B SHARES: Six Months ended October 31, 2008 Shares sold................................... 21,224 $ 554,238 Shares redeemed............................... (128,747) (3,501,034) ----------- --------------- Net increase (decrease)....................... (107,523) $ (2,946,796) =========== =============== Year ended April 30, 2008 Shares sold................................... 58,760 $ 2,259,539 Shares issued in reinvestment of distributions.............................. 142,174 4,751,473 Shares redeemed............................... (193,900) (6,878,651) ----------- --------------- Net increase (decrease)....................... 7,034 $ 132,361 =========== =============== CLASS C SHARES: Six Months ended October 31, 2008 Shares sold................................... 395,144 $ 10,623,044 Shares redeemed............................... (2,113,109) (56,370,773) ----------- --------------- Net increase (decrease)....................... (1,717,965) $ (45,747,729) =========== =============== Year ended April 30, 2008 Shares sold................................... 1,327,722 $ 46,812,879 Shares issued in reinvestment of distributions.............................. 2,777,328 89,596,613 Shares redeemed............................... (3,447,379) (120,131,071) ----------- --------------- Net increase (decrease)....................... 657,671 $ 16,278,421 =========== =============== CLASS R SHARES: Six Months ended October 31, 2008 Shares sold................................... 558,575 $ 16,400,340 Shares redeemed............................... (857,258) (24,696,216) ----------- --------------- Net increase (decrease)....................... (298,683) $ (8,295,876) =========== =============== Year ended April 30, 2008 Shares sold................................... 1,064,140 $ 39,882,854 Shares issued in reinvestment of distributions.............................. 475,058 16,389,509 Shares redeemed............................... (1,487,464) (58,153,987) ----------- --------------- Net increase (decrease)....................... 51,734 $ (1,881,624) =========== ===============
Semiannual Report | 101 Franklin Strategic Series NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 2. SHARES OF BENEFICIAL INTEREST (CONTINUED)
FRANKLIN SMALL-MID CAP GROWTH FUND ------------------------------ SHARES AMOUNT ----------- ---------------- ADVISOR CLASS SHARES: Six Months ended October 31, 2008 Shares sold................................... 2,523,705 $ 73,321,111 Shares redeemed............................... (5,414,797) (157,735,303) ----------- --------------- Net increase (decrease)....................... (2,891,092) $ (84,414,192) =========== =============== Year ended April 30, 2008 Shares sold................................... 11,838,328 $ 479,997,430 Shares issued in reinvestment of distributions 3,474,301 124,762,163 Shares redeemed............................... (10,036,923) (361,849,662) ----------- --------------- Net increase (decrease)....................... 5,275,706 $ 242,909,931 =========== ===============
3. TRANSACTIONS WITH AFFILIATES Franklin Resources, Inc. is the holding company for various subsidiaries that together are referred to as Franklin Templeton Investments. Certain officers and trustees of the Trust are also officers and/or directors of the following subsidiaries:
SUBSIDIARY AFFILIATION - ---------- ---------------------- Franklin Advisers, Inc. (Advisers) Investment manager Franklin Templeton Services, LLC (FT Services) Administrative manager Franklin Templeton Distributors, Inc. (Distributors) Principal underwriter Franklin Templeton Investor Services, LLC (Investor Services) Transfer agent
A. MANAGEMENT FEES The Franklin Flex Cap Growth Fund and the Franklin Small-MidCap Growth Fund pay an investment management fee to Advisers based on the average daily net assets of each of the funds as follows:
ANNUALIZED FEE RATE NET ASSETS - ------------------- --------------------------------------------------- 0.625% Up to and including $100 million 0.500% Over $100 million, up to and including $250 million 0.450% Over $250 million, up to and including $7.5 billion 0.440% Over $7.5 billion, up to and including $10 billion 0.430% Over $10 billion, up to and including $12.5 billion 0.420% Over $12.5 billion, up to and including $15 billion 0.400% Inexcess of $15 billion
102 | Semiannual Report Franklin Strategic Series NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 3. TRANSACTIONS WITH AFFILIATES (CONTINUED) A. MANAGEMENT FEES (CONTINUED) The Franklin Growth Opportunities Fund pays an investment management fee to Advisers based on the average daily net assets as follows:
ANNUALIZED FEE RATE NET ASSETS - ------------------- ----------------------------------------------------- 0.500% Up to and including $500 million 0.400% Over $500 million, up to and including $1 billion 0.350% Over $1 billion, up to a nd including $1.5 billion 0.300% Over $1.5 billion, up to and including $6.5 billion 0.275% Over $6.5 billion, up to and including $11.5 billion 0.250% Over $11.5 billion, up to and including $16.5 billion 0.240% Over $16.5 billion, up to and including $19 billion 0.230% Over $19 billion, up to and including $21.5 billion 0.220% Inexcess of $21.5 billion
The Franklin Small Cap Growth Fund pays an investment management fee to Advisers based on the average daily net assets as follows:
ANNUALIZED FEE RATE NET ASSETS - ------------------- ----------------------------------------------------- 0.550% Up to and including $500 million 0.450% Over $500 million, up to and including $1 billion 0.400% Over $1 billion, up to and including $1.5 billion 0.350% Over $1.5 billion, up to and including $6.5 billion 0.325% Over $6.5 billion, up to and including $11.5 billion 0.300% Over $11.5 billion, up to and including $16.5 billion 0.290% Over $16.5 billion, up to and including $19 billion 0.280% Over $19 billion, up to and including $21.5 billion 0.270% In excess of $21.5 billion
The Franklin Focused Core Equity Fund pays an investment management fee to Advisers based on the average daily net assets as follows:
ANNUALIZED FEE RATE NET ASSETS - ------------------- ----------------------------------------------------- 0.750% Up to and including $500 million 0.650% Over $500 million, up to and including $1 billion 0.600% Over $1 billion, up to and including $1.5 billion 0.550% Over $1.5 billion, up to and including $6.5 billion 0.525% Over $6.5 billion, up to and including $11.5 billion 0.500% Over $11.5 billion, up to and including $16.5 billion 0.490% Over $16.5 billion, up to and including $19 billion 0.480% Over $19 billion, up to and including $21.5 billion 0.470% In excess of $21.5 billion
Semiannual Report | 103 Franklin Strategic Series NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 3. TRANSACTIONS WITH AFFILIATES (CONTINUED) B. ADMINISTRATIVE FEES The Franklin Focused Core Equity Fund, the Franklin Growth Opportunities Fund, and the Franklin Small Cap Growth Fund pay an administrative fee to FT Services of 0.20% per year of the average daily net assets of each of the funds. Under an agreement with Advisers, FT Services provides administrative services to the Franklin Flex Cap Growth Fund and the Franklin Small-Mid Cap Growth Fund. The fee is paid by Advisers based on average daily net assets, and is not an additional expense of the funds. C. DISTRIBUTION FEES The Trust's Board of Trustees has adopted distribution plans for each share class, with the exception of Advisor Class shares, pursuant to Rule 12b-1 under the 1940 Act. Under the funds' Class A reimbursement distribution plans, the funds reimburse Distributors for costs incurred in connection with the servicing, sale and distribution of each fund's shares up to the maximum annual plan rate for each class. Under the Class A reimbursement distribution plans, costs exceeding the maximum for the current plan year cannot be reimbursed in subsequent periods. In addition, under the Funds' compensation distribution plans, the funds pay Distributors for costs incurred in connection with the servicing, sale and distribution of each fund's shares up to the maximum annual plan rate for each class. The maximum annual plan rates, based on the average daily net assets, for each class, are as follows:
FRANKLIN FRANKLIN FRANKLIN GROWTH FRANKLIN FRANKLIN FLEX CAP FOCUSED CORE OPPORTUNITIES SMALL CAP SMALL-MID CAP GROWTH FUND EQUITY FUND FUND GROWTH FUND GROWTH FUND ----------- ------------ ------------- ----------- ------------- Reimbursement Plans: Class A ............ 0.25% -- 0.35% -- 0.25% Compensation Plans: Class A ............ -- 0.35% -- 0.35% -- Class B ............ 1.00% -- 1.00% 1.00% 1.00% Class C ............ 1.00% 1.00% 1.00% 1.00% 1.00% Class R ............ 0.50% 0.50% 0.50% 0.50% 0.50%
Distributors has agreed to limit the current rate to 0.30% per year for Class A shares for the Franklin Focused Core Equity Fund, the Franklin Growth Opportunities Fund, and the Franklin Small Cap Growth Fund for the period of February 1, 2008 through January 31, 2009. 104 | Semiannual Report Franklin Strategic Series NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 3. TRANSACTIONS WITH AFFILIATES (CONTINUED) D. SALES CHARGES/UNDERWRITING AGREEMENTS Distributors has advised the Funds of the following commission transactions related to the sales and redemptions of the Funds' shares for the period:
FRANKLIN FRANKLIN FRANKLIN GROWTH FRANKLIN FLEX CAP FOCUSED CORE OPPORTUNITIES SMALL CAP GROWTH FUND EQUITY FUND FUND GROWTH FUND ----------- ------------ ------------- ----------- Sales charges retained net of commissions paid to unaffiliated broker/dealers ...... $300,319 $1,220 $45,060 $22,322 Contingent deferred sales charges retained .. $ 54,178 -- $ 8,756 $ 3,816
FRANKLIN SMALL-MID CAP GROWTH FUND ------------- Sales charges retained net of commissions paid to unaffiliated broker/dealers ...... $97,798 Contingent deferred sales charges retained .. $22,525
E. TRANSFER AGENT FEES For the period ended October 31, 2008, the Funds paid transfer agent fees as noted in the Statements of Operations of which the following amounts were retained by Investor Services:
FRANKLIN FRANKLIN FRANKLIN GROWTH FRANKLIN FRANKLIN FLEX CAP FOCUSED CORE OPPORTUNITIES SMALL CAP SMALL-MID CAP GROWTH FUND EQUITY FUND FUND GROWTH FUND GROWTH FUND ----------- ------------ ------------- ------------ ------------- Transfer agent fees .. $1,937,345 $971 $250,314 $336,572 $4,554,631
F. WAIVER AND EXPENSE REIMBURSEMENTS For the Franklin Focused Core Equity Fund, FT Services and Advisers have agreed in advance to waive all or a portion of their respective fees and to assume payment of other expenses through August 31, 2009. Total expenses waived or paid are not subject to reimbursement by the fund subsequent to the fund's fiscal year end. After August 31, 2009, FT Services and Advisers may discontinue this waiver at any time upon notice to the fund's Board of Trustees. G. OTHER AFFILIATED TRANSACTIONS At October 31, 2008, Advisers owned 67.00% of the Franklin Focused Core Equity Fund's outstanding shares. 4. EXPENSE OFFSET ARRANGEMENT The Funds have entered into an arrangement with their custodian whereby credits realized as a result of uninvested cash balances are used to reduce a portion of the Funds' custodian expenses. During the period ended October 31, 2008, the custodian fees were reduced as noted in the Statements of Operations. Semiannual Report | 105 Franklin Strategic Series NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 5. INCOME TAXES For tax purposes, capital losses may be carried over to offset future capital gains, if any. At April 30, 2008, the capital loss carryforwards were as follows:
FRANKLIN GROWTH OPPORTUNITIES FUND ------------- Capital loss carryforwards expiring in: 2010 ..................................... $ 82,516,835 2011 ..................................... 47,112,100 ------------ $129,628,935 ============
For tax purposes, realized capital losses and realized currency losses occurring subsequent to October 31, may be deferred and treated as occurring on the first day of the following fiscal year. At April 30, 2008, the Franklin Flex Cap Growth Fund and the Franklin Small Cap Growth Fund deferred realized capital losses of $8,785,285 and $17,763,909, respectively. At April 30, 2008, the Franklin Growth Opportunities Fund deferred realized currency losses of $21,792. At October 31, 2008, the cost of investments and net unrealized appreciation (depreciation) for income tax purposes were as follows:
FRANKLIN FRANKLIN FRANKLIN GROWTH FLEX CAP FOCUSED CORE OPPORTUNITIES GROWTH FUND EQUITY FUND FUND -------------- ------------ ------------- Cost of investments ......................... $2,177,337,233 $ 6,733,179 $247,229,184 ============== ============ ============= Unrealized appreciation ..................... $ 278,137,612 $ 54,887 $ 21,621,481 Unrealized depreciation ..................... (323,537,547) (2,419,347) (40,299,078) -------------- ------------ ------------- Net unrealized appreciation (depreciation) .. $ (45,399,935) $(2,364,460) $(18,677,597) ============== ============ =============
FRANKLIN FRANKLIN SMALL CAP SMALL-MID CAP GROWTH FUND GROWTH FUND ------------- --------------- Cost of investments ......................... $ 475,666,098 $ 3,882,740,556 ============ =============== Unrealized appreciation ..................... $ 48,205,657 $ 460,820,232 Unrealized depreciation ..................... (138,817,120) (1,010,082,793) ------------- --------------- Net unrealized appreciation (depreciation) .. $ (90,611,463) $ (549,262,561) ============= ===============
Net investment income (loss) differs for financial statement and tax purposes primarily due to differing treatments of foreign currency transactions and offering costs. Net realized gains (losses) differ for financial statement and tax purposes primarily due to differing treatments of wash sales and foreign currency transactions. 106 | Semiannual Report Franklin Strategic Series NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 6. INVESTMENT TRANSACTIONS Purchases and sales of investments (excluding short term securities) for the period ended October 31, 2008, were as follows:
FRANKLIN FRANKLIN FRANKLIN GROWTH FRANKLIN FRANKLIN FLEX CAP FOCUSED CORE OPPORTUNITIES SMALL CAP SMALL-MID CAP GROWTH FUND EQUITY FUND FUND GROWTH FUND GROWTH FUND ------------ ------------ ------------- ------------ -------------- Purchases .. $578,715,056 $3,263,582 $152,962,482 $115,113,216 $1,157,343,531 Sales ...... $587,727,576 $1,318,740 $130,626,485 $201,193,690 $1,706,847,007
7. INVESTMENTS IN FRANKLIN INSTITUTIONAL FIDUCIARY TRUST MONEY MARKET PORTFOLIO The Funds may invest in the Franklin Institutional Fiduciary Trust Money Market Portfolio (Sweep Money Fund), an open-end investment company managed by Advisers. Management fees paid by the Funds are reduced on assets invested in the Sweep Money Fund, in an amount not to exceed the management and administrative fees paid by the Sweep Money Fund. 8. RESTRICTED SECURITIES The Funds may invest in securities that are restricted under the Securities Act of 1933 (1933 Act) or which are subject to legal, contractual, or other agreed upon restrictions on resale. Restricted securities are often purchased in private placement transactions, and cannot be sold without prior registration unless the sale is pursuant to an exemption under the 1933 Act. Disposal of these securities may require greater effort and expense, and prompt sale at an acceptable price may be difficult. The Funds may have registration rights for restricted securities. The issuer generally incurs all registration costs. At October 31, 2008, the funds held investments in restricted securities, excluding 144A securities deemed to be liquid, valued in accordance with procedures approved by the Trust's Board of Trustees as reflecting fair value, as follows:
ACQUISITION SHARES ISSUER DATE COST VALUE - ---------- ---------------------------------------------------- ----------- ---------- ----------- FRANKLIN FLEX CAP GROWTH FUND 36,443 Anda Networks ...................................... 3/24/00 $2,000,000 $ 56,487 2,227,171 Fibrogen Inc., pfd., E ............................. 5/19/00 9,999,998 11,224,942 ----------- TOTAL RESTRICTED SECURITIES (0.54% of Net Assets) ........................ $11,281,429 =========== FRANKLIN GROWTH OPPORTUNITIES FUND 374,806 Dilithium Networks Inc., depository receipt, D, .... 7/13/06 $ 873,300 $ 873,298 pfd., 144A, PIPES 14,501 Dilithium Networks Inc., pfd., D, 11.00%, 3/20/09 ......................................... 10/30/08 14,501 14,501 12,447 Dilithium Networks Inc., wts., 3/20/09 ............. 10/30/08 -- -- ----------- TOTAL RESTRICTED SECURITIES (0.40%of Net Assets) ......................... $ 887,799 ===========
Semiannual Report | 107 Franklin Strategic Series NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 8. RESTRICTED SECURITIES (CONTINUED)
ACQUISITION SHARES ISSUER DATE COST VALUE - ---------- ---------------------------------------------------- ----------- ----------- ---------- FRANKLIN SMALL CAP GROWTH FUND 257,100 Impax Laboratories Inc. ............................ 11/01/04 - 12/03/04 $ 3,097,109 $1,828,495 ========== TOTAL RESTRICTED SECURITIES (0.47% of Net Assets) FRANKLIN SMALL-MID CAP GROWTH FUND 91,107 Anda Networks ...................................... 3/24/00 $ 5,000,000 $ 141,216 1,792,573 Foveon Inc., cvt. pfd., D, 144A .................... 4/08/02 13,999,995 -- 2,597,593 Foveon Inc., cvt. pfd., E, 144A .................... 5/31/05 2,635,024 -- 4,569,500 TeleCorp PCS Inc., Escrow Account .................. 12/15/06 -- -- ---------- TOTAL RESTRICTED SECURITIES (Less than 0.01% of Net Assets) .............. $ 141,216 ==========
9. HOLDINGS OF 5% VOTING SECURITIES OF PORTFOLIO COMPANIES The 1940 Act defines "affiliated companies" to include investments in portfolio companies in which a fund owns 5% or more of the outstanding voting securities. Investments in "affiliated companies" for the Franklin Small-Mid Cap Growth Fund for the period ended October 31, 2008, were as shown below.
NUMBER NUMBER OF SHARES OF SHARES HELD AT HELD AT VALUE AT REALIZED BEGINNING GROSS GROSS END OF END OF INVESTMENT CAPITAL NAME OF ISSUER OF PERIOD ADDITIONS REDUCTIONS PERIOD PERIOD INCOME GAIN (LOSS) - -------------- --------- --------- ---------- --------- ------------ ---------- ----------- FRANKLIN SMALL-MID CAP GROWTH FUND NON-CONTROLLED AFFILIATES American Medical Systems Holdings Inc. ................. 3,689,900 -- -- 3,689,900 $ 39,924,718 $-- $ -- Force Protection Inc. ............ 3,734,600 -- 445,400 3,289,200 --(a) -- -- FormFactor Inc. .................. 3,689,300 -- -- 3,689,300 64,267,606 -- -- Microsemi Corp. .................. 5,007,300 -- 195,800 4,811,500 104,602,010 -- 40,067 Orbital Sciences Corp. ........... 3,420,100 -- 1,080,600 2,339,500 --(a) -- -- Silicon Laboratories Inc. ........ 3,561,500 -- 1,137,600 2,423,900 62,924,444 -- 2,113,158 The Men's Wearhouse Inc. ......... 3,301,000 -- 1,776,780 1,524,220 --(a) -- -- Wolverine World Wide Inc. ........ 3,792,210 -- 1,523,135 2,269,075 --(a) -- -- ------------ --- ---------- TOTAL AFFILIATED SECURITIES (8.22% of Net Assets) ......... $271,718,778 $-- $2,153,225 ============ === ==========
(a) As of October 31, 2008, no longer an affiliate. 10. FAIR VALUE MEASUREMENTS The Funds adopted Financial Accounting Standards Board (FASB) issued FASB Statement No. 157, "Fair Value Measurement" (SFAS 157), on May 1, 2008. SFAS 157 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. The Funds have determined that the implementation of SFAS 157 did not have a material impact on the Funds' financial statements. 108 | Semiannual Report Franklin Strategic Series NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 10. FAIR VALUE MEASUREMENTS (CONTINUED) SFAS 157 establishes a fair value hierarchy that distinguishes between market data obtained from independent sources (observable inputs) and the Trust's own market assumptions (unobservable inputs). These inputs are used in determining the value of the Funds' investments and are summarized in the following fair value hierarchy: - Level 1 - quoted prices in active markets for identical securities - Level 2 - other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speed, credit risk, etc.) - Level 3 - significant unobservable inputs (including the Fund's own assumptions in determining the fair value of investments) The inputs or methodology used for valuing securities are not an indication of the risk associated with investing in those securities. The following is a summary of the inputs used as of October 31, 2008, in valuing the Funds' assets and liabilities carried at fair value:
LEVEL 1 LEVEL 2 LEVEL 3 TOTAL -------------- ----------- ----------- -------------- FRANKLIN FLEX CAP GROWTH FUND ASSETS: Investments in Securities $2,120,655,869 $ -- $11,281,429 $2,131,937,298 FRANKLIN FOCUSED CORE EQUITY FUND ASSETS: Investments in Securities $ 4,368,719 $ -- $ -- $ 4,368,719 FRANKLIN GROWTH OPPORTUNITIES FUND ASSETS: Investments in Securities $ 227,663,788 $ -- $ 887,799 $ 228,551,587 FRANKLIN SMALL CAP GROWTH FUND ASSETS: Investments in Securities $ 383,226,140 $ -- $ 1,828,495 $ 385,054,635 FRANKLIN SMALL-MID CAP GROWTH FUND ASSETS: Investments in Securities $3,304,406,053 $28,930,726 $ 141,216 $3,333,477,995
Semiannual Report | 109 Franklin Strategic Series NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 10. FAIR VALUE MEASUREMENTS (CONTINUED) At October 31, 2008, the reconciliation of assets in which significant unobservable inputs (Level 3) were used in determining the Funds' fair value, were as follows:
FRANKLIN FRANKLIN GROWTH FLEX CAP OPPORTUNITIES GROWTH FUND FUND INVESTMENTS INVESTMENTS IN SECURITIES IN SECURITIES ------------- ------------- Beginning Balance - May 1, 2008 .......................... $13,209,186 $1,293,081 Net realized gain (loss) .............................. -- -- Net change in unrealized appreciation (depreciation) .. (1,927,757) (419,783) Net purchases (sales) ................................. -- 14,501 Transfers in and/or out of Level 3 .................... -- -- ----------- ---------- Ending Balance ........................................... $11,281,429 $ 887,799 ----------- ---------- Net change in unrealized appreciation (depreciation) attributable to assets still held at end of period .... $(1,927,757) $ (419,783) =========== ==========
FRANKLIN FRANKLIN SMALL CAP SMALL-MID CAP GROWTH FUND GROWTH FUND INVESTMENTS INVESTMENTS IN SECURITIES IN SECURITIES ------------- ------------- Beginning Balance - May 1, 2008 .......................... $ -- $ 3,012,662 Net realized gain (loss) .............................. -- -- Net change in unrealized appreciation (depreciation) .. -- (2,871,446) Net purchases (sales) ................................. -- -- Transfers in and/or out of Level 3 .................... 1,828,495 -- ---------- ----------- Ending Balance ........................................... $1,828,495 $ 141,216 ---------- ----------- Net change in unrealized appreciation (depreciation) attributable to assets still held at end of period .... $ -- $(2,871,446) ========== ===========
11. NEW ACCOUNTING PRONOUNCEMENTS In March 2008, FASB issued FASB Statement No. 161, "Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133" (SFAS 161), which expands disclosures about derivative investments and hedging activities. SFAS 161 is effective for fiscal years and interim periods beginning after November 15, 2008. The Funds are currently evaluating the impact, if any, of applying the various provisions of SFAS 161. 110 | Semiannual Report Franklin Strategic Series SHAREHOLDER INFORMATION PROXY VOTING POLICIES AND PROCEDURES The Trust's investment manager has established Proxy Voting Policies and Procedures (Policies) that the Trust uses to determine how to vote proxies relating to portfolio securities. Shareholders may view the Trust's complete Policies online at franklintempleton.com. Alternatively, shareholders may request copies of the Policies free of charge by calling the Proxy Group collect at (954) 527-7678 or by sending a written request to: Franklin Templeton Companies, LLC, 500 East Broward Boulevard, Suite 1500, Fort Lauderdale, FL 33394, Attention: Proxy Group. Copies of the Trust's proxy voting records are also made available online at franklintempleton.com and posted on the U.S. Securities and Exchange Commission's website at sec.gov and reflect the most recent 12-month period ended June 30. QUARTERLY STATEMENT OF INVESTMENTS The Trust files a complete statement of investments with the U.S. Securities and Exchange Commission for the first and third quarters for each fiscal year on Form N-Q. Shareholders may view the filed Form N-Q by visiting the Commission's website at sec.gov. The filed form may also be viewed and copied at the Commission's Public Reference Room in Washington, DC. Information regarding the operations of the Public Reference Room may be obtained by calling (800) SEC-0330. Semiannual Report | 111 This page intentionally left blank. Literature Request LITERATURE REQUEST. TO RECEIVE A BROCHURE AND PROSPECTUS, PLEASE CALL US AT (800) DIAL BEN/(800) 342-5236 OR VISIT franklintempleton.com. INVESTORS SHOULD CAREFULLY CONSIDER A FUND'S INVESTMENT GOALS, RISKS, CHARGES AND EXPENSES BEFORE INVESTING. THE PROSPECTUS CONTAINS THIS AND OTHER INFORMATION. PLEASE CAREFULLY READ THE PROSPECTUS BEFORE INVESTING. TO ENSURE THE HIGHEST QUALITY OF SERVICE, WE MAY MONITOR, RECORD AND ACCESS TELEPHONE CALLS TO OR FROM OUR SERVICE DEPARTMENTS. THESE CALLS CAN BE IDENTIFIED BY THE PRESENCE OF A REGULAR BEEPING TONE. FRANKLIN TEMPLETON FUNDS VALUE Franklin All Cap Value Fund Franklin Balance Sheet Investment Fund Franklin Large Cap Value Fund Franklin MicroCap Value Fund(1) Franklin MidCap Value Fund Franklin Small Cap Value Fund Mutual Beacon Fund Mutual Qualified Fund Mutual Recovery Fund(2) Mutual Shares Fund BLEND Franklin Focused Core Equity Fund Franklin Large Cap Equity Fund Franklin Rising Dividends Fund GROWTH Franklin Capital Growth Fund(1) Franklin Flex Cap Growth Fund Franklin Growth Fund Franklin Growth Opportunities Fund(3) Franklin Small Cap Growth Fund(4) Franklin Small-Mid Cap Growth Fund SECTOR Franklin Biotechnology Discovery Fund Franklin DynaTech Fund Franklin Global Real Estate Fund Franklin Gold and Precious Metals Fund Franklin Natural Resources Fund Franklin Real Estate Securities Fund Franklin Utilities Fund Mutual Financial Services Fund GLOBAL Mutual Discovery Fund Templeton Global Long-Short Fund Templeton Global Opportunities Trust Templeton Global Smaller Companies Fund Templeton Growth Fund Templeton World Fund INTERNATIONAL Franklin India Growth Fund Franklin International Growth Fund Franklin International Small Cap Growth Fund Mutual European Fund Templeton BRIC Fund Templeton China World Fund Templeton Developing Markets Trust Templeton Emerging Markets Small Cap Fund Templeton Foreign Fund Templeton Foreign Smaller Companies Fund Templeton Frontier Markets Fund HYBRID Franklin Balanced Fund Franklin Convertible Securities Fund Franklin Equity Income Fund Franklin Income Fund Templeton Income Fund ASSET ALLOCATION Franklin Templeton Corefolio(R) Allocation FunD Franklin Templeton Founding Funds Allocation Fund Franklin Templeton Perspectives Allocation Fund Franklin Templeton Conservative Target Fund Franklin Templeton Growth Target Fund Franklin Templeton Moderate Target Fund Franklin Templeton 2015 Retirement Target Fund Franklin Templeton 2025 Retirement Target Fund Franklin Templeton 2035 Retirement Target Fund Franklin Templeton 2045 Retirement Target Fund FIXED INCOME Franklin Adjustable U.S. Government Securities Fund(5) Franklin Floating Rate Daily Access Fund Franklin High Income Fund Franklin Limited Maturity U.S. Government Securities Fund(5) Franklin Low Duration Total Return Fund Franklin Real Return Fund Franklin Strategic Income Fund Franklin Strategic Mortgage Portfolio Franklin Templeton Hard Currency Fund Franklin Total Return Fund Franklin U.S. Government Securities Fund(5) Templeton Global Bond Fund Templeton Global Total Return Fund Templeton International Bond Fund TAX-FREE INCOME(6) NATIONAL FUNDS Double Tax-Free Income Fund Federal Tax-Free Income Fund High Yield Tax-Free Income Fund Insured Tax-Free Income Fund(7) LIMITED-/INTERMEDIATE-TERM FUNDS California Intermediate-Term Tax-Free Income Fund Federal Intermediate-Term Tax-Free Income Fund Federal Limited-Term Tax-Free Income Fund New York Intermediate-Term Tax-Free Income Fund STATE-SPECIFIC Alabama Arizona California(8) Colorado Connecticut Florida Georgia Kentucky Louisiana Maryland Massachusetts(7) Michigan(7) Minnesota(7) Missouri New Jersey New York(8) North Carolina Ohio(7) Oregon Pennsylvania Tennessee Virginia INSURANCE FUNDS Franklin Templeton Variable Insurance Products Trust(9) (1.) The fund is closed to new investors. Existing shareholders and select retirement plans can continue adding to their accounts. (2.) The fund is a continuously offered, closed-end fund. Shares may be purchased daily; there is no daily redemption. However, each quarter, pending board approval, the fund will authorize the repurchase of 5%-25% of the outstanding number of shares. Investors may tender all or a portion of their shares during the tender period. (3.) Effective 11/1/07, Franklin Aggressive Growth Fund changed its name to Franklin Growth Opportunities Fund. The fund's investment goal and strategy remained the same. (4.) Effective 3/31/08, Franklin Small Cap Growth Fund II changed its name to Franklin Small Cap Growth Fund. The fund's investment goal and strategy remained the same. (5.) An investment in the fund is neither insured nor guaranteed by the U.S. government or by any other entity or institution. (6.) For investors subject to the alternative minimum tax, a small portion of fund dividends may be taxable. Distributions of capital gains are generally taxable. (7.) The fund invests primarily in insured municipal securities. (8.) These funds are available in four or more variations, including long-term portfolios, intermediate-term portfolios, portfolios of insured securities, a high-yield portfolio (CA only) and money market portfolios. (9.) The funds of the Franklin Templeton Variable Insurance Products Trust are generally available only through insurance company variable contracts. 12/08 Not part of the semiannual report (FRANKLIN TEMPLETON INVESTMENT(R) LOGO) One Franklin Parkway San Mateo, CA 94403-1906 - - WANT TO RECEIVE THIS DOCUMENT FASTER VIA EMAIL? Eligible shareholders can sign up for eDelivery at franklintempleton.com. See inside for details. SEMIANNUAL REPORT AND SHARE HOLDER LETTER FRANKLIN STRATEGIC SERIES INVESTMENT MANAGER Franklin Advisers, Inc. DISTRIBUTOR Franklin Templeton Distributors, Inc. (800) DIAL BEN(R) franklintempleton.com SHARE HOLDER SERVICES (800) 632-2301 Authorized for distribution only when accompanied or preceded by a prospectus. Investors should carefully consider a fund's investment goals, risks, charges and expenses before investing. The prospectus contains this and other information; please read it carefully before investing. To ensure the highest quality of service, telephone calls to or from our service departments may be monitored, recorded and accessed. These calls can be identified by the presence of a regular beeping tone. FSS1 S2008 12/08 OCTOBER 31, 2008 (GRAPHIC) Franklin Biotechnology Discovery Fund Franklin Natural Resources Fund SEMIANNUAL REPORT AND SHAREHOLDER LETTER SECTOR FRANKLIN STRATEGIC SERIES WANT TO RECEIVE THIS DOCUMENT FASTER VIA EMAIL? Eligible shareholders can sign up for eDelivery at franklintempleton.com. See inside for details. (FRANKLIN TEMPLETON INVESTMENTS(R) LOGO) FRANKLIN - Templeton - Mutual Series Franklin Templeton Investments GAIN FROM OUR PERSPECTIVE(R) Franklin Templeton's distinct multi-manager structure combines the specialized expertise of three world-class investment management groups--Franklin, Templeton and Mutual Series. SPECIALIZED EXPERTISE Each of our portfolio management groups operates autonomously, relying on its own research and staying true to the unique investment disciplines that underlie its success. FRANKLIN. Founded in 1947, Franklin is a recognized leader in fixed income investing and also brings expertise in growth- and value-style U.S. equity investing. TEMPLETON. Founded in 1940, Templeton pioneered international investing and, in 1954, launched what has become the industry's oldest global fund. Today, with offices in over 25 countries, Templeton offers investors a truly global perspective. MUTUAL SERIES. Founded in 1949, Mutual Series is dedicated to a unique style of value investing, searching aggressively for opportunity among what it believes are undervalued stocks, as well as arbitrage situations and distressed securities. TRUE DIVERSIFICATION Because our management groups work independently and adhere to different investment approaches, Franklin, Templeton and Mutual Series funds typically have distinct portfolios. That's why our funds can be used to build truly diversified allocation plans covering every major asset class. RELIABILITY YOU CAN TRUST At Franklin Templeton Investments, we seek to consistently provide investors with exceptional risk-adjusted returns over the long term, as well as the reliable, accurate and personal service that has helped us become one of the most trusted names in financial services.
MUTUAL FUNDS | RETIREMENT PLANS | 529 COLLEGE SAVINGS PLANS | SEPARATE ACCOUNTS (GRAPHIC) Not part of the semiannual report Contents CEO'S MESSAGE ............................................................. 1 SEMIANNUAL REPORT Economic and Market Overview .............................................. 4 Franklin Biotechnology Discovery Fund ..................................... 6 Franklin Natural Resources Fund ........................................... 12 Financial Highlights and Statements of Investments ........................ 19 Financial Statements ...................................................... 31 Notes to Financial Statements ............................................. 35 Shareholder Information ................................................... 46
A Message from Gregory E. Johnson, President and Chief Executive Officer of Franklin Resources, Inc. October 31, 2008 Dear Shareholder: The enclosed semiannual report for Franklin Strategic Series covers the six months ended October 31, 2008, and I would like to add some comments on market events during this time. Recent market volatility has been jarring to everyone, including those of us who have worked in financial markets for many years. Bank lending around the world seized up, and the fallout impacted venerable firms alongside broader stock and bond indexes. This environment is bound to provoke great concern, but it's equally important to put the latest market developments in perspective. That's why I'd like to offer a few thoughts on these events, our company's approach to investing and the strong health of our organization. A key point to recognize is that global financial turmoil is being addressed by global action. Central banks around the world have coordinated their efforts to cut interest rates and supply liquidity to frozen funding markets. A number of governments have also intervened to rescue major financial institutions or find an orderly way for them to be acquired. Here in the U.S., the Federal Sign up for EDELIVERY of your Shareholder Report Shareholders who are registered at franklintempleton.com can receive this report via email by selecting eDelivery options under "My Profile." Not all accounts are eligible for eDelivery. NOT FDIC INSURED | MAY LOSE VALUE | NO BANK GUARANTEE Not part of the semiannual report | 1 Reserve and Treasury Department have moved rapidly to establish new programs for easing money market pressures and handling troubled financial assets. The outcome of all these efforts may take a while to be realized, but I believe the latest actions here and abroad mark a significant turning point for global capital markets. It's also important to remember that as daunting as current market conditions may be, we have navigated through other periods of market volatility. U.S. stock markets recorded three bear markets during the 1960s as the nation grappled with the Vietnam War and a turbulent economy.(1) The quintupling of oil prices in 1973 led to a deep U.S. recession and a stock market plunge of 45.1% from January 1973 through December 1974.(1) And the "Black Monday" stock market crash of 1987 remains the largest single-day percentage decline in the history of the Dow Jones Industrial Average.(2) Advice applicable throughout these upheavals remains true today. The late Sir John Templeton, writing 15 years ago, ended a list of his core investment principles with these thoughts: "Do not be fearful or negative too often.... For 100 years optimists have carried the day in U.S. stocks. Even in the dark '70s, many professional money managers -- and many individual investors too -- made money in stocks.... In this century or the next it's still `Buy low, sell high.'"(3) Sir John knew these simple concepts were difficult to execute in the face of pessimism. Nonetheless, that is precisely how our Franklin, Templeton and Mutual Series portfolio managers are contending with today's challenging environment. They are using their expertise to sort through investment opportunities, avoiding those firms that have become merely cheap and identifying those firms best positioned to be eventual winners. This kind of rigorous, bottom-up, security-by-security analysis is the fundamental investment discipline practiced across our global platform. These asset management strengths are also the core of our business. Unlike financial firms that have dominated recent headlines, Franklin Templeton derives its revenue primarily from investment management, not investment banking or securities brokerage. Additionally, our assets under management are diversified by investment objective, clientele and geographic region. Diversified positioning helps our firm maintain healthy operating margins even when volatile markets reduce assets under management. It is also important (1.) Source: Ned Davis Research, Inc. (2.) Source: NYSE Euronext. The Dow Jones Industrial Average is price weighted based on the average market price of 30 blue chip stocks of companies that are generally industry leaders. (3.) Source: "16 Rules for Investment Success" by Sir John Templeton. 2 | Not part of the semiannual report to note that maintaining a strong balance sheet has been a pillar of our management strategy. We have a substantial pool of cash and investments and low levels of debt, and we are in the enviable position of not having to depend on credit to meet our operating needs. In fact, our strong franchise, sound capitalization and minimal leverage recently led Standard & Poor's to raise its credit ratings on Franklin Resources, Inc. (BEN) to the highest level currently applied to a publicly traded asset manager.(4) Franklin Templeton's six-decade growth into a premier global asset manager has given us the conviction that although conditions remain challenging, there are ample reasons to be optimistic about eventual market stabilization and recovery. Being able to take advantage of markets shaken by maximum pessimism has helped our firm develop into an organization that stretches across 29 countries and manages assets for more than 20 million shareholder accounts. In the enclosed semiannual report for Franklin Strategic Series, the portfolio managers discuss market conditions, investment decisions and Fund performance during the six months ended October 31, 2008. The report contains additional performance data and financial information. Our website, franklintempleton.com, offers more timely discussions, daily prices, portfolio holdings and other information. We encourage you to discuss your concerns with your financial advisor, who can review your overall portfolio, reassess your goals and help you stay focused on the long term. As times like these illustrate, all securities markets fluctuate, as do fund share prices. We are grateful for the trust you have placed in Franklin Templeton and remain focused on serving your investment needs. Sincerely, /s/ Gregory E. Johnson Gregory E. Johnson President and Chief Executive Officer Franklin Resources, Inc. THIS LETTER REFLECTS OUR ANALYSIS AND OPINIONS AS OF OCTOBER 31, 2008. THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET, COUNTRY, INDUSTRY, SECURITY OR FUND. STATEMENTS OF FACT ARE FROM SOURCES CONSIDERED RELIABLE. (4.) Source: Standard & Poor's press release, 10/6/08. Not part of the semiannual report | 3 Semiannual Report Economic and Market Overview For the six months ended October 31, 2008, the decelerating U.S. economy contended with a staggering financial markets crisis amid a wave of government interventions and emergency funding. In addition, high oil prices, the worst housing market contraction in decades, a severe credit crunch and rising joblessness weighed on the economy. Economic growth, as measured by gross domestic product (GDP), rebounded from a 0.9% first quarter 2008 annualized rate to a 2.8% annualized pace in the second quarter, based largely on strong exports and government spending. However, GDP fell an estimated annualized 0.5% in 2008's third quarter as the subprime financial crisis deepened and spread into all aspects of the economy. The U.S. dollar appreciated against most foreign currencies during the period, breaking a six-year downward trend as commodity prices fell, inflationary concerns abated and global economic growth began to subside. Supports to the economy included an inventory buildup, expanding government spending and a boost to household finances from a fiscal stimulus package. Although tax rebate checks lifted spending temporarily, retail sales remained weak and new vehicle sales hit a 15-year low. The U.S. labor market contracted and the unemployment rate grew from 5.0% at the beginning of the period to 6.5% in October, the highest level since June 2003.(1) In September, mass layoff (50 or more for a single employer) initial claims reached their highest level since September 2005 when high layoff activity resulted from Hurricane Katrina.(1) Volatile oil prices soared to an all-time trading high of $145 per barrel in July 2008, and dropped dramatically by period-end, settling at $68. In October, amid concerns of reduced demand due to a slowing global economy, oil prices plummeted 33%, bringing the drop since the peak in mid-July to 53%. Many other commodity prices -- including those for coal, natural gas, precious metals, raw materials and agricultural commodities - -- also neared or surpassed all-time highs due to increased worldwide demand and investors seeking alternatives to shaky stocks and corporate bonds. These prices fell through much of the third quarter as global demand subsided. For the 12 months ended October 31, 2008, inflation as measured by the core Consumer Price Index (CPI), which excludes food and energy costs, rose 2.2%; this matched its 10-year average rate.(1) (1.) Source: Bureau of Labor Statistics. 4 | Semiannual Report Seeking to stimulate the sagging economy without stoking inflation, the Federal Reserve Board (Fed) made two cuts to its key federal funds target rate during the period, lowering it from 2.00% to a four-year low of 1.00%. In this uncertain environment, short-term U.S. Treasury prices generally increased (and yields declined) as many investors sought safer alternatives to stocks and corporate bonds. The 10-year Treasury note, however, received less investor attention, and its yield increased from 3.77% at the beginning of the period to 4.01% on October 31, 2008. U.S. stock markets endured high volatility and suffered losses during this challenging period. For the six months under review, the blue chip stocks of the Dow Jones Industrial Average had a total return of -26.23%, the broader Standard & Poor's 500 Index (S&P 500) a -29.28% total return, and the technology-heavy NASDAQ Composite Index a -28.40% total return.(2) All sectors lost value, and the materials, financials and energy sectors had the largest declines. THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS AND OPINIONS AS OF OCTOBER 31, 2008. THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET, COUNTRY, INDUSTRY, SECURITY OR FUND. STATEMENTS OF FACT ARE FROM SOURCES CONSIDERED RELIABLE. (2.) Source: (C) 2008 Morningstar. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results. The Dow Jones Industrial Average is price weighted based on the average market price of 30 blue chip stocks of companies that are generally industry leaders. The S&P 500 consists of 500 stocks chosen for market size, liquidity and industry group representation. Each stock's weight in the index is proportionate to its market value. The NASDAQ Composite Index measures all NASDAQ domestic and international based common type stocks listed on The NASDAQ Stock Market. The index is market value weighted and includes more than 3,000 companies. Semiannual Report | 5 Franklin Biotechnology Discovery Fund YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin Biotechnology Discovery Fund seeks capital appreciation by investing at least 80% of its net assets in securities of biotechnology companies and discovery research firms. PORTFOLIO BREAKDOWN Franklin Biotechnology Discovery Fund Based on Total Net Assets as of 10/31/08 (PIE CHART) Biotechnology .............................. 76.2% Pharmaceuticals ............................ 12.2% Life Sciences Tools & Services ............. 6.7% Short-Term Investments & Other Net Assets .. 4.9%
PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM FIGURES SHOWN. PLEASE VISIT franklintempleton.com OR CALL (800) 342-5236 FOR MOST RECENT MONTH-END PERFORMANCE. This semiannual report for Franklin Biotechnology Discovery Fund covers the period ended October 31, 2008. PERFORMANCE OVERVIEW Franklin Biotechnology Discovery Fund - Class A had a -3.14% cumulative total return for the six months under review. The Fund performed better than its narrow benchmark, the NASDAQ Biotechnology Index, and its broad benchmark, the Standard & Poor's 500 Index (S&P 500), which had -8.08% and -29.28% total returns for the same period.(1) For comparison, the NASDAQ (1.) Source: (C) 2008 Morningstar. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. The NASDAQ Biotechnology Index contains companies primarily engaged in using biomedical research for the discovery or development of novel treatments or cures for human disease, which also meet other eligibility criteria. The NASDAQ Biotechnology Index is calculated under a modified capitalization-weighted methodology. The S&P 500 consists of 500 stocks chosen for market size, liquidity and industry group representation. Each stock's weight in the index is proportionate to its market value. The S&P 500 is one of the most widely used benchmarks of U.S. equity performance. The indexes are unmanaged and include reinvested dividends. One cannot invest directly in an index, nor is an index representative of the Fund's portfolio. THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND NAMES OF ALL PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE SOI BEGINS ON PAGE 20. 6 | Semiannual Report Composite Index had a six-month return of -28.40%.(2) You can find the Fund's long-term performance data in the Performance Summary on page 9. INVESTMENT STRATEGY The Fund is managed using a bottom-up approach to individual stock selection, with a focus on fundamental analysis and primary research. We look for biotechnology, biopharmaceutical and platform technology companies that possess products with favorable competitive profiles, large market opportunities and strong intellectual property, supported by thoughtful clinical and market development strategies. Our assessment of these products is based on extensive primary research and due diligence and includes, but is not limited to, a thorough review of medical literature, consultation of community and academic physicians, and attendance at scientific meetings and symposia. Additionally, we favor companies with excellent management, strong financial characteristics and attractive valuations. MANAGER'S DISCUSSION The Fund had numerous detractors from absolute performance during the reporting period including Orexigen Therapeutics, Helicos Biosciences and BioMarin Pharmaceutical. Late in the period, the share price for Orexigen Therapeutics fell significantly, as small cap biotech stocks in general fared poorly amid concerns that such companies would have difficulty raising capital. The Fund's investment in Helicos Biosciences hurt performance after the genetic analysis tool developer's stock was downgraded due to a perceived lack of guidance and visibility regarding revenues and financing. The share price for drug maker BioMarin Pharmaceutical dropped after the company reported slower-than-expected sales growth for new patients using its product, Kuvan. In contrast, the Fund had several contributors to absolute performance during the six months under review. These included biotechnology companies Amgen, Genentech and Kosan Biosciences. Amgen's share price received a boost after the drug developer announced successful Phase 3 trial results for an osteoporosis drug. Biotech giant Genentech's share price rose after drugmaker Roche offered to buy full control of the company. Shares of Kosan Biosciences, a developer of anti-cancer agents, surged after the company agreed to be acquired by Bristol-Myers Squibb and we sold it by period-end. TOP 10 HOLDINGS Franklin Biotechnology Discovery Fund 10/31/08
COMPANY % OF TOTAL SECTOR/INDUSTRY NET ASSETS - --------------- ---------- Celgene Corp. 11.4% BIOTECHNOLOGY Genentech Inc. 11.3% BIOTECHNOLOGY Gilead Sciences Inc. 10.8% BIOTECHNOLOGY Genzyme Corp. 10.5% BIOTECHNOLOGY Amgen Inc. 5.1% BIOTECHNOLOGY Teva Pharmaceutical Industries Ltd., ADR (Israel) 4.6% PHARMACEUTICALS Biogen Idec Inc. 4.4% BIOTECHNOLOGY Sequenom Inc. 3.9% LIFE SCIENCES TOOLS & SERVICES PDL BioPharma Inc. 3.0% BIOTECHNOLOGY Cephalon Inc. 2.7% BIOTECHNOLOGY
(2.) Source: (C) 2008 Morningstar. The NASDAQ Composite Index measures all NASDAQ domestic and international based common type stocks listed on The NASDAQ Stock Market. The index is market value weighted and includes more than 3,000 companies. The index is unmanaged and includes reinvested dividends. One cannot invest directly in an index, nor is an index representative of the Fund's portfolio. Semiannual Report | 7 Thank you for your continued participation in Franklin Biotechnology Discovery Fund. We look forward to serving your future investment needs. (PHOTO OF EVAN McCULLOCH) /s/ Evan McCulloch Evan McCulloch, CFA Portfolio Manager Franklin Biotechnology Discovery Fund THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS AS OF OCTOBER 31, 2008, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT OUR MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE DEPENDING ON FACTORS SUCH AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY. THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET, COUNTRY, INDUSTRY, SECURITY OR THE FUND. STATEMENTS OF FACT ARE FROM SOURCES CONSIDERED RELIABLE, BUT THE INVESTMENT MANAGER MAKES NO REPRESENTATION OR WARRANTY AS TO THEIR COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR INVESTMENT MANAGEMENT PHILOSOPHY. 8 | Semiannual Report Performance Summary as of 10/31/08 FRANKLIN BIOTECHNOLOGY DISCOVERY FUND Your dividend income will vary depending on dividends or interest paid by securities in the Fund's portfolio, adjusted for operating expenses. Capital gain distributions are net profits realized from the sale of portfolio securities. The performance table does not reflect any taxes that a shareholder would pay on Fund dividends, capital gain distributions, if any, or any realized gains on the sale of Fund shares. Total return reflects reinvestment of the Fund's dividends and capital gain distributions, if any, and any unrealized gains or losses. PRICE INFORMATION
CLASS A (SYMBOL: FBDIX) CHANGE 10/31/08 4/30/08 - ----------------------- ------ -------- ------- Net Asset Value (NAV) -$1.73 $52.99 $54.72
PERFORMANCE CUMULATIVE TOTAL RETURN EXCLUDES THE SALES CHARGE. AVERAGE ANNUAL TOTAL RETURNS AND VALUE OF $10,000 INVESTMENT INCLUDE THE MAXIMUM SALES CHARGE. CLASS A: 5.75% MAXIMUM INITIAL SALES CHARGE.
CLASS A 6-MONTH 1-YEAR 5-YEAR 10-YEAR - ------- ------- ------ ------- ------- Cumulative Total Return(1) -3.14% -19.51% +17.13% +136.23% Average Annual Total Return(2) -8.72% -24.14% +2.00% +8.33% Value of $10,000 Investment(3) $9,128 $7,586 $11,040 $22,263 Avg. Ann. Total Return (9/30/08)(4) -10.75% +4.69% +10.58% Total Annual Operating Expenses(5) 1.27%
PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM FIGURES SHOWN. FOR MOST RECENT MONTH-END PERFORMANCE, SEE "FUNDS AND PERFORMANCE" AT franklintempleton.com OR CALL (800) 342-5236. ENDNOTES THE FUND IS A NONDIVERSIFIED FUND THAT CONCENTRATES IN A SINGLE SECTOR, WHICH INVOLVES RISKS SUCH AS PATENT CONSIDERATIONS, PRODUCT LIABILITY, GOVERNMENT REGULATORY REQUIREMENTS AND REGULATORY APPROVAL FOR NEW DRUGS AND MEDICAL PRODUCTS. BIOTECHNOLOGY COMPANIES OFTEN ARE SMALL AND/OR RELATIVELY NEW. SMALLER COMPANIES CAN BE PARTICULARLY SENSITIVE TO CHANGES IN ECONOMIC CONDITIONS AND HAVE LESS CERTAIN GROWTH PROSPECTS THAN LARGER, MORE ESTABLISHED COMPANIES AND CAN BE VOLATILE, ESPECIALLY OVER THE SHORT TERM. THE FUND MAY ALSO INVEST IN FOREIGN COMPANIES, WHICH INVOLVE SPECIAL RISKS, INCLUDING CURRENCY FLUCTUATIONS AND POLITICAL UNCERTAINTY. THE FUND'S PROSPECTUS ALSO INCLUDES A DESCRIPTION OF THE MAIN INVESTMENT RISKS. (1.) Cumulative total return represents the change in value of an investment over the periods indicated. (2.) Average annual total return represents the average annual change in value of an investment over the periods indicated. Six-month return has not been annualized. (3.) These figures represent the value of a hypothetical $10,000 investment in the Fund over the periods indicated. (4.) In accordance with SEC rules, we provide standardized average annual total return information through the latest calendar quarter. (5.) Figures are as stated in the Fund's prospectus current as of the date of this report. Semiannual Report | 9 Your Fund's Expenses FRANKLIN BIOTECHNOLOGY DISCOVERY FUND As a Fund shareholder, you can incur two types of costs: - - Transaction costs, including sales charges (loads) on Fund purchases and redemption fees; and - - Ongoing Fund costs, including management fees, distribution and service (12b-1) fees, and other Fund expenses. All mutual funds have ongoing costs, sometimes referred to as operating expenses. The following table shows ongoing costs of investing in the Fund and can help you understand these costs and compare them with those of other mutual funds. The table assumes a $1,000 investment held for the six months indicated. ACTUAL FUND EXPENSES The first line (Actual) for each share class listed in the table provides actual account values and expenses. The "Ending Account Value" is derived from the Fund's actual return, which includes the effect of Fund expenses. You can estimate the expenses you paid during the period by following these steps. OF COURSE, YOUR ACCOUNT VALUE AND EXPENSES WILL DIFFER FROM THOSE IN THIS ILLUSTRATION: 1. Divide your account value by $1,000. IF AN ACCOUNT HAD AN $8,600 VALUE, THEN $8,600 / $1,000 = 8.6. 2. Multiply the result by the number under the heading "Expenses Paid During Period." IF EXPENSES PAID DURING PERIOD WERE $7.50, THEN 8.6 X $7.50 = $64.50. In this illustration, the estimated expenses paid this period are $64.50. HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS Information in the second line (Hypothetical) for each class in the table can help you compare ongoing costs of investing in the Fund with those of other mutual funds. This information may not be used to estimate the actual ending account balance or expenses you paid during the period. The hypothetical "Ending Account Value" is based on the actual expense ratio for each class and an assumed 5% annual rate of return before expenses, which does not represent the Fund's actual return. The figure under the heading "Expenses Paid During Period" shows the hypothetical expenses your account would have incurred under this scenario. You can compare this figure with the 5% hypothetical examples that appear in shareholder reports of other funds. 10 | Semiannual Report Your Fund's Expenses (CONTINUED) PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES OR REDEMPTION FEES. Therefore, the second line for each class is useful in comparing ongoing costs only, and will not help you compare total costs of owning different funds. In addition, if transaction costs were included, your total costs would have been higher. Please refer to the Fund prospectus for additional information on operating expenses.
BEGINNING ACCOUNT ENDING ACCOUNT EXPENSES PAID DURING CLASS A VALUE 5/1/08 VALUE 10/31/08 PERIOD* 5/1/08-10/31/08 - ------- ----------------- -------------- ----------------------- Actual $1,000 $ 968.60 $6.15 Hypothetical (5% return before expenses) $1,000 $1,018.95 $6.31
* Expenses are calculated using the most recent six-month annualized expense ratio of 1.24%, multiplied by the average account value over the period, multiplied by 184/365 to reflect the one-half year period. Semiannual Report | 11 Franklin Natural Resources Fund YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin Natural Resources Fund seeks high total return (total return consists of both capital appreciation and current dividend and interest income) by investing at least 80% of its net assets in equity and debt securities of companies that own, produce, refine, process, transport or market natural resources, as well as those that provide related services for natural resources companies. PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM FIGURES SHOWN. PLEASE VISIT franklintempleton.com OR CALL (800) 342-5236 FOR MOST RECENT MONTH-END PERFORMANCE. PORTFOLIO BREAKDOWN Franklin Natural Resources Fund Based on Total Net Assets as of 10/31/08 (PERFORMANCE GRAPH) Oil & Gas Exploration & Production 31.0% Oil & Gas Equipment & Services 23.4% Integrated Oil & Gas 18.1% Diversified Metals & Mining 5.2% Oil & Gas Drilling 4.6% Gold 4.2% Oil & Gas Refining & Marketing 3.5% Coal & Consumable Fuels 3.1% Other 5.7% Short-Term Investments & Other Net Assets 1.2%
This semiannual report for Franklin Natural Resources Fund covers the period ended October 31, 2008. PERFORMANCE OVERVIEW Franklin Natural Resources Fund - Class A had a -48.84% cumulative total return for the six months under review. The Fund underperformed its narrow benchmark, the Standard & Poor's (S&P) North American Natural Resources Index, which had a - -42.12% total return.(1) It also underperformed its broad benchmark, the S&P 500 Index (S&P 500), which had a -29.28% total return for the same period.(2) You can find the Fund's long-term performance data in the Performance Summary beginning on page 15. INVESTMENT STRATEGY We use a fundamental, research-driven approach to identify industries in the natural resources sector that we believe offer the strongest underlying attributes including, but not limited to, favorable supply and demand characteristics, barriers to entry, and pricing power. Within those industries, we seek to identify individual companies that appear to offer the best total return potential. The Fund's holdings are typically concentrated in the energy sector, but also include investments in the metals and mining, chemicals, paper and forest products, and other related sectors. (1.) Source: Standard & Poor's. The S&P North American Natural Resources Index is a modified capitalization-weighted index that includes companies involved in extractive industries (mining), energy and forestry services, producers of pulp and paper, and owners and operators of timber tracts or plantations. (2.) Source: (C) 2008 Morningstar. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. The S&P 500 consists of 500 stocks chosen for market size, liquidity and industry group representation. Each stock's weight in the index is proportionate to its market value. The S&P 500 is one of the most widely used benchmarks of U.S. equity performance. The indexes are unmanaged and include reinvested dividends. One cannot invest directly in an index, nor is an index representative of the Fund's portfolio. THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND NAMES OF ALL PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE SOI BEGINS ON PAGE 26. 12 | Semiannual Report MANAGER'S DISCUSSION During the six months under review, the Fund's performance suffered as the combined effects of the credit crisis and a slowdown in global economic growth led to a significant decline in commodity prices, earnings expectations and equity values. The credit crisis also affected the natural resources sector as investors shunned companies with capital funding requirements and those with anything less than pristine balance sheets, even though many of these companies recently generated record quarterly profits. Furthermore, as global economic growth decelerated, reduced global demand for oil and other commodities prompted a sharp decline in prices. Many investors grew concerned about a temporary oversupply and risk of a further decline in commodity prices. During this challenging review period, many Fund holdings from the energy equipment and services industry suffered steep share price declines and hurt Fund performance. Such companies support drilling and development efforts of oil and natural gas explorers and producers around the world and are integral in efforts to provide adequate supplies in the future. Detractors from the Fund's absolute performance included Halliburton, Smith International and Helix Energy Solutions Group. These companies' stock prices tumbled late in the reporting period as a result of concerns related to lower commodity prices and spending by producers in addition to disruptions to operations and property damage caused by Hurricanes Ike and Gustav. Many holdings in the integrated oil and gas industry and oil and gas exploration and production (E&P) industry had a negative impact on Fund performance for similar reasons. Although we sold a significant portion of the Fund's E&P holdings in the spring and early summer due to the group's significant appreciation and rise in commodity prices, the broad-based sell-off in the natural resources sector masked our efforts. The diversified metals and mining industry also detracted from Fund performance largely because base metals prices declined during the period as industrial consumers, such as steel producers, made efforts to match production to waning demand. In contrast, the Fund had several contributors to absolute performance during the review period, including independent oil and gas E&P companies Southwestern Energy, Range Resources and Continental Resources. Southwestern Energy's share price rose after the company reported strong third quarter earnings driven by robust growth from its Fayetteville Shale operations. Range Resources benefited from improved well performance on its Marcellus Shale acreage and completion of its natural gas processing facilities in Pennsylvania. Continental Resources reported higher profits and improved production results from its operations in Montana and North Dakota. GEOGRAPHIC BREAKDOWN Franklin Natural Resources Fund Based on Total Net Assets as of 10/31/08 (PERFORMANCE GRAPH) North America 88.6% Europe 4.1% Latin America & Caribbean 2.5% Australia & New Zealand 2.4% Middle East & Africa 1.1% Asia 0.1% Short-Term Investments & Other Net Assets 1.2%
Semiannual Report | 13 This was indeed a very difficult environment as conditions brought equity values down dramatically in a short period of time. However, such volatility can lead to opportunities to invest in quality companies at attractive valuation levels. As always, we continued to seek out such opportunities at the close of the period. Thank you for your continued participation in Franklin Natural Resources Fund. We look forward to serving your future investment needs. (PHOTO OF FREDERICK G. FROMM) /s/ Frederick G. Fromm Frederick G. Fromm, CFA Portfolio Manager Franklin Natural Resources Fund THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS AS OF OCTOBER 31, 2008, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT OUR MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE DEPENDING ON FACTORS SUCH AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY. THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET, COUNTRY, INDUSTRY, SECURITY OR THE FUND. STATEMENTS OF FACT ARE FROM SOURCES CONSIDERED RELIABLE, BUT THE INVESTMENT MANAGER MAKES NO REPRESENTATION OR WARRANTY AS TO THEIR COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR INVESTMENT MANAGEMENT PHILOSOPHY. TOP 10 HOLDINGS Franklin Natural Resources Fund 10/31/08
COMPANY % OF TOTAL SECTOR/INDUSTRY, COUNTRY NET ASSETS - ------------------------ ---------- Southwestern Energy Co. 5.0% OIL & GAS EXPLORATION & PRODUCTION, U.S. Devon Energy Corp. 3.9% OIL & GAS EXPLORATION & PRODUCTION, U.S. Petrohawk Energy Corp. 3.6% OIL & GAS EXPLORATION & PRODUCTION, U.S. Marathon Oil Corp. 3.6% INTEGRATED OIL & GAS, U.S. XTO Energy Inc. 3.4% OIL & GAS EXPLORATION & PRODUCTION, U.S. Halliburton Co. 3.2% OIL & GAS EQUIPMENT & SERVICES, U.S. Occidental Petroleum Corp. 2.9% INTEGRATED OIL & GAS, U.S. EOG Resources Inc. 2.9% OIL & GAS EXPLORATION & PRODUCTION, U.S. Schlumberger Ltd. 2.6% OIL & GAS EQUIPMENT & SERVICES, U.S. Transocean Inc. 2.5% OIL & GAS DRILLING, U.S.
14 | Semiannual Report Performance Summary as of 10/31/08 FRANKLIN NATURAL RESOURCES FUND Your dividend income will vary depending on dividends or interest paid by securities in the Fund's portfolio, adjusted for operating expenses of each class. Capital gain distributions are net profits realized from the sale of portfolio securities. The performance table does not reflect any taxes that a shareholder would pay on Fund dividends, capital gain distributions, if any, or any realized gains on the sale of Fund shares. Total return reflects reinvestment of the Fund's dividends and capital gain distributions, if any, and any unrealized gains or losses. PRICE INFORMATION
CLASS A (SYMBOL: FRNRX) CHANGE 10/31/08 4/30/08 - ----------------------- ------- -------- ------- Net Asset Value (NAV) -$22.36 $23.42 $45.78
CLASS C (SYMBOL: FNCRX) CHANGE 10/31/08 4/30/08 - ----------------------- ------- -------- ------- Net Asset Value (NAV) -$22.24 $23.11 $45.35
ADVISOR CLASS (SYMBOL: FNRAX) CHANGE 10/31/08 4/30/08 - ----------------------------- ------- -------- ------- Net Asset Value (NAV) -$23.54 $24.73 $48.27
Semiannual Report | 15 Performance Summary (CONTINUED) PERFORMANCE CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETURNS AND VALUE OF $10,000 INVESTMENT INCLUDE MAXIMUM SALES CHARGES. CLASS A: 5.75% MAXIMUM INITIAL SALES CHARGE; CLASS C: 1% CONTINGENT DEFERRED SALES CHARGE IN FIRST YEAR ONLY; ADVISOR CLASS: NO SALES CHARGES.
CLASS A(1) 6-MONTH 1-YEAR 5-YEAR 10-YEAR - ---------- ------- ------- -------- --------- Cumulative Total Return(2) -48.84% -46.40% +80.52% +156.33% Average Annual Total Return(3) -51.78% -49.48% +11.21% +9.22% Value of $10,000 Investment(4) $ 4,822 $ 5,052 $17,012 $ 24,153 Avg. Ann. Total Return (9/30/08)(5) -24.89% +19.47% +13.72% Total Annual Operating Expenses(6) 0.99%
INCEPTION CLASS C 6-MONTH 1-YEAR 3-YEAR (9/1/05) - ------- ------- ------- -------- --------- Cumulative Total Return(2) -49.03% -46.79% -10.21% -13.16% Average Annual Total Return(3) -49.54% -47.29% -3.52% -4.36% Value of $10,000 Investment(4) $ 5,046 $ 5,271 $ 8,979 $ 8,684 Avg. Ann. Total Return (9/30/08)(5) -21.61% +5.16% +6.57% Total Annual Operating Expenses(6) 1.70%
ADVISOR CLASS(1) 6-MONTH 1-YEAR 5-YEAR 10-YEAR - ---------------- ------- ------- -------- --------- Cumulative Total Return(2) -48.76% -46.23% +83.35% +173.38% Average Annual Total Return(3) -48.76% -46.23% +12.89% +10.58% Value of $10,000 Investment(4) $ 5,124 $ 5,377 $18,335 $ 27,338 Avg. Ann. Total Return (9/30/08)(5) -20.06% +21.29% +15.14% Total Annual Operating Expenses(6) 0.70%
PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM FIGURES SHOWN. FOR MOST RECENT MONTH-END PERFORMANCE, SEE "FUNDS AND PERFORMANCE" AT franklintempleton.com OR CALL (800) 342-5236. ENDNOTES INVESTING IN A FUND CONCENTRATING IN THE NATURAL RESOURCES SECTOR INVOLVES SPECIAL RISKS, INCLUDING INCREASED SUSCEPTIBILITY TO ADVERSE ECONOMIC AND REGULATORY DEVELOPMENTS AFFECTING THE SECTOR. THE FUND MAY ALSO INVEST IN FOREIGN STOCKS, WHICH INVOLVE EXPOSURE TO CURRENCY VOLATILITY AND POLITICAL AND ECONOMIC UNCERTAINTY. THE FUND'S HOLDINGS IN SMALLER COMPANIES INVOLVE SPECIAL RISKS ASSOCIATED WITH SMALLER REVENUES AND MARKET SHARE, AND MORE LIMITED PRODUCT LINES. THE PRICES OF SUCH SECURITIES CAN BE VOLATILE, PARTICULARLY OVER THE SHORT TERM. THE FUND'S PROSPECTUS ALSO INCLUDES A DESCRIPTION OF THE MAIN INVESTMENT RISKS. CLASS C: These shares have higher annual fees and expenses than Class A shares. ADVISOR CLASS: Shares are available to certain eligible investors as described in the prospectus. (1.) Past expense reductions by the Fund's manager increased the Fund's total returns. If the manager had not taken this action, the Fund's total returns would have been lower. (2.) Cumulative total return represents the change in value of an investment over the periods indicated. (3.) Average annual total return represents the average annual change in value of an investment over the periods indicated. Six-month return has not been annualized. (4.) These figures represent the value of a hypothetical $10,000 investment in the Fund over the periods indicated. (5.) In accordance with SEC rules, we provide standardized average annual total return information through the latest calendar quarter. (6.) Figures are as stated in the Fund's prospectus current as of the date of this report. 16 | Semiannual Report Your Fund's Expenses FRANKLIN NATURAL RESOURCES FUND As a Fund shareholder, you can incur two types of costs: - - Transaction costs, including sales charges (loads) on Fund purchases and redemption fees; and - - Ongoing Fund costs, including management fees, distribution and service (12b-1) fees, and other Fund expenses. All mutual funds have ongoing costs, sometimes referred to as operating expenses. The following table shows ongoing costs of investing in the Fund and can help you understand these costs and compare them with those of other mutual funds. The table assumes a $1,000 investment held for the six months indicated. ACTUAL FUND EXPENSES The first line (Actual) for each share class listed in the table provides actual account values and expenses. The "Ending Account Value" is derived from the Fund's actual return, which includes the effect of Fund expenses. You can estimate the expenses you paid during the period by following these steps. OF COURSE, YOUR ACCOUNT VALUE AND EXPENSES WILL DIFFER FROM THOSE IN THIS ILLUSTRATION: 1. Divide your account value by $1,000. IF AN ACCOUNT HAD AN $8,600 VALUE, THEN $8,600 / $1,000 = 8.6. 2. Multiply the result by the number under the heading "Expenses Paid During Period." IF EXPENSES PAID DURING PERIOD WERE $7.50, THEN 8.6 X $7.50 = $64.50. In this illustration, the estimated expenses paid this period are $64.50. HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS Information in the second line (Hypothetical) for each class in the table can help you compare ongoing costs of investing in the Fund with those of other mutual funds. This information may not be used to estimate the actual ending account balance or expenses you paid during the period. The hypothetical "Ending Account Value" is based on the actual expense ratio for each class and an assumed 5% annual rate of return before expenses, which does not represent the Fund's actual return. The figure under the heading "Expenses Paid During Period" shows the hypothetical expenses your account would have incurred under this scenario. You can compare this figure with the 5% hypothetical examples that appear in shareholder reports of other funds. Semiannual Report | 17 Your Fund's Expenses (CONTINUED) PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES OR REDEMPTION FEES. Therefore, the second line for each class is useful in comparing ongoing costs only, and will not help you compare total costs of owning different funds. In addition, if transaction costs were included, your total costs would have been higher. Please refer to the Fund prospectus for additional information on operating expenses.
BEGINNING ACCOUNT ENDING ACCOUNT EXPENSES PAID DURING VALUE 5/1/08 VALUE 10/31/08 PERIOD* 5/1/08-10/31/08 ----------------- -------------- ----------------------- CLASS A Actual $1,000 $ 511.60 $3.62 Hypothetical (5% return before expenses) $1,000 $1,020.42 $4.84 CLASS C Actual $1,000 $ 509.70 $6.35 Hypothetical (5% return before expenses) $1,000 $1,016.79 $8.49 ADVISOR CLASS Actual $1,000 $ 512.40 $2.55 Hypothetical (5% return before expenses) $1,000 $1,021.83 $3.41
* Expenses are calculated using the most recent six-month expense ratio, annualized for each class (A: 0.95%; C: 1.67%; and Advisor: 0.67%), multiplied by the average account value over the period, multiplied by 184/365 to reflect the one-half year period. 18 | Semiannual Report Franklin Strategic Series FINANCIAL HIGHLIGHTS FRANKLIN BIOTECHNOLOGY DISCOVERY FUND
SIX MONTHS ENDED YEAR ENDED APRIL 30, OCTOBER 31, 2008 ------------------------------------------------------------- (UNAUDITED) 2008 2007 2006 2005 2004 ---------------- --------- -------- -------- -------- ---------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ............. $ 54.72 $ 64.53 $ 56.44 $ 46.05 $ 53.26 $ 37.26 -------- -------- -------- -------- -------- -------- Income from investment operations(a): Net investment income (loss)(b) ............... 0.55 (0.59) (0.57) (0.59) (0.58) (0.55) Net realized and unrealized gains (losses) .... (2.28) (9.22) 8.66 10.98 (6.63) 16.55 -------- -------- -------- -------- -------- -------- Total from investment operations ................. (1.73) (9.81) 8.09 10.39 (7.21) 16.00 -------- -------- -------- -------- -------- -------- Redemption fees(c) ............................... --(d) --(d) --(d) --(d) --(d) -- -------- -------- -------- -------- -------- -------- Net asset value, end of period ................... $ 52.99 $ 54.72 $ 64.53 $ 56.44 $ 46.05 $ 53.26 ======== ======== ======== ======== ======== ======== Total return(e) .................................. (3.14)% (15.22)% 14.39% 22.50% (13.54)% 42.98% RATIOS TO AVERAGE NET ASSETS(f) Expenses before expense reduction ................ 1.25% 1.24% 1.35% 1.25% 1.29% 1.28% Expenses net of expense reduction ................ 1.24% 1.23% 1.35%(g) 1.25%(g) 1.29%(g) 1.28% Net investment income (loss) ..................... 1.86% (0.98)% (1.01)% (1.06)% (1.17)% (1.17)% SUPPLEMENTAL DATA Net assets, end of period (000's) ................ $297,772 $318,537 $457,390 $510,700 $485,909 $683,439 Portfolio turnover rate .......................... 29.64% 31.84% 42.08% 37.38% 34.34% 59.39%
(a) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (b) Based on average daily shares outstanding. (c) Effective September 1, 2008, the redemption fee was eliminated. (d) Amount rounds to less than $0.01 per share. (e) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. (f) Ratios are annualized for periods less than one year. (g) Benefit of expense reduction rounds to less than 0.01%. The accompanying notes are an integral part of these financial statements. Semiannual Report | 19 Franklin Strategic Series STATEMENT OF INVESTMENTS, OCTOBER 31, 2008 (UNAUDITED)
SHARES/ FRANKLIN BIOTECHNOLOGY DISCOVERY FUND COUNTRY WARRANTS VALUE ------------------------------------- -------------- ---------- ------------ COMMON STOCKS AND WARRANTS 92.9% BIOTECHNOLOGY 74.0% (a) 3SBio Inc., ADR .......................................................... China 135,600 $ 846,144 (a) Advanced Life Sciences Holdings Inc. ..................................... United States 122,150 37,866 (a) AEterna Zentaris Inc. .................................................... Canada 401,100 196,539 (a) Allos Therapeutics Inc. .................................................. United States 135,400 989,774 (a) Amgen Inc. ............................................................... United States 255,100 15,277,939 (a) Amicus Therapeutics Inc. ................................................. United States 23,935 254,429 (a) Anadys Pharmaceuticals Inc. .............................................. United States 328,400 719,196 (a) ARIAD Pharmaceuticals Inc. ............................................... United States 845,000 1,681,550 (a) ArQule Inc. .............................................................. United States 646,309 1,783,813 (a) Biogen Idec Inc. ......................................................... United States 304,461 12,954,815 (a) BioMarin Pharmaceutical Inc. ............................................. United States 183,500 3,361,720 (a) Celgene Corp. ............................................................ United States 527,000 33,865,020 (a) Cephalon Inc. ............................................................ United States 111,900 8,025,468 (a) ConjuChem Biotechnologies Inc., wts., 12/31/11 ........................... Canada 2,343,750 -- (a) Cougar Biotechnology Inc. ................................................ United States 15,500 393,700 (a) Curis Inc. ............................................................... United States 897,000 771,420 (a,b) CytRx Corp., 144A ........................................................ United States 443,000 204,356 (a) Dyax Corp. ............................................................... United States 185,500 621,425 (a) Genentech Inc. ........................................................... United States 404,700 33,565,818 (a) Gentium SpA, ADR ......................................................... Italy 560,900 431,893 (a) Genzyme Corp. ............................................................ United States 430,600 31,382,128 (a) Gilead Sciences Inc. ..................................................... United States 701,700 32,172,945 (a) Human Genome Sciences Inc. ............................................... United States 206,000 665,380 (a) Indevus Pharmaceuticals Inc. ............................................. United States 1,006,900 2,688,423 (a) Myriad Genetics Inc. ..................................................... United States 59,800 3,772,782 (a) Neurocrine Biosciences Inc. .............................................. United States 375,300 1,549,989 (a) Onyx Pharmaceuticals Inc. ................................................ United States 205,900 5,555,182 (a) Orexigen Therapeutics Inc. ............................................... United States 413,300 1,963,175 (a) OSI Pharmaceuticals Inc. ................................................. United States 188,800 7,164,960 PDL BioPharma Inc. ....................................................... United States 917,800 8,948,550 (a) RXi Pharmaceuticals Corp. ................................................ United States 239 2,199 (a,b) RXi Pharmaceuticals Corp., 144A .......................................... United States 22,099 203,311 (a) Savient Pharmaceuticals Inc. ............................................. United States 62,500 297,500 (a) United Therapeutics Corp. ................................................ United States 21,200 1,849,276 (a) VaxGen Inc. .............................................................. United States 826,000 404,740 (a) Vertex Pharmaceuticals Inc. .............................................. United States 216,100 5,663,981 ------------ 220,267,406 ------------ LIFE SCIENCES TOOLS & SERVICES 6.7% (a) Helicos BioSciences Corp. ................................................ United States 639,100 492,107 (a) Illumina Inc. ............................................................ United States 87,000 2,682,210 (a) Invitrogen Corp. ......................................................... United States 179,100 5,156,289 (a) Sequenom Inc. ............................................................ United States 651,620 11,729,160 ------------ 20,059,766 ------------ PHARMACEUTICALS 12.2% Allergan Inc. ............................................................ United States 40,800 1,618,536 (a) Ardea Biosciences Inc. ................................................... United States 88,000 893,200 (a) Avexa Ltd. ............................................................... Australia 3,877,824 296,757
20 | Semiannual Report Franklin Strategic Series STATEMENT OF INVESTMENTS, OCTOBER 31, 2008 (UNAUDITED) (CONTINUED)
SHARES/ FRANKLIN BIOTECHNOLOGY DISCOVERY FUND COUNTRY WARRANTS VALUE ------------------------------------- -------------- ---------- ------------ COMMON STOCKS AND WARRANTS (CONTINUED) PHARMACEUTICALS (CONTINUED) (a) Biodel Inc. .............................................................. United States 175,900 $ 390,498 (a) BioForm Medical Inc. ..................................................... United States 926,500 1,899,325 (a) Cadence Pharmaceuticals Inc. ............................................. United States 199,600 1,303,388 (a) Cardiome Pharma Corp. .................................................... Canada 474,828 2,108,237 (a) Cypress Bioscience Inc. .................................................. United States 175,100 952,544 (a) Endo Pharmaceuticals Holdings Inc. ....................................... United States 95,600 1,768,600 (a) Inspire Pharmaceuticals Inc. ............................................. United States 182,000 666,120 (a,c) MacroChem Corp. .......................................................... United States 2,250,000 157,500 (a,b,c) MacroChem Corp., wts., PIPES, 144A, 2/01/49 .............................. United States 675,000 -- (a) Nuvo Research Inc. ....................................................... Canada 6,886,000 598,089 (a) Nuvo Research Inc., wts., 2/01/49 ........................................ Canada 3,443,000 -- (a) Oculus Innovative Sciences Inc. .......................................... United States 250,000 242,500 (a) Penwest Pharmaceuticals Co. .............................................. United States 369,400 461,750 (a) Repros Therapeutics Inc. ................................................. United States 120,500 944,720 Shire PLC, ADR ........................................................... United Kingdom 117,900 4,651,155 (a) Somaxon Pharmaceuticals Inc. ............................................. United States 514,300 504,014 Teva Pharmaceutical Industries Ltd., ADR ................................. Israel 319,200 13,687,296 (a) XenoPort Inc. ............................................................ United States 74,700 3,108,267 ------------ 36,252,496 ------------ TOTAL COMMON STOCKS AND WARRANTS (COST $255,514,516) ..................... 276,579,668 ------------ PREFERRED STOCKS (COST $5,065,937) 1.9% BIOTECHNOLOGY 1.9% (a,d) FibroGen Inc., pfd., E ................................................... United States 1,128,271 5,686,486 ------------
PRINCIPAL AMOUNT(e) ---------- CONVERTIBLE BONDS (COST $1,480,677) 0.3% BIOTECHNOLOGY 0.3% (b) ConjuChem Biotechnologies Inc., cvt., sub. note, 144A, 8.00%, 12/31/10 ... Canada 1,500,000 CAD 868,558 ------------ TOTAL INVESTMENTS BEFORE SHORT TERM INVESTMENTS (COST $262,061,130) ................................................... 283,134,712 ------------
SHARES ---------- SHORT TERM INVESTMENTS (COST $23,518,617) 7.9% MONEY MARKET FUNDS 7.9% (f) Franklin Institutional Fiduciary Trust Money Market Portfolio, 1.56% ..... United States 23,518,617 23,518,617 ------------ TOTAL INVESTMENTS (COST $285,579,747) 103.0% ............................. 306,653,329 OTHER ASSETS, LESS LIABILITIES (3.0)% .................................... (8,880,886) ------------ NET ASSETS 100.0% ........................................................ $297,772,443 ============
Semiannual Report | 21 Franklin Strategic Series STATEMENT OF INVESTMENTS, OCTOBER 31, 2008 (UNAUDITED) (CONTINUED) FRANKLIN BIOTECHNOLOGY DISCOVERY FUND See Currency and Selected Portfolio Abbreviations on page 30. (a) Non-income producing for the twelve months ended October 31, 2008. (b) Security was purchased pursuant to Rule 144A under the Securities Act of 1933 and may be sold in transactions exempt from registration only to qualified institutional buyers or in a public offering registered under the Securities Act of 1933. These securities have been deemed liquid under guidelines approved by the Trust's Board of Trustees. At October 31, 2008, the aggregate value of these securities was $1,276,225, representing 0.43% of net assets. (c) See Note 9 regarding holdings of 5% voting securities. (d) See Note 8 regarding restricted and illiquid securities. (e) The principal amount is stated in U.S. dollars unless otherwise indicated. (f) See Note 7 regarding investments in the Franklin Institutional Fiduciary Trust Money Market Portfolio. The rate shown is the annualized seven-day yield at period end. The accompanying notes are an integral part of these financial statements. 22 | Semiannual Report Franklin Strategic Series FINANCIAL HIGHLIGHTS FRANKLIN NATURAL RESOURCES FUND
SIX MONTHS ENDED YEAR ENDED APRIL 30, OCTOBER 31, 2008 ------------------------------------------------------------ CLASS A (UNAUDITED) 2008 2007 2006 2005 2004 - ------- ---------------- -------- -------- -------- -------- -------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ............. $ 45.78 $ 37.84 $ 35.92 $ 24.32 $ 18.80 $ 13.60 -------- -------- -------- -------- -------- -------- Income from investment operations(a): Net investment income (loss)(b) ............... 0.04 0.05 0.09 0.13 0.04 (0.04) Net realized and unrealized gains (losses) .... (22.40) 11.11 4.29 12.64 5.48 5.26 -------- -------- -------- -------- -------- -------- Total from investment operations ................. (22.36) 11.16 4.38 12.77 5.52 5.22 -------- -------- -------- -------- -------- -------- Less distributions from: Net investment income ......................... -- (0.52) (0.25) (0.09) -- (0.02) Net realized gains ............................ -- (2.70) (2.21) (1.08) -- -- -------- -------- -------- -------- -------- -------- Total distributions .............................. -- (3.22) (2.46) (1.17) -- (0.02) -------- -------- -------- -------- -------- -------- Redemption fees(c) ............................... --(d) --(d) --(d) --(d) --(d) -- -------- -------- -------- -------- -------- -------- Net asset value, end of period ................... $ 23.42 $ 45.78 $ 37.84 $ 35.92 $ 24.32 $ 18.80 ======== ======== ======== ======== ======== ======== Total return(e) .................................. (48.84)% 30.37% 12.86% 53.11% 29.36% 38.36% RATIOS TO AVERAGE NET ASSETS(f) Expenses ......................................... 0.95%(g) 0.97%(g) 1.03%(g) 1.02%(g) 1.08%(g) 1.27% Net investment income (loss) ..................... 0.19% 0.13% 0.26% 0.44% 0.17% (0.24)% SUPPLEMENTAL DATA Net assets, end of period (000's) ................ $368,480 $752,051 $475,912 $440,475 $211,327 $102,725 Portfolio turnover rate .......................... 25.97% 37.93% 51.51% 56.08% 29.89% 59.53%
(a) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (b) Based on average daily shares outstanding. (c) Effective September 1, 2008, the redemption fee was eliminated. (d) Amount rounds to less than $0.01 per share. (e) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. (f) Ratios are annualized for periods less than one year. (g) Benefit of expense reduction rounds to less than 0.01%. The accompanying notes are an integral part of these financial statements. Semiannual Report | 23 Franklin Strategic Series FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN NATURAL RESOURCES FUND
SIX MONTHS ENDED YEAR ENDED APRIL 30, OCTOBER 31, 2008 --------------------------- CLASS C (UNAUDITED) 2008 2007 2006(a) - ------- ---------------- ------- ------- ------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ............. $ 45.35 $ 37.58 $ 35.79 $ 31.56 ------- ------- ------- ------- Income from investment operations(b): Net investment income (loss)(c) ............... (0.11) (0.25) (0.17) (0.01) Net realized and unrealized gains (losses) .... (22.13) 11.04 4.25 5.39 ------- ------- ------- ------- Total from investment operations ................. (22.24) 10.79 4.08 5.38 ------- ------- ------- ------- Less distributions from: Net investment income ......................... -- (0.32) (0.08) (0.07) Net realized gains ............................ -- (2.70) (2.21) (1.08) ------- ------- ------- ------- Total distributions .............................. -- (3.02) (2.29) (1.15) ------- ------- ------- ------- Redemption fees(d, e) ............................ -- -- -- -- ------- ------- ------- ------- Net asset value, end of period ................... $ 23.11 $ 45.35 $ 37.58 $ 35.79 ======= ======= ======= ======= Total return(f) .................................. (49.03)% 29.47% 12.01% 17.47% RATIOS TO AVERAGE NET ASSETS(g) Expenses(h) ...................................... 1.67% 1.68% 1.76% 1.67% Net investment income (loss) ..................... (0.53)% (0.58)% (0.47)% (0.21)% SUPPLEMENTAL DATA Net assets, end of period (000's) ................ $48,404 $85,387 $33,723 $18,485 Portfolio turnover rate .......................... 25.97% 37.93% 51.51% 56.08%
(a) For the period September 1, 2005 (effective date) to April 30, 2006. (b) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (c) Based on average daily shares outstanding. (d) Amount rounds to less than $0.01 per share. (e) Effective September 1, 2008, the redemption fee was eliminated. (f) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. (g) Ratios are annualized for periods less than one year. (h) Benefit of expense reduction rounds to less than 0.01%. The accompanying notes are an integral part of these financial statements. 24 | Semiannual Report Franklin Strategic Series FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN NATURAL RESOURCES FUND
SIX MONTHS ENDED YEAR ENDED APRIL 30, OCTOBER 31, 2008 ------------------------------------------------------- ADVISOR CLASS (UNAUDITED) 2008 2007 2006 2005 2004 - ------------- ---------------- ------- ------- ------- ------- ------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ............. $ 48.27 $ 39.71 $ 37.57 $ 25.35 $ 19.53 $ 14.11 ------- ------- ------- ------- ------- ------- Income from investment operations(a): Net investment income(b) ...................... 0.10 0.19 0.18 0.25 0.13 0.02 Net realized and unrealized gains (losses) .... (23.64) 11.69 4.52 13.18 5.69 5.45 ------- ------- ------- ------- ------- ------- Total from investment operations ................. (23.54) 11.88 4.70 13.43 5.82 5.47 ------- ------- ------- ------- ------- ------- Less distributions from: Net investment income ......................... -- (0.62) (0.35) (0.13) -- (0.05) Net realized gains ............................ -- (2.70) (2.21) (1.08) -- -- ------- ------- ------- ------- ------- ------- Total distributions .............................. -- (3.32) (2.56) (1.21) -- (0.05) ------- ------- ------- ------- ------- ------- Redemption fees(c) ............................... --(d) --(d) --(d) --(d) --(d) -- ------- ------- ------- ------- ------- ------- Net asset value, end of period ................... $ 24.73 $ 48.27 $ 39.71 $ 37.57 $ 25.35 $ 19.53 ======= ======= ======= ======= ======= ======= Total return(e) .................................. (48.76)% 30.74% 13.20% 53.55% 29.80% 38.83% RATIOS TO AVERAGE NET ASSETS(f) Expenses ......................................... 0.67%(g) 0.68%(g) 0.76%(g) 0.69%(g) 0.73%(g) 0.92% Net investment income ............................ 0.47% 0.42% 0.53% 0.77% 0.52% 0.11% SUPPLEMENTAL DATA Net assets, end of period (000's) ................ $45,137 $77,361 $52,103 $43,874 $33,048 $11,185 Portfolio turnover rate .......................... 25.97% 37.93% 51.51% 56.08% 29.89% 59.53%
(a) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (b) Based on average daily shares outstanding. (c) Effective September 1, 2008, the redemption fee was eliminated. (d) Amount rounds to less than $0.01 per share. (e) Total return is not annualized for periods less than one year. (f) Ratios are annualized for periods less than one year. (g) Benefit of expense reduction rounds to less than 0.01%. The accompanying notes are an integral part of these financial statements. Semiannual Report | 25 Franklin Strategic Series STATEMENT OF INVESTMENTS, OCTOBER 31, 2008 (UNAUDITED)
SHARES/ FRANKLIN NATURAL RESOURCES FUND COUNTRY WARRANTS VALUE ------------------------------- -------------- ----------- ------------ COMMON STOCKS AND WARRANTS 96.7% AGRICULTURAL PRODUCTS 0.8% Bunge Ltd. ............................................................... United States 100,000 $ 3,841,000 ------------ ALUMINUM 1.0% Alcoa Inc. ............................................................... United States 404,700 4,658,097 ------------ COAL & CONSUMABLE FUELS 3.1% (a,b) Energy Coal Resources, 144A .............................................. United States 199,375 1,752,506 (a) Patriot Coal Corp. ....................................................... United States 140,000 2,216,200 Peabody Energy Corp. ..................................................... United States 251,000 8,662,010 (a) Uranium One Inc. ......................................................... Canada 1,870,500 1,578,220 ------------ 14,208,936 ------------ CONSTRUCTION & ENGINEERING 0.4% Boart Longyear Group ..................................................... Australia 6,000,000 1,736,825 ------------ CONSTRUCTION & FARM MACHINERY & HEAVY TRUCKS 0.4% (a) Terex Corp. .............................................................. United States 105,000 1,752,450 ------------ DIVERSIFIED CHEMICALS 0.0%(c) (a,d) Solutia Inc. ............................................................. United States 789 7,606 (a,d) Solutia Inc., wts., 2/28/13 .............................................. United States 5,878 4,702 ------------ 12,308 ------------ DIVERSIFIED METALS & MINING 4.4% (a) African Copper PLC ....................................................... United Kingdom 2,400,000 109,190 Anglo American PLC ....................................................... United Kingdom 70,000 1,755,843 Anglo American PLC, ADR .................................................. United Kingdom 68,250 856,538 BHP Billiton PLC, ADR .................................................... United Kingdom 120,000 4,119,600 (a) First Uranium Corp. ...................................................... South Africa 410,000 474,812 (a,e) First Uranium Corp., 144A ................................................ Canada 205,200 237,638 Freeport-McMoRan Copper & Gold Inc., B ................................... United States 75,000 2,182,500 (a) Mineral Deposits Ltd. .................................................... Australia 3,800,000 1,504,582 (a) Mirabela Nickel Ltd. ..................................................... Australia 400,000 440,069 (a,e) Mirabela Nickel Ltd., 144A ............................................... Brazil 131,250 144,398 (a) Nautilus Minerals Inc. ................................................... Canada 860,000 818,099 (a) Nautilus Minerals Inc., Reg D ............................................ Canada 474,000 450,906 (a) Nautilus Minerals Inc., wts., Reg D, 2/15/09 ............................. Canada 237,000 -- OZ Minerals Ltd. ......................................................... Australia 3,900,000 2,452,516 Southern Copper Corp. .................................................... United States 200,000 2,912,000 Xstrata PLC .............................................................. Switzerland 118,000 2,017,682 ------------ 20,476,373 ------------ ELECTRICAL COMPONENTS & EQUIPMENT 0.1% (a) JA Solar Holdings Co. Ltd., ADR .......................................... China 95,000 456,000 ------------ GOLD 4.2% AngloGold Ashanti Ltd., ADR .............................................. South Africa 139,790 2,551,167 Barrick Gold Corp. ....................................................... Canada 280,000 6,361,600 Franco-Nevada Corp. ...................................................... Canada 40,000 571,429 (a,e) Franco-Nevada Corp., 144A ................................................ Canada 280,000 4,000,000 (a) Jinshan Gold Mines Inc. .................................................. Canada 397,300 164,323 (a,e) Jinshan Gold Mines Inc., 144A ............................................ Canada 1,305,000 539,747
26 | Semiannual Report Franklin Strategic Series STATEMENT OF INVESTMENTS, OCTOBER 31, 2008 (UNAUDITED) (CONTINUED)
SHARES/ FRANKLIN NATURAL RESOURCES FUND COUNTRY WARRANTS VALUE ------------------------------- -------------- ----------- ------------ COMMON STOCKS AND WARRANTS (CONTINUED) GOLD (CONTINUED) Newcrest Mining Ltd. ..................................................... Australia 363,000 $ 5,024,414 (a) Orezone Resources Inc. ................................................... Canada 1,100,000 198,000 ------------ 19,410,680 ------------ INTEGRATED OIL & GAS 16.8% Chevron Corp. ............................................................ United States 149,003 11,115,624 ConocoPhillips ........................................................... United States 163,200 8,489,664 Exxon Mobil Corp. ........................................................ United States 130,000 9,635,600 Hess Corp. ............................................................... United States 90,000 5,418,900 Marathon Oil Corp. ....................................................... United States 565,000 16,441,500 Murphy Oil Corp. ......................................................... United States 131,000 6,633,840 Occidental Petroleum Corp. ............................................... United States 240,000 13,329,600 Petroleo Brasileiro SA, ADR .............................................. Brazil 78,000 2,097,420 Total SA, B, ADR ......................................................... France 80,000 4,435,200 ------------ 77,597,348 ------------ MARINE 0.6% Aries Maritime Transport Ltd. ............................................ Bermuda 407,850 448,635 Genco Shipping & Trading Ltd. ............................................ United States 103,000 2,147,550 ------------ 2,596,185 ------------ OIL & GAS DRILLING 4.6% (a) Nabors Industries Ltd. ................................................... Bermuda 196,000 2,818,480 Noble Corp. .............................................................. United States 150,000 4,831,500 Rowan Cos. Inc. .......................................................... United States 120,000 2,176,800 (a) Transocean Inc. .......................................................... United States 142,000 11,690,860 ------------ 21,517,640 ------------ OIL & GAS EQUIPMENT & SERVICES 23.4% Baker Hughes Inc. ........................................................ United States 75,000 2,621,250 (a) Cal Dive International Inc. .............................................. United States 300,000 2,553,000 (a) Cameron International Corp. .............................................. United States 170,000 4,124,200 (a) Dresser-Rand Group Inc. .................................................. United States 155,000 3,472,000 (a) Dril-Quip Inc. ........................................................... United States 275,000 6,792,500 (a) FMC Technologies Inc. .................................................... United States 285,000 9,972,150 (a) Global Industries Ltd. ................................................... United States 700,000 1,785,000 Halliburton Co. .......................................................... United States 750,000 14,842,500 (a) Helix Energy Solutions Group Inc. ........................................ United States 460,000 4,857,600 (a) Hornbeck Offshore Services Inc. .......................................... United States 133,000 3,165,400 (a) National Oilwell Varco Inc. .............................................. United States 300,000 8,967,000 (a) North American Energy Partners ........................................... Canada 268,000 1,088,080 (a) Oil States International Inc. ............................................ United States 124,000 2,868,120 (a) PHI Inc., non-voting ..................................................... United States 78,000 1,636,440 Schlumberger Ltd. ........................................................ United States 229,000 11,827,850 Smith International Inc. ................................................. United States 330,000 11,378,400 (a) Superior Energy Services Inc. ............................................ United States 151,500 3,229,980 (a) T-3 Energy Services Inc. ................................................. United States 140,000 3,375,400 (a) Tesco Corp. .............................................................. Canada 250,000 2,845,000 (a) Weatherford International Ltd. ........................................... United States 390,000 6,583,200 ------------ 107,985,070 ------------
Semiannual Report | 27 Franklin Strategic Series STATEMENT OF INVESTMENTS, OCTOBER 31, 2008 (UNAUDITED) (CONTINUED)
SHARES/ FRANKLIN NATURAL RESOURCES FUND COUNTRY WARRANTS VALUE ------------------------------- -------------- ----------- ------------ COMMON STOCKS AND WARRANTS (CONTINUED) OIL & GAS EXPLORATION & PRODUCTION 31.0% Addax Petroleum Corp. .................................................... Canada 195,000 $ 2,903,466 (e) Addax Petroleum Corp., 144A .............................................. Canada 150,000 2,233,435 (a) Bill Barrett Corp. ....................................................... United States 230,000 4,692,000 (a) Carrizo Oil & Gas Inc. ................................................... United States 210,000 4,911,900 Chesapeake Energy Corp. .................................................. United States 137,000 3,009,890 (a) Continental Resources Inc. ............................................... United States 170,000 5,506,300 Devon Energy Corp. ....................................................... United States 225,000 18,193,500 EOG Resources Inc. ....................................................... United States 163,000 13,189,960 (a) Mariner Energy Inc. ...................................................... United States 498,926 7,179,545 (a) McMoRan Exploration Co. .................................................. United States 200,000 2,838,000 Noble Energy Inc. ........................................................ United States 225,000 11,659,500 (a,b) Northern Oil & Gas Inc., 144A ............................................ United States 333,000 1,587,994 (a) Petrohawk Energy Corp. ................................................... United States 880,000 16,676,000 Range Resources Corp. .................................................... United States 235,000 9,921,700 (a) Southwestern Energy Co. .................................................. United States 650,000 23,153,000 XTO Energy Inc. .......................................................... United States 437,000 15,710,150 ------------ 143,366,340 ------------ OIL & GAS REFINING & MARKETING 3.5% Aegean Marine Petroleum Network Inc. ..................................... United States 177,000 1,899,210 (a) CVR Energy Inc. .......................................................... United States 333,000 1,322,010 Holly Corp. .............................................................. United States 137,000 2,689,310 Petroplus Holdings AG .................................................... Switzerland 60,000 1,588,890 (a,e) Petroplus Holdings AG, 144A .............................................. Switzerland 39,000 1,032,778 Valero Energy Corp. ...................................................... United States 372,000 7,655,760 ------------ 16,187,958 ------------ OIL & GAS STORAGE & TRANSPORTATION 0.8% Arlington Tankers Ltd. ................................................... Bermuda 186,000 1,807,920 DHT Maritime Inc. ........................................................ Jersey Islands 389,600 2,049,296 ------------ 3,857,216 ------------ PRECIOUS METALS & MINERALS 1.1% Fresnillo PLC ............................................................ United Kingdom 150,000 297,742 (e) Fresnillo PLC, 144A ...................................................... United Kingdom 449,400 892,035 (a) Gammon Gold Inc. ......................................................... Canada 500,000 1,670,941 Hochschild Mining PLC .................................................... United Kingdom 60,000 129,027 (e) Hochschild Mining PLC, 144A .............................................. United Kingdom 18,800 40,428 Impala Platinum Holdings Ltd. ............................................ South Africa 200,000 2,054,990 ------------ 5,085,163 ------------ SPECIALTY CHEMICALS 0.5% (a) Flotek Industries Inc. ................................................... United States 440,000 2,178,000 ------------ TOTAL COMMON STOCKS AND WARRANTS (COST $598,571,007) ................................................... 446,923,589 ------------ PREFERRED STOCKS 2.1% DIVERSIFIED METALS & MINING 0.8% Companhia Vale do Rio Doce, ADR, pfd., A ................................. Brazil 314,000 3,676,940 ------------
28 | Semiannual Report Franklin Strategic Series STATEMENT OF INVESTMENTS, OCTOBER 31, 2008 (UNAUDITED) (CONTINUED)
SHARES/ FRANKLIN NATURAL RESOURCES FUND COUNTRY WARRANTS VALUE ------------------------------- -------------- ----------- ------------ PREFERRED STOCKS (CONTINUED) INTEGRATED OIL & GAS 1.3% Petroleo Brasileiro SA, ADR, pfd. ........................................ Brazil 260,000 $ 5,738,200 ------------ TOTAL PREFERRED STOCKS (COST $9,409,362) ................................. 9,415,140 ------------ TOTAL INVESTMENTS BEFORE SHORT TERM INVESTMENTS (COST $607,980,369) ................................................... 456,338,729 ------------ SHORT TERM INVESTMENTS (COST $8,447,215) 1.8% MONEY MARKET FUNDS 1.8% (f) Franklin Institutional Fiduciary Trust Money Market Portfolio, 1.56% ..... United States 8,447,215 8,447,215 ------------ TOTAL INVESTMENTS (COST $616,427,584) 100.6% ............................. 464,785,944 OTHER ASSETS, LESS LIABILITIES (0.6)% .................................... (2,764,468) ------------ NET ASSETS 100.0% ........................................................ $462,021,476 ============
See Selected Portfolio Abbreviations on page 30. (a) Non-income producing for the twelve months ended October 31, 2008. (b) See Note 8 regarding restricted and illiquid securities. (c) Rounds to less than 0.1% of net assets. (d) See Note 10 regarding other considerations. (e) Security was purchased pursuant to Rule 144A under the Securities Act of 1933 and may be sold in transactions exempt from registration only to qualified institutional buyers or in a public offering registered under the Securities Act of 1933. These securities have been deemed liquid under guidelines approved by the Trust's Board of Trustees. At October 31, 2008, the aggregate value of these securities was $9,120,459, representing 1.97% of net assets. (f) See Note 7 regarding investments in the Franklin Institutional Fiduciary Trust Money Market Portfolio. The rate shown is the annualized seven-day yield at period end. The accompanying notes are an integral part of these financial statements. Semiannual Report | 29 Franklin Strategic Series STATEMENT OF INVESTMENTS, OCTOBER 31, 2008 (UNAUDITED) CURRENCY ABBREVIATIONS CAD - Canadian Dollar SELECTED PORTFOLIO ABBREVIATIONS ADR - American Depository Receipt PIPES - Private Investment in Public Equity Security The accompanying notes are an integral part of these financial statements. 30 | Semiannual Report Franklin Strategic Series FINANCIAL STATEMENTS STATEMENTS OF ASSETS AND LIABILITIES October 31, 2008 (unaudited)
FRANKLIN BIOTECHNOLOGY FRANKLIN NATURAL DISCOVERY FUND RESOURCES FUND -------------- ---------------- Assets: Investments in securities: Cost - Unaffiliated issuers .............................................. $ 260,711,130 $ 607,980,369 Cost - Non-controlled affiliated issuers (Note 9) ........................ 1,350,000 -- Cost - Sweep Money Fund (Note 7) ......................................... 23,518,617 8,447,215 ------------- ------------- Total cost of investments ................................................ $ 285,579,747 $ 616,427,584 ------------- ------------- Value - Unaffiliated issuers ............................................. $ 282,977,212 $ 456,338,729 Value - Non-controlled affiliated issuers (Note 9) ....................... 157,500 -- Value - Sweep Money Fund (Note 7) ........................................ 23,518,617 8,447,215 ------------- ------------- Total value of investments ............................................... 306,653,329 464,785,944 Foreign currency, at value (cost $406,234) .................................. -- 327,098 Receivables: Investment securities sold ............................................... 141,023 2,171,756 Capital shares sold ...................................................... 333,225 1,189,816 Dividends and interest ................................................... 37,011 373,778 ------------- ------------- Total assets .......................................................... 307,164,588 468,848,392 ------------- ------------- Liabilities: Payables: Investment securities purchased .......................................... 8,428,124 5,070,694 Capital shares redeemed .................................................. 580,778 1,349,274 Affiliates ............................................................... 285,841 401,743 Accrued expenses and other liabilities ...................................... 97,402 5,205 ------------- ------------- Total liabilities ..................................................... 9,392,145 6,826,916 ------------- ------------- Net assets, at value ............................................... $ 297,772,443 $ 462,021,476 ============= ============= Net assets consist of: Paid-in capital ............................................................. $ 547,823,266 $ 592,826,104 Undistributed net investment income (distributions in excess of net investment income) ................................................... 2,775,086 (3,893,189) Net unrealized appreciation (depreciation) .................................. 21,073,582 (151,723,130) Accumulated net realized gain (loss) ........................................ (273,899,491) 24,811,691 ------------- ------------- Net assets, at value ............................................... $ 297,772,443 $ 462,021,476 ============= =============
The accompanying notes are an integral part of these financial statements. Semiannual Report | 31 Franklin Strategic Series FINANCIAL STATEMENTS (CONTINUED) STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED) October 31, 2008 (unaudited)
FRANKLIN BIOTECHNOLOGY FRANKLIN NATURAL DISCOVERY FUND RESOURCES FUND -------------- ---------------- CLASS A: Net assets, at value ........................................................ $297,772,443 $368,480,116 ------------ ------------ Shares outstanding .......................................................... 5,619,588 15,735,253 ------------ ------------ Net asset value per share(a) ................................................ $ 52.99 $ 23.42 ------------ ------------ Maximum offering price per share (net asset value per share / 94.25%) ....... $ 56.22 $ 24.85 ------------ ------------ CLASS C: Net assets, at value ........................................................ -- $ 48,403,875 ------------ ------------ Shares outstanding .......................................................... -- 2,094,490 ------------ ------------ Net asset value and maximum offering price per share(a) ..................... -- $ 23.11 ------------ ------------ ADVISOR CLASS: Net assets, at value ........................................................ -- $ 45,137,485 ------------ ------------ Shares outstanding .......................................................... -- 1,825,461 ------------ ------------ Net asset value and maximum offering price per share ........................ -- $ 24.73 ------------ ------------
(a) Redemption price is equal to net asset value less contingent deferred sales charges, if applicable. The accompanying notes are an integral part of these financial statements. 32 | Semiannual Report Franklin Strategic Series FINANCIAL STATEMENTS (CONTINUED) STATEMENTS OF OPERATIONS for the six months ended October 31, 2008 (unaudited)
FRANKLIN BIOTECHNOLOGY FRANKLIN NATURAL DISCOVERY FUND RESOURCES FUND -------------- ---------------- Investment income: Dividends: Unaffiliated issuers ..................................................... $ 4,995,796 $ 4,553,368 Sweep Money Fund (Note 7) ................................................ 285,908 267,477 Interest .................................................................... 57,319 2,726 Income from securities loaned ............................................... -- 6,370 ------------ ------------- Total investment income ............................................... 5,339,023 4,829,941 ------------ ------------- Expenses: Management fees (Note 3a) ................................................... 852,381 1,991,366 Administrative fees (Note 3b) ............................................... 247,195 -- Distribution fees: (Note 3c) Class A .................................................................. 436,847 970,359 Class C .................................................................. -- 431,861 Transfer agent fees (Note 3e) ............................................... 513,480 701,042 Custodian fees (Note 4) ..................................................... 3,526 17,898 Reports to shareholders ..................................................... 61,683 63,659 Registration and filing fees ................................................ 10,822 49,805 Professional fees ........................................................... 13,206 16,644 Trustees' fees and expenses ................................................. 360 7,827 Other ....................................................................... 7,291 8,000 ------------ ------------- Total expenses ........................................................ 2,146,791 4,258,461 Expense reductions (Note 4) ........................................... (609) (571) ------------ ------------- Net expenses ....................................................... 2,146,182 4,257,890 ------------ ------------- Net investment income ........................................... 3,192,841 572,051 ------------ ------------- Realized and unrealized gains (losses): Net realized gain (loss) from: Investments .............................................................. 150,892 (6,045,816) Foreign currency transactions ............................................ 1,052 50,602 ------------ ------------- Net realized gain (loss) ........................................ 151,944 (5,995,214) ------------ ------------- Net change in unrealized appreciation (depreciation) on: Investments .............................................................. (13,802,584) (457,926,845) Translation of other assets and liabilities denominated in foreign currencies ............................................................ -- (82,647) ------------ ------------- Net change in unrealized appreciation (depreciation) ............ (13,802,584) (458,009,492) ------------ ------------- Net realized and unrealized gain (loss) ........................................ (13,650,640) (464,004,706) ------------ ------------- Net increase (decrease) in net assets resulting from operations ................ $(10,457,799) $(463,432,655) ============ =============
The accompanying notes are an integral part of these financial statements. Semiannual Report | 33 Franklin Strategic Series FINANCIAL STATEMENTS (CONTINUED) STATEMENTS OF CHANGES IN NET ASSETS
FRANKLIN FRANKLIN BIOTECHNOLOGY DISCOVERY FUND NATURAL RESOURCES FUND -------------------------------- -------------------------------- SIX MONTHS ENDED SIX MONTHS ENDED OCTOBER 31, 2008 YEAR ENDED OCTOBER 31, 2008 YEAR ENDED (UNAUDITED) APRIL 30, 2008 (UNAUDITED) APRIL 30, 2008 ---------------- -------------- ---------------- -------------- Increase (decrease) in net assets: Operations: Net investment income (loss) .................... $ 3,192,841 $ (3,785,400) $ 572,051 $ 697,403 Net realized gain (loss) from investments and foreign currency transactions ................ 151,944 61,299,961 (5,995,214) 59,973,030 Net change in unrealized appreciation (depreciation) on investments and translation of other assets and liabilities denominated in foreign currencies ........................... (13,802,584) (120,313,325) (458,009,492) 125,867,182 ------------ ------------- ------------- ------------ Net increase (decrease) in net assets resulting from operations .............. (10,457,799) (62,798,764) (463,432,655) 186,537,615 ------------ ------------- ------------- ------------ Distributions to shareholders from: Net investment income: Class A ...................................... -- -- -- (7,483,274) Class C ...................................... -- -- -- (442,758) Advisor Class ................................ -- -- -- (774,756) Net realized gains: Class A ...................................... -- -- -- (39,049,422) Class C ...................................... -- -- -- (3,708,208) Advisor Class ................................ -- -- -- (3,364,045) ------------ ------------- ------------- ------------ Total distributions to shareholders ................ -- -- -- (54,822,463) ------------ ------------- ------------- ------------ Capital share transactions: (Note 2) Class A ...................................... (10,307,377) (76,055,391) (10,348,665) 166,229,180 Class C ...................................... -- -- 12,681,210 42,076,375 Advisor Class ................................ -- -- 8,313,931 13,022,154 ------------ ------------- ------------- ------------ Total capital share transactions ................... (10,307,377) (76,055,391) 10,646,476 221,327,709 ------------ ------------- ------------- ------------ Redemption fees .................................... 245 1,096 9,117 18,227 ------------ ------------- ------------- ------------ Net increase (decrease) in net assets ..... (20,764,931) (138,853,059) (452,777,062) 353,061,088 Net assets: Beginning of period ................................ 318,537,374 457,390,433 914,798,538 561,737,450 ------------ ------------- ------------- ------------ End of period ...................................... $297,772,443 $ 318,537,374 $ 462,021,476 $914,798,538 ============ ============= ============= ============ Undistributed net investment income (loss) included in net assets, end of period ....................... $ 2,775,086 $ (417,755) $ -- $ -- ------------ ------------- ------------- ------------ Distributions in excess of net investment income included in net assets, end of period .............. $ -- $ -- $ (3,893,189) $ (4,465,240) ============ ============= ============= ============
The accompanying notes are an integral part of these financial statements. 34 | Semiannual Report Franklin Strategic Series NOTES TO FINANCIAL STATEMENTS (UNAUDITED) 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES Franklin Strategic Series (Trust) is registered under the Investment Company Act of 1940, as amended, (1940 Act) as an open-end investment company, consisting of eleven separate funds. All funds included in this report (Funds) are diversified, except the Franklin Biotechnology Discovery Fund, which is non-diversified. The financial statements of the remaining funds in the Trust are presented separately. The classes of shares offered within each of the Funds are indicated below. Each class of shares differs by its initial sales load, contingent deferred sales charges, distribution fees, voting rights on matters affecting a single class and its exchange privilege.
CLASS A CLASS A, CLASS C & ADVISOR CLASS - ------- -------------------------------- Franklin Biotechnology Discovery Fund Franklin Natural Resources Fund
The following summarizes the Funds' significant accounting policies. A. SECURITY VALUATION Securities listed on a securities exchange or on the NASDAQ National Market are valued at the last quoted sale price or the official closing price of the day, respectively. Over-the-counter securities and listed securities for which there is no reported sale are valued within the range of the most recent quoted bid and ask prices. Securities that trade in multiple markets or on multiple exchanges are valued according to the broadest and most representative market. Investments in open-end mutual funds are valued at the closing net asset value. Foreign securities are valued as of the close of trading on the foreign stock exchange on which the security is primarily traded, or the NYSE, whichever is earlier. If no sale is reported at that time, the foreign security will be valued within the range of the most recent quoted bid and ask prices. The value is then converted into its U.S. dollar equivalent at the foreign exchange rate in effect at the close of the NYSE on the day that the value of the foreign security is determined. The Trust has procedures to determine the fair value of individual securities and other assets for which market prices are not readily available or which may not be reliably priced. Methods for valuing these securities may include: fundamental analysis, matrix pricing, discounts from market prices of similar securities, or discounts applied due to the nature and duration of restrictions on the disposition of the securities. Due to the inherent uncertainty of valuations of such securities, the fair values may differ significantly from the values that would have been used had a ready market for such investments existed. Occasionally, events occur between the time at which trading in a security is completed and the close of the NYSE that might call into question the availability (including the reliability) of the value of a portfolio security held by the fund. The investment manager monitors price movements following the close of trading in foreign stock markets through a series of country specific market proxies (such as baskets of American Depository Receipts, futures contracts and exchange traded funds). These price movements are Semiannual Report | 35 Franklin Strategic Series NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) A. SECURITY VALUATION (CONTINUED) measured against established trigger thresholds for each specific market proxy to assist in determining if an event has occurred. If such an event occurs, the securities may be valued using fair value procedures, which may include the use of independent pricing services. All security valuation procedures are approved by the Trust's Board of Trustees. B. FOREIGN CURRENCY TRANSLATION Portfolio securities and other assets and liabilities denominated in foreign currencies are translated into U.S. dollars based on the exchange rate of such currencies against U.S. dollars on the date of valuation. Purchases and sales of securities, income and expense items denominated in foreign currencies are translated into U.S. dollars at the exchange rate in effect on the transaction date. Occasionally, events may impact the availability or reliability of foreign exchange rates used to convert the U.S. dollar equivalent value. If such an event occurs, the foreign exchange rate will be valued at fair value using procedures established and approved by the Trust's Board of Trustees. The Funds do not separately report the effect of changes in foreign exchange rates from changes in market prices on securities held. Such changes are included in net realized and unrealized gain or loss from investments on the Statement of Operations. Realized foreign exchange gains or losses arise from sales of foreign currencies, currency gains or losses realized between the trade and settlement dates on securities transactions and the difference between the recorded amounts of dividends, interest, and foreign withholding taxes and the U.S. dollar equivalent of the amounts actually received or paid. Net unrealized foreign exchange gains and losses arise from changes in foreign exchange rates on foreign denominated assets and liabilities other than investments in securities held at the end of the reporting period. C. FOREIGN CURRENCY CONTRACTS When the Funds purchase or sell foreign securities they may enter into foreign exchange contracts to minimize foreign exchange risk from the trade date to the settlement date of the transactions. A foreign exchange contract is an agreement between two parties to exchange different currencies at an agreed upon exchange rate at a future date. Realized and unrealized gains and losses on these contracts are included in the Statement of Operations. The risks of these contracts include movement in the values of the foreign currencies relative to the U.S. dollar and the possible inability of the counterparties to fulfill their obligations under the contracts, which may be in excess of the amount reflected in the Statement of Assets and Liabilities. 36 | Semiannual Report Franklin Strategic Series NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) D. SECURITIES LENDING The Funds may loan securities to certain brokers through a securities lending agent for which they receive initial cash collateral against the loaned securities in an amount equal to at least 102% of the market value of the loaned securities. Collateral is maintained over the life of the loan in an amount not less than 100% of the market value of loaned securities, as determined at the close of fund business each day; any additional collateral required due to changes in security values is delivered to the fund on the next business day. The fund receives interest income from the investment of cash collateral, adjusted by lender fees and broker rebates. The fund bears the risk of loss with respect to the investment of the collateral and the securities loaned. The securities lending agent has agreed to indemnify the fund in the case of default of any securities borrower. At October 31, 2008, the Funds had no securities on loan. E. INCOME TAXES No provision has been made for U.S. income taxes because it is each fund's policy to qualify as a regulated investment company under the Internal Revenue Code and to distribute to shareholders substantially all of its taxable income and net realized gains. The Funds have reviewed the tax positions, taken on federal income tax returns, for each of the three open tax years and as of October 31, 2008, and have determined that no provision for income tax is required in the Funds' financial statements. F. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS Security transactions are accounted for on trade date. Realized gains and losses on security transactions are determined on a specific identification basis. Interest income and estimated expenses are accrued daily. Dividend income is recorded on the ex-dividend date except that certain dividends from foreign securities are recognized as soon as the Funds are notified of the ex-dividend date. Distributions to shareholders are recorded on the ex-dividend date and are determined according to income tax regulations (tax basis). Distributable earnings determined on a tax basis may differ from earnings recorded in accordance with accounting principles generally accepted in the United States of America. These differences may be permanent or temporary. Permanent differences are reclassified among capital accounts to reflect their tax character. These reclassifications have no impact on net assets or the results of operations. Temporary differences are not reclassified, as they may reverse in subsequent periods. Common expenses incurred by the Trust are allocated among the Funds based on the ratio of net assets of each fund to the combined net assets of the Trust. Fund specific expenses are charged directly to the fund that incurred the expense. Realized and unrealized gains and losses and net investment income, other than class specific expenses, are allocated daily to each class of shares based upon the relative proportion of net assets of each class. Differences in per share distributions, by class, are generally due to differences in class specific expenses. Semiannual Report | 37 Franklin Strategic Series NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) G. ACCOUNTING ESTIMATES The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America 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 expenses during the reporting period. Actual results could differ from those estimates. H. REDEMPTION FEES A short term trading redemption fee was imposed, with some exceptions, on any fund shares that were redeemed or exchanged within seven calendar days following their purchase date. The redemption fee was 2% of the amount redeemed. Such fees were retained by the fund and accounted for as an addition to paid-in capital. Effective September 1, 2008, the redemption fee was eliminated. I. GUARANTEES AND INDEMNIFICATIONS Under the Trust's organizational documents, its officers and trustees are indemnified by the Trust against certain liabilities arising out of the performance of their duties to the Trust. Additionally, in the normal course of business, the Trust, on behalf of the Funds, enters into contracts with service providers that contain general indemnification clauses. The Trust's maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Trust that have not yet occurred. Currently, the Trust expects the risk of loss to be remote. 2. SHARES OF BENEFICIAL INTEREST At October 31, 2008, there were an unlimited number of shares authorized (without par value). Transactions in the Funds' shares were as follows:
FRANKLIN BIOTECHNOLOGY FRANKLIN NATURAL DISCOVERY FUND RESOURCES FUND -------------------------- -------------------------- SHARES AMOUNT SHARES AMOUNT ---------- ------------- ---------- ------------- CLASS A SHARES: Six Months ended October 31, 2008 Shares sold ................... 822,362 $ 50,141,870 4,557,441 $ 185,777,158 Shares issued in reinvestment of distributions ........... -- -- -- -- Shares redeemed ............... (1,024,449) (60,449,247) (5,248,038) (196,125,823) ---------- ------------- ---------- ------------- Net increase (decrease) .......... (202,087) $ (10,307,377) (690,597) $ (10,348,665) ========== ============= ========== ============= Year ended April 30, 2008 Shares sold ................... 560,747 $ 33,649,664 6,527,523 $ 277,675,020 Shares issued in reinvestment of distributions ........... -- -- 1,025,717 42,536,277 Shares redeemed ............... (1,827,474) (109,705,055) (3,705,099) (153,982,117) ---------- ------------- ---------- ------------- Net in crease (decrease) ......... (1,266,727 $ (76,055,391) 3,848,141 $ 166,229,180 ========== ============= ========== =============
38 | Semiannual Report Franklin Strategic Series NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 2. SHARES OF BENEFICIAL INTEREST (CONTINUED)
FRANKLIN NATURAL RESOURCES FUND ------------------------ SHARES AMOUNT --------- ------------ CLASS C SHARES: Six Months ended October 31, 2008 Shares sold .................. 981,916 $ 39,701,437 Shares redeemed .............. (770,486) (27,020,227) -------- ------------ Net increase (decrease) ...... 211,430 $ 12,681,210 ======== ============ Year ended April 30, 2008 Shares sold .................. 1,293,711 $ 54,788,982 Shares issued in reinvestment of distributions .......... 95,855 3,947,327 Shares redeemed .............. (403,775) (16,659,934) -------- ------------ Net increase (decrease) ...... 985,791 $ 42,076,375 ======== ============ ADVISOR CLASS SHARES: Six Months ended October 31, 2008 Shares sold .................. 453,732 $ 15,969,754 Shares redeemed .............. (231,072) (7,655,823) -------- ------------ Net increase (decrease) ...... 222,660 $ 8,313,931 ======== ============ Year ended April 30, 2008 Shares sold .................. 471,275 $ 20,778,690 Shares issued in reinvestment of distributions .......... 89,583 3,912,111 Shares redeemed .............. (270,031) (11,668,647) -------- ------------ Net increase (decrease) ...... 290,827 $ 13,022,154 ======== ============
3. TRANSACTIONS WITH AFFILIATES Franklin Resources, Inc. is the holding company for various subsidiaries that together are referred to as Franklin Templeton Investments. Certain officers and trustees of the Trust are also officers and/or directors of the following subsidiaries:
SUBSIDIARY AFFILIATION - ---------- ---------------------- Franklin Advisers, Inc. (Advisers) Investment manager Franklin Templeton Services, LLC (FT Services) Administrative manager Franklin Templeton Distributors, Inc. (Distributors) Principal underwriter Franklin Templeton Investor Services, LLC (Investor Services) Transfer agent
Semiannual Report | 39 Franklin Strategic Series NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 3. TRANSACTIONS WITH AFFILIATES (CONTINUED) A. MANAGEMENT FEES The Funds pay an investment management fee to Advisers based on the average daily net assets of each of the Funds as follows:
ANNUALIZED FEE RATE NET ASSETS - ------------------- ---------------------------------------------------- 0.625% Up to and including $100 million 0.500% Over $100 million, up to and including $250 million 0.450% Over $250 million, up to and including $7.5 billion 0.440% Over $7.5 billion, up to and including $10 billion 0.430% Over $10 billion, up to and including $12.5 billion 0.420% Over $12.5 billion, up to and including $15 billion 0.400% In excess of $15 billion
B. ADMINISTRATIVE FEES The Franklin Biotechnology Discovery Fund pays an administrative fee to FT Services based on the fund's average daily net assets as follows:
ANNUALIZED FEE RATE NET ASSETS - ------------------- --------------------------------------------------- 0.150% Up to and including $200 million 0.135% Over $200 million, up to and including $700 million 0.100% Over $700 million, up to and including $1.2 billion 0.075% In excess of $1.2 billion
Under an agreement with Advisers, FT Services provides administrative services to the Franklin Natural Resources Fund. The fee is paid by Advisers based on average daily net assets, and is not an additional expense of the fund. C. DISTRIBUTION FEES The Trust's Board of Trustees has adopted distribution plans for each share class, with the exception of Advisor Class shares, pursuant to Rule 12b-1 under the 1940 Act. Under the Funds' Class A reimbursement distribution plans, the Funds reimburse Distributors for costs incurred in connection with the servicing, sale and distribution of each Funds' shares up to the maximum annual plan rate for each class. Under the Class A reimbursement distribution plans, costs exceeding the maximum for the current plan year cannot be reimbursed in subsequent periods. In addition, under the Franklin Natural Resources Fund's compensation distribution plan, the fund pays Distributors for costs incurred in connection with the servicing, sale and distribution of the fund's shares up to the maximum annual plan rate for each class. 40 | Semiannual Report Franklin Strategic Series NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 3. TRANSACTIONS WITH AFFILIATES (CONTINUED) C. DISTRIBUTION FEES (CONTINUED) The maximum annual plan rates, based on the average daily net assets, for each class, are as follows:
FRANKLIN BIOTECHNOLOGY FRANKLIN NATURAL DISCOVERY FUND RESOURCES FUND -------------- ---------------- Reimbursement Plans: Class A .......................... 0.35% 0.35% Compensation Plans: Class C .......................... -- 1.00%
Distributors has agreed to limit the current rate to 0.30% per year for Class A shares for the Franklin Biotechnology Discovery Fund and the Franklin Natural Resources Fund for the period of February 1, 2008 through January 31, 2009. D. SALES CHARGES/UNDERWRITING AGREEMENTS Distributors has advised the Funds of the following commission transactions related to the sales and redemptions of the Funds' shares for the period:
FRANKLIN BIOTECHNOLOGY FRANKLIN NATURAL DISCOVERY FUND RESOURCES FUND -------------- ---------------- Sales charges retained net of commissions paid to unaffiliated broker/dealers ............................................ $47,928 $369,403 Contingent deferred sales charges retained ................... $ 5,509 $ 57,393
E. TRANSFER AGENT FEES For the period ended October 31, 2008, the Funds paid transfer agent fees as noted in the Statements of Operations of which the following amounts were retained by Investor Services:
FRANKLIN BIOTECHNOLOGY FRANKLIN NATURAL DISCOVERY FUND RESOURCES FUND -------------- ---------------- Transfer agent fees ................. $362,469 $481,972
4. EXPENSE OFFSET ARRANGEMENT The Funds have entered into an arrangement with their custodian whereby credits realized as a result of uninvested cash balances are used to reduce a portion of the Funds' custodian expenses. During the period ended October 31, 2008, the custodian fees were reduced as noted in the Statements of Operations. Semiannual Report | 41 Franklin Strategic Series NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 5. INCOME TAXES For tax purposes, capital losses may be carried over to offset future capital gains, if any. At April 30, 2008, the capital loss carryforwards were as follows:
FRANKLIN BIOTECHNOLOGY DISCOVERY FUND -------------- Capital loss carryforwards expiring in: 2011 ............................... $199,096,311 2012 ............................... 72,400,540 ------------ $271,496,851 ============
For tax purposes, realized currency losses occurring subsequent to October 31, may be deferred and treated as occurring on the first day of the following fiscal year. At April 30, 2008, the Franklin Natural Resources Fund deferred realized currency losses of $144,396. At October 31, 2008, the cost of investments and net unrealized appreciation (depreciation) for income tax purposes were as follows:
FRANKLIN BIOTECHNOLOGY FRANKLIN NATURAL DISCOVERY FUND RESOURCES FUND -------------- ---------------- Cost of investments ................. $288,052,503 $ 622,921,636 ============ ============= Unrealized appreciation ............. $ 89,010,949 $ 56,936,594 Unrealized depreciation ............. (70,410,123) (215,072,286) ------------ ------------- Net unrealized appreciation (depreciation) ................... $ 18,600,826 $(158,135,692) ============ =============
Net investment income differs for financial statement and tax purposes primarily due to differing treatments of foreign currency transactions and passive foreign investment company shares. Net realized gains (losses) differ for financial statement and tax purposes primarily due to differing treatments of wash sales, foreign currency transactions, and passive foreign investment company shares. 42 | Semiannual Report Franklin Strategic Series NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 6. INVESTMENT TRANSACTIONS Purchases and sales of investments (excluding short term securities) for the period ended October 31, 2008, were as follows:
FRANKLIN BIOTECHNOLOGY FRANKLIN NATURAL DISCOVERY FUND RESOURCES FUND -------------- ---------------- Purchases ... $102,713,821 $273,213,690 Sales ....... $ 93,958,623 $212,355,628
7. INVESTMENTS IN FRANKLIN INSTITUTIONAL FIDUCIARY TRUST MONEY MARKET PORTFOLIO The Funds may invest in the Franklin Institutional Fiduciary Trust Money Market Portfolio (Sweep Money Fund), an open-end investment company managed by Advisers. Management fees paid by the Funds are reduced on assets invested in the Sweep Money Fund, in an amount not to exceed the management and administrative fees paid by the Sweep Money Fund. 8. RESTRICTED SECURITIES The Funds may invest in securities that are restricted under the Securities Act of 1933 (1933 Act) or which are subject to legal, contractual, or other agreed upon restrictions on resale. Restricted securities are often purchased in private placement transactions, and cannot be sold without prior registration unless the sale is pursuant to an exemption under the 1933 Act. Disposal of these securities may require greater effort and expense, and prompt sale at an acceptable price may be difficult. The Funds may have registration rights for restricted securities. The issuer generally incurs all registration costs. At October 31, 2008, the Funds held investments in restricted securities, excluding 144A securities deemed to be liquid, valued in accordance with procedures approved by the Trust's Board of Trustees as reflecting fair value, as follows:
ACQUISITION SHARES ISSUER DATES COST VALUE - ------ ------ ------------------ ---------- ---------- FRANKLIN BIOTECHNOLOGY DISCOVERY FUND 1,128,271 FibroGen Inc., pfd., E ............................................. 5/19/00 $5,065,937 $5,686,486 ========== TOTAL RESTRICTED SECURITIES (1.91% of Net Assets) FRANKLIN NATURAL RESOURCES FUND 199,375 Energy Coal Resources, 144A ........................................ 11/16/05 - 5/05/06 3,118,103 1,752,506 333,000 Northern Oil & Gas Inc., 144A ...................................... 6/09/08 2,997,000 1,587,994 ---------- TOTAL RESTRICTED SECURITIES (0.72% of Net Assets) ............... $3,340,500 ==========
Semiannual Report | 43 Franklin Strategic Series NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 9. HOLDINGS OF 5% VOTING SECURITIES OF PORTFOLIO COMPANIES The 1940 Act defines "affiliated companies" to include investments in portfolio companies in which a fund owns 5% or more of the outstanding voting securities. Investments in "affiliated companies" for the Franklin Biotechnology Discovery Fund for the period ended October 31, 2008, were as shown below.
NUMBER NUMBER OF SHARES OF SHARES REALIZED HELD AT HELD VALUE AT CAPITAL BEGINNING GROSS GROSS AT END END OF INVESTMENT GAIN NAME OF ISSUER OF PERIOD ADDITIONS REDUCTIONS OF PERIOD PERIOD INCOME (LOSS) - -------------- --------- --------- ---------- --------- -------- ---------- -------- FRANKLIN BIOTECHNOLOGY DISCOVERY FUND NON-CONTROLLED AFFILIATES MacroChem Corp. .................................... 2,250,000 -- -- 2,250,000 $157,500 $-- $-- MacroChem Corp., wts., PIPES, 144A, 2/01/49 ........ 675,000 -- -- 675,000 -- -- -- -------- --- --- TOTAL AFFILIATED SECURITIES (0.05% of Net Assets) .. $157,500 $-- $-- ======== === ===
10. OTHER CONSIDERATIONS Officers, directors or employees of the Franklin Natural Resources Fund Investment Manager, may serve from time to time as members of bondholders' steering committees or official creditors' committees. Such participation may result in the possession by the Investment Manager of material non-public information which, pursuant to the fund's policies and the requirements of applicable securities laws, could prevent the fund from trading in the securities of such companies for limited or extended periods of time. 11. FAIR VALUE MEASUREMENTS The Funds adopted Financial Accounting Standards Board (FASB) issued FASB Statement No. 157, "Fair Value Measurement" (SFAS 157), on May 1, 2008. SFAS 157 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. The Funds have determined that the implementation of SFAS 157 did not have a material impact on the Funds' financial statements. SFAS 157 establishes a fair value hierarchy that distinguishes between market data obtained from independent sources (observable inputs) and the Trust's own market assumptions (unobservable inputs). These inputs are used in determining the value of the Funds' investments and are summarized in the following fair value hierarchy: - Level 1 - quoted prices in active markets for identical securities - Level 2 - other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speed, credit risk, etc.) - Level 3 - significant unobservable inputs (including the Fund's own assumptions in determining the fair value of investments) 44 | Semiannual Report Franklin Strategic Series NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 11. FAIR VALUE MEASUREMENTS (CONTINUED) The inputs or methodology used for valuing securities are not an indication of the risk associated with investing in those securities. The following is a summary of the inputs used as of October 31, 2008, in valuing the Funds' assets carried at fair value:
LEVEL 1 LEVEL 2 LEVEL 3 TOTAL ------------ ---------- ---------- ------------ FRANKLIN BIOTECHNOLOGY DISCOVERY FUND ASSETS: Investments in Securities $300,098,285 $ 868,558 $5,686,486 $306,653,329 FRANKLIN NATURAL RESOURCES FUND ASSETS: Investments in Securities $456,203,497 $5,241,947 $3,340,500 $464,785,944
At October 31, 2008, the reconciliation of assets in which significant unobservable inputs (Level 3) were used in determining the Funds' fair value, were as follows:
FRANKLIN BIOTECHNOLOGY FRANKLIN NATURAL DISCOVERY FUND RESOURCES FUND -------------- ---------------- INVESTMENTS INVESTMENTS IN SECURITIES IN SECURITIES -------------- ---------------- Beginning Balance - May 1, 2008 ........................... $6,679,166 $ 3,339,531 Net realized gain (loss) ............................... 2,796 -- Net change in unrealized appreciation (depreciation) ... (992,680) (2,996,031) Net purchases (sales) .................................. (2,796) 2,997,000 Transfers in and/or out of Level 3 ..................... -- -- ---------- ----------- Ending Balance ............................................ $5,686,486 $ 3,340,500 ========== =========== Net change in unrealized appreciation (depreciation) attributable to assets still held at end of period ..... $ (970,313) $(2,996,031) ========== ===========
12. NEW ACCOUNTING PRONOUNCEMENTS In March 2008, FASB issued FASB Statement No. 161, "Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133" (SFAS 161), which expands disclosures about derivative investments and hedging activities. SFAS 161 is effective for fiscal years and interim periods beginning after November 15, 2008. The Funds are currently evaluating the impact, if any, of applying the various provisions of SFAS 161. Semiannual Report | 45 Franklin Strategic Series SHAREHOLDER INFORMATION PROXY VOTING POLICIES AND PROCEDURES The Trust's investment manager has established Proxy Voting Policies and Procedures (Policies) that the Trust uses to determine how to vote proxies relating to portfolio securities. Shareholders may view the Trust's complete Policies online at franklintempleton.com. Alternatively, shareholders may request copies of the Policies free of charge by calling the Proxy Group collect at (954) 527-7678 or by sending a written request to: Franklin Templeton Companies, LLC, 500 East Broward Boulevard, Suite 1500, Fort Lauderdale, FL 33394, Attention: Proxy Group. Copies of the Trust's proxy voting records are also made available online at franklintempleton.com and posted on the U.S. Securities and Exchange Commission's website at sec.gov and reflect the most recent 12-month period ended June 30. QUARTERLY STATEMENT OF INVESTMENTS The Trust files a complete statement of investments with the U.S. Securities and Exchange Commission for the first and third quarters for each fiscal year on Form N-Q. Shareholders may view the filed Form N-Q by visiting the Commission's website at sec.gov. The filed form may also be viewed and copied at the Commission's Public Reference Room in Washington, DC. Information regarding the operations of the Public Reference Room may be obtained by calling (800) SEC-0330. 46 | Semiannual Report This page intentionally left blank. This page intentionally left blank. Literature Request LITERATURE REQUEST. TO RECEIVE A BROCHURE AND PROSPECTUS, PLEASE CALL US AT (800) DIAL BEN/(800) 342-5236 OR VISIT franklintempleton.com. INVESTORS SHOULD CAREFULLY CONSIDER A FUND'S INVESTMENT GOALS, RISKS, CHARGES AND EXPENSES BEFORE INVESTING. THE PROSPECTUS CONTAINS THIS AND OTHER INFORMATION. PLEASE CAREFULLY READ THE PROSPECTUS BEFORE INVESTING. TO ENSURE THE HIGHEST QUALITY OF SERVICE, WE MAY MONITOR, RECORD AND ACCESS TELEPHONE CALLS TO OR FROM OUR SERVICE DEPARTMENTS. THESE CALLS CAN BE IDENTIFIED BY THE PRESENCE OF A REGULAR BEEPING TONE. FRANKLIN TEMPLETON FUNDS VALUE Franklin All Cap Value Fund Franklin Balance Sheet Investment Fund Franklin Large Cap Value Fund Franklin MicroCap Value Fund(1) Franklin MidCap Value Fund Franklin Small Cap Value Fund Mutual Beacon Fund Mutual Qualified Fund Mutual Recovery Fund(2) Mutual Shares Fund BLEND Franklin Focused Core Equity Fund Franklin Large Cap Equity Fund Franklin Rising Dividends Fund GROWTH Franklin Capital Growth Fund(1) Franklin Flex Cap Growth Fund Franklin Growth Fund Franklin Growth Opportunities Fund(3) Franklin Small Cap Growth Fund(4) Franklin Small-Mid Cap Growth Fund SECTOR Franklin Biotechnology Discovery Fund Franklin DynaTech Fund Franklin Global Real Estate Fund Franklin Gold and Precious Metals Fund Franklin Natural Resources Fund Franklin Real Estate Securities Fund Franklin Utilities Fund Mutual Financial Services Fund GLOBAL Mutual Discovery Fund Templeton Global Long-Short Fund Templeton Global Opportunities Trust Templeton Global Smaller Companies Fund Templeton Growth Fund Templeton World Fund INTERNATIONAL Franklin India Growth Fund Franklin International Growth Fund Franklin International Small Cap Growth Fund Mutual European Fund Templeton BRIC Fund Templeton China World Fund Templeton Developing Markets Trust Templeton Emerging Markets Small Cap Fund Templeton Foreign Fund Templeton Foreign Smaller Companies Fund Templeton Frontier Markets Fund HYBRID Franklin Balanced Fund Franklin Convertible Securities Fund Franklin Equity Income Fund Franklin Income Fund Templeton Income Fund ASSET ALLOCATION Franklin Templeton Corefolio(R) Allocation Fund Franklin Templeton Founding Funds Allocation Fund Franklin Templeton Perspectives Allocation Fund Franklin Templeton Conservative Target Fund Franklin Templeton Growth Target Fund Franklin Templeton Moderate Target Fund Franklin Templeton 2015 Retirement Target Fund Franklin Templeton 2025 Retirement Target Fund Franklin Templeton 2035 Retirement Target Fund Franklin Templeton 2045 Retirement Target Fund FIXED INCOME Franklin Adjustable U.S. Government Securities Fund(5) Franklin Floating Rate Daily Access Fund Franklin High Income Fund Franklin Limited Maturity U.S. Government Securities Fund(5) Franklin Low Duration Total Return Fund Franklin Real Return Fund Franklin Strategic Income Fund Franklin Strategic Mortgage Portfolio Franklin Templeton Hard Currency Fund Franklin Total Return Fund Franklin U.S. Government Securities Fund(5) Templeton Global Bond Fund Templeton Global Total Return Fund Templeton International Bond Fund TAX-FREE INCOME(6) NATIONAL FUNDS Double Tax-Free Income Fund Federal Tax-Free Income Fund High Yield Tax-Free Income Fund Insured Tax-Free Income Fund(7) LIMITED-/INTERMEDIATE-TERM FUNDS California Intermediate-Term Tax-Free Income Fund Federal Intermediate-Term Tax-Free Income Fund Federal Limited-Term Tax-Free Income Fund New York Intermediate-Term Tax-Free Income Fund STATE-SPECIFIC Alabama Arizona California(8) Colorado Connecticut Florida Georgia Kentucky Louisiana Maryland Massachusetts(7) Michigan(7) Minnesota(7) Missouri New Jersey New York(8) North Carolina Ohio(7) Oregon Pennsylvania Tennessee Virginia INSURANCE FUNDS Franklin Templeton Variable Insurance Products Trust(9) (1.) The fund is closed to new investors. Existing shareholders and select retirement plans can continue adding to their accounts. (2.) The fund is a continuously offered, closed-end fund. Shares may be purchased daily; there is no daily redemption. However, each quarter, pending board approval, the fund will authorize the repurchase of 5%-25% of the outstanding number of shares. Investors may tender all or a portion of their shares during the tender period. (3.) Effective 11/1/07, Franklin Aggressive Growth Fund changed its name to Franklin Growth Opportunities Fund. The fund's investment goal and strategy remained the same. (4.) Effective 3/31/08, Franklin Small Cap Growth Fund II changed its name to Franklin Small Cap Growth Fund. The fund's investment goal and strategy remained the same. (5.) An investment in the fund is neither insured nor guaranteed by the U.S. government or by any other entity or institution. (6.) For investors subject to the alternative minimum tax, a small portion of fund dividends may be taxable. Distributions of capital gains are generally taxable. (7.) The fund invests primarily in insured municipal securities. (8.) These funds are available in four or more variations, including long-term portfolios, intermediate-term portfolios, portfolios of insured securities, a high-yield portfolio (CA only) and money market portfolios. (9.) The funds of the Franklin Templeton Variable Insurance Products Trust are generally available only through insurance company variable contracts. Not part of the semiannual report 12/08 (FRANKLIN TEMPLETON INVESTMENTS(R) LOGO) One Franklin Parkway San Mateo, CA 94403-1906 - - WANT TO RECEIVE THIS DOCUMENT FASTER VIA EMAIL? Eligible shareholders can sign up for eDelivery at franklintempleton.com. See inside for details. SEMIANNUAL REPORT AND SHAREHOLDER LETTER FRANKLIN STRATEGIC SERIES INVESTMENT MANAGER Franklin Advisers, Inc. DISTRIBUTOR Franklin Templeton Distributors, Inc. (800) DIAL BEN(R) franklintempleton.com SHAREHOLDER SERVICES (800) 632-2301 Authorized for distribution only when accompanied or preceded by a prospectus. Investors should carefully consider a fund's investment goals, risks, charges and expenses before investing. The prospectus contains this and other information; please read it carefully before investing. To ensure the highest quality of service, telephone calls to or from our service departments may be monitored, recorded and accessed. These calls can be identified by the presence of a regular beeping tone. FSS2 S2008 12/08 (GRAPHIC) OCTOBER 31, 2008 A series of Franklin Strategic Series SEMIANNUAL REPORT AND SHAREHOLDER LETTER FIXED INCOME FRANKLIN STRATEGIC INCOME FUND WANT TO RECEIVE THIS DOCUMENT FASTER VIA EMAIL? Eligible shareholders can sign up for eDelivery at franklintempleton.com. See inside for details. (FRANKLIN TEMPLETON INVESTMENTS(R) LOGO) FRANKLIN - Templeton - Mutual Series Franklin Templeton Investments GAIN FROM OUR PERSPECTIVE(R) Franklin Templeton's distinct multi-manager structure combines the specialized expertise of three world-class investment management groups-- Franklin, Templeton and Mutual Series. SPECIALIZED EXPERTISE Each of our portfolio management groups operates autonomously, relying on its own research and staying true to the unique investment disciplines that underlie its success. FRANKLIN. Founded in 1947, Franklin is a recognized leader in fixed income investing and also brings expertise in growth- and value-style U.S. equity investing. TEMPLETON. Founded in 1940, Templeton pioneered international investing and, in 1954, launched what has become the industry's oldest global fund. Today, with offices in over 25 countries, Templeton offers investors a truly global perspective. MUTUAL SERIES. Founded in 1949, Mutual Series is dedicated to a unique style of value investing, searching aggressively for opportunity among what it believes are undervalued stocks, as well as arbitrage situations and distressed securities. TRUE DIVERSIFICATION Because our management groups work independently and adhere to different investment approaches, Franklin, Templeton and Mutual Series funds typically have distinct portfolios. That's why our funds can be used to build truly diversified allocation plans covering every major asset class. RELIABILITY YOU CAN TRUST At Franklin Templeton Investments, we seek to consistently provide investors with exceptional risk-adjusted returns over the long term, as well as the reliable, accurate and personal service that has helped us become one of the most trusted names in financial services.
MUTUAL FUNDS | RETIREMENT PLANS | 529 COLLEGE SAVINGS PLANS | SEPARATE ACCOUNTS (GRAPHIC) Not part of the semiannual report Contents CEO'S MESSAGE ............................................................. 1 SEMIANNUAL REPORT Franklin Strategic Income Fund ............................................ 4 Performance Summary ....................................................... 11 Your Fund's Expenses ...................................................... 14 Financial Highlights and Statement of Investments ......................... 16 Financial Statements ...................................................... 38 Notes to Financial Statements ............................................. 42 Shareholder Information ................................................... 56
A Message from Gregory E. Johnson, President and Chief Executive Officer of Franklin Resources, Inc. October 31, 2008 Dear Shareholder: The enclosed semiannual report for Franklin Strategic Income Fund covers the six months ended October 31, 2008, and I would like to add some comments on market events during this time. Recent market volatility has been jarring to everyone, including those of us who have worked in financial markets for many years. Bank lending around the world seized up, and the fallout impacted venerable firms alongside broader stock and bond indexes. This environment is bound to provoke great concern, but it's equally important to put the latest market developments in perspective. That's why I'd like to offer a few thoughts on these events, our company's approach to investing and the strong health of our organization. A key point to recognize is that global financial turmoil is being addressed by global action. Central banks around the world have coordinated their efforts to cut interest rates and supply liquidity to frozen funding markets. A number of governments have also intervened to rescue major financial institutions or find an orderly way for them to be acquired. Here in the U.S., the Federal Sign up for EDELIVERY of your Shareholder Report Shareholders who are registered at franklintempleton.com can receive this report via email by selecting eDelivery options under "My Profile." Not all accounts are eligible for eDelivery. NOT FDIC INSURED | MAY LOSE VALUE | NO BANK GUARANTEE Not part of the semiannual report | 1 Reserve and Treasury Department have moved rapidly to establish new programs for easing money market pressures and handling troubled financial assets. The outcome of all these efforts may take a while to be realized, but I believe the latest actions here and abroad mark a significant turning point for global capital markets. It's also important to remember that as daunting as current market conditions may be, we have navigated through other periods of market volatility. U.S. stock markets recorded three bear markets during the 1960s as the nation grappled with the Vietnam War and a turbulent economy.(1) The quintupling of oil prices in 1973 led to a deep U.S. recession and a stock market plunge of 45.1% from January 1973 through December 1974.(1) And the "Black Monday" stock market crash of 1987 remains the largest single-day percentage decline in the history of the Dow Jones Industrial Average.(2) Advice applicable throughout these upheavals remains true today. The late Sir John Templeton, writing 15 years ago, ended a list of his core investment principles with these thoughts: "Do not be fearful or negative too often. . . . For 100 years optimists have carried the day in U.S. stocks. Even in the dark '70s, many professional money managers -- and many individual investors too -- made money in stocks . . . . In this century or the next it's still 'Buy low, sell high.'"(3) Sir John knew these simple concepts were difficult to execute in the face of pessimism. Nonetheless, that is precisely how our Franklin, Templeton and Mutual Series portfolio managers are contending with today's challenging environment. They are using their expertise to sort through investment opportunities, avoiding those firms that have become merely cheap and identifying those firms best positioned to be eventual winners. This kind of rigorous, bottom-up, security-by-security analysis is the fundamental investment discipline practiced across our global platform. These asset management strengths are also the core of our business. Unlike financial firms that have dominated recent headlines, Franklin Templeton derives its revenue primarily from investment management, not investment banking or securities brokerage. Additionally, our assets under management are diversified by investment objective, clientele and geographic region. Diversified positioning helps our firm maintain healthy operating margins even when volatile markets reduce assets under management. It is also important (1.) Source: Ned Davis Research, Inc. (2.) Source: NYSE Euronext. The Dow Jones Industrial Average is price weighted based on the average market price of 30 blue chip stocks of companies that are generally industry leaders. (3.) Source: "16 Rules for Investment Success" by Sir John Templeton. 2 | Not part of the semiannual report to note that maintaining a strong balance sheet has been a pillar of our management strategy. We have a substantial pool of cash and investments and low levels of debt, and we are in the enviable position of not having to depend on credit to meet our operating needs. In fact, our strong franchise, sound capitalization and minimal leverage recently led Standard & Poor's to raise its credit ratings on Franklin Resources, Inc. (BEN) to the highest level currently applied to a publicly traded asset manager.(4) Franklin Templeton's six-decade growth into a premier global asset manager has given us the conviction that although conditions remain challenging, there are ample reasons to be optimistic about eventual market stabilization and recovery. Being able to take advantage of markets shaken by maximum pessimism has helped our firm develop into an organization that stretches across 29 countries and manages assets for more than 20 million shareholder accounts. In the enclosed semiannual report for Franklin Strategic Income Fund, the portfolio managers discuss market conditions, investment decisions and Fund performance during the six months ended October 31, 2008. The report contains additional performance data and financial information. Our website, FRANKLINTEMPLETON.COM, offers more timely discussions, daily prices, portfolio holdings and other information. We encourage you to discuss your concerns with your financial advisor, who can review your overall portfolio, reassess your goals and help you stay focused on the long term. As times like these illustrate, all securities markets fluctuate, as do fund share prices. We are grateful for the trust you have placed in Franklin Templeton and remain focused on serving your investment needs. Sincerely, /s/ Gregory E. Johnson Gregory E. Johnson President and Chief Executive Officer Franklin Resources, Inc. THIS LETTER REFLECTS OUR ANALYSIS AND OPINIONS AS OF OCTOBER 31, 2008. THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET, COUNTRY, INDUSTRY, SECURITY OR FUND. STATEMENTS OF FACT ARE FROM SOURCES CONSIDERED RELIABLE. (4.) Source: Standard & Poor's press release, 10/6/08. Not part of the semiannual report | 3 Semiannual Report Franklin Strategic Income Fund YOUR FUND'S GOALS AND MAIN INVESTMENTS: Franklin Strategic Income Fund seeks a high level of current income, with capital appreciation over the long term as a secondary goal. The Fund uses an active asset allocation process and invests at least 65% of its assets in U.S. and foreign debt securities, including those in emerging markets, which include all varieties of fixed and floating rate income securities, including bonds, mortgage securities and other asset-backed securities, and convertible securities. PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM FIGURES SHOWN. PLEASE VISIT franklintempleton.com OR CALL (800) 342-5236 FOR MOST RECENT MONTH-END PERFORMANCE. This semiannual report for Franklin Strategic Income Fund covers the period ended October 31, 2008. PERFORMANCE OVERVIEW Franklin Strategic Income Fund - Class A had a -15.66% cumulative total return for the six months under review. The Fund underperformed its benchmark, the Barclays Capital (BC; formerly, Lehman Brothers) U.S. Aggregate Index, which had a -3.63% total return for the same period.(1) During the same period, the Fund performed comparably to its peers as measured by the Lipper Multi-Sector Income Funds Classification Average's -15.68% total return.(2) (1.) Source: (C) 2008 Morningstar. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. The BC U.S. Aggregate Index represents securities that are SEC-registered, taxable and dollar denominated. The index covers the U.S. investment grade fixed-rate bond market, with index components for government and corporate securities, mortgage pass-through securities and asset-backed securities. All issues included must have at least one year to final maturity and must be rated investment grade (Baa3 or better) by Moody's Investors Service. They must also be dollar denominated and nonconvertible. Total return includes price appreciation/depreciation and income as a percentage of the original investment. The index is rebalanced monthly by market capitalization. The index is unmanaged and includes reinvestment of any income or distributions. One cannot invest directly in an index, nor is an index representative of the Fund's portfolio. (2.) Source: Lipper Inc. The Lipper Multi-Sector Income Funds Classification Average is calculated by averaging the total returns of all funds within the Lipper Multi-Sector Income Funds classification in the Lipper Open-End underlying funds universe. Lipper Multi-Sector Income Funds are defined as funds that seek current income by allocating assets among different fixed income securities sectors (not primarily in one sector except for defensive purposes), including U.S. and foreign governments, with a significant portion rated below investment grade. For the six-month period ended 10/31/08, there were 159 funds in this category. Lipper calculations do not include sales charges or expense subsidization by a fund's manager. Fund performance relative to the average may have differed if these or other factors had been considered. The Lipper average includes reinvestment of any income or distributions. One cannot invest directly in a Lipper average, nor is the average representative of the Fund's portfolio. THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND NAMES OF ALL PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE SOI BEGINS ON PAGE 21. 4 | Semiannual Report You can find the Fund's long-term performance data in the Performance Summary beginning on page 11. ECONOMIC AND MARKET OVERVIEW The events that unfolded during the Fund's six-month reporting period brought extraordinary volatility and uncertainty to financial markets. Credit market turmoil led to significant losses and writedowns by financial institutions, reduced credit availability and a general global repricing of risk. The credit contraction, continued weakness in the housing market, and significant declines in consumer confidence and consumer spending resulted in a weak and deteriorating economic climate. Job losses mounted and the unemployment rate rose to 6.5% during the reporting period.(3) These factors as well as upward inflationary pressures from a weak U.S. dollar and high food, energy and commodity prices burdened the overall economy for much of the reporting period. The economy grew at a 2.8% annualized rate in the second quarter of 2008 but contracted in the third quarter at an estimated annualized 0.5% rate. Oil prices soared to a record high in July, rising above $145 per barrel, before dramatically retreating to $68 by period-end. Many other commodities such as agricultural products and precious and base metals followed similar trends. Although inflation fell late in the reporting period, it rose at an annual 3.7% rate, largely due to higher food and energy costs.(3) Core inflation, which excludes such costs, rose at a more moderate 2.2% annual rate; however, this level was above the Federal Reserve Board's (Fed's) informal target range of 1.5%-2.0%.(3) The core personal consumption expenditures price index reported a 12-month increase of 2.1%.(4) Amid a series of events that included massive government intervention, bank and financial institution failures, and emergency funding, the Fed was focused primarily on restoring liquidity and confidence to unsettled financial markets. The Fed hoped to stimulate the sagging economy by cutting interest rates two times over the six-month period, bringing the federal funds target rate to 1.00%. It also implemented a series of unconventional measures aimed at easing strained credit conditions that included a $700 billion bailout plan that would allow the U.S. Treasury to purchase bad debt from troubled financial institutions. Volatility remained high throughout the reporting period but intensified in September as stocks fluctuated wildly and Treasury prices soared. Panicked investors drove the yield on the three-month Treasury bill to a multi-decade (3.) Source: Bureau of Labor Statistics. (4.) Source: Bureau of Economic Analysis. Semiannual Report | 5 low, and LIBOR (London InterBank Offered Rate) rates, which banks charge one another for loans, jumped to record highs. Fixed income spreads were generally wide relative to Treasury yields over the period due to heightened market turbulence and as investors sought the relative safety of short-term U.S. Treasury securities. The yield curve steepened and the spread between the two-year Treasury yield and the 10-year Treasury yield increased to 245 basis points (100 basis points equal one percentage point) at the end of October from 148 basis points at the beginning of the reporting period. The two-year bill yield fell to 1.56% at the end of October from 2.29% six months earlier. Over the same period, the 10-year U.S. Treasury note yield rose from 3.77% to 4.01%. Globally, many economies also slowed during the six-month period. European economic growth came under increased pressure and entered a technical recession in the third quarter of 2008. Having increased interest rates as late as July to counteract inflation risks from surging commodity prices, the European Central Bank (ECB) cut rates 50 basis points to 3.75% in October following a string of bank failures. Additionally, eurozone and other European countries stepped up measures to protect depositors, establish bank-rescue plans and consider fiscal spending plans to help cushion the economic downturn. In a coordinated effort with the Fed, ECB and other central banks, Sweden, Norway, Switzerland and the U.K. also reduced interest rates in October. Economic growth in Asia also moderated, but not to the same extent as in the U.S. or Europe. China's third quarter GDP registered 9.0% annual growth, although that was below the 12% average quarterly rate experienced in 2007.(5) Outside of China, economic growth in Indonesia, Malaysia and South Korea was more moderate while Singapore and Japan entered technical recessions. Weakening external demand conditions prompted policy efforts across Asia. The central banks of China, Japan, South Korea and Australia, among others, cut interest rates in October and announced fiscal stimulus packages to help offset the economic downturn. As in other regions, the rapid oil price correction by period-end, along with food price moderation, gradually reduced Asia's inflation rates. INVESTMENT STRATEGY The Fund uses an active asset allocation strategy, investing across the fixed income market in sectors including high yield and investment grade corporate bonds, international developed and emerging market bonds, U.S. government and agency securities, mortgage- and other asset-backed securities, corporate bank loans, convertible securities and preferred stocks. In addition to our bottom-up fundamental analysis of market sectors, industries and issuers, we (5.) Source: National Bureau of Statistics (China). 6 | Semiannual Report DIVIDEND DISTRIBUTIONS* 5/1/08-10/31/08
DIVIDEND PER SHARE --------------------------------------------------------------------- MONTH CLASS A CLASS B CLASS C CLASS R ADVISOR CLASS - ----- ----------- ----------- ----------- ----------- ------------- May 5.00 cents 4.66 cents 4.68 cents 4.79 cents 5.21 cents June 5.00 cents 4.66 cents 4.66 cents 4.79 cents 5.21 cents July 5.00 cents 4.66 cents 4.66 cents 4.79 cents 5.21 cents August 5.00 cents 4.66 cents 4.66 cents 4.79 cents 5.21 cents September 5.00 cents 4.67 cents 4.69 cents 4.81 cents 5.20 cents October 5.00 cents 4.67 cents 4.69 cents 4.81 cents 5.20 cents ----------- ----------- ----------- ----------- ----------- TOTAL 30.00 CENTS 27.98 CENTS 28.04 CENTS 28.78 CENTS 31.24 CENTS
* All Fund distributions will vary depending upon current market conditions, and past distributions are not indicative of future trends. evaluate country risk, business cycles, yield curves, and values between and within markets as part of our portfolio construction process. MANAGER'S DISCUSSION For the six-month period under review, the Fund's lower exposure to more U.S. interest-rate sensitive fixed income sectors (i.e., Treasury securities, agency bonds and mortgage-backed securities) constrained performance compared to the BC U.S. Aggregate Index given the stronger performance of these securities during a period of financial market volatility. The Fund's relatively heavier weighting in investment-grade corporate bonds and noninvestment-grade bank loans negatively impacted performance compared to the Fund's peers, as measured by the Lipper Multi-Sector Income Funds Classification Average. The Fund's investments in non-U.S. dollar government bonds and forward currency contracts somewhat offset the negative effect and helped performance relative to the Fund's peers. In an environment of financial market upheaval and global recessionary fears, the strongest performing fixed income asset class was U.S. Treasury securities, largely due to investors' flight to quality and expectations that a domestic recession would temper inflationary pressures. Nearly all fixed income spread sectors, those priced at a yield above U.S. Treasury securities to compensate for additional credit risk, underperformed as risk aversion rose and fundamental outlooks became more cautious. (As yields rise, prices and valuations decline.) With yields exceeding, in some cases significantly, the widest levels experienced over the past several decades, we sought to take advantage of dislocations across fixed income markets, particularly in sectors and securities that appeared to be driven more by fear and supply/demand imbalances than by longer-term fundamentals or relative value assessments. Semiannual Report | 7 PORTFOLIO BREAKDOWN Based on Total Net Assets
10/31/08 4/30/08 -------- ------- Mortgages & Other Asset-Backed Bonds 20.8% 16.7% High Yield Corporate Bonds & Preferred Stocks 19.3% 22.8% Floating Rate Bank Loans 13.8% 16.1% Investment Grade Corporate Bonds 11.5% 9.4% Other International Bonds (non-$US) 9.5% 11.8% U.S. Government & Agency Bonds* 8.4% 4.9% International Developed Country Bonds (non-$US) 3.2% 9.6% Emerging Market Bonds ($US) 2.2% 1.5% Municipal Bonds 1.1% 1.9% Convertible Securities 0.7% 2.7% Common Stocks & Warrants 0.0% 0.0%** Short-Term Investments & Other Net Assets 9.5% 2.6%
* Includes 1.1% Treasury Inflation Protected Securities. Also includes agency preferred stock. ** Rounds to less than 0.1% of net assets. With an upward move in longer-term U.S. interest rates early in the reporting period and expectations that inflation may moderate given a weakening domestic economy, we increased exposure to U.S. government securities (although overall exposure was less than 10% of total net assets at period-end). Within the more interest-rate sensitive sectors, we increased holdings in agency mortgage-backed securities and commercial mortgage- and other asset-backed securities as valuations declined significantly. In particular, following the conservatorship of Fannie Mae and Freddie Mac and the government's perceived near-explicit backing of these entities' debt and mortgage-backed securities, we found attractive the historically wide spreads on these issues. In other asset-backed sectors, we believed deterioration in the consumer and commercial sectors may pressure fundamentals and lead to increased delinquencies for such securitized issues; however, given the seniority of the Fund's positions, we believe there is a significant asset cushion that should provide downside support while also offering yields well above historical norms. The corporate credit markets were severely impacted by events in September and October. The combination of the largest bankruptcy in U.S. history (Lehman Brothers), double-digit declines in global equity markets, the virtual freezing of the commercial paper and short-term bank lending markets, and an increasingly negative outlook for global economic growth pressured prices for corporate-related debt securities. However, by period-end, many observers believed that governments across the globe not only were pumping liquidity into the financial system but also were attempting to prevent the failure of any corporate 8 | Semiannual Report issuer that could have widespread repercussions for the financial system. Consequently, we found what we believed were attractive values among major bank and finance-related corporate issuers and certain non-finance issuers that we assessed could be longer-term survivors but still offered yields and spreads that were historically cheap. Deteriorating fundamentals and a forced unwinding of positions from certain past buyers and owners of loans (e.g., hedge funds, investors in total return swaps that funded certain loan purchases, and market value collateralized loan obligations) caused the leveraged bank loan market to drop significantly during the reporting period. Although default rates rose and were expected to continue increasing into 2009, we believed price levels during the period were attractive given the senior, secured structure of loans purchased. Spreads for high yield corporate bonds similarly jumped during September and October, reaching spread levels over U.S. Treasury securities of 1,500 basis points, the highest level in the more than 20-year history of this asset class's existence.(6) We found some value in the high yield market; however, overall exposure to this asset class fell during the reporting period in favor of investment grade credit. We reduced the Fund's already modest exposure to convertible securities as investment opportunities in traditional corporate debt markets appeared more attractive to us on a risk-adjusted basis. After broad U.S. dollar depreciation in five of the past six calendar years, the dollar appreciated significantly during the reporting period against many currencies. This was largely due to a deleveraging, repatriation and risk reduction across currency markets, as well as increasingly negative outlooks for other developed and developing markets that began to be reflected in their currencies. Consequently, the Fund's non-U.S. dollar holdings provided mixed results. The Fund's holdings in several Asian and Latin American currencies declined on the U.S. dollar's strength, but holdings in Japanese yen-denominated bonds and forward currency contracts performed well given the yen's defensive strength during the period. Elsewhere, certain of our non-eurozone European positions depreciated in value; however, the Fund was hedged and net short in the euro, which helped performance as the euro declined significantly relative to the U.S. dollar during the period. The Fund was relatively underweighted versus historical levels in U.S. dollar-denominated emerging market debt throughout the period, although widening yield spreads in the period's second half, largely based on perceived supply and demand imbalances, improved the relative value of certain developing market issuers. In particular, the Fund initiated a position in U.S. dollar-denominated Russian sovereign bonds during the period, given a supportive creditor outlook for Russia despite the country's challenging economic and financial market outlook. (6.) Source: Barclays Capital. Semiannual Report | 9 Thank you for your continued participation in Franklin Strategic Income Fund. We look forward to serving your future investment needs. (PHOTO OF CHRISTOPHER J. MOLUMPHY) /s/ Christopher J. Molumphy - ------------------------------------- Christopher J. Molumphy, CFA (PHOTO OF ERIC G. TAKAHA) /s/ Eric G. Takaha - ------------------------------------- Eric G. Takaha, CFA Portfolio Management Team Franklin Strategic Income Fund THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS AS OF OCTOBER 31, 2008, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT OUR MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE DEPENDING ON FACTORS SUCH AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY. THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET, COUNTRY, INDUSTRY, SECURITY OR THE FUND. STATEMENTS OF FACT ARE FROM SOURCES CONSIDERED RELIABLE, BUT THE INVESTMENT MANAGER MAKES NO REPRESENTATION OR WARRANTY AS TO THEIR COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR INVESTMENT MANAGEMENT PHILOSOPHY. 10 | Semiannual Report Performance Summary as of 10/31/08 Your dividend income will vary depending on dividends or interest paid by securities in the Fund's portfolio, adjusted for operating expenses of each class. Capital gain distributions are net profits realized from the sale of portfolio securities. The performance table does not reflect any taxes that a shareholder would pay on Fund dividends, capital gain distributions, if any, or any realized gains on the sale of Fund shares. Total return reflects reinvestment of the Fund's dividends and capital gain distributions, if any, and any unrealized gains or losses. PRICE AND DISTRIBUTION INFORMATION
CLASS A (SYMBOL: FRSTX) CHANGE 10/31/08 4/30/08 - ----------------------- ------ -------- ------- Net Asset Value (NAV) -$1.87 $8.41 $10.28 DISTRIBUTIONS (5/1/08-10/31/08) Dividend Income $0.3000
CLASS B (SYMBOL: FKSBX) CHANGE 10/31/08 4/30/08 - ----------------------- ------ -------- ------- Net Asset Value (NAV) -$1.87 $8.45 $10.32 DISTRIBUTIONS (5/1/08-10/31/08) Dividend Income $0.2798
CLASS C (SYMBOL: FSGCX) CHANGE 10/31/08 4/30/08 - ----------------------- ------ -------- ------- Net Asset Value (NAV) -$1.86 $8.41 $10.27 DISTRIBUTIONS (5/1/08-10/31/08) Dividend Income $0.2804
CLASS R (SYMBOL: FKSRX) CHANGE 10/31/08 4/30/08 - ----------------------- ------ -------- ------- Net Asset Value (NAV) -$1.86 $8.39 $10.25 DISTRIBUTIONS (5/1/08-10/31/08) Dividend Income $0.2878
ADVISOR CLASS (SYMBOL: FKSAX) CHANGE 10/31/08 4/30/08 - ----------------------------- ------ -------- ------- Net Asset Value (NAV) -$1.86 $8.42 $10.28 DISTRIBUTIONS (5/1/08-10/31/08) Dividend Income $0.3124
Semiannual Report | 11 Performance Summary (CONTINUED) PERFORMANCE(1) CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETURNS INCLUDE MAXIMUM SALES CHARGES. CLASS A: 4.25% MAXIMUM INITIAL SALES CHARGE; CLASS B: CONTINGENT DEFERRED SALES CHARGE (CDSC) DECLINING FROM 4% TO 1% OVER SIX YEARS, AND ELIMINATED THEREAFTER; CLASS C: 1% CDSC IN FIRST YEAR ONLY; CLASS R/ADVISOR CLASS: NO SALES CHARGES.
CLASS A 6-MONTH 1-YEAR 5-YEAR 10-YEAR - ------- ------- ------ ------ ------- Cumulative Total Return(2) -15.66% -14.15% +15.08% +62.40% Average Annual Total Return(3) -19.28% -17.83% +1.97% +4.52% Avg. Ann. Total Return (9/30/08)(4) -9.02% +3.95% +5.67% Distribution Rate(5) 6.83% 30-Day Standardized Yield(6) 7.69% Total Annual Operating Expenses(7) 0.91%
INCEPTION CLASS B 6-MONTH 1-YEAR 5-YEAR (1/1/99) - ------- ------- ------ ------ --------- Cumulative Total Return(2) -15.78% -14.44% +12.86% +51.36% Average Annual Total Return(3) -19.05% -17.65% +2.14% +4.31% Avg. Ann. Total Return (9/30/08)(4) -8.92% +4.12% +5.31% Distribution Rate(5) 6.63% 30-Day Standardized Yield(6) 7.60% Total Annual Operating Expenses(7) 1.31%
CLASS C 6-MONTH 1-YEAR 5-YEAR 10-YEAR - ------- ------- ------ ------ ------- Cumulative Total Return(2) -15.75% -14.49% +12.84% +56.07% Average Annual Total Return(3) -16.57% -15.29% +2.45% +4.55% Avg. Ann. Total Return (9/30/08)(4) -6.26% +4.43% +5.71% Distribution Rate(5) 6.69% 30-Day Standardized Yield(6) 7.61% Total Annual Operating Expenses(7) 1.31%
INCEPTION CLASS R 6-MONTH 1-YEAR 5-YEAR (1/1/02) - ------- ------- ------ ------ --------- Cumulative Total Return(2) -15.72% -14.39% +13.61% +38.03% Average Annual Total Return(3) -15.72% -14.39% +2.58% +4.83% Avg. Ann. Total Return (9/30/08)(4) -5.24% +4.60% +6.31% Distribution Rate(5) 6.88% 30-Day Standardized Yield(6) 7.77% Total Annual Operating Expenses(7) 1.16%
ADVISOR CLASS(8) 6-MONTH 1-YEAR 5-YEAR 10-YEAR - ---------------- ------- ------ ------ ------- Cumulative Total Return(2) -15.46% -13.92% +16.63% +66.30% Average Annual Total Return(3) -15.46% -13.92% +3.12% +5.22% Avg. Ann. Total Return (9/30/08)(4) -4.76% +5.13% +6.38% Distribution Rate(5) 7.41% 30-Day Standardized Yield(6) 8.25% Total Annual Operating Expenses(7) 0.66%
PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM FIGURES SHOWN. FOR MOST RECENT MONTH-END PERFORMANCE, SEE "FUNDS AND PERFORMANCE" AT franklintempleton.com OR CALL (800) 342-5236. 12 | Semiannual Report Performance Summary (CONTINUED) ENDNOTES BOND PRICES GENERALLY MOVE IN THE OPPOSITE DIRECTION OF INTEREST RATES. THUS, AS PRICES OF BONDS IN THE FUND ADJUST TO A RISE IN INTEREST RATES, THE FUND'S SHARE PRICE MAY DECLINE. HIGH YIELDS REFLECT THE HIGHER CREDIT RISKS ASSOCIATED WITH CERTAIN LOWER-RATED SECURITIES HELD IN THE PORTFOLIO. FLOATING RATE LOANS AND HIGH YIELD CORPORATE BONDS ARE RATED BELOW INVESTMENT GRADE AND ARE SUBJECT TO GREATER RISK OF DEFAULT, WHICH COULD RESULT IN LOSS OF PRINCIPAL -- A RISK THAT MAY BE HEIGHTENED IN A SLOWING ECONOMY. THE RISKS OF FOREIGN SECURITIES INCLUDE CURRENCY FLUCTUATIONS AND POLITICAL UNCERTAINTY. THE FUND'S PROSPECTUS ALSO INCLUDES A DESCRIPTION OF THE MAIN INVESTMENT RISKS. CLASS B: These shares have higher annual fees and expenses than Class A shares. CLASS C: Prior to 1/1/04, these shares were offered with an initial sales charge; thus actual total returns would have differed. These shares have higher annual fees and expenses than Class A shares. CLASS R: Shares are available to certain eligible investors as described in the prospectus. These shares have higher annual fees and expenses than Class A shares. ADVISOR CLASS: Shares are available to certain eligible investors as described in the prospectus. (1.) Past expense reductions by the Fund's manager increased the Fund's total returns. Without these reductions, the Fund's total returns would have been lower. (2.) Cumulative total return represents the change in value of an investment over the periods indicated. (3.) Average annual total return represents the average annual change in value of an investment over the periods indicated. Six-month return has not been annualized. (4.) In accordance with SEC rules, we provide standardized average annual total return information through the latest calendar quarter. (5.) Distribution rate is based on an annualization of the respective class's October dividend and the maximum offering price (NAV for Classes B, C, R and Advisor) per share on 10/31/08. (6.) Yield, calculated as required by the SEC, is based on the earnings of the Fund's portfolio for the 30 days ended 10/31/08. (7.) Figures are as stated in the Fund's prospectus current as of the date of this report. (8.) Effective 9/1/99, the Fund began offering Advisor Class shares, which do not have sales charges or a Rule 12b-1 plan. Performance quotations for this class reflect the following methods of calculation: (a) For periods prior to 8/12/99, a restated figure is used based upon the Fund's Class A performance, excluding the effect of Class A's maximum initial sales charge, but reflecting the effect of the Class A Rule 12b-1 fees; and (b) for periods after 8/11/99, actual Advisor Class performance is used reflecting all charges and fees applicable to that class. Since 9/1/99 (commencement of sales), the cumulative and average annual total returns of Advisor Class shares were +61.50% and +5.34%. Semiannual Report | 13 Your Fund's Expenses As a Fund shareholder, you can incur two types of costs: - - Transaction costs, including sales charges (loads) on Fund purchases and redemption fees; and - - Ongoing Fund costs, including management fees, distribution and service (12b-1) fees, and other Fund expenses. All mutual funds have ongoing costs, sometimes referred to as operating expenses. The following table shows ongoing costs of investing in the Fund and can help you understand these costs and compare them with those of other mutual funds. The table assumes a $1,000 investment held for the six months indicated. ACTUAL FUND EXPENSES The first line (Actual) for each share class listed in the table provides actual account values and expenses. The "Ending Account Value" is derived from the Fund's actual return, which includes the effect of Fund expenses. You can estimate the expenses you paid during the period by following these steps. OF COURSE, YOUR ACCOUNT VALUE AND EXPENSES WILL DIFFER FROM THOSE IN THIS ILLUSTRATION: 1. Divide your account value by $1,000. IF AN ACCOUNT HAD AN $8,600 VALUE, THEN $8,600 / $1,000 = 8.6. 2. Multiply the result by the number under the heading "Expenses Paid During Period." IF EXPENSES PAID DURING PERIOD WERE $7.50, THEN 8.6 X $7.50 = $64.50. In this illustration, the estimated expenses paid this period are $64.50. HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS Information in the second line (Hypothetical) for each class in the table can help you compare ongoing costs of investing in the Fund with those of other mutual funds. This information may not be used to estimate the actual ending account balance or expenses you paid during the period. The hypothetical "Ending Account Value" is based on the actual expense ratio for each class and an assumed 5% annual rate of return before expenses, which does not represent the Fund's actual return. The figure under the heading "Expenses Paid During Period" shows the hypothetical expenses your account would have incurred under this scenario. You can compare this figure with the 5% hypothetical examples that appear in shareholder reports of other funds. 14 | Semiannual Report Your Fund's Expenses (CONTINUED) PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES OR REDEMPTION FEES. Therefore, the second line for each class is useful in comparing ongoing costs only, and will not help you compare total costs of owning different funds. In addition, if transaction costs were included, your total costs would have been higher. Please refer to the Fund prospectus for additional information on operating expenses.
BEGINNING ACCOUNT ENDING ACCOUNT EXPENSES PAID DURING VALUE 5/1/08 VALUE 10/31/08 PERIOD* 5/1/08-10/31/08 ----------------- -------------- ----------------------- CLASS A Actual $1,000 $ 843.40 $4.09 Hypothetical (5% return before expenses) $1,000 $1,020.77 $4.48 CLASS B Actual $1,000 $ 842.20 $5.94 Hypothetical (5% return before expenses) $1,000 $1,018.75 $6.51 CLASS C Actual $1,000 $ 842.50 $5.94 Hypothetical (5% return before expenses) $1,000 $1,018.75 $6.51 CLASS R Actual $1,000 $ 842.80 $5.25 Hypothetical (5% return before expenses) $1,000 $1,019.51 $5.75 ADVISOR CLASS Actual $1,000 $ 845.40 $2.93 Hypothetical (5% return before expenses) $1,000 $1,022.03 $3.21
* Expenses are calculated using the most recent six-month expense ratio, annualized for each class (A: 0.88%; B: 1.28%; C: 1.28%; R: 1.13%; and Advisor: 0.63%), multiplied by the average account value over the period, multiplied by 184/365 to reflect the one-half year period. Semiannual Report | 15 Franklin Strategic Series FINANCIAL HIGHLIGHTS FRANKLIN STRATEGIC INCOME FUND
SIX MONTHS ENDED YEAR ENDED APRIL 30, OCTOBER 31, 2008 ---------------------------------------------------------------- CLASS A (UNAUDITED) 2008 2007 2006 2005 2004 - ------- ---------------- ---------- ---------- -------- -------- -------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ............................ $ 10.28 $ 10.48 $ 10.20 $ 10.24 $ 10.09 $ 9.65 ---------- ---------- ---------- -------- -------- -------- Income from investment operations(a): Net investment income(b) .......... 0.26 0.56 0.53 0.51 0.53 0.56 Net realized and unrealized gains (losses) ................. (1.83) (0.07) 0.35 0.05 0.27 0.54 ---------- ---------- ---------- -------- -------- -------- Total from investment operations ..... (1.57) 0.49 0.88 0.56 0.80 1.10 ---------- ---------- ---------- -------- -------- -------- Less distributions from net investment income ............................ (0.30) (0.69) (0.60) (0.60) (0.65) (0.66) ---------- ---------- ---------- -------- -------- -------- Redemption fees(c) ................... --(d) --(d) --(d) --(d) --(d) -- ---------- ---------- ---------- -------- -------- -------- Net asset value, end of period ....... $ 8.41 $ 10.28 $ 10.48 $ 10.20 $ 10.24 $ 10.09 ========== ========== ========== ======== ======== ======== Total return(e) ...................... (15.66)% 4.80% 9.09% 5.69% 8.10% 11.69% RATIOS TO AVERAGE NET ASSETS(f) Expenses before waiver and payments by affiliates ..................... 0.88% 0.89% 0.92% 0.91% 0.92% 0.92% Expenses net of waiver and payments by affiliates(g) .................. 0.88% 0.89% 0.92% 0.91% 0.91% 0.92% Net investment income ................ 5.33% 5.44% 5.22% 5.05% 5.18% 5.53% SUPPLEMENTAL DATA Net assets, end of period (000's) .... $1,809,328 $2,123,947 $1,521,459 $998,182 $696,198 $446,282 Portfolio turnover rate .............. 26.22% 31.71% 42.24% 34.10% 48.57% 66.57% Portfolio turnover rate excluding mortgage dollar rolls(h) .......... 26.22% 31.71% 41.50% 33.59% 39.91% 52.35%
(a) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (b) Based on average daily shares outstanding. (c) Effective September 1, 2008, the redemption fee was eliminated. (d) Amount rounds to less than $0.01 per share. (e) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. (f) Ratios are annualized for periods less than one year. (g) Benefit of expense reduction rounds to less than 0.01%. (h) See Note 1(e) regarding mortgage dollar rolls. The accompanying notes are an integral part of these financial statements. 16 | Semiannual Report Franklin Strategic Series FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN STRATEGIC INCOME FUND
SIX MONTHS ENDED YEAR ENDED APRIL 30, OCTOBER 31, 2008 ---------------------------------------------------------------- CLASS B (UNAUDITED) 2008 2007 2006 2005 2004 - ------- ---------------- ---------- ---------- -------- -------- -------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ............................ $ 10.32 $ 10.52 $ 10.24 $ 10.27 $ 10.12 $ 9.67 ------- -------- -------- -------- -------- ------- Income from investment operations(a): Net investment income(b) .......... 0.24 0.52 0.49 0.47 0.49 0.52 Net realized and unrealized gains (losses) ....................... (1.83) (0.07) 0.35 0.06 0.27 0.55 ------- -------- -------- -------- -------- ------- Total from investment operations ..... (1.59) 0.45 0.84 0.53 0.76 1.07 ------- -------- -------- -------- -------- ------- Less distributions from net investment income ............................ (0.28) (0.65) (0.56) (0.56) (0.61) (0.62) ------- -------- -------- -------- -------- ------- Redemption fees(c) ................... --(d) --(d) --(d) --(d) --(d) -- ------- -------- -------- -------- -------- ------- Net asset value, end of period ....... $ 8.45 $ 10.32 $ 10.52 $ 10.24 $ 10.27 $ 10.12 ======= ======== ======== ======== ======== ======= Total return(e) ...................... (15.78)% 4.35% 8.62% 5.34% 7.65% 11.33% RATIOS TO AVERAGE NET ASSETS(f) Expenses before waiver and payments by affiliates ..................... 1.28% 1.29% 1.32% 1.31% 1.32% 1.32% Expenses net of waiver and payments by affiliates(g) .................. 1.28% 1.29% 1.32% 1.31% 1.31% 1.32% Net investment income ................ 4.93% 5.04% 4.82% 4.65% 4.78% 5.13% SUPPLEMENTAL DATA Net assets, end of period (000's) .... $81,051 $105,620 $104,523 $104,477 $110,502 $91,974 Portfolio turnover rate .............. 26.22% 31.71% 42.24% 34.10% 48.57% 66.57% Portfolio turnover rate excluding mortgage dollar rolls(h) .......... 26.22% 31.71% 41.50% 33.59% 39.91% 52.35%
(a) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (b) Based on average daily shares outstanding. (c) Effective September 1, 2008, the redemption fee was eliminated. (d) Amount rounds to less than $0.01 per share. (e) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. (f) Ratios are annualized for periods less than one year. (g) Benefit of expense reduction rounds to less than 0.01%. (h) See Note 1(e) regarding mortgage dollar rolls. The accompanying notes are an integral part of these financial statements. Semiannual Report | 17 Franklin Strategic Series FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN STRATEGIC INCOME FUND
SIX MONTHS ENDED YEAR ENDED APRIL 30, OCTOBER 31, 2008 ---------------------------------------------------------------- CLASS C (UNAUDITED) 2008 2007 2006 2005 2004 - ------- ---------------- ---------- ---------- -------- -------- -------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ............................ $ 10.27 $ 10.48 $ 10.20 $ 10.24 $ 10.09 $ 9.64 -------- -------- -------- -------- -------- -------- Income from investment operations(a): Net investment income(b) .......... 0.24 0.52 0.49 0.47 0.49 0.52 Net realized and unrealized gains (losses) ....................... (1.82) (0.08) 0.35 0.05 0.27 0.55 -------- -------- -------- -------- -------- -------- Total from investment operations ..... (1.58) 0.44 0.84 0.52 0.76 1.07 -------- -------- -------- -------- -------- -------- Less distributions from net investment income ............................ (0.28) (0.65) (0.56) (0.56) (0.61) (0.62) -------- -------- -------- -------- -------- -------- Redemption fees(c) ................... --(d) --(d) --(d) --(d) --(d) -- -------- -------- -------- -------- -------- -------- Net asset value, end of period ....... $ 8.41 $ 10.27 $ 10.48 $ 10.20 $ 10.24 $ 10.09 ======== ======== ======== ======== ======== ======== Total return(e) ...................... (15.75)% 4.28% 8.67% 5.27% 7.67% 11.36% RATIOS TO AVERAGE NET ASSETS(f) Expenses before waiver and payments by affiliates ..................... 1.28% 1.29% 1.32% 1.31% 1.32% 1.32% Expenses net of waiver and payments by affiliates(g) .................. 1.28% 1.29% 1.32% 1.31% 1.31% 1.32% Net investment income ................ 4.93% 5.04% 4.82% 4.65% 4.78% 5.13% SUPPLEMENTAL DATA Net assets, end of period (000's) .... $660,040 $733,071 $437,026 $294,412 $213,741 $151,823 Portfolio turnover rate .............. 26.22% 31.71% 42.24% 34.10% 48.57% 66.57% Portfolio turnover rate excluding mortgage dollar rolls(h) .......... 26.22% 31.71% 41.50% 33.59% 39.91% 52.35%
(a) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (b) Based on average daily shares outstanding. (c) Effective September 1, 2008, the redemption fee was eliminated. (d) Amount rounds to less than $0.01 per share. (e) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. (f) Ratios are annualized for periods less than one year. (g) Benefit of expense reduction rounds to less than 0.01%. (h) See Note 1(e) regarding mortgage dollar rolls. The accompanying notes are an integral part of these financial statements. 18 | Semiannual Report Franklin Strategic Series FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN STRATEGIC INCOME FUND
SIX MONTHS ENDED YEAR ENDED APRIL 30, OCTOBER 31, 2008 ------------------------------------------------------------- CLASS R (UNAUDITED) 2008 2007 2006 2005 2004 - ------- ---------------- ---------- ---------- -------- -------- -------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ............................ $ 10.25 $ 10.46 $ 10.18 $ 10.22 $ 10.07 $ 9.63 ------- -------- ------- ------- ------- ------ Income from investment operations(a): Net investment income(b) .......... 0.25 0.53 0.51 0.49 0.51 0.53 Net realized and unrealized gains (losses) .......................... (1.82) (0.08) 0.35 0.05 0.26 0.55 ------- -------- ------- ------- ------- ------ Total from investment operations ..... (1.57) 0.45 0.86 0.54 0.77 1.08 ------- -------- ------- ------- ------- ------ Less distributions from net investment income ............................ (0.29) (0.66) (0.58) (0.58) (0.62) (0.64) ------- -------- ------- ------- ------- ------ Redemption fees(c) ................... --(d) --(d) --(d) --(d) --(d) -- ------- -------- ------- ------- ------- ------ Net asset value, end of period ....... $ 8.39 $ 10.25 $ 10.46 $ 10.18 $ 10.22 $10.07 ======= ======== ======= ======= ======= ====== Total return(e) ...................... (15.72)% 4.55% 8.74% 5.44% 7.86% 11.45% RATIOS TO AVERAGE NET ASSETS(f) Expenses before waiver and payments by affiliates ..................... 1.13% 1.14% 1.17% 1.16% 1.17% 1.17% Expenses net of waiver and payments by affiliates(g) .................. 1.13% 1.14% 1.17% 1.16% 1.16% 1.17% Net investment income ................ 5.08% 5.19% 4.97% 4.80% 4.93% 5.28% SUPPLEMENTAL DATA Net assets, end of period (000's) .... $98,687 $108,020 $65,527 $32,971 $17,859 $7,324 Portfolio turnover rate .............. 26.22% 31.71% 42.24% 34.10% 48.57% 66.57% Portfolio turnover rate excluding mortgage dollar rolls(h) .......... 26.22% 31.71% 41.50% 33.59% 39.91% 52.35%
(a) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (b) Based on average daily shares outstanding. (c) Effective September 1, 2008, the redemption fee was eliminated. (d) Amount rounds to less than $0.01 per share. (e) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. (f) Ratios are annualized for periods less than one year. (g) Benefit of expense reduction rounds to less than 0.01%. (h) See Note 1(e) regarding mortgage dollar rolls. The accompanying notes are an integral part of these financial statements. Semiannual Report | 19 Franklin Strategic Series FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN STRATEGIC INCOME FUND
SIX MONTHS ENDED YEAR ENDED APRIL 30, OCTOBER 31, 2008 ------------------------------------------------------------- ADVISOR CLASS (UNAUDITED) 2008 2007 2006 2005 2004 - ------------- ---------------- ---------- ---------- -------- -------- -------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ............................ $ 10.28 $ 10.49 $ 10.21 $ 10.24 $ 10.09 $ 9.65 -------- -------- ------- ------- ------- ------- Income from investment operations(a): Net investment income(b) .......... 0.27 0.58 0.56 0.54 0.56 0.58 Net realized and unrealized gains (losses) .......................... (1.82) (0.07) 0.35 0.06 0.26 0.54 -------- -------- ------- ------- ------- ------- Total from investment operations ..... (1.55) 0.51 0.91 0.60 0.82 1.12 -------- -------- ------- ------- ------- ------- Less distributions from net investment income ............................ (0.31) (0.72) (0.63) (0.63) (0.67) (0.68) -------- -------- ------- ------- ------- ------- Redemption fees(c) ................... --(d) --(d) --(d) --(d) --(d) -- -------- -------- ------- ------- ------- ------- Net asset value, end of period ....... $ 8.42 $ 10.28 $ 10.49 $ 10.21 $ 10.24 $ 10.09 ======== ======== ======= ======= ======= ======= Total return(e) ...................... (15.46)% 5.05% 9.25% 6.05% 8.37% 11.97% RATIOS TO AVERAGE NET ASSETS(f) Expenses before waiver and payments by affiliates ..................... 0.63% 0.64% 0.67% 0.66% 0.67% 0.67% Expenses net of waiver and payments by affiliates(g) .................. 0.63% 0.64% 0.67% 0.66% 0.66% 0.67% Net investment income ................ 5.58% 5.69% 5.47% 5.30% 5.43% 5.78% SUPPLEMENTAL DATA Net assets, end of period (000's) .... $108,661 $111,346 $66,745 $57,367 $60,489 $39,784 Portfolio turnover rate .............. 26.22% 31.71% 42.24% 34.10% 48.57% 66.57% Portfolio turnover rate excluding mortgage dollar rolls(h) .......... 26.22% 31.71% 41.50% 33.59% 39.91% 52.35%
(a) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (b) Based on average daily shares outstanding. (c) Effective September 1, 2008, the redemption fee was eliminated. (d) Amount rounds to less than $0.01 per share. (e) Total return is not annualized for periods less than one year. (f) Ratios are annualized for periods less than one year. (g) Benefit of expense reduction rounds to less than 0.01%. (h) See Note 1(e) regarding mortgage dollar rolls. The accompanying notes are an integral part of these financial statements. 20 | Semiannual Report Franklin Strategic Series STATEMENT OF INVESTMENTS, OCTOBER 31, 2008 (UNAUDITED)
COUNTRY/ FRANKLIN STRATEGIC INCOME FUND ORGANIZATION SHARES VALUE ------------------------------ -------------- ----------- -------------- COMMON STOCKS 0.0% AUTOMOBILES & COMPONENTS 0.0% (a, b) Cambridge Industries Liquidating Trust Interest ................. United States 516,372 $ -- -------------- COMMERCIAL & PROFESSIONAL SERVICES 0.0% (a, b) VS Holdings Inc. ................................................ United States 64,666 -- -------------- TOTAL COMMON STOCKS (COST $64,666) .............................. -- -------------- CONVERTIBLE PREFERRED STOCKS 0.3% BANKS 0.0%(c) Fannie Mae, 8.75%, cvt. pfd. .................................... United States 121,200 170,892 -------------- DIVERSIFIED FINANCIALS 0.1% Affiliated Managers Group Inc., 5.10%, cvt. pfd. ................ United States 174,000 3,153,750 -------------- PHARMACEUTICALS, BIOTECHNOLOGY & LIFE SCIENCES 0.2% Schering-Plough Corp., 6.00%, cvt. pfd. ......................... United States 43,000 5,747,731 -------------- TOTAL CONVERTIBLE PREFERRED STOCKS (COST $22,705,290) 9,072,373 -------------- PREFERRED STOCKS (COST $5,000,000) 0.0%(c) ...................... BANKS 0.0%(c) Freddie Mac, 8.375%, pfd., Z .................................... United States 200,000 310,000 --------------
PRINCIPAL AMOUNT(d) ----------- (e, f) SENIOR FLOATING RATE INTERESTS 13.8% AUTOMOBILES & COMPONENTS 0.2% (g) Dayco Products LLC (Mark IV), Replacement Term Loan, 7.65% - 8.48%, 6/23/11 ....................................... United States 710,034 241,412 Key Safety Systems Inc., Term Loan B, 5.469% - 6.753%, 3/10/14 ...................................................... United States 576,225 342,854 TRW Automotive Inc., Tranche B-1 Term Loan, 4.625% - 5.813%, 2/09/14 ..................................... United States 4,396,608 3,465,991 -------------- 4,050,257 -------------- CAPITAL GOODS 0.8% Allison Transmission Inc., Term Loan B, 5.56% - 5.75%, 8/07/14 ...................................................... United States 5,399,804 3,708,509 Amsted Industries Inc., (g) Delay Draw, 4.81% - 5.77%, 4/05/13 ........................... United States 4,251,753 3,358,885 Term Loan B, 4.82% - 6.82%, 4/05/13 .......................... United States 625,135 481,354 Hawker Beechcraft Inc., Synthetic L/C, 5.762%, 3/26/14 ............................... United States 241,060 156,517 Term Loan B, 5.762%, 3/26/14 ................................. United States 4,115,700 2,672,267 Oshkosh Truck Corp., Term Loan B, 4.32% - 6.09%, 12/06/13 ..................................................... United States 10,324,745 7,201,509 RBS Global Inc. (Rexnord Corp.), Term Loan, 6.00% - 7.003%, 7/22/13 ...................................................... United States 4,050,000 3,240,000 TransDigm Inc., Term Loan B, 5.21%, 6/23/13 ..................... United States 2,130,000 1,632,113 -------------- 22,451,154 --------------
Semiannual Report | 21 Franklin Strategic Series STATEMENT OF INVESTMENTS, OCTOBER 31, 2008 (UNAUDITED) (CONTINUED)
COUNTRY/ PRINCIPAL FRANKLIN STRATEGIC INCOME FUND ORGANIZATION AMOUNT(d) VALUE ------------------------------ -------------- ----------- -------------- (e, f) SENIOR FLOATING RATE INTERESTS (CONTINUED) COMMERCIAL & PROFESSIONAL SERVICES 1.2% Allied Waste North America Inc., Credit Link, 4.18%, 3/28/14 .................................. United States 2,353,822 $ 2,251,823 Term Loan B, 4.06% - 5.55%, 3/28/14 .......................... United States 3,293,764 3,151,035 ARAMARK Corp., Synthetic L/C, 2.427%, 1/26/14 ............................... United States 885,285 743,418 Term Loan B, 5.637%, 1/26/14 ................................. United States 13,799,709 11,588,306 (g, h) EnviroSolutions Inc., Initial Term Loan, PIK, 12.042%, 7/07/12 ...................................................... United States 4,054,608 3,010,547 Nielsen Finance LLC (VNU Inc.), Dollar Term Loan, 4.803%, 8/09/13 ...................................................... United States 14,196,278 10,349,087 West Corp., Term Loan B-2, 5.594% - 5.75%, 10/24/13 ............. United States 2,165,388 1,402,089 -------------- 32,496,305 -------------- CONSUMER DURABLES & APPAREL 0.5% Jarden Corp., Term Loan B1, 5.512%, 1/24/12 ................................ United States 2,868,214 2,348,350 Term Loan B2, 5.512%, 1/24/12 ................................ United States 5,267,473 4,312,744 Jostens IH Corp. (Visant Holding Corp.), Term Loan C, 5.171%, 12/21/11 ..................................................... United States 4,558,727 3,800,839 The William Carter Co., Term Loan B, 4.618% - 4.92%, 7/14/12 ...................................................... United States 4,560,898 3,842,556 -------------- 14,304,489 -------------- CONSUMER SERVICES 1.7% Affinion Group Inc., Term Loan B, 5.311% - 5.618%, 10/17/12 ..................................................... United States 6,238,544 4,975,239 Education Management LLC, Term Loan C, 5.563%, 6/01/13 .......... United States 11,508,709 8,113,639 (g) Kuilima Resort Co. (Turtle Bay), First Lien Term Loan, 8.75%, 9/30/10 ...................................................... United States 6,000,000 2,925,000 Laureate Education Inc., Closing Date Term Loan, 7.001%, 8/17/14 ...................... United States 2,035,728 1,455,546 Delayed Draw Term Loan, 7.001%, 8/17/14 ...................... United States 304,636 217,815 OSI Restaurant Partners LLC (Outback), Pre-Funded Revolving Credit, 2.639%, 6/14/13 ................. United States 714,727 375,827 Term Loan B, 5.25%, 6/14/14 .................................. United States 8,935,335 4,698,494 Penn National Gaming Inc., Term Loan B, 4.55% - 5.29%, 10/03/12 ..................................................... United States 10,334,622 8,640,891 VML U.S. Finance LLC (Venetian Macau), Delayed Draw, 6.02%, 5/25/12 ................................. Macau 6,787,577 4,361,018 (g) New Project Term Loans, 6.02%, 5/25/13 ....................... Macau 5,014,598 3,221,879 Term Loan B, 6.02%, 5/25/13 .................................. Macau 11,932,825 7,666,840 -------------- 46,652,188 -------------- DIVERSIFIED FINANCIALS 0.5% Nuveen Investments Inc., Term Loan B, 6.12% - 6.77%, 11/13/14 ..................................................... United States 14,106,378 8,134,682 TD Ameritrade Holding Corp., Term Loan B, 5.00%, 12/31/12 ..................................................... United States 6,831,733 5,713,037 -------------- 13,847,719 --------------
22 | Semiannual Report Franklin Strategic Series STATEMENT OF INVESTMENTS, OCTOBER 31, 2008 (UNAUDITED) (CONTINUED)
COUNTRY/ PRINCIPAL FRANKLIN STRATEGIC INCOME FUND ORGANIZATION AMOUNT(d) VALUE ------------------------------ -------------- ----------- -------------- (e, f) SENIOR FLOATING RATE INTERESTS (CONTINUED) ENERGY 0.3% Citgo Petroleum Corp., Term Loan B, 3.391%, 11/15/12 ............ United States 6,460,892 $ 4,829,517 Dresser Inc., Term Loan B, 5.057% - 5.368%, 5/04/14 ............. United States 4,219,449 3,070,970 -------------- 7,900,487 -------------- FOOD, BEVERAGE & TOBACCO 0.5% Constellation Brands Inc., Term Loan B, 4.313% - 5.25%, 6/05/13 ...................................................... United States 6,765,933 5,908,351 Dean Foods Co., Term Loan B, 4.62% - 5.27%, 4/02/14 ............. United States 8,477,419 6,387,209 -------------- 12,295,560 -------------- HEALTH CARE EQUIPMENT & SERVICES 1.7% Bausch and Lomb Inc., (i) Delayed Draw Term Loan,3.25% - 7.01%, 4/28/15 ................ United States 178,769 145,101 Parent Term Loan B, 7.012%, 4/28/15 .......................... United States 1,182,855 960,084 (g) Carestream Health Inc., Term Loan, 5.42% - 5.762%, 4/30/13 ...................................................... United States 1,360,265 895,507 Community Health Systems Inc., Term Loan, 5.06% - 5.973%, 7/25/14 ...................................................... United States 19,720,119 15,852,510 DaVita Inc., Term Loan B-1, 4.20% - 6.32%, 10/05/12 ............. United States 6,325,000 5,511,788 DJO Finance LLC, Term Loan B, 6.723% - 6.762%, 5/20/14 .......... United States 6,388,652 4,887,319 Fresenius Medical Care Holdings Inc., Term Loan B, 4.19% - 6.13%, 3/31/13 ....................................... United States 6,960,385 5,930,248 HCA Inc., Term Loan A-1, 5.262%, 11/19/12 .............................. United States 5,448,502 4,616,243 Term Loan B-1, 6.012%, 11/18/13 .............................. United States 8,395,068 6,949,017 LifePoint Hospitals Inc., Term Loan B, 4.435%, 4/15/12 .......... United States 2,012,042 1,696,403 -------------- 47,444,220 -------------- MATERIALS 1.3% Celanese U.S. Holdings LLC, Dollar Term Loan, 5.553%, 4/02/14 ...................................................... United States 7,264,375 5,904,898 Domtar Corp., Term Loan, 4.875%, 3/07/14 ........................ United States 2,478,688 2,005,259 Georgia-Pacific LLC, Additional Term Loan, 4.868% - 6.044%, 12/20/12 .............. United States 1,948,313 1,623,054 Term Loan B, 4.551% - 4.868%, 12/20/12 ....................... United States 10,646,059 8,868,763 Hexion Specialty Chemicals BV, Term Loan C-2, 6.063%, 5/03/13 ...................................................... Netherlands 1,197,293 833,116 Hexion Specialty Chemicals Inc., Term Loan C-1, 6.188%, 5/03/13 ...................................................... United States 5,511,674 3,835,205 (g) Huntsman International LLC, Term Loan B,4.97%, 4/19/14 .......... United States 514,286 447,245 Ineos U.S. Finance LLC, Term Loan B2, 5.727% - 5.952%, 12/16/13 ...................... United States 794,895 442,492 Term Loan C2, 6.227% - 6.452%, 12/23/14 ...................... United States 794,895 435,205 (g) Lyondell Chemical Co., Tranche B-1,8.04%, 12/20/14 .............. United States 2,500,000 1,503,400 Nalco Co., Term Loan B, 4.92% - 5.313%, 11/04/10 ................ United States 4,318,089 3,873,943 Rockwood Specialties Group Inc., Term Loan E, 4.618%, 7/30/12 ...................................................... United States 7,528,278 6,304,932 -------------- 36,077,512 --------------
Semiannual Report | 23 Franklin Strategic Series STATEMENT OF INVESTMENTS, OCTOBER 31, 2008 (UNAUDITED) (CONTINUED)
COUNTRY/ PRINCIPAL FRANKLIN STRATEGIC INCOME FUND ORGANIZATION AMOUNT(d) VALUE ------------------------------ -------------- ----------- -------------- (e, f) SENIOR FLOATING RATE INTERESTS (CONTINUED) MEDIA 2.3% CSC Holdings Inc. (Cablevision), Incremental Term Loan, 4.569%, 3/29/13 ...................................................... United States 8,212,729 $ 7,139,211 Dex Media West LLC, Term Loan B, 7.00% - 7.77%, 10/24/14 ..................................................... United States 6,295,026 3,506,329 DIRECTV Holdings LLC, Term Loan B, 4.618%, 4/13/13 .............. United States 6,387,135 5,682,775 Idearc Inc., Term Loan A, 4.62%, 11/17/13 ................................. United States 2,100,000 955,500 (g) Term Loan B, 5.12% - 5.77%, 11/17/14 ......................... United States 10,383,031 4,482,012 Insight Midwest Holdings, Term Loan B, 5.93%, 4/02/14 ........... United States 3,093,225 2,448,804 MCC Iowa, Tranche D-1 Term Loan, 3.89%, 1/31/15 ........................ United States 3,530,158 2,568,190 Tranche D-2 Term Loan, 3.89%, 1/31/15 ........................ United States 1,722,568 1,253,168 Mediacom LLC, Term Loan C, 3.64%, 1/31/15 ....................... United States 3,037,168 2,209,539 (g) Metro-Goldwyn-Mayer Inc., Term Loan B, 7.012%, 4/08/12 .......... United States 5,190,537 2,624,465 R.H. Donnelley Inc., Term Loan D-2, 6.75% - 7.52%, 6/30/11 ...................................................... United States 4,796,430 3,046,731 Regal Cinemas Corp., Term Loan, 5.262%, 10/27/13 ................ United States 10,212,892 7,722,080 Tribune Co., (g) Incremental Term Loan, 6.00%, 5/14/14 ........................ United States 6,457,526 2,389,284 Term Loan B, 6.00%, 5/16/14 .................................. United States 3,946,420 1,771,943 Univision Communications Inc., Initial Term Loan, 5.25%, 9/29/14 ...................................................... United States 17,260,000 9,380,810 UPC Financing Partnership, Term Loan N, 5.47%, 12/31/14 ......... Netherlands 9,230,000 6,622,525 -------------- 63,803,366 -------------- REAL ESTATE 0.2% Capital Automotive REIT, Term Loan B, 5.47%, 12/15/10 ........... United States 9,215,918 5,870,540 -------------- SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT 0.1% Fairchild Semiconductor Corp., Initial Term Loan, 5.262%, 6/26/13 ...................................................... United States 4,685,230 3,396,791 -------------- SOFTWARE & SERVICES 1.1% Affiliated Computer Services Inc., Additional Term Loan, 5.00% - 6.513%, 3/20/13 ................ United States 6,406,772 5,425,735 Term Loan B, 5.259%, 3/20/13 ................................. United States 595,170 504,035 Dealer Computer Services Inc. (Reynolds & Reynolds), First Lien Term Loan, 5.171%, 10/26/12 .................................. United States 6,920,220 4,498,143 First Data Corp., Term Loan B-2, 5.948% - 6.512%, 9/24/14 ....... United States 16,990,467 12,579,011 SunGard Data Systems Inc., New U.S. Term Loan, 4.553%, 2/28/14 ...................................................... United States 11,070,391 8,532,105 -------------- 31,539,029 -------------- TECHNOLOGY HARDWARE & EQUIPMENT 0.2% Flextronics International USA Inc., Term Loan A, 6.133% - 7.069%, 10/01/14 ....................... United States 5,155,040 3,956,493 Term Loan A-1, 7.069%, 10/01/14 .............................. United States 1,481,367 1,136,949 -------------- 5,093,442 --------------
24 | Semiannual Report Franklin Strategic Series STATEMENT OF INVESTMENTS, OCTOBER 31, 2008 (UNAUDITED) (CONTINUED)
COUNTRY/ PRINCIPAL FRANKLIN STRATEGIC INCOME FUND ORGANIZATION AMOUNT(d) VALUE ------------------------------ -------------- ----------- -------------- (e, f) SENIOR FLOATING RATE INTERESTS (CONTINUED) TELECOMMUNICATION SERVICES 0.7% Alltel Communications Inc., Term Loan B-3, 5.50%, 5/18/15 ....... United States 9,326,676 $ 8,927,382 (g) Hawaiian Telecom Communications Inc., Term Loan C, 6.262%, 6/01/14 ...................................................... United States 3,697,776 2,015,288 Windstream Corp., Tranche B-1, 6.05%, 7/17/13 ................... United States 10,672,837 9,329,394 -------------- 20,272,064 -------------- TRANSPORTATION 0.1% Avis Budget Car Rental LLC, Term Loan, 4.67%, 4/19/12 ........... United States 5,580,891 3,302,029 -------------- UTILITIES 0.4% Dynegy Holdings Inc., Term L/C Facility, 4.62%, 4/02/13 ......... United States 3,232,841 2,394,995 NRG Energy Inc., Credit Link, 2.70%, 2/01/13 .................................. United States 2,110,136 1,837,576 Term Loan, 5.26%, 2/01/13 .................................... United States 4,295,104 3,740,318 Texas Competitive Electric Holdings Co. LLC, Term Loan B-2, 6.303% - 7.64%, 10/10/14 ..................................... United States 2,788,584 2,187,488 -------------- 10,160,377 -------------- TOTAL SENIOR FLOATING RATE INTERESTS (COST $495,560,072) .......................................... 380,957,529 -------------- CORPORATE BONDS 30.8% AUTOMOBILES & COMPONENTS 0.6% Ford Motor Credit Co. LLC, senior note, 5.80%, 1/12/09 ............................................... United States 6,000,000 5,563,308 9.875%, 8/10/11 .............................................. United States 10,000,000 6,307,020 (j) TRW Automotive Inc., senior note, 144A, 7.25%, 3/15/17 .......... United States 8,000,000 4,640,000 -------------- 16,510,328 -------------- BANKS 1.8% (j, k) BNP Paribas, 144A, 7.195%, Perpetual ............................ France 10,000,000 6,386,980 Citigroup Capital XXI, pfd., junior sub. bond, 8.30%, 12/21/77 ..................................................... United States 12,000,000 8,238,840 HSBC Holdings PLC, sub. note, 6.50%, 9/15/37 .................... United Kingdom 10,000,000 7,889,440 (j) ICICI Bank Ltd., 144A, 6.625%, 10/03/12 ......................... India 6,000,000 4,051,200 Svensk Exportkredit AB, senior note, 7.625%, 6/30/14 ............ Sweden 3,780,000 NZD 2,300,415 UBS AG Stamford, senior note, 5.875%, 12/20/17 .................. United States 10,000,000 8,000,410 Wells Fargo & Co., senior note, 5.625%, 12/11/17 ................ United States 5,000,000 4,421,545 (k) Wells Fargo Capital XIII, pfd., 7.70%, Perpetual ................ United States 8,000,000 6,548,328 (k) Wells Fargo Capital XV, 9.75%, Perpetual ........................ United States 2,000,000 1,941,842 -------------- 49,779,000 -------------- CAPITAL GOODS 1.4% (j) Allison Transmission Inc., senior note, 144A, 11.00%, 11/01/15 ..................................................... United States 7,500,000 4,725,000 DRS Technologies Inc., senior sub. note, 6.875%, 11/01/13 ............................................. United States 1,500,000 1,492,500 7.625%, 2/01/18 .............................................. United States 5,000,000 4,975,000 L-3 Communications Corp., senior sub. note, 5.875%, 1/15/15 .............................................. United States 4,500,000 3,712,500 6.375%, 10/15/15 ............................................. United States 2,000,000 1,670,000
Semiannual Report | 25 Franklin Strategic Series STATEMENT OF INVESTMENTS, OCTOBER 31, 2008 (UNAUDITED) (CONTINUED)
COUNTRY/ PRINCIPAL FRANKLIN STRATEGIC INCOME FUND ORGANIZATION AMOUNT(d) VALUE ------------------------------ -------------- ----------- -------------- CORPORATE BONDS (CONTINUED) CAPITAL GOODS (CONTINUED) Nortek Inc., senior note, 10.00%, 12/01/13 ...................... United States 900,000 $ 666,000 RBS Global & Rexnord Corp., senior note, 9.50%, 8/01/14 ......... United States 8,000,000 5,560,000 RSC Equipment Rental Inc., senior note, 9.50%, 12/01/14 ......... United States 8,000,000 4,840,000 Terex Corp., senior sub. note, 8.00%, 11/15/17 .................. United States 7,500,000 5,587,500 TransDigm Inc., senior sub. note, 7.75%, 7/15/14 ................ United States 5,400,000 4,347,000 -------------- 37,575,500 -------------- COMMERCIAL & PROFESSIONAL SERVICES 0.7% Allied Waste North America Inc., senior secured note, 6.875%, 6/01/17 ...................................................... United States 3,600,000 3,150,000 ARAMARK Corp., senior note, 8.50%, 2/01/15 ...................... United States 7,500,000 6,450,000 Iron Mountain Inc., senior sub. note, 8.75%, 7/15/18 ............ United States 4,800,000 4,128,000 JohnsonDiversey Holdings Inc., senior disc. note, 10.67%, 5/15/13 ...................................................... United States 2,000,000 1,490,000 JohnsonDiversey Inc., senior sub. note, B, 9.625%, 5/15/12 ...... United States 4,000,000 3,580,000 -------------- 18,798,000 -------------- CONSUMER DURABLES & APPAREL 0.8% D.R. Horton Inc., senior note, 6.50%, 4/15/16 ................... United States 7,500,000 4,425,000 Jarden Corp., senior sub. note, 7.50%, 5/01/17 .................. United States 8,000,000 6,000,000 Jostens IH Corp., senior sub. note, 7.625%, 10/01/12 ............ United States 7,500,000 5,962,500 KB Home, senior note, 6.25%, 6/15/15 ............................................... United States 3,900,000 2,613,000 7.25%, 6/15/18 ............................................... United States 3,100,000 2,061,500 -------------- 21,062,000 -------------- CONSUMER SERVICES 1.3% (j) Fontainebleau Las Vegas, 144A, 10.25%, 6/15/15 .................. United States 6,500,000 910,000 Host Hotels & Resorts LP, senior note, 6.875%, 11/01/14 ............................................. United States 1,000,000 750,000 K, 7.125%, 11/01/13 .......................................... United States 6,000,000 4,740,000 M, 7.00%, 8/15/12 ............................................ United States 2,000,000 1,630,000 MGM MIRAGE, senior note, 6.625%, 7/15/15 .............................................. United States 11,000,000 6,490,000 7.50%, 6/01/16 ............................................... United States 1,000,000 595,000 OSI Restaurant Partners Inc., senior note, 10.00%, 6/15/15 ...... United States 4,250,000 1,020,000 Pinnacle Entertainment Inc., senior sub. note, 8.25%, 3/15/12 ............................................... United States 3,300,000 2,301,750 8.75%, 10/01/13 .............................................. United States 4,200,000 3,192,000 Royal Caribbean Cruises Ltd., senior deb., 7.25%, 3/15/18 ....... United States 9,000,000 5,805,000 Starwood Hotels & Resorts Worldwide Inc., 6.75%, 5/15/18 ........ United States 8,000,000 5,602,856 Station Casinos Inc., senior note, 6.00%, 4/01/12 .................................. United States 1,200,000 447,000 senior note, 7.75%, 8/15/16 .................................. United States 3,000,000 1,020,000 senior sub. note, 6.50%, 2/01/14 ............................. United States 500,000 56,875 senior sub. note, 6.875%, 3/01/16 ............................ United States 4,600,000 437,000 -------------- 34,997,481 --------------
26 | Semiannual Report Franklin Strategic Series STATEMENT OF INVESTMENTS, OCTOBER 31, 2008 (UNAUDITED) (CONTINUED)
COUNTRY/ PRINCIPAL FRANKLIN STRATEGIC INCOME FUND ORGANIZATION AMOUNT(d) VALUE ------------------------------ -------------- ----------- -------------- CORPORATE BONDS (CONTINUED) DIVERSIFIED FINANCIALS 3.5% American Express Co., senior note, 7.00%, 3/19/18 ............... United States 8,000,000 $ 6,176,152 American Express Credit Corp., C, 7.30%, 8/20/13 ................ United States 4,000,000 3,535,452 Bank of America Corp., (k) pfd., sub. bond, M, 8.125%, Perpetual ........................ United States 14,000,000 10,866,520 senior note, 5.65%, 5/01/18 .................................. United States 5,000,000 4,308,220 Capmark Financial Group Inc., senior note, 6.30%, 5/10/17 ....... United States 5,000,000 1,110,375 Citigroup Inc., senior note, 6.125%, 11/21/17 ................... United States 5,000,000 4,308,675 General Electric Capital Corp., senior note, A, 8.50%, 4/06/18 ...................................................... United States 170,000,000 MXN 10,132,313 GMAC LLC, 7.25%, 3/02/11 ............................................... United States 4,500,000 2,771,339 6.875%, 9/15/11 .............................................. United States 7,000,000 4,103,449 6.875%, 8/28/12 .............................................. United States 4,000,000 2,191,624 The Goldman Sachs Group Inc., sub. note, 6.75%, 10/01/37 ........ United States 12,500,000 8,145,087 JP Morgan Chase & Co., 6.00%, 1/15/18 ........................... United States 5,000,000 4,496,120 (k) JPMorgan Chase & Co., junior sub. note, 1, 7.90%, Perpetual ..... United States 5,000,000 4,062,630 JPMorgan Chase Capital XXII, sub. bond, 6.45%, 2/02/37 .......... United States 14,000,000 9,775,430 (l) Lehman Brothers Holdings Inc., senior note, 6.20%, 9/26/14 ...... United States 16,000,000 2,160,000 Merrill Lynch & Co. Inc., senior note, 6.40%, 8/28/17 ........... United States 10,000,000 8,468,470 Morgan Stanley, senior note, 6.00%, 4/28/15 ..................... United States 12,000,000 9,767,700 -------------- 96,379,556 -------------- ENERGY 3.2% Baker Hughes Inc., senior note, 7.50%, 11/15/18 ................. United States 8,000,000 7,891,576 Canadian Natural Resources Ltd., 5.90%, 2/01/18 ................. Canada 7,500,000 6,280,200 Chesapeake Energy Corp., senior note, 7.625%, 7/15/13 .............................................. United States 1,500,000 1,282,500 6.625%, 1/15/16 .............................................. United States 3,500,000 2,751,875 6.25%, 1/15/18 ............................................... United States 6,000,000 4,290,000 7.25%, 12/15/18 .............................................. United States 1,000,000 760,000 Compagnie Generale de Geophysique-Veritas, senior note, 7.50%, 5/15/15 ............................................... France 5,700,000 3,847,500 7.75%, 5/15/17 ............................................... France 1,800,000 1,215,000 Copano Energy LLC, senior note, 8.125%, 3/01/16 .............................................. United States 7,000,000 5,180,000 (j) 144A, 7.75%, 6/01/18 ......................................... United States 1,000,000 695,000 (j) Kazmunaigaz Finance SUB BV, 144A, 9.125%, 7/02/18 ............... Kazakhstan 6,500,000 4,257,500 Mariner Energy Inc., senior note, 7.50%, 4/15/13 ................ United States 7,500,000 5,212,500 MarkWest Energy Partners LP, senior note, 6.875%, 11/01/14 ............................................. United States 7,000,000 5,092,500 8.75%, 4/15/18 ............................................... United States 800,000 580,000 (j) Petroplus Finance Ltd., senior note, 144A, 6.75%, 5/01/14 ....... Switzerland 8,000,000 5,400,000 Plains Exploration & Production Co., senior note, 7.625%, 6/01/18 ...................................................... United States 8,800,000 5,808,000 Quicksilver Resources Inc., senior note, 8.25%, 8/01/15 ......... United States 8,000,000 5,600,000 (j) SandRidge Energy Inc., senior note, 144A, 8.00%, 6/01/18 ........ United States 3,700,000 2,479,000 Tesoro Corp., senior note, 6.25%, 11/01/12 .............................................. United States 500,000 385,000 6.50%, 6/01/17 ............................................... United States 10,000,000 6,750,000
Semiannual Report | 27 Franklin Strategic Series STATEMENT OF INVESTMENTS, OCTOBER 31, 2008 (UNAUDITED) (CONTINUED)
COUNTRY/ PRINCIPAL FRANKLIN STRATEGIC INCOME FUND ORGANIZATION AMOUNT(d) VALUE ------------------------------ -------------- ----------- -------------- CORPORATE BONDS (CONTINUED) ENERGY (CONTINUED) Weatherford International Ltd., senior note, 6.00%, 3/15/18 ..... United States 8,000,000 $ 6,124,856 The Williams Cos. Inc., senior note, 7.625%, 7/15/19 .............................................. United States 3,000,000 2,479,206 7.875%, 9/01/21 .............................................. United States 3,400,000 2,810,212 8.75%, 3/15/32 ............................................... United States 1,300,000 1,061,797 -------------- 88,234,222 -------------- FOOD & STAPLES RETAILING 0.2% The Kroger Co., 6.15%, 1/15/20 .................................. United States 7,500,000 6,173,565 -------------- FOOD, BEVERAGE & TOBACCO 1.5% Bottling Group LLC, senior note, 6.95%, 3/15/14 ................. United States 8,000,000 8,185,944 (j) Cargill Inc., 144A, 5.20%, 1/22/13 ............................................... United States 500,000 455,089 6.00%, 11/27/17 .............................................. United States 7,000,000 5,644,268 Dean Foods Inc., senior note, 7.00%, 6/01/16 .................... United States 5,100,000 3,901,500 Philip Morris International Inc., 5.65%, 5/16/18 ................ United States 12,000,000 10,290,744 Reynolds American Inc., senior secured note, 7.625%, 6/01/16 ...................................................... United States 8,500,000 6,989,473 Smithfield Foods Inc., senior note, 7.75%, 5/15/13 ...................................................... United States 4,200,000 2,835,000 7/01/17 ...................................................... United States 3,800,000 2,413,000 -------------- 40,715,018 -------------- HEALTH CARE EQUIPMENT & SERVICES 2.3% Coventry Health Care Inc., senior note, 6.30%, 8/15/14 ............................................... United States 5,200,000 3,661,226 5.95%, 3/15/17 ............................................... United States 2,800,000 1,810,220 DaVita Inc., senior sub. note, 7.25%, 3/15/15 ................... United States 8,000,000 6,880,000 FMC Finance III SA, senior note, 6.875%, 7/15/17 ................ Germany 7,500,000 6,000,000 HCA Inc., senior note, 6.50%, 2/15/16 .................................. United States 3,000,000 1,777,500 senior secured note, 9.125%, 11/15/14 ........................ United States 10,000,000 8,625,000 Medco Health Solutions Inc., 7.125%, 3/15/18 .................... United States 8,000,000 6,713,144 Quest Diagnostics Inc., 6.40%, 7/01/17 .......................... United States 8,500,000 6,925,868 Tenet Healthcare Corp., senior note, 6.375%, 12/01/11 ............................................. United States 5,000,000 4,325,000 9.875%, 7/01/14 .............................................. United States 2,500,000 2,056,250 (h) United Surgical Partners International Inc., senior sub. note, PIK, 9.25%, 5/01/17 .......................................... United States 7,500,000 4,856,250 (f, h) U.S. Oncology Holdings Inc., senior note, PIK, FRN, 8.334%, 3/15/12 ...................................................... United States 8,060,331 5,601,930 Vanguard Health Holding Co. II LLC, senior sub. note, 9.00%, 10/01/14 ..................................................... United States 7,000,000 5,845,000 -------------- 65,077,388 -------------- INSURANCE 0.3% (j) American International Group Inc., 144A, 8.25%, 8/15/18 ......................................... United States 3,000,000 1,237,644 junior sub. deb., 144A, FRN, 8.175%, 5/15/58 ................. United States 4,000,000 639,092
28 | Semiannual Report Franklin Strategic Series STATEMENT OF INVESTMENTS, OCTOBER 31, 2008 (UNAUDITED) (CONTINUED)
COUNTRY/ PRINCIPAL FRANKLIN STRATEGIC INCOME FUND ORGANIZATION AMOUNT(d) VALUE ------------------------------ -------------- ----------- -------------- CORPORATE BONDS (CONTINUED) INSURANCE (CONTINUED) (f, j) MetLife Capital Trust X, secured bond, 144A, FRN, 9.25%, 4/08/68 ...................................................... United States 1,900,000 $ 1,182,788 MetLife Inc., (f) junior sub. note, FRN, 6.40%, 12/15/66 ....................... United States 8,000,000 3,982,880 senior note, A, 6.817%, 8/15/18 .............................. United States 2,000,000 1,726,056 -------------- 8,768,460 -------------- MATERIALS 2.4% Crown Americas Inc., senior note, 7.75%, 11/15/15 ............... United States 7,500,000 6,581,250 Freeport-McMoRan Copper & Gold Inc., senior note, 8.25%, 4/01/15 ............................................... United States 2,000,000 1,601,852 8.375%, 4/01/17 .............................................. United States 8,000,000 6,288,688 Huntsman International LLC, senior sub. note, 7.875%, 11/15/14 ..................................................... United States 6,000,000 5,370,000 (j) Ineos Group Holdings PLC, senior secured note, 144A, 8.50%, 2/15/16 ...................................................... United Kingdom 8,000,000 3,000,000 (j) MacDermid Inc., senior sub. note, 144A, 9.50%, 4/15/17 .......... United States 7,000,000 3,745,000 Nalco Co., senior sub. note, 8.875%, 11/15/13 ................... United States 7,500,000 6,487,500 NewPage Corp., senior secured note, 10.00%, 5/01/12 ............. United States 7,500,000 5,137,500 Novelis Inc., senior note, 7.25%, 2/15/15 ....................... Canada 8,000,000 5,400,000 Owens-Brockway Glass Container Inc., senior note, 6.75%, 12/01/14 ..................................................... United States 7,000,000 6,090,000 Rio Tinto Finance USA Ltd., 5.875%, 7/15/13 ..................... Australia 10,000,000 8,544,800 RPM International Inc., 6.50%, 2/15/18 .......................... United States 7,500,000 6,379,950 Smurfit Kappa Funding PLC, senior sub. note, 7.75%, 4/01/15 ...................................................... Ireland 2,600,000 1,859,000 -------------- 66,485,540 -------------- MEDIA 3.6% (j) British Sky Broadcasting Group PLC, senior note, 144A, 6.10%, 2/15/18 ...................................................... United Kingdom 8,000,000 6,764,688 CanWest Media Inc., senior sub. note, 8.00%, 9/15/12 ............ Canada 7,500,000 4,837,500 CCH I LLC, senior secured note, 11.00%, 10/01/15 ................ United States 4,000,000 1,820,000 CCH II LLC, senior note, 10.25%, 9/15/10 ........................ United States 9,000,000 6,300,000 Comcast Corp., senior note, 6.30%, 11/15/17 ..................... United States 7,500,000 6,499,260 CSC Holdings Inc., senior deb., 7.625%, 7/15/18 ................................. United States 6,000,000 4,335,000 senior note, 6.75%, 4/15/12 .................................. United States 600,000 522,000 Dex Media West Finance, senior sub. note, 9.875%, 8/15/13 ....... United States 4,000,000 1,510,000 (j) DIRECTV Holdings LLC, senior note, 144A, 7.625%, 5/15/16 ........ United States 10,000,000 8,450,000 EchoStar DBS Corp., senior note, 6.375%, 10/01/11 ............................................. United States 5,500,000 4,908,750 7.125%, 2/01/16 .............................................. United States 3,500,000 2,826,250 Idearc Inc., senior note, 8.00%, 11/15/16 ....................... United States 9,000,000 1,293,750 Lamar Media Corp., senior sub. note, 7.25%, 1/01/13 ............................................... United States 6,500,000 5,135,000 B, 6.625%, 8/15/15 ........................................... United States 1,500,000 1,110,000 Liberty Media Corp., senior note, 5.70%, 5/15/13 ................ United States 9,000,000 6,306,138 LIN Television Corp., senior sub. note, 6.50%, 5/15/13 .......... United States 6,000,000 3,390,000
Semiannual Report | 29 Franklin Strategic Series STATEMENT OF INVESTMENTS, OCTOBER 31, 2008 (UNAUDITED) (CONTINUED)
COUNTRY/ PRINCIPAL FRANKLIN STRATEGIC INCOME FUND ORGANIZATION AMOUNT(d) VALUE ------------------------------ -------------- ----------- -------------- CORPORATE BONDS (CONTINUED) MEDIA (CONTINUED) Quebecor Media Inc., senior note, 7.75%, 3/15/16 ................ Canada 8,000,000 $ 5,580,000 R.H. Donnelley Corp., senior disc. note, A-1, 6.875%, 1/15/13 ...................... United States 100,000 23,500 senior disc. note, A-2, 6.875%, 1/15/13 ...................... United States 400,000 94,000 senior note, A-3, 8.875%, 1/15/16 ............................ United States 7,500,000 1,612,500 Radio One Inc., senior sub. note, 6.375%, 2/15/13 ............... United States 6,500,000 2,957,500 Time Warner Cable Inc., senior note, 6.75%, 7/01/18 ............. United States 9,000,000 7,740,900 Time Warner Inc., 5.875%, 11/15/16 .............................. United States 9,000,000 7,221,258 (h, j) Univision Communications Inc., senior note, 144A, PIK, 9.75%, 3/15/15 ...................................................... United States 8,500,000 1,785,000 Viacom Inc., senior note, 6.875%, 4/30/36 ....................... United States 8,000,000 5,585,632 -------------- 98,608,626 -------------- REAL ESTATE 0.1% Forest City Enterprises Inc., senior note, 7.625%, 6/01/15 ...... United States 5,000,000 3,525,000 -------------- RETAILING 0.4% Dollar General Corp., senior note, 10.625%, 7/15/15 ............. United States 7,500,000 6,937,500 Michaels Stores Inc., senior note, 10.00%, 11/01/14 ............. United States 8,000,000 3,640,000 -------------- 10,577,500 -------------- SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT 0.1% Freescale Semiconductor Inc., senior note, 8.875%, 12/15/14 ..................................................... United States 4,400,000 1,980,000 -------------- SOFTWARE & SERVICES 0.3% SunGard Data Systems Inc., senior note, 9.125%, 8/15/13 ................................. United States 5,000,000 4,175,000 senior sub. note, 10.25%, 8/15/15 ............................ United States 7,000,000 4,935,000 -------------- 9,110,000 -------------- TECHNOLOGY HARDWARE & EQUIPMENT 0.5% Celestica Inc., senior sub. note, 7.875%, 7/01/11 .............................................. Canada 4,100,000 3,710,500 7.625%, 7/01/13 .............................................. Canada 1,400,000 1,141,000 (j) Nortel Networks Ltd., senior note, 144A, 10.75%, 7/15/16 ........ Canada 8,000,000 4,260,000 Sanmina-SCI Corp., (f, j) senior note, 144A, FRN, 5.569%, 6/15/14 ...................... United States 2,000,000 1,550,000 senior sub. note, 6.75%, 3/01/13 ............................. United States 4,300,000 2,945,500 senior sub. note, 8.125%, 3/01/16 ............................ United States 1,700,000 1,079,500 -------------- 14,686,500 -------------- TELECOMMUNICATION SERVICES 2.7% (j) American Tower Corp., senior note, 144A, 7.00%, 10/15/17 ........ United States 7,500,000 6,562,500 (j) Digicel Group Ltd., senior note, 144A, 8.875%, 1/15/15 .......... Jamaica 8,000,000 4,520,000 Embarq Corp., senior note, 7.082%, 6/01/16 ...................... United States 7,500,000 5,782,830 Inmarsat Finance II PLC, senior note, zero cpn. to 11/15/08, 10.375% thereafter, 11/15/12 ................................. United Kingdom 7,500,000 6,000,000 Intelsat Bermuda Ltd., senior note, 11.25%, 6/15/16 ............. Bermuda 2,000,000 1,720,000 (j) Intelsat Subsidiary Holding Co. Ltd., senior note, 144A, 8.50%, 1/15/13 ...................................................... Bermuda 8,000,000 7,000,000
30 | Semiannual Report Franklin Strategic Series STATEMENT OF INVESTMENTS, OCTOBER 31, 2008 (UNAUDITED) (CONTINUED)
COUNTRY/ PRINCIPAL FRANKLIN STRATEGIC INCOME FUND ORGANIZATION AMOUNT(d) VALUE ------------------------------ -------------- ----------- -------------- CORPORATE BONDS (CONTINUED) TELECOMMUNICATION SERVICES (CONTINUED) MetroPCS Wireless Inc., senior note, 9.25%, 11/01/14 ............ United States 8,000,000 $ 6,700,000 Millicom International Cellular SA, senior note, 10.00%, 12/01/13 ..................................................... Luxembourg 8,000,000 6,280,000 Qwest Communications International Inc., senior note, 7.50%, 2/15/14 ...................................................... United States 7,500,000 5,137,500 Telecom Italia Capital, senior note, 4.95%, 9/30/14 ............................................... Italy 8,000,000 5,585,600 6.999%, 6/04/18 .............................................. Italy 1,500,000 1,090,161 Verizon Communications Inc., 6.10%, 4/15/18 ..................... United States 4,000,000 3,504,812 Verizon New York Inc., senior deb., A, 6.875%, 4/01/12 ........................................... United States 5,000,000 4,730,775 B, 7.375%, 4/01/32 ........................................... United States 1,500,000 1,173,213 (j) Wind Acquisition Finance SA, senior note, 144A, 10.75%, 12/01/15 ..................................................... Italy 8,000,000 6,200,000 Windstream Corp., senior note, 8.625%, 8/01/16 .................. United States 3,700,000 2,812,000 -------------- 74,799,391 -------------- TRANSPORTATION 0.2% (j) Ceva Group PLC, senior note, 144A, 10.00%, 9/01/14 .............. United Kingdom 7,000,000 5,075,000 -------------- UTILITIES 2.9% The AES Corp., senior note, 8.00%, 10/15/17 .............................................. United States 8,000,000 6,200,000 (j) 144A, 8.00%, 6/01/20 ......................................... United States 2,000,000 1,480,000 CenterPoint Energy Inc., senior note, 6.125%, 11/01/17 ............................................. United States 7,500,000 5,768,835 6.50%, 5/01/18 ............................................... United States 1,500,000 1,138,183 Dominion Resources Inc., 6.40%, 6/15/18 ......................... United States 8,000,000 6,798,016 Dynegy Holdings Inc., senior note, 8.375%, 5/01/16 .............. United States 7,500,000 5,587,500 (j) E.ON International Finance BV, 144A, 5.80%, 4/30/18 ............. Germany 8,000,000 6,849,512 Edison Mission Energy, senior note, 7.00%, 5/15/17 .............. United States 7,500,000 5,971,875 (j) Intergen NV, senior secured note, 144A, 9.00%, 6/30/17 .......... Netherlands 7,000,000 5,635,000 Mirant North America LLC, senior note, 7.375%, 12/31/13 ......... United States 8,000,000 7,030,000 NRG Energy Inc., senior note, 7.25%, 2/01/14 ............................................... United States 1,500,000 1,316,250 7.375%, 2/01/16 .............................................. United States 6,000,000 5,190,000 7.375%, 1/15/17 .............................................. United States 2,500,000 2,168,750 Pacific Gas & Electric Co., senior note, 8.25%, 10/15/18 ........ United States 7,800,000 7,962,989 PNM Resources Inc., senior note, 9.25%, 5/15/15 ................. United States 2,500,000 2,062,500 (j) Texas Competitive Electric Holdings Co. LLC, senior note, 144A, 10.25%, 11/01/15 ............................................. United States 11,000,000 8,442,500 -------------- 79,601,910 -------------- TOTAL CORPORATE BONDS (COST $1,148,128,644) ..................... 848,519,985 -------------- CONVERTIBLE BONDS 0.4% DIVERSIFIED FINANCIALS 0.2% Merrill Lynch & Co. Inc., cvt., senior note, zero cpn., 3/13/32 ...................................................... United States 7,000,000 7,168,560 --------------
Semiannual Report | 31 Franklin Strategic Series STATEMENT OF INVESTMENTS, OCTOBER 31, 2008 (UNAUDITED) (CONTINUED)
COUNTRY/ PRINCIPAL FRANKLIN STRATEGIC INCOME FUND ORGANIZATION AMOUNT(d) VALUE ------------------------------ -------------- ----------- -------------- CONVERTIBLE BONDS (CONTINUED) PHARMACEUTICALS, BIOTECHNOLOGY & LIFE SCIENCES 0.2% Mylan Inc., cvt., senior note, 1.25%, 3/15/12 ................... United States 7,000,000 $ 4,646,250 -------------- TOTAL CONVERTIBLE BONDS (COST $14,048,928) ...................... 11,814,810 -------------- ASSET-BACKED SECURITIES AND COMMERCIAL MORTGAGE-BACKED SECURITIES 6.2% BANKS 3.4% (f) Banc of America Commercial Mortgage Inc., 2005-6, A4, FRN, 5.403%, 9/10/47 .............................................. United States 8,000,000 6,443,980 (f) Citibank Credit Card Issuance Trust, 2005-A3, A3, FRN, 3.345%, 4/24/14 .............................................. United States 13,000,000 10,905,409 Citigroup/Deutsche Bank Commercial Mortgage Trust, (f) 2005-CD1, A4, FRN, 5.40%, 7/15/44 ......................... United States 5,440,000 4,438,468 2006-CD3, A5, 5.617%, 10/15/48 ............................ United States 22,000,000 17,090,722 Countrywide Asset-Backed Certificates, 2004-7, AF4, 4.774%, 8/25/32 .............................. United States 225,276 222,790 2005-11, AF4, 5.21%, 3/25/34 .............................. United States 2,800,000 2,158,017 GE Capital Commercial Mortgage Corp., 2003-C1, A4, 4.819%, 1/10/38 ...................................................... United States 1,827,831 1,604,684 Greenwich Capital Commercial Funding Corp., 2004-GG1, A7, 5.317%, 6/10/36 ............................. United States 10,714,000 9,229,462 2005-GG5, A5, 5.224%, 4/10/37 ............................. United States 9,280,000 7,501,094 (f) 2006-GG7, A4, FRN, 5.913%, 7/10/38 ........................ United States 12,000,000 9,603,763 GS Mortgage Securities Corp. II, 2003-C1, A3, 4.608%, 1/10/40 .............................. United States 3,965,000 3,438,412 (f) 2006-GG6, A4, FRN, 5.553%, 4/10/38 ........................ United States 10,000,000 7,978,481 2006-GG8, A4, 5.56%, 11/10/39 ............................. United States 5,000,000 3,867,746 (f) LB-UBS Commercial Mortgage Trust, 2002-C2, A4, FRN, 5.594%, 6/15/31 .............................................. United States 5,000,000 4,623,730 (f) Morgan Stanley Capital I Trust, 2004-IQ7, A4, FRN, 5.431%, 6/15/38 ...................................................... United States 7,000,000 6,013,835 -------------- 95,120,593 -------------- DIVERSIFIED FINANCIALS 2.8% (f) American Express Credit Account Master Trust, 2004-4, A, FRN, 2.578%, 3/15/12 ........................... United States 3,000,000 2,900,511 2008-1, A, FRN, 2.938%, 8/15/13 ........................... United States 8,200,000 7,359,507 (f) Chase Issuance Trust, 2005-A9, A9, FRN, 2.508%, 11/15/11 ........................ United States 2,000,000 1,925,867 2007-A9, A9, FRN, 2.518%, 6/16/14 ......................... United States 12,000,000 9,984,881 sub. note, 2006-A7, A, FRN, 2.498%, 2/15/13 ............... United States 4,000,000 3,608,946 Citigroup Commercial Mortgage Trust, 2008-C7, A4, 6.095%, 12/10/49 ..................................................... United States 19,150,000 14,835,021 JPMorgan Chase Commercial Mortgage Securities Corp., (f) 2004-CB9, A4, FRN, 5.377%, 6/12/41 ........................ United States 8,871,306 7,548,284 2004-LN2, A2, 5.115%, 7/15/41 ............................. United States 807,292 671,551 (f) 2005-LDP5, A4, FRN, 5.179%, 12/15/44 ...................... United States 11,700,000 9,412,076 (j) Keystone Owner Trust, 1997-P3, M2, 144A, 7.98%, 12/25/24 ..................................................... United States 13,065 12,974
32 | Semiannual Report Franklin Strategic Series STATEMENT OF INVESTMENTS, OCTOBER 31, 2008 (UNAUDITED) (CONTINUED)
COUNTRY/ PRINCIPAL FRANKLIN STRATEGIC INCOME FUND ORGANIZATION AMOUNT(d) VALUE ------------------------------ -------------- ---------------- -------------- ASSET-BACKED SECURITIES AND COMMERCIAL MORTGAGE-BACKED SECURITIES (CONTINUED) DIVERSIFIED FINANCIALS (CONTINUED) (f) MBNA Credit Card Master Note Trust, 2005-A4, A4, FRN, 2.528%, 11/15/12 ............................................. United States 6,000,000 $ 5,567,742 (f) MBNA Master Credit Card Trust II, 1997-B, A, FRN, 2.648%, 8/15/14 ...................................................... United States 15,000,000 12,733,225 Residential Asset Securities Corp., 2004-KS1, AI4, 4.213%, 4/25/32 ...................................................... United States 271,196 258,651 -------------- 76,819,236 -------------- TOTAL ASSET-BACKED SECURITIES AND COMMERCIAL MORTGAGE-BACKED SECURITIES (COST $207,145,926) ............... 171,939,829 -------------- MORTGAGE-BACKED SECURITIES 14.6% (f) FEDERAL HOME LOAN MORTGAGE CORP. (FHLMC) ADJUSTABLE RATE 0.0%(a) FHLMC, 6.065%, 1/01/33 .......................................... United States 324,367 329,407 -------------- FEDERAL HOME LOAN MORTGAGE CORP. (FHLMC) FIXED RATE 5.7% FHLMC Gold 15 Year, 4.50%, 10/01/18 - 9/01/19 ................... United States 5,677,668 5,429,795 FHLMC Gold 15 Year, 5.00%, 12/01/17 - 7/01/22 ................... United States 12,423,282 12,166,924 FHLMC Gold 15 Year, 5.50%, 7/01/17 - 2/01/19 .................... United States 1,109,218 1,111,306 FHLMC Gold 15 Year, 6.50%, 4/01/11 .............................. United States 446 458 FHLMC Gold 15 Year, 7.00%, 1/01/09 - 9/01/11 .................... United States 626 655 FHLMC Gold 30 Year, 5.00%, 3/01/34 - 6/01/38 .................... United States 23,398,211 22,164,694 FHLMC Gold 30 Year, 5.50%, 6/01/33 - 7/01/38 .................... United States 50,867,498 49,651,720 FHLMC Gold 30 Year, 6.00%, 6/01/33 - 6/01/38 .................... United States 38,970,218 38,937,152 FHLMC Gold 30 Year, 6.50%, 10/01/21 - 8/01/38 ................... United States 26,395,631 26,776,506 FHLMC Gold 30 Year, 7.00%, 9/01/21 - 8/01/32 .................... United States 228,264 234,677 FHLMC Gold 30 Year, 7.50%, 4/01/24 - 1/01/31 .................... United States 39,771 42,108 FHLMC Gold 30 Year, 8.00%, 11/01/25 - 1/01/26 ................... United States 810 859 FHLMC Gold 30 Year, 9.00%, 12/01/24 ............................. United States 416 458 -------------- 156,517,312 -------------- (f) FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA) ADJUSTABLE RATE 0.1% FNMA, 4.537%, 4/01/20 ........................................... United States 311,051 310,591 FNMA, 4.617%, 12/01/34 .......................................... United States 1,469,707 1,507,221 -------------- 1,817,812 -------------- FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA) FIXED RATE 8.4% FNMA 15 Year, 4.50%, 3/01/20 .................................... United States 1,242,879 1,186,641 FNMA 15 Year, 5.00%, 1/01/18 - 6/01/18 .......................... United States 1,597,655 1,575,905 FNMA 15 Year, 5.50%, 3/01/14 - 4/01/21 .......................... United States 5,899,244 5,891,651 FNMA 15 Year, 6.00%, 4/01/13 - 10/01/16 ......................... United States 211,358 213,887 FNMA 15 Year, 6.50%, 4/01/11 - 6/01/13 .......................... United States 16,723 17,127 FNMA 15 Year, 7.50%, 10/01/14 ................................... United States 15,554 16,393 FNMA 30 Year, 5.00%, 4/01/34 - 6/01/38 .......................... United States 59,262,574 56,175,787 FNMA 30 Year, 5.50%, 9/01/33 - 6/01/37 .......................... United States 55,677,540 54,461,380 FNMA 30 Year, 6.00%, 6/01/34 - 8/01/38 .......................... United States 82,731,720 82,768,324 FNMA 30 Year, 6.50%, 1/01/24 - 10/01/37 ......................... United States 30,545,806 30,997,317 FNMA 30 Year, 7.50%, 12/01/28 - 10/01/29 ........................ United States 37,335 39,267
Semiannual Report | 33 Franklin Strategic Series STATEMENT OF INVESTMENTS, OCTOBER 31, 2008 (UNAUDITED) (CONTINUED)
COUNTRY/ PRINCIPAL FRANKLIN STRATEGIC INCOME FUND ORGANIZATION AMOUNT(d) VALUE ------------------------------ -------------- ---------------- -------------- MORTGAGE-BACKED SECURITIES (CONTINUED) FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA) FIXED RATE (CONTINUED) FNMA 30 Year, 8.00%, 1/01/25 - 6/01/26 .......................... United States 18,773 $ 19,848 FNMA 30 Year, 8.50%, 7/01/25 .................................... United States 736 793 -------------- 233,364,320 -------------- GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA) FIXED RATE 0.4% GNMA I SF 30 Year, 5.00%, 6/15/34 - 7/15/34 ..................... United States 1,359,072 1,299,976 GNMA I SF 30 Year, 5.50%, 2/15/33 - 6/15/36 ..................... United States 4,274,214 4,201,669 GNMA I SF 30 Year, 6.00%, 8/15/36 ............................... United States 744,867 746,055 GNMA I SF 30 Year, 6.50%, 3/15/24 - 3/15/32 ..................... United States 310,671 315,643 GNMA I SF 30 Year, 7.00%, 11/15/27 - 5/15/28 .................... United States 53,914 55,455 GNMA I SF 30 Year, 7.50%, 9/15/23 - 5/15/27 ..................... United States 18,155 19,196 GNMA I SF 30 Year, 8.00%, 2/15/25 - 9/15/27 ..................... United States 17,850 19,103 GNMA I SF 30 Year, 8.50%, 8/15/24 ............................... United States 137 148 GNMA I SF 30 Year, 9.00%, 1/15/25 ............................... United States 830 905 GNMA I SF 30 Year, 9.50%, 6/15/25 ............................... United States 716 797 GNMA II SF 30 Year, 5.00%, 9/20/33 - 11/20/33 ................... United States 1,905,037 1,822,944 GNMA II SF 30 Year, 5.50%, 6/20/34 .............................. United States 1,007,268 990,069 GNMA II SF 30 Year, 6.00%, 11/20/34 ............................. United States 888,943 889,448 GNMA II SF 30 Year, 6.50%, 7/20/28 - 12/20/31 ................... United States 381,740 386,754 GNMA II SF 30 Year, 7.50%, 8/20/16 - 4/20/32 .................... United States 208,239 218,987 -------------- 10,967,149 -------------- TOTAL MORTGAGE-BACKED SECURITIES (COST $407,453,284) .......................................... 402,996,000 -------------- U.S. GOVERNMENT AND AGENCY SECURITIES 8.4% FHLMC, 5.00%, 2/16/17 ............................................... United States 11,000,000 10,875,887 5.625%, 3/15/11 .............................................. United States 5,600,000 5,927,488 senior note, 4.75%, 3/5/12 ................................... United States 22,000,000 22,747,516 FNMA, 4.125%, 4/15/14 ........................................... United States 10,100,000 10,026,512 U.S. Treasury Bond, 4.50%, 2/15/16 ............................................... United States 13,100,000 13,817,435 4.50%, 5/15/17 ............................................... United States 5,000,000 5,208,595 5.25%, 2/15/29 ............................................... United States 1,750,000 1,855,957 6.25%, 8/15/23 ............................................... United States 6,800,000 7,771,659 6.88%, 8/15/25 ............................................... United States 1,000,000 1,243,594 7.125%, 2/15/23 .............................................. United States 10,200,000 12,534,056 7.875%, 2/15/21 .............................................. United States 7,200,000 9,209,815 U.S. Treasury Note, 3.375%, 10/15/09 ............................................. United States 500,000 509,376 3.375%, 6/30/13 .............................................. United States 13,000,000 13,398,138 3.50%, 12/15/09 .............................................. United States 4,500,000 4,607,581 3.50%, 5/31/13 ............................................... United States 16,000,000 16,616,256 4.00%, 8/31/09 ............................................... United States 7,000,000 7,152,579 4.00%, 4/15/10 ............................................... United States 1,100,000 1,140,649 4.00%, 11/15/12 .............................................. United States 1,850,000 1,981,235 4.125%, 8/15/10 .............................................. United States 2,900,000 3,041,604
34 | Semiannual Report Franklin Strategic Series STATEMENT OF INVESTMENTS, OCTOBER 31, 2008 (UNAUDITED) (CONTINUED)
COUNTRY/ PRINCIPAL FRANKLIN STRATEGIC INCOME FUND ORGANIZATION AMOUNT(d) VALUE ------------------------------ -------------- ---------------- -------------- U.S. GOVERNMENT AND AGENCY SECURITIES (CONTINUED) U.S. Treasury Note, (continued) 4.25%, 8/15/13 ............................................... United States 1,000,000 $ 1,071,329 4.25%, 8/15/14 ............................................... United States 7,600,000 8,162,286 4.25%, 11/15/14 .............................................. United States 700,000 750,915 4.375%, 8/15/12 .............................................. United States 2,600,000 2,821,814 4.50%, 9/30/11 ............................................... United States 2,500,000 2,693,165 4.625%, 11/15/16 ............................................. United States 6,700,000 7,029,245 4.625%, 2/15/17 .............................................. United States 12,000,000 12,612,192 4.75%, 8/15/17 ............................................... United States 7,000,000 7,414,533 4.875%, 7/31/11 .............................................. United States 7,250,000 7,870,216 5.00%, 8/15/11 ............................................... United States 2,100,000 2,298,024 (m) Index Linked, 1.625%, 1/15/15 ................................ United States 3,442,575 3,013,599 (m) Index Linked, 2.00%, 1/15/14 ................................. United States 24,191,323 22,157,752 (m) Index Linked, 2.50%, 7/15/16 ................................. United States 4,339,937 3,996,474 -------------- TOTAL U.S. GOVERNMENT AND AGENCY SECURITIES (COST $233,202,083) .......................................... 231,557,476 -------------- FOREIGN GOVERNMENT AND AGENCY SECURITIES 13.5% European Investment Bank, senior note, 1612/37, 6.50%, 9/10/14 ...................................................... Supranational(n) 12,905,000 NZD 7,613,639 (f, o) Government of Argentina, senior bond, FRN, 3.127%, 8/03/12 ...................................................... Argentina 89,378,000 16,183,343 Government of Indonesia, 10.00%, 7/15/17 .............................................. Indonesia 10,200,000,000 IDR 633,991 11.00%, 10/15/14 ............................................. Indonesia 4,500,000,000 IDR 324,598 FR10, 13.15%, 3/15/10 ........................................ Indonesia 7,125,000,000 IDR 637,328 FR17, 13.15%, 1/15/12 ........................................ Indonesia 17,300,000,000 IDR 1,456,215 FR19, 14.25%, 6/15/13 ........................................ Indonesia 63,035,000,000 IDR 5,378,216 FR20, 14.275%, 12/15/13 ...................................... Indonesia 28,415,000,000 IDR 2,385,297 FR34, 12.80%, 6/15/21 ........................................ Indonesia 108,710,000,000 IDR 7,579,783 FR39, 11.75%, 8/15/23 ........................................ Indonesia 29,150,000,000 IDR 1,858,648 FR42, 10.25%, 7/15/27 ........................................ Indonesia 86,000,000,000 IDR 4,773,396 FR47, 10.00%, 2/15/28 ........................................ Indonesia 28,000,000,000 IDR 1,483,488 (p) Government of Iraq, Reg S, 5.80%, 1/15/28 ....................... Iraq 3,620,000 1,737,600 Government of Malaysia, 3.461%, 7/31/13 .............................................. Malaysia 28,900,000 MYR 7,921,029 3.756%, 4/28/11 .............................................. Malaysia 53,580,000 MYR 15,029,854 3.833%, 9/28/11 .............................................. Malaysia 6,150,000 MYR 1,726,127 4.24%, 2/07/18 ............................................... Malaysia 64,800,000 MYR 18,072,047 4.305%, 2/27/09 .............................................. Malaysia 21,510,000 MYR 6,068,933 Government of Mexico, 8.00%, 12/17/15 .............................................. Mexico 725,000(q) MXN 5,404,656 10.00%, 12/05/24 ............................................. Mexico 3,355,000(q) MXN 28,741,668 Government of Poland, 5.75%, 9/23/22 ............................................... Poland 38,200,000 PLN 12,937,764 6.25%, 10/24/15 .............................................. Poland 17,100,000 PLN 6,002,948
Semiannual Report | 35 Franklin Strategic Series STATEMENT OF INVESTMENTS, OCTOBER 31, 2008 (UNAUDITED) (CONTINUED)
COUNTRY/ PRINCIPAL FRANKLIN STRATEGIC INCOME FUND ORGANIZATION AMOUNT(d) VALUE ------------------------------ -------------- ---------------- -------------- FOREIGN GOVERNMENT AND AGENCY SECURITIES (CONTINUED) Government of Russia, (j) 144A, 7.50%, 3/31/30 ......................................... Russia 14,404,040 $ 12,601,864 (p) senior bond, Reg S, 7.50%, 3/31/30 ........................... Russia 36,260,000 31,727,681 Government of Singapore, 2.375%, 10/01/09 ............................................. Singapore 11,570,000 SGD 7,887,566 2.625%, 4/01/10 .............................................. Singapore 16,450,000 SGD 11,309,417 4.375%, 1/15/09 .............................................. Singapore 3,680,000 SGD 2,496,989 Government of Sweden, 4.00%, 12/01/09 .............................................. Sweden 119,950,000 SEK 15,665,694 5.50%, 10/08/12 .............................................. Sweden 24,960,000 SEK 3,511,085 KfW Bankengruppe, (f) FRN, 0.688%, 8/08/11 ......................................... Germany 2,828,000,000 JPY 28,499,648 senior note, 6.50%, 11/15/11 ................................. Germany 10,164,000 NZD 5,990,780 Korea Treasury Bond, 0525-2703, 5.25%, 3/10/27 .................. South Korea 13,696,000,000 KRW 10,347,192 Korea Treasury Note, 0525-1209, 5.25%, 9/10/12 .................................... South Korea 15,100,000,000 KRW 11,812,330 0550-1709, 5.50%, 9/10/17 .................................... South Korea 23,470,000,000 KRW 18,044,802 Province of Manitoba, 6.375%, 9/01/15 ........................... Canada 3,000,000 NZD 1,735,637 New South Wales Treasury Corp., senior note, 5.50%, 3/01/17 ...................................................... Australia 12,025,000 AUD 7,839,447 Nota Do Tesouro Nacional, 9.762%, 1/01/12 .............................................. Brazil 8,400(r) BRL 3,244,733 9.762%, 1/01/14 .............................................. Brazil 5,200(r) BRL 1,808,697 9.762%, 1/01/17 .............................................. Brazil 60,650(r) BRL 19,042,755 (s) Index Linked, 10.495%, 5/15/15 ............................... Brazil 8,700(r) BRL 5,781,575 (s) Index Linked, 10.495%, 5/15/45 ............................... Brazil 3,570(r) BRL 2,157,274 Province of Ontario, 6.25%, 6/16/15 ............................. Canada 2,826,000 NZD 1,589,006 Queensland Treasury Corp., 6.00%, 9/14/17 ............................................... Australia 4,090,000 AUD 2,756,862 13, 6.00%, 8/14/13 ........................................... Australia 2,045,000 AUD 1,384,171 (j) 144A, 7.125%, 9/18/17 ........................................ Australia 15,990,000 NZD 9,907,015 -------------- TOTAL FOREIGN GOVERNMENT AND AGENCY SECURITIES (COST $462,933,057)........................................... 371,092,788 -------------- MUNICIPAL BONDS (COST $35,103,129) 1.1% California State GO, Refunding, 5.00%, 4/01/38 .................. United States 35,000,000 30,421,300 -------------- TOTAL INVESTMENTS BEFORE SHORT TERM INVESTMENTS (COST $3,031,345,079)......................................... 2,458,682,090 -------------- SHORT TERM INVESTMENTS 5.5% FOREIGN GOVERNMENT AND AGENCY SECURITIES (COST $40,289,109) 1.4% (t) Egypt Treasury Bills, 11/18/08 - 9/22/09 ........................ Egypt 229,275,000 EGP 38,701,635 -------------- TOTAL INVESTMENTS BEFORE MONEY MARKET FUNDS (COST $3,071,634,188) ........................................ 2,497,383,725 --------------
36 | Semiannual Report Franklin Strategic Series STATEMENT OF INVESTMENTS, OCTOBER 31, 2008 (UNAUDITED) (CONTINUED)
COUNTRY/ FRANKLIN STRATEGIC INCOME FUND ORGANIZATION SHARES VALUE ------------------------------ -------------- ----------- -------------- SHORT TERM INVESTMENTS (CONTINUED) MONEY MARKET FUNDS (COST $111,978,281) 4.1% (u) Franklin Institutional Fiduciary Trust Money Market Portfolio, 1.56% ........................................................ United States 111,978,281 $ 111,978,281 -------------- TOTAL INVESTMENTS (COST $3,183,612,469) 94.6% 2,609,362,006 NET UNREALIZED APPRECIATION ON FORWARD EXCHANGE CONTRACTS 2.3% .. 63,819,848 OTHER ASSETS, LESS LIABILITIES 3.1% ............................. 84,585,190 -------------- NET ASSETS 100.0% ............................................... $2,757,767,044 ==============
CURRENCY ABBREVIATIONS AUD - Australian Dollar BRL - Brazilian Real EGP - Egyptian Pound IDR - Indonesian Rupiah JPY - Japanese Yen KRW - South Korean Won MXN - Mexican Peso MYR - Malaysian Ringgit NZD - New Zealand Dollar PLN - Polish Zloty SEK - Swedish Krona SGD - Singapore Dollar SELECTED PORTFOLIO ABBREVIATIONS FHLMC - Federal Home Loan Mortgage Corp. FNMA - Federal National Mortgage Association FRN - Floating Rate Note GNMA - Government National Mortgage Association GO - General Obligation L/C - Letter of Credit PIK - Payment-In-Kind REIT - Real Estate Investment Trust SF - Single Family (a) Non-income producing for the twelve months ended October 31, 2008. (b) See Note 10 regarding restricted and illiquid securities. (c) Rounds to less than 0.1% of net assets. (d) The principal amount is stated in U.S. dollars unless otherwise indicated. (e) See Note 1(f) regarding senior floating rate interests. (f) The coupon rate shown represents the rate at period end. (g) A portion or all of the security purchased on a delayed delivery basis. See Note 1(c). (h) Income may be received in additional securities and/or cash. (i) See Note 11 regarding unfunded loan commitments. (j) Security was purchased pursuant to Rule 144A under the Securities Act of 1933 and may be sold in transactions exempt from registration only to qualified institutional buyers or in a public offering registered under the Securities Act of 1933. These securities have been deemed liquid under guidelines approved by the Trust's Board of Trustees. At October 31, 2008, the aggregate value of these securities was $146,544,614, representing 5.31% of net assets. (k) Perpetual securities with no stated maturity date. (l) See Note 9 regarding defaulted securities. (m) Principal amount of security is adjusted for inflation. See Note 1(h). (n) A supranational organization is an entity formed by two or more central governments through international treaties. (o) The principal amount is stated in original face, and scheduled paydowns are reflected in the market price on ex-date. (p) Security was purchased pursuant to Regulation S under the Securities Act of 1933, which exempts from registration securities offered and sold outside of the United States. Such a security cannot be sold in the United States without either an effective registration statement filed pursuant to the Securities Act of 1933, or pursuant to an exemption from registration. These securities have been deemed liquid under guidelines approved by the Trust's Board of Trustees. At October 31, 2008, the aggregate value of these securities was $33,465,281, representing 1.21% of net assets. (q) Principal amount is stated in 100 Mexican Peso Units. (r) Principal amount is stated in 1000 Brazilian Real Units. (s) Redemption price at maturity is adjusted for inflation. See Note 1(h). (t) The security is traded on a discount basis with no stated coupon rate. (u) See Note 7 regarding investments in the Franklin Institutional Fiduciary Trust Money Market Portfolio. The rate shown is the annualized seven-day yield at period end. The accompanying notes are an integral part of these financial statements. Semiannual Report | 37 Franklin Strategic Series FINANCIAL STATEMENTS STATEMENT OF ASSETS AND LIABILITIES October 31, 2008 (unaudited)
FRANKLIN STRATEGIC INCOME FUND --------------- Assets: Investments in securities: Cost - Unaffiliated issuers ................................... $ 3,071,634,188 Cost - Sweep Money Fund (Note 7) .............................. 111,978,281 --------------- Total cost of investments ..................................... $ 3,183,612,469 =============== Value - Unaffiliated issuers .................................. $ 2,497,383,725 Value - Sweep Money Fund (Note 7) ............................. 111,978,281 --------------- Total value of investments .................................... 2,609,362,006 Cash ............................................................. 23,257,339 Foreign currency, at value (cost $2,788,454) ..................... 2,737,804 Receivables: Investment securities sold .................................... 65,647,202 Capital shares sold ........................................... 5,854,589 Dividends and interest ........................................ 40,814,964 Unrealized appreciation on forward exchange contracts (Note 8) ... 76,393,486 --------------- Total assets ............................................... 2,824,067,390 --------------- Liabilities: Payables: Investment securities purchased ............................... 41,519,430 Capital shares redeemed ....................................... 9,195,200 Affiliates .................................................... 2,213,899 Unrealized depreciation on forward exchange contracts (Note 8) ... 12,573,638 Unrealized depreciation on unfunded loan commitments (Note 11) ... 177,802 Accrued expenses and other liabilities ........................... 620,377 --------------- Total liabilities .......................................... 66,300,346 --------------- Net assets, at value .................................... $ 2,757,767,044 =============== Net assets consist of: Paid-in capital .................................................. $ 3,375,295,815 Distributions in excess of net investment income ................. (735,212) Net unrealized appreciation (depreciation) ....................... (510,521,781) Accumulated net realized gain (loss) ............................. (106,271,778) --------------- Net assets, at value .................................... $ 2,757,767,044 ===============
The accompanying notes are an integral part of these financial statements. 38 | Semiannual Report Franklin Strategic Series FINANCIAL STATEMENTS (CONTINUED) STATEMENT OF ASSETS AND LIABILITIES (CONTINUED) October 31, 2008 (unaudited)
FRANKLIN STRATEGIC INCOME FUND -------------- CLASS A: Net assets, at value .................................................... $1,809,328,011 -------------- Shares outstanding ...................................................... 215,150,536 -------------- Net asset value per share(a) ............................................ $ 8.41 -------------- Maximum offering price per share (net asset value per share / 95.75%) ... $ 8.78 -------------- CLASS B: Net assets, at value .................................................... $ 81,051,255 -------------- Shares outstanding ...................................................... 9,596,308 -------------- Net asset value and maximum offering price per share(a) ................. $ 8.45 -------------- CLASS C: Net assets, at value .................................................... $ 660,039,715 -------------- Shares outstanding ...................................................... 78,507,322 -------------- Net asset value and maximum offering price per share(a) ................. $ 8.41 -------------- CLASS R: Net assets, at value .................................................... $ 98,687,012 -------------- Shares outstanding ...................................................... 11,763,444 -------------- Net asset value and maximum offering price per share(a) ................. $ 8.39 -------------- ADVISOR CLASS: Net assets, at value .................................................... $ 108,661,051 -------------- Shares outstanding ...................................................... 12,910,858 -------------- Net asset value and maximum offering price per share(a) ................. $ 8.42 --------------
(a) Redemption price is equal to net asset value less contingent deferred sales charges, if applicable. The accompanying notes are an integral part of these financial statements. Semiannual Report | 39 Franklin Strategic Series FINANCIAL STATEMENTS (CONTINUED) STATEMENT OF OPERATIONS for the six months ended October 31, 2008 (unaudited)
FRANKLIN STRATEGIC INCOME FUND ------------- Investment income: Dividends: Unaffiliated issuers ............................................ $ 2,035,270 Sweep Money Fund (Note 7) ....................................... 863,089 Interest ........................................................... 96,835,303 ------------- Total investment income ...................................... 99,733,662 ------------- Expenses: Management fees (Note 3a) .......................................... 7,216,093 Distribution fees: (Note 3c) Class A ......................................................... 2,652,386 Class B ......................................................... 332,436 Class C ......................................................... 2,463,869 Class R ......................................................... 278,167 Transfer agent fees (Note 3e) ...................................... 2,213,591 Custodian fees (Note 4) ............................................ 376,199 Reports to shareholders ............................................ 134,058 Registration and filing fees ....................................... 77,570 Professional fees .................................................. 45,911 Trustees' fees and expenses ........................................ 24,619 Other .............................................................. 29,964 ------------- Total expenses ............................................... 15,844,863 Expense reductions (Note 4) .................................. (18,057) ------------- Net expenses .............................................. 15,826,806 ------------- Net investment income .................................. 83,906,856 ------------- Realized and unrealized gains (losses): Net realized gain (loss) from: Investments ..................................................... (95,418,839) Foreign currency transactions ................................... 1,472,538 ------------- Net realized gain (loss) ............................... (93,946,301) ------------- Net change in unrealized appreciation (depreciation) on: Investments ........................................................ (578,424,873) Translation of other assets and liabilities denominated in foreign currencies ...................................................... 62,147,408 ------------- Net change in unrealized appreciation (depreciation) ... (516,277,465) ------------- Net realized and unrealized gain (loss) ............................... (610,223,766) ------------- Net increase (decrease) in net assets resulting from operations ....... $(526,316,910) =============
The accompanying notes are an integral part of these financial statements. 40 | Semiannual Report Franklin Strategic Series FINANCIAL STATEMENTS (CONTINUED) STATEMENTS OF CHANGES IN NET ASSETS
FRANKLIN STRATEGIC INCOME FUND --------------------------------- SIX MONTHS ENDED OCTOBER 31, 2008 YEAR ENDED (UNAUDITED) APRIL 30, 2008 ---------------- -------------- Increase (decrease) in net assets: Operations: Net investment income ............................................................. $ 83,906,856 $ 142,246,377 Net realized gain (loss) from investments and foreign currency transactions ....... (93,946,301) 45,899,679 Net change in unrealized appreciation (depreciation) on investments and translation of other assets and liabilities denominated in foreign currencies ............. (516,277,465) (56,027,125) -------------- -------------- Net increase (decrease) in net assets resulting from operations ............... (526,316,910) 132,118,931 -------------- -------------- Distributions to shareholders from net investment income: Class A .......................................................................... (64,883,512) (121,244,242) Class B .......................................................................... (2,910,074) (6,404,920) Class C .......................................................................... (21,594,424) (35,256,134) Class R .......................................................................... (3,247,405) (5,569,720) Advisor Class .................................................................... (3,705,066) (6,366,080) -------------- -------------- Total distributions to shareholders ................................................. (96,340,481) (174,841,096) -------------- -------------- Capital share transactions: (Note 2) Class A .......................................................................... 95,388,138 632,530,329 Class B .......................................................................... (5,313,724) 3,048,823 Class C .......................................................................... 75,206,151 304,040,457 Class R .......................................................................... 12,501,512 43,785,438 Advisor Class .................................................................... 20,628,163 46,009,389 -------------- -------------- Total capital share transactions .................................................... 198,410,240 1,029,414,436 -------------- -------------- Redemption fees ..................................................................... 9,548 32,113 -------------- -------------- Net increase (decrease) in net assets ......................................... (424,237,603) 986,724,384 Net assets: Beginning of period ................................................................. 3,182,004,647 2,195,280,263 -------------- -------------- End of period ....................................................................... $2,757,767,044 $3,182,004,647 ============== ============== Undistributed net investment income (distributions in excess of net investment income) included in net assets: End of period .................................................................... $ (735,212) $ 11,698,413 ============== ==============
The accompanying notes are an integral part of these financial statements. Semiannual Report | 41 Franklin Strategic Series NOTES TO FINANCIAL STATEMENTS (UNAUDITED) FRANKLIN STRATEGIC INCOME FUND 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES Franklin Strategic Series (Trust) is registered under the Investment Company Act of 1940, as amended, (1940 Act) as an open-end investment company, consisting of eleven separate funds. The Franklin Strategic Income Fund (Fund) included in this report is diversified. The financial statements of the remaining funds in the Trust are presented separately. The Fund offers five classes of shares: Class A, Class B, Class C, Class R, and Advisor Class. Each class of shares differs by its initial sales load, contingent deferred sales charges, distribution fees, voting rights on matters affecting a single class and its exchange privilege. The following summarizes the Fund's significant accounting policies. A. SECURITY VALUATION Securities listed on a securities exchange or on the NASDAQ National Market System are valued at the last quoted sale price or the official closing price of the day, respectively. Over-the-counter securities and listed securities for which there is no reported sale are valued within the range of the most recent quoted bid and ask prices. Securities that trade in multiple markets or on multiple exchanges are valued according to the broadest and most representative market. Investments in open-end mutual funds are valued at the closing net asset value. Corporate debt securities, government securities, mortgage pass-through securities, other mortgage-backed securities, collateralized mortgage obligations and asset-backed securities generally trade in the over-the-counter market rather than on a securities exchange. The Trust may utilize independent pricing services, quotations from bond dealers, and information with respect to bond and note transactions, to assist in determining a current market value for each security. The Trust's pricing services may use valuation models or matrix pricing which considers information with respect to comparable bond and note transactions, quotations from bond dealers, or by reference to other securities that are considered comparable in such characteristics as rating, interest rate and maturity date, option adjusted spread models, prepayment projections, interest rate spreads and yield curves, to determine current value. Senior secured corporate loans with floating or variable interest rates generally trade in the over-the-counter market rather than on a securities exchange. The Trust may utilize independent pricing services, quotations from loan dealers and other financial institutions, and information with respect to bond and note transactions, to assist in determining a current market value for each security. The Trust's pricing services use independent market quotations from loan dealers or financial institutions and may incorporate valuation methodologies that consider multiple bond characteristics such as dealer quotes, issuer type, coupon, maturity, weighted average maturity, interest rate spreads and yield curves, cash flow and credit risk/quality analysis, to determine current value. 42 | Semiannual Report Franklin Strategic Series NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) FRANKLIN STRATEGIC INCOME FUND 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) A. SECURITY VALUATION (CONTINUED) Foreign securities are valued as of the close of trading on the foreign stock exchange on which the security is primarily traded, or the NYSE, whichever is earlier. If no sale is reported at that time, the foreign security will be valued within the range of the most recent quoted bid and ask prices. The value is then converted into its U.S. dollar equivalent at the foreign exchange rate in effect at the close of the NYSE on the day that the value of the foreign security is determined. The Trust has procedures to determine the fair value of individual securities and other assets for which market prices are not readily available or which may not be reliably priced. Methods for valuing these securities may include: fundamental analysis, matrix pricing, discounts from market prices of similar securities, or discounts applied due to the nature and duration of restrictions on the disposition of the securities. Due to the inherent uncertainty of valuations of such securities, the fair values may differ significantly from the values that would have been used had a ready market for such investments existed. Occasionally, events occur between the time at which trading in a security is completed and the close of the NYSE that might call into question the availability (including the reliability) of the value of a portfolio security held by the Fund. If such an event occurs, the securities may be valued using fair value procedures, which may include the use of independent pricing services. All security valuation procedures are approved by the Trust's Board of Trustees. B. FOREIGN CURRENCY TRANSLATION Portfolio securities and other assets and liabilities denominated in foreign currencies are translated into U.S. dollars based on the exchange rate of such currencies against U.S. dollars on the date of valuation. Purchases and sales of securities, income and expense items denominated in foreign currencies are translated into U.S. dollars at the exchange rate in effect on the transaction date. Occasionally, events may impact the availability or reliability of foreign exchange rates used to convert the U.S. dollar equivalent value. If such an event occurs, the foreign exchange rate will be valued at fair value using procedures established and approved by the Trust's Board of Trustees. The Fund does not separately report the effect of changes in foreign exchange rates from changes in market prices on securities held. Such changes are included in net realized and unrealized gain or loss from investments on the Statement of Operations. Realized foreign exchange gains or losses arise from sales of foreign currencies, currency gains or losses realized between the trade and settlement dates on securities transactions and the difference between the recorded amounts of dividends, interest, and foreign withholding taxes and the U.S. dollar equivalent of the amounts actually received or paid. Net unrealized foreign exchange Semiannual Report | 43 Franklin Strategic Series NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) FRANKLIN STRATEGIC INCOME FUND 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) B. FOREIGN CURRENCY TRANSLATION (CONTINUED) gains and losses arise from changes in foreign exchange rates on foreign denominated assets and liabilities other than investments in securities held at the end of the reporting period. C. SECURITIES PURCHASED ON A DELAYED DELIVERY BASIS The Fund may purchase securities on a delayed delivery basis, with payment and delivery scheduled for a future date. These transactions are subject to market fluctuations and are subject to the risk that the value at delivery may be more or less than the trade date purchase price. Although the Fund will generally purchase these securities with the intention of holding the securities, it may sell the securities before the settlement date. Sufficient assets have been segregated for these securities. D. FOREIGN CURRENCY CONTRACTS When the Fund purchases or sells foreign securities it may enter into foreign exchange contracts to minimize foreign exchange risk from the trade date to the settlement date of the transactions. A foreign exchange contract is an agreement between two parties to exchange different currencies at an agreed upon exchange rate at a future date. Realized and unrealized gains and losses on these contracts are included in the Statement of Operations. The Fund may also enter into forward exchange contracts to hedge against fluctuations in foreign exchange rates or to gain exposure to certain foreign currencies. These contracts are valued daily by the Fund and the unrealized appreciation or depreciation on the contracts, as measured by the difference between the contractual forward foreign exchange rates and the forward rates at the reporting date, are included in the Statement of Assets and Liabilities. Realized and unrealized gains and losses on these contracts are included in the Statement of Operations. The risks of these contracts include movement in the values of the foreign currencies relative to the U.S. dollar and the possible inability of the counterparties to fulfill their obligations under the contracts, which may be in excess of the amount reflected in the Statement of Assets and Liabilities. E. MORTGAGE DOLLAR ROLLS The Fund may enter into mortgage dollar rolls, typically on a TBA basis. Mortgage dollar rolls are agreements between the Fund and a financial institution to simultaneously sell and repurchase mortgage-backed securities at a future date. Gains or losses are realized on the initial sale, and the difference between the repurchase price and the sale price is recorded as an unrealized gain or loss to the fund upon entering into the mortgage dollar roll. In addition, the Fund may earn 44 | Semiannual Report Franklin Strategic Series NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) FRANKLIN STRATEGIC INCOME FUND 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) E. MORTGAGE DOLLAR ROLLS (CONTINUED) interest on the cash proceeds that are received from the initial sale. During the period between the sale and repurchase, the Fund is not entitled to principal and interest paid on the mortgage backed securities. The risks of mortgage dollar roll transactions include the potential inability of the counterparty to fulfill its obligations. F. SENIOR FLOATING RATE INTERESTS Senior secured corporate loans pay interest at rates which are periodically reset by reference to a base lending rate plus a spread. These base lending rates are generally the prime rate offered by a designated U.S. bank or the London InterBank Offered Rate (LIBOR). Senior secured corporate loans often require prepayment of principal from excess cash flows or at the discretion of the borrower. As a result, actual maturity may be substantially less than the stated maturity. Senior secured corporate loans in which the Fund invests are generally readily marketable, but may be subject to some restrictions on resale. G. INCOME TAXES No provision has been made for U.S. income taxes because it is the Fund's policy to qualify as a regulated investment company under the Internal Revenue Code and to distribute to shareholders substantially all of its taxable income and net realized gains. The Fund has reviewed the tax positions, taken on federal income tax returns, for each of the three open tax years and as of October 31, 2008, and has determined that no provision for income tax is required in the Fund's financial statements. H. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS Security transactions are accounted for on trade date. Realized gains and losses on security transactions are determined on a specific identification basis. Interest income and estimated expenses are accrued daily. Amortization of premium and accretion of discount on debt securities are included in interest income. Facility fees are recognized as income over the expected term of the loan. Dividend income is recorded on the ex-dividend date. Distributions to shareholders are recorded on the ex-dividend date and are determined according to income tax regulations (tax basis). Distributable earnings determined on a tax basis may differ from earnings recorded in accordance with accounting principles generally accepted in the United States of America. These differences may be permanent or temporary. Permanent differences are reclassified among capital accounts to reflect their tax character. These reclassifications have no impact on net assets or the results of operations. Temporary differences are not reclassified, as they may reverse in subsequent periods. Semiannual Report | 45 Franklin Strategic Series NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) FRANKLIN STRATEGIC INCOME FUND 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) H. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS (CONTINUED) Common expenses incurred by the Trust are allocated among the funds based on the ratio of net assets of each fund to the combined net assets of the Trust. Fund specific expenses are charged directly to the fund that incurred the expense. Realized and unrealized gains and losses and net investment income, other than class specific expenses, are allocated daily to each class of shares based upon the relative proportion of net assets of each class. Differences in per share distributions, by class, are generally due to differences in class specific expenses. Inflation-indexed bonds provide an inflation hedge through periodic increases or decreases in the security's interest accruals and principal redemption value, by amounts corresponding to the current rate of inflation. Any such adjustments, including adjustments to principal redemption value, are recorded as interest income. I. ACCOUNTING ESTIMATES The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America 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 expenses during the reporting period. Actual results could differ from those estimates. J. REDEMPTION FEES A short term trading redemption fee was imposed, with some exceptions, on any fund shares that were redeemed or exchanged within seven calendar days following their purchase date. The redemption fee was 2% of the amount redeemed. Such fees were retained by the fund and accounted for as an addition to paid-in capital. Effective September 1, 2008, the redemption fee was eliminated. K. GUARANTEES AND INDEMNIFICATIONS Under the Trust's organizational documents, its officers and trustees are indemnified by the Trust against certain liabilities arising out of the performance of their duties to the Trust. Additionally, in the normal course of business, the Trust, on behalf of the Fund, enters into contracts with service providers that contain general indemnification clauses. The Trust's maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Trust that have not yet occurred. Currently, the Trust expects the risk of loss to be remote. 46 | Semiannual Report Franklin Strategic Series NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) FRANKLIN STRATEGIC INCOME FUND 2. SHARES OF BENEFICIAL INTEREST At October 31, 2008, there were an unlimited number of shares authorized (without par value). Transactions in the Fund's shares were as follows:
SIX MONTHS ENDED YEAR ENDED OCTOBER 31, 2008 APRIL 30, 2008 --------------------------- --------------------------- SHARES AMOUNT SHARES AMOUNT ----------- ------------- ----------- ------------- CLASS A SHARES: Shares sold ....................... 40,229,633 $ 391,944,435 91,217,409 $ 936,036,841 Shares issued in reinvestment of distributions ............... 5,008,434 49,245,182 8,915,352 91,352,929 Shares redeemed ................... (36,762,281) (345,801,479) (38,572,698) (394,859,441) ----------- ------------ ----------- ------------ Net increase (decrease) ........... 8,475,786 $ 95,388,138 61,560,063 $ 632,530,329 =========== ============ =========== ============ CLASS B SHARES: Shares sold ....................... 1,907,170 $ 18,572,752 2,874,628 $ 29,428,423 Shares issued in reinvestment of distributions ............... 195,088 1,928,890 408,776 4,208,385 Shares redeemed ................... (2,741,164) (25,815,366) (2,980,058) (30,587,985) ----------- ------------ ----------- ------------ Net increase (decrease) ........... (638,906) $ (5,313,724) 303,346 $ 3,048,823 =========== ============ =========== ============ CLASS C SHARES: Shares sold ....................... 19,154,256 $ 186,972,696 37,244,007 $ 381,547,354 Shares issued in reinvestment of distributions ............... 1,544,413 15,179,672 2,345,925 24,029,491 Shares redeemed ................... (13,542,043) (126,946,217) (9,929,608) (101,536,388) ----------- ------------ ----------- ------------ Net increase (decrease) ........... 7,156,626 $ 75,206,151 29,660,324 $ 304,040,457 =========== ============ =========== ============ CLASS R SHARES: Shares sold ....................... 2,811,607 $ 27,140,093 6,278,677 $ 64,256,553 Shares issued in reinvestment of distributions ............... 306,498 3,005,385 505,060 5,161,628 Shares redeemed ................... (1,890,196) (17,643,966) (2,511,917) (25,632,743) ----------- ------------ ----------- ------------ Net increase (decrease) ........... 1,227,909 $ 12,501,512 4,271,820 $ 43,785,438 =========== ============ =========== ============ ADVISOR CLASS SHARES: Shares sold ....................... 2,802,694 $ 27,298,100 5,446,481 $ 56,078,457 Shares issued in reinvestment of distributions ............... 316,487 3,109,558 515,703 5,286,545 Shares redeemed ................... (1,035,082) (9,779,495) (1,497,484) (15,355,613) ----------- ------------ ----------- ------------ Net increase (decrease) ........... 2,084,099 $ 20,628,163 4,464,700 $ 46,009,389 =========== ============ =========== ============
Semiannual Report | 47 Franklin Strategic Series NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) FRANKLIN STRATEGIC INCOME FUND 3. TRANSACTIONS WITH AFFILIATES Franklin Resources, Inc. is the holding company for various subsidiaries that together are referred to as Franklin Templeton Investments. Certain officers and trustees of the Trust are also officers and/or directors of the following subsidiaries:
SUBSIDIARY AFFILIATION - ---------- ---------------------- Franklin Advisers, Inc. (Advisers) Investment manager Franklin Templeton Services, LLC (FT Services) Administrative manager Franklin Templeton Distributors, Inc. (Distributors) Principal underwriter Franklin Templeton Investor Services, LLC (Investor Services) Transfer agent
A. MANAGEMENT FEES The Fund pays an investment management fee to Advisers based on the average daily net assets of the Fund as follows:
ANNUALIZED FEE RATE NET ASSETS - ------------------- --------------------------------------------------- 0.625% Up to and including $100 million 0.500% Over $100 million, up to and including $250 million 0.450% Over $250 million, up to and including $7.5 billion 0.440% Over $7.5 billion, up to and including $10 billion 0.430% Over $10 billion, up to and including $12.5 billion 0.420% Over $12.5 billion, up to and including $15 billion 0.400% Over $15 billion, up to and including $17.5 billion 0.380% Over $17.5 billion, up to and including $20 billion 0.360% Over $20 billion, up to and including $35 billion 0.355% Over $35 billion, up to and including $50 billion 0.350% In excess of $50 billion
B. ADMINISTRATIVE FEES Under an agreement with Advisers, FT Services provides administrative services to the Fund. The fee is paid by Advisers based on average daily net assets, and is not an additional expense of the Fund. C. DISTRIBUTION FEES The Trust's Board of Trustees has adopted distribution plans for each share class, with the exception of Advisor Class shares, pursuant to Rule 12b-1 under the 1940 Act. Under the Fund's Class A reimbursement distribution plan, the Fund reimburses Distributors for costs incurred in connection with the servicing, sale and distribution of the Fund's shares up to the maximum annual plan rate. Under the Class A reimbursement distribution plan, costs exceeding the maximum for the current plan year cannot be reimbursed in subsequent periods. 48 | Semiannual Report Franklin Strategic Series NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) FRANKLIN STRATEGIC INCOME FUND 3. TRANSACTIONS WITH AFFILIATES (CONTINUED) C. DISTRIBUTION FEES (CONTINUED) In addition, under the Fund's Class B, C, and R compensation distribution plans, the Fund pays Distributors for costs incurred in connection with the servicing, sale and distribution of the Fund's shares up to the maximum annual plan rate for each class. The maximum annual plan rates, based on the average daily net assets, for each class, are as follows: Class A ........... 0.25% Class B ........... 0.65% Class C ........... 0.65% Class R ........... 0.50%
D. SALES CHARGES/UNDERWRITING AGREEMENTS Distributors has advised the Fund of the following commission transactions related to the sales and redemptions of the Fund's shares for the period: Sales charges retained net of commissions paid to unaffiliated broker/dealers ............................................... $678,490 Contingent deferred sales charges retained ...................... $310,097
E. TRANSFER AGENT FEES For the period ended October 31, 2008, the Fund paid transfer agent fees of $2,213,591, of which $1,349,344 was retained by Investor Services. 4. EXPENSE OFFSET ARRANGEMENT The Fund has entered into an arrangement with its custodian whereby credits realized as a result of uninvested cash balances are used to reduce a portion of the Fund's custodian expenses. During the period ended October 31, 2008, the custodian fees were reduced as noted in the Statement of Operations. 5. INCOME TAXES For tax purposes, capital losses may be carried over to offset future capital gains, if any. At April 30, 2008, the Fund had tax basis capital losses of $10,888,827 expiring in 2011. For tax purposes, realized capital losses occurring subsequent to October 31, may be deferred and treated as occurring on the first day of the following fiscal year. At April 30, 2008, the Fund deferred realized capital losses of $1,404,408. Semiannual Report | 49 Franklin Strategic Series NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) FRANKLIN STRATEGIC INCOME FUND 5. INCOME TAXES (CONTINUED) At October 31, 2008, the cost of investments and net unrealized appreciation (depreciation) for income tax purposes were as follows: Cost of investments ......................... $3,189,647,961 ============== Unrealized appreciation ..................... $ 13,287,753 Unrealized depreciation ..................... (593,573,708) -------------- Net unrealized appreciation (depreciation) .. $ (580,285,955) ==============
Net investment income (loss) differs for financial statement and tax purposes primarily due to differing treatments of defaulted securities, foreign currency transactions, mortgage dollar roll, paydown losses, payments-in-kind, bond discounts and premiums and inflation related adjustments on foreign securities. Net realized gains (losses) differ for financial statement and tax purposes primarily due to differing treatments of wash sales, foreign currency transactions, mortgage dollar roll, paydown losses, bond discounts and premiums and inflation related adjustments on foreign securities. 6. INVESTMENT TRANSACTIONS Purchases and sales of investments (excluding short term securities) for the period ended October 31, 2008, aggregated $861,624,481 and $738,215,204, respectively. 7. INVESTMENTS IN FRANKLIN INSTITUTIONAL FIDUCIARY TRUST MONEY MARKET PORTFOLIO The Fund may invest in the Franklin Institutional Fiduciary Trust Money Market Portfolio (Sweep Money Fund), an open-end investment company managed by Advisers. Management fees paid by the Fund are reduced on assets invested in the Sweep Money Fund, in an amount not to exceed the management and administrative fees paid by the Sweep Money Fund. 8. FORWARD EXCHANGE CONTRACTS At October 31, 2008, the Fund had the following forward exchange contracts outstanding:
CONTRACT SETTLEMENT UNREALIZED UNREALIZED AMOUNT(a) DATE APPRECIATION DEPRECIATION ---------- ---------- ------------ ------------ CONTRACTS TO BUY 7,625,100 Swiss Franc ......... 7,000,000 1/22/09 $-- $ (412,414) 38,991,000 Euro ................ 52,777,200 3/04/09 -- (3,202,868) 26,980,000 Euro ................ 36,014,899 3/16/09 -- (1,717,803)
50 | Semiannual Report Franklin Strategic Series NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) FRANKLIN STRATEGIC INCOME FUND 8. FORWARD EXCHANGE CONTRACTS (CONTINUED)
CONTRACT SETTLEMENT UNREALIZED UNREALIZED AMOUNT(a) DATE APPRECIATION DEPRECIATION --------------- ---------- ------------ ------------ CONTRACTS TO BUY (CONTINUED) 11,050,000 Euro ................ 14,904,240 4/23/09 $ -- $ (865,323) 9,550,000 Euro ................ 13,847,978 5/29/09 -- (1,715,657) 12,300,000 Euro ................ 17,283,960 6/03/09 -- (1,657,993) 5,000,000 U.S. Dollar ......... 3,251,356 EUR 7/10/09 869,375 -- 48,366,965 Russian Ruble ....... 2,908,311 NZD 9/15/09 -- (139,115) 20,000,000 U.S. Dollar ......... 14,359,254 EUR 9/17/09 1,743,897 -- 102,616,000 Chinese Yuan Renminbi ......... 14,958,601 9/23/09 -- (315,454) 85,937,019 Russian Ruble ....... 4,088,221 AUD 9/24/09 11,713 -- 132,105,686 Russian Ruble ....... 6,349,870 AUD 9/28/09 -- (25,399) 32,917,966,021 Viet Nam Dong ....... 2,673,084 AUD 10/07/09 -- (25,117) 10,867,913 Chinese Yuan Renminbi ......... 2,348,144 AUD 10/13/09 20,753 -- 11,141,998 Chinese Yuan Renminbi ......... 2,365,951 AUD 10/19/09 48,551 -- 19,992,188 Chinese Yuan Renminbi ......... 2,890,297 10/23/09 -- (39,816) 33,924,068 Chinese Yuan Renminbi ......... 4,878,259 10/26/09 -- (41,775) 20,270,115 Chinese Yuan Renminbi ......... 2,893,664 10/27/09 -- (3,876) 23,100,000 Swiss Franc ......... 15,594,937 EUR 10/27/09 208,190 -- CONTRACTS TO SELL 44,379,630 Mexican Peso ........ 499,350,721 KZT 1/16/09 691,009 -- 73,468,367 Mexican Peso ........ 255,905,014 INR 1/27/09 -- (438,264) 27,622,500,000 South Korean Won .... 31,831,225 CHF 2/13/09 5,754,369 -- 63,268,687 Mexican Peso ........ 5,622,884 2/27/09 851,709 -- 59,280,000 Euro ................ 88,755,794 3/04/09 13,385,415 -- 9,880,000 Euro ................ 1,503,587,800 JPY 3/05/09 2,794,643 -- 9,880,000 Euro ................ 1,519,524,240 JPY 3/09/09 2,961,151 -- 29,200,000 Euro ................ 44,548,980 3/16/09 7,429,811 -- 9,600,000 Euro ................ 1,485,984,000 JPY 4/06/09 3,000,167 -- 169,061,600 Mexican Peso ........ 15,313,551 4/07/09 2,668,730 -- 2,848,160 U.S. Dollar ......... 358,198,842 KZT 4/17/09 -- (6,936) 13,820,000 Euro ................ 21,615,586 4/23/09 4,057,411 -- 4,400,000 Euro ................ 696,850,000 JPY 4/23/09 1,543,711 -- 9,915,000,000 South Korean Won .... 10,036,146 CHF 4/24/09 834,881 -- 22,688,628 Mexican Peso ........ 88,338,174 INR 5/15/09 86,676 -- 24,100,000 Euro ................ 37,073,512 5/29/09 6,456,871 -- 10,370,000,000 South Korean Won .... 10,454,683 CHF 6/02/09 823,210 -- 8,115,000 British Pound Sterling ......... 50,201,013 MYR 6/03/09 1,263,623 --
Semiannual Report | 51 Franklin Strategic Series NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) FRANKLIN STRATEGIC INCOME FUND 8. FORWARD EXCHANGE CONTRACTS (CONTINUED)
CONTRACT SETTLEMENT UNREALIZED UNREALIZED AMOUNT(a) DATE APPRECIATION DEPRECIATION --------------- ---------- ------------ ------------ CONTRACTS TO SELL (CONTINUED) 32,340,000 Euro ................ 66,445,764 SGD 6/03/09 $ 4,095,254 $ -- 24,100,000 Euro ................ 36,719,965 6/03/09 6,103,234 -- 4,042,731,000 South Korean Won .... 4,026,223 CHF 6/11/09 276,883 -- 2,090,331 Euro ................ 10,431,379 MYR 6/12/09 299,579 -- 95,141,931 Mexican Peso ........ 4,303,650,105 CLP 6/12/09 -- (704,743) 13,542,000 Euro ................ 20,710,912 6/15/09 3,506,981 -- 2,741,568 Euro ................ 13,615,995 MYR 6/15/09 374,877 -- 5,434,859 Euro ................ 26,902,552 MYR 6/16/09 718,041 -- 997,100,000 South Korean Won .... 994,266 CHF 6/18/09 69,135 -- 85,260,441 Mexican Peso ........ 187,895,953 RUB 7/01/09 -- (333,466) 5,145,000,000 South Korean Won .... 5,216,995 CHF 7/09/09 428,208 -- 1,521,000,000 South Korean Won .... 1,531,876 CHF 7/24/09 116,835 -- 30,299,970 New Zealand Dollar .. 204,079,388,412 IDR 8/04/09 231,034 -- 5,846,578 New Zealand Dollar .. 98,105,572 RUB 8/12/09 -- (250,760) 5,487,492 New Zealand Dollar .. 66,500,169,499 VND 8/14/09 467,614 -- 5,808,327 New Zealand Dollar .. 97,208,161 RUB 8/14/09 -- (257,216) 5,415,120,000 South Korean Won .... 5,385,446 CHF 8/28/09 353,390 -- 6,770,000 Euro ................ 13,690,294 SGD 9/02/09 738,052 -- 6,090,000 Euro ................ 29,842,218 MYR 9/03/09 735,748 -- 35,638,464 Mexican Peso ........ 85,218,696 RUB 9/17/09 60,590 -- Unrealized appreciation (depreciation) on offsetting forward exchange contracts ................................................... 312,165 (419,643) ----------- ----------- Unrealized appreciation (depreciation) on forward exchange contracts ................................................ 76,393,486 (12,573,638) ----------- ----------- Net unrealized appreciation (depreciation) on forward exchange contracts ............................................. $63,819,848 ===========
(a) In U.S. dollars unless otherwise indicated. CURRENCY ABBREVIATIONS AUD - Australian Dollar CHF - Swiss Franc CLP - Chilean Peso EUR - Euro IDR - Indonesian Rupiah INR - Indian Rupee JPY - Japanese Yen KZT - Kazakhstani Tenge MYR - Malaysian Ringgit NZD - New Zealand Dollar RUB - Russian Ruble SGD - Singapore Dollar VND - Viet Nam Dong 52 | Semiannual Report Franklin Strategic Series NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) FRANKLIN STRATEGIC INCOME FUND 9. CREDIT RISK AND DEFAULTED SECURITIES The Fund has 38.5% of its portfolio invested in high yield, senior secured floating rate notes, or other securities rated below investment grade. These securities may be more sensitive to economic conditions causing greater price volatility and are potentially subject to a greater risk of loss due to default than higher rated securities. The Fund held defaulted securities and/or other securities for which the income has been deemed uncollectible. At October 31, 2008, the value of this security was $2,160,000, representing 0.08% of the Fund's net assets. The Fund discontinues accruing income on securities for which income has been deemed uncollectible and provides an estimate for losses on interest receivable. The securities have been identified on the accompanying Statement of Investments. 10. RESTRICTED SECURITIES The Fund may invest in securities that are restricted under the Securities Act of 1933 (1933 Act) or which are subject to legal, contractual, or other agreed upon restrictions on resale. Restricted securities are often purchased in private placement transactions, and cannot be sold without prior registration unless the sale is pursuant to an exemption under the 1933 Act. Disposal of these securities may require greater effort and expense, and prompt sale at an acceptable price may be difficult. The Fund may have registration rights for restricted securities. The issuer generally incurs all registration costs. At October 31, 2008, the Fund held investments in restricted securities, excluding 144A securities deemed to be liquid, valued in accordance with procedures approved by the Trust's Board of Trustees as reflecting fair value, as follows:
ACQUISITION SHARES ISSUER DATE COST VALUE - ------ ---------------------------------------------------- ------------ ------- ----- 516,372 Cambridge Industries Liquidating Trust Interest .... 1/09/02 $ -- $-- 64,666 VS Holdings Inc. ................................... 12/06/01 64,666 -- --- TOTAL RESTRICTED SECURITIES (0.0.% of Net Assets) .. $-- ===
11. UNFUNDED LOAN COMMITMENTS The Fund may enter into certain credit agreements, all or a portion of which may be unfunded. The Fund is obligated to fund these loan commitments at the borrowers' discretion. Funded portions of credit agreements are presented on the Statement of Investments. Semiannual Report | 53 Franklin Strategic Series NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) FRANKLIN STRATEGIC INCOME FUND 11. UNFUNDED LOAN COMMITMENTS (CONTINUED) At October 31, 2008, unfunded commitments were as follows:
UNFUNDED BORROWER COMMITMENTS - -------- ----------- Bausch & Lomb Inc., Delayed Draw Term Loan .............. $ 119,179 Community Health Systems, Inc., Delayed Draw Term Loan .. 1,008,724 ---------- $1,127,903 ==========
Unfunded loan commitments and funded portions of credit agreements are marked to market daily and any unrealized appreciation or depreciation is included in the Statement of Assets and Liabilities and Statement of Operations. 12. FAIR VALUE MEASUREMENTS The Fund adopted Financial Accounting Standards Board (FASB) issued FASB Statement No. 157, "Fair Value Measurement" (SFAS 157), on May 1, 2008. SFAS 157 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. The Fund has determined that the implementation of SFAS 157 did not have a material impact on the Fund's financial statements. SFAS 157 establishes a fair value hierarchy that distinguishes between market data obtained from independent sources (observable inputs) and the Fund's own market assumptions (unobservable inputs). These inputs are used in determining the value of the Fund's investments and are summarized in the following fair value hierarchy: - Level 1 - quoted prices in active markets for identical securities - Level 2 - other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speed, credit risk, etc.) - Level 3 - significant unobservable inputs (including the Fund's own assumptions in determining the fair value of investments) The inputs or methodology used for valuing securities are not an indication of the risk associated with investing in those securities. 54 | Semiannual Report Franklin Strategic Series NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) FRANKLIN STRATEGIC INCOME FUND 12. FAIR VALUE MEASUREMENTS (CONTINUED) The following is a summary of the inputs used as of October 31, 2008, in valuing the Fund's assets and liabilities carried at fair value:
LEVEL 1 LEVEL 2 LEVEL 3 TOTAL ------------ -------------- ------- -------------- ASSETS: Investments in Securities $151,160,808 $2,458,201,198 $-- $2,609,362,006 Other Financial Instruments(a) -- 76,393,486 -- 76,393,486 LIABILITIES: Other Financial Instruments(a) -- 12,751,440 -- 12,751,440
(a) Other financial instruments may include net unrealized appreciation (depreciation) of futures, forward exchange contracts, swaps, and unfunded loan commitments. 13. NEW ACCOUNTING PRONOUNCEMENTS In March 2008, FASB issued FASB Statement No. 161, "Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133" (SFAS 161), which expands disclosures about derivative investments and hedging activities. SFAS 161 is effective for fiscal years and interim periods beginning after November 15, 2008. The Fund is currently evaluating the impact, if any, of applying the various provisions of SFAS 161. Semiannual Report | 55 Franklin Strategic Series SHAREHOLDER INFORMATION FRANKLIN STRATEGIC INCOME FUND PROXY VOTING POLICIES AND PROCEDURES The Trust's investment manager has established Proxy Voting Policies and Procedures (Policies) that the Trust uses to determine how to vote proxies relating to portfolio securities. Shareholders may view the Trust's complete Policies online at franklintempleton.com. Alternatively, shareholders may request copies of the Policies free of charge by calling the Proxy Group collect at (954) 527-7678 or by sending a written request to: Franklin Templeton Companies, LLC, 500 East Broward Boulevard, Suite 1500, Fort Lauderdale, FL 33394, Attention: Proxy Group. Copies of the Trust's proxy voting records are also made available online at franklintempleton.com and posted on the U.S. Securities and Exchange Commission's website at sec.gov and reflect the most recent 12-month period ended June 30. QUARTERLY STATEMENT OF INVESTMENTS The Trust files a complete statement of investments with the U.S. Securities and Exchange Commission for the first and third quarters for each fiscal year on Form N-Q. Shareholders may view the filed Form N-Q by visiting the Commission's website at sec.gov. The filed form may also be viewed and copied at the Commission's Public Reference Room in Washington, DC. Information regarding the operations of the Public Reference Room may be obtained by calling (800) SEC-0330. 56 | Semiannual Report Literature Request LITERATURE REQUEST. TO RECEIVE A BROCHURE AND PROSPECTUS, PLEASE CALL US AT (800) DIAL BEN/(800) 342-5236 OR VISIT franklintempleton.com. INVESTORS SHOULD CAREFULLY CONSIDER A FUND'S INVESTMENT GOALS, RISKS, CHARGES AND EXPENSES BEFORE INVESTING. THE PROSPECTUS CONTAINS THIS AND OTHER INFORMATION. PLEASE CAREFULLY READ THE PROSPECTUS BEFORE INVESTING. TO ENSURE THE HIGHEST QUALITY OF SERVICE, WE MAY MONITOR, RECORD AND ACCESS TELEPHONE CALLS TO OR FROM OUR SERVICE DEPARTMENTS. THESE CALLS CAN BE IDENTIFIED BY THE PRESENCE OF A REGULAR BEEPING TONE. FRANKLIN TEMPLETON FUNDS VALUE Franklin All Cap Value Fund Franklin Balance Sheet Investment Fund Franklin Large Cap Value Fund Franklin MicroCap Value Fund(1) Franklin MidCap Value Fund Franklin Small Cap Value Fund Mutual Beacon Fund Mutual Qualified Fund Mutual Recovery Fund(2) Mutual Shares Fund BLEND Franklin Focused Core Equity Fund Franklin Large Cap Equity Fund Franklin Rising Dividends Fund GROWTH Franklin Capital Growth Fund(1) Franklin Flex Cap Growth Fund Franklin Growth Fund Franklin Growth Opportunities Fund(3) Franklin Small Cap Growth Fund(4) Franklin Small-Mid Cap Growth Fund SECTOR Franklin Biotechnology Discovery Fund Franklin DynaTech Fund Franklin Global Real Estate Fund Franklin Gold and Precious Metals Fund Franklin Natural Resources Fund Franklin Real Estate Securities Fund Franklin Utilities Fund Mutual Financial Services Fund GLOBAL Mutual Discovery Fund Templeton Global Long-Short Fund Templeton Global Opportunities Trust Templeton Global Smaller Companies Fund Templeton Growth Fund Templeton World Fund INTERNATIONAL Franklin India Growth Fund Franklin International Growth Fund Franklin International Small Cap Growth Fund Mutual European Fund Templeton BRIC Fund Templeton China World Fund Templeton Developing Markets Trust Templeton Emerging Markets Small Cap Fund Templeton Foreign Fund Templeton Foreign Smaller Companies Fund Templeton Frontier Markets Fund HYBRID Franklin Balanced Fund Franklin Convertible Securities Fund Franklin Equity Income Fund Franklin Income Fund Templeton Income Fund ASSET ALLOCATION Franklin Templeton Corefolio(R) Allocation Fund Franklin Templeton Founding Funds Allocation Fund Franklin Templeton Perspectives Allocation Fund Franklin Templeton Conservative Target Fund Franklin Templeton Growth Target Fund Franklin Templeton Moderate Target Fund Franklin Templeton 2015 Retirement Target Fund Franklin Templeton 2025 Retirement Target Fund Franklin Templeton 2035 Retirement Target Fund Franklin Templeton 2045 Retirement Target Fund FIXED INCOME Franklin Adjustable U.S. Government Securities Fund(5) Franklin Floating Rate Daily Access Fund Franklin High Income Fund Franklin Limited Maturity U.S. Government Securities Fund(5) Franklin Low Duration Total Return Fund Franklin Real Return Fund Franklin Strategic Income Fund Franklin Strategic Mortgage Portfolio Franklin Templeton Hard Currency Fund Franklin Total Return Fund Franklin U.S. Government Securities Fund5 Templeton Global Bond Fund Templeton Global Total Return Fund Templeton International Bond Fund TAX-FREE INCOME(6) NATIONAL FUNDS Double Tax-Free Income Fund Federal Tax-Free Income Fund High Yield Tax-Free Income Fund Insured Tax-Free Income Fund(7) LIMITED-/INTERMEDIATE-TERM FUNDS California Intermediate-Term Tax-Free Income Fund Federal Intermediate-Term Tax-Free Income Fund Federal Limited-Term Tax-Free Income Fund New York Intermediate-Term Tax-Free Income Fund STATE-SPECIFIC Alabama Arizona California(8) Colorado Connecticut Florida Georgia Kentucky Louisiana Maryland Massachusetts(7) Michigan(7) Minnesota(7) Missouri New Jersey New York(8) North Carolina Ohio(7) Oregon Pennsylvania Tennessee Virginia INSURANCE FUNDS Franklin Templeton Variable Insurance Products Trust(9) (1.) The fund is closed to new investors. Existing shareholders and select retirement plans can continue adding to their accounts. (2.) The fund is a continuously offered, closed-end fund. Shares may be purchased daily; there is no daily redemption. However, each quarter, pending board approval, the fund will authorize the repurchase of 5%-25% of the outstanding number of shares. Investors may tender all or a portion of their shares during the tender period. (3.) Effective 11/1/07, Franklin Aggressive Growth Fund changed its name to Franklin Growth Opportunities Fund. The fund's investment goal and strategy remained the same. (4.) Effective 3/31/08, Franklin Small Cap Growth Fund II changed its name to Franklin Small Cap Growth Fund. The fund's investment goal and strategy remained the same. (5.) An investment in the fund is neither insured nor guaranteed by the U.S. government or by any other entity or institution. (6.) For investors subject to the alternative minimum tax, a small portion of fund dividends may be taxable. Distributions of capital gains are generally taxable. (7.) The fund invests primarily in insured municipal securities. (8.) These funds are available in four or more variations, including long-term portfolios, intermediate-term portfolios, portfolios of insured securities, a high-yield portfolio (CA only) and money market portfolios. (9.) The funds of the Franklin Templeton Variable Insurance Products Trust are generally available only through insurance company variable contracts. 12/08 Not part of the semiannual report (FRANKLIN TEMPLETON INVESTMENTS (R) LOGO) One Franklin Parkway San Mateo, CA 94403-1906 - - WANT TO RECEIVE THIS DOCUMENT FASTER VIA EMAIL? Eligible shareholders can sign up for eDelivery at franklintempleton.com. See inside for details. SEMIANNUAL REPORT AND SHAREHOLDER LETTER FRANKLIN STRATEGIC INCOME FUND INVESTMENT MANAGER Franklin Advisers, Inc. DISTRIBUTOR Franklin Templeton Distributors, Inc. (800) DIAL BEN(R) franklintempleton.com SHAREHOLDER SERVICES (800) 632-2301 Authorized for distribution only when accompanied or preceded by a prospectus. Investors should carefully consider a fund's investment goals, risks, charges and expenses before investing. The prospectus contains this and other information; please read it carefully before investing. To ensure the highest quality of service, telephone calls to or from our service departments may be monitored, recorded and accessed. These calls can be identified by the presence of a regular beeping tone. 194 S2008 12/08 FRANKLIN STRATEGIC SERIES FINANCIAL HIGHLIGHTS FRANKLIN GLOBAL COMMUNICATIONS FUND
Six Months Ended Year Ended April 30, October 31, 2008 ----------------------------------------------------------- CLASS A (unaudited) 2008 2007 2006 2005 2004 - ------- ---------------- ------- ------- ------- ------- ------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period $ 14.16 $ 13.36 $ 11.46 $ 7.94 $ 7.63 $ 5.92 ------- ------- ------- ------- ------- ------- Income from investment operations(a): Net investment income (loss)(b) (0.02) (0.03) (0.11) (0.04) --(c) --(c) Net realized and unrealized gains (losses) (5.04) 0.83 2.01 3.66 0.33 1.71 ------- ------- ------- ------- ------- ------- Total from investment operations (5.06) 0.80 1.90 3.62 0.33 1.71 ------- ------- ------- ------- ------- ------- Less distributions from net investment income -- -- -- (0.10) (0.02) -- ------- ------- ------- ------- ------- ------- Redemption fees(d) --(c) --(c) --(c) --(c) --(c) -- ------- ------- ------- ------- ------- ------- Net asset value, end of period $ 9.10 $ 14.16 $ 13.36 $ 11.46 $ 7.94 $ 7.63 ------- ------- ------- ------- ------- ------- Total return(e) (35.73)% 5.99% 16.58% 45.70% 4.32% 28.89% RATIOS TO AVERAGE NET ASSETS(f) Expenses 1.35%(g) 1.25%(g) 1.42%(g) 1.40%(g) 1.47%(g) 1.47% Net investment income (loss) (0.31)% (0.18)% (0.96)% (0.40)% 0.04% (0.03)% SUPPLEMENTAL DATA Net assets, end of period (000's) $45,785 $84,103 $74,026 $69,746 $49,926 $59,702 Portfolio turnover rate 16.56% 71.74% 121.15% 149.34% 171.40% 137.83%
(a) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (b) Based on average daily shares outstanding. (c) Amount rounds to less than $0.01 per share. (d) Effective September 1, 2008, the redemption fee was eliminated. (e) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. (f) Ratios are annualized for periods less than one year. (g) Benefit of expense reduction rounds to less than 0.01%.
Six Months Ended Year Ended April 30, October 31, 2008 ----------------------------------------------------------- CLASS B (unaudited) 2008 2007 2006 2005 2004 - ------- ---------------- ------- ------- ------- ------- ------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period $ 13.33 $12.66 $ 10.94 $ 7.59 $ 7.33 $ 5.73 ------- ------ ------- ------- ------- ------- Income from investment operations(a): Net investment income (loss)(b) (0.06) (0.13) (0.19) (0.11) (0.05) (0.05) Net realized and unrealized gains (losses) (4.75) 0.80 1.91 3.48 0.31 1.65 ------- ------ ------- ------- ------- ------- Total from investment operations (4.81) 0.67 1.72 3.37 0.26 1.60 ------- ------ ------- ------- ------- ------- Less distributions from net investment income -- -- -- (0.02) -- -- ------- ------ ------- ------- ------- ------- Redemption fees(c) --(d) --(d) --(d) --(d) --(d) -- ------- ------ ------- ------- ------- ------- Net asset value, end of period $ 8.52 $13.33 $ 12.66 $ 10.94 $ 7.59 $ 7.33 ------- ------ ------- ------- ------- ------- Total return(e) (36.08)% 5.21% 15.71% 44.57% 3.69% 27.75% RATIOS TO AVERAGE NET ASSETS(f) Expenses 2.10%(g) 2.00%(g) 2.16%(g) 2.14%(g) 2.21%(g) 2.22% Net investment income (loss) (1.06)% (0.93)% (1.70)% (1.14)% (0.70)% (0.78)% SUPPLEMENTAL DATA Net assets, end of period (000's) $ 1,321 $3,522 $ 3,636 $ 3,517 $ 2,663 $ 3,170 Portfolio turnover rate 16.56% 71.74% 121.15% 149.34% 171.40% 137.83%
The accompanying notes are an integral part of these financial statements. Semiannual Report (a) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (b) Based on average daily shares outstanding. (c) Effective September 1, 2008, the redemption fee was eliminated. (d) Amount rounds to less than $0.01 per share. (e) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. (f) Ratios are annualized for periods less than one year. (g) Benefit of expense reduction rounds to less than 0.01%.
Six Months Ended Year Ended April 30, October 31, 2008 ----------------------------------------------------------- CLASS C (unaudited) 2008 2007 2006 2005 2004 - ------- ---------------- ------- ------- ------- ------- ------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period $ 13.34 $ 12.67 $ 10.96 $ 7.60 $ 7.34 $ 5.74 ------- ------- ------- ------- ------- ------- Income from investment operations(a): Net investment income (loss)(b) (0.06) (0.13) (0.19) (0.11) (0.05) (0.05) Net realized and unrealized gains (losses) (4.74) 0.80 1.90 3.50 0.31 1.65 ------- ------- ------- ------- ------- ------- Total from investment operations (4.80) 0.67 1.71 3.39 0.26 1.60 ------- ------- ------- ------- ------- ------- Less distributions from net investment income -- -- -- (0.03) -- -- ------- ------- ------- ------- ------- ------- Redemption fees(c) --(d) --(d) --(d) --(d) --(d) -- ------- ------- ------- ------- ------- ------- Net asset value, end of period $ 8.54 $ 13.34 $ 12.67 $ 10.96 $ 7.60 $ 7.34 ------- ------- ------- ------- ------- ------- Total return(e) (35.98)% 5.21% 15.69% 44.61% 3.54% 27.87% RATIOS TO AVERAGE NET ASSETS(f) Expenses 2.06%(g) 2.00%(g) 2.17%(g) 2.15%(g) 2.22%(g) 2.22% Net investment income (loss) (1.02)% (0.93)% (1.71)% (1.15)% (0.71)% (0.78)% SUPPLEMENTAL DATA Net assets, end of period (000's) $ 8,938 $18,905 $13,572 $10,287 $ 7,054 $ 8,633 Portfolio turnover rate 16.56% 71.74% 121.15% 149.34% 171.40% 137.83%
(a) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (b) Based on average daily shares outstanding. (c) Effective September 1, 2008, the redemption fee was eliminated. (d) Amount rounds to less than $0.01 per share. (e) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. (f) Ratios are annualized for periods less than one year. (g) Benefit of expense reduction rounds to less than 0.01%. Franklin Strategic Series Franklin Global Communications Fund STATEMENT OF INVESTMENTS, OCTOBER 31, 2008 (UNAUDITED)
SHARES/ COUNTRY WARRANTS VALUE ------------- --------- ----------- COMMON STOCKS AND WARRANTS 94.4% AEROSPACE & DEFENSE 0.6% (a) Orbital Sciences Corp. United States 17,000 $ 348,330 ----------- COMMUNICATIONS EQUIPMENT 18.9% (a) Cisco Systems Inc. United States 80,800 1,435,816 (a, b) Dilithium Networks Inc., wts., 3/20/09 United States 4,126 -- (a) F5 Networks Inc. United States 28,900 717,298 Harris Corp. United States 35,100 1,261,845 (a) Infinera Corp. United States 64,600 502,588 Nokia Corp., ADR Finland 108,000 1,639,440 QUALCOMM Inc. United States 65,500 2,506,030 (a) Research In Motion Ltd. Canada 17,300 872,439 (a) Riverbed Technology Inc. United States 57,700 722,981 (a) Tandberg ASA Norway 53,500 658,099 Telefonaktiebolaget LM Ericsson, B, ADR Sweden 42,200 298,354 ----------- 10,614,890 ----------- COMPUTERS & PERIPHERALS 4.7% (a) Apple Inc. United States 24,600 2,646,714 ----------- DIVERSIFIED TELECOMMUNICATION SERVICES 4.9% AT&T Inc. United States 65,582 1,755,630 Telenor ASA Norway 63,200 374,626 Telus Corp. Canada 12,000 391,200 (a) tw telecom Inc., A United States 29,500 208,860 ----------- 2,730,316 ----------- ELECTRONIC EQUIPMENT, INSTRUMENTS & COMPONENTS 4.9% (a) Dolby Laboratories Inc., A United States 11,300 356,741 (a) FLIR Systems Inc. United States 73,800 2,368,980 ----------- 2,725,721 ----------- INTERNET & CATALOG RETAIL 0.5% (a) Amazon.com Inc. United States 5,500 314,820 ----------- INTERNET SOFTWARE & SERVICES 6.7% (a) Baidu.com Inc., ADR China 3,100 638,600 (a) Equinix Inc. United States 14,700 917,574 (a) Google Inc., A United States 4,700 1,688,992 (a) MercadoLibre Inc. Argentina 14,300 195,481 (a) Omniture Inc. United States 26,200 301,300 ----------- 3,741,947 ----------- MEDIA 3.5% News Corp., A United States 74,900 796,936 (a) Outdoor Channel Holdings Inc. United States 57,500 460,000 The Walt Disney Co. United States 26,530 687,127 ----------- 1,944,063 ----------- SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT 4.7% (a) FormFactor Inc. United States 46,300 806,546 Maxim Integrated Products Inc. United States 60,100 817,360 (a) Microsemi Corp. United States 31,900 693,506 (a) Microtune Inc. United States 138,300 345,750 ----------- 2,663,162 ----------- SOFTWARE 6.2% (a) Activision Blizzard Inc. United States 131,800 1,642,228 (a) Adobe Systems Inc. United States 33,800 900,432 Nintendo Co. Ltd. Japan 1,800 578,443
(a) UbiSoft Entertainment SA France 6,400 335,881 ----------- 3,456,984 ----------- WIRELESS TELECOMMUNICATION SERVICES 38.8% America Movil SAB de CV, L, ADR Mexico 58,200 $ 1,800,708 (a) American Tower Corp., A United States 73,935 2,388,840 (a) Bharti Airtel Ltd. India 26,405 352,148 Cellcom Israel Ltd. Israel 15,700 462,522 (a) Centennial Communications Corp., A United States 245,600 874,336 China Mobile (Hong Kong) Ltd., ADR China 12,600 553,014 (a) Crown Castle International Corp. United States 76,638 1,622,427 (a) Leap Wireless International Inc. United States 41,500 1,163,660 (a) MetroPCS Communications Inc. United States 172,900 2,375,646 (a) NII Holdings Inc. United States 98,400 2,534,784 Rogers Communications Inc., B Canada 91,900 2,659,923 (a) SBA Communications Corp. United States 130,400 2,737,096 Sprint Nextel Corp. United States 465,100 1,455,763 Taiwan Mobile Co. Ltd. Taiwan 556,294 770,733 ----------- 21,751,600 ----------- TOTAL COMMON STOCKS AND WARRANTS (COST $65,459,627) 52,938,547 ----------- PREFERRED STOCKS 0.5% COMMUNICATIONS EQUIPMENT 0.5% (a, b) Dilithium Networks Inc., depository receipt, D, pfd., 144A, PIPES United States 124,248 289,498 (a, b) Dilithium Networks Inc., pfd., D, 11.00%, 3/20/09 United States 4,807 4,807 ----------- TOTAL PREFERRED STOCKS (COST $294,307) 294,305 ----------- TOTAL INVESTMENTS BEFORE SHORT TERM INVESTMENTS (COST $65,753,934) 53,232,852 ----------- SHORT TERM INVESTMENTS (COST $4,344,943) 7.8% MONEY MARKET FUNDS 7.8% (c) Franklin Institutional Fiduciary Trust Money Market Portfolio, 1.56% United States 4,344,943 4,344,943 ----------- TOTAL INVESTMENTS (COST $70,098,877) 102.7% 57,577,795 OTHER ASSETS, LESS LIABILITIES (2.7)% (1,533,634) ----------- NET ASSETS 100.0% $56,044,161 ===========
SELECTED PORTFOLIO ABBREVIATIONS ADR American Depository Receipt PIPES Private Investment in Public Equity Security (a) Non-income producing for the twelve months ended October 31, 2008. (b) See Note 8 regarding restricted and illiquid securities. (c) See Note 7 regarding investments in the Franklin Institutional Fiduciary Trust Money Market Portfolio. The rate shown is the annualized seven-day yield at period end. FRANKLIN STRATEGIC SERIES FINANCIAL HIGHLIGHTS FRANKLIN GLOBAL HEALTH CARE FUND
Six Months Ended Year Ended April 30, October 31, 2008 --------------------------------------------------------------- CLASS A (unaudited) 2008 2007 2006 2005 2004 - ------- ---------------- -------- -------- -------- ------- --------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period $ 24.05 $ 25.92 $ 23.31 $ 20.36 $ 19.86 $ 15.53 ------- -------- -------- -------- ------- ------- Income from investment operations(a): Net investment income (loss)(b) 0.11 (0.01) --(c) 0.12 (0.08) (0.10) Net realized and unrealized gains (losses) (4.41) (1.84) 2.74 2.83 0.58 4.43 ------- -------- -------- -------- ------- ------- Total from investment operations (4.30) (1.85) 2.74 2.95 0.50 4.33 ------- -------- -------- -------- ------- ------- Less distributions from net investment income -- (0.02) (0.13) -- -- -- ------- -------- -------- -------- ------- ------- Redemption fees(d) --(c) --(c) --(c) --(c) --(c) -- ------- -------- -------- -------- ------- ------- Net asset value, end of period $ 19.75 $ 24.05 $ 25.92 $ 23.31 $ 20.36 $19.86 ------- -------- -------- -------- ------- ------- Total return(e) (17.84)% (7.10)% 11.80% 14.44% 2.52% 27.88% RATIOS TO AVERAGE NET ASSETS(f) Expenses before expense reduction 1.26% 1.19% 1.27% 1.26% 1.32% 1.36% Expenses net of expense reduction 1.26%(g) 1.18% 1.27%(g) 1.26%(g) 1.32%(g) 1.36% Net investment income (loss) 0.88% (0.04)% --%(h) 0.55% (0.42)% (0.52)% SUPPLEMENTAL DATA Net assets, end of period (000's) $76,050 $105,474 $108,756 $106,293 $86,934 $91,314 Portfolio turnover rate 4.68% 39.32% 29.33% 39.75% 77.50% 82.63%
(a) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (b) Based on average daily shares outstanding. (c) Amount rounds to less than $0.01 per share. (d) Effective September 1, 2008, the redemption fee was eliminated. (e) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. (f) Ratios are annualized for periods less than one year. (g) Benefit of expense reduction rounds to less than 0.01%. (h) Rounds to less than 0.01%.
Six Months Ended Year Ended April 30, October 31, 2008 ------------------------------------------------------------- CLASS B (unaudited) 2008 2007 2006 2005 2004 - ------- ---------------- -------- -------- -------- ------- ------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period $ 22.59 $24.50 $ 22.08 $ 19.44 $ 19.10 $ 15.04 ------- ------ ------- ------- ------- ------- Income from investment operations(a): Net investment income (loss)(b) 0.01 (0.20) (0.17) (0.04) (0.22) (0.23) Net realized and unrealized gains (losses) (4.12) (1.71) 2.59 2.68 0.56 4.29 ------- ------ ------- ------- ------- ------- Total from investment operations (4.11) (1.91) 2.42 2.64 0.34 4.06 ------- ------ ------- ------- ------- ------- Redemption fees(c) --(d) --(d) --(d) --(d) --(d) -- ------- ------ ------- ------- ------- ------- Net asset value, end of period $ 18.48 $22.59 $ 24.50 $ 22.08 $ 19.44 $ 19.10 ------- ------ ------- ------- ------- ------- Total return(e) (18.15)% (7.80)% 10.96% 13.58% 1.78% 26.91% RATIOS TO AVERAGE NET ASSETS(f) Expenses before expense reduction 2.01% 1.94% 2.01% 2.00% 2.06% 2.11% Expenses net of expense reduction 2.01%(g) 1.93% 2.01%(g) 2.00%(g) 2.06%(g) 2.11% Net investment income (loss) 0.13% (0.79)% (0.74)% (0.19)% (1.16)% (1.27)% SUPPLEMENTAL DATA Net assets, end of period (000's) $ 5,881 $9,213 $11,367 $14,233 $12,060 $13,054 Portfolio turnover rate 4.68% 39.32% 29.33% 39.75% 77.50% 82.63%
(a) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (b) Based on average daily shares outstanding. (c) Effective September 1, 2008, the redemption fee was eliminated. (d) Amount rounds to less than $0.01 per share. (e) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. (f) Ratios are annualized for periods less than one year. (g) Benefit of expense reduction rounds to less than 0.01%.
Six Months Ended Year Ended April 30, October 31, 2008 ------------------------------------------------------------- CLASS C (unaudited) 2008 2007 2006 2005 2004 - ------- ---------------- -------- -------- -------- ------- ------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period $ 22.37 $ 24.26 $ 21.87 $ 19.24 $ 18.92 $ 14.90 ------- ------- ------- ------- ------- ------- Income from investment operations(a): Net investment income (loss)(b) 0.01 (0.19) (0.17) (0.04) (0.22) (0.22) Net realized and unrealized gains (losses) (4.08) (1.70) 2.56 2.67 0.54 4.24 ------- ------- ------- ------- ------- ------- Total from investment operations (4.07) (1.89) 2.39 2.63 0.32 4.02 ------- ------- ------- ------- ------- ------- Redemption fees(c) --(d) --(d) --(d) --(d) --(d) -- ------- ------- ------- ------- ------- ------- Net asset value, end of period $ 18.30 $ 22.37 $ 24.26 $ 21.87 $ 19.24 $ 18.92 ------- ------- ------- ------- ------- ------- Total return(e) (18.19)% (7.79)% 10.93% 13.67% 1.69% 26.98% RATIOS TO AVERAGE NET ASSETS(f) Expenses before expense reduction 2.00% 1.94% 2.01% 2.01% 2.07% 2.11% Expenses net of expense reduction 2.00%(g) 1.93% 2.01%(g) 2.01%(g) 2.07%(g) 2.11% Net investment income (loss) 0.14% (0.79)% (0.74)% (0.20)% (1.17)% (1.27)% SUPPLEMENTAL DATA Net assets, end of period (000's) $20,146 $28,206 $27,560 $29,083 $22,021 $23,850 Portfolio turnover rate 4.68% 39.32% 29.33% 39.75% 77.50% 82.63%
(a) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (b) Based on average daily shares outstanding. (c) Effective September 1, 2008, the redemption fee was eliminated. (d) Amount rounds to less than $0.01 per share. (e) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. (f) Ratios are annualized for periods less than one year. (g) Benefit of expense reduction rounds to less than 0.01%. Franklin Strategic Series Franklin Global Health Care Fund STATEMENT OF INVESTMENTS, OCTOBER 31, 2008 (UNAUDITED)
SHARES/ COUNTRY WARRANTS VALUE -------------- --------- ------------ COMMON STOCKS AND WARRANTS 97.5% BIOTECHNOLOGY 12.4% (a) Amgen Inc. United States 21,900 $ 1,311,591 (a) Celgene Corp. United States 44,800 2,878,848 (a) Cephalon Inc. United States 15,900 1,140,348 (a, b) CytRx Corp., 144A United States 82,000 37,827 (a) Genzyme Corp. United States 49,500 3,607,560 (a) Gilead Sciences Inc. United States 69,600 3,191,160 (a) Myriad Genetics Inc. United States 7,100 447,939 (a, b) RXi Pharmaceuticals Corp., 144A United States 4,091 37,633 ------------ 12,652,906 ------------ ELECTRICAL EQUIPMENT 0.3% (a) Polypore International Inc. United States 32,800 279,784 ------------ FOOD & STAPLES RETAILING 2.3% CVS Caremark Corp. United States 76,700 2,350,855 ------------ HEALTH CARE EQUIPMENT & SUPPLIES 18.4% Baxter International Inc. United States 49,300 2,982,157 C. R. Bard Inc. United States 18,100 1,597,325 DENTSPLY International Inc. United States 35,800 1,087,604 (a) Hologic Inc. United States 36,088 441,717 Medtronic Inc. United States 121,000 4,879,930 Mindray Medical International Ltd., ADR China 18,200 392,392 Smith & Nephew PLC, ADR United Kingdom 42,900 1,980,693 (a) St. Jude Medical Inc. United States 33,900 1,289,217 Stryker Corp. United States 43,900 2,346,894 (a) Zimmer Holdings Inc. United States 38,700 1,796,841 ------------ 18,794,770 ------------ HEALTH CARE PROVIDERS & SERVICES 16.7% Aetna Inc. United States 49,000 1,218,630 (a) Amedisys Inc. United States 23,734 1,338,835 (a) DaVita Inc. United States 41,200 2,338,100 Diagnosticos DA America SA Brazil 64,200 744,580 Ensign Group Inc. United States 44,100 722,799 (a) Express Scripts Inc. United States 36,600 2,218,326 (a) Henry Schein Inc. United States 28,300 1,324,723 (a) Laboratory Corp. of America Holdings United States 28,300 1,740,167 (a) Medco Health Solutions Inc. United States 54,800 2,079,660 (a) MWI Veterinary Supply Inc. United States 26,900 931,547 (a) Skilled Healthcare Group Inc. United States 51,700 634,876 (a) Triple-S Management Corp., B United States 55,000 561,550 (a) WellPoint Inc. United States 29,400 1,142,778 ------------ 16,996,571 ------------ HEALTH CARE TECHNOLOGY 3.6% Allscripts-Misys Healthcare Solutions United States 121,000 786,500 Inc. (a) Cerner Corp. United States 44,500 1,656,735 (a) MedAssets Inc. United States 42,200 608,946 (a) Phase Forward Inc. United States 40,300 575,081 ------------ 3,627,262 ------------ INSURANCE 1.1% (b) Amil Participacoes SA, 144A Brazil 190,000 877,923 (b) Sul America SA, 144A Brazil 40,000 295,721 ------------ 1,173,644 ------------ LIFE SCIENCES TOOLS & SERVICES 6.5% (a) Covance Inc. United States 17,200 860,000 Pharmaceutical Product Development Inc. United States 63,400 1,964,132 (a) Thermo Fisher Scientific Inc. United States 64,168 2,605,221
(a) Waters Corp. United States 27,300 $ 1,195,740 ------------ 6,625,093 ------------ PHARMACEUTICALS 36.2% Abbott Laboratories United States 52,600 2,900,890 Allergan Inc. United States 22,780 903,683 Bayer AG, Br. Germany 44,400 2,496,012 Johnson & Johnson United States 88,000 5,397,920 (a, b) MacroChem Corp., wts., PIPES, 144A, United States 75,000 -- 2/01/49 Merck & Co. Inc. United States 122,100 3,778,995 Merck KGaA Germany 30,500 2,706,039 Novartis AG Switzerland 58,600 2,951,988 Roche Holding AG Switzerland 29,000 4,422,669 Schering-Plough Corp. United States 346,400 5,019,336 Shire PLC, ADR United Kingdom 28,800 1,136,160 Teva Pharmaceutical Industries Ltd., ADR Israel 78,800 3,378,944 Wyeth United States 57,800 1,860,004 ------------ 36,952,640 ------------ TOTAL COMMON STOCKS AND WARRANTS (COST $100,103,861) 99,453,525 ------------ SHORT TERM INVESTMENTS (COST $2,885,662) 2.8% MONEY MARKET FUNDS 2.8% (c) Franklin Institutional Fiduciary Trust Money Market Portfolio, 1.56% United States 2,885,662 2,885,662 ------------ TOTAL INVESTMENTS (COST $102,989,523) 100.3% 102,339,187 OTHER ASSETS, LESS LIABILITIES (0.3)% (262,251) ------------ NET ASSETS 100.0% $102,076,936 ============
SELECTED PORTFOLIO ABBREVIATIONS ADR American Depository Receipt PIPES Private Investment in Public Equity Security (a) Non-income producing for the twelve months ended October 31, 2008. (b) Security was purchased pursuant to Rule 144A under the Securities Act of 1933 and may be sold in transactions exempt from registration only to qualified institutional buyers or in a public offering registered under the Securities Act of 1933. These securities have been deemed liquid under guidelines approved by the Trust's Board of Trustees. At October 31, 2008, the aggregate value of these securities was $1,249,104, representing 1.22% of net assets. (c) See Note 7 regarding investments in the Franklin Institutional Fiduciary Trust Money Market Portfolio. The rate shown is the annualized seven-day yield at period end. FRANKLIN STRATEGIC SERIES FINANCIAL HIGHLIGHTS FRANKLIN TECHNOLOGY FUND
Six Months Ended Year Ended April 30, October 31, 2008 ------------------------------------------------------- CLASS A (unaudited) 2008 2007 2006 2005 2004 - ------- ---------------- ------- ------- ------- ------- ------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period $ 5.83 $ 5.83 $ 5.69 $ 4.34 $ 4.25 $ 3.19 ------- ------- ------- ------- ------- ------- Income from investment operations(a): Net investment income (loss)(b) (0.03) (0.06) (0.05) (0.06) (0.05) (0.05) Net realized and unrealized gains (losses) (1.58) 0.06 0.19 1.41 0.14 1.11 ------- ------- ------- ------- ------- ------- Total from investment operations (1.61) -- 0.14 1.35 0.09 1.06 ------- ------- ------- ------- ------- ------- Redemption fees(c) --(d) --(d) --(d) --(d) --(d) -- ------- ------- ------- ------- ------- ------- Net asset value, end of period $ 4.22 $ 5.83 $ 5.83 $ 5.69 $ 4.34 $ 4.25 ------- ------- ------- ------- ------- ------- Total return(e) (27.62)% --% 2.46% 31.11% 2.12% 33.23% RATIOS TO AVERAGE NET ASSETS(f) Expenses 1.63%(g) 1.59%(g) 1.83%(g) 1.74%(g) 1.73%(g) 1.72% Net investment income (loss) (1.01)% (1.00)% (1.03)% (1.27)% (1.02)% (1.48)% SUPPLEMENTAL DATA Net assets, end of period (000's) $22,309 $32,965 $30,089 $33,681 $27,626 $28,636 Portfolio turnover rate 45.31% 104.05% 138.70% 96.23% 68.39% 141.34%
(a) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (b) Based on average daily shares outstanding. (c) Effective September 1, 2008, the redemption fee was eliminated. (d) Amount rounds to less than $0.01 per share. (e) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. (f) Ratios are annualized for periods less than one year. (g) Benefit of expense reduction rounds to less than 0.01%.
Six Months Ended Year Ended April 30, October 31, 2008 ----------------------------------------------------- CLASS B (unaudited) 2008 2007 2006 2005 2004 - ------- ---------------- ------- ------- ------ ------ ------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period $ 5.54 $ 5.58 $ 5.49 $ 4.21 $ 4.15 $ 3.14 ------- ------- ------- ------ ------ ------- Income from investment operations(a): Net investment income (loss)(b) (0.05) (0.10) (0.08) (0.09) (0.08) (0.17) Net realized and unrealized gains (losses) (1.49) 0.06 0.17 1.37 0.14 1.18 ------- ------- ------- ------ ------ ------- Total from investment operations (1.54) (0.04) 0.09 1.28 0.06 1.01 ------- ------- ------- ------ ------ ------- Redemption fees(c) --(d) --(d) --(d) --(d) --(d) -- ------- ------- ------- ------ ------ ------- Net asset value, end of period $ 4.00 $ 5.54 $ 5.58 $ 5.49 $ 4.21 $ 4.15 ------- ------- ------- ------ ------ ------- Total return(e) (27.80)% (0.89)% 1.64% 30.40% 1.45% 32.17% RATIOS TO AVERAGE NET ASSETS(f) Expenses 2.32%(g) 2.27%(g) 2.48%(g) 2.37%(g) 2.40%(g) 2.35% Net investment income (loss) (1.70)% (1.68)% (1.68)% (1.90)% (1.69)% (2.11)% SUPPLEMENTAL DATA Net assets, end of period (000's) $ 1,571 $ 3,009 $ 3,574 $4,385 $4,221 $ 4,788 Portfolio turnover rate 45.31% 104.05% 138.70% 96.23% 68.39% 141.34%
(a) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (b) Based on average daily shares outstanding. (c) Effective September 1, 2008, the redemption fee was eliminated. (d) Amount rounds to less than $0.01 per share. (e) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. (f) Ratios are annualized for periods less than one year. (g) Benefit of expense reduction rounds to less than 0.01%.
Six Months Ended Year Ended April 30, October 31, 2008 ----------------------------------------------------- CLASS C (unaudited) 2008 2007 2006 2005 2004 - ------- ---------------- ------- ------- ------ ------ ------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period $ 5.52 $ 5.56 $ 5.47 $ 4.20 $ 4.14 $ 3.13 ------- ------- ------- ------ ------ ------- Income from investment operations(a): Net investment income (loss)(b) (0.05) (0.10) (0.09) (0.09) (0.08) (0.14) Net realized and unrealized gains (losses) (1.49) 0.06 0.18 1.36 0.14 1.15 ------- ------- ------- ------ ------ ------- Total from investment operations (1.54) (0.04) 0.09 1.27 0.06 1.01 ------- ------- ------- ------ ------ ------- Redemption fees(c) --(d) --(d) --(d) --(d) --(d) -- ------- ------- ------- ------ ------ ------- Net asset value, end of period $ 3.98 $ 5.52 $ 5.56 $ 5.47 $ 4.20 $ 4.14 ------- ------- ------- ------ ------ ------- Total return(e) (27.90)% (0.90)% 1.65% 30.24% 1.45% 32.27% RATIOS TO AVERAGE NET ASSETS(f) Expenses 2.32%(g) 2.28%(g) 2.48%(g) 2.38%(g) 2.42%(g) 2.37% Net investment income (loss) (1.70)% (1.69)% (1.68)% (1.91)% (1.71)% (2.13)% SUPPLEMENTAL DATA Net assets, end of period (000's) $ 6,239 $ 9,783 $ 8,819 $9,621 $8,502 $10,949 Portfolio turnover rate 45.31% 104.05% 138.70% 96.23% 68.39% 141.34%
(a) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (b) Based on average daily shares outstanding. (c) Effective September 1, 2008, the redemption fee was eliminated. (d) Amount rounds to less than $0.01 per share. (e) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. (f) Ratios are annualized for periods less than one year. (g) Benefit of expense reduction rounds to less than 0.01%.
Six Months Ended Year Ended April 30, October 31, 2008 ----------------------------------------------------- CLASS R (unaudited) 2008 2007 2006 2005 2004 - ------- ---------------- ------- ------- ------ ------ ------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period $ 5.77 $ 5.79 $ 5.66 $ 4.32 $ 4.24 $ 3.19 ------- ------- ------- ------ ------ ------- Income from investment operations(a): Net investment income (loss)(b) (0.03) (0.07) (0.06) (0.07) (0.05) (0.06) Net realized and unrealized gains (losses) (1.57) 0.05 0.19 1.41 0.13 1.11 ------- ------- ------- ------ ------ ------- Total from investment operations (1.60) (0.02) 0.13 1.34 0.08 1.05 ------- ------- ------- ------ ------ ------- Redemption fees(c) --(d) --(d) --(d) --(d) --(d) -- ------- ------- ------- ------ ------ ------- Net asset value, end of period $ 4.17 $ 5.77 $ 5.79 $ 5.66 $ 4.32 $ 4.24 ------- ------- ------- ------ ------ ------- Total return(e) (27.73)% (0.35)% 2.30% 31.02% 1.89% 33.33% RATIOS TO AVERAGE NET ASSETS(f) Expenses 1.83%(g) 1.78%(g) 1.98%(g) 1.89%(g) 1.92%(g) 1.87% Net investment income (loss) (1.21)% (1.19)% (1.18)% (1.42)% (1.21)% (1.63)% SUPPLEMENTAL DATA Net assets, end of period (000's) $ 5,470 $ 7,605 $ 6,280 $3,797 $2,701 $ 1,582 Portfolio turnover rate 45.31% 104.05% 138.70% 96.23% 68.39% 141.34%
(a) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (b) Based on average daily shares outstanding. (c) Effective September 1, 2008, the redemption fee was eliminated. (d) Amount rounds to less than $0.01 per share. (e) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. (f) Ratios are annualized for periods less than one year. (g) Benefit of expense reduction rounds to less than 0.01%. Franklin Strategic Series Franklin Technology Fund STATEMENT OF INVESTMENTS, OCTOBER 31, 2008 (UNAUDITED)
SHARES/ COUNTRY WARRANTS VALUE -------------- --------- ------------ COMMON STOCKS 94.8% COMMUNICATIONS EQUIPMENT 20.0% (a) Cisco Systems Inc. United States 79,000 $ 1,403,830 Corning Inc. United States 63,000 682,290 Harris Corp. United States 20,700 744,165 Nokia Corp., ADR Finland 50,200 762,036 QUALCOMM Inc. United States 36,900 1,411,794 (a) Research In Motion Ltd. Canada 11,800 595,074 (a) Riverbed Technology Inc. United States 56,300 705,439 (a) Tandberg ASA Norway 32,200 396,090 (a) ViaSat Inc. United States 42,500 774,350 ------------ 7,475,068 ------------ COMPUTERS & PERIPHERALS 7.1% (a) Apple Inc. United States 11,500 1,237,285 Hewlett-Packard Co. United States 23,900 914,892 (a) NetApp Inc. United States 36,100 488,433 ------------ 2,640,610 ------------ ELECTRICAL EQUIPMENT 1.5% SunPower Corp., A United States 14,300 558,558 ------------ ELECTRONIC EQUIPMENT, INSTRUMENTS & COMPONENTS 4.2% (a) Agilent Technologies Inc. United States 49,400 1,096,186 (a) FLIR Systems Inc. United States 15,300 491,130 ------------ 1,587,316 ------------ INTERNET & CATALOG RETAIL 1.9% (a) Amazon.com Inc. United States 12,300 704,052 ------------ INTERNET SOFTWARE & SERVICES 8.8% (a) Baidu.com Inc., ADR China 2,200 453,200 (a) Equinix Inc. United States 12,500 780,250 Google Inc., A United States 3,600 1,293,696 (a) MercadoLibre Inc. Argentina 29,700 405,999 (a) Omniture Inc. United States 32,500 373,750 ------------ 3,306,895 ------------ IT SERVICES 7.3% Accenture Ltd., A United States 18,600 614,730 (a) Affiliated Computer Services Inc., A United States 13,700 561,700 (a) Alliance Data Systems Corp. United States 15,700 787,512 MasterCard Inc., A United States 5,300 783,446 ------------ 2,747,388 ------------ LIFE SCIENCES TOOLS & SERVICES 4.3% (a) Thermo Fisher Scientific Inc. United States 20,000 812,000 (a) Waters Corp. United States 18,000 788,400 ------------ 1,600,400 ------------ MEDIA 2.1% (a) The DIRECTV Group Inc. United States 34,900 763,961 ------------ SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT 21.7% (a) Advanced Analogic Technologies Inc. United States 176,200 530,362 (a) Atheros Communications United States 30,100 540,897 (a) FormFactor Inc. United States 42,900 747,318 (a) Hittite Microwave Corp. United States 18,100 593,137 Maxim Integrated Products Inc. United States 62,700 852,720 Microchip Technology Inc. United States 35,700 879,291 (a) Microsemi Corp. United States 44,600 969,604 (a) Microtune Inc. United States 199,900 499,750 (a) Netlogic Microsystems Inc. United States 35,200 743,424 (a) Power Integrations Inc. United States 31,600 663,284
(a) Silicon Laboratories Inc. United States 23,200 602,272 (a) Varian Semiconductor Equipment Associates Inc. United States 26,000 $ 510,120 ------------ 8,132,179 ------------ SOFTWARE 11.6% (a) Activision Blizzard Inc. United States 36,232 451,451 (a) Adobe Systems Inc. United States 22,800 607,392 (a) ANSYS Inc. United States 17,500 501,025 (a) Concur Technologies Inc. United States 17,200 433,956 Nintendo Co. Ltd. Japan 1,700 546,307 (a) Nuance Communications Inc. United States 62,100 568,215 (a) Oracle Corp. United States 39,300 718,797 (a) Quest Software Inc. United States 39,200 519,400 ------------ 4,346,543 ------------ WIRELESS TELECOMMUNICATION SERVICES 4.3% (a) American Tower Corp., A United States 49,500 1,599,345 ------------ TOTAL COMMON STOCKS (COST $43,527,144) 35,462,315 ------------ SHORT TERM INVESTMENTS (COST $3,308,051) 8.8% MONEY MARKET FUNDS 8.8% (b) Franklin Institutional Fiduciary Trust Money Market Portfolio, 1.56% United States 3,308,051 3,308,051 ----------- TOTAL INVESTMENTS (COST $46,835,195) 103.6% 38,770,366 OTHER ASSETS, LESS LIABILITIES (3.6)% (1,331,057) ------------ NET ASSETS 100.0% $ 37,439,309 ============
SELECTED PORTFOLIO ABBREVIATIONS ADR American Depository Receipt (a) Non-income producing for the twelve months ended October 31, 2008. (b) See Note 7 regarding investments in the Franklin Institutional Fiduciary Trust Money Market Portfolio. The rate shown is the annualized seven-day yield at period end. FRANKLIN STRATEGIC SERIES FINANCIAL STATEMENTS STATEMENT OF ASSETS AND LIABILITIES OCTOBER 31, 2008 (UNAUDITED)
Franklin Global Franklin Global Franklin Communications Fund Health Care Fund Technology Fund ------------------- ---------------- --------------- Assets: Investments in securities: Cost - Unaffiliated issuers $ 65,753,934 $100,103,861 $43,527,144 Cost - Sweep Money Fund (Note 7) 4,344,943 2,885,662 3,308,051 ------------ ------------ ----------- Total cost of investments $ 70,098,877 $102,989,523 $46,835,195 ------------ ------------ ----------- Value - Unaffiliated issuers $ 53,232,852 $ 99,453,525 $35,462,315 Value - Sweep Money Fund (Note 7) 4,344,943 2,885,662 3,308,051 ------------ ------------ ----------- Total value of investments 57,577,795 102,339,187 38,770,366 Cash 4,807 -- -- Receivables: Investment securities sold 130,942 -- 161,614 Capital shares sold 3,766 22,881 14,921 Dividends 51,236 140,473 19,130 ------------ ------------ ----------- Total assets 57,768,546 102,502,541 38,966,031 ------------ ------------ ----------- Liabilities: Payables: Investment securities purchased 1,410,351 -- 1,340,519 Capital shares redeemed 206,663 264,832 104,383 Affiliates 63,045 119,222 49,848 Accrued expenses and other liabilities 44,326 41,551 31,972 ------------ ------------ ----------- Total liabilities 1,724,385 425,605 1,526,722 ------------ ------------ ----------- Net assets, at value $ 56,044,161 $102,076,936 $37,439,309 ------------ ------------ ----------- Net assets consist of: Paid-in capital $167,394,675 $111,386,031 $90,297,911 Undistributed net investment income (loss) (213,235) 457,348 (316,924) Net unrealized appreciation (depreciation) (12,519,917) (654,154) (8,064,071) Accumulated net realized gain (loss) (98,617,362) (9,112,289) (44,477,607) ------------ ------------ ----------- Net assets, at value $ 56,044,161 $102,076,936 $37,439,309 ------------ ------------ ----------- CLASS A: Net assets, at value $ 45,785,280 $ 76,050,091 $22,308,863 ------------ ------------ ----------- Shares outstanding 5,031,969 3,849,692 5,288,752 ------------ ------------ ----------- Net asset value per share(a) $ 9.10 $ 19.75 $ 4.22 ------------ ------------ ----------- Maximum offering price per share (net asset value per share / 94.25%) $ 9.66 $20.95 $ 4.48 ------------ ------------ ----------- CLASS B: Net assets, at value $ 1,320,911 $ 5,880,679 $1,571,117 ------------ ------------ ----------- Shares outstanding 154,990 318,135 392,986 ------------ ------------ ----------- Net asset value and maximum offering price per share(a) $ 8.52 $ 18.48 $ 4.00 ------------ ------------ ----------- CLASS C: Net assets, at value $ 8,937,970 $ 20,146,166 $6,239,498 ------------ ------------ -----------
Shares outstanding 1,046,972 1,101,129 1,567,182 ------------ ------------ ----------- Net asset value and maximum offering price per share(a) $ 8.54 $ 18.30 $ 3.98 ------------ ------------ ----------- CLASS R: Net assets, at value -- -- $ 5,470,228 ------------ ------------ ----------- Shares outstanding -- -- 1,310,654 ------------ ------------ ----------- Net asset value and maximum offering price per share -- -- $ 4.17 ------------ ------------ ----------- ADVISOR CLASS: Net assets, at value -- -- $ 1,849,603 ------------ ------------ ----------- Shares outstanding -- -- 426,499 ------------ ------------ -----------
STATEMENT OF ASSETS AND LIABILITIES (CONTINUED) OCTOBER 31, 2008 (UNAUDITED)
Franklin Global Franklin Global Franklin Communications Fund Health Care Fund Technology Fund ------------------- ---------------- --------------- Net asset value and maximum offering price per share -- -- $ 4.34 ------------ ------------ -----------
(a) Redemption price is equal to net asset value less contingent deferred sales charges, if applicable. STATEMENTS OF OPERATIONS FOR THE PERIOD ENDED OCTOBER 31, 2008 (UNAUDITED)
Franklin Global Franklin Global Franklin Communications Fund Health Care Fund Technology Fund ------------------- ---------------- --------------- Investment income: Dividends: (net of foreign taxes)(a) Unaffiliated issuers $ 459,648 $ 1,384,177 $ 121,758 Sweep Money Fund (Note 7) 20,320 45,848 44,337 ------------ ------------ ------------ Total investment income 479,968 1,430,025 166,095 ------------ ------------ ------------ Expenses: Management fees (Note 3a) 286,227 391,182 141,441 Administrative fees Note 3b) -- -- 54,126 Distribution fees: (Note 3c) Class A 92,580 123,488 48,300 Class B 13,677 41,848 12,714 Class C 77,390 133,264 45,628 Class R -- -- 18,216 Transfer agent fees (Note 3e) 146,193 207,752 104,895 Custodian fees (Note 4) 9,374 6,790 412 Reports to shareholders 16,070 21,536 9,277 Registration and filing fees 22,223 20,148 26,435 Professional fees 13,052 11,857 9,601 Trustees' fees and expenses 873 1,104 459 Other 15,858 14,012 11,527 ------------ ------------ ------------ Total expenses 693,517 972,981 483,031 Expense reductions (Note 4) (314) (304) (12) ------------ ------------ ------------ Net expenses 693,203 972,677 483,019 ------------ ------------ ------------ Net investment income (loss) (213,235) 457,348 (316,924) ------------ ------------ ------------ Realized and unrealized gains (losses): Net realized gain (loss) from: Investments 6,017,065 (4,996,372) 1,501,453 Foreign currency transactions 55,683 23,368 (5,831) ------------ ------------ ------------ Net realized gain (loss) 6,072,748 (4,973,004) 1,495,622 ------------ ------------ ------------ Net change in unrealized appreciation (depreciation) on: Investments (40,786,919) (19,144,097) (16,366,449) Translation of other assets and liabilities denominated in foreign currencies 3,586 (15,166) 758 Change in deferred taxes on unrealized appreciation (depreciation) 39,827 -- -- ------------ ------------ ------------ Net change in unrealized appreciation (depreciation) (40,743,506) (19,159,263) (16,365,691) ------------ ------------ ------------ Net realized and unrealized gain (loss) (34,670,758) (24,132,267) (14,870,069) ------------ ------------ ------------ Net increase (decrease) in net assets resulting from operations $(34,883,993) $(23,674,919) $(15,186,993) ------------ ------------ ------------ (a)Foreign taxes withheld on dividends $ 51,469 $ 3,942 $4,169
STATEMENTS OF CHANGES IN NET ASSETS
FRANKLIN GLOBAL FRANKLIN GLOBAL COMMUNICATIONS FUND HEALTH CARE FUND --------------------------------- --------------------------------- SIX MONTHS ENDED SIX MONTHS ENDED OCTOBER 31, 2008 YEAR ENDED OCTOBER 31, 2008 YEAR ENDED (UNAUDITED) APRIL 30, 2008 (UNAUDITED) APRIL 30, 2008 ---------------- -------------- ---------------- -------------- Increase (decrease) in net assets: Operations: Net investment income (loss) $ (213,235) $ (359,915) $ 457,348 $ (355,230) Net realized gain (loss) from investments and foreign currency transactions 6,072,748 8,699,670 (4,973,004) 9,484,503 Net change in unrealized appreciation (depreciation) on investments, translation of other assets and liabilities denominated in foreign currencies and deferred taxes (40,743,506) (5,274,357) (19,159,263) (20,441,554) ------------ ------------ ------------ ------------ Net increase (decrease) in net assets resulting from operations (34,883,993) 3,065,398 (23,674,919) (11,312,281) ------------ ------------ ------------ ------------ Distributions to shareholders from net investment income: Class A -- -- -- (102,980) ------------ ------------ ------------ ------------ Capital share transactions: (Note 2) Class A (10,268,927) 6,881,245 (12,072,414) 5,038,484 Class B (1,271,053) (275,845) (1,895,513) (1,389,273) Class C (4,062,903) 5,622,814 (3,174,149) 2,976,404 ------------ ------------ ------------ ------------ Total capital share transactions (15,602,883) 12,228,214 (17,142,076) 6,625,615 ------------ ------------ ------------ ------------ Redemption fees 922 1,708 158 96 ------------ ------------ ------------ ------------ Net increase (decrease) in net assets (50,485,954) 15,295,320 (40,816,837) (4,789,550) Net assets: Beginning of period 106,530,115 91,234,795 142,893,773 147,683,323 ------------ ------------ ------------ ------------ End of period $ 56,044,161 $106,530,115 $102,076,936 $142,893,773 ------------ ------------ ------------ ------------ Undistributed net investment income (loss) included in net assets: End of period $ (213,235) $ -- $ 457,348 $ -- ------------ ------------ ------------ ------------
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
FRANKLIN TECHNOLOGY FUND --------------------------------- SIX MONTHS ENDED OCTOBER 31, 2008 YEAR ENDED (UNAUDITED) APRIL 30, 2008 ---------------- -------------- Increase (decrease) in net assets: Operations: Net investment income (loss) $ (316,924) $ (647,483) Net realized gain (loss) from investments and foreign currency transactions 1,495,622 1,115,081 Net change in unrealized appreciation (depreciation) on investments and translation of other assets and liabilities denominated in foreign currencies (16,365,691) (1,724,645) ------------ ----------- Net increase (decrease) in net assets resulting from operations (15,186,993) (1,257,047) ------------ ----------- Capital share transactions:(Note 2) Class A (1,536,091) 3,738,104 Class B (775,472) (501,176) Class C (949,843) 1,282,176 Class R (40,873) 1,322,219 Advisor Class (287,849) 149,967 ------------ ----------- Total capital share transactions (3,590,128) 5,991,290 ------------ ----------- Redemption fees 132 1,163 ------------ ----------- Net increase (decrease) in net assets (18,776,989) 4,735,406 Net assets: Beginning of period 56,216,298 51,480,892 ------------ ----------- End of period $ 37,439,309 $56,216,298 ------------ ----------- Undistributed net investment income (loss) included in net assets: End of period $ (316,924) -- ------------ -----------
Franklin Strategic Series Notes to Financial Statements (unaudited) 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES Franklin Strategic Series (Trust) is registered under the Investment Company Act of 1940, as amended, (1940 Act) as an open-end investment company, consisting of eleven separate funds. All funds included in this report (Funds) are diversified, except the Franklin Global Healthcare Fund, which is non-diversified. The financial statements of the remaining funds in the Trust are presented separately. The classes of shares offered within each of the Funds are indicated below. Each class of shares differs by its initial sales load, contingent deferred sales charges, distribution fees, voting rights on matters affecting a single class and its exchange privilege.
CLASS A, CLASS B, CLASS C, CLASS A, CLASS B & CLASS C CLASS R & ADVISOR CLASS - -------------------------- -------------------------- Franklin Global Communications Fund Franklin Technology Fund Franklin Global Health Care Fund
The following summarizes the Funds' significant accounting policies. A. SECURITY VALUATION Securities listed on a securities exchange or on the NASDAQ National Market System are valued at the last quoted sale price or the official closing price of the day, respectively. Over-the-counter securities and listed securities for which there is no reported sale are valued within the range of the most recent quoted bid and ask prices. Securities that trade in multiple markets or on multiple exchanges are valued according to the broadest and most representative market. Investments in open-end mutual funds are valued at the closing net asset value. Foreign securities are valued as of the close of trading on the foreign stock exchange on which the security is primarily traded, or the NYSE, whichever is earlier. If no sale is reported at that time, the foreign security will be valued within the range of the most recent quoted bid and ask prices. The value is then converted into its U.S. dollar equivalent at the foreign exchange rate in effect at the close of the NYSE on the day that the value of the foreign security is determined. The Trust has procedures to determine the fair value of individual securities and other assets for which market prices are not readily available or which may not be reliably priced. Methods for valuing these securities may include: fundamental analysis, matrix pricing, discounts from market prices of similar securities, or discounts applied due to the nature and duration of restrictions on the disposition of the securities. Due to the inherent uncertainty of valuations of such securities, the fair values may differ significantly from the values that would have been used had a ready market for such investments existed. Occasionally, events occur between the time at which trading in a security is completed and the close of the NYSE that might call into question the availability (including the reliability) of the value of a portfolio security held by the fund. The investment manager monitors price movements following the close of trading in foreign stock markets through a series of country specific market proxies (such as baskets of American Depository Receipts, futures contracts and exchange traded funds). These price movements are measured against established trigger thresholds for each specific market proxy to assist in determining if an event has occurred. If such an event occurs, the securities may be valued using fair value procedures, which may include the use of independent pricing services. All security valuation procedures are approved by the Trust's Board of Trustees. B. FOREIGN CURRENCY TRANSLATION Portfolio securities and other assets and liabilities denominated in foreign currencies are translated into U.S. dollars based on the exchange rate of such currencies against U.S. dollars on the date of valuation. Purchases and sales of securities, income and expense items denominated in foreign currencies are translated into U.S. dollars at the exchange rate in effect on the transaction date. Occasionally, events may impact the availability or reliability of foreign exchange rates used to convert the U.S. dollar equivalent value. If such an event occurs, the foreign exchange rate will be valued at fair value using procedures established and approved by the Trust's Board of Trustees. The Funds do not separately report the effect of changes in foreign exchange rates from changes in market prices on securities held. Such changes are included in net realized and unrealized gain or loss from investments on the Statement of Operations. Realized foreign exchange gains or losses arise from sales of foreign currencies, currency gains or losses realized between the trade and settlement dates on securities transactions and the difference between the recorded amounts of dividends, interest, and foreign withholding taxes and the U.S. dollar equivalent of the amounts actually received or paid. Net unrealized foreign exchange gains and losses arise from changes in foreign exchange rates on foreign denominated assets and liabilities other than investments in securities held at the end of the reporting period. C. FOREIGN CURRENCY CONTRACTS When the Funds purchase or sell foreign securities they may enter into foreign exchange contracts to minimize foreign exchange risk from the trade date to the settlement date of the transactions. A foreign exchange contract is an agreement between two parties to exchange different currencies at an agreed upon exchange rate at a future date. Realized and unrealized gains and losses on these contracts are included in the Statement of Operations. The risks of these contracts include movement in the values of the foreign currencies relative to the U.S. dollar and the possible inability of the counterparties to fulfill their obligations under the contracts, which may be in excess of the amount reflected in the Statement of Assets and Liabilities. D. INCOME TAXES No provision has been made for U.S. income taxes because it is each fund's policy to qualify as a regulated investment company under the Internal Revenue Code and to distribute to shareholders substantially all of its taxable income and net realized gains. The Funds have reviewed the tax positions, taken on federal income tax returns, for each of the three open tax years and as of October 31, 2008, and have determined that no provision for income tax is required in the Funds' financial statements. Foreign securities held by the Funds may be subject to foreign taxation on dividend income received. Foreign taxes, if any, are recorded based on the tax regulations and rates that exist in the foreign markets in which the Funds invest. E. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS Security transactions are accounted for on trade date. Realized gains and losses on security transactions are determined on a specific identification basis. Interest income and estimated expenses are accrued daily. Dividend income is recorded on the ex-dividend date except that certain dividends from foreign securities are recognized as soon as the Funds are notified of the ex-dividend date. Distributions to shareholders are recorded on the ex-dividend date and are determined according to income tax regulations (tax basis). Distributable earnings determined on a tax basis may differ from earnings recorded in accordance with accounting principles generally accepted in the United States of America. These differences may be permanent or temporary. Permanent differences are reclassified among capital accounts to reflect their tax character. These reclassifications have no impact on net assets or the results of operations. Temporary differences are not reclassified, as they may reverse in subsequent periods. Common expenses incurred by the Trust are allocated among the Funds based on the ratio of net assets of each fund to the combined net assets of the Trust. Fund specific expenses are charged directly to the fund that incurred the expense. Realized and unrealized gains and losses and net investment income, other than class specific expenses, are allocated daily to each class of shares based upon the relative proportion of net assets of each class. Differences in per share distributions, by class, are generally due to differences in class specific expenses. F. ACCOUNTING ESTIMATES The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America 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 expenses during the reporting period. Actual results could differ from those estimates. G. REDEMPTION FEES A short term trading redemption fee was imposed, with some exceptions, on any fund shares that were redeemed or exchanged within seven calendar days following their purchase date. The redemption fee was 2% of the amount redeemed. Such fees were retained by the fund and accounted for as an addition to paid-in capital. Effective September 1, 2008, the redemption fee was eliminated. H. GUARANTEES AND INDEMNIFICATIONS Under the Trust's organizational documents, its officers and trustees are indemnified by the Trust against certain liabilities arising out of the performance of their duties to the Trust. Additionally, in the normal course of business, the Trust, on behalf of the Funds, enters into contracts with service providers that contain general indemnification clauses. The Trust's maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Trust that have not yet occurred. Currently, the Trust expects the risk of loss to be remote. 2. SHARES OF BENEFICIAL INTEREST At October 31, 2008, there were an unlimited number of shares authorized (without par value). Transactions in the Funds' shares were as follows: SHARES OF BENEFICIAL INTEREST
Franklin Global Franklin Global Communications Fund Health Care Fund ------------------------- ------------------------ Shares Amount Shares Amount ---------- ------------ --------- ------------ CLASS A SHARES: Six Months ended October 31, 2008 Shares sold 590,848 $ 8,361,864 206,138 $ 4,882,728 Shares redeemed (1,497,243) (18,630,791) (741,901) (16,955,142) ---------- ------------ --------- ------------ Net increase (decrease) (906,395) $(10,268,927) (535,763) $(12,072,414) ---------- ------------ --------- ------------ Year ended April 30, 2008 Shares sold 2,194,520 $ 32,313,166 1,076,860 $ 28,002,885 Shares issued in reinvestment of distributions -- -- 3,284 90,277 Shares redeemed (1,798,678) (25,431,921) (891,277) (23,054,678) ---------- ------------ --------- ------------ Net increase (decrease) 395,842 $ 6,881,245 188,867 $ 5,038,484 ---------- ------------ --------- ------------ CLASS B SHARES: Six Months ended October 31, 2008 Shares sold 6,638 $ 86,800 7,111 $ 153,898 Shares redeemed (115,897) (1,357,853) (96,815) (2,049,411) ---------- ------------ --------- ------------ Net increase (decrease) (109,259) $ (1,271,053) (89,704) $ (1,895,513) ---------- ------------ --------- ------------ Year ended April 30, 2008 Shares sold 90,859 $ 1,244,326 52,978 $ 1,244,841 Shares redeemed (113,727) (1,520,171) (109,073) (2,634,114) ---------- ------------ --------- ------------ Net increase (decrease) (22,868) $ (275,845) (56,095) $ (1,389,273) ---------- ------------ --------- ------------ CLASS C SHARES: Six Months ended October 31, 2008 Shares sold 53,074 $ 693,199 72,988 $ 1,617,272 Shares redeemed (423,648) (4,756,102) (232,919) (4,791,421) ---------- ------------ --------- ------------ Net increase (decrease) (370,574) $ (4,062,903) (159,931) $ (3,174,149) ---------- ------------ --------- ------------ Year ended April 30, 2008 Shares sold 909,535 $ 12,906,106 362,624 $ 8,671,866 Shares redeemed (562,812) (7,283,292) (237,530) (5,695,462) ---------- ------------ --------- ------------ Net increase (decrease) 346,723 $ 5,622,814 125,094 $ 2,976,404 ---------- ------------ --------- ------------
Franklin Technology Fund ------------------------- Shares Amount ---------- ------------ CLASS A SHARES: Six Months ended October 31, 2008 Shares sold 855,434 $ 5,038,217 Shares redeemed (1,224,347) (6,574,308) ---------- ------------ Net increase (decrease) (368,913) $ (1,536,091) ---------- ------------ Year ended April 30, 2008 Shares sold 2,474,777 $ 15,344,897 Shares redeemed (1,977,240) (11,606,793) ---------- ------------ Net increase (decrease) 497,537 $ 3,738,104 ---------- ------------ CLASS B SHARES: Six Months ended October 31, 2008 Shares sold 24,255 $ 135,248 Shares redeemed (174,217) (910,720) ---------- ------------ Net increase (decrease) (149,962) $ (775,472) ---------- ------------ Year ended April 30, 2008 Shares sold 103,905 $ 614,421 Shares redeemed (200,994) (1,115,597) ---------- ------------ Net increase (decrease) (97,089) $ (501,176) ---------- ------------ CLASS C SHARES: Six Months ended October 31, 2008 Shares sold 141,016 $ 788,546 Shares redeemed (346,093) (1,738,389) ---------- ------------ Net increase (decrease) (205,077) $ (949,843) ---------- ------------ Year ended April 30, 2008 Shares sold 852,437 $ 5,039,064 Shares redeemed (665,233) (3,756,888) ---------- ------------ Net increase (decrease) 187,204 $ 1,282,176 ---------- ------------ CLASS R SHARES: Six Months ended October 31, 2008 Shares sold 187,478 $ 1,033,488 Shares redeemed (194,668) (1,074,361) ---------- ------------ Net increase (decrease) (7,190) $ (40,873) ---------- ------------ Year ended April 30, 2008 Shares sold 775,838 $ 4,512,387 Shares redeemed (543,217) (3,190,168) ---------- ------------ Net increase (decrease) 232,621 $ 1,322,219 ---------- ------------ ADVISOR CLASS SHARES: Six Months ended October 31, 2008 Shares sold 32,358 $ 192,228 Shares redeemed (83,222) (480,077) ---------- ------------ Net increase (decrease) (50,864) $ (287,849) ---------- ------------ Year ended April 30, 2008 Shares sold 147,541 $ 957,702 Shares redeemed (125,645) (807,735) ---------- ------------ Net increase (decrease) 21,896 $ 149,967 ---------- ------------
3. TRANSACTIONS WITH AFFILIATES Franklin Resources, Inc. is the holding company for various subsidiaries that together are referred to as Franklin Templeton Investments. Certain officers and trustees of the Trust are also officers and/or directors of the following subsidiaries:
SUBSIDIARY AFFILIATION - ---------- ---------------------- Franklin Advisers, Inc. (Advisers) Investment manager Franklin Templeton Services, LLC (FT Services) Administrative manager Franklin Templeton Distributors, Inc. (Distributors) Principal underwriter Franklin Templeton Investor Services, LLC (Investor Services) Transfer agent
A. MANAGEMENT FEES All funds, except the Franklin Technology Fund, pay an investment management fee to Advisers based on the average daily net assets of each of the funds as follows:
ANNUALIZED FEE RATE NET ASSETS - ---------- --------------------------------------------------- 0.625% Up to and including $100 million 0.500% Over $100 million, up to and including $250 million 0.450% Over $250 million, up to and including $7.5 billion 0.440% Over $7.5 billion, up to and including $10 billion 0.430% Over $10 billion, up to and including $12.5 billion 0.420% Over $12.5 billion, up to and including $15 billion 0.400% In excess of $15 billion
The Franklin Technology Fund pays an investment management fee to Advisers based on the average daily net assets of the fund as follows:
ANNUALIZED FEE RATE NET ASSETS - ---------- ----------------------------------------------------- 0.550% Up to and including $500 million 0.450% Over $500 million, up to and including $1 billion 0.400% Over $1 billion, up to and including $1.5 billion 0.350% Over $1.5 billion, up to and including $6.5 billion 0.325% Over $6.5 billion, up to and including $11.5 billion 0.300% Over $11.5 billion, up to and including $16.5 billion 0.290% Over $16.5 billion, up to and including $19 billion 0.280% Over $19 billion, up to and including $21.5 billion 0.270% In excess of $21.5 billion
B. ADMINISTRATIVE FEES The Franklin Technology Fund pays an administrative fee to FT Services of 0.20% per year of the average daily net assets of the fund. Under an agreement with Advisers, FT Services provides administrative services to the Franklin Global Communications Fund and the Franklin Global Health Care Fund. The fee is paid by Advisers based on average daily net assets, and is not an additional expense of the funds. C. DISTRIBUTION FEES The Trust's Board of Trustees has adopted distribution plans for each share class, with the exception of Advisor Class shares, pursuant to Rule 12b-1 under the 1940 Act. Under the funds' Class A reimbursement distribution plans, the funds reimburse Distributors for costs incurred in connection with the servicing, sale and distribution of each funds' shares up to the maximum annual plan rate for each class. Under the Class A reimbursement distribution plans, costs exceeding the maximum for the current plan year cannot be reimbursed in subsequent periods. In addition, under the funds' compensation distribution plans, the funds pay Distributors for costs incurred in connection with the servicing, sale and distribution of each fund's shares up to the maximum annual plan rate for each class. The maximum annual plan rates, based on the average daily net assets, for each class, are as follows:
FRANKLIN GLOBAL FRANKLIN GLOBAL FRANKLIN TECHNOLOGY COMMUNICATIONS FUND HEALTH CARE FUND FUND ------------------- ---------------- ------------------- Reimbursement Plans: Class A 0.25% 0.25% -- Compensation Plans: Class A -- -- 0.35% Class B 1.00% 1.00% 1.00% Class C 1.00% 1.00% 1.00% Class R -- -- 0.50%
Distributors has agreed to limit the current rate to 0.30% per year for Class A shares for the Franklin Technology Fund for the period of February 1, 2008 through January 31, 2009. D. SALES CHARGES/UNDERWRITING AGREEMENTS Distributors has advised the Funds of the following commission transactions related to the sales and redemptions of the Funds' shares for the period:
FRANKLIN GLOBAL FRANKLIN GLOBAL FRANKLIN COMMUNICATIONS FUND HEALTH CARE FUND TECHNOLOGY FUND ------------------- ---------------- --------------- Sales charges retained net of commissions paid to unaffiliated broker/dealers $8,157 $10,257 $5,429 Contingent deferred sales charges retained $5,760 $ 4,530 $5,218
E. TRANSFER AGENT FEES For the period ended October 31, 2008, the Funds paid transfer agent fees as noted in the Statements of Operations of which the following amounts were retained by Investor Services:
FRANKLIN GLOBAL FRANKLIN GLOBAL FRANKLIN COMMUNICATIONS FUND HEALTH CARE FUND TECHNOLOGY FUND ------------------- ---------------- --------------- Transfer agent fees $105,144 $152,573 $74,532
4. EXPENSE OFFSET ARRANGEMENT The Funds have entered into an arrangement with their custodian whereby credits realized as a result of uninvested cash balances are used to reduce a portion of the Funds' custodian expenses. During the period ended October 31, 2008, the custodian fees were reduced as noted in the Statements of Operations. 5. INCOME TAXES For tax purposes, capital losses may be carried over to offset future capital gains, if any. At April 30, 2008, the capital loss carryforwards were as follows:
FRANKLIN GLOBAL FRANKLIN GLOBAL FRANKLIN TECHNOLOGY COMMUNICATIONS FUND HEALTH CARE FUND FUND ------------------- ---------------- ------------------- Capital loss carryforwards expiring in: 2010 $ 52,065,436 $ -- $15,057,438 2011 52,123,016 -- 28,445,452 2012 -- 3,784,201 -- ------------ ---------- ----------- $104,188,452 $3,784,201 $43,502,890 ============ ========== ===========
For tax purposes, realized capital losses and realized currency losses occurring subsequent to October 31, may be deferred and treated as occurring on the first day of the following fiscal year. At April 30, 2008, the Franklin Technology Fund deferred realized capital losses and realized currency losses of $1,935,527 and $3,304, respectively. At October 31, 2008, the cost of investments and net unrealized appreciation (depreciation) for income tax purposes were as follows:
FRANKLIN GLOBAL FRANKLIN GLOBAL FRANKLIN TECHNOLOGY COMMUNICATIONS FUND HEALTH CARE FUND FUND ------------------- ---------------- ------------------- Cost of investments $ 70,386,926 $103,344,607 $47,084,226 ------------ ------------ ----------- Unrealized appreciation $ 6,018,738 $ 15,786,947 $ 1,567,196 Unrealized depreciation (18,827,869) (16,792,367) (9,881,056) ------------ ------------ ----------- Net unrealized appreciation (depreciation) $(12,809,131) $ (1,005,420) $(8,313,860) ============ ============ ===========
Net investment income (loss) differs for financial statement and tax purposes primarily due to differing treatments of foreign currency transactions. Net realized gains (losses) differ for financial statement and tax purposes primarily due to differing treatments of wash sales and foreign currency transactions. 6. INVESTMENT TRANSACTIONS Purchases and sales of investments (excluding short term securities) for the period ended October 31, 2008, were as follows:
FRANKLIN GLOBAL FRANKLIN GLOBAL FRANKLIN COMMUNICATIONS FUND HEALTH CARE FUND TECHNOLOGY FUND ------------------- ---------------- --------------- Purchases $14,897,065 $ 6,026,277 $22,265,787 Sales $31,932,410 $19,275,656 $24,402,026
7. INVESTMENTS IN FRANKLIN INSTITUTIONAL FIDUCIARY TRUST MONEY MARKET PORTFOLIO The Funds may invest in the Franklin Institutional Fiduciary Trust Money Market Portfolio (Sweep Money Fund), an open-end investment company managed by Advisers. Management fees paid by the Funds are reduced on assets invested in the Sweep Money Fund, in an amount not to exceed the management and administrative fees paid by the Sweep Money Fund. 8. RESTRICTED SECURITIES The Funds may invest in securities that are restricted under the Securities Act of 1933 (1933 Act) or which are subject to legal, contractual, or other agreed upon restrictions on resale. Restricted securities are often purchased in private placement transactions, and cannot be sold without prior registration unless the sale is pursuant to an exemption under the 1933 Act. Disposal of these securities may require greater effort and expense, and prompt sale at an acceptable price may be difficult. The Funds may have registration rights for restricted securities. The issuer generally incurs all registration costs. At October 31, 2008, the Franklin Global Communications Fund held investments in restricted securities, excluding 144A securities deemed to be liquid, valued in accordance with procedures approved by the Trust's Board of Trustees as reflecting fair value, as follows:
ACQUISITION SHARES/WARRANTS ISSUER DATES COST VALUE - --------------- ----------------------------------------------------------------- ----------- ----------- -------- FRANKLIN GLOBAL COMMUNICATIONS FUND 124,248 Dilithium Networks Inc., depository receipt, D, pfd., 144A, PIPES 7/13/06 $289,500 $289,498 4,807 Dilithium Networks Inc., pfd., D, 11.00%, 3/20/09 10/30/08 4,807 4,807 4,126 Dilithium Networks Inc., wts., 3/20/09 10/30/08 -- -- -------- TOTAL RESTRICTED SECURITIES (0.53% of Net Assets) $294,305 ========
9. SUBSEQUENT EVENTS On December 3, 2008, the Franklin DynaTech Fund acquired the net assets of the Funds pursuant to a plan of reorganization approved by the Funds' shareholders. The merger was accomplished by a tax-free exchange of shares of the Franklin DynaTech Fund for the net assets of the Funds. Capital losses acquired by the Franklin DynaTech Fund may be carried over to offset future capital gains, subject to certain limitations. 10. FAIR VALUE MEASUREMENTS The Funds adopted Financial Accounting Standards Board (FASB) issued FASB Statement No. 157, "Fair Value Measurement" (SFAS 157), on May 1, 2008. SFAS 157 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. The Funds have determined that the implementation of SFAS 157 did not have a material impact on the Funds' financial statements. SFAS 157 establishes a fair value hierarchy that distinguishes between market data obtained from independent sources (observable inputs) and the Trust's own market assumptions (unobservable inputs). These inputs are used in determining the value of the Funds' investments and are summarized in the following fair value hierarchy: - Level 1 -- quoted prices in active markets for identical securities - Level 2 -- other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speed, credit risk, etc.) - Level 3 -- significant unobservable inputs (including the Fund's own assumptions in determining the fair value of investments) The inputs or methodology used for valuing securities are not an indication of the risk associated with investing in those securities. The following is a summary of the inputs used as of October 31, 2008, in valuing the Funds' assets carried at fair value:
LEVEL 1 LEVEL 2 LEVEL 3 TOTAL ------------ -------- -------- ------------ FRANKLIN GLOBAL COMMUNICATIONS FUND ASSETS: Investments in Securities $ 56,352,899 $930,591 $294,305 $ 57,577,795 FRANKLIN GLOBAL HEALTH CARE FUND ASSETS: Investments in Securities $102,339,187 $ -- $ -- $102,339,187 FRANKLIN TECHNOLOGY FUND ASSETS: Investments in Securities $ 38,224,059 $546,307 $ -- $ 38,770,366
At October 31, 2008, the reconciliation of assets in which significant unobservable inputs (Level 3) were used in determining the Franklin Global Communication Fund's fair value,were as follows:
FRANKLIN GLOBAL COMMUNICATIONS FUND INVESTMENTS IN SECURITIES ------------------- Beginning Balance - May 1, 2008 $ 428,655 Net realized gain (loss) -- Net change in unrealized appreciation (depreciation) (139,157) Net purchases (sales) 4,807 Transfers in and/or out of Level 3 -- --------- Ending Balance $ 294,305 ========= Net change in unrealized appreciation (depreciation) attributable to assets still held at end of period $(139,157) =========
11. NEW ACCOUNTING PRONOUNCEMENTS In March 2008, FASB issued FASB Statement No. 161, "Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133" (SFAS 161), which expands disclosures about derivative investments and hedging activities. SFAS 161 is effective for fiscal years and interim periods beginning after November 15, 2008. The Funds are currently evaluating the impact, if any, of applying the various provisions of SFAS 161. ITEM 2. CODE OF ETHICS. (a) The Registrant has adopted a code of ethics that applies to its principal executive officers and principal financial and accounting officer. (c) N/A (d) N/A (f) Pursuant to Item 12(a)(1), the Registrant is attaching as an exhibit a copy of its code of ethics that applies to its principal executive officers and principal financial and accounting officer. ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT. (a)(1) The Registrant has an audit committee financial expert serving on its audit committee. (2) The audit committee financial expert is John B. Wilson and he is "independent" as defined under the relevant Securities and Exchange Commission Rules and Releases. ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES. N/A ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS. N/A ITEM 6. SCHEDULE OF INVESTMENTS. N/A ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END MANAGEMENT INVESTMENT COMPANIES. N/A ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES. N/A ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT COMPANY AND AFFILIATED PURCHASERS. N/A ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. There have been no changes to the procedures by which shareholders may recommend nominees to the Registrant's Board of Trustees that would require disclosure herein. ITEM 11. CONTROLS AND PROCEDURES. (a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. The Registrant maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Registrant's filings under the Securities Exchange Act of 1934 and the Investment Company Act of 1940 is recorded, processed, summarized and reported within the periods specified in the rules and forms of the Securities and Exchange Commission. Such information is accumulated and communicated to the Registrant's management, including its principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. The Registrant's management, including the principal executive officer and the principal financial officer, recognizes that any set of controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. Within 90 days prior to the filing date of this Shareholder Report on Form N-CSR, the Registrant had carried out an evaluation, under the supervision and with the participation of the Registrant's management, including the Registrant's principal executive officer and the Registrant's principal financial officer, of the effectiveness of the design and operation of the Registrant's disclosure controls and procedures. Based on such evaluation, the Registrant's principal executive officer and principal financial officer concluded that the Registrant's disclosure controls and procedures are effective. (b) CHANGES IN INTERNAL CONTROLS. There have been no significant changes in the Registrant's internal controls or in other factors that could significantly affect the internal controls subsequent to the date of their evaluation in connection with the preparation of this Shareholder Report on Form N-CSR. ITEM 12. EXHIBITS. (a)(1) Code of Ethics (a)(2) Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 of Jennifer J. Bolt, Chief Executive Officer - Finance and Administration, and Laura F. Fergerson, Chief Financial Officer and Chief Accounting Officer (b) Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of Jennifer J. Bolt, Chief Executive Officer - Finance and Administration, and Laura F. Fergerson, Chief Financial Officer and Chief Accounting Officer SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. FRANKLIN STRATEGIC SERIES By /s/Jennifer J. Bolt ------------------ Jennifer J. Bolt Chief Executive Officer - Finance and Administration Date December 26, 2008 Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. By /s/Jennifer J. Bolt ------------------ Jennifer J. Bolt Chief Executive Officer - Finance and Administration Date December 26, 2008 By /s/LAURA F. FERGERSON --------------------- Laura F. Fergerson Chief Financial Officer and Chief Accounting Officer Date December 26, 2008 EX-99.CODE ETH 2 ncsr_code308.txt Exhibit 12(a)(1) CODE OF ETHICS FOR PRINCIPAL EXECUTIVES & SENIOR FINANCIAL OFFICERS - ------------------------------------------------------------------------------ PROCEDURES Revised March 06, 2008 - ------------------------------------------------------------------------------- FRANKLIN TEMPLETON FUNDS CODE OF ETHICS FOR PRINCIPAL EXECUTIVE AND SENIOR FINANCIAL OFFICERS I. Covered Officers and Purpose of the Code This code of ethics (the "Code") applies to the Principal Executive Officers, Principal Financial Officer and Principal Accounting Officer (the "Covered Officers," each of whom is set forth in Exhibit A) of each investment company advised by a Franklin Resources subsidiary and that is registered with the United States Securities & Exchange Commission ("SEC") (collectively, "FT Funds") for the purpose of promoting: o Honest and ethical conduct, including the ethical resolution of actual or apparent conflicts of interest between personal and professional relationships; o Full, fair, accurate, timely and understandable disclosure in reports and documents that a registrant files with, or submits to, the SEC and in other public communications made by or on behalf of the FT Funds; o Compliance with applicable laws and governmental rules and regulations; o The prompt internal reporting of violations of the Code to an appropriate person or persons identified in the Code; and o Accountability for adherence to the Code. Each Covered Officer will be expected to adhere to a high standard of business ethics and must be sensitive to situations that may give rise to actual as well as apparent conflicts of interest. II. Other Policies and Procedures This Code shall be the sole code of ethics adopted by the Funds for purposes of Section 406 of the Sarbanes-Oxley Act and the rules and forms applicable to registered investment companies thereunder. Franklin Resources, Inc. has separately adopted the CODE OF ETHICS AND BUSINESS CONDUCT ("Business Conduct"), which is applicable to all officers, directors and employees of Franklin Resources, Inc., including Covered Officers. It summarizes the values, principles and business practices that guide the employee's business conduct and also provides a set of basic principles to guide officers, directors and employees regarding the minimum ethical requirements expected of them. It supplements the values, principles and business conduct identified in the Code and other existing employee policies. Additionally, the Franklin Templeton Funds have separately adopted the CODE OF ETHICS AND POLICY STATEMENT ON INSIDER TRADING governing personal securities trading and other related matters. The Code for Insider Trading provides for separate requirements that apply to the Covered Officers and others, and therefore is not part of this Code. Insofar as other policies or procedures of Franklin Resources, Inc., the Funds, the Funds' adviser, principal underwriter, or other service providers govern or purport to govern the behavior or activities of the Covered Officers who are subject to this Code, they are superceded by this Code to the extent that they overlap or conflict with the provisions of this Code. Please review these other documents or consult with the Legal Department if have questions regarding the applicability of these policies to you. III. Covered Officers Should Handle Ethically Actual and Apparent Conflicts of Interest OVERVIEW. A "conflict of interest" occurs when a Covered Officer's private interest interferes with the interests of, or his or her service to, the FT Funds. For example, a conflict of interest would arise if a Covered Officer, or a member of his family, receives improper personal benefits as a result of apposition with the FT Funds. Certain conflicts of interest arise out of the relationships between Covered Officers and the FT Funds and already are subject to conflict of interest provisions in the Investment Company Act of 1940 ("Investment Company Act") and the Investment Advisers Act of 1940 ("Investment Advisers Act"). For example, Covered Officers may not individually engage in certain transactions (such as the purchase or sale of securities or other property) with the FT Funds because of their status as "affiliated persons" of the FT Funds. The FT Funds' and the investment advisers' compliance programs and procedures are designed to prevent, or identify and correct, violations of these provisions. This Code does not, and is not intended to, repeat or replace these programs and procedures, and such conflicts fall outside of the parameters of this Code. Although typically not presenting an opportunity for improper personal benefit, conflicts arise from, or as a result of, the contractual relationship between the FT Funds, the investment advisers and the fund administrator of which the Covered Officers are also officers or employees. As a result, this Code recognizes that the Covered Officers will, in the normal course of their duties (whether formally for the FT Funds, for the adviser, the administrator, or for all three), be involved in establishing policies and implementing decisions that will have different effects on the adviser, administrator and the FT Funds. The participation of the Covered Officers in such activities is inherent in the contractual relationship between the FT Funds, the adviser, and the administrator and is consistent with the performance by the Covered Officers of their duties as officers of the FT Funds. Thus, if performed in conformity with the provisions of the Investment Company Act and the Investment Advisers Act, such activities will be deemed to have been handled ethically. In addition, it is recognized by the FT Funds' Boards of Directors ("Boards") that the Covered Officers may also be officers or employees of one or more other investment companies covered by this or other codes. Other conflicts of interest are covered by the Code, even if such conflicts of interest are not subject to provisions in the Investment Company Act and the Investment Advisers Act. The following list provides examples of conflicts of interest under the Code, but Covered Officers should keep in mind that these examples are not exhaustive. The overarching principle is that the personal interest of a Covered Officer should not be placed improperly before the interest of the FT Funds. Each Covered Officer must: o Not use his or her personal influence or personal relationships improperly to influence investment decisions orfinancial reporting by the FT Funds whereby the Covered Officer would benefit personally to the detriment of the FT Funds; o Not cause the FT Funds to take action, or fail to take action, for the individual personal benefit of the Covered Officer rather than the benefit the FT Funds; o Not retaliate against any other Covered Officer or any employee of the FT Funds or their affiliated persons for reports of potential violations that are made in good faith; o Report at least annually the following affiliations or other relationships:/ 1 o all directorships for public companies and all companies that are required to file reports with the SEC; o any direct or indirect business relationship with any independent directors of the FT Funds; o any direct or indirect business relationship with any independent public accounting firm (which are not related to the routine issues related to the firm's service as the Covered Persons accountant); and o any direct or indirect interest in any transaction with any FT Fund that will benefit the officer (not including benefits derived from the advisory, sub-advisory, distribution or service agreements with affiliates of Franklin Resources). These reports will be reviewed by the Legal Department for compliance with the Code. There are some conflict of interest situations that should always be approved in writing by Franklin Resources General Counsel or Deputy General Counsel, if material. Examples of these include/2: o Service as a director on the board of any public or private Company; o The receipt of any gifts in excess of $100 from any person, from any corporation or association o The receipt of any entertainment from any Company with which the FT Funds has current or prospective business dealings unless such entertainment is business related, reasonable in cost, appropriate as to time and place, and not so frequent as to raise any question of impropriety. Notwithstanding the foregoing, the Covered Officers must obtain prior approval from the Franklin Resources General Counsel for any entertainment with a value in excess of $1000. o Any ownership interest in, or any consulting or employment relationship with, any of the FT Fund's service providers, other than an investment adviser, principal underwriter, administrator or any affiliated person thereof; o A direct or indirect financial interest in commissions, transaction charges or spreads paid by the FT Funds for effecting portfolio transactions or for selling or redeeming shares other than an interest arising from the Covered Officer's employment, such as compensation or equity ownership. Franklin Resources General Counsel or Deputy General Counsel will provide a report to the FT Funds Audit Committee of any approvals granted at the next regularly scheduled meeting. IV. Disclosure and Compliance o Each Covered Officer should familiarize himself with the disclosure requirements generally applicable to the FT Funds; o Each Covered Officer should not knowingly misrepresent, or cause others to misrepresent, facts about the FT Funds to others, whether within or outside the FT Funds, including to the FT Funds' directors and auditors, and to governmental regulators and self-regulatory organizations; o Each Covered Officer should, to the extent appropriate within his or her area of responsibility, consult with other officers and employees of the FT Funds, the FT Fund's adviser and the administrator with the goal of promoting full, fair, accurate, timely and understandable disclosure in the reports and documents the FT Funds file with, or submit to, the SEC and in other public communications made by the FT Funds; and o It is the responsibility of each Covered Officer to promote compliance with the standards and restrictions imposed by applicable laws, rules and regulations. V. Reporting and Accountability Each Covered Officer must: o Upon becoming a covered officer affirm in writing to the Board that he or she has received, read, and understands the Code (see Exhibit B); o Annually thereafter affirm to the Board that he has complied with the requirements of the Code; and o Notify Franklin Resources' General Counsel or Deputy General Counsel promptly if he or she knows of any violation of this Code. Failure to do so is itself is a violation of this Code. Franklin Resources' General Counsel and Deputy General Counsel are responsible for applying this Code to specific situations in which questions are presented under it and have the authority to interpret this Code in any particular situation./3 However, the Independent Directors of the respective FT Funds will consider any approvals or waivers/4 sought by any Chief Executive Officers of the Funds. The FT Funds will follow these procedures in investigating and enforcing this Code: o Franklin Resources General Counsel or Deputy General Counsel will take all appropriate action to investigate any potential violations reported to the Legal Department; o If, after such investigation, the General Counsel or Deputy General Counsel believes that no violation has occurred, The General Counsel is not required to take any further action; o Any matter that the General Counsel or Deputy General Counsel believes is a violation will be reported to the Independent Directors of the appropriate FT Fund; o If the Independent Directors concur that a violation has occurred, it will inform and make a recommendation to the Board of the appropriate FT Fund or Funds, which will consider appropriate action, which may include review of, and appropriate modifications to, applicable policies and procedures; notification to appropriate personnel of the investment adviser or its board; or a recommendation to dismiss the Covered Officer; o The Independent Directors will be responsible for granting waivers, as appropriate; and o Any changes to or waivers of this Code will, to the extent required, are disclosed as provided by SEC rules./5 VI. Other Policies and Procedures This Code shall be the sole code of ethics adopted by the FT Funds for purposes of Section 406 of the Sarbanes-Oxley Act and the rules and forms applicable to registered investment companies thereunder. Insofar as other policies or procedures of the FT Funds, the FT Funds' advisers, principal underwriter, or other service providers govern or purport to govern the behavior or activities of the Covered Officers who are subject to this Code, they are superseded by this Code to the extent that they overlap or conflict with the provisions of this Code. The FT Code of Ethics and Policy Statement On Insider Trading, adopted by the FT Funds, FT investment advisers and FT Fund's principal underwriter pursuant to Rule 17j-1 under the Investment Company Act, the Code of Ethics and Business Conduct and more detailed policies and procedures set forth in FT's Employee Handbook are separate requirements applying to the Covered Officers and others, and are not part of this Code. VII. Amendments Any amendments to this Code, other than amendments to Exhibit A, must be approved or ratified by a majority vote of the FT Funds' Board including a majority of independent directors. VIII. Confidentiality All reports and records prepared or maintained pursuant to this Code will be considered confidential and shall be maintained and protected accordingly. Except as otherwise required by law or this Code, such matters shall not be disclosed to anyone other than the FT Funds' Board and their counsel. IX. Internal Use The Code is intended solely for the internal use by the FT Funds and does not constitute an admission, by or on behalf of any FT Funds, as to any fact, circumstance, or legal conclusion. X. Disclosure on Form N-CSR Item 2 of Form N-CSR requires a registered management investment company to disclose annually whether, as of the end of the period covered by the report, it has adopted a code of ethics that applies to the registrant's principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, regardless of whether these officers are employed by the registrant or a third party. If the registrant has not adopted such a code of ethics, it must explain why it has not done so. The registrant must also: (1) file with the SEC a copy of the code as an exhibit to its annual report; (2) post the text of the code on its Internet website and disclose, in its most recent report on Form N-CSR, its Internet address and the fact that it has posted the code on its Internet website; or (3) undertake in its most recent report on Form N-CSR to provide to any person without charge, upon request, a copy of the code and explain the manner in which such request may be made. Disclosure is also required of amendments to, or waivers (including implicit waivers) from, a provision of the code in the registrant's annual report on Form N-CSR or on its website. If the registrant intends to satisfy the requirement to disclose amendments and waivers by posting such information on its website, it will be required to disclose its Internet address and this intention. The Legal Department shall be responsible for ensuring that: o a copy of the Code is filed with the SEC as an exhibit to each Fund's annual report; and o any amendments to, or waivers (including implicit waivers) from, a provision of the Code is disclosed in the registrant's annual report on Form N-CSR. In the event that the foregoing disclosure is omitted or is determined to be incorrect, the Legal Department shall promptly file such information with the SEC as an amendment to Form N-CSR. In such an event, the Fund Chief Compliance Officer shall review the Code and propose such changes to the Code as are necessary or appropriate to prevent reoccurrences. EXHIBIT A Persons Covered by the Franklin Templeton Funds Code of Ethics March 2008 FRANKLIN GROUP OF FUNDS Edward B. Jamieson President and Chief Executive Officer - Investment Management Charles B. Johnson President and Chief Executive Officer - Investment Management Rupert H. Johnson, Jr. President and Chief Executive Officer - Investment Management William J. Lippman President and Chief Executive Officer - Investment Management Christopher Molumphy President and Chief Executive Officer - Investment Management Galen G. Vetter Senior Vice President and Chief Executive Officer - Finance and Administration Jimmy D. Gambill Vice President Laura Fergerson Chief Financial Officer and Chief Accounting Officer FRANKLIN MUTUAL SERIES FUNDS Peter Langerman Chief Executive Officer-Investment Management Galen G. Vetter Senior Vice President and Chief Executive Officer - Finance and Administration Jimmy D. Gambill Vice President Laura Fergerson Chief Financial Officer and Chief Accounting Officer TEMPLETON GROUP OF FUNDS Mark Mobius President and Chief Executive Officer - Investment Management Christopher J. Molumphy President and Chief Executive Officer - Investment Management Gary P. Motyl President and Chief Executive Officer - Investment Management Donald F. Reed President and Chief Executive Officer - Investment Management Galen G. Vetter Senior Vice President and Chief Executive Officer - Finance and Administration Jimmy D. Gambill Vice President Laura Fergerson Chief Financial Officer and Chief Accounting Officer EXHIBIT B ACKNOWLEDGMENT FORM DECEMBER FRANKLIN TEMPLETON FUNDS CODE OF ETHICS FOR PRINCIPAL EXECUTIVE AND SENIOR FINANCIAL OFFICERS INSTRUCTIONS: 1. Complete all sections of this form. 2. Print the completed form, sign, and date. 3. Submit completed form to FT's General Counsel c/o Maria Abbott within 10 days of becoming a Covered Officer and by January 30th of each subsequent year. INTER-OFFICE MAIL: Maria Abbott, Manager, Code of Ethics, Global Compliance SM-920/2 TELEPHONE: (650) 312-5698 Fax: (650) 312-5646 E-MAIL: Abbott, Maria (internal address); mabbott@frk.com (external address) - ---------------------------------------------------------------------------- COVERED OFFICER'S NAME: - ---------------------------------------------------------------------------- TITLE: - ---------------------------------------------------------------------------- DEPARTMENT: - ---------------------------------------------------------------------------- LOCATION: - ---------------------------------------------------------------------------- CERTIFICATION FOR YEAR ENDING: - ---------------------------------------------------------------------------- TO: Franklin Resources General Counsel, Legal Department I hereby acknowledge receipt of a copy of Franklin Templeton Fund's code of ethics for Principal Executive Officers and Senior Financial Officers (the "Code") that I have read and understand. I will comply fully with all provisions of the Code to the extent they apply to me during the period of my employment. I further understand and acknowledge that any violation of the Code may subject me to disciplinary action, including termination of employment. - ---------------------------- ---------------------- Signature Date signed - ----------------------------- 1. Reporting of these affiliations or other relationships shall be made by completing the annual Directors and Officers Questionnaire and returning the questionnaire to Franklin Resources Inc, General Counsel or Deputy General Counsel. 2. Any activity or relationship that would present a conflict for a Covered Officer may also present a conflict for the Covered Officer if a member of the Covered Officer's immediate family engages in such an activity or has such a relationship. The Cover Person should also obtain written approval by FT's General Counsel in such situations. 3. Franklin Resources General Counsel and Deputy General Counsel are authorized to consult, as appropriate, with members of the Audit Committee, counsel to the FT Funds and counsel to the Independent Directors, and are encouraged to do so. 4. Item 2 of Form N-CSR defines "waiver" as "the approval by the registrant of a material departure from a provision of the code of ethics" and "implicit waiver," which must also be disclosed, as "the registrant's failure to take action within a reasonable period of time regarding a material departure from a provision of the code of ethics that has been made known to an executive officer" of the registrant. See Part X. 5. See Part X. EX-99.CERT 3 fss302cert.txt 302 CERTIFICATION Exhibit 12(a)(2) I, Jennifer J. Bolt, certify that: 1. I have reviewed this report on Form N-CSR of FRANKLIN STRATEGIC SERIES; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) and internal control over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of a date within 90 days prior to the filing date of this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the second fiscal quarter of the period covered by this report that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. 12/26/2008 S\ JENNIFER J. BOLT Jennifer J. Bolt Chief Executive Officer - Finance and Administration I, Laura F. Fergerson, certify that: 1. I have reviewed this report on Form N-CSR of FRANKLIN STRATEGIC SERIES; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) and internal control over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of a date within 90 days prior to the filing date of this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the second fiscal quarter of the period covered by this report that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. 12/26/2008 S\ LAURA F. FERGERSON Laura F. Fergerson Chief Financial Officer and Chief Accounting Officer EX-99.906CERT 4 fss906cert.txt 906 CERTIFICATION Exhibit 12(b) CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 I, Jennifer J. Bolt, Chief Executive Officer of the FRANKLIN STRATEGIC SERIES (the "Registrant"), certify, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge: 1. The periodic report on Form N-CSR of the Registrant for the period ended 10/31/2008 (the "Form N-CSR") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Form N-CSR fairly presents, in all material respects, the financial condition and results of operations of the Registrant. Dated: 12/26/2008 S\ JENNIFER J. BOLT Jennifer J. Bolt Chief Executive Officer - Finance and Administration CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 I, Laura F. Fergerson, Chief Financial Officer of the FRANKLIN STRATEGIC SERIES (the "Registrant"), certify, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge: 1. The periodic report on Form N-CSR of the Registrant for the period ended 10/31/2008 (the "Form N-CSR") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Form N-CSR fairly presents, in all material respects, the financial condition and results of operations of the Registrant. Dated: 12/26/2008 S\ LAURA F. FERGERSON Laura F. Fergerson Chief Financial Officer and Chief Accounting Officer -----END PRIVACY-ENHANCED MESSAGE-----