UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED
MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number 811-07288
Franklin Strategic Mortgage Portfolio
(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: 9/30
Date of reporting period: 9/30/17
| Item 1. | Reports to Stockholders. |
|
Annual Report and Shareholder Letter
September 30, 2017 |
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Franklin Templeton Investments
Gain From Our Perspective®
At Franklin Templeton Investments, we’re dedicated to one goal: delivering exceptional asset management for our clients. By bringing together multiple, world-class investment teams in a single firm, we’re able to offer specialized expertise across styles and asset classes, all supported by the strength and resources of one of the world’s largest asset managers. This has helped us to become a trusted partner to individual and institutional investors across the globe.
Dear Shareholder:
CFA® is a trademark owned by CFA Institute.
1. Source: Morningstar.
See www.franklintempletondatasources.com for additional data provider information.
| Not FDIC Insured | |
May Lose Value | |
No Bank Guarantee |
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Franklin Strategic Mortgage Portfolio
1. Guarantees of timely payment of principal and interest do not apply to the market prices and yield of the security or to the net asset value or performance of the Fund. Ginnie Mae pass-through securities are backed by the full faith and credit of the US government. Although US government-sponsored entities, such as Fannie Mae and Freddie Mac, may be chartered or sponsored by acts of Congress, their securities are neither insured nor guaranteed by the US Treasury. Please refer to the Fund’s prospectus for a detailed discussion regarding various levels of credit support for government agency or instrumentality securities.
2. Source: Morningstar.
3. Source: Lipper, a Thomson Reuters Company. For the 12 months ended 9/30/17, this category consisted of 116 funds. Lipper calculations do not include sales charges or subsidization by a fund’s manager. The Fund’s performance relative to the average might have differed if these or other factors had been considered.
The indexes are unmanaged and include reinvestment of any income or distributions. They do not reflect any fees, expenses or sales charges. One cannot invest directly in an index, and an index is not representative of the Fund’s portfolio.
4. Source: Bureau of Labor Statistics.
See www.franklintempletondatasources.com for additional data provider information.
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 15.
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FRANKLIN STRATEGIC MORTGAGE PORTFOLIO
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FRANKLIN STRATEGIC MORTGAGE PORTFOLIO
Performance Summary as of September 30, 2017
The performance table and graphs do 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. 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.
Performance as of 9/30/171
Cumulative total return excludes sales charges. Average annual total return includes maximum sales charges. Sales charges will vary depending on the size of the investment and the class of share purchased. The maximum is 4.25% and the minimum is 0%. Class A: 4.25% maximum initial sales charge; Advisor Class: no sales charges. For other share classes, visit franklintempleton.com.
| Share Class | Cumulative Total Return2 |
Average Annual Total Return3 | ||||
| A4 | ||||||
|
1-Year |
+0.45% | -3.77% | ||||
|
5-Year |
+12.19% | +1.44% | ||||
|
10-Year |
+46.99% | +3.48% | ||||
| Advisor5 | ||||||
|
1-Year |
+0.70% | +0.70% | ||||
|
5-Year |
+13.59% | +2.58% | ||||
|
10-Year |
+50.85% | +4.20% | ||||
| 30-Day Standardized Yield7 | ||||||||
| Share Class | Distribution Rate6 |
(with waiver) | (without waiver) | |||||
| A |
2.77% | 3.04% | 3.03% | |||||
| Advisor |
3.15% | 3.42% | 3.42% | |||||
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, go to franklintempleton.com or call (800) 342-5236.
See page 8 for Performance Summary footnotes.
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FRANKLIN STRATEGIC MORTGAGE PORTFOLIO
PERFORMANCE SUMMARY
Total Return Index Comparison for a Hypothetical $10,000 Investment1
Total return represents the change in value of an investment over the periods shown. It includes any applicable maximum sales charge, Fund expenses, account fees and reinvested distributions. The unmanaged index includes reinvestment of any income or distributions. It differs from the Fund in composition and does not pay management fees or expenses. One cannot invest directly in an index.
Class A (10/1/07–9/30/17)
Advisor Class (10/1/07–9/30/17)
See page 8 for Performance Summary footnotes.
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FRANKLIN STRATEGIC MORTGAGE PORTFOLIO
PERFORMANCE SUMMARY
Distributions (10/1/16–9/30/17)
| Share Class | Net Investment Income |
Tax Return of Capital |
Total | |||
| A |
$0.266352 | $0.004298 | $0.270650 | |||
| A1 |
$0.289447 | $0.004638 | $0.294085 | |||
| C |
$0.229726 | $0.003740 | $0.233466 | |||
| R6 (8/1/17–9/30/17) |
$0.049757 | $0.001021 | $0.050778 | |||
| Advisor |
$0.289178 | $0.004634 | $0.293812 |
Total Annual Operating Expenses9
| Share Class | With Waiver | Without Waiver | ||
| A |
1.00% |
1.01% | ||
| Advisor |
0.75% |
0.76% |
Each class of shares is available to certain eligible investors and has different annual fees and expenses, as described in the prospectus.
All investments involve risks, including possible loss of principal. The Fund’s share price and yield will be affected by interest rate movements and mortgage prepayments. During periods of declining interest rates, principal prepayments tend to increase as borrowers refinance their mortgages at lower rates; therefore the Fund may be forced to reinvest returned principal at lower interest rates, reducing income. 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. The fund may be affected by issuers that fail to make interest payments and repay principal when due. Changes in the financial strength of a bond issuer or in a bond’s credit rating may affect its value. The Fund is actively managed but there is no guarantee that the manager’s investment decisions will produce the desired results. The Fund’s prospectus also includes a description of the main investment risks.
1. The Fund has a fee waiver associated with any investment it makes in a Franklin Templeton money fund and/or other Franklin Templeton fund, contractually guaranteed through 1/31/18. Fund investment results reflect the fee waiver; without this waiver, the results 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. Return for less than one year, if any, has not been annualized.
4. Performance quotations for Class A shares reflect the following methods of calculation: (a) For periods prior to 2/1/12, a restated figure is used based on Class A1 performance and including the Class A Rule 12b-1 fee, and (b) for periods after 2/1/12, actual Class A performance is used, reflecting all charges and fees applicable to that class. Since 2/1/12 (commencement of sales), the cumulative and average annual total returns of Class A shares were +17.31% and +2.07%.
5. Effective 2/1/12, the Fund began offering Advisor Class shares, which do not have sales charges or a Rule 12b-1 fee. Performance quotations for this class reflect the following methods of calculation: (a) For periods prior to 2/1/12, a restated figure is used based on the Fund’s oldest share class, Class A1, excluding the effect of its maximum initial sales charge; and (b) for periods after 2/1/12, actual Advisor Class performance is used, reflecting all charges and fees applicable to that class. Since 2/1/12 (commencement of sales), the cumulative and average annual total returns of Advisor Class shares were +18.97% and +3.12%.
6. Distribution rate is based on an annualization of the sum of distributions per share for the 30 days of September and the maximum offering price (NAV for Advisor Class) on 9/30/17.
7. The Fund’s 30-day standardized yield is calculated over a trailing 30-day period using the yield to maturity on bonds and/or the dividends accrued on stocks. It may not equal the Fund’s actual income distribution rate, which reflects the Fund’s past dividends paid to shareholders.
8. Source: Morningstar. The Bloomberg Barclays US MBS Fixed Rate Index is the fixed-rate component of the Bloomberg Barclays US MBS Index and includes the agency mortgage-backed pass-through securities of Ginnie Mae (GNMA), Fannie Mae (FNMA) and Freddie Mac (FHLMC).
9. Figures are as stated in the Fund’s current prospectus and may differ from the expense ratios disclosed in the Your Fund’s Expenses and Financial Highlights sections in this report. In periods of market volatility, assets may decline significantly, causing total annual Fund operating expenses to become higher than the figures shown.
See www.franklintempletondatasources.com for additional data provider information.
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As a Fund shareholder, you can incur two types of costs: (1) transaction costs, including sales charges (loads) on Fund purchases and redemptions; and (2) 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 table below 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 table below provides information about actual account values and actual expenses in the columns under the heading “Actual.” In these columns the Fund’s actual return, which includes the effect of Fund expenses, is used to calculate the “Ending Account Value” for each class of shares. 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): Divide your account value by $1,000 (if your account had an $8,600 value, then $8,600 ÷ $1,000 = 8.6). Then multiply the result by the number in the row for your class of shares under the headings “Actual” and “Expenses Paid During Period” (if Actual Expenses Paid During Period were $7.50, then 8.6 x $7.50 = $64.50). In this illustration, the actual expenses paid this period are $64.50.
Hypothetical Example for Comparison with Other Funds
Under the heading “Hypothetical” in the table, information is provided about hypothetical account values and hypothetical expenses based on the Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund’s actual return. This information may not be used to estimate the actual ending account balance or expenses you paid for the period, but it can help you compare ongoing costs of investing in the Fund with those of other funds. To do so, compare this 5% hypothetical example for the class of shares you hold with the 5% hypothetical examples that appear in the shareholder reports of other funds.
Please note that expenses shown in the table are meant to highlight ongoing costs and do not reflect any transactional costs. Therefore, information under the heading “Hypothetical” is useful in comparing ongoing costs only, and will not help you compare total costs of owning different funds. In addition, if transactional costs were included, your total costs would have been higher.
| Actual (actual return after expenses) |
Hypothetical (5% annual return before expenses) |
|||||||||||
| Share Class |
Beginning Account Value1 |
Ending Account Value 9/30/17 |
Expenses Paid During 4/1/17–9/30/172,3,4 |
Ending Value 9/30/17 |
Expenses Paid During Period 4/1/17–9/30/173,4 |
Net Annualized Expense Ratio4 | ||||||
|
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| |||||||||
| A |
$1,000 | $1,018.10 | $6.48 | $1,018.65 | $6.48 | 1.28% | ||||||
| A1 |
$1,000 | $1,019.40 | $5.21 | $1,019.90 | $5.22 | 1.03% | ||||||
| C |
$1,000 | $1,016.10 | $8.49 | $1,016.65 | $8.49 | 1.68% | ||||||
| R6 |
$1,000 | $1,000.10 | $1.23 | $1,021.31 | $3.80 | 0.75% | ||||||
| Advisor |
$1,000 | $1,019.40 | $5.21 | $1,019.90 | $5.22 | 1.03% | ||||||
1. For Classes A, A1, C and Advisor, 4/1/17 for Actual and Hypothetical. For R6, 8/1/17 for Actual and 4/1/17 for Hypothetical.
2. For Classes A, A1, C and Advisor, 4/1/17–9/30/17. For Class R6, 8/1/17–9/30/17.
3. Expenses are equal to the annualized expense ratio for the six-month period as indicated above—in the far right column—multiplied by the simple average account value over the period indicated, and then multiplied by 183/365 to reflect the one-half year period. The multiplier is 60/365 for Actual Class R6 expenses to reflect the number of days since inception.
4. Reflects expenses after fee waivers and expense reimbursements. Does not include acquired fund fees and expenses.
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| Year Ended September 30, | ||||||||||||||||||||
| 2017 | 2016 | 2015 | 2014 | 2013 | ||||||||||||||||
| Class A |
||||||||||||||||||||
| Per share operating performance |
||||||||||||||||||||
| (for a share outstanding throughout the year) | ||||||||||||||||||||
| Net asset value, beginning of year |
$ 9.57 | $ 9.49 | $ 9.43 | $ 9.37 | $ 9.69 | |||||||||||||||
|
|
|
|||||||||||||||||||
| Income from investment operationsa: | ||||||||||||||||||||
| Net investment income | 0.147 | 0.144 | 0.185 | 0.249 | 0.229 | |||||||||||||||
| Net realized and unrealized gains (losses) |
(0.106 | ) | 0.135 | 0.088 | 0.218 | (0.202 | ) | |||||||||||||
|
|
|
|||||||||||||||||||
| Total from investment operations |
0.041 | 0.279 | 0.273 | 0.467 | 0.027 | |||||||||||||||
|
|
|
|||||||||||||||||||
| Less distributions from: | ||||||||||||||||||||
| Net investment income | (0.267 | ) | (0.199 | ) | (0.213 | ) | (0.407 | ) | (0.347 | ) | ||||||||||
| Tax return of capital. |
(0.004 | ) | — | — | — | — | ||||||||||||||
|
|
|
|||||||||||||||||||
|
Total distributions |
|
(0.271 |
) |
(0.199 | ) | (0.213 | ) | (0.407 | ) | (0.347 | ) | |||||||||
|
|
|
|||||||||||||||||||
|
Net asset value, end of year. |
|
$ 9.34 |
|
$ 9.57 | $ 9.49 | $ 9.43 | $ 9.37 | |||||||||||||
|
|
|
|||||||||||||||||||
| Total returnb | 0.45% | 2.98% | 2.91% | 5.09% | 0.28% | |||||||||||||||
| Ratios to average net assets |
||||||||||||||||||||
| Expenses before waiver and payments by affiliates | 1.17% | 1.00% | 1.01% | 1.06% | 0.96% | |||||||||||||||
| Expenses net of waiver and payments by affiliates | 1.16% | c | 0.99% | c | 1.01% | d | 1.06% | d | 0.96% | |||||||||||
| Net investment income | 1.82% | 1.47% | 1.84% | 2.37% | 2.04% | |||||||||||||||
| Supplemental data |
||||||||||||||||||||
| Net assets, end of year (000’s) | $21,143 | $34,191 | $26,328 | $9,920 | $8,627 | |||||||||||||||
| Portfolio turnover rate | 244.09% | 551.77% | 614.11% | 514.95% | 674.91% | |||||||||||||||
| Portfolio turnover rate excluding mortgage dollar rollse | 111.62% | 185.40% | 172.54% | 133.55% | 252.41% | |||||||||||||||
aThe 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’s shares in relation to income earned and/or fluctuating fair value of the investments of the Fund.
bTotal return does not reflect sales commissions or contingent deferred sales charges, if applicable.
cBenefit of expense reduction rounds to less than 0.01%.
dBenefit of waiver and payments by affiliates and expense reduction rounds to less than 0.01%.
eSee Note 1(e) regarding mortgage dollar rolls.
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The accompanying notes are an integral part of these financial statements. |
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FRANKLIN STRATEGIC MORTGAGE PORTFOLIO
FINANCIAL HIGHLIGHTS
| Year Ended September 30, | ||||||||||||||||||||
| 2017 | 2016 | 2015 | 2014 | 2013 | ||||||||||||||||
| Class A1 |
||||||||||||||||||||
| Per share operating performance |
||||||||||||||||||||
| (for a share outstanding throughout the year) |
||||||||||||||||||||
| Net asset value, beginning of year |
$ 9.58 | $ 9.49 | $ 9.44 | $ 9.38 | $ 9.69 | |||||||||||||||
| Income from investment operationsa: |
||||||||||||||||||||
| Net investment income |
0.177 | 0.160 | 0.197 | 0.232 | 0.190 | |||||||||||||||
| Net realized and unrealized gains (losses) |
(0.113) | 0.153 | 0.090 | 0.259 | (0.129) | |||||||||||||||
| Total from investment operations |
0.064 | 0.313 | 0.287 | 0.491 | 0.061 | |||||||||||||||
| Less distributions from: |
||||||||||||||||||||
| Net investment income |
(0.289) | (0.223) | (0.237) | (0.431) | (0.371) | |||||||||||||||
| Tax return of capital |
(0.005) | — | — | — | — | |||||||||||||||
| Total distributions |
(0.294) | (0.223) | (0.237) | (0.431) | (0.371) | |||||||||||||||
| Net asset value, end of year |
$ 9.35 | $ 9.58 | $ 9.49 | $ 9.44 | $ 9.38 | |||||||||||||||
| Total returnb |
0.70% | 3.34% | 3.06% | 5.35% | 0.64% | |||||||||||||||
| Ratios to average net assets |
||||||||||||||||||||
| Expenses before waiver and payments by affiliates |
0.92% | 0.75% | 0.76% | 0.81% | 0.71% | |||||||||||||||
| Expenses net of waiver and payments by affiliates |
0.91% | c | 0.74%c | 0.76%d | 0.81%d | 0.71% | ||||||||||||||
| Net investment income |
2.07% | 1.72% | 2.09% | 2.62% | 2.29% | |||||||||||||||
| Supplemental data |
||||||||||||||||||||
| Net assets, end of year (000’s) |
$40,844 | $53,432 | $59,352 | $64,325 | $75,609 | |||||||||||||||
| Portfolio turnover rate |
244.09% | 551.77% | 614.11% | 514.95% | 674.91% | |||||||||||||||
| Portfolio turnover rate excluding mortgage dollar rollse |
111.62% | 185.40% | 172.54% | 133.55% | 252.41% | |||||||||||||||
aThe 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’s shares in relation to income earned and/or fluctuating fair value of the investments of the Fund.
bTotal return does not reflect sales commissions or contingent deferred sales charges, if applicable.
cBenefit of expense reduction rounds to less than 0.01%.
dBenefit of waiver and payments by affiliates and expense reduction rounds to less than 0.01%.
eSee Note 1(e) regarding mortgage dollar rolls.
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FRANKLIN STRATEGIC MORTGAGE PORTFOLIO
FINANCIAL HIGHLIGHTS
| Year Ended September 30, | ||||||||||||||||||||
| 2017 | 2016 | 2015 | 2014 | 2013 | ||||||||||||||||
| Class C |
||||||||||||||||||||
| Per share operating performance |
||||||||||||||||||||
| (for a share outstanding throughout the year) |
||||||||||||||||||||
| Net asset value, beginning of year |
$ 9.57 | $ 9.49 | $ 9.43 | $ 9.37 | $ 9.69 | |||||||||||||||
| Income from investment operationsa: |
||||||||||||||||||||
| Net investment income |
0.112 | 0.112 | 0.142 | 0.207 | 0.167 | |||||||||||||||
| Net realized and unrealized gains (losses) |
(0.109 | ) | 0.130 | 0.093 | 0.223 | (0.178 | ) | |||||||||||||
| Total from investment operations |
0.003 | 0.242 | 0.235 | 0.430 | (0.011 | ) | ||||||||||||||
| Less distributions from: |
||||||||||||||||||||
| Net investment income |
(0.229 | ) | (0.162 | ) | (0.175 | ) | (0.370 | ) | (0.309 | ) | ||||||||||
| Tax return of capital |
(0.004 | ) | — | — | — | — | ||||||||||||||
| Total distributions |
(0.233 | ) | (0.162 | ) | (0.175 | ) | (0.370 | ) | (0.309 | ) | ||||||||||
| Net asset value, end of year |
$ 9.34 | $ 9.57 | $ 9.49 | $ 9.43 | $ 9.37 | |||||||||||||||
| Total returnb |
0.06% | 2.57% | 2.51% | 4.68% | (0.11 | )% | ||||||||||||||
| Ratios to average net assets |
||||||||||||||||||||
| Expenses before waiver and payments by affiliates |
1.57% | 1.40% | 1.41% | 1.46% | 1.36% | |||||||||||||||
| Expenses net of waiver and payments by affiliates |
1.56% | c | 1.39% | c | 1.41% | d | 1.46% | d | 1.36% | |||||||||||
| Net investment income |
1.42% | 1.07% | 1.44% | 1.97% | 1.64% | |||||||||||||||
| Supplemental data |
||||||||||||||||||||
| Net assets, end of year (000’s) |
$6,308 | $9,468 | $4,067 | $2,409 | $2,137 | |||||||||||||||
| Portfolio turnover rate |
244.09% | 551.77% | 614.11% | 514.95% | 674.91% | |||||||||||||||
| Portfolio turnover rate excluding mortgage dollar rollse |
111.62% | 185.40% | 172.54% | 133.55% | 252.41% | |||||||||||||||
aThe 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’s shares in relation to income earned and/or fluctuating fair value of the investments of the Fund.
bTotal return does not reflect sales commissions or contingent deferred sales charges, if applicable.
cBenefit of expense reduction rounds to less than 0.01%.
dBenefit of waiver and payments by affiliates and expense reduction rounds to less than 0.01%.
eSee Note 1(e) regarding mortgage dollar rolls.
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FRANKLIN STRATEGIC MORTGAGE PORTFOLIO
FINANCIAL HIGHLIGHTS
|
|
Year Ended September 30, 2017a |
|||
| Class R6 |
||||
| Per share operating performance |
||||
| (for a share outstanding throughout the year) |
||||
| Net asset value, beginning of year |
$ 9.38 | |||
| Income from investment operationsb: |
||||
| Net investment income |
0.003 | |||
| Net realized and unrealized gains (losses) |
(0.002 | ) | ||
| Total from investment operations |
0.001 | |||
| Less distributions from: |
||||
| Net investment income |
(0.050) | |||
| Tax return of capital |
(0.001) | |||
| Total distributions |
(0.051) | |||
| Net asset value, end of year |
$ 9.33 | |||
| Total returnc |
0.01% | |||
| Ratios to average net assetsd |
||||
| Expenses before waiver and payments by affiliates |
1.83% | |||
| Expenses net of waiver and payments by affiliates |
0.75%e | |||
| Net investment income |
2.23% | |||
| Supplemental data |
||||
| Net assets, end of year (000’s) |
$5 | |||
| Portfolio turnover rate |
244.09% | |||
| Portfolio turnover rate excluding mortgage dollar rollsf |
111.62% | |||
aFor the period August 1, 2017 (effective date) to September 30, 2017.
bThe 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’s shares in relation to income earned and/or fluctuating fair value of the investments of the Fund.
cTotal return is not annualized for periods less than one year.
dRatios are annualized for periods less than one year, except for non-recurring expenses, if any.
eBenefit of expense reduction rounds to less than 0.01%.
fSee Note 1(e) regarding mortgage dollar rolls.
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The accompanying notes are an integral part of these financial statements. | Annual Report |
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FRANKLIN STRATEGIC MORTGAGE PORTFOLIO
FINANCIAL HIGHLIGHTS
| Year Ended September 30, | ||||||||||||||||||
| 2017 | 2016 | 2015 | 2014 | 2013 | ||||||||||||||
| Advisor Class |
||||||||||||||||||
| Per share operating performance |
||||||||||||||||||
| (for a share outstanding throughout the year) |
||||||||||||||||||
| Net asset value, beginning of year |
$ 9.57 | $ 9.48 | $ 9.43 | $ 9.37 | $ 9.69 | |||||||||||||
| Income from investment operationsa: |
||||||||||||||||||
| Net investment income |
0.187 | 0.146 | 0.199 | 0.371 | 0.252 | |||||||||||||
| Net realized and unrealized gains (losses) |
(0.133 | ) | 0.166 | 0.087 | 0.119 | (0.201) | ||||||||||||
| Total from investment operations |
0.054 | 0.312 | 0.286 | 0.490 | 0.051 | |||||||||||||
| Less distributions from: |
||||||||||||||||||
| Net investment income |
(0.289 | ) | (0.222 | ) | (0.236 | ) | (0.430 | ) | (0.371) | |||||||||
| Tax return of capital |
(0.005 | ) | — | — | — | — | ||||||||||||
| Total distributions |
(0.294 | ) | (0.222 | ) | (0.236 | ) | (0.430 | ) | (0.371) | |||||||||
| Net asset value, end of year |
$ 9.33 | $ 9.57 | $ 9.48 | $ 9.43 | $ 9.37 | |||||||||||||
| Total return |
0.70% | 3.34% | 3.06% | 5.35% | 0.54% | |||||||||||||
| Ratios to average net assets |
||||||||||||||||||
| Expenses before waiver and payments by affiliates |
0.92% | 0.75% | 0.76% | 0.81% | 0.71% | |||||||||||||
| Expenses net of waiver and payments by affiliates |
0.91% | b | 0.74% | b | 0.76% | c | 0.81% | c | 0.71% | |||||||||
| Net investment income |
2.07% | 1.72% | 2.09% | 2.62% | 2.29% | |||||||||||||
| Supplemental data |
||||||||||||||||||
| Net assets, end of year (000’s) |
$7,632 | $8,264 | $12,651 | $9,049 | $3,007 | |||||||||||||
| Portfolio turnover rate |
244.09% | 551.77% | 614.11% | 514.95% | 674.91% | |||||||||||||
| Portfolio turnover rate excluding mortgage dollar rollsd |
111.62% | 185.40% | 172.54% | 133.55% | 252.41% | |||||||||||||
aThe 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’s shares in relation to income earned and/or fluctuating fair value of the investments of the Fund.
bBenefit of expense reduction rounds to less than 0.01%.
cBenefit of waiver and payments by affiliates and expense reduction rounds to less than 0.01%.
dSee Note 1(e) regarding mortgage dollar rolls.
|
14 |
Annual Report | |
The accompanying notes are an integral part of these financial statements. |
franklintempleton.com |
FRANKLIN STRATEGIC MORTGAGE PORTFOLIO
| Statement of Investments, September 30, 2017 | ||||||
| Principal Amount |
Value | |||||
| U.S. Government and Agency Securities 0.6% |
||||||
| U.S. Treasury Bond, |
||||||
| 4.75%, 2/15/37 |
$ | 225,000 | $ 298,714 | |||
| 4.25%, 11/15/40 |
131,000 | 164,351 | ||||
|
| ||||||
|
Total U.S. Government and Agency Securities (Cost $484,756) |
463,065 | |||||
|
| ||||||
| Asset-Backed Securities and Commercial Mortgage-Backed Securities 29.7% |
||||||
| Finance 29.7% |
||||||
| a American Home Mortgage
Investment Trust, 2005-1, 6A, FRN, 3.456%, (6-month USD LIBOR + 2.00%), |
143,921 | 146,110 | ||||
| b,c,d Anthracite Ltd., 2004-HY1A, E, 144A, 7.147%, 6/20/41 |
1,598,000 | 4,455 | ||||
| a,b ARCap REIT Inc., 2004-RR3, A2, 144A, FRN, 4.76%, (1-month USD LIBOR + 4.76%), 9/21/45 |
40,940 | 41,296 | ||||
| Banc of America Commercial Mortgage Trust, 2006-4, AJ, 5.695%, 7/10/46 |
32,112 | 32,514 | ||||
| a Bear Stearns ALT-A Trust, 2004-13, A2, FRN, 2.117%, (1-month USD LIBOR + 0.88%), 11/25/34 |
88,851 | 88,200 | ||||
| e,f Bear Stearns Commercial Mortgage Securities Trust, 2005-T20, E, FRN, 5.276%, 10/12/42 |
215,000 | 196,644 | ||||
| e,f CD Commercial Mortgage Trust, 2005-CD1, E, FRN, 5.437%, 7/15/44 |
47,683 | 47,619 | ||||
| CD Mortgage Trust, 2016-CD2, A4, 3.526%, 11/10/49 |
175,000 | 181,413 | ||||
| b Centerline REIT Inc., 2004-RR3, B, 144A, 5.04%, 9/21/45 |
200,000 | 188,260 | ||||
| Citigroup Commercial Mortgage Trust, |
||||||
| 2006-C5, AJ, 5.482%, 10/15/49 |
213,547 | 201,861 | ||||
| e,f,g 2015-GC27, XA, IO, FRN, 1.567%, 2/10/48 |
3,719,051 | 292,375 | ||||
| 2015-GC31, A4, 3.762%, 6/10/48 |
250,000 | 262,991 | ||||
| 2016-GC37, A4, 3.314%, 4/10/49 |
250,000 | 254,321 | ||||
| b,e,f Citigroup Mortgage Loan Trust, 2013-A, A, 144A, FRN, 3.00%, 5/25/42 |
52,628 | 52,931 | ||||
| a,b Colony American Homes, |
||||||
| 2014-1A, A, 144A, FRN, 2.384%, (1-month USD LIBOR + 1.15%), 5/17/31 |
92,647 | 93,092 | ||||
| 2014-1A, C, 144A, FRN, 3.084%, (1-month USD LIBOR + 1.85%), 5/17/31 |
250,000 | 251,096 | ||||
| 2014-2A, A, 144A, FRN, 2.186%, (1-month USD LIBOR + 0.95%), 7/17/31 |
75,491 | 75,653 | ||||
| 2014-2A, C, 144A, FRN, 3.136%, (1-month USD LIBOR + 1.90%), 7/17/31 |
163,008 | 164,055 | ||||
| 2015-1A, A, 144A, FRN, 2.434%, (1-month USD LIBOR + 1.20%), 7/17/32 |
287,746 | 289,280 | ||||
| b Colony MFM Trust, 2014-1, A, 144A, 2.543%, 4/20/50 |
65,920 | 65,659 | ||||
| e,f,g COMM Mortgage Trust, 2014-UBS4, XA, IO, FRN, 1.385%, 8/10/47 |
3,669,792 | 203,950 | ||||
| e,f Commercial Mortgage Trust, 2006-GG7, AJ, FRN, 5.766%, 7/10/38 |
195,000 | 183,061 | ||||
| e,f Conseco Finance Securitizations Corp., 2002-2, M1, FRN, 7.424%, 3/01/33 |
399,841 | 440,658 | ||||
| Conseco Financial Corp., |
||||||
| 1996-9, M1, 7.63%, 8/15/27 |
208,521 | 225,509 | ||||
| 1997-3, A7, 7.64%, 3/15/28 |
50,692 | 51,470 | ||||
| 1998-6, A8, 6.66%, 6/01/30 |
169,841 | 180,608 | ||||
| b Core Industrial Trust, 2015-CALW, A, 144A, 3.04%, 2/10/34 |
250,000 | 255,830 | ||||
| CSAIL Commercial Mortgage Trust, |
||||||
| 2015-C1, A4, 3.505%, 4/15/50 |
430,000 | 444,988 | ||||
| e,f,g 2015-C2, XA, IO, FRN, 1.001%, 6/15/57 |
5,562,836 | 259,840 | ||||
| b,e,f CSMC, 2009-15R, 3A1, 144A, FRN, 3.211%, 3/26/36 |
58,016 | 58,192 | ||||
| b,e,f CSMC Trust, 2014-OAK1, 1A1, 144A, FRN, 3.00%, 11/25/29 |
154,080 | 156,175 | ||||
| a,h CWABS Asset-Backed
Certificates Trust, 2004-7, MV3, FRN, 2.287%, (1-month USD LIBOR + 1.05%), |
31,128 | 31,309 | ||||
| a CWABS Inc. Asset-Backed
Certificates, 2004-1, M1, FRN, 1.987%, (1-month USD LIBOR + 0.75%), |
101,418 | 102,195 | ||||
| b,e,f Eleven Madison Trust Mortgage Trust, 2015-11MD, A, 144A, FRN, 3.673%, 9/10/35 |
400,000 | 415,598 | ||||
| a FHLMC Structured Agency Credit Risk Debt Notes, |
||||||
| 2014-DN1, M2, FRN, 3.437%, (1-month USD LIBOR + 2.20%), 2/25/24 |
227,598 | 234,956 | ||||
| 2014-DN3, M3, FRN, 5.237%, (1-month USD LIBOR + 4.00%), 8/25/24 |
244,865 | 261,406 | ||||
| 2014-DN4, M3, FRN, 5.787%, (1-month USD LIBOR + 4.55%), 10/25/24 |
234,076 | 253,845 | ||||
|
franklintempleton.com |
Annual Report |
15 |
FRANKLIN STRATEGIC MORTGAGE PORTFOLIO
STATEMENT OF INVESTMENTS
| Principal Amount |
Value | |||||
| Asset-Backed Securities and Commercial Mortgage-Backed Securities |
||||||
| (continued) |
||||||
| Finance (continued) |
||||||
| a FHLMC Structured Agency Credit Risk Debt Notes, (continued) |
||||||
| 2014-HQ1, M2, FRN, 3.737%, (1-month USD LIBOR + 2.50%), 8/25/24 |
$ | 104,769 | $ 105,685 | |||
| 2014-HQ2, M2, FRN, 3.437%, (1-month USD LIBOR + 2.20%), 9/25/24 |
250,000 | 258,244 | ||||
| 2014-HQ3, M2, FRN, 3.887%, (1-month USD LIBOR + 2.65%), 10/25/24 |
35,136 | 35,267 | ||||
| 2014-HQ3, M3, FRN, 5.987%, (1-month USD LIBOR + 4.75%), 10/25/24 |
250,000 | 276,812 | ||||
| 2015-DN1, M2, FRN, 3.637%, (1-month USD LIBOR + 2.40%), 1/25/25 |
25,084 | 25,123 | ||||
| 2015-DN1, M3, FRN, 5.387%, (1-month USD LIBOR + 4.15%), 1/25/25 |
250,000 | 268,847 | ||||
| 2015-DNA1, M2, FRN, 3.087%, (1-month USD LIBOR + 1.85%), 10/25/27 |
250,000 | 255,457 | ||||
| h 2015-DNA3, B, FRN, 10.587%, (1-month USD LIBOR + 9.35%), 4/25/28 |
249,765 | 299,260 | ||||
| 2015-DNA3, M2, FRN, 4.087%, (1-month USD LIBOR + 2.85%), 4/25/28 |
412,834 | 428,359 | ||||
| 2015-HQ1, M2, FRN, 3.437%, (1-month USD LIBOR + 2.20%), 3/25/25 |
115,410 | 116,400 | ||||
| 2015-HQ1, M3, FRN, 5.037%, (1-month USD LIBOR + 3.80%), 3/25/25 |
500,000 | 538,898 | ||||
| h 2015-HQA1, B, FRN, 10.037%, (1-month USD LIBOR + 8.80%), 3/25/28 |
249,404 | 285,560 | ||||
| 2015-HQA1, M2, FRN, 3.887%, (1-month USD LIBOR + 2.65%), 3/25/28 |
158,422 | 161,940 | ||||
| 2016-HQ1, M1, FRN, 2.987%, (1-month USD LIBOR + 1.75%), 9/25/28 |
78,568 | 78,834 | ||||
| 2016-HQA2, M2, FRN, 3.487%, (1-month USD LIBOR + 2.25%), 11/25/28 |
250,000 | 257,114 | ||||
| a FNMA, 2007-1, NF, FRN, 1.487%, (1-month USD LIBOR + 0.25%), 2/25/37 |
120,731 | 120,905 | ||||
| a FNMA Connecticut Avenue Securities, |
||||||
| 2014-C02, 2M1, FRN, 2.187%, (1-month USD LIBOR + 0.95%), 5/25/24 |
12,291 | 12,301 | ||||
| 2014-C02, 2M2, FRN, 3.837%, (1-month USD LIBOR + 2.60%), 5/25/24 |
400,000 | 414,373 | ||||
| 2014-C04, 1M1, FRN, 6.137%, (1-month USD LIBOR + 4.90%), 11/25/24 |
310,511 | 351,951 | ||||
| 2015-C01, 2M2, FRN, 5.787%, (1-month USD LIBOR + 4.55%), 2/25/25 |
244,510 | 261,123 | ||||
| 2017-C01, 1B1, FRN, 6.987%, (1-month USD LIBOR + 5.75%), 7/25/29 |
280,000 | 311,430 | ||||
| e,f GE Capital Commercial Mortgage Corp. Trust, 2007-C1, AM, FRN, 5.606%, 12/10/49 |
250,000 | 254,374 | ||||
| b G-Force LLC, 2005-RRA, C, 144A, 5.20%, 8/22/36 |
263,614 | 260,183 | ||||
| h GMAC Commercial Mortgage Securities Inc. Trust, 2005-C1, B, 4.936%, 5/10/43 |
295,926 | 15,135 | ||||
| Green Tree Financial Corp., |
||||||
| 1997-3, A6, 7.32%, 3/15/28 |
3,575 | 3,626 | ||||
| 1998-4, A7, 6.87%, 4/01/30 |
76,307 | 82,054 | ||||
| e,f Greenwich Capital Commercial Funding Corp., 2006-GG7, AM, FRN, 5.959%, 7/10/38 |
83,008 | 83,800 | ||||
| e,f,g GS Mortgage Securities Corp. II, 2015-GC30, XA, IO, FRN, 1.024%, 5/10/50 |
6,127,362 | 278,835 | ||||
| e,f,g GS Mortgage Securities Trust, 2017-GS5, XA, IO, FRN, 0.971%, 3/10/50 |
3,246,514 | 211,946 | ||||
| a GSAA Home Equity Trust, 2005-6, A3, FRN, 1.607%, (1-month USD LIBOR + 0.37%), 6/25/35 |
73,072 | 73,814 | ||||
| a GSAMP Trust, 2005-HE3, M2, FRN, 2.242%, (1-month USD LIBOR + 1.005%), 6/25/35 |
109,997 | 110,849 | ||||
| b Hilton USA Trust, 2016-SFP, C, 144A, 4.122%, 11/05/35 |
233,000 | 237,540 | ||||
| a Home Equity Mortgage Trust, 2004-4, M3, FRN, 2.212%, (1-month USD LIBOR + 0.975%), 12/25/34 |
374,998 | 374,226 | ||||
| a Impac Secured Assets Trust, 2007-2, FRN, 1.487%, (1-month USD LIBOR + 0.25%), 4/25/37 |
185,478 | 185,237 | ||||
| a,b Invitation Homes Trust, |
||||||
| 2014-SFR2, A, 144A, FRN, 2.335%, (1-month USD LIBOR + 1.10%), 9/17/31 |
237,161 | 238,069 | ||||
| 2014-SFR2, B, 144A, FRN, 2.834%, (1-month USD LIBOR + 1.60%), 9/17/31 |
200,000 | 200,208 | ||||
| 2014-SFR3, C, 144A, FRN, 3.734%, (1-month USD LIBOR + 2.50%), 12/17/31 |
49,073 | 49,213 | ||||
| 2015-SFR1, A, 144A, FRN, 2.684%, (1-month USD LIBOR + 1.45%), 3/17/32 |
213,729 | 215,481 | ||||
| 2015-SFR2, A, 144A, FRN, 2.584%, (1-month USD LIBOR + 1.35%), 6/17/32 |
243,013 | 244,969 | ||||
| 2015-SFR2, C, 144A, FRN, 3.234%, (1-month USD LIBOR + 2.00%), 6/17/32 |
200,000 | 200,908 | ||||
| 2015-SFR3, A, 144A, FRN, 2.534%, (1-month USD LIBOR + 1.30%), 8/17/32 |
238,680 | 240,588 | ||||
| 2015-SFR3, C, 144A, FRN, 3.234%, (1-month USD LIBOR + 2.00%), 8/17/32 |
225,000 | 226,064 | ||||
| JP Morgan Chase Commercial Mortgage Securities Trust, |
||||||
| e,f 2005-LPD5, F, FRN, 5.888%, 12/15/44 |
91,056 | 90,841 | ||||
| 2016-JP3, AS, 3.144%, 8/15/49 |
450,000 | 441,917 | ||||
| b,e,f JP Morgan Mortgage Trust, 2013-3, A3, 144A, FRN, 3.411%, 7/25/43 |
239,289 | 240,906 | ||||
|
16 |
| Annual Report |
franklintempleton.com |
FRANKLIN STRATEGIC MORTGAGE PORTFOLIO
STATEMENT OF INVESTMENTS
| Principal Amount |
Value | |||||
| Asset-Backed Securities and Commercial Mortgage-Backed Securities |
||||||
| (continued) |
||||||
| Finance (continued) |
||||||
| JPMBB Commercial Mortgage Securities Trust, |
||||||
| e,f 2014-C24, AS, FRN, 3.914%, 11/15/47 |
$ | 250,000 | $ 259,698 | |||
| 2015-C33, A4, 3.77%, 12/15/48 |
250,000 | 263,109 | ||||
| e,f
LB-UBS Commercial Mortgage Trust, |
||||||
| b,h 2001-C3, E, 144A, FRN, 6.95%, 6/15/36 |
300,000 | 294,317 | ||||
| 2006-C1, AJ, FRN, 5.276%, 2/15/41 |
127,494 | 127,528 | ||||
| a Lehman XS Trust, 2005-1, 2A2, FRN, 2.737%, (1-month USD LIBOR + 1.50%), 7/25/35 |
74,263 | 74,512 | ||||
| b,e,f Mach One ULC, |
||||||
| 2004-1A, K, 144A, FRN, 5.45%, 5/28/40 |
125,000 | 124,990 | ||||
| 2004-1A, L, 144A, FRN, 5.45%, 5/28/40 |
125,000 | 125,374 | ||||
| a Madison Avenue Manufactured Housing Contract Trust, 2002-A, B1, FRN, 4.487%, (1-month USD LIBOR + 3.25%), 3/25/32 |
107,173 | 109,587 | ||||
| Merrill Lynch Mortgage Investors Trust, |
||||||
| a 2003-A, 1A, FRN, 1.977%, (1-month USD LIBOR + 0.74%), 3/25/28 |
192,391 | 185,410 | ||||
| e,f 2004-A1, M1, FRN, 3.308%, 2/25/34 |
200,206 | 166,627 | ||||
| e,f Merrill Lynch Mortgage Trust, 2005-CKI1, D, FRN, 5.54%, 11/12/37 |
32,541 | 32,507 | ||||
| b,e,f Mill City Mortgage Loan Trust, 2016-1, A, 144A, FRN, 2.50%, 4/25/57 |
153,137 | 153,420 | ||||
| a Morgan Stanley ABS Capital I Inc. Trust, 2005-WMC, M2, FRN, 1.972%, (1-month USD LIBOR + 0.735%), 1/25/35 |
113,943 | 114,611 | ||||
| b,e,f Morgan Stanley Capital I Trust, 2014-150E, C, 144A, FRN, 4.438%, 9/09/32 |
330,000 | 348,496 | ||||
| b,e,f Multi Security Asset Trust LP Commercial Mortgage, |
||||||
| 2005-RR4A, J, 144A, FRN, 5.88%, 11/28/35 |
220,000 | 221,939 | ||||
| 2005-RR4A, K, 144A, FRN, 5.88%, 11/28/35 |
130,000 | 132,083 | ||||
| a Novastar Home Equity Loan, 2004-4, M4, FRN, 2.887%, (1-month USD LIBOR + 1.65%), 3/25/35 |
45,566 | 45,752 | ||||
| Oakwood Mortgage Investors Inc., 1999-A, A3, 6.09%, 4/15/29 |
95,035 | 96,136 | ||||
| b One Market Plaza Trust, 2017-1MKT, B, 144A, 3.845%, 2/10/32 |
350,000 | 364,637 | ||||
| Residential Asset Securities Corp., 2004-KS8, AI6, 4.79%, 9/25/34 |
18,832 | 18,951 | ||||
| e,f Residential Funding Mortgage Securities II, 2004-HI3, A5, FRN, 5.98%, 6/25/34 |
65,088 | 67,154 | ||||
| b,e,f Towd Point Mortgage Trust, |
||||||
| 2015-1, 144A, FRN, 2.75%, 11/25/60 |
306,188 | 308,262 | ||||
| 2015-3, A1B, 144A, FRN, 3.00%, 3/25/54 |
193,433 | 195,638 | ||||
| 2016-5, A1, 144A, FRN, 2.50%, 10/25/56 |
371,870 | 372,371 | ||||
| 2017-1, A1, 144A, FRN, 2.75%, 10/25/56 |
190,920 | 192,379 | ||||
| 2017-1, A2, 144A, FRN, 3.50%, 10/25/56 |
165,000 | 170,155 | ||||
| 2017-2, A1, 144A, FRN, 2.75%, 4/25/57 |
111,204 | 111,926 | ||||
| 2017-4, A1, 144A, FRN, 2.75%, 6/25/57 |
206,098 | 207,527 | ||||
| a,b Tricon American Homes Trust, |
||||||
| 2015-SFR1, A, 144A, FRN, 2.571%, (1-month USD LIBOR + 1.25%), 5/17/32 |
215,094 | 216,689 | ||||
| 2015-SFR1, C, 144A, FRN, 3.134%, (1-month USD LIBOR + 1.90%), 5/17/32 |
200,000 | 201,232 | ||||
| b,e,f Wachovia Bank Commercial Mortgage Trust, 2003-C7, F, 144A, FRN, 6.138%, 10/15/35 |
46,590 | 46,530 | ||||
| a WaMu Mortgage Pass-Through Certificates, |
||||||
| 2005-AR19, A1A1, FRN, 1.507%, (1-month USD LIBOR + 0.27%), 12/25/45 |
248,041 | 241,202 | ||||
| 2005-AR8, 1A1A, FRN, 1.527%, (1-month USD LIBOR + 0.29%), 7/25/45 |
128,515 | 126,962 | ||||
| e,f,g Wells Fargo Commercial Mortgage Trust, 2016-NXS6, XA, IO, FRN, 1.80%, 11/15/49 |
2,837,091 | 283,776 | ||||
| Wells Fargo Mortgage Backed Securities Trust, |
||||||
| e,f 2004-W, A9, FRN, 3.616%, 11/25/34 |
104,062 | 106,526 | ||||
| e,f 2005-AR10, 2A3, FRN, 3.296%, 6/25/35 |
101,032 | 101,743 | ||||
| e,f 2005-AR9, 2A2, FRN, 3.53%, 10/25/33 |
158,909 | 158,597 | ||||
| 2007-3, 3A1, 5.50%, 4/25/22 |
17,033 | 17,427 | ||||
|
| ||||||
| Total Asset-Backed Securities and Commercial Mortgage-Backed Securities |
||||||
| (Cost $22,309,621) |
22,499,861 | |||||
|
| ||||||
|
franklintempleton.com |
Annual Report |
17 |
FRANKLIN STRATEGIC MORTGAGE PORTFOLIO
STATEMENT OF INVESTMENTS
| Principal Amount |
Value | |||||
| Mortgage-Backed Securities 75.8% |
||||||
| Federal Home Loan Mortgage Corp. (FHLMC) Fixed Rate 42.2% |
||||||
| FHLMC Gold 20 Year, 6.50%, 2/01/19 |
$ | 6,667 | $ 6,698 | |||
| FHLMC Gold 30 Year, 3.00%, 4/01/47 |
4,297,344 | 4,314,946 | ||||
| i FHLMC Gold 30 Year, 3.00%, 10/01/47 |
500,000 | 501,563 | ||||
| FHLMC Gold 30 Year, 3.50%, 3/01/47 |
4,846,497 | 5,002,883 | ||||
| FHLMC Gold 30 Year, 3.50%, 6/01/47 |
6,569,019 | 6,780,987 | ||||
| i FHLMC Gold 30 Year, 3.50%, 10/01/47 |
1,000,000 | 1,031,211 | ||||
| FHLMC Gold 30 Year, 4.00%, 6/01/47 |
4,982,876 | 5,248,987 | ||||
| FHLMC Gold 30 Year, 4.00%, 8/01/47 |
7,010,146 | 7,384,523 | ||||
| FHLMC Gold 30 Year, 4.50%, 4/01/40 |
656,472 | 706,642 | ||||
| FHLMC Gold 30 Year, 5.00%, 10/01/33 - 2/01/39 |
413,900 | 453,410 | ||||
| FHLMC Gold 30 Year, 5.50%, 9/01/33 |
45,681 | 51,058 | ||||
| FHLMC Gold 30 Year, 6.00%, 7/01/28 - 11/01/36 |
126,997 | 143,491 | ||||
| FHLMC Gold 30 Year, 6.50%, 11/01/27 - 7/01/32 |
73,091 | 81,066 | ||||
| FHLMC Gold 30 Year, 7.50%, 10/01/25 - 8/01/32 |
177,296 | 194,453 | ||||
| FHLMC Gold 30 Year, 8.00%, 7/01/24 - 5/01/30 |
100,771 | 106,834 | ||||
| FHLMC Gold 30 Year, 8.50%, 6/01/21 |
8,615 | 8,693 | ||||
| FHLMC Gold 30 Year, 9.00%, 9/01/30 |
26,079 | 26,483 | ||||
| FHLMC Gold 30 Year, 9.50%, 12/01/19 - 12/01/22 |
11,682 | 11,828 | ||||
|
| ||||||
|
32,055,756 | ||||||
|
| ||||||
| j Federal National Mortgage Association (FNMA) Adjustable Rate 2.5% |
||||||
| FNMA, 1.907% - 3.125%, (11th District COF +/- MBS Margin), 1/01/18 - 4/01/37 |
734,937 | 750,550 | ||||
| FNMA, 3.145% - 3.388%, (11th District COF +/- MBS Margin), 5/01/21 - 7/01/38 |
719,934 | 735,862 | ||||
| FNMA, 3.445% - 3.75%, (11th District COF +/- MBS Margin), 5/01/22 - 4/01/37 |
376,185 | 388,710 | ||||
|
| ||||||
|
1,875,122 | ||||||
|
| ||||||
| Federal National Mortgage Association (FNMA) Fixed Rate 18.5% |
||||||
| FNMA 15 Year, 5.00%, 6/01/18 - 7/01/18 |
32,021 | 32,777 | ||||
| FNMA 15 Year, 5.50%, 11/01/17 - 2/01/18 |
2,748 | 2,750 | ||||
| FNMA 30 Year, 3.00%, 4/01/47 |
5,532,696 | 5,553,492 | ||||
| i FNMA 30 Year, 3.00%, 10/01/47 |
785,000 | 787,208 | ||||
| i FNMA 30 Year, 3.50%, 10/01/47 |
2,050,000 | 2,112,701 | ||||
| FNMA 30 Year, 3.50%, 7/01/56 |
1,232,214 | 1,267,686 | ||||
| i FNMA 30 Year, 4.00%, 10/01/47 |
250,000 | 263,145 | ||||
| FNMA 30 Year, 5.00%, 4/01/34 |
120,433 | 131,699 | ||||
| FNMA 30 Year, 5.50%, 9/01/33 - 11/01/33 |
615,022 | 684,946 | ||||
| FNMA 30 Year, 5.50%, 11/01/33 - 11/01/35 |
602,185 | 675,477 | ||||
| FNMA 30 Year, 6.00%, 12/01/23 - 10/01/34 |
374,382 | 428,455 | ||||
| FNMA 30 Year, 6.00%, 10/01/34 - 5/01/35 |
597,105 | 682,043 | ||||
| FNMA 30 Year, 6.00%, 7/01/35 - 8/01/35 |
252,596 | 285,638 | ||||
| FNMA 30 Year, 6.50%, 12/01/27 - 8/01/32 |
673,087 | 749,439 | ||||
| FNMA 30 Year, 6.50%, 8/01/32 |
93,766 | 104,211 | ||||
| FNMA 30 Year, 7.50%, 8/01/25 - 5/01/32 |
28,507 | 33,605 | ||||
| FNMA 30 Year, 8.00%, 1/01/25 - 7/01/31 |
25,072 | 28,445 | ||||
| FNMA 30 Year, 8.50%, 11/01/26 - 11/01/28 |
165,741 | 178,980 | ||||
| FNMA 30 Year, 9.00%, 12/01/17 - 4/01/25 |
1,679 | 1,859 | ||||
| FNMA 30 Year, 9.50%, 11/01/21 - 4/01/30 |
40,241 | 42,684 | ||||
| FNMA 30 Year, 10.00%, 11/01/18 - 4/01/21 |
6,919 | 7,009 | ||||
| FNMA 30 Year, 10.50%, 5/01/30 |
2,004 | 2,013 | ||||
| FNMA PL 30 Year, 10.00%, 9/01/20 |
7,761 | 7,857 | ||||
|
| ||||||
|
14,064,119 | ||||||
|
| ||||||
|
18 |
| Annual Report |
franklintempleton.com |
FRANKLIN STRATEGIC MORTGAGE PORTFOLIO
STATEMENT OF INVESTMENTS
| Principal Amount |
Value | |||||
| Mortgage-Backed Securities (continued) |
||||||
| Government National Mortgage Association (GNMA) Fixed Rate 12.6% |
||||||
| GNMA I SF 30 Year, 6.50%, 1/15/24 - 9/15/32 |
$ | 109,212 | $120,612 | |||
| GNMA I SF 30 Year, 7.00%, 6/15/23 - 2/15/32 |
62,323 | 65,630 | ||||
| GNMA I SF 30 Year, 7.50%, 10/15/23 - 10/15/29 |
33,761 | 35,796 | ||||
| GNMA I SF 30 Year, 8.00%, 1/15/22 - 9/15/27 |
41,590 | 44,985 | ||||
| GNMA I SF 30 Year, 8.25%, 2/15/21 - 5/15/21 |
21,236 | 21,313 | ||||
| GNMA I SF 30 Year, 8.50%, 10/15/21 - 7/15/24 |
39,964 | 40,403 | ||||
| GNMA I SF 30 Year, 10.00%, 12/15/18 |
1,286 | 1,292 | ||||
| GNMA II SF 30 Year, 3.00%, 7/20/47 |
3,909,722 | 3,968,651 | ||||
| GNMA II SF 30 Year, 3.00%, 8/20/47 |
433,987 | 440,528 | ||||
| GNMA II SF 30 Year, 3.50%, 5/20/47 |
1,378,489 | 1,434,974 | ||||
| GNMA II SF 30 Year, 3.50%, 9/20/47 |
2,483,510 | 2,585,273 | ||||
| i GNMA II SF 30 Year, 3.50%, 10/01/47 |
460,000 | 478,112 | ||||
| GNMA II SF 30 Year, 6.50%, 1/20/26 - 1/20/33 |
179,119 | 206,029 | ||||
| GNMA II SF 30 Year, 7.50%, 11/20/22 - 7/20/32 |
110,151 | 126,777 | ||||
| GNMA II SF 30 Year, 8.00%, 8/20/26 |
107 | 126 | ||||
| GNMA II SF 30 Year, 9.00%, 11/20/19 - 3/20/25 |
977 | 1,029 | ||||
| GNMA II SF 30 Year, 10.50%, 6/20/20 |
9 | 9 | ||||
|
| ||||||
|
9,571,539 | ||||||
|
| ||||||
| Total Mortgage-Backed Securities (Cost $56,890,864) |
57,566,536 | |||||
|
| ||||||
| Total Investments before Short Term Investments (Cost $79,685,241) |
80,529,462 | |||||
|
| ||||||
| Shares | ||||||
| Short Term Investments (Cost $841,566) 1.1% |
||||||
| Money Market Funds 1.1% |
||||||
| k,l Institutional Fiduciary Trust Money Market Portfolio, 0.67% |
841,566 | 841,566 | ||||
|
| ||||||
| Total Investments (Cost $80,526,807) 107.2% |
81,371,028 | |||||
| Other Assets, less Liabilities (7.2)% |
(5,439,329) | |||||
|
| ||||||
| Net Assets 100.0% |
$75,931,699 | |||||
|
| ||||||
aThe coupon rate shown represents the rate inclusive of any caps or floors, if applicable, in effect at period end.
bSecurity 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 Fund’s Board of Trustees. At September 30, 2017, the aggregate value of these securities was $8,253,666, representing 10.9% of net assets.
cFair valued using significant unobservable inputs. See Note 10 regarding fair value measurements.
dSee Note 7 regarding defaulted securities.
eAdjustable rate security with an interest rate that is not based on a published reference index and spread. The rate is based on the structure of the agreement and current market conditions.
fThe coupon rate shown represents the rate at period end.
gInvestment in an interest-only security entitles holders to receive only the interest payment on the underlying instruments. The principal amount shown is the notional amount of the underlying instruments.
hThe bond pays interest and/or principal based upon the issuer’s ability to pay, which may be less than the stated interest rate or principal paydown.
iSecurity purchased on a to-be-announced (TBA) basis. See Note 1(c).
jAdjustable Rate Mortgage-Backed Security (ARM); the rate shown is the effective rate at period end. ARM rates are not based on a published reference rate and spread, but instead pass-through weighted average interest income inclusive of any caps or floors, if applicable, from the underlying mortgage loans in which the majority of mortgages pay interest based on the index shown at their designated reset dates plus a spread, less the applicable servicing and guaranty fee (MBS margin).
kSee Note 3(f) regarding investments in affiliated management investment companies.
lThe rate shown is the annualized seven-day yield at period end.
|
franklintempleton.com |
Annual Report |
19 |
FRANKLIN STRATEGIC MORTGAGE PORTFOLIO
STATEMENT OF INVESTMENTS
At September 30, 2017, the Fund had the following futures contracts outstanding. See Note 1(d).
Futures Contracts
| Description | Type | Number of Contracts |
Notional Amount* |
Expiration Date |
Value/ Unrealized Appreciation (Depreciation) |
|||||||||||||||
| Interest Rate Contracts |
||||||||||||||||||||
| CME Ultra Long Term U.S. Treasury Bond |
Short | 5 | $825,625 | 12/19/17 | $ 16,080 | |||||||||||||||
| U.S. Treasury 5 Yr. Note |
Long | 21 | 2,467,500 | 12/29/17 | (16,296 | ) | ||||||||||||||
| U.S. Treasury 10 Yr. Note Ultra |
Long | 24 | 3,223,875 | 12/19/17 | (37,563 | ) | ||||||||||||||
| U.S. Treasury 30 Yr. Bond |
Long | 8 | 1,222,500 | 12/19/17 | (18,018 | ) | ||||||||||||||
|
|
|
|||||||||||||||||||
| Total Futures Contracts |
$(55,797 | ) | ||||||||||||||||||
|
|
|
|||||||||||||||||||
*as of period end.
See Note 8 regarding other derivative information.
See Abbreviations on page 33.
|
20 |
Annual Report | |
The accompanying notes are an integral part of these financial statements. |
franklintempleton.com |
FRANKLIN STRATEGIC MORTGAGE PORTFOLIO
Statement of Assets and Liabilities
September 30, 2017
| Assets: |
||
| Investments in securities: |
||
| Cost - Unaffiliated issuers |
$ 79,685,241 | |
| Cost - Non-controlled affiliates (Note 3f) |
841,566 | |
|
| ||
| Value - Unaffiliated issuers |
$ 80,529,462 | |
| Value - Non-controlled affiliates (Note 3f) |
841,566 | |
| Receivables: |
||
| Investment securities sold |
2,271,984 | |
| Capital shares sold |
10,021 | |
| Interest |
230,448 | |
| Initial margin on future contracts |
59,250 | |
| Other assets |
36 | |
|
| ||
| Total assets |
83,942,767 | |
|
| ||
| Liabilities: |
||
| Payables: |
||
| Investment securities purchased |
7,579,435 | |
| Capital shares redeemed |
248,118 | |
| Management fees |
25,152 | |
| Distribution fees |
15,792 | |
| Transfer agent fees |
40,346 | |
| Distributions to shareholders |
20,994 | |
| Variation margin on futures contracts |
9,352 | |
| Funds advanced by custodian |
41 | |
| Accrued expenses and other liabilities |
71,838 | |
|
| ||
| Total liabilities |
8,011,068 | |
|
| ||
| Net assets, at value |
$ 75,931,699 | |
|
| ||
| Net assets consist of: |
||
| Paid-in capital |
$ 92,819,636 | |
| Distributions in excess of net investment income |
(33,701) | |
| Net unrealized appreciation (depreciation) |
788,455 | |
| Accumulated net realized gain (loss) |
(17,642,691) | |
|
| ||
| Net assets, at value |
$ 75,931,699 | |
|
| ||
|
franklintempleton.com |
The accompanying notes are an integral part of these financial statements. | Annual Report |
21 |
FRANKLIN STRATEGIC MORTGAGE PORTFOLIO
FINANCIAL STATEMENTS
Statement of Assets and Liabilities (continued)
September 30, 2017
| Class A: |
||
| Net assets, at value |
$21,143,381 | |
|
| ||
| Shares outstanding |
2,263,705 | |
|
| ||
| Net asset value per sharea |
$9.34 | |
|
| ||
| Maximum offering price per share (net asset value per share ÷ 95.75%) |
$9.75 | |
|
| ||
| Class A1: |
||
| Net assets, at value |
$40,843,522 | |
|
| ||
| Shares outstanding |
4,370,120 | |
|
| ||
| Net asset value per sharea |
$9.35 | |
|
| ||
| Maximum offering price per share (net asset value per share ÷ 95.75%) |
$9.77 | |
|
| ||
| Class C: |
||
| Net assets, at value |
$ 6,307,947 | |
|
| ||
| Shares outstanding |
675,274 | |
|
| ||
| Net asset value and maximum offering price per sharea |
$9.34 | |
|
| ||
| Class R6: |
||
| Net assets, at value |
$ 4,974 | |
|
| ||
| Shares outstanding |
533 | |
|
| ||
| Net asset value and maximum offering price per share |
$9.33 | |
|
| ||
| Advisor Class: |
||
| Net assets, at value |
$ 7,631,875 | |
|
| ||
| Shares outstanding |
817,662 | |
|
| ||
| Net asset value and maximum offering price per share |
$9.33 | |
|
| ||
aRedemption price is equal to net asset value less contingent deferred sales charges, if applicable.
|
22 |
Annual Report | |
The accompanying notes are an integral part of these financial statements. |
franklintempleton.com |
FRANKLIN STRATEGIC MORTGAGE PORTFOLIO
FINANCIAL STATEMENTS
Statement of Operations
for the year ended September 30, 2017
| Investment income: |
||||
| Dividends: |
||||
| Unaffiliated issuers |
$ | 1,378 | ||
| Non-controlled affiliates (Note 3f) |
6,806 | |||
| Interest: |
||||
| Unaffiliated issuers: |
||||
| Paydown gain (loss) |
(628,540 | ) | ||
| Paid in cash |
3,234,703 | |||
|
|
|
|||
|
Total investment income |
|
2,614,347 |
| |
|
|
|
|||
| Expenses: |
||||
| Management fees (Note 3a) |
351,351 | |||
| Distribution fees: (Note 3c) |
||||
| Class A |
65,542 | |||
| Class C |
49,656 | |||
| Transfer agent fees: (Note 3e) |
||||
| Class A |
44,950 | |||
| Class A1 |
78,803 | |||
| Class C |
13,124 | |||
| Class R6 |
54 | |||
| Advisor Class |
13,453 | |||
| Custodian fees (Note 4) |
3,583 | |||
| Reports to shareholders |
27,186 | |||
| Registration and filing fees |
100,583 | |||
| Professional fees |
102,556 | |||
| Trustees’ fees and expenses |
2,586 | |||
| Other |
70,354 | |||
|
|
|
|||
|
Total expenses |
|
923,781 |
| |
| Expense reductions (Note 4) |
(110 | ) | ||
| Expenses waived/paid by affiliates (Note 3g) |
(10,266 | ) | ||
|
|
|
|||
|
Net expenses |
|
913,405 |
| |
|
|
|
|||
|
Net investment income |
|
1,700,942 |
| |
|
|
|
|||
| Realized and unrealized gains (losses): |
||||
| Net realized gain (loss) from: |
||||
| Investments: |
||||
| Unaffiliated issuers |
(1,843,027 | ) | ||
| Foreign currency transactions |
144 | |||
| Futures contracts |
185,714 | |||
|
|
|
|||
|
Net realized gain (loss) |
|
(1,657,169 |
) | |
|
|
|
|||
| Net change in unrealized appreciation (depreciation) on: |
||||
| Investments: |
||||
| Unaffiliated issuers |
157,028 | |||
| Futures contracts |
(74,221 | ) | ||
|
|
|
|||
|
Net change in unrealized appreciation (depreciation) |
|
82,807 |
| |
|
|
|
|||
|
Net realized and unrealized gain (loss) |
|
(1,574,362 |
) | |
|
|
|
|||
|
Net increase (decrease) in net assets resulting from operations |
$ |
126,580 |
| |
|
|
|
|
franklintempleton.com |
The accompanying notes are an integral part of these financial statements. | Annual Report |
23 |
FRANKLIN STRATEGIC MORTGAGE PORTFOLIO
FINANCIAL STATEMENTS
Statements of Changes in Net Assets
| Year Ended September 30, | ||||||||
| 2017 | 2016 | |||||||
|
|
||||||||
| Increase (decrease) in net assets: |
||||||||
| Operations: |
||||||||
| Net investment income |
$ | 1,700,942 | $ | 1,717,548 | ||||
| Net realized gain (loss) |
(1,657,169) | 2,587,383 | ||||||
| Net change in unrealized appreciation (depreciation) |
82,807 | (917,730) | ||||||
|
|
|
|||||||
| Net increase (decrease) in net assets resulting from operations |
126,580 | 3,387,201 | ||||||
|
|
|
|||||||
| Distributions to shareholders from: |
||||||||
| Net investment income: |
||||||||
| Class A |
(735,045) | (651,156) | ||||||
| Class A1 |
(1,411,458) | (1,326,336) | ||||||
| Class C |
(185,197) | (121,974) | ||||||
| Class R6 |
(26) | — | ||||||
| Advisor Class |
(244,016) | (277,140) | ||||||
| Tax return of capital: |
||||||||
| Class A |
(11,031) | — | ||||||
| Class A1 |
(21,821) | — | ||||||
| Class C |
(2,856) | — | ||||||
| Class R6 |
(1) | — | ||||||
| Advisor Class |
(3,942) | — | ||||||
|
|
|
|||||||
| Total distributions to shareholders |
(2,615,393) | (2,376,606) | ||||||
|
|
|
|||||||
| Capital share transactions: (Note 2) |
||||||||
| Class A |
(12,242,804) | 7,566,588 | ||||||
| Class A1 |
(11,327,345) | (6,429,412) | ||||||
| Class C |
(2,934,339) | 5,319,994 | ||||||
| Class R6 |
5,000 | — | ||||||
| Advisor Class |
(434,713) | (4,510,111) | ||||||
|
|
|
|||||||
| Total capital share transactions |
(26,934,201) | 1,947,059 | ||||||
|
|
|
|||||||
| Net increase (decrease) in net assets |
(29,423,014) | 2,957,654 | ||||||
| Net assets: |
||||||||
| Beginning of year |
105,354,713 | 102,397,059 | ||||||
|
|
|
|||||||
| End of year |
$ | 75,931,699 | $ | 105,354,713 | ||||
|
|
|
|||||||
| Distributions in excess of net investment income included in net assets: |
||||||||
| End of year |
$ | (33,701) | $ | (37,456) | ||||
|
|
|
|||||||
|
24 |
Annual Report | |
The accompanying notes are an integral part of these financial statements. |
franklintempleton.com |
FRANKLIN STRATEGIC MORTGAGE PORTFOLIO
|
franklintempleton.com |
Annual Report |
25 |
FRANKLIN STRATEGIC MORTGAGE PORTFOLIO
NOTES TO FINANCIAL STATEMENTS
|
26 |
Annual Report |
franklintempleton.com |
FRANKLIN STRATEGIC MORTGAGE PORTFOLIO
NOTES TO FINANCIAL STATEMENTS
|
franklintempleton.com |
Annual Report |
27 |
FRANKLIN STRATEGIC MORTGAGE PORTFOLIO
NOTES TO FINANCIAL STATEMENTS
2. Shares of Beneficial Interest
At September 30, 2017, there were an unlimited number of shares authorized (without par value). Transactions in the Fund’s shares were as follows:
| Year Ended September 30, | ||||||||||||||||
|
2017 |
2016 |
|||||||||||||||
|
Shares
|
Amount
|
Shares
|
Amount
|
|||||||||||||
| Class A Shares: |
||||||||||||||||
| Shares sold |
801,773 | $ | 7,524,637 | 2,195,608 | $ | 20,859,418 | ||||||||||
| Shares issued in reinvestment of distributions |
73,222 | 686,195 | 63,407 | 602,975 | ||||||||||||
| Shares redeemed |
(2,183,021) | (20,453,636) | (1,462,885) | (13,895,805) | ||||||||||||
| Net increase (decrease) |
(1,308,026) | $ | (12,242,804) | 796,130 | $ | 7,566,588 | ||||||||||
| Class A1 Shares: |
||||||||||||||||
| Shares sold |
199,931 | $ | 1,873,549 | 488,676 | $ | 4,639,255 | ||||||||||
| Shares issued in reinvestment of distributions |
144,795 | 1,357,943 | 132,064 | 1,255,793 | ||||||||||||
| Shares redeemed |
(1,553,196) | (14,558,837) | (1,296,056) | (12,324,460) | ||||||||||||
| Net increase (decrease) |
(1,208,470) | $ | (11,327,345) | (675,316) | $ | (6,429,412) | ||||||||||
| Class C Shares: |
||||||||||||||||
| Shares sold |
93,491 | $ | 879,328 | 762,910 | $ | 7,244,402 | ||||||||||
| Shares issued in reinvestment of distributions |
18,250 | 171,045 | 11,731 | 111,692 | ||||||||||||
| Shares redeemed |
(425,443) | (3,984,712) | (214,304) | (2,036,100) | ||||||||||||
| Net increase (decrease) |
(313,702) | $ | (2,934,339) | 560,337 | $ | 5,319,994 | ||||||||||
| Class R6 Sharesa: |
||||||||||||||||
| Shares sold |
533 | $ | 5,000 | |||||||||||||
| Advisor Class Shares: |
||||||||||||||||
| Shares sold |
743,154 | $ | 6,947,738 | 495,713 | $ | 4,697,342 | ||||||||||
| Shares issued in reinvestment of distributions |
16,400 | 153,614 | 22,802 | 216,556 | ||||||||||||
| Shares redeemed |
(805,806) | (7,536,065) | (989,438) | (9,424,009) | ||||||||||||
| Net increase (decrease) |
(46,252) | $ | (434,713) | (470,923) | $ | (4,510,111) | ||||||||||
a For the period August 1, 2017 (effective date) to September 30, 2017.
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 Fund 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 |
|
28 |
Annual Report |
franklintempleton.com |
FRANKLIN STRATEGIC MORTGAGE PORTFOLIO
NOTES TO FINANCIAL STATEMENTS
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 | |||
|
0.400%
|
First $250 million | |||
| 0.380%
|
Over $250 million, up to and including $500 million | |||
| 0.360%
|
In excess of $500 million |
For the year ended September 30, 2017, the effective investment management fee rate was 0.400% of the Fund’s average daily net assets.
b. Administrative Fees
Under an agreement with Advisers, FT Services provides administrative services to the Fund. The fee is paid by Advisers based on the Fund’s average daily net assets, and is not an additional expense of the Fund.
c. Distribution Fees
The Board has adopted distribution plans for Class A and Class C 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. In addition, under the Fund’s Class C 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. The plan year, for purposes of monitoring compliance with the maximum annual plan rate, is February 1 through January 31.
The maximum annual plan rates, based on the average daily net assets, for each class, are as follows:
| Class A |
0.25 | % | ||
| Class C |
0.65 | % |
d. Sales Charges/Underwriting Agreements
Front-end sales charges and contingent deferred sales charges (CDSC) do not represent expenses of the Fund. These charges are deducted from the proceeds of sales of Fund shares prior to investment or from redemption proceeds prior to remittance, as applicable. Distributors has advised the Fund of the following commission transactions related to the sales and redemptions of the Fund’s shares for the year:
| Sales charges retained net of commissions paid to unaffiliated brokers/dealers |
$ | 6,408 | ||
| CDSC retained |
$ | 1,914 |
e. Transfer Agent Fees
Each class of shares, except for Class R6, pays transfer agent fees to Investor Services for its performance of shareholder servicing obligations and reimburses Investor Services for out of pocket expenses incurred, including shareholder servicing fees paid to third parties. These fees are allocated daily based upon their relative proportion of such classes’ aggregate net assets. Class R6 pays Investor Services transfer agent fees specific to that class.
For the year ended September 30, 2017, the Fund paid transfer agent fees of $150,384, of which $59,098 was retained by Investor Services.
|
franklintempleton.com |
Annual Report |
29 |
FRANKLIN STRATEGIC MORTGAGE PORTFOLIO
NOTES TO FINANCIAL STATEMENTS
3. Transactions with Affiliates (continued)
f. Investments in Affiliated Management Investment Companies
The Fund invests in one or more affiliated management investment companies for purposes other than exercising a controlling influence over the management or policies. Management fees paid by the Fund are waived on assets invested in the affiliated management investment companies, as noted in the Statement of Operations, in an amount not to exceed the management and administrative fees paid directly or indirectly by each affiliate. Prior to October 1, 2013, the waiver was accounted for as a reduction to management fees. During the year ended September 30, 2017, the Fund held investments in affiliated management investment companies as follows:
| Number of Shares Held at Beginning of Year |
Gross Additions |
Gross Reductions |
Number of Shares Held at End of Year |
Value at End of Year |
Dividend Income |
Realized Gain (Loss) |
Net Change in Unrealized (Depreciation) | |||||||||||||||||||||||
| Non-Controlled Affiliates |
||||||||||||||||||||||||||||||
| Institutional Fiduciary Trust Money Market Portfolio, 0.67% |
5,250,982 | 22,674,479 | (27,083,895 | ) | 841,566 | $ | 841,566 | $6,806 | $- | $- | ||||||||||||||||||||
g. Waiver and Expense Reimbursements
Investor Services has voluntarily agreed in advance to waive or limit its fees so that the Class R6 transfer agent fees do not exceed 0.01%. Investor Services may discontinue this waiver in the future.
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 year ended September 30, 2017, 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. Capital loss carryforwards with no expiration, if any, must be fully utilized before those losses with expiration dates.
At September 30, 2017, capital loss carryforwards were as follows:
| Capital loss carryforwards subject to expiration: |
||||
| 2018 |
$ | 6,929,694 | ||
| 2019 |
8,155,073 | |||
| Capital loss carryforwards not subject to expiration: |
||||
| Short term |
1,551,315 | |||
| Long term |
1,062,293 | |||
|
Total capital loss carryforwards |
$
|
17,698,375
|
|
On September 30, 2017, the Fund had expired capital loss carryforwards of $2,449,042, which were reclassified to paid-in capital.
|
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NOTES TO FINANCIAL STATEMENTS
The tax character of distributions paid during the years ended September 30, 2017 and 2016, was as follows:
| 2017 | 2016 | |||||||
| Distributions paid from: |
||||||||
| Ordinary income |
$ | 2,575,742 | $ | 2,376,606 | ||||
| Return of capital |
39,651 | — | ||||||
| $ | 2,615,393 | $ | 2,376,606 | |||||
At September 30, 2017, the cost of investments, net unrealized appreciation (depreciation), and undistributed ordinary income for income tax purposes were as follows:
| Cost of investments |
$ | 80,483,979 | ||
| Unrealized appreciation |
$ | 1,521,523 | ||
| Unrealized depreciation |
(690,119 | ) | ||
| Net unrealized appreciation (depreciation) |
$ | 831,404 | ||
Differences between income and/or capital gains as determined on a book basis and a tax basis are primarily due to paydown losses.
6. Investment Transactions
Purchases and sales of investments (excluding short term securities) for the year ended September 30, 2017, aggregated $228,500,301 and $260,715,197, respectively.
7. Credit Risk and Defaulted Securities
At September 30, 2017, the Fund had 7.0% of its portfolio invested in high yield securities or other securities rated below investment grade and unrated securities, if any. 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 a defaulted security and/or other securities for which the income has been deemed uncollectible. At September 30, 2017, the value of this security represents less than 0.1% of the Fund’s portfolio. The Fund discontinues accruing income on securities for which income has been deemed uncollectible and provides an estimate for losses on interest receivable. The security has been identified in the accompanying Statement of Investments.
8. Other Derivative Information
At September 30, 2017, the Fund’s investments in derivative contracts are reflected in the Statement of Assets and Liabilities as follows:
| Asset Derivatives | Liability Derivatives | |||||||||||
| Derivative Contracts Not Accounted for as Hedging Instruments |
Statement of Assets and Liabilities Location |
Fair Value | Statement of Assets and Liabilities Location |
Fair Value | ||||||||
| Interest rate contracts |
Variation margin on futures contracts |
$ | 16,080 | a | Variation margin on futures contracts |
$ | 71,877 | a | ||||
a This amount reflects the cumulative appreciation (depreciation) of future contracts as reported in the Statement of Investments. Only the variation margin receivable/payable at period end is separately reported within the Statement of Assets and Liabilities. Prior variation margin movements were recorded to cash upon receipt or payment.
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NOTES TO FINANCIAL STATEMENTS
8. Other Derivative Information (continued)
For the year ended September 30, 2017, the effect of derivative contracts in the Fund’s Statement of Operations was as follows:
| Derivative Contracts Not Accounted for as Hedging Instruments |
Statement of Operations Location |
Net Realized Gain (Loss) for the Year |
Statement of Operations Location |
Net Change in for the Year | ||||||
| Net realized gain (loss) from: | Net change in unrealized appreciation (depreciation) on: | |||||||||
| Interest rate contracts |
Futures contracts | $185,714 | Futures contracts | $(74,221) | ||||||
For the year ended September 30, 2017, the average month end notional amount of futures contracts represented $7,135,118.
See Note 1(e) regarding derivative financial instruments.
9. Credit Facility
The Fund, together with other U.S. registered and foreign investment funds (collectively, Borrowers), managed by Franklin Templeton Investments, are borrowers in a joint syndicated senior unsecured credit facility totaling $2 billion (Global Credit Facility) which matures on February 9, 2018. This Global Credit Facility provides a source of funds to the Borrowers for temporary and emergency purposes, including the ability to meet future unanticipated or unusually large redemption requests.
Under the terms of the Global Credit Facility, the Fund shall, in addition to interest charged on any borrowings made by the Fund and other costs incurred by the Fund, pay its share of fees and expenses incurred in connection with the implementation and maintenance of the Global Credit Facility, based upon its relative share of the aggregate net assets of all of the Borrowers, including an annual commitment fee of 0.15% based upon the unused portion of the Global Credit Facility. These fees are reflected in other expenses in the Statement of Operations. During the year ended September 30, 2017, the Fund did not use the Global Credit Facility.
10. Fair Value Measurements
The Fund follows 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 financial instruments and are summarized in the following fair value hierarchy:
| • | Level 1 – quoted prices in active markets for identical financial instruments |
| • | Level 2 – other significant observable inputs (including quoted prices for similar financial instruments, interest rates, prepayment speed, credit risk, etc.) |
| • | Level 3 – significant unobservable inputs (including the Fund’s own assumptions in determining the fair value of financial instruments) |
The input levels are not necessarily an indication of the risk or liquidity associated with financial instruments at that level.
For movements between the levels within the fair value hierarchy, the Fund has adopted a policy of recognizing the transfers as of the date of the underlying event which caused the movement.
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NOTES TO FINANCIAL STATEMENTS
A summary of inputs used as of September 30, 2017, in valuing the Fund’s assets and liabilities carried at fair value, is as follows:
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Assets: |
||||||||||||||||
| Investments in Securities: |
||||||||||||||||
| U.S. Government and Agency Securities |
$ | — | $ | 463,065 | $ | — | $ | 463,065 | ||||||||
| Asset-Backed Securities and Commercial Mortgage-Backed Securities |
— | 22,495,406 | 4,455 | 22,499,861 | ||||||||||||
| Mortgage-Backed Securities |
— | 57,566,536 | — | 57,566,536 | ||||||||||||
| Short Term Investments |
841,566 | — | — | 841,566 | ||||||||||||
| Total Investments in Securities |
$ | 841,566 | $ | 80,525,007 | $ | 4,455 | $ | 81,371,028 | ||||||||
| Other Financial Instruments: |
||||||||||||||||
| Futures Contracts |
$ | 16,080 | $ | — | $ | — | $ | 16,080 | ||||||||
| Liabilities: |
||||||||||||||||
| Other Financial Instruments: |
||||||||||||||||
| Futures Contracts |
$ | 71,877 | $ | — | $ | — | $ | 71,877 | ||||||||
A reconciliation of assets in which Level 3 inputs are used in determining fair value is presented when there are significant Level 3 financial instruments at the end of the year.
11. New Accounting Pronouncements
In March 2017, the Financial Accounting Standards Board issued Accounting Standards Update (ASU) No. 2017-08, Receivables—Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities. The amendments in the ASU shorten the amortization period for certain callable debt securities acquired at a premium, to be amortized to the earliest call date. The ASU does not require an accounting change for securities acquired at a discount, which continues to be amortized to maturity. The ASU is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2018. Management is currently evaluating the impact, if any, of applying this provision.
12. Subsequent Events
The Fund has evaluated subsequent events through the issuance of the financial statements and determined that no events have occurred that require disclosure.
Abbreviations
Selected Portfolio
FRN Floating Rate Note
IO Interest Only
MFM Multi-Family Mortgage
PL Project Loan
REIT Real Estate Investment Trust
SF Single Family
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Report of Independent Registered Public Accounting Firm
To the Board of Trustees and Shareholders of the Franklin Strategic Mortgage Portfolio:
In our opinion, the accompanying statement of assets and liabilities, including the statement of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of the Franklin Strategic Mortgage Portfolio (the “Fund”) as of September 30, 2017, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended and the financial highlights for each of the periods indicated, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as “financial statements”) are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities as of September 30, 2017 by correspondence with the custodian, transfer agent and brokers, provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
San Francisco, California
November 15, 2017
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Under Section 871(k)(1)(C) of the Internal Revenue Code, the Fund hereby reports the maximum amount allowable but no less than $2,531,427 as interest related dividends for purposes of the tax imposed under Section 871(a)(1)(A) of the Code for the fiscal year ended September 30, 2017.
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The name, year of birth and address of the officers and board members, as well as their affiliations, positions held with the Trust, principal occupations during at least the past five years and number of US registered portfolios overseen in the Franklin Templeton Investments fund complex, are shown below. Generally, each board member serves until that person’s successor is elected and qualified.
Independent Board Members
| Name, Year of Birth and Address |
Position | Length of Time Served |
Number of Portfolios in Fund Complex Overseen by Board Member* |
Other Directorships Held During at Least the Past 5 Years | ||||
| Harris J. Ashton (1932) One Franklin Parkway San Mateo, CA 94403-1906 |
Trustee | Since 1992 | 140 | Bar-S Foods (meat packing company) (1981-2010). | ||||
|
Principal Occupation During at Least the Past 5 Years: Director of various companies; and formerly, Director, RBC Holdings, Inc. (bank holding company) (until 2002); and President, Chief Executive Officer and Chairman of the Board, General Host Corporation (nursery and craft centers) (until 1998).
| ||||||||
| Mary C. Choksi (1950) One Franklin Parkway San Mateo, CA 94403-1906 |
Trustee | Since 2014 | 134 | Avis Budget Group Inc. (car rental) (2007-present), Omnicom Group Inc. (advertising and marketing communications services) (2011-present) and White Mountains Insurance Group, Ltd. (holding company) (August 2017- present). | ||||
| Principal Occupation During at Least the Past 5 Years: | ||||||||
| Senior Advisor, Strategic Investment Group (investment management group) (2015-present); director of various companies; and formerly, Founding Partner and Senior Managing Director, Strategic Investment Group (1987–2015); Founding Partner and Managing Director, Emerging Markets Management LLC (investment management firm) (1987-2011); and Loan Officer/Senior Loan Officer/Senior Pension Investment Officer, World Bank Group (international financial institution) (1977-1987).
| ||||||||
| Edith E. Holiday (1952) One Franklin Parkway San Mateo, CA 94403-1906 |
Trustee | Since 2003 | 140 | Hess Corporation (exploration of oil and gas) (1993-present), Canadian National Railway (railroad) (2001-present), White Mountains Insurance Group, Ltd. (holding company) (2004-present), Santander Consumer USA Holdings, Inc. (consumer finance) (2016-present), RTI International Metals, Inc. (manufacture and distribution of titanium) (1999-2015) and H.J. Heinz Company (processed foods and allied products) (1994-2013). | ||||
|
Principal Occupation During at Least the Past 5 Years: | ||||||||
| Director or Trustee of various companies and trusts; and formerly, Assistant to the President of the United States and Secretary of the Cabinet (1990-1993); General Counsel to the United States Treasury Department (1989-1990); and Counselor to the Secretary and Assistant Secretary for Public Affairs and Public Liaison-United States Treasury Department (1988-1989).
| ||||||||
| J. Michael Luttig (1954) One Franklin Parkway San Mateo, CA 94403-1906 |
Trustee | Since 2009 | 140 | Boeing Capital Corporation (aircraft financing) (2006-2013). | ||||
|
Principal Occupation During at Least the Past 5 Years: | ||||||||
| Executive Vice President, General Counsel and member of the Executive Council, The Boeing Company (aerospace company) (2006-present); and formerly, Federal Appeals Court Judge, U.S. Court of Appeals for the Fourth Circuit (1991-2006). | ||||||||
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Independent Board Members (continued)
| Name, Year of Birth and Address |
Position | Length of Time Served |
Number of Portfolios in Fund Complex Overseen by Board Member* |
Other Directorships Held During at Least the Past 5 Years | ||||
| Larry D. Thompson (1945) One Franklin Parkway San Mateo, CA 94403-1906 |
Trustee | Since 2007 | 140 | The Southern Company (energy company) (2014-present; previously 2010-2012), Graham Holdings Company (education and media organization) (2011-present) and Cbeyond, Inc. (business communications provider) (2010-2012). | ||||
|
Principal Occupation During at Least the Past 5 Years: Director of various companies; Counsel, Finch McCranie, LLP (law firm) (2015-present); Independent Compliance Monitor and Auditor, Volkswagen AG (manufacturer of automobiles and commercial vehicles) (April 2017 – present); John A. Sibley Professor of Corporate and Business Law, University of Georgia School of Law (2015-present; previously 2011-2012); and formerly, Executive Vice President - Government Affairs, General Counsel and Corporate Secretary, PepsiCo, Inc. (consumer products) (2012-2014); Senior Vice President - Government Affairs, General Counsel and Secretary, PepsiCo, Inc. (2004-2011); Senior Fellow of The Brookings Institution (2003-2004); Visiting Professor, University of Georgia School of Law (2004); and Deputy Attorney General, U.S. Department of Justice (2001-2003).
| ||||||||
| John B. Wilson (1959) One Franklin Parkway San Mateo, CA 94403-1906 |
Lead Independent Trustee |
Trustee since 2007 and Lead Independent Trustee since 2008 | 114 | None | ||||
|
Principal Occupation During at Least the Past 5 Years: | ||||||||
| President and Founder, Hyannis Port Capital, Inc. (real estate and private equity investing)(2002-present); serves on private and non-profit boards; and formerly, President, Staples International and Head of Global Transformation (office supplies) (2012-2016); Chief Operating Officer and Executive Vice President, Gap, Inc. (retail) (1996-2000); Chief Financial Officer and Executive Vice President – Finance and Strategy, Staples, Inc. (1992-1996); Senior Vice President – Corporate Planning, Northwest Airlines, Inc. (airlines) (1990-1992); and Vice President and Partner, Bain & Company (consulting firm) (1986-1990).
| ||||||||
| Interested Board Members and Officers
|
||||||||
| Name, Year of Birth and Address |
Position | Length of Time Served |
Number of Portfolios in Fund Complex Overseen by Board Member* |
Other Directorships Held During at Least the Past 5 Years | ||||
| **Gregory E. Johnson (1961) One Franklin Parkway San Mateo, CA 94403-1906 |
Trustee | Since 2007 | 156 | None | ||||
|
Principal Occupation During at Least the Past 5 Years: | ||||||||
| Chairman of the Board, Member - Office of the Chairman, Director, and Chief Executive Officer, Franklin Resources, Inc.; officer and/or director or trustee, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 44 of the investment companies in Franklin Templeton Investments; Vice Chairman, Investment Company Institute; and formerly, President, Franklin Resources, Inc. (1994-2015).
| ||||||||
| **Rupert H. Johnson, Jr. (1940) One Franklin Parkway San Mateo, CA 94403-1906 |
Chairman of the Board and Trustee |
Since 2013 | 140 | None | ||||
|
Principal Occupation During at Least the Past 5 Years: | ||||||||
| Vice Chairman, Member - Office of the Chairman and Director, Franklin Resources, Inc.; Director, Franklin Advisers, Inc.; Senior Vice President, Franklin Advisory Services, LLC; and officer and/or director or trustee, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 43 of the investment companies in Franklin Templeton Investments.
| ||||||||
| Alison E. Baur (1964) One Franklin Parkway San Mateo, CA 94403-1906 |
Vice President | Since 2012 | Not Applicable | Not Applicable | ||||
|
Principal Occupation During at Least the Past 5 Years: | ||||||||
| Deputy General Counsel, Franklin Templeton Investments; and officer of some of the other subsidiaries of Franklin Resources, Inc. and of 45 of the investment companies in Franklin Templeton Investments. | ||||||||
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Interested Board Members and Officers (continued)
| Name, Year of Birth and Address |
Position | Length of Time Served |
Number of Portfolios in Fund Complex Overseen by Board Member* |
Other Directorships Held During at Least the Past 5 Years | ||||
| Gaston Gardey (1967) One Franklin Parkway San Mateo, CA 94403-1906 |
Chief Financial Officer, Chief Accounting Officer and Treasurer |
Since 2009 | Not Applicable | Not Applicable | ||||
|
Principal Occupation During at Least the Past 5 Years: |
||||||||
| Treasurer, U.S. Fund Administration & Reporting, Franklin Templeton Investments; and officer of 27 of the investment companies in Franklin Templeton Investments.
| ||||||||
| Aliya S. Gordon (1973) One Franklin Parkway San Mateo, CA 94403-1906 |
Vice President | Since 2009 | Not Applicable | Not Applicable | ||||
|
Principal Occupation During at Least the Past 5 Years: |
||||||||
| Senior Associate General Counsel, Franklin Templeton Investments; officer of 45 of the investment companies in Franklin Templeton Investments.
| ||||||||
| Steven J. Gray (1955) One Franklin Parkway San Mateo, CA 94403-1906 |
Vice President | Since 2009 | Not Applicable | Not Applicable | ||||
|
Principal Occupation During at Least the Past 5 Years: |
||||||||
| Senior Associate General Counsel, Franklin Templeton Investments; Vice President, Franklin Templeton Distributors, Inc. and FT AlphaParity, LLC; and officer of 45 of the investment companies in Franklin Templeton Investments.
| ||||||||
| Matthew T. Hinkle (1971) One Franklin Parkway San Mateo, CA 94403-1906 |
Chief Executive Officer – Finance and Administration |
Since June 2017 | Not Applicable | Not Applicable | ||||
|
Principal Occupation During at Least the Past 5 Years: |
||||||||
| Senior Vice President, U.S. Fund Administration Reporting & Fund Tax, Franklin Templeton Investments; officer of 45 of the investment companies in Franklin Templeton Investments; and formerly, Vice President, Global Tax (2012-April 2017) and Treasurer/Assistant Treasurer, Franklin Templeton Investments (2009-2017).
| ||||||||
| Robert Lim (1948) One Franklin Parkway San Mateo, CA 94403-1906 |
Vice President –AML Compliance |
Since 2016 | Not Applicable | Not Applicable | ||||
|
Principal Occupation During at Least the Past 5 Years: |
||||||||
| Vice President, Franklin Templeton Companies, LLC; Chief Compliance Officer, Franklin Templeton Distributors, Inc. and Franklin Templeton Investor Services, LLC; and officer of 45 of the investment companies in Franklin Templeton Investments.
| ||||||||
| Christopher J. Molumphy (1962) One Franklin Parkway San Mateo, CA 94403-1906 |
President and Chief Executive Officer – Investment Management |
Since 2010 | Not Applicable | Not Applicable | ||||
|
Principal Occupation During at Least the Past 5 Years: |
||||||||
| Director and Executive Vice President, Franklin Advisers, Inc.; Executive Vice President, Franklin Templeton Institutional, LLC; and officer of some of the other subsidiaries of Franklin Resources, Inc. and of 22 of the investment companies in Franklin Templeton Investments.
| ||||||||
| Kimberly H. Novotny (1972) 300 S.E. 2nd Street Fort Lauderdale, FL 33301-1923 |
Vice President | Since 2013 | Not Applicable | Not Applicable | ||||
|
Principal Occupation During at Least the Past 5 Years: |
||||||||
| Associate General Counsel, Franklin Templeton Investments; Vice President and Corporate Secretary, Fiduciary Trust International of the South; Vice President, Templeton Investment Counsel, LLC; Assistant Secretary, Franklin Resources, Inc.; and officer of 45 of the investment companies in Franklin Templeton Investments. | ||||||||
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Interested Board Members and Officers (continued)
| Name, Year of Birth and Address |
Position | Length of Time Served |
Number of Portfolios in Fund Complex Overseen by Board Member* |
Other Directorships Held During at Least the Past 5 Years | ||||
| Robert C. Rosselot (1960) 300 S.E. 2nd Street Fort Lauderdale, FL 33301-1923 |
Chief Compliance Officer |
Since 2013 | Not Applicable | Not Applicable | ||||
|
Principal Occupation During at Least the Past 5 Years: |
||||||||
| Director, Global Compliance, Franklin Templeton Investments; Vice President, Franklin Templeton Companies, LLC; officer of 45 of the investment companies in Franklin Templeton Investments; and formerly, Senior Associate General Counsel, Franklin Templeton Investments (2007-2013); and Secretary and Vice President, Templeton Group of Funds (2004-2013).
| ||||||||
| Karen L. Skidmore (1952) One Franklin Parkway San Mateo, CA 94403-1906 |
Vice President and Secretary |
Since 2006 | Not Applicable | Not Applicable | ||||
|
Principal Occupation During at Least the Past 5 Years: |
||||||||
| Senior Associate General Counsel, Franklin Templeton Investments; and officer of 45 of the investment companies in Franklin Templeton Investments.
| ||||||||
| Navid J. Tofigh (1972) One Franklin Parkway San Mateo, CA 94403-1906 |
Vice President | Since 2015 | Not Applicable | Not Applicable | ||||
|
Principal Occupation During at Least the Past 5 Years: |
||||||||
| Associate General Counsel, Franklin Templeton Investments; and officer of 45 of the investment companies in Franklin Templeton Investments.
| ||||||||
| Craig S. Tyle (1960) One Franklin Parkway San Mateo, CA 94403-1906 |
Vice President | Since 2005 | Not Applicable | Not Applicable | ||||
|
Principal Occupation During at Least the Past 5 Years: |
||||||||
| General Counsel and Executive Vice President, Franklin Resources, Inc.; and officer of some of the other subsidiaries of Franklin Resources, Inc. and of 45 of the investment companies in Franklin Templeton Investments.
| ||||||||
| Lori A. Weber (1964) 300 S.E. 2nd Street Fort Lauderdale, FL 33301-1923 |
Vice President | Since 2011 | Not Applicable | Not Applicable | ||||
|
Principal Occupation During at Least the Past 5 Years: |
||||||||
| Senior Associate General Counsel, Franklin Templeton Investments; Assistant Secretary, Franklin Resources, Inc.; Vice President and Secretary, Templeton Investment Counsel, LLC; and officer of 45 of the investment companies in Franklin Templeton Investments. | ||||||||
*We base the number of portfolios on each separate series of the US registered investment companies within the Franklin Templeton Investments fund complex. These portfolios have a common investment manager or affiliated investment managers.
**Gregory E. Johnson is considered to be an interested person of the Fund under the federal securities laws due to his position as an officer and director of Franklin Resources, Inc. (Resources), which is the parent company of the Fund’s investment manager and distributor. Rupert H. Johnson, Jr. is considered to be an interested person of the Fund under the federal securities laws due to his position as officer and director and major shareholder of Resources.
Note 1: Rupert H. Johnson, Jr. is the uncle of Gregory E. Johnson.
Note 2: Officer information is current as of the date of this report. It is possible that after this date, information about officers may change.
Note 3: Effective November 1, 2016, Frank A. Olson ceased to be a trustee of the Trust
The Sarbanes-Oxley Act of 2002 and Rules adopted by the Securities and Exchange Commission require the Fund to disclose whether the Fund’s Audit Committee includes at least one member who is an audit committee financial expert within the meaning of such Act and Rules. The Fund’s Board has determined that there is at least one such financial expert on the Audit Committee and has designated John B. Wilson as its audit committee financial expert. The Board believes that Mr. Wilson qualifies as such an expert in view of his extensive business background and experience, including service as chief financial officer of Staples, Inc. from 1992 to 1996. Mr. Wilson has been a Member and Chairman of the Fund’s Audit Committee since 2007. As a result of such background and experience, the Board believes that Mr. Wilson has acquired an understanding of generally accepted accounting principles and financial statements, the general application of such principles in connection with the accounting estimates, accruals and reserves, and analyzing and evaluating financial statements that present a breadth and level of complexity of accounting issues generally comparable to those of the Fund, as well as an understanding of internal controls and procedures for financial reporting and an understanding of audit committee functions. Mr. Wilson is an independent Board member as that term is defined under the relevant Securities and Exchange Commission Rules and Releases.
The Statement of Additional Information (SAI) includes additional information about the board members and is available, without charge, upon request. Shareholders may call (800) DIAL BEN/342-5236 to request the SAI.
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Annual Report and Shareholder Letter Franklin Strategic Mortgage Portfolio | |
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Investment Manager | ||
| Franklin Advisers, Inc. | ||
|
Distributor | ||
| Franklin Templeton Distributors, Inc. (800) DIAL BEN® / 342-5236 franklintempleton.com | ||
|
Shareholder Services | ||
| (800) 632-2301 |
Authorized for distribution only when accompanied or preceded by a summary prospectus and/or prospectus. Investors should carefully consider a fund’s investment goals, risks, charges and expenses before investing. A prospectus contains this and other information; please read it carefully before investing.
To help ensure we provide you with quality service, all calls to and from our service areas are monitored and/or recorded.
| © 2017 Franklin Templeton Investments. All rights reserved. | 357 A 11/17 |
| 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. |
| (a) | Audit Fees |
The aggregate fees paid to the principal accountant for professional services rendered by the principal accountant for the audit of the registrant’s annual financial statements or for services that are normally provided by the principal accountant in connection with statutory and regulatory filings or engagements were $38,553 for the fiscal year ended September 30, 2017 and $42,053 for the fiscal year ended September 30, 2016.
(b) Audit-Related Fees
There were no fees paid to the principal accountant for assurance and related services rendered by the principal accountant to the registrant that are reasonably related to the performance of the audit of the registrant’s financial statements and are not reported under paragraph (a) of Item 4.
There were no fees paid to the principal accountant for assurance and related services rendered by the principal accountant to the registrant’s investment adviser and any entity controlling, controlled by or under common control with the investment adviser that provides ongoing services to the registrant that are reasonably related to the performance of the audit of their financial statements.
(c) Tax Fees
There were no fees paid to the principal accountant for professional services rendered by the principal accountant to the registrant for tax compliance, tax advice and tax planning.
There were no fees paid to the principal accountant for professional services rendered by the principal accountant to the registrant’s investment adviser and any entity controlling, controlled by or under common control with the investment adviser that provides ongoing services to the registrant for tax compliance, tax advice and tax planning.
(d) All Other Fees
There were no fees paid to the principal accountant for products and services rendered by the principal accountant to the registrant not reported in paragraphs (a)-(c) of Item 4.
The aggregate fees paid to the principal accountant for products and services rendered by the principal accountant to the registrant’s investment adviser and any entity controlling, controlled by or under common control with the investment adviser that provides ongoing services to the registrant not reported in paragraphs (a)-(c) of Item 4 were $14,000 for the fiscal year ended September 30, 2017 and $539,168 for the fiscal year ended September 30, 2016. The services for which these fees were paid included review of materials provided to the fund Board in connection with the investment management contract renewal process and derivatives assessments, review of system processes related to fixed income securities, and benchmarking services in connection with the 2015 ICI TA Survey.
(e) (1) The registrant’s audit committee is directly responsible for approving the services to be provided by the auditors, including:
(i) pre-approval of all audit and audit related services;
(ii) pre-approval of all non-audit related services to be provided to the Fund by the auditors;
(iii) pre-approval of all non-audit related services to be provided to the registrant by the auditors to the registrant’s investment adviser or to any entity that controls, is controlled by or is under common control with the registrant’s investment adviser and that provides ongoing services to the registrant where the non-audit services relate directly to the operations or financial reporting of the registrant; and
(iv) establishment by the audit committee, if deemed necessary or appropriate, as an alternative to committee pre-approval of services to be provided by the auditors, as required by paragraphs (ii) and (iii) above, of policies and procedures to permit such services to be pre-approved by other means, such as through establishment of guidelines or by action of a designated member or members of the committee; provided the policies and procedures are detailed as to the particular service and the committee is informed of each service and such policies and procedures do not include delegation of audit committee responsibilities, as contemplated under the Securities Exchange Act of 1934, to management; subject, in the case of (ii) through (iv), to any waivers, exceptions or exemptions that may be available under applicable law or rules.
(e) (2) None of the services provided to the registrant described in paragraphs (b)-(d) of Item 4 were approved by the audit committee pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of regulation S-X.
(f) No disclosures are required by this Item 4(f).
(g) The aggregate non-audit fees paid to the principal accountant for services rendered by the principal accountant to the registrant and the registrant’s investment adviser and any entity controlling, controlled by or under common control with the investment adviser that provides ongoing services to the registrant were $14,000 for the fiscal year ended September 30, 2017 and $539,168 for the fiscal year ended September 30, 2016.
(h) The registrant’s audit committee of the board has considered whether the provision of non-audit services that were rendered to the registrant’s investment adviser (not including any sub-adviser whose role is primarily portfolio management and is subcontracted with or overseen by another investment adviser), and any entity controlling, controlled by, or under common control with the investment adviser that provides ongoing services to the registrant that were not pre-approved pursuant to paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X is compatible with maintaining the principal accountant’s independence.
| 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 changes in the Registrant’s internal controls or in other factors that could materially affect the internal controls over financial reporting 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 Matthew T. Hinkle, Chief Executive Officer - Finance and Administration, and Gaston Gardey, Chief Financial Officer and Chief Accounting Officer
(b) Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of Matthew T. Hinkle, Chief Executive Officer - Finance and Administration, and Gaston Gardey, 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 MORTGAGE PORTFOLIO
| By | /s/ Matthew T. Hinkle | |
| Matthew T. Hinkle | ||
| Chief Executive Officer - Finance and Administration | ||
| Date | November 27, 2017 | |
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/ Matthew T. Hinkle | |
| Matthew T. Hinkle | ||
| Chief Executive Officer - Finance and Administration | ||
| Date | November 27, 2017 | |
| By | /s/ Gaston Gardey | |
| Gaston Gardey | ||
| Chief Financial Officer and Chief Accounting Officer | ||
| Date | November 27, 2017 | |