UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM N-CSRS
CERTIFIED SHAREHOLDER REPORT OF REGISTERED
MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number 811-06243
Franklin Strategic Series
(Exact name of registrant as specified in charter)
One Franklin Parkway, San Mateo, CA 94403-1906
(Address of principal executive offices) (Zip code)
Craig S. Tyle , One Franklin Parkway, San Mateo, CA 94403-1906
(Name and address of agent for service)
Registrant’s telephone number, including area code: 650 312-2000
Date of fiscal year end: 4/30
Date of reporting period: 10/31/18
| Item 1. | Reports to Stockholders. |
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 | | Semiannual Report and Shareholder Letter October 31, 2018 |
Franklin Growth Opportunities Fund
Franklin Select U.S. Equity Fund
Formerly, Franklin Focused Core Equity Fund
Franklin Small Cap Growth Fund
Franklin Small-Mid Cap Growth Fund
Sign up for electronic delivery at franklintempleton.com/edelivery
Franklin Templeton Investments
Successful investing begins with ambition. And achievement only comes when you reach for it. That’s why we continually strive to deliver better outcomes for investors. No matter what your goals are, our deep, global investment expertise allows us to offer solutions that can help.
During our more than 70 years of experience, we’ve managed through all kinds of markets—up, down and those in between. We’re always preparing for what may come next. It’s because of this, combined with our strength as one of the world’s largest asset managers that we’ve earned the trust of millions of investors around the world.
Dear Shareholder:
The six months ended October 31, 2018, benefited from mostly upbeat economic data as the U.S. job market continued to improve and the unemployment rate declined. During the second and third quarters, U.S. corporate profits rose, supported by healthy economic growth and tax cuts.
In September 2018, the Standard & Poor’s 500® Index (S&P 500®) reached an all-time high, but experienced heightened volatility near period-end due to investor concerns about U.S. Federal Reserve interest-rate policies, higher U.S. Treasury yields, trade tensions, a potentially slower economy and some weaker-than-expected fourth-quarter 2018 revenue guidance. Within this environment, U.S. stocks, as measured by the S&P 500, generated a modest positive total return for the six-month period.
We are committed to our long-term perspective and disciplined investment approach as we conduct a rigorous, fundamental analysis of securities with a regular emphasis on investment risk management.
We believe active, professional investment management serves investors well. We also recognize the important role of financial advisors in today’s markets and encourage investors to continue to seek their advice. Amid changing markets and economic conditions, we are confident investors with a well-diversified portfolio and a patient, long-term outlook should be well positioned for the years ahead.
In addition, Franklin Strategic Series’ semiannual report includes more detail about prevailing conditions and a discussion about investment decisions during the period. Please remember all securities markets fluctuate, as do mutual fund share prices.
We thank you for investing with Franklin Templeton, welcome your questions and comments, and look forward to serving your future investment needs.
Sincerely,
Edward B. Jamieson
President and Chief Executive Officer –
Investment Management
Franklin Strategic Series
This letter reflects our analysis and opinions as of October 31, 2018, unless otherwise indicated. The information is not a complete analysis of every aspect of any market, country, industry, security or fund. Statements of fact are from sources considered reliable.
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| Not FDIC Insured | May Lose Value | No Bank Guarantee |
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Contents
Semiannual Report
Visit franklintempleton.com for fund updates, to access your account, or to find helpful financial planning tools.
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Semiannual Report
Economic and Market Overview
The U.S. economy grew during the six months under review. The economy grew faster in 2018’s second quarter, driven by consumer spending, business investment, exports and government spending, but moderated in the third quarter due to declines in exports and housing investment. The manufacturing and services sectors expanded during the period. The unemployment rate declined from 3.9% in April 2018, as reported at the beginning of the six-month period, to a nearly 49-year low of 3.7% at period-end.1 Annual inflation, as measured by the Consumer Price Index, was 2.5% in April 2018, as reported at the beginning of the period, and while it varied during the six months under review, it ended the period at 2.5%.1
The U.S. Federal Reserve (Fed) raised its target range for the federal funds rate 0.25% at its June 2018 meeting and continued to reduce its balance sheet as part of its ongoing plan to normalize monetary policy. In his congressional testimony in July 2018 and at the Fed symposium in August, Fed Chair Jerome Powell reiterated the Fed’s intention to gradually raise interest rates. At its September 2018 meeting, the Fed raised its target range for the federal funds rate 0.25% to 2.00%–2.25%, as widely expected. Furthermore, the Fed raised its forecast for U.S. economic growth in 2018 and 2019 and projected one more rate increase in 2018. Minutes from the Fed’s September meeting (released in October) indicated that a few officials expected monetary policy to become modestly restrictive of economic growth, while some officials seemed to favor increasing the federal funds rate temporarily above what they consider to be its longer-term level to reduce the risk of overshooting the Fed’s inflation objective. In contrast, some officials indicated they would not favor a restrictive policy unless they see clear signs of an overheating economy and rising inflation.
U.S. equity markets rose overall during the period, benefiting from mostly upbeat economic data and better U.S. corporate earnings. However, markets were pressured at certain times during the period by fears of tighter regulation of information technology and technology-related companies, as well as concerns that strong economic growth and rising inflation would lead the Fed to increase its target rate faster than expected. Other factors that curbed investor sentiment were tensions between the U.S. and North Korea earlier in the
period, political uncertainties in the U.S., the Trump administration’s protectionist policies, and the potential impact of escalating U.S.-China trade tensions on global growth and corporate earnings. Partially offsetting these concerns were an overall easing of tensions in the Korean peninsula in the latter part of the period, intermittent U.S.-China trade negotiations, an agreement between the U.S. and the European Union to try to reduce trade barriers, and a trade deal between the U.S., Mexico and Canada. After reaching a new all-time high in September 2018, the broad U.S. stock market, as measured by the Standard & Poor’s 500 Index (S&P 500), experienced heightened volatility in October amid investor concerns about the Fed’s interest-rate path, rising U.S. Treasury yields, trade, a potentially moderating economy and several big companies’ weaker-than-expected fourth-quarter 2018 revenue guidance. In this environment, the S&P 500 generated a +3.40% total return for the six-month period.2
The foregoing information reflects our analysis and opinions as of October 31, 2018. The information is not a complete analysis of every aspect of any market, country, industry, security or fund. Statements of fact are from sources considered reliable.
1. Source: U.S. Bureau of Labor Statistics.
2. Source: Morningstar.
See www.franklintempletondatasources.com for additional data provider information.
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Franklin Growth Opportunities Fund
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| This semiannual report for Franklin Growth Opportunities Fund covers the period ended October 31, 2018. | | Portfolio Composition |
| | Based on Total Net Assets as of 10/31/18 |
Your Fund’s Goal and Main Investments
The Fund seeks capital appreciation by investing, under normal conditions, predominantly in equity securities of companies demonstrating accelerating growth, increasing profitability, or above-average growth or growth potential as compared with the overall economy.
Performance Overview
The Fund’s Class A shares delivered a +0.96% cumulative total return for the six months under review. In comparison, the Fund’s narrow benchmark, the Russell 3000® Growth Index, which measures performance of Russell 3000® Index companies with relatively higher price-to-book ratios and higher forecasted growth values, generated a +4.29% total return.1 The Fund’s broad benchmark, the Standard & Poor’s 500 Index (S&P 500), which tracks the broad U.S. stock market, produced a +3.40% total return.1 You can find the Fund’s long-term performance data in the Performance Summary beginning on page 7.
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.
Investment Strategy
We use fundamental, bottom-up research to seek companies meeting our criteria of growth potential, quality and valuation. In seeking sustainable growth characteristics, we look for companies we believe can produce sustainable earnings and cash flow growth, evaluating the long-term market opportunity and competitive structure of an industry to target leaders and emerging leaders. We define quality companies as those with strong and improving competitive positions in attractive markets. We also believe important attributes of quality are experienced and talented management teams as well as financial strength reflected in the capital structure, gross and
operating margins, free cash flow generation and returns on capital employed. Our valuation analysis includes a range of potential outcomes based on an assessment of multiple scenarios. In assessing value, we consider whether security prices fully reflect the balance of the sustainable growth opportunities relative to business and financial risks.
Manager’s Discussion
During the six months under review, several sectors represented in the Fund’s portfolio posted positive returns and contributed to absolute performance. Relative to the Russell 3000® Growth Index, key contributors to the Fund’s performance included stock selection and an underweighting in materials. Within the sector, our position in Ingevity, a
1. Source: Morningstar.
Frank Russell Company is the source and owner of the trademarks, service marks and copyrights related to the Russell Indexes. Russell® is a trademark of Frank Russell Company.
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.
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 33.
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FRANKLIN GROWTH OPPORTUNITIES FUND
manufacturer of specialty chemicals and carbon materials, benefited relative results.
Other key individual contributors to relative performance included our investments in payment solutions provider Mastercard, biopharmaceutical firm AbbVie,2 programmable devices company Xilinx and frozen potato products manufacturer Lamb Weston Holdings. Mastercard continues to perform very well, exceeding expectations and announcing several growth initiatives and partnerships. The company has shown an ability to both invest for the long term while delivering solid quarter-to-quarter execution, which we believe is supported by a strong organic growth profile, specifically in Europe and total cross-border flows. Our underweighted position in Abbvie, which declined during the period due to investor concerns about rebates and biosimilar adoptions, contributed to relative results. Xilinx benefited from the adoption of complex programmable logic devices into additional end markets and its introduction of new products. In addition to delivering solid results for the September 2018 quarter, the company also provided strong forward guidance.
In contrast, key detractors from the Fund’s relative performance included stock selection in the consumer discretionary, financials and consumer staples sectors, as well as an overweighting in the financials sector and an underweighting in the consumer staples sector.
Within consumer discretionary, casino resorts operator Wynn Resorts’ shares fell amid slowing VIP trends in Macau, concerns about new competition and trade war risks, and a weak third-quarter convention calendar in Las Vegas with relatively weak leisure visitation.2
In the financials sector, our positions in financial and banking holding company SVB Financial Group and financial services firm Charles Schwab hindered relative returns.
In consumer staples, Constellation Brands, which produces, markets and distributes beverage alcohol products, detracted from relative results.
Other key individual detractors included our positions in medical devices company Nevro and defense and security solutions manufacturer Raytheon. Nevro’s shares declined due to weaker-than-expected earnings reports and a reduction in 2018 sales guidance. Although Nevro’s market growth and share capture assumptions have been lowered, we believe
Top 10 Holdings
10/31/18
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Company
Sector/Industry | | % of Total
Net Assets | |
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Amazon.com Inc. Consumer Discretionary | | | 7.4% | |
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Apple Inc. Information Technology | | | 6.0% | |
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Mastercard Inc. Information Technology | | | 5.0% | |
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Microsoft Corp. Information Technology | | | 4.7% | |
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Alphabet Inc. Communication Services | | | 4.0% | |
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Visa Inc. Information Technology | | | 4.0% | |
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UnitedHealth Group Inc. Health Care | | | 2.7% | |
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SBA Communications Corp. Real Estate | | | 2.3% | |
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ServiceNow Inc. Information Technology | | | 2.2% | |
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Adobe Inc. Information Technology | | | 2.0% | |
Nevro’s growth profile is still attractive, with new applications and product enhancements driving its strong growth going forward. Raytheon’s shares declined along with many defense stocks, despite the company’s better-than-expected earnings reports and a relatively solid 2019 guidance.
2. Not held at period-end.
See www.franklintempletondatasources.com for additional data provider information.
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FRANKLIN GROWTH OPPORTUNITIES FUND
Thank you for your continued participation in Franklin Growth Opportunities Fund. We look forward to serving your future investment needs.
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Grant Bowers Lead Portfolio Manager |
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Sara Araghi, CFA |
| | Portfolio Management Team |
The foregoing information reflects our analysis, opinions and portfolio holdings as of October 31, 2018, the end of the reporting period. The way we implement our main investment strategies and the resulting portfolio holdings may change depending on factors such as market and economic conditions. These opinions may not be relied upon as investment advice or an offer for a particular security. The information is not a complete analysis of every aspect of any market, country, industry, security or the Fund. Statements of fact are from sources considered reliable, but the investment manager makes no representation or warranty as to their completeness or accuracy. Although historical performance is no guarantee of future results, these insights may help you understand our investment management philosophy.
CFA® is a trademark owned by CFA Institute.
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FRANKLIN GROWTH OPPORTUNITIES FUND
Performance Summary as of October 31, 2018
The performance table does not reflect any taxes that a shareholder would pay on Fund dividends, capital gain distributions, if any, or any realized gains on the sale of Fund shares. Total return reflects reinvestment of the Fund’s dividends and capital gain distributions, if any, and any unrealized gains or losses. 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 10/31/181
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 5.50% and the minimum is 0%. Class A: 5.50% maximum initial sales charge; Advisor Class: no sales charges. For other share classes, visit franklintempleton.com.
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Share Class | | Cumulative
Total Return2 | | Average Annual
Total Return3 |
A4 | | | | |
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6-Month | | +0.96% | | -4.60% |
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1-Year | | +8.89% | | +2.90% |
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5-Year | | +63.11% | | +9.04% |
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10-Year | | +271.21% | | +13.37% |
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Advisor | | | | |
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6-Month | | +1.09% | | +1.09% |
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1-Year | | +9.16% | | +9.16% |
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5-Year | | +65.35% | | +10.58% |
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10-Year | | +281.74% | | +14.33% |
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 GROWTH OPPORTUNITIES FUND
PERFORMANCE SUMMARY
Total Annual Operating Expenses5
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Share Class | | |
A | | 0.99% |
Advisor | | 0.74% |
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. Growth stock prices reflect projections of future earnings or revenues, and can, therefore, fall dramatically if the company fails to meet those projections. To the extent the Fund focuses on particular countries, regions, industries, sectors or types of investment from time to time, it may be subject to greater risks of adverse developments in such areas of focus than a fund that invests in a wider variety of countries, regions, industries, sectors or investments. Smaller, midsized and relatively new or unseasoned companies can be particularly sensitive to changing economic conditions, and their prospects for growth are less certain than those of larger, more established companies. Historically, these securities have experienced more price volatility than larger-company stocks, especially over the short term. 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 8/31/19. 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. Prior to 9/10/18, these shares were offered at a higher initial sales charge of 5.75%, thus actual returns would have differed. Total returns with sales charges have been restated to reflect the current maximum initial sales charge of 5.50%.
5. 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.
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FRANKLIN GROWTH OPPORTUNITIES FUND
Your Fund’s Expenses
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.
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| | | | | | | Actual | | | | Hypothetical | | | | |
| | | | | | | (actual return after expenses) | | | | (5% annual return before expenses) | | | | |
Share
Class | | Beginning
Account
Value 5/1/18 | | | | Ending
Account
Value 10/31/18 | | Expenses
Paid During
Period
5/1/18–10/31/181,2 | | | | Ending
Account
Value 10/31/18 | | Expenses
Paid During
Period
5/1/18–10/31/181,2 | | | | Net
Annualized
Expense
Ratio2 |
| A | | $1,000 | | | | $1,009.60 | | $4.76 | | | | $1,020.47 | | $4.79 | | | | 0.94% |
| C | | $1,000 | | | | $1,005.80 | | $8.54 | | | | $1,016.69 | | $8.59 | | | | 1.69% |
| R | | $1,000 | | | | $1,008.40 | | $6.02 | | | | $1,019.21 | | $6.06 | | | | 1.19% |
| R6 | | $1,000 | | | | $1,011.50 | | $2.94 | | | | $1,022.28 | | $2.96 | | | | 0.58% |
| Advisor | | $1,000 | | | | $1,010.90 | | $3.50 | | | | $1,021.73 | | $3.52 | | | | 0.69% |
1. 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 184/365 to reflect the one-half year period.
2. Reflects expenses after fee waivers and expense reimbursements. Does not include acquired fund fees and expenses.
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Franklin Select U.S. Equity Fund
Formerly, Franklin Focused Core Equity Fund
This semiannual report for Franklin Select U.S. Equity Fund covers the period ended October 31, 2018. As previously communicated, effective June 1, 2018, the Fund changed its investment strategy, but its goal remained the same.
Your Fund’s Goal and Main Investments
The Fund seeks capital appreciation by investing, under normal market conditions, at least 80% of its net assets in U.S. equity securities. The Fund invests primarily to predominantly in equity securities of large capitalization companies, which are similar in size to those in the Standard & Poor’s 500 Index (S&P 500).
Performance Overview
The Fund’s Class A shares delivered a +0.06% cumulative total return for the six months under review. In comparison, the S&P 500, which tracks the broad U.S. stock market, generated a +3.40% total return.1 You can find the Fund’s long-term performance data in the Performance Summary beginning on page 13.
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.
Investment Strategy
We are research-driven, bottom-up fundamental investors seeking companies that exhibit a combination of growth potential, quality and reasonable valuation. We assess growth potential by considering companies that we believe are positioned for growth in revenue, earnings or assets. In assessing valuation, we consider whether security prices fully reflect the balance of the long-term growth prospects relative to business and financial risks. We place a particular emphasis on quality and assessing downside risk, believing that important attributes of quality include experienced and talented management teams, favorable competitive positioning, and financial strength reflected in metrics including profitability, free cash flow generation and returns on capital employed. This quality analysis generally includes our assessment of the
Portfolio Composition
Based on Total Net Assets as of 10/31/18
potential impacts of any material environmental, social and governance (ESG) factors on the long-term risk and return profile of a company. We generally use a team of analysts to help provide in-depth industry expertise and use both qualitative and quantitative analysis to evaluate companies.
Manager’s Discussion
During the six months under review, key sector contributors to the Fund’s absolute performance included information technology (IT), health care and materials.
Within the IT sector, our investments in software and electronics equipment company Apple, software and services
1. Source: Morningstar.
The index is unmanaged and includes reinvestment of any income or distributions. It does 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.
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 41.
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FRANKLIN SELECT U.S. EQUITY FUND
firm Microsoft and payment technology company Mastercard benefited absolute performance. Apple reported solid results for its fiscal second and third quarters (ended March and June, respectively), supported by strong growth in services and higher average selling price for iPhones, and issued strong guidance for its fiscal fourth quarter (ended September). Near period-end, the company revealed its latest lineup of products, which included new Apple Watch and iPhone models. Microsoft reported robust quarterly results during the period, supported by solid demand for its suite of office and cloud-based products and services. The company is a beneficiary of strong sales execution, a positive enterprise IT spending environment, its status as a critical partner to IT departments in this time of digital transformation, and a large installed base that it is successfully moving to higher-value cloud and Service-as-a-Software (SaaS) deployments. In the consumer market, the company continued to deliver new value into the declining personal computer market, while generating growth in gaming.
In health care, life sciences tools and services company Illumina and health care provider UnitedHealth Group contributed to absolute results. Illumina benefited from strong second- and third-quarter earnings, with revenue and a raise in guidance coming in above expectations. Results were helped by high customer utilization rates of the company’s genome sequencing system NovaSeq.
In the materials sector, Ecolab, which provides products and services in the field of water, hygiene and energy, aided absolute results.
Other key individual contributors to absolute performance included frozen potato products manufacturer Lamb Weston Holdings.
In contrast, key sector detractors from the Fund’s absolute performance included financials, consumer discretionary and industrials.
Within financials, our positions in asset manager BlackRock and financial services firm Charles Schwab hurt absolute results. Although BlackRock reported better-than-expected earnings for the second and third quarters of 2018, its shares declined due to investor concerns about slower investment inflows. Charles Schwab reported second-quarter 2018 earnings that were slightly better than market expectations and third-quarter earnings that were in line with expectations. However, its shares declined due to investor concerns about pricing pressures coming from new no-fee products introduced by competitors.
Top 10 Holdings
10/31/18
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Company
Sector/Industry | | % of Total
Net Assets | |
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Amazon.com Inc. Consumer Discretionary | | | 4.3% | |
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Microsoft Corp. Information Technology | | | 3.5% | |
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Alphabet Inc. Communication Services | | | 3.2% | |
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Mastercard Inc. Information Technology | | | 2.8% | |
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Analog Devices Inc. Information Technology | | | 2.7% | |
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UnitedHealth Group Inc. Health Care | | | 2.7% | |
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The Charles Schwab Corp. Financials | | | 2.6% | |
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NextEra Energy Inc. Utilities | | | 2.4% | |
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Apple Inc. Information Technology | | | 2.4% | |
| |
Fortive Corp. Industrials | | | 2.3% | |
In consumer discretionary, Alibaba Group Holding, China’s largest e-commerce company, hindered absolute results.
In the industrials sector, defense and security solutions manufacturer Raytheon and nuclear components and products company BWX Technologies hurt performance.
Other key individual detractors included semiconductor equipment company Applied Materials. Its shares fell after the company reported mixed results for fiscal third-quarter 2018 (ended July), with earnings exceeding market expectations and revenue missing expectations. Furthermore, the company provided a weaker-than-expected guidance for its fiscal fourth quarter, due in part to weakness at a foundry customer that reduced capital expenditures resulting from weaker cryptocurrency (a digital or virtual currency that uses cryptography for security) demand.
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FRANKLIN SELECT U.S. EQUITY FUND
Thank you for your continued participation in Franklin Select U.S. Equity Fund.
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| | Serena Perin Vinton, CFA Lead Portfolio Manager |
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| | Chris Anderson |
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| | Portfolio Management Team |
The foregoing information reflects our analysis, opinions and portfolio holdings as of October 31, 2018, the end of the reporting period. The way we implement our main investment strategies and the resulting portfolio holdings may change depending on factors such as market and economic conditions. These opinions may not be relied upon as investment advice or an offer for a particular security. The information is not a complete analysis of every aspect of any market, country, industry, security or the Fund. Statements of fact are from sources considered reliable, but the investment manager makes no representation or warranty as to their completeness or accuracy. Although historical performance is no guarantee of future results, these insights may help you understand our investment management philosophy.
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FRANKLIN SELECT U.S. EQUITY FUND
Performance Summary as of October 31, 2018
The performance table does not reflect any taxes that a shareholder would pay on Fund dividends, capital gain distributions, if any, or any realized gains on the sale of Fund shares. Total return reflects reinvestment of the Fund’s dividends and capital gain distributions, if any, and any unrealized gains or losses. 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 10/31/181
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 5.50% and the minimum is 0%. Class A: 5.50% 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 | | | | | | | | |
| | |
6-Month | | | +0.06% | | | | -5.44% | |
| | |
1-Year | | | +4.61% | | | | -1.15% | |
| | |
5-Year | | | +43.92% | | | | +6.34% | |
| | |
10-Year | | | +226.50% | | | | +11.93% | |
| | |
Advisor | | | | | | | | |
| | |
6-Month | | | +0.18% | | | | +0.18% | |
| | |
1-Year | | | +4.86% | | | | +4.86% | |
| | |
5-Year | | | +45.74% | | | | +7.82% | |
| | |
10-Year | | | +234.98% | | | | +12.85% | |
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 14 for Performance Summary footnotes.
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| franklintempleton.com | | Semiannual Report | | 13 |
FRANKLIN SELECT U.S. EQUITY FUND
PERFORMANCE SUMMARY
Total Annual Operating Expenses5
| | | | |
Share Class | | With Waiver | | Without Waiver |
A | | 1.25% | | 1.49% |
Advisor | | 1.00% | | 1.24% |
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. To the extent the Fund focuses on particular countries, regions, industries, sectors or types of investment from time to time, it may be subject to greater risks of adverse developments in such areas of focus than a fund that invests in a wider variety of countries, regions, industries, sectors or investments. The Fund may have investments in both growth and value stocks, or in stocks with characteristics of both. Growth stock prices reflect projections of future earnings or revenues, and can, therefore, fall dramatically if the company fails to meet those projections. A value stock may not increase in price as anticipated by the investment manager if other investors fail to recognize the company’s value and bid up the price, the markets favor faster growing companies, or the factors that the investment manager believes will increase the price of the security do not occur. Foreign securities involve special risks, including currency fluctuations and economic and political uncertainties. 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 an expense reduction contractually guaranteed through 8/31/19. Fund investment results reflect the expense reduction; without this reduction, 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. Prior to 9/10/18, these shares were offered at a higher initial sales charge of 5.75%, thus actual returns would have differed. Total returns with sales charges have been restated to reflect the current maximum initial sales charge of 5.50%.
5. 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.
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FRANKLIN SELECT U.S. EQUITY FUND
Your Fund’s Expenses
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 | | | | Hypothetical | | | | |
| | | | | | | (actual return after expenses) | | | | (5% annual return before expenses) | | | | |
| | | | | | | | | Expenses | | | | | | Expenses | | | | Net |
| | | Beginning | | | | Ending | | Paid During | | | | Ending | | Paid During | | | | Annualized |
| Share | | Account | | | | Account | | Period | | | | Account | | Period | | | | Expense |
| Class | | Value 5/1/18 | | | | Value 10/31/18 | | 5/1/18–10/31/181,2 | | | | Value 10/31/18 | | 5/1/18–10/31/181,2 | | | | Ratio2 |
| A | | $1,000 | | | | $1,000.60 | | $6.20 | | | | $1,019.00 | | $ 6.26 | | | | 1.23% |
| C | | $1,000 | | | | $ 996.80 | | $9.97 | | | | $1,015.22 | | $10.06 | | | | 1.98% |
| R | | $1,000 | | | | $ 999.40 | | $7.66 | | | | $1,017.54 | | $ 7.73 | | | | 1.52% |
| R6 | | $1,000 | | | | $1,002.40 | | $4.29 | | | | $1,020.92 | | $ 4.33 | | | | 0.85% |
| Advisor | | $1,000 | | | | $1,001.80 | | $4.94 | | | | $1,020.27 | | $ 4.99 | | | | 0.98% |
1. 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 184/365 to reflect the one-half year period.
2. Reflects expenses after fee waivers and expense reimbursements. Does not include acquired fund fees and expenses.
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| franklintempleton.com | | Semiannual Report | | 15 |
Franklin Small Cap Growth Fund
This semiannual report for Franklin Small Cap Growth Fund covers the period ended October 31, 2018. At the market close on February 12, 2015, the Fund closed to new investors with limited exceptions. Existing shareholders may add to their accounts. Effective April 28, 2017, the Fund opened Class R6 shares to new investors who are eligible to purchase Class R6 shares. Effective January 17, 2019, all share classes of the Fund will be re-opened to new investors.
Your Fund’s Goal and Main Investments
The Fund seeks long-term capital growth by investing, under normal market conditions, at least 80% of its net assets in equity securities of small-cap companies, which for this Fund are those with market capitalizations not exceeding $1.5 billion or that of the highest market capitalization in the Russell 2000® Index, whichever is greater, at the time of purchase.1
Performance Overview
The Fund’s Class A shares delivered a +3.09% cumulative total return for the six months under review. In comparison, the Russell 2000® Growth Index, which measures performance of small-cap companies with relatively higher price-to-book ratios and higher forecasted growth values, had a -1.26% total return.2 The Standard & Poor’s 500 Index (S&P 500), which tracks the broad U.S. stock market, produced a +3.40% total return.2 You can find the Fund’s long-term performance data in the Performance Summary beginning on page 19.
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.
Investment Strategy
We use fundamental, bottom-up research to seek companies meeting our criteria of growth potential, quality and valuation. In seeking sustainable growth characteristics, we look for companies we believe can produce sustainable earnings and cash flow growth, evaluating the long-term market opportunity and competitive structure of an industry. We define quality
Portfolio Composition
Based on Total Net Assets as of 10/31/18
companies as those with strong and improving competitive positions in attractive markets. We also believe important attributes of quality are experienced and talented management teams as well as financial strength reflected in the capital structure, gross and operating margins, free cash flow generation and returns on capital employed. Our valuation analysis includes a range of potential outcomes based on an assessment of multiple scenarios. In assessing value, we consider whether security prices fully reflect the balance of the sustainable growth opportunities relative to business and financial risks.
Manager’s Discussion
During the six months under review, key contributors to the Fund’s performance relative to the Russell 2000® Growth
1. The Russell 2000 Index is market capitalization weighted and measures performance of the 2,000 smallest companies in the Russell 3000 Index, which represent a small amount of the total market capitalization of the Russell 3000 Index.
2. Source: Morningstar.
The indexes are unmanaged and include reinvested dividends. 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.
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 48.
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FRANKLIN SMALL CAP GROWTH FUND
Index included stock selection and an overweighting in the information technology (IT) sector and stock selection in the consumer discretionary and industrials sectors.
Within IT, our positions in cloud communications company Twilio and system-level semiconductor solutions developer Integrated Device Technology (not held at period-end) aided relative results. Twilio reported stronger-than-expected earnings and revenue for the first and second quarters of 2018 and raised its full-year 2018 guidance, aided by a larger customer base, higher average revenue per customer and its core voice and messaging solutions. During the period, the company introduced a new contact center solution, Twilio Flex, and announced its plan to acquire a leading business-to-consumer email messaging company.
In consumer discretionary, Duluth Holdings, which sells men’s and women’s casual wear, work wear and accessories through its own channels, contributed to relative results.
In the industrials sector, notable contributors included Spirit Airlines,3 an ultra low-cost, low-fare airline, and Mercury Systems, a provider of secure sensor and safety critical mission processing subsystems. Spirit Airlines delivered better-than-expected second- and third-quarter earnings, supported by solid growth in ticket and non-ticket revenues, fares and capacity. The airline also benefited from service improvements and cost reductions, as well as a new pilot deal that gave the airline more flexibility, leading to more completed flights.
Other notable contributors included medical device manufacturer DexCom3 and cancer diagnostics and pharmaceutical services company NeoGenomics. DexCom reported better-than-expected sales for the first and second quarters of 2018, driven by strong international sales growth, and company management raised its 2018 sales guidance. Furthermore, management indicated that the early adoption of the recently launched G6 continuous glucose monitoring (CGM) system represented a broadening of its user base into individuals who had been waiting for a CGM system that did not require finger stick calibration measurements.
In contrast, key detractors from the Fund’s relative performance included stock selection and an overweighting in the financials sector and stock selection and underweightings in the communication services and consumer staples sectors.
Top 10 Holdings
10/31/18
| | | | |
Company Sector/Industry | | % of Total
Net Assets | |
| |
2U Inc. Information Technology | | | 2.1% | |
| |
Mercury Systems Inc. Industrials | | | 1.8% | |
| |
Spirit Airlines Inc. Industrials | | | 1.7% | |
| |
Grand Canyon Education Inc. Consumer Discretionary | | | 1.4% | |
| |
Cubic Corp. Industrials | | | 1.4% | |
| |
Integer Holdings Corp. Health Care | | | 1.4% | |
| |
Univar Inc. Industrials | | | 1.4% | |
| |
US Ecology Inc. Industrials | | | 1.3% | |
| |
Kennametal Inc. Industrials | | | 1.3% | |
| |
Twilio Inc. Information Technology | | | 1.3% | |
Within the financials sector, our position in Western Alliance Bancorp, which provides banking products and services for businesses, hampered relative results. Other key detractors included motion pictures technology company IMAX in the communication services sector and baked sweet goods company Hostess Brands in the consumer staples sector.
Other notable individual detractors from the Fund’s relative performance included medical devices company Nevro, roofing materials distributor Beacon Roofing Supply and education technology company 2U. Nevro’s shares declined due to weaker-than-expected earnings reports and a reduction in 2018 sales guidance. Although Nevro’s market growth and share capture assumptions have been lowered, we believe Nevro’s growth profile is still attractive, with new applications and product enhancements driving its strong growth going forward. Beacon Roofing Supply’s share price weakened due to investor concerns about several issues, including rising mortgage rates, an unfavorable price/cost dynamic for roofing shingles and slowing growth in upcoming quarters due to increased storm-related activity last year. 2U’s shares reached an all-time high in mid-May after the company reported better-than-expected first-quarter 2018 results and raised its revenue
3. Not part of the index.
See www.franklintempletondatasources.com for additional data provider information.
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| franklintempleton.com | | Semiannual Report | | 17 |
FRANKLIN SMALL CAP GROWTH FUND
guidance for full-year 2018. However, its shares were pressured by an analyst report that raised investor concerns about the company’s competition. Nonetheless, the company reported strong second-quarter results and again raised its full-year 2018 guidance.
Thank you for your continued participation in Franklin Small Cap Growth Fund. We look forward to serving your future investment needs.
| | |
 | | 
Michael P. McCarthy, CFA Lead Portfolio Manager |
| |
 | | 
Bradley T. Carris, CFA |
| | Portfolio Management Team |
The foregoing information reflects our analysis, opinions and portfolio holdings as of October 31, 2018, the end of the reporting period. The way we implement our main investment strategies and the resulting portfolio holdings may change depending on factors such as market and economic conditions. These opinions may not be relied upon as investment advice or an offer for a particular security. The information is not a complete analysis of every aspect of any market, country, industry, security or the Fund. Statements of fact are from sources considered reliable, but the investment manager makes no representation or warranty as to their completeness or accuracy. Although historical performance is no guarantee of future results, these insights may help you understand our investment management philosophy.
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FRANKLIN SMALL CAP GROWTH FUND
Performance Summary as of October 31, 2018
The performance table does not reflect any taxes that a shareholder would pay on Fund dividends, capital gain distributions, if any, or any realized gains on the sale of Fund shares. Total return reflects reinvestment of the Fund’s dividends and capital gain distributions, if any, and any unrealized gains or losses. 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 10/31/181
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 5.50% and the minimum is 0%. Class A: 5.50% 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 | | | | |
| | |
6-Month | | +3.09% | | -2.59% |
| | |
1-Year | | +13.71% | | +7.44% |
| | |
5-Year | | +50.13% | | +7.24% |
| | |
10-Year | | +328.88% | | +15.02% |
| | |
Advisor | | | | |
| | |
6-Month | | +3.21% | | +3.21% |
| | |
1-Year | | +14.00% | | +14.00% |
| | |
5-Year | | +52.12% | | +8.75% |
| | |
10-Year | | +341.21% | | +16.00% |
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 20 for Performance Summary footnotes.
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franklintempleton.com | | Semiannual Report | | 19 |
FRANKLIN SMALL CAP GROWTH FUND
PERFORMANCE SUMMARY
Total Annual Operating Expenses5
| | | | | | | | |
Share Class | | With Waiver | | | Without Waiver | |
A | | | 1.09% | | | | 1.10% | |
Advisor | | | 0.84% | | | | 0.85% | |
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. Smaller, midsized and relatively new or unseasoned companies can be particularly sensitive to changing economic conditions, and their prospects for growth are less certain than those of larger, more established companies. Historically, these securities have experienced more price volatility than larger-company stocks, especially over the short term. Growth stock prices reflect projections of future earnings or revenues, and can, therefore, fall dramatically if the company fails to meet those projections. To the extent the Fund focuses on particular countries, regions, industries, sectors or types of investment from time to time, it may be subject to greater risks of adverse developments in such areas of focus than a fund that invests in a wider variety of countries, regions, industries, sectors or investments. From time to time, the trading market for a particular security or type of security in which the Fund invests may become less liquid or even illiquid. 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 8/31/19. 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. Prior to 9/10/18, these shares were offered at a higher initial sales charge of 5.75%, thus actual returns would have differed. Total returns with sales charges have been restated to reflect the current maximum initial sales charge of 5.50%.
5. 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.
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FRANKLIN SMALL CAP GROWTH FUND
Your Fund’s Expenses
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
Value 5/1/18 | | | | Ending
Account
Value 10/31/18 | | Expenses
Paid During
Period
5/1/18–10/31/181,2 | | | | Ending
Account
Value 10/31/18 | | Expenses
Paid During
Period
5/1/18–10/31/181,2 | | | | Net
Annualized
Expense
Ratio2 |
| | | | | | | | | | | | |
| A | | $1,000 | | | | $1,030.90 | | $5.37 | | | | $1,019.91 | | $5.35 | | | | 1.05% |
| C | | $1,000 | | | | $1,026.80 | | $9.20 | | | | $1,016.13 | | $9.15 | | | | 1.80% |
| R | | $1,000 | | | | $1,029.60 | | $6.65 | | | | $1,018.65 | | $6.61 | | | | 1.30% |
| R6 | | $1,000 | | | | $1,033.00 | | $3.23 | | | | $1,022.03 | | $3.21 | | | | 0.63% |
| Advisor | | $1,000 | | | | $1,032.10 | | $4.10 | | | | $1,021.17 | | $4.08 | | | | 0.80% |
1. 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 184/365 to reflect the one-half year period.
2. Reflects expenses after fee waivers and expense reimbursements. Does not include acquired fund fees and expenses.
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| franklintempleton.com | | Semiannual Report | | 21 |
Franklin Small-Mid Cap Growth Fund
This semiannual report for Franklin Small-Mid Cap Growth Fund covers the period ended October 31, 2018.
Your Fund’s Goal and Main Investments
The Fund seeks long-term capital growth by investing, under normal market conditions, at least 80% of its net assets in equity securities of small-cap and mid-cap companies. The Fund defines small-cap companies as those within the market capitalization range of companies in the Russell 2500™ Index at the time of purchase, and mid-cap companies as those within the market capitalization range of the Russell Midcap® Index, at the time of purchase.1
Performance Overview
The Fund’s Class A shares delivered a +0.19% cumulative total return for the six months under review. In comparison, the Russell Midcap® Growth Index, which measures performance of companies in the Russell Midcap® Index with relatively higher price-to-book ratios and higher forecasted growth values, generated a +0.94% total return.2 Also in comparison, the Standard & Poor’s 500 Index (S&P 500), which tracks the broad U.S. stock market, produced a +3.40% total return.2 You can find the Fund’s long-term performance data in the Performance Summary beginning on page 25.
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.
Investment Strategy
We use fundamental, bottom-up research to seek companies meeting our criteria of growth potential, quality and valuation. In seeking sustainable growth characteristics, we look for companies we believe can produce sustainable earnings and cash flow growth, evaluating the long-term market opportunity and competitive structure of an industry to target leaders and emerging leaders. We define quality companies as those with strong and improving competitive positions in attractive markets. We also believe important attributes of quality are
Portfolio Composition
Based on Total Net Assets as of 10/31/18
experienced and talented management teams as well as financial strength reflected in the capital structure, gross and operating margins, free cash flow generation and returns on capital employed. Our valuation analysis includes a range of potential outcomes based on an assessment of multiple scenarios. In assessing value, we consider whether security prices fully reflect the balance of the sustainable growth opportunities relative to business and financial risks.
Manager’s Discussion
During the six months under review, most sectors represented in the Fund’s portfolio posted positive returns and contributed to absolute performance. Relative to the Russell Midcap® Growth Index, key contributors to the Fund’s performance included stock selection and an underweighting in the materials
1. The Russell 2500 Index is market capitalization weighted and measures performance of the 2,500 smallest companies in the Russell 3000 Index, which represent a modest amount of the Russell 3000 Index’s total market capitalization. The Russell Midcap Index is market capitalization weighted and measures performance of the smallest companies in the Russell 1000 Index, which represent a modest amount of the Russell 1000 Index’s total market capitalization.
2. Source: Morningstar.
The indexes are unmanaged and include reinvested dividends. 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.
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 57.
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FRANKLIN SMALL-MID CAP GROWTH FUND
sector and stock selection in the financials and consumer discretionary sectors.
In materials, our investment in Ingevity, a manufacturer of specialty chemicals and carbon materials, benefited relative results.3 In financials, MarketAxess Holdings, an electronic trading platform operator, aided relative returns.
In the consumer discretionary sector, notable contributors included apparel and home product retailer Burlington Stores, education services provider Grand Canyon Education and fantasy sports company DraftKings3. Burlington Stores reported better-than-expected earnings for the first and second quarters of 2018 and raised its earnings guidance for full-year 2018. The company continued to show improved productivity, merchandise margin expansion and store growth opportunities.
Other key individual contributors included system-level semiconductor solutions developer Integrated Device Technology4 and medical device manufacturer DexCom. Integrated Device Technology reported better-than-expected second-quarter 2018 earnings results and raised its full-year 2018 guidance. Further boosting its shares was an agreement to be acquired by Japanese semiconductor company Renesas Electronics (not a Fund holding). DexCom reported better-than-expected sales for the first and second quarters of 2018, driven by strong international sales growth, and company management raised its 2018 sales guidance. Furthermore, management indicated that the early adoption of the recently launched G6 continuous glucose monitoring (CGM) system represented a broadening of its user base into individuals who had been waiting for a CGM system that did not require finger stick calibration measurements.
In contrast, key detractors from the Fund’s relative performance included stock selection in the information technology (IT), energy and real estate sectors.
Within IT, notable detractors included education technology company 2U, software solutions firm Red Hat4 and semiconductor products manufacturer Microchip Technology. 2U’s shares reached an all-time high in mid-May after the company reported better-than-expected first-quarter 2018 results and raised its revenue guidance for full-year 2018. However, its shares were pressured by an analyst report that raised investor concerns about the company’s competition. Nonetheless, the company reported strong second-quarter
Top 10 Holdings
10/31/18
| | |
Company
Sector/Industry | | % of Total
Net Assets |
| |
Roper Technologies Inc.
Industrials | | 2.7% |
| |
Edwards Lifesciences Corp.
Health Care | | 2.1% |
| |
ServiceNow Inc.
Information Technology | | 2.1% |
| |
GoDaddy Inc.
Information Technology | | 1.9% |
| |
SBA Communications Corp.
Real Estate | | 1.8% |
| |
Ross Stores Inc.
Consumer Discretionary | | 1.7% |
| |
Verisk Analytics Inc.
Industrials | | 1.7% |
| |
Workday Inc.
Information Technology | | 1.7% |
| |
2U Inc.
Information Technology | | 1.6% |
| |
Worldpay Inc.
Information Technology | | 1.5% |
results and again raised its full-year 2018 guidance. Red Hat reported slightly better-than-expected revenue and earnings for its fiscal first quarter (ended May) and reduced its revenue outlook for fiscal-year 2019 (ending in February), citing unfavorable currency exchange rates. Furthermore, the company reported slightly weaker-than-expected revenue for its fiscal second quarter (ended August), due to various reasons, including unfavorable currency exchange rates and increased competition in its middleware business.
In the energy sector, our position in oil and natural gas company Concho Resources hurt relative results.
Other key individual detractors from relative performance included holdings in medical devices company Nevro and homebuilder NVR. Nevro’s shares declined due to weaker-than-expected earnings reports and a reduction in 2018 sales guidance.
3. Not part of the index.
4. Not held at period-end.
See www.franklintempletondatasources.com for additional data provider information.
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| franklintempleton.com | | Semiannual Report | | 23 |
FRANKLIN SMALL-MID CAP GROWTH FUND
Thank you for your continued participation in Franklin Small-Mid Cap Growth Fund. We look forward to serving your future investment needs.
| | |
 | | 
Edward B. Jamieson Lead Portfolio Manager |
| |
 | |  |
| | John P. Scandalios Michael P. McCarthy, CFA James Cross, CFA Portfolio Management Team |
The foregoing information reflects our analysis, opinions and portfolio holdings as of October 31, 2018, the end of the reporting period. The way we implement our main investment strategies and the resulting portfolio holdings may change depending on factors such as market and economic conditions. These opinions may not be relied upon as investment advice or an offer for a particular security. The information is not a complete analysis of every aspect of any market, country, industry, security or the Fund. Statements of fact are from sources considered reliable, but the investment manager makes no representation or warranty as to their completeness or accuracy. Although historical performance is no guarantee of future results, these insights may help you understand our investment management philosophy.
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24 | | Semiannual Report | | franklintempleton.com |
FRANKLIN SMALL-MID CAP GROWTH FUND
Performance Summary as of October 31, 2018
The performance table does not reflect any taxes that a shareholder would pay on Fund dividends, capital gain distributions, if any, or any realized gains on the sale of Fund shares. Total return reflects reinvestment of the Fund’s dividends and capital gain distributions, if any, and any unrealized gains or losses. 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 10/31/181
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 5.50% and the minimum is 0%. Class A: 5.50% 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 | | | | |
| | |
6-Month | | +0.19% | | -5.32% |
| | |
1-Year | | +4.66% | | -1.10% |
| | |
5-Year | | +45.45% | | +6.57% |
| | |
10-Year | | +236.44% | | +12.26% |
| | |
Advisor | | | | |
| | |
6-Month | | +0.33% | | +0.33% |
| | |
1-Year | | +4.94% | | +4.94% |
| | |
5-Year | | +47.30% | | +8.05% |
| | |
10-Year | | +245.20% | | +13.19% |
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 26 for Performance Summary footnotes.
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| franklintempleton.com | | Semiannual Report | | 25 |
FRANKLIN SMALL-MID CAP GROWTH FUND
PERFORMANCE SUMMARY
Total Annual Operating Expenses5
| | | | | | | | |
Share Class | | With Waiver | | | Without Waiver | |
A | | | 0.93% | | | | 0.95% | |
Advisor | | | 0.68% | | | | 0.70% | |
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. Growth stock prices reflect projections of future earnings or revenues, and can, therefore, fall dramatically if the company fails to meet those projections. Smaller, midsized and relatively new or unseasoned companies can be particularly sensitive to changing economic conditions, and their prospects for growth are less certain than those of larger, more established companies. Historically, these securities have experienced more price volatility than larger-company stocks, especially over the short term. To the extent the Fund focuses on particular countries, regions, industries, sectors or types of investment from time to time, it may be subject to greater risks of adverse developments in such areas of focus than a fund that invests in a wider variety of countries, regions, industries, sectors or investments. From time to time, the trading market for a particular security or type of security in which the Fund invests may become less liquid or even illiquid. 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 8/31/19. 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. Prior to 9/10/18, these shares were offered at a higher initial sales charge of 5.75%, thus actual returns would have differed. Total returns with sales charges have been restated to reflect the current maximum initial sales charge of 5.50%.
5. 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.
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26 | | Semiannual Report | | franklintempleton.com |
FRANKLIN SMALL-MID CAP GROWTH FUND
Your Fund’s Expenses
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 Value 5/1/18 | | | | Ending Account Value 10/31/18 | | Expenses Paid During Period 5/1/18–10/31/181,2 | | | | Ending Account Value 10/31/18 | | Expenses Paid During Period 5/1/18–10/31/181,2 | | | | Net Annualized
Expense Ratio2 |
| | | | | | | | | | | | |
| A | | $1,000 | | | | $1,001.90 | | $4.34 | | | | $1,020.87 | | $4.38 | | | | 0.86% |
| C | | $1,000 | | | | $ 998.10 | | $8.11 | | | | $1,017.09 | | $8.19 | | | | 1.61% |
| R | | $1,000 | | | | $1,000.60 | | $5.55 | | | | $1,019.66 | | $5.60 | | | | 1.10% |
| R6 | | $1,000 | | | | $1,003.80 | | $2.42 | | | | $1,022.79 | | $2.45 | | | | 0.48% |
| Advisor | | $1,000 | | | | $1,003.30 | | $3.08 | | | | $1,022.13 | | $3.11 | | | | 0.61% |
1. 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 184/365 to reflect the one-half year period.
2. Reflects expenses after fee waivers and expense reimbursements. Does not include acquired fund fees and expenses.
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| franklintempleton.com | | Semiannual Report | | 27 |
FRANKLIN STRATEGIC SERIES
Financial Highlights
Franklin Growth Opportunities Fund
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Six Months Ended
October 31, 2018 (unaudited) | | | Year Ended April 30, | |
| | | 2018 | | | 2017 | | | 2016 | | | 2015 | | | 2014 | |
| | | | | | |
Class A | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | |
| Per share operating performance (for a share outstanding throughout the period) | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | |
Net asset value, beginning of period | | | $38.58 | | | | $34.81 | | | | $30.40 | | | | $33.13 | | | | $28.48 | | | | $24.29 | |
| | | | | | |
Income from investment operationsa: | | | | | | | | | | | | | | | | | | | | | | | | |
Net investment income (loss)b | | | (0.07) | | | | (0.10) | | | | (0.09) | | | | (0.19) | | | | (0.19) | | | | (0.19) | |
Net realized and unrealized gains (losses) | | | 0.44 | | | | 7.03 | | | | 5.14 | | | | (1.88) | | | | 5.50 | | | | 5.11 | |
| | | | | | |
Total from investment operations | | | 0.37 | | | | 6.93 | | | | 5.05 | | | | (2.07) | | | | 5.31 | | | | 4.92 | |
| | | | | | |
Less distributions from net realized gains | | | — | | | | (3.16) | | | | (0.64) | | | | (0.66) | | | | (0.66) | | | | (0.73) | |
| | | | | | |
Net asset value, end of period | | | $38.95 | | | | $38.58 | | | | $34.81 | | | | $30.40 | | | | $33.13 | | | | $28.48 | |
| | | | | | |
Total returnc | | | 0.96% | | | | 20.43% | | | | 16.88% | | | | (6.36)% | | | | 18.87% | | | | 20.26% | |
| | | | | | |
Ratios to average net assetsd | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | |
Expenses before waiver and payments by affiliates | | | 0.94% | | | | 1.02% | | | | 1.05% | | | | 1.11% | | | | 1.18% | | | | 1.17% | |
| | | | | | |
Expenses net of waiver and payments by affiliates | | | 0.94% | e,f | | | 0.99% | e | | | 0.97% | e | | | 1.10% | | | | 1.18% | f | | | 1.17% | e,f |
| | | | | | | |
Net investment income (loss) | | | (0.32)% | | | | (0.27)% | | | | (0.30)% | | | | (0.58)% | | | | (0.59)% | | | | (0.70)% | |
| | | | | | |
Supplemental data | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | |
Net assets, end of period (000’s) | | | $2,548,290 | | | | $2,428,175 | | | | $2,272,831 | | | | $548,871 | | | | $457,619 | | | | $349,343 | |
| | | | | | |
Portfolio turnover rate | | | 16.02% | | | | 22.68% | | | | 47.75% | | | | 25.56% | | | | 40.64% | | | | 36.64% | |
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.
bBased on average daily shares outstanding.
cTotal return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year.
dRatios are annualized for periods less than one year.
eBenefit of expense reduction rounds to less than 0.01%.
fBenefit of waiver and payments by affiliates rounds to less than 0.01%.
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28 | | Semiannual Report | The accompanying notes are an integral part of these financial statements. | | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
FINANCIAL HIGHLIGHTS
Franklin Growth Opportunities Fund (continued)
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Six Months Ended
October 31, 2018 (unaudited) | | | Year Ended April 30, | |
| | | 2018 | | | 2017 | | | 2016 | | | 2015 | | | 2014 | |
| | | | | | |
Class C | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | |
Per share operating performance
(for a share outstanding throughout the period) | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | |
Net asset value, beginning of period | | | $32.67 | | | | $30.12 | | | | $26.59 | | | | $29.27 | | | | $25.41 | | | | $21.89 | |
Income from investment operationsa: | | | | | | | | | | | | | | | | | | | | | | | | |
Net investment income (loss)b | | | (0.19 | ) | | | (0.33 | ) | | | (0.29 | ) | | | (0.37 | ) | | | (0.36 | ) | | | (0.35 | ) |
Net realized and unrealized gains (losses) | | | 0.38 | | | | 6.04 | | | | 4.46 | | | | (1.65 | ) | | | 4.88 | | | | 4.60 | |
| | | | | | |
Total from investment operations | | | 0.19 | | | | 5.71 | | | | 4.17 | | | | (2.02 | ) | | | 4.52 | | | | 4.25 | |
| | | | | | |
Less distributions from net realized gains | | | — | | | | (3.16 | ) | | | (0.64 | ) | | | (0.66 | ) | | | (0.66 | ) | | | (0.73 | ) |
| | | | | | |
Net asset value, end of period | | | $32.86 | | | | $32.67 | | | | $30.12 | | | | $26.59 | | | | $29.27 | | | | $25.41 | |
| | | | | | |
Total returnc | | | 0.58% | | | | 19.53% | | | | 15.98% | | | | (7.03)% | | | | 18.04% | | | | 19.42% | |
| | | | | | |
Ratios to average net assetsd | | | | | | | | | | | | | | | | | | | | | | | | |
Expenses before waiver and payments by affiliates | | | 1.69% | | | | 1.77% | | | | 1.80% | | | | 1.85% | | | | 1.88% | | | | 1.87% | |
Expenses net of waiver and payments by affiliates | | | 1.69% | e,f | | | 1.74% | e | | | 1.72% | e | | | 1.84% | | | | 1.88% | f | | | 1.87% | e,f |
Net investment income (loss) | | | (1.07)% | | | | (1.02)% | | | | (1.05)% | | | | (1.32)% | | | | (1.29)% | | | | (1.40)% | |
| | | | | | |
Supplemental data | | | | | | | | | | | | | | | | | | | | | | | | |
Net assets, end of period (000’s) | | | $238,946 | | | | $400,295 | | | | $390,123 | | | | $137,882 | | | | $110,513 | | | | $85,883 | |
Portfolio turnover rate | | | 16.02% | | | | 22.68% | | | | 47.75% | | | | 25.56% | | | | 40.64% | | | | 36.64% | |
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.
bBased on average daily shares outstanding.
cTotal return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year.
dRatios are annualized for periods less than one year.
eBenefit of expense reduction rounds to less than 0.01%.
fBenefit of waiver and payments by affiliates rounds to less than 0.01%.
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| | | |
| franklintempleton.com | | The accompanying notes are an integral part of these financial statements. | Semiannual Report | | 29 |
FRANKLIN STRATEGIC SERIES
FINANCIAL HIGHLIGHTS
Franklin Growth Opportunities Fund (continued)
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Six Months Ended
October 31, 2018 (unaudited) | | | Year Ended April 30, | |
| | | 2018 | | | 2017 | | | 2016 | | | 2015 | | | 2014 | |
| | | | | | |
Class R | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | |
Per share operating performance
(for a share outstanding throughout the period) | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | |
Net asset value, beginning of period | | | $36.93 | | | | $33.52 | | | | $29.37 | | | | $32.10 | | | | $27.67 | | | | $23.67 | |
| | | | | | |
Income from investment operationsa: | | | | | | | | | | | | | | | | | | | | | | | | |
Net investment income (loss)b | | | (0.11 | ) | | | (0.18 | ) | | | (0.17 | ) | | | (0.26 | ) | | | (0.24 | ) | | | (0.24 | ) |
Net realized and unrealized gains (losses) | | | 0.42 | | | | 6.75 | | | | 4.96 | | | | (1.81 | ) | | | 5.33 | | | | 4.97 | |
| | | | | | |
Total from investment operations | | | 0.31 | | | | 6.57 | | | | 4.79 | | | | (2.07 | ) | | | 5.09 | | | | 4.73 | |
| | | | | | |
Less distributions from net realized gains | | | — | | | | (3.16 | ) | | | (0.64 | ) | | | (0.66 | ) | | | (0.66 | ) | | | (0.73 | ) |
| | | | | | |
Net asset value, end of period | | | $37.24 | | | | $36.93 | | | | $33.52 | | | | $29.37 | | | | $32.10 | | | | $27.67 | |
| | | | | | |
Total returnc | | | 0.84% | | | | 20.14% | | | | 16.62% | | | | (6.60)% | | | | 18.63% | | | | 19.99% | |
| | | | | | |
Ratios to average net assetsd | | | | | | | | | | | | | | | | | | | | | | | | |
Expenses before waiver and payments by affiliates | | | 1.19% | | | | 1.27% | | | | 1.30% | | | | 1.35% | | | | 1.38% | | | | 1.37% | |
Expenses net of waiver and payments by affiliates | | | 1.19% | e,f | | | 1.24% | e | | | 1.22% | e | | | 1.34% | | | | 1.38% | f | | | 1.37% | e,f |
| | | | | | | |
Net investment income (loss) | | | (0.57)% | | | | (0.52)% | | | | (0.55)% | | | | (0.82)% | | | | (0.79)% | | | | (0.90)% | |
| | | | | | |
Supplemental data | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | |
Net assets, end of period (000’s) | | | $34,978 | | | | $36,582 | | | | $50,429 | | | | $39,786 | | | | $48,266 | | | | $42,953 | |
| | | | | | |
Portfolio turnover rate | | | 16.02% | | | | 22.68% | | | | 47.75% | | | | 25.56% | | | | 40.64% | | | | 36.64% | |
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.
bBased on average daily shares outstanding.
cTotal return is not annualized for periods less than one year.
dRatios are annualized for periods less than one year.
eBenefit of expense reduction rounds to less than 0.01%.
fBenefit of waiver and payments by affiliates rounds to less than 0.01%.
| | | | |
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30 | | Seimiannual Report | The accompanying notes are an integral part of these financial statements. | | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
FINANCIAL HIGHLIGHTS
Franklin Growth Opportunities Fund (continued)
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Six Months Ended
October 31, 2018 (unaudited) | | | Year Ended April 30, | |
| | | 2018 | | | 2017 | | | 2016 | | | 2015 | | | 2014a | |
| | | | | | |
Class R6 | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | |
Per share operating performance
(for a share outstanding throughout the period) | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | |
Net asset value, beginning of period | | | $41.78 | | | | $37.30 | | | | $32.39 | | | | $35.09 | | | | $29.98 | | | | $24.99 | |
| | | | | | |
Income from investment operationsb: | | | | | | | | | | | | | | | | | | | | | | | | |
Net investment income (loss)c | | | 0.01 | | | | 0.07 | | | | 0.05 | | | | (0.05 | ) | | | (0.03 | ) | | | (0.07 | ) |
Net realized and unrealized gains (losses) | | | 0.47 | | | | 7.57 | | | | 5.50 | | | | (1.99 | ) | | | 5.80 | | | | 5.79 | |
| | | | | | |
Total from investment operations | | | 0.48 | | | | 7.64 | | | | 5.55 | | | | (2.04 | ) | | | 5.77 | | | | 5.72 | |
| | | | | | |
Less distributions from net realized gains | | | — | | | | (3.16 | ) | | | (0.64 | ) | | | (0.66 | ) | | | (0.66 | ) | | | (0.73 | ) |
| | | | | | |
Net asset value, end of period | | | $42.26 | | | | $41.78 | | | | $37.30 | | | | $32.39 | | | | $35.09 | | | | $29.98 | |
| | | | | | |
Total returnd | | | 1.15% | | | | 20.98% | | | | 17.42% | | | | (5.94)% | | | | 19.47% | | | | 22.90% | |
| | | | | | |
Ratios to average net assetse | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | |
Expenses before waiver and payments by affiliates | | | 0.59% | | | | 0.58% | | | | 0.59% | | | | 0.67% | | | | 0.68% | | | | 0.71% | |
| | | | | | |
Expenses net of waiver and payments by affiliates | | | 0.58%f | | | | 0.55%f | | | | 0.51%f | | | | 0.66% | | | | 0.68% | g | | | 0.71% | f,g |
| | | | | | | |
Net investment income (loss) | | | 0.04% | | | | 0.17% | | | | 0.16% | | | | (0.14)% | | | | (0.09)% | | | | (0.24)% | |
| | | | | | |
Supplemental data | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | |
Net assets, end of period (000’s) | | | $372,619 | | | | $369,688 | | | | $291,825 | | | | $235,620 | | | | $246,911 | | | | $180,843 | |
| | | | | | |
Portfolio turnover rate | | | 16.02% | | | | 22.68% | | | | 47.75% | | | | 25.56% | | | | 40.64% | | | | 36.64% | |
aFor the year May 1, 2013 (effective date) to April 30, 2014.
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.
cBased on average daily shares outstanding.
dTotal return is not annualized for periods less than one year.
eRatios are annualized for periods less than one year.
fBenefit of expense reduction rounds to less than 0.01%.
gBenefit of waiver and payments by affiliates rounds to less than 0.01%.
| | | | |
| | | |
| franklintempleton.com | | The accompanying notes are an integral part of these financial statements. | Semiannual Report | | 31 |
FRANKLIN STRATEGIC SERIES
FINANCIAL HIGHLIGHTS
Franklin Growth Opportunities Fund (continued)
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Six Months Ended
October 31, 2018 (unaudited) | | | Year Ended April 30, | |
| | | 2018 | | | 2017 | | | 2016 | | | 2015 | | | 2014 | |
| | | | | | |
Advisor Class | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | |
Per share operating performance
(for a share outstanding throughout the period) | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | |
Net asset value, beginning of period | | | $41.34 | | | | $37.02 | | | | $32.20 | | | | $34.96 | | | | $29.93 | | | | $25.43 | |
| | | | | | |
Income from investment operationsa: | | | | | | | | | | | | | | | | | | | | | | | | |
Net investment income (loss)b | | | (0.01 | ) | | | (0.01 | ) | | | (0.02 | ) | | | (0.11 | ) | | | (0.10 | ) | | | (0.13 | ) |
Net realized and unrealized gains (losses) | | | 0.46 | | | | 7.49 | | | | 5.48 | | | | (1.99 | ) | | | 5.79 | | | | 5.36 | |
| | | | | | |
Total from investment operations | | | 0.45 | | | | 7.48 | | | | 5.46 | | | | (2.10 | ) | | | 5.69 | | | | 5.23 | |
| | | | | | |
Less distributions from net realized gains | | | — | | | | (3.16 | ) | | | (0.64 | ) | | | (0.66 | ) | | | (0.66 | ) | | | (0.73 | ) |
| | | | | | |
Net asset value, end of period | | | $41.79 | | | | $41.34 | | | | $37.02 | | | | $32.20 | | | | $34.96 | | | | $29.93 | |
| | | | | | |
Total returnc | | | 1.09% | | | | 20.71% | | | | 17.21% | | | | (6.11)% | | | | 19.23% | | | | 20.58% | |
| | | | | | |
Ratios to average net assetsd | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | |
Expenses before waiver and payments by affiliates | | | 0.69% | | | | 0.77% | | | | 0.80% | | | | 0.85% | | | | 0.88% | | | | 0.87% | |
| | | | | | |
Expenses net of waiver and payments by affiliates | | | 0.69% | e,f | | | 0.74% | e | | | 0.72% | e | | | 0.84% | | | | 0.88% | f | | | 0.87% | e,f |
| | | | | | | |
Net investment income (loss) | | | (0.07)% | | | | (0.02)% | | | | (0.05)% | | | | (0.32)% | | | | (0.29)% | | | | (0.40)% | |
| | | | | | |
Supplemental data | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | |
Net assets, end of period (000’s) | | | $573,809 | | | | $583,509 | | | | $537,193 | | | | $256,377 | | | | $269,887 | | | | $224,469 | |
| | | | | | |
Portfolio turnover rate | | | 16.02% | | | | 22.68% | | | | 47.75% | | | | 25.56% | | | | 40.64% | | | | 36.64% | |
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.
bBased on average daily shares outstanding.
cTotal return is not annualized for periods less than one year.
dRatios are annualized for periods less than one year.
eBenefit of expense reduction rounds to less than 0.01%.
fBenefit of waiver and payments by affiliates rounds to less than 0.01%.
| | | | |
| | | |
32 | | Semiannual Report | The accompanying notes are an integral part of these financial statements. | | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
Statement of Investments, October 31, 2018 (unaudited)
Franklin Growth Opportunities Fund
| | | | | | | | | | | | |
| | | Country | | | Shares | | | Value | |
Common Stocks 97.1% | | | | | | | | | | | | |
Communication Services 8.7% | | | | | | | | | | | | |
a Alphabet Inc., C | | | United States | | | | 141,218 | | | $ | 152,059,306 | |
a Electronic Arts Inc. | | | United States | | | | 273,347 | | | | 24,869,110 | |
a Facebook Inc., A | | | United States | | | | 445,940 | | | | 67,689,233 | |
a Liberty Broadband Corp., C | | | United States | | | | 398,771 | | | | 33,070,079 | |
a Netflix Inc. | | | United States | | | | 94,664 | | | | 28,567,702 | |
The Walt Disney Co. | | | United States | | | | 206,647 | | | | 23,729,276 | |
| | | | | | | | | | | | |
| | | | | | | | | | | 329,984,706 | |
| | | | | | | | | | | | |
Consumer Discretionary 9.3% | | | | | | | | | | | | |
a Alibaba Group Holding Ltd., ADR | | | China | | | | 112,248 | | | | 15,970,645 | |
a Amazon.com Inc. | | | United States | | | | 175,410 | | | | 280,306,934 | |
Aptiv PLC | | | United States | | | | 310,457 | | | | 23,843,097 | |
a Booking Holdings Inc. | | | United States | | | | 16,258 | | | | 30,476,922 | |
| | | | | | | | | | | | |
| | | | | | | | | | | 350,597,598 | |
| | | | | | | | | | | | |
Consumer Staples 3.9% | | | | | | | | | | | | |
Constellation Brands Inc., A | | | United States | | | | 243,478 | | | | 48,508,122 | |
Lamb Weston Holdings Inc. | | | United States | | | | 585,690 | | | | 45,777,530 | |
a Monster Beverage Corp. | | | United States | | | | 704,493 | | | | 37,232,455 | |
a Nomad Foods Ltd. | | | United Kingdom | | | | 848,960 | | | | 16,215,136 | |
| | | | | | | | | | | | |
| | | | | | | | | | | 147,733,243 | |
| | | | | | | | | | | | |
Energy 1.0% | | | | | | | | | | | | |
Diamondback Energy Inc. | | | United States | | | | 328,246 | | | | 36,881,721 | |
| | | | | | | | | | | | |
Financials 6.7% | | | | | | | | | | | | |
a Athene Holding Ltd., A | | | United States | | | | 344,551 | | | | 15,752,872 | |
The Charles Schwab Corp. | | | United States | | | | 1,199,717 | | | | 55,474,914 | |
Intercontinental Exchange Inc. | | | United States | | | | 526,269 | | | | 40,543,764 | |
MarketAxess Holdings Inc. | | | United States | | | | 115,487 | | | | 24,214,159 | |
MSCI Inc. | | | United States | | | | 261,375 | | | | 39,305,572 | |
S&P Global Inc. | | | United States | | | | 206,927 | | | | 37,726,931 | |
a SVB Financial Group | | | United States | | | | 161,783 | | | | 38,379,781 | |
| | | | | | | | | | | | |
| | | | | | | | | | | 251,397,993 | |
| | | | | | | | | | | | |
Health Care 14.2% | | | | | | | | | | | | |
a ABIOMED Inc. | | | United States | | | | 125,198 | | | | 42,717,558 | |
a Celgene Corp. | | | United States | | | | 241,835 | | | | 17,315,386 | |
a Centene Corp. | | | United States | | | | 273,841 | | | | 35,686,959 | |
a Edwards Lifesciences Corp. | | | United States | | | | 327,286 | | | | 48,307,413 | |
a Elanco Animal Health Inc. | | | United States | | | | 303,435 | | | | 9,248,699 | |
a,b Guardant Health Inc. | | | United States | | | | 65,800 | | | | 2,202,984 | |
a Heron Therapeutics Inc. | | | United States | | | | 1,043,980 | | | | 28,980,885 | |
a IDEXX Laboratories Inc. | | | United States | | | | 43,192 | | | | 9,161,887 | |
a Illumina Inc. | | | United States | | | | 107,267 | | | | 33,376,127 | |
a Intuitive Surgical Inc. | | | United States | | | | 73,172 | | | | 38,135,783 | |
Medtronic PLC | | | United States | | | | 295,141 | | | | 26,509,565 | |
a Nevro Corp. | | | United States | | | | 486,365 | | | | 23,715,157 | |
a PTC Therapeutics Inc. | | | United States | | | | 600,031 | | | | 23,113,194 | |
a Sage Therapeutics Inc. | | | United States | | | | 198,926 | | | | 25,597,798 | |
UnitedHealth Group Inc. | | | United States | | | | 397,500 | | | | 103,886,625 | |
a Veeva Systems Inc. | | | United States | | | | 216,347 | | | | 19,763,298 | |
West Pharmaceutical Services Inc. | | | United States | | | | 447,854 | | | | 47,436,696 | |
| | | | | | | | | | | | |
| | | | | | | | | | | 535,156,014 | |
| | | | | | | | | | | | |
| | | | |
| | | |
| franklintempleton.com | | Semiannual Report | | 33 |
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS (UNAUDITED)
Franklin Growth Opportunities Fund (continued)
| | | | | | | | | | | | |
| | | Country | | | Shares | | | Value | |
Common Stocks (continued) | | | | | | | | | | | | |
Industrials 10.9% | | | | | | | | | | | | |
Allegiant Travel Co. | | | United States | | | | 45,773 | | | $ | 5,224,530 | |
The Boeing Co. | | | United States | | | | 118,585 | | | | 42,081,073 | |
a CoStar Group Inc. | | | United States | | | | 188,656 | | | | 68,184,052 | |
Honeywell International Inc. | | | United States | | | | 230,925 | | | | 33,442,559 | |
a IHS Markit Ltd. | | | United States | | | | 687,516 | | | | 36,115,215 | |
Raytheon Co. | | | United States | | | | 386,564 | | | | 67,664,163 | |
a Resideo Technologies Inc. | | | United States | | | | 38,487 | | | | 810,151 | |
Rockwell Automation Inc. | | | United States | | | | 167,009 | | | | 27,511,393 | |
Roper Technologies Inc. | | | United States | | | | 134,892 | | | | 38,160,947 | |
Stanley Black & Decker Inc. | | | United States | | | | 178,377 | | | | 20,784,488 | |
a Univar Inc. | | | United States | | | | 744,134 | | | | 18,320,579 | |
a Verisk Analytics Inc. | | | United States | | | | 439,698 | | | | 52,693,408 | |
| | | | | | | | | | | | |
| | | | | | | | | | | 410,992,558 | |
| | | | | | | | | | | | |
Information Technology 37.9% | | | | | | | | | | | | |
a 2U Inc. | | | United States | | | | 626,932 | | | | 39,440,292 | |
a Adobe Inc. | | | United States | | | | 303,216 | | | | 74,518,364 | |
a Adyen NV | | | Netherlands | | | | 7,000 | | | | 4,526,396 | |
Amphenol Corp., A | | | United States | | | | 104,868 | | | | 9,385,686 | |
Analog Devices Inc. | | | United States | | | | 302,239 | | | | 25,300,427 | |
Apple Inc. | | | United States | | | | 1,027,152 | | | | 224,802,487 | |
a Autodesk Inc. | | | United States | | | | 277,091 | | | | 35,814,012 | |
a Elastic NV | | | United States | | | | 47,200 | | | | 3,209,600 | |
a Fiserv Inc. | | | United States | | | | 383,466 | | | | 30,408,854 | |
a Guidewire Software Inc. | | | United States | | | | 99,276 | | | | 8,832,586 | |
a InterXion Holding NV | | | Netherlands | | | | 648,898 | | | | 38,200,625 | |
a,c,d LegalZoom.com Inc. | | | United States | | | | 418,321 | | | | 17,536,016 | |
Mastercard Inc., A | | | United States | | | | 946,211 | | | | 187,037,528 | |
Microsoft Corp. | | | United States | | | | 1,654,321 | | | | 176,698,026 | |
Monolithic Power Systems | | | United States | | | | 297,294 | | | | 35,116,367 | |
NVIDIA Corp. | | | United States | | | | 248,919 | | | | 52,479,593 | |
a PayPal Holdings Inc. | | | United States | | | | 369,633 | | | | 31,119,402 | |
a Pluralsight Inc., A | | | United States | | | | 84,500 | | | | 1,893,645 | |
a PTC Inc. | | | United States | | | | 152,616 | | | | 12,577,085 | |
a Salesforce.com Inc. | | | United States | | | | 421,929 | | | | 57,905,536 | |
a ServiceNow Inc. | | | United States | | | | 466,159 | | | | 84,393,425 | |
a StoneCo. Ltd. | | | Brazil | | | | 71,500 | | | | 2,051,335 | |
a Twilio Inc., A | | | United States | | | | 281,430 | | | | 21,169,165 | |
a Tyler Technologies Inc. | | | United States | | | | 174,879 | | | | 37,014,889 | |
Visa Inc., A | | | United States | | | | 1,086,520 | | | | 149,776,782 | |
Xilinx Inc. | | | United States | | | | 409,838 | | | | 34,987,870 | |
a Zendesk Inc. | | | United States | | | | 587,963 | | | | 32,320,326 | |
| | | | | | | | | | | | |
| | | | | | | | | | | 1,428,516,319 | |
| | | | | | | | | | | | |
Materials 0.9% | | | | | | | | | | | | |
a Axalta Coating Systems Ltd. | | | United States | | | | 402,526 | | | | 9,934,342 | |
a Ingevity Corp. | | | United States | | | | 254,671 | | | | 23,195,434 | |
| | | | | | | | | | | | |
| | | | | | | | | | | 33,129,776 | |
| | | | | | | | | | | | |
| | | | |
| | | |
34 | | Semiannual Report | | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS (UNAUDITED)
Franklin Growth Opportunities Fund (continued)
| | | | | | | | | | | | |
| | | Country | | | Shares | | | Value | |
Common Stocks (continued) | | | | | | | | | | | | |
Real Estate 3.6% | | | | | | | | | | | | |
American Tower Corp. | | | United States | | | | 182,028 | | | $ | 28,361,783 | |
Equinix Inc. | | | United States | | | | 56,910 | | | | 21,554,093 | |
a SBA Communications Corp., A | | | United States | | | | 529,884 | | | | 85,931,288 | |
| | | | | | | | | | | | |
| | | | | | | | | | | 135,847,164 | |
| | | | | | | | | | | | |
Total Common Stocks (Cost $2,002,858,612) | | | | | | | | | | | 3,660,237,092 | |
| | | | | | | | | | | | |
| | | |
Preferred Stocks 1.4% | | | | | | | | | | | | |
Communication Services 0.2% | | | | | | | | | | | | |
a,c,d Tanium Inc., pfd., G | | | United States | | | | 805,800 | | | | 6,373,855 | |
| | | | | | | | | | | | |
Consumer Discretionary 0.9% | | | | | | | | | | | | |
a,c,d ClearMotion Inc., pfd., C | | | United States | | | | 2,610,594 | | | | 6,150,418 | |
a,c,d Proterra Inc., pfd., 5, 144A | | | United States | | | | 2,362,202 | | | | 18,559,431 | |
a,c,d Proterra Inc., pfd., 6, 144A | | | United States | | | | 596,775 | | | | 4,688,763 | |
a,c,d Proterra Inc., pfd., 7 | | | United States | | | | 780,667 | | | | 6,133,572 | |
| | | | | | | | | | | | |
| | | | | | | | | | | 35,532,184 | |
| | | | | | | | | | | | |
Industrials 0.3% | | | | | | | | | | | | |
a,c,d,e Optoro Inc., pfd., E | | | United States | | | | 509,182 | | | | 10,020,702 | |
| | | | | | | | | | | | |
Total Preferred Stocks (Cost $39,818,563) | | | | | | | | | | | 51,926,741 | |
| | | | | | | | | | | | |
Total Investments before Short Term Investments
(Cost $2,042,677,175) | | | | | | | | | | | 3,712,163,833 | |
| | | | | | | | | | | | |
| | | |
Short Term Investments 2.1% | | | | | | | | | | | | |
| | | |
Money Market Funds (Cost $77,027,803) 2.0% | | | | | | | | | | | | |
f,g Institutional Fiduciary Trust Money Market Portfolio, 1.83% | | | United States | | | | 77,027,803 | | | | 77,027,803 | |
| | | | | | | | | | | | |
h Investments from Cash Collateral Received for Loaned Securities
(Cost $2,175,000) 0.1% | | | | | | | | | | | | |
Money Market Funds 0.1% | | | | | | | | | | | | |
f,g Institutional Fiduciary Trust Money Market Portfolio, 1.83% | | | United States | | | | 2,175,000 | | | | 2,175,000 | |
| | | | | | | | | | | | |
Total Investments (Cost $2,121,879,978) 100.6% | | | | | | | | | | | 3,791,366,636 | |
Other Assets, less Liabilities (0.6)% | | | | | | | | | | | (22,725,205 | ) |
| | | | | | | | | | | | |
Net Assets 100.0% | | | | | | | | | | $ | 3,768,641,431 | |
| | | | | | | | | | | | |
See Abbreviations on page 83.
aNon-income producing.
bA portion or all of the security is on loan at October 31, 2018. See Note 1(c).
cFair valued using significant unobservable inputs. See Note 10 regarding fair value measurements.
dSee Note 7 regarding restricted securities.
eSee Note 8 regarding holdings of 5% voting securities.
fSee Note 3(f) regarding investments in affiliated management investment companies.
gThe rate shown is the annualized seven-day effective yield at period end.
hSee Note 1(c) regarding securities on loan.
| | | | |
| | | |
| franklintempleton.com | | The accompanying notes are an integral part of these financial statements. | Semiannual Report | | 35 |
FRANKLIN STRATEGIC SERIES
Financial Highlights
Franklin Select U.S. Equity Fund
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Six Months Ended October 31, 2018 (unaudited) | | | Year Ended April 30, | |
| | | 2018 | | | 2017 | | | 2016 | | | 2015 | | | 2014 | |
| | | | | | |
Class A | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | |
Per share operating performance (for a share outstanding throughout the period) | | | | | | | | | | | | | | | | | | | | | | | | |
Net asset value, beginning of period | | $ | 16.32 | | | $ | 15.20 | | | $ | 13.12 | | | $ | 15.29 | | | $ | 13.38 | | | $ | 10.63 | |
| | | | | | |
Income from investment operationsa: | | | | | | | | | | | | | | | | | | | | | | | | |
Net investment income (loss)b | | | (0.03 | ) | | | (0.04 | ) | | | (0.01 | ) | | | 0.07 | c | | | (0.01 | ) | | | 0.03 | |
Net realized and unrealized gains (losses) | | | 0.04 | | | | 1.16 | | | | 2.09 | | | | (1.83 | ) | | | 2.23 | | | | 2.92 | |
| | | | | | |
Total from investment operations | | | 0.01 | | | | 1.12 | | | | 2.08 | | | | (1.76 | ) | | | 2.22 | | | | 2.95 | |
| | | | | | |
Less distributions from: | | | | | | | | | | | | | | | | | | | | | | | | |
Net investment income | | | — | | | | — | | | | — | | | | (0.06 | ) | | | — | | | | (0.07 | ) |
Net realized gains | | | — | | | | — | | | | — | | | | (0.35 | ) | | | (0.31 | ) | | | (0.13 | ) |
| | | | | | |
Total distributions | | | — | | | | — | | | | — | | | | (0.41 | ) | | | (0.31 | ) | | | (0.20 | ) |
| | | | | | |
Net asset value, end of period | | | $16.33 | | | | $16.32 | | | | $15.20 | | | | $13.12 | | | | $15.29 | | | | $13.38 | |
| | | | | | |
Total returnd | | | 0.06% | | | | 7.37% | | | | 15.85% | | | | (11.70)% | | | | 16.84% | | | | 28.00% | |
| | | | | | |
Ratios to average net assetse | | | | | | | | | | | | | | | | | | | | | | | | |
Expenses before waiver and payments by affiliates | | | 1.48% | | | | 1.54% | | | | 1.47% | | | | 1.46% | | | | 1.54% | | | | 1.73% | |
Expenses net of waiver and payments by affiliates | | | 1.23%f | | | | 1.25%f | | | | 1.24%f | | | | 1.25% | | | | 1.28% | | | | 1.22% | |
Net investment income (loss) | | | (0.33)% | | | | (0.25)% | | | | (0.04)% | | | | 0.48%c | | | | (0.07)% | | | | 0.23% | |
| | | | | | |
Supplemental data | | | | | | | | | | | | | | | | | | | | | | | | |
Net assets, end of period (000’s) | | | $68,151 | | | | $65,565 | | | | $77,733 | | | | $100,483 | | | | $92,612 | | | | $40,372 | |
Portfolio turnover rate | | | 0.17% | | | | 93.43% | | | | 17.45% | | | | 35.56% | | | | 25.55% | | | | 43.30% | |
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.
bBased on average daily shares outstanding.
cNet investment income per share includes approximately $0.06 per share related to income received in the form of special dividends in connection with certain Fund holdings. Excluding this amount, the ratio of net investment income to average net assets would have been 0.02%.
dTotal return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year.
eRatios are annualized for periods less than one year.
fBenefit of expense reduction rounds to less than 0.01%.
| | | | |
| | | |
36 | | Semiannual Report | The accompanying notes are an integral part of these financial statements. | | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
FINANCIAL HIGHLIGHTS
Franklin Select U.S. Equity Fund (continued)
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Six Months Ended
October 31, 2018 (unaudited) | | | Year Ended April 30, | |
| | | 2018 | | | 2017 | | | 2016 | | | 2015 | | | 2014 | |
| | | | | | |
Class C | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | |
Per share operating performance
(for a share outstanding throughout the period) | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | |
Net asset value, beginning of period | | | $15.42 | | | | $14.46 | | | | $12.58 | | | | $14.73 | | | | $12.98 | | | | $10.36 | |
| | | | | | |
Income from investment operationsa: | | | | | | | | | | | | | | | | | | | | | | | | |
Net investment income (loss)b | | | (0.09 | ) | | | (0.15 | ) | | | (0.10 | ) | | | (0.04 | )c | | | (0.11 | ) | | | (0.06 | ) |
Net realized and unrealized gains (losses) | | | 0.04 | | | | 1.11 | | | | 1.98 | | | | (1.76 | ) | | | 2.17 | | | | 2.84 | |
| | | | | | |
Total from investment operations | | | (0.05 | ) | | | 0.96 | | | | 1.88 | | | | (1.80 | ) | | | 2.06 | | | | 2.78 | |
| | | | | | |
Less distributions from: | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | |
Net investment income. | | | — | | | | — | | | | — | | | | — | | | | — | | | | (0.03 | ) |
| | | | | | |
Net realized gains | | | — | | | | — | | | | — | | | | (0.35 | ) | | | (0.31 | ) | | | (0.13 | ) |
| | | | | | |
Total distributions | | | — | | | | — | | | | — | | | | (0.35 | ) | | | (0.31 | ) | | | (0.16 | ) |
| | | | | | |
Net asset value, end of period | | | $15.37 | | | | $15.42 | | | | $14.46 | | | | $12.58 | | | | $14.73 | | | | $12.98 | |
| | | | | | |
Total returnd | | | (0.32)% | | | | 6.64% | | | | 14.94% | | | | (12.31)% | | | | 16.12% | | | | 26.99% | |
| | | | | | |
Ratios to average net assetse | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | |
Expenses before waiver and payments by affiliates | | | 2.23% | | | | 2.29% | | | | 2.21% | | | | 2.20% | | | | 2.24% | | | | 2.43% | |
| | | | | | |
Expenses net of waiver and payments by affiliates | | | 1.98% | f | | | 2.00% | f | | | 1.98% | f | | | 1.99% | | | | 1.98% | | | | 1.92% | |
| | | | | | |
Net investment income (loss) | | | (1.08)% | | | | (1.00)% | | | | (0.78)% | | | | (0.26)% | c | | | (0.77)% | | | | (0.47)% | |
| | | | | | |
Supplemental data | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | |
Net assets, end of period (000’s) | | | $14,806 | | | | $18,103 | | | | $20,341 | | | | $25,119 | | | | $18,758 | | | | $6,666 | |
| | | | | | |
Portfolio turnover rate | | | 0.17% | | | | 93.43% | | | | 17.45% | | | | 35.56% | | | | 25.55% | | | | 43.30% | |
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.
bBased on average daily shares outstanding.
cNet investment income per share includes approximately $0.06 per share related to income received in the form of special dividends in connection with certain Fund holdings. Excluding this amount, the ratio of net investment income to average net assets would have been (0.72)%.
dTotal return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year.
eRatios are annualized for periods less than one year.
fBenefit of expense reduction rounds to less than 0.01%.
| | | | |
| | | |
| franklintempleton.com | | The accompanying notes are an integral part of these financial statements. | Semiannual Report | | 37 |
FRANKLIN STRATEGIC SERIES
FINANCIAL HIGHLIGHTS
Franklin Select U.S. Equity Fund (continued)
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Six Months Ended October 31, 2018 | | | Year Ended April 30, | |
| | | (unaudited) | | | 2018 | | | 2017 | | | 2016 | | | 2015 | | | 2014 | |
| | | | | | |
Class R | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | |
Per share operating performance
(for a share outstanding throughout the period) | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | |
Net asset value, beginning of period | | | $16.08 | | | | $15.01 | | | | $12.98 | | | | $15.15 | | | | $13.28 | | | | $10.56 | |
Income from investment operationsa: | | | | | | | | | | | | | | | | | | | | | | | | |
Net investment income (loss)b | | | (0.05 | ) | | | (0.06 | ) | | | (0.03 | ) | | | 0.03 | c | | | (0.04 | ) | | | 0.01 | |
Net realized and unrealized gains (losses) | | | 0.04 | | | | 1.13 | | | | 2.06 | | | | (1.81 | ) | | | 2.22 | | | | 2.90 | |
| | | | | | |
Total from investment operations | | | (0.01 | ) | | | 1.07 | | | | 2.03 | | | | (1.78 | ) | | | 2.18 | | | | 2.91 | |
| | | | | | |
Less distributions from: | | | | | | | | | | | | | | | | | | | | | | | | |
Net investment income | | | — | | | | — | | | | — | | | | (0.04 | ) | | | — | | | | (0.06 | ) |
Net realized gains | | | — | | | | — | | | | — | | | | (0.35 | ) | | | (0.31 | ) | | | (0.13 | ) |
| | | | | | |
Total distributions | | | — | | | | — | | | | — | | | | (0.39 | ) | | | (0.31 | ) | | | (0.19 | ) |
| | | | | | |
Net asset value, end of period | | | $16.07 | | | | $16.08 | | | | $15.01 | | | | $12.98 | | | | $15.15 | | | | $13.28 | |
| | | | | | |
Total returnd | | | (0.06)% | | | | 7.13% | | | | 15.64% | | | | (11.91)% | | | | 16.66% | | | | 27.70% | |
| | | | | | |
Ratios to average net assetse | | | | | | | | | | | | | | | | | | | | | | | | |
Expenses before waiver and payments by affiliates | | | 1.77% | | | | 1.70% | | | | 1.64% | | | | 1.69% | | | | 1.74% | | | | 1.93% | |
Expenses net of waiver and payments by affiliates | | | 1.52% | f | | | 1.41% | f | | | 1.41% | f | | | 1.48% | | | | 1.48% | | | | 1.42% | |
Net investment income (loss) | | | (0.62)% | | | | (0.41)% | | | | (0.21)% | | | | 0.25% | c | | | (0.27)% | | | | 0.03% | |
| | | | | | |
Supplemental data | | | | | | | | | | | | | | | | | | | | | | | | |
Net assets, end of period (000’s) | | | $135 | | | | $137 | | | | $166 | | | | $273 | | | | $169 | | | | $124 | |
Portfolio turnover rate | | | 0.17% | | | | 93.43% | | | | 17.45% | | | | 35.56% | | | | 25.55% | | | | 43.30% | |
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.
bBased on average daily shares outstanding.
cNet investment income per share includes approximately $0.06 per share related to income received in the form of special dividends in connection with certain Fund holdings. Excluding this amount, the ratio of net investment income to average net assets would have been (0.21)%.
dTotal return is not annualized for periods less than one year.
eRatios are annualized for periods less than one year.
fBenefit of expense reduction rounds to less than 0.01%.
| | | | |
| | | |
38 | | Semiannual Report | The accompanying notes are an integral part of these financial statements. | | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
FINANCIAL HIGHLIGHTS
Franklin Select U.S. Equity Fund (continued)
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Six Months Ended
October 31, 2018 (unaudited) | | | Year Ended April 30, | |
| | | 2018 | | | 2017 | | | 2016 | | | 2015 | | | 2014a | |
| | | | | | |
Class R6 | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | |
Per share operating performance
(for a share outstanding throughout the period) | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | |
| Net asset value, beginning of period | | | $16.64 | | | | $15.44 | | | | $13.27 | | | | $15.46 | | | | $13.49 | | | | $10.54 | |
| | | | | | |
Income from investment operationsb: | | | | | | | | | | | | | | | | | | | | | | | | |
Net investment incomec | | | — | d | | | 0.11 | | | | 0.05 | | | | 0.12 | e | | | 0.05 | | | | 0.07 | |
Net realized and unrealized gains (losses) | | | 0.04 | | | | 1.09 | | | | 2.12 | | | | (1.85 | ) | | | 2.27 | | | | 3.11 | |
| | | | | | |
Total from investment operations | | | 0.04 | | | | 1.20 | | | | 2.17 | | | | (1.73 | ) | | | 2.32 | | | | 3.18 | |
| | | | | | |
Less distributions from: | | | | | | | | | | | | | | | | | | | | | | | | |
Net investment income | | | — | | | | — | | | | — | | | | (0.11 | ) | | | (0.04 | ) | | | (0.10 | ) |
Net realized gains | | | — | | | | — | | | | — | | | | (0.35 | ) | | | (0.31 | ) | | | (0.13 | ) |
| | | | | | |
Total distributions | | | — | | | | — | | | | — | | | | (0.46 | ) | | | (0.35 | ) | | | (0.23 | ) |
| | | | | | |
Net asset value, end of period | | | $16.68 | | | | $16.64 | | | | $15.44 | | | | $13.27 | | | | $15.46 | | | | $13.49 | |
| | | | | | |
Total returnf | | | 0.24% | | | | 7.77% | | | | 16.35% | | | | (11.32)% | | | | 17.45% | | | | 30.43% | |
| | | | | | |
Ratios to average net assetsg | | | | | | | | | | | | | | | | | �� | | | | | | | |
| | | | | | |
Expenses before waiver and payments by affiliates | | | 1.17% | | | | 1.12% | | | | 1.06% | | | | 1.04% | | | | 1.09% | | | | 2.28% | |
| | | | | | |
Expenses net of waiver and payments by affiliates | | | 0.85% | h | | | 0.84% | h | | | 0.84% | h | | | 0.85% | | | | 0.83% | | | | 0.77% | |
| | | | | | |
Net investment income | | | 0.05% | | | | 0.16% | | | | 0.36% | | | | 0.88% | e | | | 0.38% | | | | 0.68% | |
| | | | | | |
Supplemental data | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | |
Net assets, end of period (000’s) | | | $892 | | | | $939 | | | | $20,401 | | | | $33,640 | | | | $25,739 | | | | $14 | |
| | | | | | |
Portfolio turnover rate | | | 0.17% | | | | 93.43% | | | | 17.45% | | | | 35.56% | | | | 25.55% | | | | 43.30% | |
aFor the year May 1, 2013 (effective date) to April 30, 2014.
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.
cBased on average daily shares outstanding.
dAmount rounds to less than $0.01 per share.
eNet investment income per share includes approximately $0.06 per share related to income received in the form of special dividends in connection with certain Fund holdings. Excluding this amount, the ratio of net investment income to average net assets would have been 0.42%.
fTotal return is not annualized for periods less than one year.
gRatios are annualized for periods less than one year.
hBenefit of expense reduction rounds to less than 0.01%.
| | | | |
| | | |
| franklintempleton.com | | The accompanying notes are an integral part of these financial statements. | Semiannual Report | | 39 |
FRANKLIN STRATEGIC SERIES
FINANCIAL HIGHLIGHTS
Franklin Select U.S. Equity Fund (continued)
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Six Months Ended
October 31, 2018 (unaudited) | | | Year Ended April 30, | |
| | | 2018 | | | 2017 | | | 2016 | | | 2015 | | | 2014 | |
| | | | | | |
Advisor Class | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | |
Per share operating performance (for a share outstanding throughout the period)
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | |
| Net asset value, beginning of period | | | $16.57 | | | | $15.39 | | | | $13.25 | | | | $15.44 | | | | $13.48 | | | | $10.70 | |
| | | | | | |
Income from investment operationsa: | | | | | | | | | | | | | | | | | | | | | | | | |
Net investment income (loss)b | | | (0.01 | ) | | | — | c | | | 0.03 | | | | 0.10 | d | | | 0.04 | | | | 0.07 | |
Net realized and unrealized gains (losses) | | | 0.04 | | | | 1.18 | | | | 2.11 | | | | (1.85 | ) | | | 2.25 | | | | 2.93 | |
| | | | | | |
Total from investment operations | | | 0.03 | | | | 1.18 | | | | 2.14 | | | | (1.75 | ) | | | 2.29 | | | | 3.00 | |
| | | | | | |
Less distributions from: | | | | | | | | | | | | | | | | | | | | | | | | |
Net investment income | | | — | | | | — | | | | — | | | | (0.09 | ) | | | (0.02 | ) | | | (0.09 | ) |
Net realized gains | | | — | | | | — | | | | — | | | | (0.35 | ) | | | (0.31 | ) | | | (0.13 | ) |
| | | | | | |
Total distributions | | | — | | | | — | | | | — | | | | (0.44 | ) | | | (0.33 | ) | | | (0.22 | ) |
| | | | | | |
Net asset value, end of period | | | $16.60 | | | | $16.57 | | | | $15.39 | | | | $13.25 | | | | $15.44 | | | | $13.48 | |
| | | | | | |
Total returne | | | 0.18% | | | | 7.67% | | | | 16.15% | | | | (11.45)% | | | | 17.25% | | | | 28.27% | |
| | | | | | |
Ratios to average net assetsf | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | |
Expenses before waiver and payments by affiliates | | | 1.23% | | | | 1.29% | | | | 1.22% | | | | 1.20% | | | | 1.24% | | | | 1.43% | |
| | | | | | |
Expenses net of waiver and payments by affiliates | | | 0.98% | g | | | 1.00% | g | | | 0.99% | g | | | 0.99% | | | | 0.98% | | | | 0.92% | |
| | | | | | |
Net investment income (loss) | | | (0.08)% | | | | —% | h | | | 0.21% | | | | 0.74% | d | | | 0.23% | | | | 0.53% | |
| | | | | | |
Supplemental data | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | |
Net assets, end of period (000’s) | | | $11,694 | | | | $10,450 | | | | $13,077 | | | | $10,736 | | | | $9,914 | | | | $6,990 | |
| | | | | | |
Portfolio turnover rate | | | 0.17% | | | | 93.43% | | | | 17.45% | | | | 35.56% | | | | 25.55% | | | | 43.30% | |
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.
bBased on average daily shares outstanding.
cAmount rounds to less than $0.01 per share.
dNet investment income per share includes approximately $0.06 per share related to income received in the form of special dividends in connection with certain Fund holdings. Excluding this amount, the ratio of net investment income to average net assets would have been 0.28%.
eTotal return is not annualized for periods less than one year.
fRatios are annualized for periods less than one year.
gBenefit of expense reduction rounds to less than 0.01%.
hRounds to less than 0.01%.
| | | | |
| | | |
40 | | Semiannual Report | The accompanying notes are an integral part of these financial statements. | | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
Statement of Investments, October 31, 2018 (unaudited)
Franklin Select U.S. Equity Fund
| | | | | | | | | | | | |
| | | Country | | | Shares | | | Value | |
Common Stocks 95.2% | | | | | | | | | | | | |
Communication Services 6.9% | | | | | | | | | | | | |
a Alphabet Inc., A | | | United States | | | | 2,800 | | | $ | 3,053,624 | |
a Electronic Arts Inc. | | | United States | | | | 15,000 | | | | 1,364,700 | |
The Walt Disney Co. | | | United States | | | | 18,900 | | | | 2,170,287 | |
| | | | | | | | | | | | |
| | | | | | | | | | | 6,588,611 | |
| | | | | | | | | | | | |
Consumer Discretionary 9.7% | | | | | | | | | | | | |
a Alibaba Group Holding Ltd., ADR | | | China | | | | 13,500 | | | | 1,920,780 | |
a Amazon.com Inc. | | | United States | | | | 2,600 | | | | 4,154,826 | |
Aptiv PLC | | | United States | | | | 15,500 | | | | 1,190,400 | |
NIKE Inc., B | | | United States | | | | 27,000 | | | | 2,026,080 | |
| | | | | | | | | | | | |
| | | | | | | | | | | 9,292,086 | |
| | | | | | | | | | | | |
Consumer Staples 6.3% | | | | | | | | | | | | |
Constellation Brands Inc., A | | | United States | | | | 8,000 | | | | 1,593,840 | |
Estee Lauder Cos. Inc., A | | | United States | | | | 9,400 | | | | 1,291,936 | |
Lamb Weston Holdings Inc. | | | United States | | | | 23,000 | | | | 1,797,680 | |
a Monster Beverage Corp. | | | United States | | | | 25,320 | | | | 1,338,162 | |
| | | | | | | | | | | | |
| | | | | | | | | | | 6,021,618 | |
| | | | | | | | | | | | |
Energy 3.0% | | | | | | | | | | | | |
Cabot Oil & Gas Corp., A | | | United States | | | | 61,140 | | | | 1,481,422 | |
a Concho Resources Inc. | | | United States | | | | 9,700 | | | | 1,349,173 | |
| | | | | | | | | | | | |
| | | | | | | | | | | 2,830,595 | |
| | | | | | | | | | | | |
Financials 8.9% | | | | | | | | | | | | |
BlackRock Inc. | | | United States | | | | 5,200 | | | | 2,139,384 | |
The Charles Schwab Corp. | | | United States | | | | 53,500 | | | | 2,473,840 | |
Intercontinental Exchange Inc. | | | United States | | | | 26,800 | | | | 2,064,672 | |
S&P Global Inc. | | | United States | | | | 9,900 | | | | 1,804,968 | |
| | | | | | | | | | | | |
| | | | | | | | | | | 8,482,864 | |
| | | | | | | | | | | | |
Health Care 15.1% | | | | | | | | | | | | |
a ABIOMED Inc. | | | United States | | | | 4,500 | | | | 1,535,400 | |
AstraZeneca PLC, ADR | | | United Kingdom | | | | 53,400 | | | | 2,070,852 | |
a Illumina Inc. | | | United States | | | | 5,700 | | | | 1,773,555 | |
a Mettler-Toledo International Inc. | | | United States | | | | 3,100 | | | | 1,695,142 | |
Stryker Corp. | | | United States | | | | 11,200 | | | | 1,816,864 | |
Teleflex Inc. | | | United States | | | | 6,950 | | | | 1,673,143 | |
UnitedHealth Group Inc. | | | United States | | | | 9,700 | | | | 2,535,095 | |
a Waters Corp. | | | United States | | | | 7,300 | | | | 1,384,737 | |
| | | | | | | | | | | | |
| | | | | | | | | | | 14,484,788 | |
| | | | | | | | | | | | |
Industrials 13.4% | | | | | | | | | | | | |
3M Co. | | | United States | | | | 10,000 | | | | 1,902,600 | |
BWX Technologies Inc. | | | United States | | | | 22,000 | | | | 1,286,120 | |
FedEx Corp. | | | United States | | | | 7,400 | | | | 1,630,516 | |
Fortive Corp. | | | United States | | | | 29,600 | | | | 2,197,800 | |
Raytheon Co. | | | United States | | | | 12,000 | | | | 2,100,480 | |
Republic Services Inc. | | | United States | | | | 21,200 | | | | 1,540,816 | |
a Verisk Analytics Inc. | | | United States | | | | 18,140 | | | | 2,173,898 | |
| | | | | | | | | | | | |
| | | | | | | | | | | 12,832,230 | |
| | | | | | | | | | | | |
Information Technology 24.6% | | | | | | | | | | | | |
a Adyen NV | | | Netherlands | | | | 400 | | | | 258,651 | |
Amphenol Corp., A | | | United States | | | | 16,700 | | | | 1,494,650 | |
Analog Devices Inc. | | | United States | | | | 31,150 | | | | 2,607,566 | |
| | | | |
| | | |
| franklintempleton.com | | Semiannual Report | | 41 |
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS (UNAUDITED)
Franklin Select U.S. Equity Fund (continued)
| | | | | | | | | | | | |
| | | Country | | | Shares | | | Value | |
Common Stocks (continued) | | | | | | | | | | | | |
Information Technology (continued) | | | | | | | | | | | | |
Apple Inc. | | | United States | | | | 10,500 | | | $ | 2,298,030 | |
Applied Materials Inc. | | | United States | | | | 34,020 | | | | 1,118,578 | |
Cognex Corp. | | | United States | | | | 28,800 | | | | 1,233,792 | |
a InterXion Holding NV | | | Netherlands | | | | 30,900 | | | | 1,819,083 | |
Mastercard Inc., A | | | United States | | | | 13,500 | | | | 2,668,545 | |
Microsoft Corp. | | | United States | | | | 31,400 | | | | 3,353,834 | |
NVIDIA Corp. | | | United States | | | | 6,000 | | | | 1,264,980 | |
a Salesforce.com Inc. | | | United States | | | | 15,000 | | | | 2,058,600 | |
a ServiceNow Inc. | | | United States | | | | 11,300 | | | | 2,045,752 | |
a Tyler Technologies Inc. | | | United States | | | | 6,200 | | | | 1,312,292 | |
| | | | | | | | | | | | |
| | | | | | | | | | | 23,534,353 | |
| | | | | | | | | | | | |
Materials 3.1% | | | | | | | | | | | | |
Albemarle Corp. | | | United States | | | | 10,300 | | | | 1,021,966 | |
Ecolab Inc. | | | United States | | | | 13,000 | | | | 1,990,950 | |
| | | | | | | | | | | | |
| | | | | | | | | | | 3,012,916 | |
| | | | | | | | | | | | |
Real Estate 1.8% | | | | | | | | | | | | |
a SBA Communications Corp., A | | | United States | | | | 10,600 | | | | 1,719,002 | |
| | | | | | | | | | | | |
Utilities 2.4% | | | | | | | | | | | | |
NextEra Energy Inc. | | | United States | | | | 13,500 | | | | 2,328,750 | |
| | | | | | | | | | | | |
Total Common Stocks (Cost $83,979,935) | | | | | | | | | | | 91,127,813 | |
| | | | | | | | | | | | |
| | | |
Short Term Investments (Cost $4,662,257) 4.9% | | | | | | | | | | | | |
| | | |
Money Market Funds 4.9% | | | | | | | | | | | | |
b,c Institutional Fiduciary Trust Money Market Portfolio, 1.83% | | | United States | | | | 4,662,257 | | | | 4,662,257 | |
| | | | | | | | | | | | |
Total Investments (Cost $88,642,192) 100.1% | | | | | | | | | | | 95,790,070 | |
Other Assets, less Liabilities (0.1)% | | | | | | | | | | | (112,281 | ) |
| | | | | | | | | | | | |
Net Assets 100.0% | | | | | | | | | | $ | 95,677,789 | |
| | | | | | | | | | | | |
aNon-income producing.
bSee Note 3(f) regarding investments in affiliated management investment companies.
cThe rate shown is the annualized seven-day effective yield at period end.
| | | | |
| | | |
42 | | Semiannual Report | The accompanying notes are an integral part of these financial statements. | | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
Financial Highlights
Franklin Small Cap Growth Fund
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Six Months Ended
October 31, 2018 (unaudited) | | | Year Ended April 30, | |
| | | 2018 | | | 2017 | | | 2016 | | | 2015 | | | 2014 | |
| | | | | | |
Class A | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | |
Per share operating performance (for a share outstanding throughout the period) | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | |
| Net asset value, beginning of period | | | $23.01 | | | | $19.60 | | | | $16.37 | | | | $18.83 | | | | $18.20 | | | | $14.26 | |
| | | | | | |
Income from investment operationsa: | | | | | | | | | | | | | | | | | | | | | | | | |
Net investment income (loss)b | | | (0.09 | ) | | | (0.13 | ) | | | (0.11 | ) | | | (0.08 | ) | | | (0.12 | ) | | | (0.15 | ) |
Net realized and unrealized gains (losses) | | | 0.80 | | | | 3.96 | | | | 3.34 | | | | (2.03 | ) | | | 1.57 | | | | 4.75 | |
| | | | | | |
Total from investment operations | | | 0.71 | | | | 3.83 | | | | 3.23 | | | | (2.11 | ) | | | 1.45 | | | | 4.60 | |
| | | | | | |
Less distributions from net realized gains | | | — | | | | (0.42 | ) | | | — | | | | (0.35 | ) | | | (0.82 | ) | | | (0.66 | ) |
| | | | | | |
Net asset value, end of period | | | $23.72 | | | | $23.01 | | | | $19.60 | | | | $16.37 | | | | $18.83 | | | | $18.20 | |
| | | | | | |
Total returnc | | | 3.09% | | | | 19.71% | | | | 19.73% | | | | (11.28)% | | | | 8.34% | | | | 32.40% | |
| | | | | | |
Ratios to average net assetsd | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | |
Expenses before waiver and payments by affiliates | | | 1.07% | | | | 1.11% | | | | 1.10% | | | | 1.13% | | | | 1.16% | | | | 1.20% | |
| | | | | | |
Expenses net of waiver and payments by affiliates | | | 1.05% | e | | | 1.10% | e | | | 1.08% | e | | | 1.11% | e | | | 1.16% | f | | | 1.20% | f |
| | | | | | | |
Net investment income (loss) | | | (0.73)% | | | | (0.61)% | | | | (0.61)% | | | | (0.44)% | | | | (0.66)% | | | | (0.85)% | |
| | | | | | |
Supplemental data | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | |
Net assets, end of period (000’s) | | | $677,410 | | | | $665,251 | | | | $719,752 | | | | $792,072 | | | | $1,164,218 | | | | $851,317 | |
| | | | | | |
Portfolio turnover rate | | | 24.92% | | | | 29.82% | | | | 29.93% | | | | 43.99% | | | | 30.15% | | | | 40.35% | |
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.
bBased on average daily shares outstanding.
cTotal return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year.
dRatios are annualized for periods less than one year.
eBenefit of expense reduction rounds to less than 0.01%.
fBenefit of waiver and payments by affiliates and expense reduction rounds to less than 0.01%.
| | | | |
| | | |
| franklintempleton.com | | The accompanying notes are an integral part of these financial statements. | Semiannual Report | | 43 |
FRANKLIN STRATEGIC SERIES
FINANCIAL HIGHLIGHTS
Franklin Small Cap Growth Fund (continued)
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Six Months Ended
October 31, 2018 (unaudited) | | | Year Ended April 30, | |
| | | 2018 | | | 2017 | | | 2016 | | | 2015 | | | 2014 | |
| | | | | | |
Class C | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | |
Per share operating performance
(for a share outstanding throughout the period) | | | | | | | | | | | | | | | | | | | | | | | | |
Net asset value, beginning of period | | | $19.41 | | | | $16.71 | | | | $14.07 | | | | $16.36 | | | | $16.03 | | | | $12.70 | |
| | | | | | |
Income from investment operationsa: | | | | | | | | | | | | | | | | | | | | | | | | |
Net investment income (loss)b | | | (0.16 | ) | | | (0.25 | ) | | | (0.21 | ) | | | (0.18 | ) | | | (0.22 | ) | | | (0.24 | ) |
Net realized and unrealized gains (losses) | | | 0.68 | | | | 3.37 | | | | 2.85 | | | | (1.76 | ) | | | 1.37 | | | | 4.23 | |
| | | | | | |
Total from investment operations | | | 0.52 | | | | 3.12 | | | | 2.64 | | | | (1.94 | ) | | | 1.15 | | | | 3.99 | |
| | | | | | |
Less distributions from net realized gains | | | — | | | | (0.42 | ) | | | — | | | | (0.35 | ) | | | (0.82 | ) | | | (0.66 | ) |
| | | | | | |
Net asset value, end of period | | | $19.93 | | | | $19.41 | | | | $16.71 | | | | $14.07 | | | | $16.36 | | | | $16.03 | |
| | | | | | |
Total returnc | | | 2.68% | | | | 18.79% | | | | 18.76% | | | | (11.95 | )% | | | 7.58% | | | | 31.57% | |
| | | | | | |
Ratios to average net assetsd | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | |
Expenses before waiver and payments by affiliates | | | 1.82% | | | | 1.86% | | | | 1.85% | | | | 1.88% | | | | 1.87% | | | | 1.90% | |
| | | | | | |
Expenses net of waiver and payments by affiliates | | | 1.80% | e | | | 1.85% | e | | | 1.83% | e | | | 1.86% | e | | | 1.87% | f | | | 1.90% | f |
| | | | | | | |
Net investment income (loss) | | | (1.48)% | | | | (1.36)% | | | | (1.36)% | | | | (1.19)% | | | | (1.37)% | | | | (1.55)% | |
| | | | | | |
Supplemental data | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | |
Net assets, end of period (000’s) | | | $92,179 | | | | $132,116 | | | | $142,539 | | | | $157,175 | | | | $225,105 | | | | $187,271 | |
| | | | | | |
Portfolio turnover rate | | | 24.92% | | | | 29.82% | | | | 29.93% | | | | 43.99% | | | | 30.15% | | | | 40.35% | |
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.
bBased on average daily shares outstanding.
cTotal return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year.
dRatios are annualized for periods less than one year.
eBenefit of expense reduction rounds to less than 0.01%.
fBenefit of waiver and payments by affiliates and expense reduction rounds to less than 0.01%.
| | | | |
| | | |
44 | | Semiannual Report | The accompanying notes are an integral part of these financial statements. | | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
FINANCIAL HIGHLIGHTS
Franklin Small Cap Growth Fund (continued)
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Six Months Ended October 31, 2018 (unaudited) | | | | | | | | | | | | | | | | |
| | | Year Ended April 30, | |
| | | 2018 | | | 2017 | | | 2016 | | | 2015 | | | 2014 | |
| | | | | | |
Class R | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | |
Per share operating performance
(for a share outstanding throughout the period) | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | |
Net asset value, beginning of period | | | $21.93 | | | | $18.74 | | | | $15.70 | | | | $18.11 | | | | $17.57 | | | | $13.81 | |
| | | | | | |
Income from investment operationsa: | | | | | | | | | | | | | | | | | | | | | | | | |
Net investment income (loss)b | | | (0.12 | ) | | | (0.17 | ) | | | (0.15 | ) | | | (0.12 | ) | | | (0.16 | ) | | | (0.18 | ) |
Net realized and unrealized gains (losses) | | | 0.77 | | | | 3.78 | | | | 3.19 | | | | (1.94 | ) | | | 1.52 | | | | 4.60 | |
| | | | | | |
Total from investment operations | | | 0.65 | | | | 3.61 | | | | 3.04 | | | | (2.06 | ) | | | 1.36 | | | | 4.42 | |
| | | | | | |
Less distributions from net realized gains | | | — | | | | (0.42 | ) | | | — | | | | (0.35 | ) | | | (0.82 | ) | | | (0.66 | ) |
| | | | | | |
Net asset value, end of period | | | $22.58 | | | | $21.93 | | | | $18.74 | | | | $15.70 | | | | $18.11 | | | | $17.57 | |
| | | | | | |
Total returnc | | | 2.96% | | | | 19.37% | | | | 19.36% | | | | (11.46)% | | | | 8.12% | | | | 32.15% | |
| | | | | | |
Ratios to average net assetsd | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | |
Expenses before waiver and payments by affiliates | | | 1.32% | | | | 1.36% | | | | 1.35% | | | | 1.38% | | | | 1.37% | | | | 1.40% | |
| | | | | | |
Expenses net of waiver and payments by affiliates | | | 1.30% | e | | | 1.35% | e | | | 1.33% | e | | | 1.36% | e | | | 1.37% | f | | | 1.40% | f |
| | | | | | | |
Net investment income (loss) | | | (0.98)% | | | | (0.86)% | | | | (0.86)% | | | | (0.69)% | | | | (0.87)% | | | | (1.05)% | |
| | | | | | |
Supplemental data | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | |
Net assets, end of period (000’s) | | | $71,956 | | | | $71,398 | | | | $79,995 | | | | $79,929 | | | | $92,455 | | | | $51,190 | |
| | | | | | |
Portfolio turnover rate | | | 24.92% | | | | 29.82% | | | | 29.93% | | | | 43.99% | | | | 30.15% | | | | 40.35% | |
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.
bBased on average daily shares outstanding.
cTotal return is not annualized for periods less than one year.
dRatios are annualized for periods less than one year.
eBenefit of expense reduction rounds to less than 0.01%.
fBenefit of waiver and payments by affiliates and expense reduction rounds to less than 0.01%.
| | | | |
| | | |
| franklintempleton.com | | The accompanying notes are an integral part of these financial statements. | Semiannual Report | | 45 |
FRANKLIN STRATEGIC SERIES
FINANCIAL HIGHLIGHTS
Franklin Small Cap Growth Fund (continued)
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Six Months Ended October 31, 2018 (unaudited) | | | | | | | | | | | | | | | | |
| | | Year Ended April 30, | |
| | | 2018 | | | 2017 | | | 2016 | | | 2015 | | | 2014a | |
| | | | | | |
Class R6 | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | |
Per share operating performance
(for a share outstanding throughout the period) | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | |
Net asset value, beginning of period | | | $24.88 | | | | $21.06 | | | | $17.52 | | | | $20.02 | | | | $19.21 | | | | $14.64 | |
| | | | | | |
Income from investment operationsb: | | | | | | | | | | | | | | | | | | | | | | | | |
Net investment income (loss)c | | | (0.04 | ) | | | (0.03 | ) | | | (0.03 | ) | | | 0.01 | | | | (0.03 | ) | | | (0.06 | ) |
Net realized and unrealized gains (losses) | | | 0.86 | | | | 4.27 | | | | 3.57 | | | | (2.16 | ) | | | 1.66 | | | | 5.29 | |
| | | | | | |
Total from investment operations | | | 0.82 | | | | 4.24 | | | | 3.54 | | | | (2.15 | ) | | | 1.63 | | | | 5.23 | |
| | | | | | |
Less distributions from net realized gains | | | — | | | | (0.42 | ) | | | — | | | | (0.35 | ) | | | (0.82 | ) | | | (0.66 | ) |
| | | | | | |
Net asset value, end of period | | | $25.70 | | | | $24.88 | | | | $21.06 | | | | $17.52 | | | | $20.02 | | | | $19.21 | |
| | | | | | |
Total returnd | | | 3.30% | | | | 20.23% | | | | 20.21% | | | | (10.81)% | | | | 8.91% | | | | 35.80% | |
| | | | | | |
Ratios to average net assetse | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | |
Expenses before waiver and payments by affiliates | | | 0.67% | | | | 0.65% | | | | 0.63% | | | | 0.63% | | | | 0.66% | | | | 0.72% | |
| | | | | | |
Expenses net of waiver and payments by affiliates | | | 0.63% | f | | | 0.63% | f | | | 0.61% | f | | | 0.61% | f | | | 0.66% | g | | | 0.72% | g |
| | | | | | | |
Net investment income (loss) | | | (0.31)% | | | | (0.14)% | | | | (0.14)% | | | | 0.06% | | | | (0.16)% | | | | (0.37)% | |
| | | | | | |
Supplemental data | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | |
Net assets, end of period (000’s) | | | $949,815 | | | | $935,509 | | | | $858,972 | | | | $846,724 | | | | $844,293 | | | | $87,777 | |
| | | | | | |
Portfolio turnover rate | | | 24.92% | | | | 29.82% | | | | 29.93% | | | | 43.99% | | | | 30.15% | | | | 40.35% | |
aFor the year May 1, 2013 (effective date) to April 30, 2014.
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.
cBased on average daily shares outstanding.
dTotal return is not annualized for periods less than one year.
eRatios are annualized for periods less than one year.
fBenefit of expense reduction rounds to less than 0.01%.
gBenefit of waiver and payments by affiliates and expense reduction rounds to less than 0.01%.
| | | | |
| | | |
46 | | Semiannual Report | The accompanying notes are an integral part of these financial statements. | | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
FINANCIAL HIGHLIGHTS
Franklin Small Cap Growth Fund (continued)
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Six Months Ended October 31, 2018 (unaudited) | | | | | | | | | | | | | | | | |
| | | Year Ended April 30, | |
| | | 2018 | | | 2017 | | | 2016 | | | 2015 | | | 2014 | |
| | | | | | |
Advisor Class | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | |
Per share operating performance
(for a share outstanding throughout the period) | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | |
Net asset value, beginning of period | | | $24.61 | | | | $20.88 | | | | $17.41 | | | | $19.94 | | | | $19.17 | | | | $14.94 | |
| | | | | | |
Income from investment operationsa: | | | | | | | | | | | | | | | | | | | | | | | | |
Net investment income (loss)b | | | (0.07 | ) | | | (0.08 | ) | | | (0.07 | ) | | | (0.04 | ) | | | (0.07 | ) | | | (0.11 | ) |
Net realized and unrealized gains (losses) | | | 0.86 | | | | 4.23 | | | | 3.54 | | | | (2.14 | ) | | | 1.66 | | | | 5.00 | |
| | | | | | |
Total from investment operations | | | 0.79 | | | | 4.15 | | | | 3.47 | | | | (2.18 | ) | | | 1.59 | | | | 4.89 | |
| | | | | | |
Less distributions from net realized gains. | | | — | | | | (0.42 | ) | | | — | | | | (0.35 | ) | | | (0.82 | ) | | | (0.66 | ) |
| | | | | | |
Net asset value, end of period | | | $25.40 | | | | $24.61 | | | | $20.88 | | | | $17.41 | | | | $19.94 | | | | $19.17 | |
| | | | | | |
Total returnc | | | 3.21% | | | | 19.97% | | | | 19.93% | | | | (11.06)% | | | | 8.65% | | | | 32.87% | |
| | | | | | |
Ratios to average net assetsd | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | |
Expenses before waiver and payments by affiliates | | | 0.82% | | | | 0.86% | | | | 0.85% | | | | 0.88% | | | | 0.87% | | | | 0.90% | |
| | | | | | |
Expenses net of waiver and payments by affiliates | | | 0.80% | e | | | 0.85% | e | | | 0.83% | e | | | 0.86% | e | | | 0.87% | f | | | 0.90% | f |
| | | | | | | |
Net investment income (loss) | | | (0.48)% | | | | (0.36)% | | | | (0.36)% | | | | (0.19)% | | | | (0.37)% | | | | (0.55)% | |
| | | | | | |
Supplemental data | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | |
Net assets, end of period (000’s) | | | $716,229 | | | | $713,135 | | | | $805,661 | | | | $850,975 | | | | $1,077,822 | | | | $427,406 | |
| | | | | | |
Portfolio turnover rate | | | 24.92% | | | | 29.82% | | | | 29.93% | | | | 43.99% | | | | 30.15% | | | | 40.35% | |
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.
bBased on average daily shares outstanding.
cTotal return is not annualized for periods less than one year.
dRatios are annualized for periods less than one year.
eBenefit of expense reduction rounds to less than 0.01%.
fBenefit of waiver and payments by affiliates and expense reduction rounds to less than 0.01%.
| | | | |
| | | |
| franklintempleton.com | | The accompanying notes are an integral part of these financial statements. | Semiannual Report | | 47 |
FRANKLIN STRATEGIC SERIES
Statement of Investments, October 31, 2018 (unaudited)
Franklin Small Cap Growth Fund
| | | | | | | | |
| | | Shares | | | Value | |
Common Stocks 96.1% | | | | | | | | |
Communication Services 2.0% | | | | | | | | |
a Eventbrite Inc., A | | | 229,200 | | | $ | 6,486,360 | |
a IMAX Corp. | | | 964,800 | | | | 18,678,528 | |
a Yelp Inc. | | | 611,400 | | | | 26,180,148 | |
| | | | | | | 51,345,036 | |
Consumer Discretionary 13.4% | | | | | | | | |
a At Home Group Inc. | | | 794,200 | | | | 21,713,428 | |
a Boot Barn Holdings Inc. | | | 1,060,435 | | | | 26,171,536 | |
Dave & Buster’s Entertainment Inc. | | | 391,500 | | | | 23,313,824 | |
a,b,c DraftKings Inc. | | | 9,905,685 | | | | 22,601,167 | |
a,d Duluth Holdings Inc. | | | 1,052,942 | | | | 32,356,908 | |
a Five Below Inc. | | | 188,300 | | | | 21,432,306 | |
a Grand Canyon Education Inc. | | | 283,300 | | | | 35,327,510 | |
a Laureate Education Inc., A | | | 69,355 | | | | 1,032,696 | |
Lithia Motors Inc. | | | 271,100 | | | | 24,149,588 | |
a M/I Homes Inc. | | | 1,160,776 | | | | 28,055,956 | |
a,d RH | | | 221,000 | | | | 25,571,910 | |
a,e Sportsman’s Warehouse Holdings Inc. | | | 3,588,200 | | | | 18,048,646 | |
Steven Madden Ltd. | | | 661,150 | | | | 20,674,160 | |
Tenneco Inc., A | | | 359,000 | | | | 12,360,370 | |
Wingstop Inc. | | | 383,329 | | | | 24,004,062 | |
| | | | | | | 336,814,067 | |
Consumer Staples 1.7% | | | | | | | | |
a Hostess Brands Inc., A | | | 1,485,500 | | | | 15,449,200 | |
a The Simply Good Foods Co. | | | 754,600 | | | | 14,307,216 | |
a Smart & Final Stores Inc. | | | 2,454,324 | | | | 12,394,336 | |
| | | | | | | 42,150,752 | |
Energy 2.7% | | | | | | | | |
a Callon Petroleum Co. | | | 2,567,400 | | | | 25,596,978 | |
d Liberty Oilfield Services Inc., A | | | 1,376,500 | | | | 26,125,970 | |
a Ring Energy Inc. | | | 2,435,600 | | | | 17,365,828 | |
| | | | | | | 69,088,776 | |
Financials 8.3% | | | | | | | | |
Chemical Financial Corp. | | | 542,923 | | | | 25,441,372 | |
Evercore Inc. | | | 207,200 | | | | 16,926,168 | |
a FGL Holdings., A | | | 1,464,200 | | | | 11,567,180 | |
a Focus Financial Partners Inc. | | | 75,700 | | | | 2,891,740 | |
Houlihan Lokey Inc. | | | 475,200 | | | | 19,568,736 | |
LegacyTexas Financial Group Inc. | | | 633,100 | | | | 24,393,343 | |
MB Financial Inc. | | | 548,300 | | | | 24,339,037 | |
a Metropolitan Bank Holding Corp. | | | 318,661 | | | | 11,745,845 | |
Pinnacle Financial Partners Inc. | | | 534,404 | | | | 27,949,329 | |
a PRA Group Inc. | | | 506,500 | | | | 15,620,460 | |
a Western Alliance Bancorp | | | 570,300 | | | | 27,511,272 | |
| | | | | | | 207,954,482 | |
Health Care 22.3% | | | | | | | | |
a Aclaris Therapeutics Inc. | | | 1,259,049 | | | | 14,970,093 | |
a Allogene Therapeutics Inc. | | | 360,700 | | | | 8,660,407 | |
a American Renal Associates Holdings Inc. | | | 1,087,100 | | | | 20,970,159 | |
a Amicus Therapeutics Inc. | | | 1,198,900 | | | | 13,403,702 | |
| | | | |
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48 | | Semiannual Report | | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS (UNAUDITED)
Franklin Small Cap Growth Fund (continued)
| | | | | | | | |
| | | Shares | | | Value | |
Common Stocks (continued) | | | | | | | | |
Health Care (continued) | | | | | | | | |
a,e Aratana Therapeutics Inc. | | | 2,466,919 | | | $ | 14,653,499 | |
a Argenx SE, ADR (Netherlands) | | | 125,200 | | | | 10,017,252 | |
a Array BioPharma Inc. | | | 1,507,500 | | | | 24,421,500 | |
a Ascendis Pharma AS, ADR (Denmark) | | | 138,900 | | | | 8,929,881 | |
a Collegium Pharmaceutical Inc. | | | 698,800 | | | | 11,215,740 | |
a DexCom Inc. | | | 122,400 | | | | 16,251,048 | |
a Dynavax Technologies Corp. | | | 1,116,300 | | | | 11,040,207 | |
a,d Foamix Pharmaceuticals Ltd. (Israel) | | | 586,080 | | | | 2,549,448 | |
a G1 Therapeutics Inc. | | | 148,800 | | | | 5,953,488 | |
a Global Blood Therapeutics Inc. | | | 283,800 | | | | 9,958,542 | |
a HealthEquity Inc. | | | 159,716 | | | | 14,661,929 | |
a Heron Therapeutics Inc. | | | 944,388 | | | | 26,216,211 | |
a Inspire Medical Systems Inc. | | | 218,304 | | | | 8,749,624 | |
a Integer Holdings Corp. | | | 466,900 | | | | 34,770,043 | |
a Iovance Biotherapeutics Inc. | | | 1,909,200 | | | | 17,335,536 | |
a iRhythm Technologies Inc. | | | 391,097 | | | | 30,216,154 | |
a Karyopharm Therapeutics Inc. | | | 547,757 | | | | 5,773,359 | |
a Loxo Oncology Inc. | | | 69,658 | | | | 10,633,990 | |
a Neogen Corp. | | | 285,666 | | | | 17,345,639 | |
a NeoGenomics Inc. | | | 1,323,000 | | | | 24,396,120 | |
a Neos Therapeutics Inc. | | | 646,938 | | | | 2,024,916 | |
a Neuronetics Inc. | | | 292,300 | | | | 7,447,804 | |
a Nevro Corp. | | | 628,600 | | | | 30,650,536 | |
a Odonate Therapeutics Inc. | | | 383,200 | | | | 5,556,400 | |
a Penumbra Inc. | | | 160,700 | | | | 21,855,200 | |
a,e Pfenex Inc. | | | 1,787,331 | | | | 7,095,704 | |
a PTC Therapeutics Inc. | | | 559,400 | | | | 21,548,088 | |
a,d RA Medical Systems Inc. | | | 219,200 | | | | 2,345,440 | |
a Reata Pharmaceuticals Inc. | | | 295,374 | | | | 17,406,390 | |
a Revance Therapeutics Inc. | | | 871,492 | | | | 18,972,381 | |
a Sage Therapeutics Inc. | | | 135,700 | | | | 17,461,876 | |
a TG Therapeutics Inc. | | | 247,875 | | | | 1,127,831 | |
a,d TherapeuticsMD Inc. | | | 2,797,900 | | | | 13,681,731 | |
a Tivity Health Inc. | | | 818,378 | | | | 28,160,387 | |
| | | | | | | | |
| | | | | | | 558,428,255 | |
| | | | | | | | |
Industrials 17.8% | | | | | | | | |
Allegiant Travel Co. | | | 275,348 | | | | 31,428,221 | |
Altra Industrial Motion Corp. | | | 677,600 | | | | 21,866,152 | |
a Astronics Corp. | | | 467,019 | | | | 13,618,274 | |
a Astronics Corp., B | | | 70,052 | | | | 2,038,513 | |
a Beacon Roofing Supply Inc. | | | 830,000 | | | | 23,165,300 | |
Cubic Corp. | | | 536,300 | | | | 35,186,643 | |
Granite Construction Inc. | | | 657,243 | | | | 30,049,150 | |
Healthcare Services Group Inc. | | | 712,500 | | | | 28,920,375 | |
Kennametal Inc. | | | 924,700 | | | | 32,780,615 | |
a,e The KeyW Holding Corp. | | | 3,430,282 | | | | 26,859,108 | |
Lindsay Corp. | | | 64,721 | | | | 6,188,622 | |
a Mercury Systems Inc. | | | 950,916 | | | | 44,559,924 | |
Mobile Mini Inc. | | | 432,400 | | | | 17,780,288 | |
a SAIA Inc. | | | 343,824 | | | | 21,612,777 | |
a Spirit Airlines Inc. | | | 825,700 | | | | 42,853,830 | |
a Univar Inc. | | | 1,397,732 | | | | 34,412,162 | |
| | | | |
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| franklintempleton.com | | Semiannual Report | | 49 |
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS (UNAUDITED)
Franklin Small Cap Growth Fund (continued)
| | | | | | | | |
| | | Shares | | | Value | |
Common Stocks (continued) | | | | | | | | |
Industrials (continued) | | | | | | | | |
US Ecology Inc. | | | 490,765 | | | $ | 34,319,196 | |
| | | | | | | | |
| | | | | | | 447,639,150 | |
| | | | | | | | |
Information Technology 25.5% | | | | | | | | |
a 2U Inc. | | | 839,472 | | | | 52,811,184 | |
a Alarm.com Holdings Inc. | | | 407,824 | | | | 18,140,012 | |
a Alteryx Inc. | | | 438,000 | | | | 23,209,620 | |
a Anaplan Inc. | | | 25,200 | | | | 579,600 | |
a Elastic NV | | | 127,534 | | | | 8,672,312 | |
a Envestnet Inc. | | | 457,822 | | | | 23,815,900 | |
a GreenSky Inc., A | | | 1,644,000 | | | | 21,667,920 | |
a Guidewire Software Inc. | | | 204,900 | | | | 18,229,953 | |
a Hubspot Inc. | | | 143,829 | | | | 19,510,404 | |
a Inphi Corp. | | | 575,900 | | | | 18,428,800 | |
a InterXion Holding NV (Netherlands) | | | 512,795 | | | | 30,188,242 | |
a Lattice Semiconductor Corp. | | | 2,544,700 | | | | 15,293,647 | |
a,b,c LegalZoom.com Inc. | | | 357,820 | | | | 14,999,814 | |
ManTech International Corp., A | | | 515,000 | | | | 29,499,200 | |
Monolithic Power Systems | | | 216,700 | | | | 25,596,604 | |
a Nanometrics Inc. | | | 510,500 | | | | 16,366,630 | |
a Paylocity Holding Corp. | | | 342,932 | | | | 22,561,496 | |
a Pluralsight Inc., A | | | 1,127,000 | | | | 25,256,070 | |
a Pure Storage Inc., A | | | 813,900 | | | | 16,424,502 | |
a Q2 Holdings Inc. | | | 442,600 | | | | 23,559,598 | |
a RealPage Inc. | | | 335,700 | | | | 17,792,100 | |
a Twilio Inc., A | | | 434,302 | | | | 32,668,196 | |
a USA Technologies Inc. | | | 646,500 | | | | 3,749,700 | |
Versum Materials Inc. | | | 796,500 | | | | 25,137,540 | |
a ViaSat Inc. | | | 492,183 | | | | 31,381,588 | |
a Viavi Solutions Inc. | | | 1,470,000 | | | | 16,949,100 | |
a WEX Inc. | | | 76,300 | | | | 13,425,748 | |
a Wix.com Ltd. (Israel) | | | 263,500 | | | | 25,651,725 | |
a Zendesk Inc. | | | 477,314 | | | | 26,237,951 | |
a Zscaler Inc. | | | 582,000 | | | | 21,120,780 | |
| | | | | | | | |
| | | | | | | 638,925,936 | |
| | | | | | | | |
Materials 1.2% | | | | | | | | |
a Ingevity Corp. | | | 320,600 | | | | 29,200,248 | |
| | | | | | | | |
Real Estate 1.2% | | | | | | | | |
Coresite Realty Corp. | | | 315,700 | | | | 29,631,602 | |
| | | | | | | | |
Total Common Stocks (Cost $1,920,120,281) | | | | | | | 2,411,178,304 | |
| | | | | | | | |
| | |
Preferred Stocks 3.1% | | | | | | | | |
Consumer Discretionary 1.4% | | | | | | | | |
a,b,c Proterra Inc., pfd., 5, 144A | | | 1,787,047 | | | | 14,040,534 | |
a,b,c Proterra Inc., pfd., 6, 144A | | | 1,310,834 | | | | 10,299,006 | |
a,b,c Proterra Inc., pfd., 7 | | | 536,367 | | | | 4,214,147 | |
a,b,c Tula Technology Inc., E | | | 3,611,111 | | | | 6,662,886 | |
| | | | | | | | |
| | | | | | | 35,216,573 | |
| | | | | | | | |
Financials 0.6% | | | | | | | | |
a,b,c Peloton Interactive Inc., pfd., F | | | 1,038,769 | | | | 15,000,011 | |
| | | | | | | | |
| | | | |
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50 | | Semiannual Report | | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS (UNAUDITED)
Franklin Small Cap Growth Fund (continued)
| | | | | | | | |
| | | Shares | | | Value | |
Preferred Stocks (continued) | | | | | | | | |
Industrials 0.4% | | | | | | | | |
a,b,c,e Optoro Inc., pfd., E | | | 508,130 | | | $ | 9,999,999 | |
| | | | | | | | |
Information Technology 0.7% | | | | | | | | |
a,b,c Smule Inc., pfd., G, 144A | | | 1,542,673 | | | | 13,412,075 | |
a,b,c Smule Inc., pfd., H, 144A | | | 352,675 | | | | 3,245,645 | |
| | | | | | | | |
| | | | | | | 16,657,720 | |
| | | | | | | | |
Total Preferred Stocks (Cost $65,362,396) | | | | | | | 76,874,303 | |
| | | | | | | | |
Total Investments before Short Term Investments (Cost $1,985,482,677) | | | | | | | 2,488,052,607 | |
| | | | | | | | |
| | |
Short Term Investments 3.2% | | | | | | | | |
| | |
Money Market Funds (Cost $11,371,636) 0.5% | | | | | | | | |
f,g Institutional Fiduciary Trust Money Market Portfolio, 1.83% | | | 11,371,636 | | | | 11,371,636 | |
| | | | | | | | |
h Investments from Cash Collateral Received for Loaned Securities (Cost $67,585,075) 2.7% | | | | | | | | |
Money Market Funds 2.7% | | | | | | | | |
f,g Institutional Fiduciary Trust Money Market Portfolio, 1.83% | | | 67,585,075 | | | | 67,585,075 | |
| | | | | | | | |
Total Investments (Cost $2,064,439,388) 102.4% | | | | | | | 2,567,009,318 | |
Other Assets, less Liabilities (2.4)% | | | | | | | (59,421,137 | ) |
| | | | | | | | |
Net Assets 100.0% | | | | | | $ | 2,507,588,181 | |
| | | | | | | | |
aNon-income producing.
bFair valued using significant unobservable inputs. See Note 10 regarding fair value measurements.
cSee Note 7 regarding restricted securities.
dA portion or all of the security is on loan at October 31, 2018. See Note 1(c).
eSee Note 8 regarding holdings of 5% voting securities.
fSee Note 3(f) regarding investments in affiliated management investment companies.
gThe rate shown is the annualized seven-day effective yield at period end.
hSee Note 1(c) regarding securities on loan.
| | | | |
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| franklintempleton.com | | The accompanying notes are an integral part of these financial statements. | Semiannual Report | | 51 |
FRANKLIN STRATEGIC SERIES
Financial Highlights
Franklin Small-Mid Cap Growth Fund
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Six Months Ended October 31, 2018
(unaudited) | | | Year Ended April 30, | |
| | | 2018 | | | 2017 | | | 2016 | | | 2015 | | | 2014 | |
| | | | | | |
Class A | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | |
Per share operating performance
| | | | | | | | | | | | | | | | | | | | | | | | |
(for a share outstanding throughout the period) | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | |
Net asset value, beginning of period | | | $36.07 | | | | $34.35 | | | | $31.84 | | | | $38.38 | | | | $40.42 | | | | $38.01 | |
| |
Income from investment operationsa: | | | | |
Net investment income (loss)b | | | (0.05 | ) | | | (0.15 | ) | | | (0.11 | ) | | | (0.03 | )c | | | (0.14 | ) | | | (0.20 | ) |
Net realized and unrealized gains (losses) | | | 0.12 | | | | 4.97 | | | | 4.73 | | | | (3.37 | ) | | | 5.71 | | | | 8.39 | |
| | | | | | |
Total from investment operations | | | 0.07 | | | | 4.82 | | | | 4.62 | | | | (3.40 | ) | | | 5.57 | | | | 8.19 | |
| | | | | | |
Less distributions from net realized gains | | | — | | | | (3.10 | ) | | | (2.11 | ) | | | (3.14 | ) | | | (7.61 | ) | | | (5.78 | ) |
| | | | | | |
Net asset value, end of period | | | $36.14 | | | | $36.07 | | | | $34.35 | | | | $31.84 | | | | $38.38 | | | | $40.42 | |
| | | | | | |
Total returnd | | | 0.19% | | | | 14.28% | | | | 15.01% | | | | (9.02)% | | | | 15.78% | | | | 21.99% | |
| | | | | | |
Ratios to average net assetse | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | |
Expenses before waiver and payments by affiliates | | | 0.87% | | | | 1.02% | | | | 0.95% | | | | 0.96% | | | | 0.94% | | | | 0.96% | |
| | | | | | |
Expenses net of waiver and payments by affiliates | | | 0.86%f | | | | 1.00%f | | | | 0.94% | f | | | 0.95% | f | | | 0.94% | g | | | 0.96% | f,g |
| | | | | | | |
Net investment income (loss) | | | (0.26)% | | | | (0.41)% | | | | (0.34)% | | | | (0.08)% | c | | | (0.35)% | | | | (0.48)% | |
| | | | | | |
Supplemental data | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | |
Net assets, end of period (000’s) | | | $2,403,214 | | | | $2,262,471 | | | | $2,303,113 | | | | $2,231,822 | | | | $2,535,853 | | | | $2,371,448 | |
| | | | | | |
Portfolio turnover rate | | | 28.30% | | | | 38.35% | | | | 35.46% | | | | 38.72% | | | | 47.98% | | | | 40.82% | |
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.
bBased on average daily shares outstanding.
cNet investment income per share includes approximately $0.11 per share related to income received in the form of special dividends in connection with certain Fund holdings. Excluding this amount, the ratio of net investment income to average net assets would have been (0.38)%.
dTotal return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year.
eRatios are annualized for periods less than one year.
fBenefit of expense reduction rounds to less than 0.01%.
gBenefit of waiver and payments by affiliates rounds to less than 0.01%.
| | | | |
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52 | | Semiannual Report | The accompanying notes are an integral part of these financial statements. | | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
FINANCIAL HIGHLIGHTS
Franklin Small-Mid Cap Growth Fund (continued)
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Six Months Ended October 31, 2018
(unaudited) | | | Year Ended April 30, | |
| | | 2018 | | | 2017 | | | 2016 | | | 2015 | | | 2014 | |
| | | | | | |
Class C | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | |
Per share operating performance | | | | | | | | | | | | | | | | | | | | | | | | |
(for a share outstanding throughout the period) | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | |
Net asset value, beginning of period | | | $25.84 | | | | $25.59 | | | | $24.40 | | | | $30.43 | | | | $33.78 | | | | $32.80 | |
| |
Income from investment operationsa: | | | | |
Net investment income (loss)b | | | (0.14 | ) | | | (0.31 | ) | | | (0.27 | ) | | | (0.23 | )c | | | (0.36 | ) | | | (0.43 | ) |
Net realized and unrealized gains (losses) | | | 0.09 | | | | 3.66 | | | | 3.57 | | | | (2.66 | ) | | | 4.62 | | | | 7.19 | |
| | | | | | |
Total from investment operations | | | (0.05 | ) | | | 3.35 | | | | 3.30 | | | | (2.89 | ) | | | 4.26 | | | | 6.76 | |
| | | | | | |
Less distributions from net realized gains | | | — | | | | (3.10 | ) | | | (2.11 | ) | | | (3.14 | ) | | | (7.61 | ) | | | (5.78 | ) |
| | | | | | |
Net asset value, end of period | | | $25.79 | | | | $25.84 | | | | $25.59 | | | | $24.40 | | | | $30.43 | | | | $33.78 | |
| | | | | | |
Total returnd | | | (0.19)% | | | | 13.39% | | | | 14.15% | | | | (9.72)% | | | | 14.96% | | | | 21.04% | |
| | | | | | |
Ratios to average net assetse | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | |
Expenses before waiver and payments by affiliates | | | 1.62% | | | | 1.77% | | | | 1.70% | | | | 1.71% | | | | 1.69% | | | | 1.71% | |
| | | | | | |
Expenses net of waiver and payments by affiliates | | | 1.61% | f | | | 1.75% | f | | | 1.69% | f | | | 1.70% | f | | | 1.69% | g | | | 1.71% | f,g |
| | | | | | | |
Net investment income (loss) | | | (1.01)% | | | | (1.16)% | | | | (1.09)% | | | | (0.83)% | c | | | (1.10)% | | | | (1.23)% | |
| | | | | | |
Supplemental data | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | |
Net assets, end of period (000’s) | | | $165,090 | | | | $334,769 | | | | $371,262 | | | | $377,024 | | | | $448,722 | | | | $404,923 | |
| | | | | | |
Portfolio turnover rate | | | 28.30% | | | | 38.35% | | | | 35.46% | | | | 38.72% | | | | 47.98% | | | | 40.82% | |
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.
bBased on average daily shares outstanding.
cNet investment income per share includes approximately $0.11 per share related to income received in the form of special dividends in connection with certain Fund holdings. Excluding this amount, the ratio of net investment income to average net assets would have been (1.13)%.
dTotal return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. eRatios are annualized for periods less than one year.
fBenefit of expense reduction rounds to less than 0.01%.
gBenefit of waiver and payments by affiliates rounds to less than 0.01%.
| | | | |
| | | |
| franklintempleton.com | | The accompanying notes are an integral part of these financial statements. | Semiannual��Report | | 53 |
FRANKLIN STRATEGIC SERIES
FINANCIAL HIGHLIGHTS
Franklin Small-Mid Cap Growth Fund (continued)
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Six Months Ended
October 31, 2018 (unaudited) | | | Year Ended April 30, | |
| | | 2018 | | | 2017 | | | 2016 | | | 2015 | | | 2014 | |
| | | | | | |
Class R | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | |
Per share operating performance
(for a share outstanding throughout the period) | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | |
Net asset value, beginning of period | | | $33.15 | | | | $31.87 | | | | $29.75 | | | | $36.18 | | | | $38.61 | | | | $36.61 | |
| |
Income from investment operationsa: | | | | |
Net investment income (loss)b | | | (0.09 | ) | | | (0.22 | ) | | | (0.18 | ) | | | (0.11 | )c | | | (0.23 | ) | | | (0.29 | ) |
Net realized and unrealized gains (losses) | | | 0.11 | | | | 4.60 | | | | 4.41 | | | | (3.18 | ) | | | 5.41 | | | | 8.07 | |
| | | | | | |
Total from investment operations | | | 0.02 | | | | 4.38 | | | | 4.23 | | | | (3.29 | ) | | | 5.18 | | | | 7.78 | |
| | | | | | |
Less distributions from net realized gains | | | — | | | | (3.10 | ) | | | (2.11 | ) | | | (3.14 | ) | | | (7.61 | ) | | | (5.78 | ) |
| | | | | | |
Net asset value, end of period | | | $33.17 | | | | $33.15 | | | | $31.87 | | | | $29.75 | | | | $36.18 | | | | $38.61 | |
| | | | | | |
Total returnd | | | 0.06% | | | | 14.00% | | | | 14.70% | | | | (9.24 | )% | | | 15.52% | | | | 21.66% | |
| | | | | | |
Ratios to average net assetse | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | |
Expenses before waiver and payments by affiliates | | | 1.11% | | | | 1.26% | | | | 1.19% | | | | 1.21% | | | | 1.19% | | | | 1.21% | |
| | | | | | |
Expenses net of waiver and payments by affiliates | | | 1.10% | f | | | 1.24% | f | | | 1.18% | f | | | 1.20% | f | | | 1.19% | g | | | 1.21% | f,g |
| | | | | | | |
Net investment income (loss) | | | (0.50)% | | | | (0.65)% | | | | (0.58)% | | | | (0.33)% | c | | | (0.60)% | | | | (0.73)% | |
| | | | | | |
Supplemental data | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | |
Net assets, end of period (000’s) | | | $69,131 | | | | $70,692 | | | | $81,864 | | | | $86,989 | | | | $96,593 | | | | $85,921 | |
| | | | | | |
Portfolio turnover rate | | | 28.30% | | | | 38.35% | | | | 35.46% | | | | 38.72% | | | | 47.98% | | | | 40.82% | |
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.
bBased on average daily shares outstanding.
cNet investment income per share includes approximately $0.11 per share related to income received in the form of special dividends in connection with certain Fund holdings. Excluding this amount, the ratio of net investment income to average net assets would have been (0.63)%.
dTotal return is not annualized for periods less than one year.
eRatios are annualized for periods less than one year.
fBenefit of expense reduction rounds to less than 0.01%.
gBenefit of waiver and payments by affiliates rounds to less than 0.01%.
| | | | |
| | | |
54 | | Semiannual Report | The accompanying notes are an integral part of these financial statements. | | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
FINANCIAL HIGHLIGHTS
Franklin Small-Mid Cap Growth Fund (continued)
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Six Months Ended
October 31, 2018 (unaudited) | | | Year Ended April 30, | |
| | | 2018 | | | 2017 | | | 2016 | | | 2015 | | | 2014a | |
| | | | | | |
Class R6 | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | |
Per share operating performance | | | | | | | | | | | | | | | | | | | | | | | | |
(for a share outstanding throughout the period) | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | |
Net asset value, beginning of period | | | $39.91 | | | | $37.51 | | | | $34.43 | | | | $41.04 | | | | $42.53 | | | | $38.96 | |
| |
Income from investment operationsb: | | | | |
Net investment incomec | | | 0.03 | | | | 0.05 | | | | 0.05 | | | | 0.15d | | | | 0.05 | | | | 0.01 | |
Net realized and unrealized gains (losses) | | | 0.12 | | | | 5.45 | | | | 5.14 | | | | (3.62 | ) | | | 6.07 | | | | 9.34 | |
| | | | | | |
Total from investment operations | | | 0.15 | | | | 5.50 | | | | 5.19 | | | | (3.47 | ) | | | 6.12 | | | | 9.35 | |
| | | | | | |
Less distributions from net realized gains | | | — | | | | (3.10 | ) | | | (2.11 | ) | | | (3.14 | ) | | | (7.61 | ) | | | (5.78 | ) |
| | | | | | |
Net asset value, end of period | | | $40.06 | | | | $39.91 | | | | $37.51 | | | | $34.43 | | | | $41.04 | | | | $42.53 | |
| | | | | | |
Total returne | | | 0.38% | | | | 14.90% | | | | 15.51% | | | | (8.54)% | | | | 16.32% | | | | 24.43% | |
| | | | | | |
Ratios to average net assetsf | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | |
Expenses before waiver and payments by affiliates | | | 0.51% | | | | 0.50% | | | | 0.48% | | | | 0.48% | | | | 0.48% | | | | 0.47% | |
| | | | | | |
Expenses net of waiver and payments by affiliates | | | 0.48% | g | | | 0.47% | g | | | 0.47% | g | | | 0.47% | g | | | 0.48% | h | | | 0.47% | g,h |
| | | | | | | |
Net investment income | | | 0.12% | | | | 0.12% | | | | 0.13% | | | | 0.40% | d | | | 0.11% | | | | 0.01% | |
| | | | | | |
Supplemental data | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | |
Net assets, end of period (000’s) | | | $263,604 | | | | $275,835 | | | | $222,577 | | | | $242,237 | | | | $206,548 | | | | $157,153 | |
| | | | | | |
Portfolio turnover rate | | | 28.30% | | | | 38.35% | | | | 35.46% | | | | 38.72% | | | | 47.98% | | | | 40.82% | |
aFor the year May 1, 2013 (effective date) to April 30, 2014.
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.
cBased on average daily shares outstanding.
dNet investment income per share includes approximately $0.11 per share related to income received in the form of special dividends in connection with certain Fund holdings. Excluding this amount, the ratio of net investment income to average net assets would have been 0.10%.
eTotal return is not annualized for periods less than one year.
fRatios are annualized for periods less than one year.
gBenefit of expense reduction rounds to less than 0.01%.
hBenefit of waiver and payments by affiliates rounds to less than 0.01%.
| | | | |
| | | |
| franklintempleton.com | | The accompanying notes are an integral part of these financial statements. | Semiannual Report | | 55 |
FRANKLIN STRATEGIC SERIES
FINANCIAL HIGHLIGHTS
Franklin Small-Mid Cap Growth Fund (continued)
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Six Months Ended
October 31, 2018 (unaudited) | | | Year Ended April 30, | |
| | | 2018 | | | 2017 | | | 2016 | | | 2015 | | | 2014 | |
| | | | | | |
Advisor Class | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | |
Per share operating performance | | | | | | | | | | | | | | | | | | | | | | | | |
(for a share outstanding throughout the period) | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | |
Net asset value, beginning of period | | | $39.33 | | | | $37.11 | | | | $34.15 | | | | $40.83 | | | | $42.44 | | | | $39.56 | |
| |
Income from investment operationsa: | | | | |
Net investment income (loss)b | | | (— | )c | | | (0.06 | ) | | | (0.03 | ) | | | 0.06d | | | | (0.04 | ) | | | (0.10 | ) |
Net realized and unrealized gains (losses) | | | 0.13 | | | | 5.38 | | | | 5.10 | | | | (3.60 | ) | | | 6.04 | | | | 8.76 | |
| | | | | | |
Total from investment operations | | | 0.13 | | | | 5.32 | | | | 5.07 | | | | (3.54 | ) | | | 6.00 | | | | 8.66 | |
| | | | | | |
Less distributions from net realized gains | | | — | | | | (3.10 | ) | | | (2.11 | ) | | | (3.14 | ) | | | (7.61 | ) | | | (5.78 | ) |
| | | | | | |
Net asset value, end of period | | | $39.46 | | | | $39.33 | | | | $37.11 | | | | $34.15 | | | | $40.83 | | | | $42.44 | |
| | | | | | |
Total returne | | | 0.33% | | | | 14.57% | | | | 15.28% | | | | (8.79)% | | | | 16.09% | | | | 22.30% | |
| | | | | | |
Ratios to average net assetsf | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | |
Expenses before waiver and payments by affiliates | | | 0.62% | | | | 0.77% | | | | 0.70% | | | | 0.71% | | | | 0.69% | | | | 0.71% | |
| | | | | | |
Expenses net of waiver and payments by affiliates | | | 0.61% | g | | | 0.75% | g | | | 0.69% | g | | | 0.70% | g | | | 0.69% | h | | | 0.71% | g,h |
| | | | | | | |
Net investment income (loss) | | | (0.01)% | | | | (0.16)% | | | | (0.09)% | | | | 0.17% | d | | | (0.10)% | | | | (0.23)% | |
| | | | | | |
Supplemental data | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | |
Net assets, end of period (000’s) | | | $524,983 | | | | $520,842 | | | | $584,840 | | | | $551,176 | | | | $708,617 | | | | $650,426 | |
| | | | | | |
Portfolio turnover rate | | | 28.30% | | | | 38.35% | | | | 35.46% | | | | 38.72% | | | | 47.98% | | | | 40.82% | |
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.
bBased on average daily shares outstanding.
cAmount rounds to less than $0.01 per share.
dNet investment income per share includes approximately $0.11 per share related to income received in the form of special dividends in connection with certain Fund holdings. Excluding this amount, the ratio of net investment income to average net assets would have been (0.13)%.
eTotal return is not annualized for periods less than one year.
fRatios are annualized for periods less than one year.
gBenefit of expense reduction rounds to less than 0.01%.
hBenefit of waiver and payments by affiliates rounds to less than 0.01%.
| | | | |
| | | |
56 | | Semiannual Report | The accompanying notes are an integral part of these financial statements. | | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
Statement of Investments, October 31, 2018 (unaudited)
Franklin Small-Mid Cap Growth Fund
| | | | | | | | |
| | | Shares | | | Value | |
| | |
Common Stocks 96.5% | | | | | | | | |
Consumer Discretionary 15.4% | | | | | | | | |
Aptiv PLC | | | 463,000 | | | $ | 35,558,400 | |
a Burlington Stores Inc. | | | 263,000 | | | | 45,101,870 | |
a Dollar Tree Inc. | | | 385,000 | | | | 32,455,500 | |
Domino’s Pizza Inc. | | | 151,000 | | | | 40,587,291 | |
a,b,c DraftKings Inc. | | | 7,974,537 | | | | 18,194,991 | |
Expedia Group Inc. | | | 258,500 | | | | 32,423,655 | |
a Grand Canyon Education Inc. | | | 359,000 | | | | 44,767,300 | |
a GrubHub Inc. | | | 117,000 | | | | 10,850,580 | |
MGM Resorts International | | | 668,000 | | | | 17,822,240 | |
a Norwegian Cruise Line Holdings Ltd. | | | 335,800 | | | | 14,798,706 | |
a NVR Inc. | | | 12,500 | | | | 27,987,875 | |
a O’Reilly Automotive Inc. | | | 141,000 | | | | 45,225,750 | |
Ross Stores Inc. | | | 602,000 | | | | 59,598,000 | |
Tapestry Inc. | | | 375,000 | | | | 15,866,250 | |
Tractor Supply Co. | | | 261,900 | | | | 24,065,991 | |
a Ulta Beauty Inc. | | | 78,000 | | | | 21,412,560 | |
a,d Under Armour Inc., A | | | 387,000 | | | | 8,556,570 | |
Vail Resorts Inc. | | | 80,000 | | | | 20,105,600 | |
VF Corp. | | | 160,000 | | | | 13,260,800 | |
| | | | | | | | |
| | |
| | | | | | | 528,639,929 | |
| | | | | | | | |
Consumer Staples 1.2% | | | | | | | | |
Brown-Forman Corp., B | | | 398,000 | | | | 18,443,320 | |
Lamb Weston Holdings Inc. | | | 290,000 | | | | 22,666,400 | |
| | | | | | | | |
| | |
| | | | | | | 41,109,720 | |
| | | | | | | | |
Energy 1.6% | | | | | | | | |
Cabot Oil & Gas Corp., A | | | 806,010 | | | | 19,529,622 | |
a Concho Resources Inc. | | | 177,700 | | | | 24,716,293 | |
Diamondback Energy Inc. | | | 100,000 | | | | 11,236,000 | |
| | | | | | | | |
| | |
| | | | | | | 55,481,915 | |
| | | | | | | | |
Financials 7.9% | | | | | | | | |
Arthur J. Gallagher & Co. | | | 510,000 | | | | 37,745,100 | |
CBOE Global Markets Inc. | | | 330,000 | | | | 37,240,500 | |
First Republic Bank. | | | 215,000 | | | | 19,562,850 | |
a Focus Financial Partners Inc. | | | 148,000 | | | | 5,653,600 | |
MarketAxess Holdings Inc. | | | 195,000 | | | | 40,885,650 | |
Moody’s Corp. | | | 263,000 | | | | 38,261,240 | |
MSCI Inc. | | | 206,500 | | | | 31,053,470 | |
SEI Investments Co. | | | 323,000 | | | | 17,264,350 | |
a SVB Financial Group | | | 103,500 | | | | 24,553,305 | |
a Western Alliance Bancorp | | | 335,000 | | | | 16,160,400 | |
| | | | | | | | |
| | |
| | | | | | | 268,380,465 | |
| | | | | | | | |
Health Care 14.4% | | | | | | | | |
a ABIOMED Inc. | | | 94,000 | | | | 32,072,800 | |
a Agios Pharmaceuticals Inc. | | | 50,000 | | | | 3,153,000 | |
a Array BioPharma Inc. | | | 130,000 | | | | 2,106,000 | |
a BioMarin Pharmaceutical Inc. | | | 222,666 | | | | 20,523,125 | |
a Centene Corp. | | | 296,000 | | | | 38,574,720 | |
a Cerner Corp. | | | 328,502 | | | | 18,816,595 | |
a DexCom Inc. | | | 170,414 | | | | 22,625,867 | |
a Edwards Lifesciences Corp. | | | 490,000 | | | | 72,324,000 | |
| | | | |
| | | |
| franklintempleton.com | | Semiannual Report | | 57 |
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS (UNAUDITED)
Franklin Small-Mid Cap Growth Fund (continued)
| | | | | | | | |
| | | Shares | | | Value | |
| | |
Common Stocks (continued) | | | | | | | | |
Health Care (continued) | | | | | | | | |
a Elanco Animal Health Inc. | | | 174,400 | | | $ | 5,315,712 | |
a,d Guardant Health Inc. | | | 72,300 | | | | 2,420,604 | |
a Heron Therapeutics Inc. | | | 60,000 | | | | 1,665,600 | |
a IDEXX Laboratories Inc. | | | 102,500 | | | | 21,742,300 | |
a Incyte Corp. | | | 207,614 | | | | 13,457,539 | |
a Insulet Corp. | | | 249,217 | | | | 21,983,432 | |
a iRhythm Technologies Inc. | | | 181,450 | | | | 14,018,827 | |
a Jazz Pharmaceuticals PLC | | | 133,000 | | | | 21,123,060 | |
a Mettler-Toledo International Inc. | | | 74,500 | | | | 40,738,090 | |
a Neurocrine Biosciences Inc. | | | 155,042 | | | | 16,612,750 | |
a Nevro Corp. | | | 248,000 | | | | 12,092,480 | |
a Penumbra Inc. | | | 161,647 | | | | 21,983,992 | |
a Revance Therapeutics Inc. | | | 356,000 | | | | 7,750,120 | |
a Sage Therapeutics Inc. | | | 42,000 | | | | 5,404,560 | |
a Sarepta Therapeutics Inc. | | | 76,000 | | | | 10,165,760 | |
a Seattle Genetics Inc. | | | 144,500 | | | | 8,110,785 | |
a Veeva Systems Inc. | | | 119,500 | | | | 10,916,325 | |
a Waters Corp. | | | 160,000 | | | | 30,350,400 | |
West Pharmaceutical Services Inc. | | | 145,000 | | | | 15,358,400 | |
| | | | | | | | |
| | |
| | | | | | | 491,406,843 | |
| | | | | | | | |
Industrials 18.6% | | | | | | | | |
BWX Technologies Inc. | | | 421,000 | | | | 24,611,660 | |
a CoStar Group Inc. | | | 134,000 | | | | 48,430,280 | |
Fortive Corp. | | | 612,500 | | | | 45,478,125 | |
Harris Corp. | | | 245,500 | | | | 36,508,305 | |
IDEX Corp. | | | 263,500 | | | | 33,417,070 | |
a IHS Markit Ltd. | | | 636,915 | | | | 33,457,145 | |
J.B. Hunt Transport Services Inc. | | | 281,000 | | | | 31,081,410 | |
a Mercury Systems Inc. | | | 409,000 | | | | 19,165,740 | |
Old Dominion Freight Line Inc. | | | 198,000 | | | | 25,823,160 | |
Republic Services Inc. | | | 476,000 | | | | 34,595,680 | |
Rockwell Automation Inc. | | | 263,000 | | | | 43,323,990 | |
Roper Technologies Inc. | | | 327,530 | | | | 92,658,237 | |
Stanley Black & Decker Inc. | | | 247,000 | | | | 28,780,440 | |
Textron Inc. | | | 329,800 | | | | 17,687,174 | |
TransUnion | | | 225,000 | | | | 14,793,750 | |
a Univar Inc. | | | 942,000 | | | | 23,192,040 | |
a Verisk Analytics Inc. | | | 488,000 | | | | 58,481,920 | |
a WABCO Holdings Inc. | | | 226,000 | | | | 24,283,700 | |
| | | | | | | | |
| | |
| | | | | | | 635,769,826 | |
| | | | | | | | |
Information Technology 32.4% | | | | | | | | |
a 2U Inc. | | | 853,000 | | | | 53,662,230 | |
a Advanced Micro Devices Inc. | | | 750,000 | | | | 13,657,500 | |
a Adyen NV (Netherlands) | | | 47,500 | | | | 30,714,828 | |
a Alarm.com Holdings Inc. | | | 369,000 | | | | 16,413,120 | |
Amphenol Corp., A | | | 540,000 | | | | 48,330,000 | |
a ANSYS Inc. | | | 108,000 | | | | 16,151,400 | |
a Arista Networks Inc. | | | 83,000 | | | | 19,119,050 | |
a Autodesk Inc. | | | 377,000 | | | | 48,727,250 | |
a Black Knight Inc. | | | 358,000 | | | | 17,459,660 | |
a,d Ceridian HCM Holding Inc. | | | 251,000 | | | | 9,530,470 | |
| | | | |
| | | |
58 | | Semiannual Report | | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS (UNAUDITED)
Franklin Small-Mid Cap Growth Fund (continued)
| | | | | | | | |
| | | Shares | | | Value | |
| | |
Common Stocks (continued) | | | | | | | | |
Information Technology (continued) | | | | | | | | |
Cognex Corp. | | | 661,000 | | | $ | 28,317,240 | |
a Elastic NV | | | 149,400 | | | | 10,159,200 | |
a EPAM Systems Inc. | | | 142,000 | | | | 16,964,740 | |
a FleetCor Technologies Inc. | | | 172,000 | | | | 34,405,160 | |
a GoDaddy Inc., A | | | 887,800 | | | | 64,960,326 | |
a GreenSky Inc., A | | | 437,100 | | | | 5,760,978 | |
a Guidewire Software Inc. | | | 321,000 | | | | 28,559,370 | |
a Inphi Corp. | | | 105,000 | | | | 3,360,000 | |
a InterXion Holding NV (Netherlands) | | | 426,000 | | | | 25,078,620 | |
KLA-Tencor Corp. | | | 364,000 | | | | 33,320,560 | |
Lam Research Corp. | | | 223,000 | | | | 31,605,790 | |
Maxim Integrated Products Inc. | | | 170,000 | | | | 8,503,400 | |
Microchip Technology Inc. | | | 762,000 | | | | 50,124,360 | |
Monolithic Power Systems | | | 225,000 | | | | 26,577,000 | |
a Pluralsight Inc., A | | | 430,000 | | | | 9,636,300 | |
a PTC Inc. | | | 233,000 | | | | 19,201,530 | |
a Q2 Holdings Inc. | | | 231,000 | | | | 12,296,130 | |
a ServiceNow Inc. | | | 391,000 | | | | 70,786,640 | |
a Shopify Inc., A (Canada) | | | 70,000 | | | | 9,670,500 | |
a Silicon Laboratories Inc. | | | 155,000 | | | | 12,637,150 | |
Skyworks Solutions Inc. | | | 183,000 | | | | 15,877,080 | |
a Square Inc., A | | | 652,000 | | | | 47,889,400 | |
a StoneCo. Ltd. (Brazil) | | | 64,100 | | | | 1,839,029 | |
a Synopsys Inc. | | | 268,000 | | | | 23,994,040 | |
Total System Services Inc. | | | 227,500 | | | | 20,736,625 | |
a Trimble Inc. | | | 463,000 | | | | 17,306,940 | |
a Twilio Inc., A | | | 124,000 | | | | 9,327,280 | |
a ViaSat Inc. | | | 449,050 | | | | 28,631,428 | |
a Wix.com Ltd. (Israel) | | | 257,000 | | | | 25,018,950 | |
a Workday Inc., A | | | 433,000 | | | | 57,597,660 | |
a Worldpay Inc., A | | | 574,200 | | | | 52,734,528 | |
Xilinx Inc. | | | 287,000 | | | | 24,501,190 | |
a Zscaler Inc. | | | 268,000 | | | | 9,725,720 | |
| | | | | | | | |
| | |
| | | | | | | 1,110,870,372 | |
| | | | | | | | |
Materials 2.8% | | | | | | | | |
Avery Dennison Corp. | | | 252,000 | | | | 22,861,440 | |
Celanese Corp. | | | 226,000 | | | | 21,908,440 | |
a Ingevity Corp. | | | 276,780 | | | | 25,209,122 | |
Packaging Corp. of America | | | 290,000 | | | | 26,624,900 | |
| | | | | | | | |
| | |
| | | | | | | 96,603,902 | |
| | | | | | | | |
Real Estate 2.2% | | | | | | | | |
Coresite Realty Corp. | | | 147,000 | | | | 13,797,420 | |
a SBA Communications Corp., A | | | 383,000 | | | | 62,111,110 | |
| | | | | | | | |
| | |
| | | | | | | 75,908,530 | |
| | | | | | | | |
Total Common Stocks (Cost $2,438,031,570) | | | | | | | 3,304,171,502 | |
| | | | | | | | |
| | | | |
| | | |
| franklintempleton.com | | Semiannual Report | | 59 |
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS (UNAUDITED)
Franklin Small-Mid Cap Growth Fund (continued)
| | | | | | | | |
| | | Shares | | | Value | |
| | |
Preferred Stocks (Cost $7,135,914) 0.3% | | | | | | | | |
Consumer Discretionary 0.3% | | | | | | | | |
a,b,c Proterra Inc., pfd., 5, 144A | | | 1,416,913 | | | $ | 11,132,452 | |
| | | | | | | | |
Total Investments before Short Term Investments (Cost $2,445,167,484) | | | | | | | 3,315,303,954 | |
| | | | | | | | |
| | |
Short Term Investments 4.0% | | | | | | | | |
| | |
Money Market Funds (Cost $128,140,053) 3.7% | | | | | | | | |
e,f Institutional Fiduciary Trust Money Market Portfolio, 1.83% | | | 128,140,053 | | | | 128,140,053 | |
| | | | | | | | |
g Investments from Cash Collateral Received for Loaned Securities (Cost $9,970,826) 0.3% | | | | | | | | |
Money Market Funds 0.3% | | | | | | | | |
e,f Institutional Fiduciary Trust Money Market Portfolio, 1.83% | | | 9,970,826 | | | | 9,970,826 | |
| | | | | | | | |
Total Investments (Cost $2,583,278,363) 100.8%. | | | | | | | 3,453,414,833 | |
Other Assets, less Liabilities (0.8)% | | | | | | | (27,392,854 | ) |
| | | | | | | | |
Net Assets 100.0% | | | | | | $ | 3,426,021,979 | |
| | | | | | | | |
aNon-income producing.
bFair valued using significant unobservable inputs. See Note 10 regarding fair value measurements.
cSee Note 7 regarding restricted securities.
dA portion or all of the security is on loan at October 31, 2018. See Note 1(c).
eSee Note 3(f) regarding investments in affiliated management investment companies.
fThe rate shown is the annualized seven-day effective yield at period end.
gSee Note 1(c) regarding securities on loan.
| | | | |
| | | |
60 | | Semiannual Report | The accompanying notes are an integral part of these financial statements. | | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
Financial Statements
Statements of Assets and Liabilities
October 31, 2018 (unaudited)
| | | | | | | | | | | | | | | | |
| | | Franklin Growth
Opportunities Fund | | | Franklin
Select U.S.
Equity Fund | | | Franklin
Small Cap
Growth Fund | | | Franklin
Small-Mid Cap
Growth Fund | |
| | | | |
Assets: | | | | | | | | | | | | | | | | |
+Investments in securities: | | | | | | | | | | | | | | | | |
Cost - Unaffiliated issuers | | | $2,032,656,473 | | | | $83,979,935 | | | | $1,865,952,438 | | | | $2,445,167,484 | |
Cost - Non-controlled affiliates (Note 3f and 8) | | | 89,223,505 | | | | 4,662,257 | | | | 198,486,950 | | | | 138,110,879 | |
| | | | |
Value - Unaffiliated issuers | | | $3,702,143,131 | | | | $91,127,813 | | | | $2,411,395,651 | | | | $3,315,303,954 | |
Value - Non-controlled affiliates (Note 3f and 8) | | | 89,223,505 | | | | 4,662,257 | | | | 155,613,667 | | | | 138,110,879 | |
Receivables: | | | | | | | | | | | | | | | | |
Investment securities sold | | | — | | | | — | | | | 12,211,825 | | | | 1,524,289 | |
Capital shares sold | | | 2,633,000 | | | | 77,962 | | | | 2,009,006 | | | | 1,926,406 | |
Dividends | | | 639,793 | | | | 13,785 | | | | 230,046 | | | | 201,916 | |
Due from custodian | | | — | | | | — | | | | 31,900 | | | | — | |
Other assets | | | 1,139 | | | | — | | | | 763 | | | | 1,061 | |
| | | | |
Total assets | | | 3,794,640,568 | | | | 95,881,817 | | | | 2,581,492,858 | | | | 3,457,068,505 | |
| | | | |
Liabilities: | | | | | | | | | | | | | | | | |
Payables: | | | | | | | | | | | | | | | | |
Investment securities purchased | | | 16,993,027 | | | | — | | | | 603,924 | | | | 6,534,770 | |
Capital shares redeemed | | | 2,943,134 | | | | 76,469 | | | | 3,271,028 | | | | 10,332,020 | |
Management fees | | | 1,804,472 | | | | 58,344 | | | | 1,348,313 | | | | 1,319,956 | |
Distribution fees | | | 850,957 | | | | 28,613 | | | | 275,264 | | | | 761,129 | |
Transfer agent fees | | | 1,061,889 | | | | 33,520 | | | | 659,083 | | | | 1,914,933 | |
Funds advanced by custodian | | | 820 | | | | — | | | | — | | | | — | |
Payable upon return of securities loaned | | | 2,175,000 | | | | — | | | | 67,616,975 | | | | 9,970,826 | |
Accrued expenses and other liabilities | | | 169,838 | | | | 7,082 | | | | 130,090 | | | | 212,892 | |
| | | | |
Total liabilities | | | 25,999,137 | | | | 204,028 | | | | 73,904,677 | | | | 31,046,526 | |
| | | | |
Net assets, at value | | | $3,768,641,431 | | | | $95,677,789 | | | | $2,507,588,181 | | | | $3,426,021,979 | |
Net assets consist of: | | | | | | | | | | | | | | | | |
Paid-in capital | | | $1,711,781,419 | | | | $75,714,315 | | | | $1,556,926,509 | | | | $2,174,550,155 | |
Total distributable earnings (loss) | | | 2,056,860,012 | | | | 19,963,474 | | | | 950,661,672 | | | | 1,251,471,824 | |
| | | | |
Net assets, at value | | | $3,768,641,431 | | | | $95,677,789 | | | | $2,507,588,181 | | | | $3,426,021,979 | |
| | | | | | | | | | | | | | | | |
+Includes securities loaned | | $ | 2,092,500 | | | $ | — | | | $ | 65,197,887 | | | $ | 10,012,326 | |
| | | | |
| | | |
| franklintempleton.com | | The accompanying notes are an integral part of these financial statements. | Semiannual Report | | 61 |
FRANKLIN STRATEGIC SERIES
FINANCIAL STATEMENTS
Statements of Assets and Liabilities (continued)
October 31, 2018 (unaudited)
| | | | | | | | | | | | | | | | | | | | |
| | | Franklin Growth
Opportunities Fund | | Franklin
Select U.S.
Equity Fund | | Franklin
Small Cap
Growth Fund | | Franklin
Small-Mid Cap
Growth Fund |
Class A: | | | | | | | | | | | | | | | | | | | | |
Net assets, at value | | | | $2,548,289,779 | | | | | $68,150,589 | | | | | $677,409,512 | | | | | $2,403,213,831 | |
Shares outstanding | | | | 65,420,487 | | | | | 4,174,106 | | | | | 28,559,757 | | | | | 66,499,476 | |
Net asset value per sharea | | | | $38.95 | | | | | $16.33 | | | | | $23.72 | | | | | $36.14 | |
Maximum offering price per share (net asset value per share ÷ 94.50%) | | | | $41.22 | | | | | $17.28 | | | | | $25.10 | | | | | $38.24 | |
Class C: | | | | | | | | | | | | | | | | | | | | |
Net assets, at value | | | | $ 238,946,253 | | | | | $14,806,033 | | | | | $ 92,178,958 | | | | | $ 165,089,542 | |
Shares outstanding | | | | 7,271,838 | | | | | 963,552 | | | | | 4,624,392 | | | | | 6,401,898 | |
Net asset value and maximum offering price per sharea | | | | $32.86 | | | | | $15.37 | | | | | $19.93 | | | | | $25.79 | |
Class R: | | | | | | | | | | | | | | | | | | | | |
Net assets, at value | | | | $ 34,977,730 | | | | | $ 134,689 | | | | | $ 71,955,592 | | | | | $ 69,131,244 | |
Shares outstanding | | | | 939,144 | | | | | 8,382 | | | | | 3,187,335 | | | | | 2,084,205 | |
Net asset value and maximum offering price per share | | | | $37.24 | | | | | $16.07 | | | | | $22.58 | | | | | $33.17 | |
Class R6: | | | | | | | | | | | | | | | | | | | | |
Net assets, at value | | | | $ 372,618,874 | | | | | $ 892,328 | | | | | $949,815,102 | | | | | $ 263,604,490 | |
Shares outstanding | | | | 8,818,087 | | | | | 53,505 | | | | | 36,953,748 | | | | | 6,580,074 | |
Net asset value and maximum offering price per share | | | | $42.26 | | | | | $16.68 | | | | | $25.70 | | | | | $40.06 | |
Advisor Class: | | | | | | | | | | | | | | | | | | | | |
Net assets, at value | | | | $ 573,808,795 | | | | | $11,694,150 | | | | | $716,229,017 | | | | | $ 524,982,872 | |
Shares outstanding | | | | 13,729,254 | | | | | 704,518 | | | | | 28,194,281 | | | | | 13,305,545 | |
Net asset value and maximum offering price per share | | | | $41.79 | | | | | $16.60 | | | | | $25.40 | | | | | $39.46 | |
aRedemption price is equal to net asset value less contingent deferred sales charges, if applicable.
| | | | |
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62 | | Semiannual Report | The accompanying notes are an integral part of these financial statements. | | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
FINANCIAL STATEMENTS
Statements of Operations
for the six months ended October 31, 2018 (unaudited)
| | | | | | | | | | | | | | | | |
| | | Franklin Growth
Opportunities Fund | | | Franklin
Select U.S.
Equity Fund | | | Franklin
Small Cap
Growth Fund | | | Franklin
Small-Mid Cap
Growth Fund | |
Investment income: | | | | | | | | | | | | | | | | |
Dividends: (net of foreign taxes)* | | | | | | | | | | | | | | | | |
Unaffiliated issuers | | | $ 12,469,473 | | | | $ 431,222 | | | | $ 3,264,899 | | | | $ 9,860,492 | |
Non-controlled affiliates (Note 3f and 8) | | | 152,301 | | | | 24,572 | | | | 419,396 | | | | 989,632 | |
Income from securities loaned (net of fees and rebates) | | | 9,947 | | | | — | | | | 783,968 | | | | 141,759 | |
| | | | |
| | | | |
Total investment income | | | 12,631,721 | | | | 455,794 | | | | 4,468,263 | | | | 10,991,883 | |
| | | | |
Expenses: | | | | | | | | | | | | | | | | |
Management fees (Note 3a) | | | 11,098,845 | | | | 478,268 | | | | 8,570,555 | | | | 8,406,017 | |
Distribution fees: (Note 3c) | | | | | | | | | | | | | | | | |
Class A | | | 3,271,412 | | | | 87,304 | | | | 897,315 | | | | 3,030,253 | |
Class C | | | 2,069,113 | | | | 90,832 | | | | 692,916 | | | | 1,692,413 | |
Class R | | | 95,505 | | | | 383 | | | | 196,813 | | | | 184,331 | |
Transfer agent fees: (Note 3e) | | | | | | | | | | | | | | | | |
Class A | | | 1,653,049 | | | | 49,075 | | | | 668,026 | | | | 1,859,647 | |
Class C | | | 262,563 | | | | 12,809 | | | | 128,804 | | | | 261,109 | |
Class R | | | 24,213 | | | | 100 | | | | 72,980 | | | | 57,352 | |
Class R6 | | | 49,622 | | | | 368 | | | | 190,444 | | | | 54,326 | |
Advisor Class | | | 395,584 | | | | 8,132 | | | | 728,081 | | | | 433,248 | |
Custodian fees (Note 4) | | | 21,579 | | | | 771 | | | | 11,150 | | | | 14,806 | |
Reports to shareholders | | | 169,107 | | | | 7,768 | | | | 81,592 | | | | 156,788 | |
Registration and filing fees | | | 66,776 | | | | 40,147 | | | | 52,547 | | | | 81,567 | |
Professional fees | | | 37,866 | | | | 19,867 | | | | 30,748 | | | | 34,685 | |
Trustees’ fees and expenses | | | 22,755 | | | | 627 | | | | 15,624 | | | | 21,620 | |
Other | | | 33,925 | | | | 4,614 | | | | 24,798 | | | | 32,981 | |
| | | | |
| | | | |
Total expenses | | | 19,271,914 | | | | 801,065 | | | | 12,362,393 | | | | 16,321,143 | |
Expense reductions (Note 4) | | | (1,678 | ) | | | (94 | ) | | | (679 | ) | | | (58 | ) |
Expenses waived/paid by affiliates (Note 3f and 3g) | | | (47,225 | ) | | | (127,672 | ) | | | (318,475 | ) | | | (277,667 | ) |
| | | | |
| | | | |
Net expenses | | | 19,223,011 | | | | 673,299 | | | | 12,043,239 | | | | 16,043,418 | |
| | | | |
| | | | |
Net investment income (loss) | | | (6,591,290 | ) | | | (217,505 | ) | | | (7,574,976 | ) | | | (5,051,535 | ) |
| | | | |
Realized and unrealized gains (losses): | | | | | | | | | | | | | | | | |
Net realized gain (loss) from: | | | | | | | | | | | | | | | | |
Investments: | | | | | | | | | | | | | | | | |
Unaffiliated issuers | | | 230,685,717 | | | | 373,981 | | | | 255,554,082 | | | | 211,205,029 | |
Non-controlled affiliates (Note 3f and 8) | | | — | | | | — | | | | (6,561,761 | ) | | | — | |
Foreign currency transactions | | | 6,322 | | | | (489 | ) | | | — | | | | (45,437 | ) |
| | | | |
| | | | |
Net realized gain (loss) | | | 230,692,039 | | | | 373,492 | | | | 248,992,321 | | | | 211,159,592 | |
| | | | |
Net change in unrealized appreciation (depreciation) on: | | | | | | | | | | | | | | | | |
Investments: | | | | | | | | | | | | | | | | |
Unaffiliated issuers | | | (180,829,105 | ) | | | (218,889 | ) | | | (166,619,498 | ) | | | (196,828,976 | ) |
Non-controlled affiliates (Note 3f and 8) | | | — | | | | — | | | | 6,657,883 | | | | — | |
Translation of other assets and liabilities denominated in foreign currencies | | | — | | | | — | | | | — | | | | 1,845 | |
| | | | |
| | | | |
Net change in unrealized appreciation (depreciation) | | | (180,829,105 | ) | | | (218,889 | ) | | | (159,961,615 | ) | | | (196,827,131 | ) |
| | | | |
| | | | |
Net realized and unrealized gain (loss) | | | 49,862,934 | | | | 154,603 | | | | 89,030,706 | | | | 14,332,461 | |
| | | | |
| | | | |
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| franklintempleton.com | | The accompanying notes are an integral part of these financial statements. | Semiannual Report | | 63 |
FRANKLIN STRATEGIC SERIES
FINANCIAL STATEMENTS
Statements of Operations (continued)
for the six months ended October 31, 2018 (unaudited)
| | | | | | | | | | | | | | | | |
| | | | |
| | | Franklin Growth
Opportunities Fund | | | Franklin
Select U.S.
Equity Fund | | | Franklin
Small Cap
Growth Fund | | | Franklin
Small-Mid Cap
Growth Fund | |
Net increase (decrease) in net assets resulting from operations | | | $43,271,644 | | | | $(62,902 | ) | | | $81,455,730 | | | | $9,280,926 | |
| | | | |
| | | | | | | | | | | | | | | | |
*Foreign taxes withheld on dividends | | $ | 123 | | | $ | 534 | | | $ | — | | | $ | 236 | |
| | | | |
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64 | | Semiannual Report | The accompanying notes are an integral part of these financial statements. | | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
FINANCIAL STATEMENTS
Statements of Changes in Net Assets
| | | | | | | | | | | | | | | | |
| | | Franklin Growth
Opportunities Fund | | | Franklin Select U.S.
Equity Fund | |
| | | Six Months Ended October 31, 2018 (unaudited) | | | Year Ended
April 30, 2018 | | | Six Months Ended October 31, 2018
(unaudited) | | | Year Ended
April 30, 2018 | |
| | | | |
Increase (decrease) in net assets: | | | | | | | | | | | | | | | | |
Operations: | | | | | | | | | | | | | | | | |
Net investment income (loss) | | | $ (6,591,290 | ) | | | $ (10,261,563 | ) | | | $ (217,505 | ) | | | $ (359,541 | ) |
Net realized gain (loss) | | | 230,692,039 | | | | 289,840,333 | | | | 373,492 | | | | 23,070,802 | |
Net change in unrealized appreciation (depreciation) | | | (180,829,105 | ) | | | 405,837,652 | | | | (218,889 | ) | | | (15,755,359 | ) |
| | | | |
Net increase (decrease) in net assets resulting from operations | | | 43,271,644 | | | | 685,416,422 | | | | (62,902 | ) | | | 6,955,902 | |
Distributions to shareholders: (Note 1e) | | | | | | | | | | | | | | | | |
Class A | | | — | | | | (189,384,206 | ) | | | — | | | | — | |
Class C | | | — | | | | (36,890,234 | ) | | | — | | | | — | |
Class R | | | — | | | | (3,861,226 | ) | | | — | | | | — | |
Class R6 | | | — | | | | (26,495,718 | ) | | | — | | | | — | |
Advisor Class | | | — | | | | (42,059,463 | ) | | | — | | | | — | |
| | | | |
Total distributions to shareholders | | | — | | | | (298,690,847 | ) | | | — | | | | — | |
| | | | |
Capital share transactions: (Note 2) | | | | | | | | | | | | | | | | |
Class A | | | 97,540,283 | | | | (91,864,958 | ) | | | 2,681,699 | | | | (17,113,814 | ) |
Class C | | | (168,908,248 | ) | | | (23,626,956 | ) | | | (3,365,792 | ) | | | (3,442,504 | ) |
Class R | | | (1,959,419 | ) | | | (18,366,509 | ) | | | (1,885 | ) | | | (43,959 | ) |
Class R6 | | | (1,623,067 | ) | | | 41,353,334 | | | | (52,856 | ) | | | (19,406,366 | ) |
Advisor Class | | | (17,928,425 | ) | | | (18,372,365 | ) | | | 1,286,131 | | | | (3,475,298 | ) |
| | | | |
Total capital share transactions | | | (92,878,876 | ) | | | (110,877,454 | ) | | | 547,297 | | | | (43,481,941 | ) |
| | | | |
Net increase (decrease) in net assets | | | (49,607,232 | ) | | | 275,848,121 | | | | 484,395 | | | | (36,526,039 | ) |
Net assets: | | | | | | | | | | | | | | | | |
Beginning of period | | | 3,818,248,663 | | | | 3,542,400,542 | | | | 95,193,394 | | | | 131,719,433 | |
| | | | |
End of period (Note 1e) | | | $3,768,641,431 | | | | $3,818,248,663 | | | | $95,677,789 | | | | $95,193,394 | |
| | | | |
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| franklintempleton.com | | The accompanying notes are an integral part of these financial statements. | Semiannual Report | | 65 |
FRANKLIN STRATEGIC SERIES
FINANCIAL STATEMENTS
Statements of Changes in Net Assets (continued)
| | | | | | | | | | | | | | | | |
| | | Franklin Small Cap
Growth Fund | | | Franklin
Small-Mid Cap
Growth Fund | |
| | | Six Months Ended October 31, 2018 (unaudited) | | | Year Ended April 30, 2018 | | | Six Months Ended October 31, 2018
(unaudited) | | | Year Ended
April 30, 2018 | |
| | | | |
Increase (decrease) in net assets: | | | | | | | | | | | | | | | | |
Operations: | | | | | | | | | | | | | | | | |
Net investment income (loss) | | | $ (7,574,976 | ) | | | $ (10,835,341 | ) | | | $ (5,051,535 | ) | | | $ (14,570,284 | ) |
Net realized gain (loss) | | | 248,992,321 | | | | 347,278,699 | | | | 211,159,592 | | | | 393,654,195 | |
Net change in unrealized appreciation | | | | | | | | | | | | | | | | |
(depreciation) | | | (159,961,615 | ) | | | 131,654,453 | | | | (196,827,131 | ) | | | 100,694,860 | |
| | | | |
Net increase (decrease) in net assets resulting from operations | | | 81,455,730 | | | | 468,097,811 | | | | 9,280,926 | | | | 479,778,771 | |
| | | | |
Distributions to shareholders: (Note 1e) | | | | | | | | | | | | | | | | |
Class A | | | — | | | | (13,026,727 | ) | | | — | | | | (188,183,859 | ) |
Class C | | | — | | | | (2,968,851 | ) | | | — | | | | (37,764,936 | ) |
Class R | | | — | | | | (1,455,647 | ) | | | — | | | | (6,640,970 | ) |
Class R6 | | | — | | | | (16,214,723 | ) | | | — | | | | (21,566,773 | ) |
Advisor Class | | | — | | | | (13,459,989 | ) | | | — | | | | (39,628,357 | ) |
| | | | |
| | | | |
Total distributions to shareholders | | | — | | | | (47,125,937 | ) | | | — | | | | (293,784,895 | ) |
| | | | |
| | | | |
Capital share transactions: (Note 2) | | | | | | | | | | | | | | | | |
Class A | | | (10,009,516 | ) | | | (165,302,683 | ) | | | 137,763,407 | | | | (165,123,618 | ) |
Class C | | | (44,776,944 | ) | | | (30,398,855 | ) | | | (171,944,683 | ) | | | (43,224,469 | ) |
Class R | | | (1,610,909 | ) | | | (20,277,000 | ) | | | (1,674,574 | ) | | | (14,958,409 | ) |
Class R6 | | | (14,421,598 | ) | | | (75,776,145 | ) | | | (15,129,222 | ) | | | 39,199,957 | |
Advisor Class | | | (20,457,752 | ) | | | (218,726,187 | ) | | | 3,116,911 | | | | (100,935,015 | ) |
| | | | |
| | | | |
Total capital share transactions | | | (91,276,719 | ) | | | (510,480,870 | ) | | | (47,868,161 | ) | | | (285,041,554 | ) |
| | | | |
| | | | |
Net increase (decrease) in net assets | | | (9,820,989 | ) | | | (89,508,996 | ) | | | (38,587,235 | ) | | | (99,047,678 | ) |
Net assets: | | | | | | | | | | | | | | | | |
Beginning of period | | | 2,517,409,170 | | | | 2,606,918,166 | | | | 3,464,609,214 | | | | 3,563,656,892 | |
| | | | |
| | | | |
End of period (Note 1e) | | | $2,507,588,181 | | | | $2,517,409,170 | | | | $3,426,021,979 | | | | $3,464,609,214 | |
| | | | |
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66 | | Semiannual Report | The accompanying notes are an integral part of these financial statements. | | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
Notes to Financial Statements (unaudited)
1. Organization and Significant Accounting Policies
Franklin Strategic Series (Trust) is registered under the Investment Company Act of 1940 (1940 Act) as an open-end management investment company, consisting of eight separate funds, four of which are included in this report (Funds) and applies the specialized accounting and reporting guidance in U.S. Generally Accepted Accounting Principles (U.S. GAAP). The Funds offer five classes of shares: Class A, Class C, Class R, Class R6, and Advisor Class. Beginning on October 19, 2018, Class C shares automatically convert to Class A shares after they have been held for 10 years. Each class of shares may differ by its initial sales load, contingent deferred sales charges, voting rights on matters affecting a single class, its exchange privilege and fees due to differing arrangements for distribution and transfer agent fees.
Franklin Small Cap Growth Fund was closed to new investors with limited exceptions effective at the close of market February 12, 2015. Effective April 28, 2017, the Fund opened Class R6 shares to new investors who are eligible to purchase Class R6 shares. Effective January 17, 2019, all share classes of the Fund will be re-opened to new investors.
Effective June 1, 2018, Franklin Focused Core Equity Fund was renamed Franklin Select U.S. Equity Fund.
The following summarizes the Funds’ significant accounting policies.
a. Financial Instrument Valuation
The Funds’ investments in financial instruments are carried at fair value daily. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date. The Funds calculate the net asset value (NAV) per share each business day as of 4 p.m. Eastern time or the regularly scheduled close of the New York Stock Exchange (NYSE), whichever is earlier. Under compliance policies and procedures approved by the Trust’s Board of Trustees (the Board), the Funds’ administrator has responsibility for oversight of valuation, including leading the cross-functional Valuation Committee (VC). The VC provides administration and oversight of the Funds’ valuation policies and procedures, which are approved annually by the Board. Among other things,
these procedures allow the Funds to utilize independent pricing services, quotations from securities and financial instrument dealers, and other market sources to determine fair value.
Equity securities listed on an exchange or on the NASDAQ National Market System are valued at the last quoted sale price or the official closing price of the day, respectively. Foreign equity securities are valued as of the close of trading on the foreign stock exchange on which the security is primarily traded, or as of 4 p.m. Eastern time. The value is then converted into its U.S. dollar equivalent at the foreign exchange rate in effect at 4 p.m. Eastern time on the day that the value of the security is determined. Over-the-counter (OTC) securities are valued within the range of the most recent quoted bid and ask prices. Securities that trade in multiple markets or on multiple exchanges are valued according to the broadest and most representative market. Certain equity securities are valued based upon fundamental characteristics or relationships to similar securities.
Investments in open-end mutual funds are valued at the closing NAV.
The Funds have procedures to determine the fair value of financial instruments for which market prices are not reliable or readily available. Under these procedures, the VC convenes on a regular basis to review such financial instruments and considers a number of factors, including significant unobservable valuation inputs, when arriving at fair value. The VC primarily employs a market-based approach which may use related or comparable assets or liabilities, recent transactions, market multiples, book values, and other relevant information for the investment to determine the fair value of the investment. An income-based valuation approach may also be used in which the anticipated future cash flows of the investment are discounted to calculate fair value. Discounts may also be applied due to the nature or duration of any restrictions on the disposition of the investments. Due to the inherent uncertainty of valuations of such investments, the fair values may differ significantly from the values that would have been used had an active market existed. The VC employs various methods for calibrating these valuation approaches including a regular review of key inputs and assumptions, transactional back-testing or disposition analysis, and reviews of any related market activity.
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| franklintempleton.com | | Semiannual Report | | 67 |
FRANKLIN STRATEGIC SERIES
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
1. Organization and Significant Accounting Policies (continued)
a. Financial Instrument Valuation (continued)
Trading in securities on foreign securities stock exchanges and OTC markets may be completed before 4 p.m. Eastern time. In addition, trading in certain foreign markets may not take place on every Funds’ business day. Occasionally, events occur between the time at which trading in a foreign security is completed and 4 p.m. Eastern time that might call into question the reliability of the value of a portfolio security held by the Fund. As a result, differences may arise between the value of the Funds’ portfolio securities as determined at the foreign market close and the latest indications of value at 4 p.m. Eastern time. In order to minimize the potential for these differences, the VC monitors price movements following the close of trading in foreign stock markets through a series of country specific market proxies (such as baskets of American Depositary Receipts, futures contracts and exchange traded funds). These price movements are measured against established trigger thresholds for each specific market proxy to assist in determining if an event has occurred that may call into question the reliability of the values of the foreign securities held by the Funds. If such an event occurs, the securities may be valued using fair value procedures, which may include the use of independent pricing services.
When the last day of the reporting period is a non-business day, certain foreign markets may be open on those days that the Funds’ NAV is not calculated, which could result in differences between the value of the Funds’ portfolio securities on the last business day and the last calendar day of the reporting period. Any significant security valuation changes due to an open foreign market are adjusted and reflected by the Funds for financial reporting purposes.
b. Foreign Currency Translation
Portfolio securities and other assets and liabilities denominated in foreign currencies are translated into U.S. dollars based on the exchange rate of such currencies against U.S. dollars on the date of valuation. The Funds may enter into foreign currency exchange contracts to facilitate transactions denominated in a foreign currency. Purchases and sales of securities, income and expense items denominated in foreign currencies are translated into U.S. dollars at the exchange rate in effect on the transaction date. Portfolio securities and assets and liabilities denominated in foreign currencies contain risks that those currencies will
decline in value relative to the U.S. dollar. Occasionally, events may impact the availability or reliability of foreign exchange rates used to convert the U.S. dollar equivalent value. If such an event occurs, the foreign exchange rate will be valued at fair value using procedures established and approved by the Board.
The Funds do not separately report the effect of changes in foreign exchange rates from changes in market prices on securities held. Such changes are included in net realized and unrealized gain or loss from investments in the Statements of Operations.
Realized foreign exchange gains or losses arise from sales of foreign currencies, currency gains or losses realized between the trade and settlement dates on securities transactions and the difference between the recorded amounts of dividends, interest, and foreign withholding taxes and the U.S. dollar equivalent of the amounts actually received or paid. Net unrealized foreign exchange gains and losses arise from changes in foreign exchange rates on foreign denominated assets and liabilities other than investments in securities held at the end of the reporting period.
c. Securities Lending
Certain or all Funds participate in an agency based securities lending program to earn additional income. The Fund receives cash collateral against the loaned securities in an amount equal to at least 102% of the fair value of the loaned securities. Collateral is maintained over the life of the loan in an amount not less than 100% of the fair value of loaned securities, as determined at the close of Fund business each day; any additional collateral required due to changes in security values is delivered to the Fund on the next business day. The collateral is deposited into a joint cash account with other funds and is used to invest in a money market fund managed by Franklin Advisers, Inc., an affiliate of the Funds. The Fund may receive income from the investment of cash collateral, in addition to lending fees and rebates paid by the borrower. Income from securities loaned, net of fees paid to the securities lending agent and/or third-party vendor, is reported separately in the Statements of Operations. The Fund bears the market risk with respect to the collateral investment, securities loaned, and the risk that the agent may default on its obligations to the Fund. If the borrower defaults on its obligation to return the securities loaned, the Fund has the right to repurchase the securities in the
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FRANKLIN STRATEGIC SERIES
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
open market using the collateral received. The securities lending agent has agreed to indemnify the Fund in the event of default by a third party borrower.
d. Income and Deferred Taxes
It is each Fund’s policy to qualify as a regulated investment company under the Internal Revenue Code. Each Fund intends to distribute to shareholders substantially all of its taxable income and net realized gains to relieve it from federal income and excise taxes. As a result, no provision for U.S. federal income taxes is required.
The Funds may be subject to foreign taxation related to income received, capital gains on the sale of securities and certain foreign currency transactions in the foreign jurisdictions in which the Funds invest. Foreign taxes, if any, are recorded based on the tax regulations and rates that exist in the foreign markets in which the Funds invest. When a capital gain tax is determined to apply, certain or all Funds record an estimated deferred tax liability in an amount that would be payable if the securities were disposed of on the valuation date.
Each Fund may recognize an income tax liability related to its uncertain tax positions under U.S. GAAP when the uncertain tax position has a less than 50% probability that it will be sustained upon examination by the tax authorities based on its technical merits. As of October 31, 2018, each Fund has determined that no tax liability is required in its financial statements related to uncertain tax positions for any open tax years (or expected to be taken in future tax years). Open tax years are those that remain subject to examination and are based on the statute of limitations in each jurisdiction in which the Fund invests.
e. Security Transactions, Investment Income, Expenses and Distributions
Security transactions are accounted for on trade date. Realized gains and losses on security transactions are determined on a specific identification basis. Interest income and estimated expenses are accrued daily. Dividend income is recorded on the ex-dividend date except for certain dividends from securities where the dividend rate is not available. In such cases, the dividend is recorded as soon as the information is received by the Funds. Distributions to shareholders are recorded on the ex-dividend date. Distributable earnings are determined according to income tax regulations (tax basis) and may differ from earnings recorded in accordance with U.S. GAAP. These
differences may be permanent or temporary. Permanent differences are reclassified among capital accounts to reflect their tax character. These reclassifications have no impact on net assets or the results of operations. Temporary differences are not reclassified, as they may reverse in subsequent periods.*
Common expenses incurred by the Trust are allocated among the Funds based on the ratio of net assets of each Fund to the combined net assets of the Trust or based on the ratio of number of shareholders of each Fund to the combined number of shareholders of the Trust. Fund specific expenses are charged directly to the Fund that incurred the expense.
Realized and unrealized gains and losses and net investment income, excluding class specific expenses, are allocated daily to each class of shares based upon the relative proportion of net assets of each class. Differences in per share distributions by class are generally due to differences in class specific expenses.
f. Accounting Estimates
The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the amounts of income and expenses during the reporting period. Actual results could differ from those estimates.
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FRANKLIN STRATEGIC SERIES
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
1. Organization and Significant Accounting Policies (continued)
g. Guarantees and Indemnifications
Under the Trust’s organizational documents, its officers and trustees are indemnified by the Trust against certain liabilities arising out of the performance of their duties to the Trust. Additionally, in the normal course of business, the Trust, on
behalf of the Funds, enters into contracts with service providers that contain general indemnification clauses. The Trust’s maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Trust that have not yet occurred. Currently, the Trust expects the risk of loss to be remote.
*Effective during the current reporting period, it is no longer required to present certain line items on the Statements of Changes in Net Assets. Such disclosure changes are included in the Statements of Changes in Net Assets, therefore prior period amounts are presented below.
For the year ended April 30, 2018, distributions to shareholders were as follows:
| | | | | | | | | | | | | | | | |
| | | Franklin Growth
Opportunities Fund | | | Franklin Select U.S.
Equity Fund | | | Franklin Small Cap
Growth Fund | | | Franklin
Small-Mid Cap
Growth Fund | |
Distributions from net realized gains: | | | | | | | | | | | | | | | | |
Class A | | | $(189,384,206 | ) | | | $ — | | | | $(13,026,727 | ) | | | $(188,183,859 | ) |
Class C | | | (36,890,234 | ) | | | — | | | | (2,968,851 | ) | | | (37,764,936 | ) |
Class R | | | (3,861,226 | ) | | | — | | | | (1,455,647 | ) | | | (6,640,970 | ) |
Class R6 | | | (26,495,718 | ) | | | — | | | | (16,214,723 | ) | | | (21,566,773 | ) |
Advisor Class | | | (42,059,463 | ) | | | — | | | | (13,459,989 | ) | | | (39,628,357 | ) |
For the year ended April 30, 2018, accumulated net investment loss included in net assets was as follows:
| | | | |
| Fund | | Accumulated net
investment loss | |
Franklin Growth Opportunities Fund | | | $(4,268,478 | ) |
Franklin Select U.S. Equity Fund | | | $ (243,541 | ) |
Franklin Small Cap Growth Fund | | | $(2,644,648 | ) |
Franklin Small-Mid Cap Growth Fund | | | $ — | |
2. Shares of Beneficial Interest
At October 31, 2018, there were an unlimited number of shares authorized (without par value). Transactions in the Funds’ shares were as follows:
| | | | | | | | | | | | | | | | |
| | | Franklin Growth | | | Franklin Select U.S. | |
| | | Opportunities Fund | | | Equity Fund | |
| | | | |
| | | Shares | | | Amount | | | Shares | | | Amount | |
Class A Shares: | | | | | | | | | | | | | | | | |
Six Months ended October 31, 2018 | | | | | | | | | | | | | | | | |
Shares solda | | | 7,257,876 | | | $ | 295,658,732 | | | | 569,190 | | | $ | 9,777,381 | |
Shares redeemed | | | (4,777,086 | ) | | | (198,118,449 | ) | | | (412,715 | ) | | | (7,095,682 | ) |
| | | | |
Net increase (decrease) | | | 2,480,790 | | | $ | 97,540,283 | | | | 156,475 | | | $ | 2,681,699 | |
| | | | |
Year ended April 30, 2018 | | | | | | | | | | | | | | | | |
Shares sold | | | 7,166,896 | | | $ | 269,822,921 | | | | 503,310 | | | $ | 8,051,742 | |
Shares issued in reinvestment of distributions | | | 4,805,055 | | | | 175,240,189 | | | | — | | | | — | |
Shares redeemed | | | (14,319,505 | ) | | | (536,928,068 | ) | | | (1,600,612 | ) | | | (25,165,556 | ) |
| | | | |
Net increase (decrease) | | | (2,347,554 | ) | | $ | (91,864,958 | ) | | | (1,097,302 | ) | | $ | (17,113,814 | ) |
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FRANKLIN STRATEGIC SERIES
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
| | | | | | | | | | | | | | | | |
| | | Franklin Growth Opportunities Fund | | | Franklin Select U.S. Equity Fund | |
| | | Shares | | | Amount | | | Shares | | | Amount | |
Class C Shares: | | | | | | | | | | | | | | | | |
Six Months ended October 31, 2018 | | | | | | | | | | | | | | | | |
Shares sold | | | 872,537 | | | $ | 30,597,963 | | | | 112,140 | | | $ | 1,819,445 | |
Shares redeemeda | | | (5,854,284 | ) | | | (199,506,211 | ) | | | (322,807 | ) | | | (5,185,237) | |
| | | | |
Net increase (decrease) | | | (4,981,747 | ) | | $ | (168,908,248 | ) | | | (210,667 | ) | | $ | (3,365,792) | |
| | | | |
Year ended April 30, 2018 | | | | | | | | | | | | | | | | |
Shares sold | | | 1,416,968 | | | $ | 45,670,045 | | | | 169,798 | | | $ | 2,570,525 | |
Shares issued in reinvestment of distributions | | | 1,171,816 | | | | 36,291,145 | | | | — | | | | — | |
Shares redeemed | | | (3,285,529 | ) | | | (105,588,146 | ) | | | (401,846 | ) | | | (6,013,029) | |
| | | | |
Net increase (decrease) | | | (696,745 | ) | | $ | (23,626,956 | ) | | | (232,048 | ) | | $ | (3,442,504) | |
| | | | |
Class R Shares: | | | | | | | | | | | | | | | | |
Six Months ended October 31, 2018 | | | | | | | | | | | | | | | | |
Shares sold | | | 92,540 | | | $ | 3,675,571 | | | | 184 | | | $ | 3,097 | |
Shares redeemed | | | (143,874 | ) | | | (5,634,990 | ) | | | (292 | ) | | | (4,982) | |
| | | | |
Net increase (decrease) | | | (51,334 | ) | | $ | | (1,959,419) | | | (108 | ) | | $ | (1,885) | |
| | | | |
Year ended April 30, 2018 | | | | | | | | | | | | | | | | |
Shares sold | | | 184,889 | | | $ | 6,657,157 | | | | 5,129 | | | $ | 77,884 | |
Shares issued in reinvestment of distributions | | | 109,382 | | | | 3,821,807 | | | | — | | | | — | |
Shares redeemed | | | (808,089 | ) | | | (28,845,473 | ) | | | (7,727 | ) | | | (121,843) | |
| | | | |
Net increase (decrease) | | | (513,818 | ) | | $ | (18,366,509 | ) | | | (2,598 | ) | | $ | (43,959) | |
| | | | |
Class R6 Shares: | | | | | | | | | | | | | | | | |
Six Months ended October 31, 2018 | | | | | | | | | | | | | | | | |
Shares sold | | | 758,900 | | | $ | 33,814,413 | | | | 5,151 | | | $ | 89,694 | |
Shares redeemed | | | (790,073 | ) | | | (35,437,480 | ) | | | (8,100 | ) | | | (142,550) | |
| | | | |
Net increase (decrease) | | | (31,173 | ) | | $ | | (1,623,067) | | | (2,949 | ) | | $ | (52,856) | |
| | | | |
Year ended April 30, 2018 | | | | | | | | | | | | | | | | |
Shares sold | | | 1,719,083 | | | $ | 70,340,588 | | | | 85,528 | | | $ | 1,360,151 | |
Shares issued in reinvestment of distributions | | | 516,029 | | | | 20,352,194 | | | | — | | | | — | |
Shares redeemed | | | (1,209,156 | ) | | | (49,339,448 | ) | | | (1,350,483 | ) | | | (20,766,517) | |
| | | | |
Net increase (decrease) | | | 1,025,956 | | | $ | 41,353,334 | | | | (1,264,955 | ) | | $ | (19,406,366) | |
| | | | |
Advisor Class Shares: | | | | | | | | | | | | | | | | |
Six Months ended October 31, 2018 | | | | | | | | | | | | | | | | |
Shares sold | | | 1,370,255 | | | $ | 60,775,277 | | | | 122,595 | | | $ | 2,145,129 | |
Shares redeemed | | | (1,755,221 | ) | | | (78,703,702 | ) | | | (48,777 | ) | | | (858,998) | |
| | | | |
Net increase (decrease) | | | (384,966 | ) | | $ | (17,928,425 | ) | | | 73,818 | | | $ | 1,286,131 | |
| | | | |
Year ended April 30, 2018 | | | | | | | | | | | | | | | | |
Shares sold | | | 2,255,020 | | | $ | 89,869,837 | | | | 224,083 | | | $ | 3,543,200 | |
Shares issued in reinvestment of distributions | | | 1,049,408 | | | | 40,968,889 | | | | — | | | | — | |
Shares redeemed | | | (3,702,910 | ) | | | (149,211,091 | ) | | | (442,950 | ) | | | (7,018,498) | |
| | | | |
Net increase (decrease) | | | (398,482 | ) | | $ | (18,372,365 | ) | | | (218,867 | ) | | $ | (3,475,298) | |
| | | | |
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FRANKLIN STRATEGIC SERIES
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
2. Shares of Beneficial Interest (continued)
| | | | | | | | | | | | | | | | |
| | | Franklin Small Cap Growth Fund | | | Franklin Small-Mid Cap Growth Fund | |
| | | | |
| | | Shares | | | Amount | | | Shares | | | Amount | |
Class A Shares: | | | | | | | | | | | | | | | | |
Six Months ended October 31, 2018 | | | | | | | | | | | | | | | | |
Shares solda | | | 3,635,208 | | | $ | 90,395,669 | | | | 9,410,625 | | | $ | 352,963,377 | |
Shares redeemed | | | (3,987,623) | | | | (100,405,185) | | | | (5,634,609) | | | | (215,199,970) | |
| | | | |
| | | | |
Net increase (decrease) | | | (352,415) | | | $ | (10,009,516) | | | | 3,776,016 | | | $ | 137,763,407 | |
| | | | |
| | | | |
Year ended April 30, 2018 | | | | | | | | | | | | | | | | |
Shares sold | | | 3,189,012 | | | $ | 67,849,901 | | | | 10,215,023 | | | $ | 369,305,768 | |
Shares issued in reinvestment of distributions | | | 547,334 | | | | 11,920,682 | | | | 5,062,829 | | | | 177,806,171 | |
Shares redeemed | | | (11,554,343) | | | | (245,073,266) | | | | (19,601,669) | | | | (712,235,557) | |
| | | | |
| | | | |
Net increase (decrease) | | | (7,817,997) | | | $ | (165,302,683) | | | | (4,323,817) | | | $ | (165,123,618) | |
| | | | |
| | | | |
Class C Shares: | | | | | | | | | | | | | | | | |
Six Months ended October 31, 2018 | | | | | | | | | | | | | | | | |
Shares sold | | | 209,869 | | | $ | 4,446,956 | | | | 947,242 | | | $ | 25,733,614 | |
Shares redeemeda | | | (2,392,405) | | | | (49,223,900) | | | | (7,502,265) | | | | (197,678,297) | |
| | | | |
| | | | |
Net increase (decrease) | | | (2,182,536) | | | $ | (44,776,944) | | | | (6,555,023) | | | $ | (171,944,683) | |
| | | | |
| | | | |
Year ended April 30, 2018 | | | | | | | | | | | | | | | | |
Shares sold | | | 279,449 | | | $ | 5,088,767 | | | | 1,315,525 | | | $ | 34,824,098 | |
Shares issued in reinvestment of distributions | | | 156,063 | | | | 2,874,674 | | | | 1,482,639 | | | | 37,392,153 | |
Shares redeemed | | | (2,157,881) | | | | (38,362,296) | | | | (4,350,045) | | | | (115,440,720) | |
| | | | |
| | | | |
Net increase (decrease) | | | (1,722,369) | | | $ | (30,398,855) | | | | (1,551,881) | | | $ | (43,224,469) | |
| | | | |
| | | | |
Class R Shares: | | | | | | | | | | | | | | | | |
Six Months ended October 31, 2018 | | | | | | | | | | | | | | | | |
Shares sold | | | 565,479 | | | $ | 13,715,673 | | | | 220,252 | | | $ | 7,739,994 | |
Shares redeemed | | | (634,175) | | | | (15,326,582) | | | | (268,734) | | | | (9,414,568) | |
| | | | |
| | | | |
Net increase (decrease) | | | (68,696) | | | $ | (1,610,909) | | | | (48,482) | | | $ | (1,674,574) | |
| | | | |
| | | | |
Year ended April 30, 2018 | | | | | | | | | | | | | | | | |
Shares sold | | | 642,577 | | | $ | 13,280,250 | | | | 564,940 | | | $ | 18,785,330 | |
Shares issued in reinvestment of distributions | | | 69,237 | | | | 1,438,739 | | | | 197,203 | | | | 6,369,651 | |
Shares redeemed | | | (1,724,856) | | | | (34,995,989) | | | | (1,198,049) | | | | (40,113,390) | |
| | | | |
| | | | |
Net increase (decrease) | | | (1,013,042) | | | $ | (20,277,000) | | | | (435,906) | | | $ | (14,958,409) | |
| | | | |
| | | | |
Class R6 Shares: | | | | | | | | | | | | | | | | |
Six Months ended October 31, 2018 | | | | | | | | | | | | | | | | |
Shares sold | | | 6,161,099 | | | $ | 169,587,523 | | | | 985,570 | | | $ | 41,007,203 | |
Shares redeemed | | | (6,805,084) | | | | (184,009,121) | | | | (1,317,360) | | | | (56,136,425) | |
| | | | |
| | | | |
Net increase (decrease) | | | (643,985) | | | $ | (14,421,598) | | | | (331,790) | | | $ | (15,129,222) | |
| | | | |
| | | | |
Year ended April 30, 2018 | | | | | | | | | | | | | | | | |
Shares sold | | | 9,126,555 | | | $ | 210,441,655 | | | | 2,883,707 | | | $ | 115,938,495 | |
Shares issued in reinvestment of distributions | | | 599,648 | | | | 14,103,732 | | | | 509,486 | | | | 19,762,976 | |
Shares redeemed | | | (12,909,982) | | | | (300,321,532) | | | | (2,414,377) | | | | (96,501,514) | |
| | | | |
| | | | |
Net increase (decrease) | | | (3,183,779) | | | $ | (75,776,145) | | | | 978,816 | | | $ | 39,199,957 | |
| | | | |
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FRANKLIN STRATEGIC SERIES
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
| | | | | | | | | | | | | | | | |
| | | Franklin Small Cap Growth Fund | | | Franklin Small-Mid Cap Growth Fund | |
| | | | |
| | | Shares | | | Amount | | | Shares | | | Amount | |
Advisor Class Shares: | | | | | | | | | | | | | | | | |
Six Months ended October 31, 2018 | | | | | | | | | | | | | | | | |
Shares sold | | | 2,886,532 | | | $ | 78,570,799 | | | | 1,789,434 | | | $ | 74,788,763 | |
Shares redeemed | | | (3,666,667 | ) | | | (99,028,551 | ) | | | (1,726,099 | ) | | | (71,671,852) | |
| | | | |
| | | | |
Net increase (decrease) | | | (780,135 | ) | | $ | (20,457,752 | ) | | | 63,335 | | | $ | 3,116,911 | |
| | | | |
| | | | |
Year ended April 30, 2018 | | | | | | | | | | | | | | | | |
Shares sold | | | 5,063,743 | | | $ | 115,186,325 | | | | 2,962,038 | | | $ | 115,876,935 | |
Shares issued in reinvestment of distributions | | | 516,706 | | | | 12,028,914 | | | | 979,925 | | | | 37,482,152 | |
Shares redeemed | | | (15,186,221 | ) | | | (345,941,426 | ) | | | (6,459,038 | ) | | | (254,294,102) | |
| | | | |
| | | | |
Net increase (decrease) | | | (9,605,772 | ) | | $ | (218,726,187 | ) | | | (2,517,075 | ) | | $ | (100,935,015) | |
| | | | |
aMay include a portion of Class C shares that were automatically converted to Class A.
3. Transactions with Affiliates
Franklin Resources, Inc. is the holding company for various subsidiaries that together are referred to as Franklin Templeton Investments. Certain officers and trustees of the Trust are also officers and/or directors of the following subsidiaries:
| | |
| Subsidiary | | Affiliation |
Franklin Advisers, Inc. (Advisers) | | Investment manager |
Franklin Templeton Services, LLC (FT Services) | | Administrative manager |
Franklin Templeton Distributors, Inc. (Distributors) | | Principal underwriter |
Franklin Templeton Investor Services, LLC (Investor Services) | | Transfer agent |
a. Management Fees
Franklin Growth Opportunities 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 |
0.700% | | Up to and including $500 million |
0.600% | | Over $500 million, up to and including $1 billion |
0.550% | | Over $1 billion, up to and including $1.5 billion |
0.500% | | Over $1.5 billion, up to and including $6.5 billion |
0.475% | | Over $6.5 billion, up to and including $11.5 billion |
0.450% | | Over $11.5 billion, up to and including $16.5 billion |
0.440% | | Over $16.5 billion, up to and including $19 billion |
0.430% | | Over $19 billion, up to and including $21.5 billion |
0.420% | | In excess of $21.5 billion |
| | | | |
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FRANKLIN STRATEGIC SERIES
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
3. Transactions with Affiliates (continued)
a. Management Fees (continued)
Franklin Select U.S. Equity 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 |
0.950% | | Up to and including $500 million |
0.850% | | Over $500 million, up to and including $1 billion |
0.800% | | Over $1 billion, up to and including $1.5 billion |
0.750% | | Over $1.5 billion, up to and including $6.5 billion |
0.725% | | Over $6.5 billion, up to and including $11.5 billion |
0.700% | | Over $11.5 billion, up to and including $16.5 billion |
0.690% | | Over $16.5 billion, up to and including $19 billion |
0.680% | | Over $19 billion, up to and including $21.5 billion |
0.670% | | In excess of $21.5 billion |
Franklin Small Cap Growth 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 |
0.750% | | Up to and including $500 million |
0.650% | | Over $500 million, up to and including $1 billion |
0.600% | | Over $1 billion, up to and including $1.5 billion |
0.550% | | Over $1.5 billion, up to and including $6.5 billion |
0.525% | | Over $6.5 billion, up to and including $11.5 billion |
0.500% | | Over $11.5 billion, up to and including $16.5 billion |
0.490% | | Over $16.5 billion, up to and including $19 billion |
0.480% | | Over $19 billion, up to and including $21.5 billion |
0.470% | | In excess of $21.5 billion |
Franklin Small-Mid Cap Growth Fund pays an investment management fee to Advisers based on the average daily net assets of the Fund as follows:
| | |
| Annualized Fee Rate | | Net Assets |
0.625% | | Up to and including $100 million |
0.500% | | Over $100 million, up to and including $250 million |
0.450% | | Over $250 million, up to and including $7.5 billion |
0.440% | | Over $7.5 billion, up to and including $10 billion |
0.430% | | Over $10 billion, up to and including $12.5 billion |
0.420% | | Over $12.5 billion, up to and including $15 billion |
0.400% | | In excess of $15 billion |
| | | | |
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FRANKLIN STRATEGIC SERIES
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
For the period ended October 31, 2018, each Fund’s annualized gross effective investment management fee rate based on average daily net assets was as follows:
| | | | | | | | | | | | | | |
Franklin Growth
Opportunities
Fund | | | Franklin
Select U.S.
Equity Fund | | | Franklin
Small Cap
Growth Fund | | | Franklin
Small-Mid Cap
Growth Fund | |
| | 0.543% | | | | 0.950% | | | | 0.613% | | | | 0.457% | |
b. Administrative Fees
Under an agreement with Advisers, FT Services provides administrative services to the Funds. The fee is paid by Advisers based on each of the Funds’ average daily net assets, and is not an additional expense of the Funds.
c. Distribution Fees
The Board has adopted distribution plans for each share class, with the exception of Class R6 and Advisor Class shares, pursuant to Rule 12b-1 under the 1940 Act. Under the Funds’ Class A reimbursement distribution plans, the Funds reimburse Distributors for costs incurred in connection with the servicing, sale and distribution of each Fund’s shares up to the maximum annual plan rate. Under the Class A reimbursement distribution plans, costs exceeding the maximum for the current plan year cannot be reimbursed in subsequent periods. In addition, under the Funds’ Class C and R compensation distribution plans, the Funds pay Distributors for costs incurred in connection with the servicing, sale and distribution of each Fund’s shares up to the maximum annual plan rate for each class. The plan year, for purposes of monitoring compliance with the maximum annual plan rates, is February 1 through January 31 for each Fund.
The maximum annual plan rates, based on the average daily net assets, for each class, are as follows:
| | | | | | | | | | | | | | | | |
| | | Franklin Growth
Opportunities Fund | | | Franklin
Select U.S.
Equity Fund | | | Franklin
Small Cap
Growth Fund | | | Franklin
Small-Mid Cap
Growth Fund | |
Reimbursement Plans: | | | | | | | | | | | | | | | | |
Class A | | | 0.35% | | | | 0.35% | | | | 0.35% | | | | 0.25% | |
Compensation Plans: | | | | | | | | | | | | | | | | |
Class C | | | 1.00% | | | | 1.00% | | | | 1.00% | | | | 1.00% | |
Class R | | | 0.50% | | | | 0.50% | | | | 0.50% | | | | 0.50% | |
For Franklin Growth Opportunities Fund, Franklin Select U.S. Equity Fund and Franklin Small Cap Growth Fund, the Board has set the current rate at 0.25% per year for Class A shares until further notice and approval by the Board.
d. Sales Charges/Underwriting Agreements
Front-end sales charges and contingent deferred sales charges (CDSC) do not represent expenses of the Funds. 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 Funds of the following commission transactions related to the sales and redemptions of the Funds’ shares for the period:
| | | | | | | | | | | | | | | | |
| | | Franklin Growth
Opportunities Fund | | | Franklin
Select U.S.
Equity Fund | | | Franklin
Small Cap
Growth Fund | | | Franklin
Small-Mid Cap
Growth Fund | |
Sales charges retained net of commissions paid to unaffiliated brokers/dealers | | | $231,172 | | | | $10,930 | | | | $13,076 | | | | $306,789 | |
CDSC retained | | | $ 4,589 | | | | $ 403 | | | | $ 709 | | | | $ 9,242 | |
| | | | |
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FRANKLIN STRATEGIC SERIES
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
3. Transactions with Affiliates (continued)
d. Sales Charges/Underwriting Agreements (continued)
Effective September 10, 2018, the Board approved changes to certain front-end sales charges and dealer commissions on Class A shares. Further details are disclosed in the Funds’ Prospectus.
e. Transfer Agent Fees
Each class of shares pays transfer agent fees to Investor Services for its performance of shareholder servicing obligations. The fees are based on an annualized asset based fee of 0.02% plus a transaction based fee. In addition, each class reimburses Investor Services for out of pocket expenses incurred and, except for Class R6, reimburses 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 period ended October 31, 2018, the Funds paid transfer agent fees as noted in the Statements of Operations of which the following amounts were retained by Investor Services:
| | | | | | | | | | | | | | | | |
| | | Franklin Growth
Opportunities Fund | | | Franklin
Select U.S.
Equity Fund | | | Franklin
Small Cap
Growth Fund | | | Franklin
Small-Mid Cap
Growth Fund | |
Transfer agent fees | | | $1,081,682 | | | | $34,713 | | | | $721,767 | | | | $1,190,418 | |
f. Investments in Affiliated Management Investment Companies
Certain or all Funds invest 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 Funds are waived on assets invested in the affiliated management investment companies, as noted in the Statements of Operations, in an amount not to exceed the management and administrative fees paid directly or indirectly by each affiliate. During the period ended October 31, 2018, investments in affiliated management investment companies were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Number of
Shares Held at Beginning
of Period | | | Gross
Additions | | | Gross
Reductions | | | Number of
Shares Held at End of Period | | | Value at End of Period | | | Dividend
Income | | | Realized
Gain
(Loss) | | | Net Change in
Unrealized
Appreciation
(Depreciation) | |
Franklin Growth Opportunities Fund | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Non-Controlled Affiliates | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Institutional Fiduciary Trust Money Market Portfolio, 1.83% | | | 18,556,305 | | | | 444,177,013 | | | | (383,530,515 | ) | | | 79,202,803 | | | | $ 79,202,803 | | | | $152,301 | | | | $ — | | | | $ — | |
Franklin Select U.S. Equity Fund | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Non-Controlled Affiliates | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Institutional Fiduciary Trust Money Market Portfolio, 1.83% | | | 761,261 | | | | 11,287,866 | | | | (7,386,870 | ) | | | 4,662,257 | | | | $ 4,662,257 | | | | $ 24,572 | | | | $ — | | | | $ — | |
Franklin Small Cap Growth Fund | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Non-Controlled Affiliates | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Institutional Fiduciary Trust Money Market Portfolio, 1.83% | | | 91,669,644 | | | | 630,309,093 | | | | (643,022,026 | ) | | | 78,956,711 | | | | $ 78,956,711 | | | | $419,396 | | | | $ — | | | | $ — | |
Franklin Small-Mid Cap Growth Fund | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Non-Controlled Affiliates | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Institutional Fiduciary Trust Money Market Portfolio, 1.83% | | | 143,228,358 | | | | 471,081,540 | | | | (476,199,019 | ) | | | 138,110,879 | | | | $138,110,879 | | | | $989,632 | | | | $ — | | | | $ — | |
| | | | |
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FRANKLIN STRATEGIC SERIES
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
g. Waiver and Expense Reimbursements
Advisers and Investor Services have contractually agreed in advance to waive or limit their respective fees and to assume as their own expense certain expenses otherwise payable by Franklin Select U.S. Equity Fund so that the expenses (excluding distribution fees and acquired fund fees and expenses) for Class A, Class C, Class R and Advisor Class of the Fund does not exceed 1.00%, and Class R6 does not exceed 0.88% based on the average net assets of each class (other than certain non-routine expenses or costs, including those relating to litigation, indemnification, reorganizations, and liquidations) until August 31, 2019. Total expenses waived or paid are not subject to recapture subsequent to the Fund’s fiscal year end.
Prior to September 1, 2018, expenses (excluding certain fees and expenses as previously disclosed) for Franklin Select U.S. Equity Fund for Class R6 were limited to 0.84% based on the average net assets of the class.
For Franklin Growth Opportunities Fund, Franklin Small Cap Growth Fund and Franklin Small-Mid Cap Growth Fund, Investor Services has voluntarily agreed in advance to waive or limit its fees so that the Class R6 transfer agent fees do not exceed 0.02% based on the average net assets of the class. Investor Services may discontinue this waiver in the future.
h. Other Affiliated Transactions
At October 31, 2018, one or more of the funds in Franklin Fund Allocator Series owned 5.5% of the Franklin Growth Opportunities Fund outstanding shares.
4. Expense Offset Arrangement
The Funds have entered into an arrangement with their custodian whereby credits realized as a result of uninvested cash balances are used to reduce a portion of the Funds’ custodian expenses. During the period ended October 31, 2018, the custodian fees were reduced as noted in the Statements of Operations.
5. Income Taxes
For tax purposes, the Funds may elect to defer any portion of late-year ordinary to the first day of the following fiscal year. At April 30, 2018, the deferred were as follows:
| | | | | | | | | | | | |
| | | Franklin Growth
Opportunities Fund | | | Franklin
Select U.S.
Equity Fund | | | Franklin
Small Cap
Growth Fund | |
Late-year ordinary losses | | | $4,273,095 | | | | $243,544 | | | | $2,644,651 | |
At October 31, 2018, the cost of investments and net unrealized appreciation (depreciation) for income tax purposes were as follows:
| | | | | | | | | | | | | | | | |
| | | Franklin Growth
Opportunities Fund | | | Franklin
Select U.S.
Equity Fund | | | Franklin Small Cap Growth Fund | | | Franklin
Small-Mid Cap
Growth Fund | |
Cost of investments | | | $2,125,578,971 | | | $ | 88,642,192 | | | $ | 2,069,861,309 | | | $ | 2,584,951,950 | |
| | | | |
| | | | |
Unrealized appreciation | | | $1,738,537,434 | | | $ | 11,929,729 | | | $ | 677,751,268 | | | $ | 943,208,033 | |
Unrealized depreciation | | | (72,749,769 | ) | | | (4,781,851 | ) | | | (180,603,259 | ) | | | (74,745,150) | |
| | | | |
| | | | |
Net unrealized appreciation (depreciation) | | | $1,665,787,665 | | | $ | 7,147,878 | | | $ | 497,148,009 | | | $ | 868,462,883 | |
| | | | |
Differences between income and/or capital gains as determined on a book basis and a tax basis are primarily due to differing treatment of wash sales.
| | | | |
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FRANKLIN STRATEGIC SERIES
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
6. Investment Transactions
Purchases and sales of investments (excluding short term securities) for the period ended October 31, 2018, were as follows:
| | | | | | | | | | | | | | | | |
| | | Franklin Growth
Opportunities Fund | | | Franklin
Select U.S.
Equity Fund | | | Franklin
Small Cap
Growth Fund | | | Franklin
Small-Mid Cap
Growth Fund | |
Purchases | | | $638,306,087 | | | | $ 162,763 | | | | $667,250,726 | | | | $ 988,094,105 | |
Sales | | | $769,255,422 | | | | $3,756,136 | | | | $771,148,434 | | | | $1,052,870,261 | |
At October 31, 2018, in connection with securities lending transactions, certain or all Funds loaned investments and received cash collateral as follows:
| | | | | | | | | | | | |
| | | Franklin Growth
Opportunities Fund | | | Franklin Small Cap
Growth Fund | | | Franklin Small-Mid Cap Growth Fund | |
Securities lending transactionsa: | | | | | | | | | | | | |
Equity investmentsb | | | $2,175,000 | | | | $67,585,075 | | | | $9,970,826 | |
aThe agreements can be terminated at any time.
bThe gross amount of recognized liability for such transactions is included in payable upon return of securities loaned in the Statements of Assets and Liabilities.
7. Restricted Securities
Certain or all Funds invest in securities that are restricted under the Securities Act of 1933 (1933 Act). Restricted securities are often purchased in private placement transactions, and cannot be sold without prior registration unless the sale is pursuant to an exemption under the 1933 Act. Disposal of these securities may require greater effort and expense, and prompt sale at an acceptable price may be difficult. The Funds may have registration rights for restricted securities. The issuer generally incurs all registration costs.
At October 31, 2018, investments in restricted securities, excluding securities exempt from registration under the 1933 Act deemed to be liquid, were as follows:
| | | | | | | | | | | | | | | | |
| Shares | | | Issuer | | Acquisition Date | | | Cost | | | Value | |
| | Franklin Growth Opportunities Fund | | | | | | | | | | | | |
| | 2,610,594 | | | ClearMotion Inc., pfd., C | | | 11/06/17 | | | $ | 5,500,000 | | | $ | 6,150,418 | |
| | 418,321 | | | LegalZoom.com Inc. | | | 7/20/18 | | | | 17,536,016 | | | | 17,536,016 | |
| | 509,182 | | | Optoro Inc., pfd., E | | | 7/24/18 | | | | 10,020,702 | | | | 10,020,702 | |
| | 2,362,202 | | | Proterra Inc., pfd., 5, 144A | | | 9/21/16 - 1/13/17 | | | | 11,896,616 | | | | 18,559,431 | |
| | 596,775 | | | Proterra Inc., pfd., 6, 144A | | | 6/07/17 | | | | 3,306,052 | | | | 4,688,763 | |
| | 780,667 | | | Proterra Inc., pfd., 7 | | | 5/21/18 - 9/18/18 | | | | 5,094,960 | | | | 6,133,572 | |
| | 805,800 | | | Tanium Inc., pfd., G | | | 9/14/15 | | | | 4,000,233 | | | | 6,373,855 | |
| | | | | | | | | | | | |
| | | | Total Restricted Securities (Value is 1.8% of Net Assets) | | | | | | $ | 57,354,579 | | | $ | 69,462,757 | |
| | | | | | | | | | | | |
| | Franklin Small Cap Growth Fund | | | | | | | | | | | | |
| | 9,905,685 | | | DraftKings Inc. | | | 8/07/15 - 3/02/17 | | | $ | 26,627,302 | | | $ | 22,601,167 | |
| | 357,820 | | | LegalZoom.com Inc. | | | 7/20/18 | | | | 14,999,814 | | | | 14,999,814 | |
| | 508,130 | | | Optoro Inc., pfd., E | | | 7/24/18 | | | | 9,999,999 | | | | 9,999,999 | |
| | 1,038,769 | | | Peloton Interactive Inc., pfd., F | | | 8/08/18 | | | | 15,000,011 | | | | 15,000,011 | |
| | 1,787,047 | | | Proterra Inc., pfd., 5, 144A | | | 9/21/16 - 1/13/17 | | | | 8,999,998 | | | | 14,040,534 | |
| | 1,310,834 | | | Proterra Inc., pfd., 6, 144A | | | 6/07/17 - 1/02/18 | | | | 7,261,842 | | | | 10,299,006 | |
| | 536,367 | | | Proterra Inc., pfd., 7 | | | 5/21/18 | | | | 3,500,556 | | | | 4,214,147 | |
| | 1,542,673 | | | Smule Inc., pfd., G, 144A | | | 5/31/16 | | | | 11,099,995 | | | | 13,412,075 | |
| | 352,675 | | | Smule Inc., pfd., H, 144A | | | 4/27/17 | | | | 2,999,995 | | | | 3,245,645 | |
| | 3,611,111 | | | Tula Technology Inc., E | | | 9/08/17 | | | | 6,500,000 | | | | 6,662,886 | |
| | | | | | | | | | | | |
| | | | Total Restricted Securities (Value is 4.6% of Net Assets) | | | | | | $ | 106,989,512 | | | $ | 114,475,284 | |
| | | | | | | | | | | | |
| | | | |
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FRANKLIN STRATEGIC SERIES
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
| | | | | | | | | | | | | | |
| Shares | | Issuer | | Acquisition Date | | | Cost | | | Value | |
Franklin Small-Mid Cap Growth Fund | | | | | | | | | | | | |
| 7,974,537 | | DraftKings Inc. | | | 8/07/15 - 3/02/17 | | | | $21,380,303 | | | | $18,194,991 | |
| 1,416,913 | | Proterra Inc., pfd., 5, 144A | | | 9/21/16 | | | | 7,135,914 | | | | 11,132,452 | |
| | Total Restricted Securities (Value is 0.9% of Net Assets) | | | | | | | $28,516,217 | | | | $29,327,443 | |
8. Holdings of 5% Voting Securities of Portfolio Companies
The 1940 Act defines “affiliated companies” to include investments in portfolio companies in which a fund owns 5% or more of the outstanding voting securities. During the period ended October 31, 2018, investments in “affiliated companies” were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Name of Issuer | | Number of
Shares Held
at Beginning
of Period | | | Gross
Additions | | | Gross
Reductions | | | Number of
Shares Held
at End of Period | | | Value at End of Period | | | Dividend
Income | | | Realized Gain (Loss) | | | Net Change
in Unrealized
Appreciation
(Depreciation) | |
Franklin Growth Opportunities Fund | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Non-Controlled Affiliates | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Optoro Inc., pfd., E (Value is 0.3% of Net Assets) | | | — | | | | 509,182 | | | | — | | | | 509,182 | | | $ | 10,020,702 | | | | $ — | | | $ | — | | | | $ — | |
Franklin Small Cap Growth Fund | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Non-Controlled Affiliates | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Aratana Therapeutics Inc. | | | 2,697,019 | | | | — | | | | (230,100 | ) | | | 2,466,919 | | | $ | 14,653,499 | | | | $ — | | | $ | (3,550,800 | ) | | | $ 5,556,274 | |
The KeyW Holding Corp. | | | 3,430,282 | | | | — | | | | — | | | | 3,430,282 | | | | 26,859,108 | | | | — | | | | — | | | | 308,725 | |
Optoro Inc., pfd., E | | | — | | | | 508,130 | | | | — | | | | 508,130 | | | | 9,999,999 | | | | — | | | | — | | | | — | |
Pfenex Inc. | | | 1,175,631 | | | | 611,700 | | | | — | | | | 1,787,331 | | | | 7,095,704 | | | | — | | | | — | | | | (2,763,804 | ) |
Sportsman’s Warehouse Holdings Inc. | | | 4,162,000 | | | | — | | | | (573,800 | ) | | | 3,588,200 | | | | 18,048,646 | | | | — | | | | (3,010,961 | ) | | | 3,556,688 | |
Total Affiliated Securities (Value is 3.1% of Net Assets) | | | | | | | | | | | $ | 76,656,956 | | | | $ — | | | $ | (6,561,761 | ) | | | $ 6,657,883 | |
9. Credit Facility
The Funds, 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 8, 2019. 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 Funds shall, in addition to interest charged on any borrowings made by the Funds and other costs incurred by the Funds, pay their share of fees and expenses incurred in connection with the implementation and maintenance of the Global Credit Facility, based upon their 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 Statements of Operations. During the period ended October 31, 2018, the Funds did not use the Global Credit Facility.
| | | | |
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FRANKLIN STRATEGIC SERIES
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
10. Fair Value Measurements
The Funds follow a fair value hierarchy that distinguishes between market data obtained from independent sources (observable inputs) and the Funds’ own market assumptions (unobservable inputs). These inputs are used in determining the value of the Funds’ 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 Funds’ 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 Funds have adopted a policy of recognizing the transfers as of the date of the underlying event which caused the movement.
A summary of inputs used as of October 31, 2018 , in valuing the Funds’ assets carried at fair value, is as follows:
| | | | | | | | | | | | | | | | |
| | | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
Franklin Growth Opportunities Fund | | | | | | | | | | | | | | | | |
Assets: | | | | | | | | | | | | | | | | |
Investments in Securities:a | | | | | | | | | | | | | | | | |
Equity Investments:b | | | | | | | | | | | | | | | | |
Communication Services | | $ | 329,984,706 | | | $ | — | | | $ | 6,373,855 | | | $ | 336,358,561 | |
Consumer Discretionary | | | 350,597,598 | | | | — | | | | 35,532,184 | | | | 386,129,782 | |
Industrials | | | 410,992,558 | | | | — | | | | 10,020,702 | | | | 421,013,260 | |
Information Technology | | | 1,410,980,303 | | | | — | | | | 17,536,016 | | | | 1,428,516,319 | |
All Other Equity Investments | | | 1,140,145,911 | | | | — | | | | — | | | | 1,140,145,911 | |
Short Term Investments | | | 79,202,803 | | | | — | | | | — | | | | 79,202,803 | |
Total Investments in Securities | | $ | 3,721,903,879 | | | $ | — | | | $ | 69,462,757 | | | $ | 3,791,366,636 | |
| | | | |
Franklin Select U.S. Equity Fund | | | | | | | | | | | | | | | | |
Assets: | | | | | | | | | | | | | | | | |
Investments in Securities:a | | | | | | | | | | | | | | | | |
Equity Investments | | $ | 91,127,813 | | | $ | — | | | $ | — | | | $ | 91,127,813 | |
Short Term Investments | | | 4,662,257 | | | | — | | | | — | | | | 4,662,257 | |
| | | | |
Total Investments in Securities | | $ | 95,790,070 | | | $ | — | | | $ | — | | | $ | 95,790,070 | |
Franklin Small Cap Growth Fund | | | | | | | | | | | | | | | | |
Assets: | | | | | | | | | | | | | | | | |
Investments in Securities:a | | | | | | | | | | | | | | | | |
Equity Investments:b | | | | | | | | | | | | | | | | |
Consumer Discretionary | | $ | 314,212,900 | | | $ | — | | | $ | 57,817,740 | | | $ | 372,030,640 | |
Financials | | | 207,954,482 | | | | — | | | | 15,000,011 | | | | 222,954,493 | |
Industrials | | | 447,639,150 | | | | — | | | | 9,999,999 | | | | 457,639,149 | |
Information Technology | | | 623,926,122 | | | | — | | | | 31,657,534 | | | | 655,583,656 | |
All Other Equity Investments | | | 779,844,669 | | | | — | | | | — | | | | 779,844,669 | |
Short Term Investments | | | 78,956,711 | | | | — | | | | — | | | | 78,956,711 | |
| | | | |
Total Investments in Securities | | $ | 2,452,534,034 | | | $ | — | | | $ | 114,475,284 | | | $ | 2,567,009,318 | |
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NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
| | | | | | | | | | | | | | | | |
| | | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
Franklin Small-Mid Cap Growth Fund | | | | | | | | | | | | | | | | |
Assets: | | | | | | | | | | | | | | | | |
Investments in Securities:a | | | | | | | | | | | | | | | | |
Equity Investments:b | | | | | | | | | | | | | | | | |
Consumer Discretionary | | | $ 510,444,938 | | | $ | — | | | | $ 29,327,443 | | | | $ 539,772,381 | |
All Other Equity Investments. | | | 2,775,531,573 | | | | — | | | | — | | | | 2,775,531,573 | |
Short Term Investments | | | 138,110,879 | | | | — | | | | — | | | | 138,110,879 | |
| | | | |
Total Investments in Securities | | | $ 3,424,087,390 | | | $ | — | | | | $ 29,327,443 | | | | $ 3,453,414,833 | |
aFor detailed categories, see the accompanying Statement of Investments.
bIncludes common and preferred stocks.
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 beginning and/or end of the period. At October 31, 2018, the reconciliation of assets are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Balance at
Beginning
of Period | | | Purchases | | | Sales | | | Transfer
Into (Out of)
Level 3 | | | Cost Basis
Adjustments | | | Net
Realized
Gain
(Loss) | | | Net
Unrealized
Appreciation
(Depreciation) | | | Balance at End
of Period | | | Net Change in
Unrealized
Appreciation
(Depreciation)
on Assets
Held at
Period End | |
Franklin Growth Opportunities Fund | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Assets: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Investments in Securities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Equity Investmentsa: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Communication Services | | $ | 5,074,222 | | | $ | — | | | $ | — | | | | $ — | | | | $ — | | | | $ — | | | | $ 1,299,633 | | | $ | 6,373,855 | | | | $ 1,299,633 | |
Consumer Discretionary | | | 23,116,412 | | | | 5,094,960 | | | | — | | | | — | | | | — | | | | — | | | | 7,320,812 | | | | 35,532,184 | | | | 7,320,812 | |
Industrials | | | — | | | | 10,020,702 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 10,020,702 | | | | — | |
Information Technology | | | — | | | | 17,536,016 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 17,536,016 | | | | — | |
Total Investments in Securities | | $ | 28,190,634 | | | $ | 32,651,678 | | | $ | — | | | | $ — | | | | $ — | | | | $ — | | | | $ 8,620,445 | | | $ | 69,462,757 | | | | $ 8,620,445 | |
Franklin Small Cap Growth Fund | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Assets: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Investments in Securities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Equity Investmentsa: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Consumer Discretionary | | $ | 40,098,007 | | | $ | 3,500,556 | | | $ | — | | | | $ — | | | | $ — | | | | $ — | | | | $14,219,177 | | | $ | 57,817,740 | | | | $14,219,177 | |
Financials | | | — | | | | 15,000,011 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 15,000,011 | | | | — | |
Industrials | | | — | | | | 9,999,999 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 9,999,999 | | | | — | |
Information Technology | | | 16,778,723 | | | | 14,999,814 | | | | — | | | | — | | | | — | | | | — | | | | (121,003 | ) | | | 31,657,534 | | | | (121,003 | ) |
Total Investments in Securities | | $ | 56,876,730 | | | $ | 43,500,380 | | | $ | — | | | | $ — | | | | $ — | | | | $ — | | | | $14,098,174 | | | $ | 114,475,284 | | | | $14,098,174 | |
aIncludes common and preferred stocks.
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FRANKLIN STRATEGIC SERIES
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
10. Fair Value Measurements (continued)
Significant unobservable valuation inputs for material Level 3 financial instruments and impact to fair value as a result of changes in unobservable valuation inputs as of October 31, 2018, are as follows:
| | | | | | | | | | | | | | | | | | |
| Description | | Fair Value at End of
Period | | | Valuation
Technique | | | Unobservable Inputs | | Amount/ Range | | | Impact to Fair
Value if Input
Increasesa | |
Franklin Growth Opportunities Fund | | | | | | | | | | | | | | | |
Assets: | | | | | | | | | | | | | | | | | | |
Investments in Securities: | | | | | | | | | | | | | | | | | | |
Equity Investments:b | | | | | | | | | | | | | | | | | | |
Consumer Discretionary | | $ | 35,532,184 | | | | Discounted cash flow | | | Forward EBITDA growth rate | | | 4.0 | % | | | Increase | c |
| | | | | | | | | | Free cash flow growth rate | | | 2.0 | % | | | Increase | |
| | | | | | | | | | Discount rate | | | 10.3 | % - 12.9% | | | Decrease | d |
| | | | | | | | | | Discount for lack of marketability | | | 5.6% - 25.0 | % | | | Decrease | c |
Communication Services | | | 6,373,855 | | | | Discounted cash flow | | | NOPAT multiple | | | 30.6 | x | | | Increase | c |
| | | | | | | | | | Discount rate | | | 10.4 | % | | | Decrease | c |
| | | | | | | | | | Discount for lack of marketability | | | 18.7 | % | | | Decrease | c |
All Other Investmentse | | | 27,556,718 | | | | | | | | | | | | | | | |
Total | | $ | 69,462,757 | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
Franklin Small Cap Growth Fund | | | | | | | | | | | | | | | |
Assets: | | | | | | | | | | | | | | | | | | |
Investments in Securities: | | | | | | | | | | | | | | | | | | |
Equity Investments:b | | | | | | | | | | | | | | | | | | |
Consumer Discretionary | | | $57,817,740 | | | | Discounted cash flow | | | Forward EBITDA growth rate | | | 4.0 | % | | | Increase | c |
| | | | | | | | | | Free cash flow | | | $2.8 | (bil) | | | Increase | d |
| | | | | | | | | | Discount rate | | | 10.3 | % - 17.9% | | | Decrease | d |
| | | | | | | | | | Discount for lack of marketability | | | 5.6 | % - 11.6% | | | Decrease | c |
| | | | | | | Market Comparables | | | EV / EBITDA multiple | | | 22.2x - 24.2 | x | | | Increase | c |
| | | | | | | | | | EV / revenue multiple | | | 12.3 | x | | | Increase | c |
| | | | | | | | | | Volatility | | | 45.8 | % | | | Increase | |
| | | | | | | | | | Discount for lack of | | | 23.7 | % | | | Decrease | c |
| | | | | | | | | | | marketability | | | | | | | | |
Information Technology | | | 16,657,720 | | | | Market Comparables | | | EV / revenue multiple | | | 4.8 | x | | | Increase | c |
| | | | | | | | | | Discount for lack of marketability | | | 13.9 | % | | | Decrease | c |
| | | | | | | | | | | Volatility | | | 49.9 | % | | | Increase | |
All Other Investmentse | | | 39,999,824 | | | | | | | | | | | | | | | |
Total | | | $114,475,284 | | | | | | | | | | | | | | | |
aRepresents the directional change in the fair value of the Level 3 financial instruments that would result from a significant and reasonable increase in the corresponding input. A significant and reasonable decrease in the input would have the opposite effect. Significant impacts, if any, to fair value and/or net assets have been indicated.
bIncludes preferred stocks.
cRepresents a significant impact to fair value but not net assets.
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FRANKLIN STRATEGIC SERIES
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
dRepresents a significant impact to fair value and net assets.
eIncludes financial instruments with values derived using private transaction prices or non-public third party pricing information which is unobservable. May also include fair value of immaterial financial instruments developed using various valuation techniques and unobservable inputs.
| | |
| Abbreviations |
| |
EBITDA | | Earnings before interest, taxes, depreciation and amortization |
EV | | Enterprise value |
NOPAT | | Net Operating Profit After Taxes |
11. New Accounting Pronouncements
In August 2018, the Financial Accounting Standards Board issued Accounting Standards Update (ASU) No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurements. The amendments in the ASU modify the disclosure requirements on fair value measurements in Topic 820. The ASU is effective for interim and annual reporting periods beginning after December 15, 2019. Management has reviewed the requirements and believes the adoption of this ASU will not have a material impact on the financial statements.
12. Subsequent Events
The Funds have evaluated subsequent events through the issuance of the financial statements and determined that no events have occurred that require disclosure, other than those already disclosed in the financial statements.
Abbreviations
Selected Portfolio
| | |
ADR American Depositary Receipt | | |
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FRANKLIN STRATEGIC SERIES
Shareholder Information
Proxy Voting Policies and Procedures
The Trust’s investment manager has established Proxy Voting Policies and Procedures (Policies) that the Trust uses to determine how to vote proxies relating to portfolio securities. Shareholders may view the Trust’s complete Policies online at franklintempleton.com. Alternatively, shareholders may request copies of the Policies free of charge by calling the Proxy Group collect at (954) 527-7678 or by sending a written request to: Franklin Templeton Companies, LLC, 300 S.E. 2nd Street, Fort Lauderdale, FL 33301, Attention: Proxy Group. Copies of the Trust’s proxy voting records are also made available online at franklintempleton.com and posted on the U.S. Securities and Exchange Commission’s website at sec.gov and reflect the most recent 12-month period ended June 30.
Quarterly Statement of Investments
The Trust files a complete statement of investments with the U.S. Securities and Exchange Commission for the first and third quarters for each fiscal year on Form N-Q. Shareholders may view the filed Form N-Q by visiting the Commission’s website at sec.gov. The filed form may also be viewed and copied at the Commission’s Public Reference Room in Washington, DC. Information regarding the operations of the Public Reference Room may be obtained by calling (800) SEC-0330.
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| | Semiannual Report and Shareholder Letter Franklin Strategic Series 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.
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| © 2018 Franklin Templeton Investments. All rights reserved. | | FSS1 S 12/18 |
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| | Semiannual Report and Shareholder Letter October 31, 2018 |
Franklin Biotechnology Discovery Fund
Franklin Natural Resources Fund
Sign up for electronic delivery at franklintempleton.com/edelivery
Franklin Templeton Investments
Successful investing begins with ambition. And achievement only comes when you reach for it. That’s why we continually strive to deliver better outcomes for investors. No matter what your goals are, our deep, global investment expertise allows us to offer solutions that can help.
During our more than 70 years of experience, we’ve managed through all kinds of markets—up, down and those in between. We’re always preparing for what may come next. It’s because of this, combined with our strength as one of the world’s largest asset managers that we’ve earned the trust of millions of investors around the world.
Dear Shareholder:
The six months ended October 31, 2018, benefited from mostly upbeat economic data as the U.S. job market continued to improve and the unemployment rate declined. During the second and third quarters, U.S. corporate profits rose, supported by healthy economic growth and tax cuts.
In September 2018, the Standard & Poor’s 500® Index (S&P 500®) reached an all-time high, but experienced heightened volatility near period-end due to investor concerns about U.S. Federal Reserve interest-rate policies, higher U.S. Treasury yields, trade tensions, a potentially slower economy and some weaker-than-expected fourth-quarter 2018 revenue guidance. Within this environment, U.S. stocks, as measured by the S&P 500, generated a modest positive total return for the six-month period.
We are committed to our long-term perspective and disciplined investment approach as we conduct a rigorous, fundamental analysis of securities with a regular emphasis on investment risk management.
We believe active, professional investment management serves investors well. We also recognize the important role of financial advisors in today’s markets and encourage investors to continue to seek their advice. Amid changing markets and economic conditions, we are confident investors with a well-diversified portfolio and a patient, long-term outlook should be well positioned for the years ahead.
In addition, Franklin Strategic Series’ semiannual report includes more detail about prevailing conditions and a discussion about investment decisions during the period. Please remember all securities markets fluctuate, as do mutual fund share prices.
We thank you for investing with Franklin Templeton, welcome your questions and comments, and look forward to serving your future investment needs.
Sincerely,
Edward B. Jamieson
President and Chief Executive Officer –
Investment Management
Franklin Strategic Series
This letter reflects our analysis and opinions as of October 31, 2018, unless otherwise indicated. The information is not a complete analysis of every aspect of any market, country, industry, security or fund. Statements of fact are from sources considered reliable.
|
Not FDIC Insured | May Lose Value | No Bank Guarantee |
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| franklintempleton.com | | Not part of the semiannual report | | 1 |
Contents
Semiannual Report
Visit franklintempleton.com for fund updates, to access your account, or to find helpful financial planning tools.
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Semiannual Report
Economic and Market Overview
The U.S. economy grew during the six months under review. The economy grew faster in 2018’s second quarter, driven by consumer spending, business investment, exports and government spending, but moderated in the third quarter due to declines in exports and housing investment. The manufacturing and services sectors expanded during the period. The unemployment rate declined from 3.9% in April 2018, as reported at the beginning of the six-month period, to a nearly 49-year low of 3.7% at period-end.1 Annual inflation, as measured by the Consumer Price Index, was 2.5% in April 2018, as reported at the beginning of the period, and while it varied during the six months under review, it ended the period at 2.5%.1
The U.S. Federal Reserve (Fed) raised its target range for the federal funds rate 0.25% at its June 2018 meeting and continued to reduce its balance sheet as part of its ongoing plan to normalize monetary policy. In his congressional testimony in July 2018 and at the Fed symposium in August, Fed Chair Jerome Powell reiterated the Fed’s intention to gradually raise interest rates. At its September 2018 meeting, the Fed raised its target range for the federal funds rate 0.25% to 2.00%–2.25%, as widely expected. Furthermore, the Fed raised its forecast for U.S. economic growth in 2018 and 2019 and projected one more rate increase in 2018. Minutes from the Fed’s September meeting (released in October) indicated that a few officials expected monetary policy to become modestly restrictive of economic growth, while some officials seemed to favor increasing the federal funds rate temporarily above what they consider to be its longer-term level to reduce the risk of overshooting the Fed’s inflation objective. In contrast, some officials indicated they would not favor a restrictive policy unless they see clear signs of an overheating economy and rising inflation.
U.S. equity markets rose overall during the period, benefiting from mostly upbeat economic data and better U.S. corporate earnings. However, markets were pressured at certain times during the period by fears of tighter regulation of information technology and technology-related companies, as well as concerns that strong economic growth and rising inflation would lead the Fed to increase its target rate faster than expected. Other factors that curbed investor sentiment were tensions between the U.S. and North Korea earlier in the
period, political uncertainties in the U.S., the Trump administration’s protectionist policies, and the potential impact of escalating U.S.-China trade tensions on global growth and corporate earnings. Partially offsetting these concerns were an overall easing of tensions in the Korean peninsula in the latter part of the period, intermittent U.S.-China trade negotiations, an agreement between the U.S. and the European Union to try to reduce trade barriers, and a trade deal between the U.S., Mexico and Canada. After reaching a new all-time high in September 2018, the broad U.S. stock market, as measured by the Standard & Poor’s 500 Index (S&P 500), experienced heightened volatility in October amid investor concerns about the Fed’s interest-rate path, rising U.S. Treasury yields, trade, a potentially moderating economy and several big companies’ weaker-than-expected fourth-quarter 2018 revenue guidance. In this environment, the S&P 500 generated a +3.40% total return for the six-month period.2
The foregoing information reflects our analysis and opinions as of October 31, 2018. The information is not a complete analysis of every aspect of any market, country, industry, security or fund. Statements of fact are from sources considered reliable.
1. Source: U.S. Bureau of Labor Statistics.
2. Source: Morningstar.
See www.franklintempletondatasources.com for additional data provider information.
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| franklintempleton.com | | Semiannual Report | | 3 |
Franklin Biotechnology Discovery Fund
This semiannual report for Franklin Biotechnology Discovery Fund covers the period ended October 31, 2018.
Your Fund’s Goal and Main Investments
The Fund seeks capital appreciation by investing at least 80% of its net assets in securities of biotechnology companies and discovery research firms located in the U.S. and other countries.
Performance Overview
The Fund’s Class A shares had a -4.86% cumulative total return for the six months under review. In comparison, the NASDAQ Biotechnology Index®, which tracks U.S. and international-based biotechnology stocks, posted a +0.88% total return.1 Also in comparison, the Standard & Poor’s 500 Index, which is a broad measure of the U.S. stock market, posted a +3.40% total return.1 You can find the Fund’s long-term performance data in the Performance Summary beginning on page 6.
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.
Investment Strategy
We are research-driven, fundamental investors, pursuing a growth strategy. As bottom-up investors focusing primarily on individual securities, we choose companies that have identifiable drivers of future earnings growth and that present, in our opinion, the best trade-off between earnings growth, business and financial risk, and valuation. We rely on a team of analysts to help provide in-depth industry expertise and use both qualitative and quantitative analysis to evaluate companies for distinct and sustainable competitive advantages likely to lead to growth in earnings and/or share price. Competitive advantages, such as a particular product niche, proven technology, sound financial position and strong management, are all factors we believe may contribute to strong growth potential.
Portfolio Composition
Based on Total Net Assets as of 10/31/18
*Includes escrows and litigation trusts securities.
Manager’s Discussion
During the six months under review, the biotech industry experienced significant volatility, particularly during the last month of the period. Please keep in mind that volatility is not uncommon in the biotechnology industry, and we seek to take advantage of short-term volatility by initiating positions or adding to existing holdings in companies we believe are undervalued.
Key detractors from the Fund’s absolute performance during the period included Celgene, Clovis Oncology (not held at period-end) and Nektar Therapeutics. Biopharmaceutical company Celgene detracted from results despite positive earnings reports for the second and third quarters of 2018. The pending loss of patent protection for Revlimid, the company’s most profitable drug, continued to weigh on investor sentiment, as did drug trial and approval setbacks that occurred prior to the period. Shares of pharmaceutical company Clovis Oncology declined despite a study suggesting Rubraca, currently used for treating ovarian cancer, may also be effective for treating prostate cancer. Investor sentiment was hampered by concerns the study could end up benefiting competitor AstraZenceca (not a Fund holding), as doctors may choose that company’s drug Lynparza, which is in the same class as Rubraca, to treat prostate cancer. Pharmaceutical company Nektar Therapeutics also detracted from results. The company was hurt by the release of positive drug study data from competitor Roche as
1. Source: Morningstar.
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.
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 20.
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FRANKLIN BIOTECHNOLOGY DISCOVERY FUND
well as investor skepticism about a Nektar drug currently in the development stage.
In contrast, key contributors to the Fund’s absolute performance included Illumina, Array BioPharma and Neurocrine Biosciences. Illumina develops, manufactures and markets integrated systems for the analysis of genetic variation and function. The company benefited from strong second- and third-quarter earnings, with revenue and a raise in guidance coming in above expectations. Results were helped by high customer utilization rates of the company’s genome sequencing system NovaSeq. Array BioPharma is focused on the development and sale of cancer-treatment drugs. Third-quarter earnings greatly benefited from the U.S. debut of Braftovi-Mektovi, a two-drug treatment for skin cancer, which saw sales well above market expectations. The company also has a colon cancer drug in the trial phase that could prove to be profitable. Biopharmaceutical company Neurocrine Biosciences contributed to results due to second-quarter revenues beating investor expectations. Strong earnings were driven by increased sales of Ingrezza, a drug used to treat a neurological disorder.
Thank you for your continued participation in Franklin Biotechnology Discovery Fund. We look forward to serving your future investment needs.
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Evan McCulloch, CFA Lead Portfolio Manager Wendy Lam, Ph.D. Steven Kornfeld, CFA Portfolio Management Team |
Top 10 Holdings
10/31/18
| | | | |
Company Sector/Industry | | % of Total
Net Assets | |
| |
Alexion Pharmaceuticals Inc. Biotechnology | | | 7.4% | |
| |
Celgene Corp. Biotechnology | | | 6.5% | |
| |
Biogen Inc. Biotechnology | | | 6.2% | |
| |
Vertex Pharmaceuticals Inc. Biotechnology | | | 5.6% | |
| |
Illumina Inc. Life Sciences Tools & Services | | | 5.2% | |
| |
Regeneron Pharmaceuticals Inc. Biotechnology | | | 4.1% | |
| |
Array BioPharma Inc. Biotechnology | | | 3.7% | |
| |
Amgen Inc. Biotechnology | | | 3.7% | |
| |
Gilead Sciences Inc. Biotechnology | | | 3.6% | |
| |
Heron Therapeutics Inc. Biotechnology | | | 3.1% | |
The foregoing information reflects our analysis, opinions and portfolio holdings as of October 31, 2018, the end of the reporting period. The way we implement our main investment strategies and the resulting portfolio holdings may change depending on factors such as market and economic conditions. These opinions may not be relied upon as investment advice or an offer for a particular security. The information is not a complete analysis of every aspect of any market, country, industry, security or the Fund. Statements of fact are from sources considered reliable, but the investment manager makes no representation or warranty as to their completeness or accuracy. Although historical performance is no guarantee of future results, these insights may help you understand our investment management philosophy.
CFA® is a trademark owned by CFA Institute.
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FRANKLIN BIOTECHNOLOGY DISCOVERY FUND
Performance Summary as of October 31, 2018
The performance table does not reflect any taxes that a shareholder would pay on Fund dividends, capital gain distributions, if any, or any realized gains on the sale of Fund shares. Total return reflects reinvestment of the Fund’s dividends and capital gain distributions, if any, and any unrealized gains or losses. 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 10/31/181
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 5.50% and the minimum is 0%. Class A: 5.50% 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 | | | | |
| | |
6-Month | | -4.86% | | -10.10% |
| | |
1-Year | | -5.30% | | -10.51% |
| | |
5-Year | | +41.84% | | +6.03% |
| | |
10-Year | | +293.41% | | +14.03% |
| | |
Advisor5 | | | | |
| | |
6-Month | | -4.73% | | -4.73% |
| | |
1-Year | | -5.07% | | -5.07% |
| | |
5-Year | | +43.65% | | +7.51% |
| | |
10-Year | | +303.27% | | +14.96% |
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 7 for Performance Summary footnotes.
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FRANKLIN BIOTECHNOLOGY DISCOVERY FUND
PERFORMANCE SUMMARY
Total Annual Operating Expenses6
| | | | | | | | |
Share Class | | With Waiver | | | Without Waiver | |
| |
A | | | 1.02 | % | | | 1.04% | |
| |
Advisor | | | 0.77 | % | | | 0.79% | |
| |
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 is a nondiversified fund that concentrates in a single sector, which involves risks such as patent considerations, product liability, government regulatory requirements, and regulatory approval for new drugs and medical products. Biotechnology companies often are small and/or relatively new. Smaller companies can be particularly sensitive to changes in economic conditions and have less certain growth prospects than larger, more established companies and can be volatile, especially over the short term. The Fund may also invest in foreign companies, which involve special risks, including currency fluctuations and political uncertainty. The Fund 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 8/31/19. 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. Prior to 9/10/18, these shares were offered at a higher initial sales charge of 5.75%, thus actual returns would have differed. Total returns with sales charges have been restated to reflect the current maximum initial sales charge of 5.50%.
5. Effective 9/1/09, the Fund began offering Advisor Class shares, which do not have sales charges or a Rule 12b-1 plan. Performance quotations for this class reflect the following methods of calculation: (a) For periods prior to 9/1/09, a restated figure is used based upon the Fund’s Class A performance, excluding the effect of Class A’s maximum initial sales charge, but reflecting the effect of the Class A Rule 12b-1 fees; and (b) for periods after 9/1/09, actual Advisor Class performance is used reflecting all charges and fees applicable to that class. Since 9/1/09 (commencement of sales), the cumulative and average annual total returns of Advisor Class shares were +274.83% and +15.51%.
6. 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.
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| franklintempleton.com | | Semiannual Report | | 7 |
FRANKLIN BIOTECHNOLOGY DISCOVERY FUND
Your Fund’s Expenses
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 Value 5/1/18 | | Ending Account Value 10/31/18 | | Expenses Paid During Period 5/1/18–10/31/181,2 | | Ending Account Value 10/31/18 | | Expenses Paid During Period 5/1/18–10/31/181,2 | | Net Annualized Expense Ratio2 |
| | | | | | |
| A | | $1,000 | | $951.40 | | $4.92 | | $1,020.16 | | $5.09 | | 1.00% |
| C | | $1,000 | | $947.80 | | $8.59 | | $1,016.38 | | $8.89 | | 1.75% |
| R6 | | $1,000 | | $953.20 | | $3.10 | | $1,022.03 | | $3.21 | | 0.63% |
| Advisor | | $1,000 | | $952.70 | | $3.69 | | $1,021.42 | | $3.82 | | 0.75% |
1. 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 184/365 to reflect the one-half year period.
2. Reflects expenses after fee waivers and expense reimbursements. Does not include acquired fund fees and expenses.
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8 | | Semiannual Report | | franklintempleton.com |
Franklin Natural Resources Fund
This semiannual report for Franklin Natural Resources Fund covers the period ended October 31, 2018.
Your Fund’s Goal and Main Investments
The Fund seeks high total return (total return consists of capital appreciation and current dividend and interest income) by investing, under normal market conditions, at least 80% of its net assets in equity and debt securities of companies that own, produce, refine, process, transport or market natural resources, as well as those that provide related services.
Performance Overview
The Fund’s Class A shares had a -13.30% cumulative total return for the six months under review. In comparison, the Standard & Poor’s (S&P®) North American Natural Resources Sector Index, which tracks companies involved in industries such as mining, energy, timber and forestry services, and the production of pulp and paper, had a -10.41% total return.1 Also in comparison, the Standard & Poor’s 500 Index, which is a broad measure of the U.S. stock market, posted a +3.40% total return.1 Please note index performance information is provided for reference and we do not attempt to track any index but rather undertake investments on the basis of fundamental research. The Fund’s strategy, which focuses on companies with higher long-term growth potential, differs from the natural resources index’s large weighting in income-oriented companies that we believe typically provide more limited opportunities for growth. This difference may occasionally lead to wide performance discrepancies, especially in periods when investors focus on short-term safety and yield or, conversely, when investors focus more heavily on companies with stronger growth prospects and greater commodity price leverage. You can find the Fund’s long-term performance data in the Performance Summary beginning on page 13.
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.
Geographic Composition
Based on Total Net Assets as of 10/31/18
Investment Strategy
We are research-driven, fundamental investors, pursuing a growth strategy. As bottom-up investors focusing primarily on individual securities, we choose companies that have identifiable drivers of future earnings growth and that present, in our opinion, the best trade-off between potential earnings growth, business and financial risk, and valuation. We rely on a team of analysts to help provide in-depth industry expertise and use both qualitative and quantitative analysis to evaluate companies for distinct and sustainable competitive advantages likely to lead to growth in earnings and/or share price. Competitive advantages, such as a particular product niche, proven technology, sound financial position and strong management, are all factors we believe may contribute to strong growth potential.
Sector Overview
Global commodity prices experienced heightened volatility during the six-month period driven, by multiple crosscurrents that also impacted commodity-linked equity values. Although natural gas and certain metals rose, several commodities, such as oil and silver, declined. Commodities were up early in the period until late May, when investors became concerned about the potential for a U.S. trade war with China and other trading partners. In June, lukewarm economic data from Asia, Latin America and Europe also pressured commodity prices. At the same time, a stronger U.S. dollar made commodities more
1. Source: Morningstar.
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.
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 27.
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| franklintempleton.com | | Semiannual Report | | 9 |
FRANKLIN NATURAL RESOURCES FUND
expensive for buyers using other currencies. Through the summer months, despite the agreement by the U.S., Mexico and Canada on the new North American Free Trade Agreement, continued trade conflicts, particularly between the U.S. and China, contributed to investor fears about potentially slower global economic growth that could hinder commodity demand and affect consumer and business sentiment.
Crude oil prices declined for the period amid mixed global supply and demand trends. After increasing to a multi-year high early in the period due to concerns about vulnerable global supply, crude oil prices declined in mid-July due to concerns that tense trade negotiations between the U.S. and China may hurt economic growth and dampen global energy demand. Oil prices recovered from late August through early October amid renewed U.S. sanctions against Iran, plummeting oil output from Venezuela, political turmoil in Libya, declines in U.S. oil stockpiles and healthy global demand growth, especially in emerging markets. After reaching a new multi-year high in early October, oil prices swiftly declined in response to rising U.S. oil supplies, fears of slowing global demand growth and potential increases in output by Russia and Saudi Arabia, resulting in an overall decline in oil prices for the period.
Strong demand for U.S. natural gas led to higher prices despite record production. An extended winter season increased natural gas demand through the beginning of the period, setting the stage for decreased inventories. Overseas demand for liquefied natural gas increased exports, also helping to absorb supply. Gas prices decreased in July along with most commodities due to trade concerns, but prices rebounded after ongoing summer heat waves increased demand. The increased summer demand resulted in lower-than-expected inventories ahead of the high-demand heating season that starts in November. These factors led to price increases for the remainder of the period, including a large increase in October and for the period overall.
Gold prices declined for the period amid U.S. dollar strength and rising U.S. interest rates that drove many investors toward income-producing asset classes. Silver and platinum prices decreased for similar reasons, while palladium prices rose amid tight global supplies and stronger demand for the metal due to its emissions-control use in gasoline vehicles. Among industrial metals, iron ore prices increased, while prices of copper and other metals declined in response to expectations about trade tensions and the weakening outlook for China, the world’s largest consumer of base metals, as its factory activity slowed.
Manager’s Discussion
The reporting period followed relatively strong performance from late 2017, which we believe made the Fund’s holdings
Portfolio Composition
Based on Total Net Assets as of 10/31/18
*Includes convertible preferred stock.
more susceptible to the downdraft that followed. Since the late spring of 2018, investors became increasingly concerned with trade and tariff implementation and the potential for slowing economic growth. In particular, these concerns negatively impacted the mining industry (where the index has almost no exposure) and cyclical sectors, such as chemicals (again, little to no index exposure), while sectors viewed as more stable with heavier weights in the index, such as oil and gas storage and transportation and metal and glass containers, outperformed. Although the entire period was fairly volatile, October was particularly weak as oil prices plummeted. This period also spanned the third-quarter earnings season, which was particularly volatile, mostly to the downside.
Oil and gas exploration and production was the biggest detractor from the Fund’s performance relative to the S&P North American Natural Resources Sector Index due to a decline in oil prices that impacted the industry in early October. Top detractors included an underweighting in diversified producer ConocoPhillips, which appreciated in a down market as investors flocked to large producers perceived as having
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FRANKLIN NATURAL RESOURCES FUND
Top 10 Holdings
10/31/18
| | |
Company Sector/Industry | | % of Total
Net Assets |
| |
Schlumberger Ltd. Oil & Gas Equipment & Services | | 3.9% |
| |
Cabot Oil & Gas Corp. Oil & Gas Exploration & Production | | 3.7% |
| |
Exxon Mobil Corp. Integrated Oil & Gas | | 3.6% |
| |
Chevron Corp. Integrated Oil & Gas | | 3.3% |
| |
Royal Dutch Shell PLC Integrated Oil & Gas | | 2.8% |
| |
Diamondback Energy Inc. Oil & Gas Exploration & Production | | 2.8% |
| |
BHP Billiton PLC Diversified Metals & Mining | | 2.7% |
| |
Concho Resources Inc. Oil & Gas Exploration & Production | | 2.7% |
| |
TechnipFMC PLC Oil & Gas Equipment & Services | | 2.6% |
| |
Occidental Petroleum Corp. Integrated Oil & Gas | | 2.5% |
lower risk, and an overweighting in natural gas producer EQT, which suffered from missed production targets and lowered guidance. However, the industry held one of the biggest single contributors in natural gas producer Cabot Oil & Gas.
Oil and gas equipment and services hurt relative results due to the Fund’s overweighting in the sector. OFS (oilfield services) is one of the most leveraged industries to oil prices since activity is tied to producer spending, which is tied to producer cash flow, and therefore commodity prices. The industry had been struggling for most of the period due to sector overcapacity and limited signs of spending increases outside the U.S., but fell further in October because of lower oil prices. Weakness was broad-based with no particular themes, though onshore OFS stocks were weak as a result of slowing activity in the Permian Basin of Texas due to pipeline constraints and weak local oil prices. Top detractors included Oil States, Superior Energy Services and Halliburton.
Most metals prices declined before mining equities as the commodities responded to potential economic slowing, particularly in China. As indicators increasingly pointed to slowing growth, the equities followed with significant declines for small-mid capitalization miners while large, diversified
companies held up much better. For example, copper producers Antofagasta and First Quantum Minerals declined and hurt the Fund’s relative performance.2 Although select off-benchmark holdings in diversified metals and mining producers detracted from absolute returns, their more modest declines compared with the benchmark contributed to relative returns.
During this tough period, Fund gains were as much from a lack of exposure as from investments. The Fund also benefited from its cash holdings.
Stock selection in oil and gas drilling, particularly in Pioneer Energy Services,2 was the biggest contributor to the Fund’s relative performance. Underweightings in paper and packaging and aluminum, both of which investors perceived as being tied to the economy, also contributed to relative performance. Off-benchmark allocations in specialty chemicals (particularly in Albemarle) and fertilizers and agricultural chemicals benefited relative results as investors believed these industries were less sensitive to economic trends and tariffs.
Thank you for your continued participation in Franklin Natural Resources Fund. We look forward to serving your future investment needs.
| | |
 | | 
Frederick G. Fromm, CFA |
 | | 
Matthew J. Adams, CFA |
| |
| | Stephen M. Land, CFA |
| |
| | Portfolio Management Team |
2. Not part of the index.
See www.franklintempletondatasources.com for additional data provider information.
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| franklintempleton.com | | Semiannual Report | | 11 |
FRANKLIN NATURAL RESOURCES FUND
The foregoing information reflects our analysis, opinions and portfolio holdings as of October 31, 2018, the end of the reporting period. The way we implement our main investment strategies and the resulting portfolio holdings may change depending on factors such as market and economic conditions. These opinions may not be relied upon as investment advice or an offer for a particular security. The information is not a complete analysis of every aspect of any market, country, industry, security or the Fund. Statements of fact are from sources considered reliable, but the investment manager makes no representation or warranty as to their completeness or accuracy. Although historical performance is no guarantee of future results, these insights may help you understand our investment management philosophy.
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FRANKLIN NATURAL RESOURCES FUND
Performance Summary as of October 31, 2018
The performance table does not reflect any taxes that a shareholder would pay on Fund dividends, capital gain distributions, if any, or any realized gains on the sale of Fund shares. Total return reflects reinvestment of the Fund’s dividends and capital gain distributions, if any, and any unrealized gains or losses. 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 10/31/181
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 5.50% and the minimum is 0%. Class A: 5.50% 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 | | | | |
| | |
6-Month | | -13.30% | | -18.08% |
| | |
1-Year | | -1.87% | | -7.28% |
| | |
5-Year | | -31.16% | | -8.24% |
| | |
10-Year | | +21.38% | | +1.38% |
| | |
Advisor | | | | |
| | |
6-Month | | -13.19% | | -13.19% |
| | |
1-Year | | -1.58% | | -1.58% |
| | |
5-Year | | -30.21% | | -6.94% |
| | |
10-Year | | +24.85% | | +2.24% |
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 14 for Performance Summary footnotes.
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| franklintempleton.com | | Semiannual Report | | 13 |
FRANKLIN NATURAL RESOURCES FUND
PERFORMANCE SUMMARY
Total Annual Operating Expenses5
| | | | |
Share Class | | With Waiver | | Without Waiver |
| | |
| A | | 1.06% | | 1.06% |
| | |
| Advisor | | 0.81% | | 0.81% |
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. Investing in a fund concentrating in the natural resources sector involves special risks, including increased susceptibility to adverse economic and regulatory developments affecting the sector. Growth stock prices may fall dramatically if the company fails to meet projections of earnings or revenue; their prices may be more volatile than other securities, particularly over the short term. Smaller companies can be particularly sensitive to changes in economic conditions and have less certain growth prospects than larger, more established companies and can be volatile, especially over the short term. The Fund may also invest in foreign companies, which involve special risks, including currency fluctuations and political uncertainty. The Fund 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 8/31/19. 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. Prior to 9/10/18, these shares were offered at a higher initial sales charge of 5.75%, thus actual returns would have differed. Total returns with sales charges have been restated to reflect the current maximum initial sales charge of 5.50%.
5. 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.
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FRANKLIN NATURAL RESOURCES FUND
Your Fund’s Expenses
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 | | | | Hypothetical | | | | |
| | | | | | | (actual return after expenses) | | | | (5% annual return before expenses) | | | | |
| | | | | | | | | |
Share Class | | Beginning
Account
Value 5/1/18 | | | | Ending Account
Value 10/31/18 | | Expenses Paid During Period 5/1/18–10/31/181,2 | | | | Ending Account
Value 10/31/18 | | Expenses Paid During Period 5/1/18–10/31/181,2 | | | | Net
Annualized
Expense
Ratio2 |
| A | | $1,000 | | | | $867.00 | | $4.75 | | | | $1,020.11 | | $5.14 | | | | 1.01% |
| C | | $1,000 | | | | $863.50 | | $8.27 | | | | $1,016.33 | | $8.94 | | | | 1.76% |
| R6 | | $1,000 | | | | $868.70 | | $2.68 | | | | $1,022.33 | | $2.91 | | | | 0.57% |
| Advisor | | $1,000 | | | | $868.10 | | $3.58 | | | | $1,021.37 | | $3.87 | | | | 0.76% |
1. 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 184/365 to reflect the one-half year period.
2. Reflects expenses after fee waivers and expense reimbursements. Does not include acquired fund fees and expenses.
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| franklintempleton.com | | Semiannual Report | | 15 |
FRANKLIN STRATEGIC SERIES
Financial Highlights
Franklin Biotechnology Discovery Fund
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Six Months Ended | | | | | | | | | | | | | | | |
| | | October 31, 2018 | | | Year Ended April 30, | |
| | | (unaudited) | | | 2018 | | | 2017 | | | 2016 | | | 2015 | | | 2014 |
| | | | | | |
Class A | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | |
Per share operating performance | | | | | | | | | | | | | | | | | | | | | | | | |
(for a share outstanding throughout the period) | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | |
Net asset value, beginning of period | | | $146.14 | | | | $147.22 | | | | $128.19 | | | | $182.30 | | | | $129.27 | | | | $105.95 | |
| | | | | | |
Income from investment operationsa: | | | | | | | | | | | | | | | | | | | | | | | | |
Net investment income (loss)b | | | (0.53 | ) | | | (0.80 | ) | | | (0.79 | ) | | | (0.94 | ) | | | (1.09 | ) | | | (1.07 | ) |
Net realized and unrealized gains (losses) | | | (6.57 | ) | | | 3.32 | | | | 25.75 | | | | (39.39 | ) | | | 60.79 | | | | 33.18 | |
| | | | | | |
Total from investment operations | | | (7.10 | ) | | | 2.52 | | | | 24.96 | | | | (40.33 | ) | | | 59.70 | | | | 32.11 | |
| | | | | | |
Less distributions from: | | | | | | | | | | | | | | | | | | | | | | | | |
Net investment income | | | — | | | | — | | | | (1.73 | ) | | | — | | | | — | | | | — | |
Net realized gains | | | — | | | | (3.60 | ) | | | (4.20 | ) | | | (13.78 | ) | | | (6.67 | ) | | | (8.79 | ) |
| | | | | | |
Total distributions | | | — | | | | (3.60 | ) | | | (5.93 | ) | | | (13.78 | ) | | | (6.67 | ) | | | (8.79 | ) |
| | | | | | |
Net asset value, end of period | | | $139.04 | | | | $146.14 | | | | $147.22 | | | | $128.19 | | | | $182.30 | | | | $129.27 | |
| | | | | | |
Total returnc | | | (4.86)% | | | | 1.69% | | | | 20.02% | | | | (23.55)% | | | | 46.81% | | | | 30.60% | |
| | | | | | |
Ratios to average net assetsd | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | |
Expenses before waiver and payments by affiliates | | | 1.02% | | | | 1.05% | | | | 1.04% | | | | 0.99% | | | | 1.00% | | | | 1.10% | |
| | | | | | |
Expenses net of waiver and payments by affiliatese | | | 1.00% | | | | 1.03% | | | | 1.02% | | | | 0.98% | | | | 1.00% | f | | | 1.10% | f |
| | | | | | | |
Net investment income (loss) | | | (0.67)% | | | | (0.53)% | | | | (0.58)% | | | | (0.56)% | | | | (0.67)% | | | | (0.82)% | |
| | | | | | |
Supplemental data | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | |
Net assets, end of period (000’s) | | | $969,243 | | | | $1,081,883 | | | | $1,176,687 | | | | $1,074,903 | | | | $1,601,906 | | | | $1,141,890 | |
| | | | | | |
Portfolio turnover rate | | | 13.48% | | | | 26.95% | | | | 34.12% | | | | 22.13% | | | | 41.43% | | | | 48.70% | |
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.
bBased on average daily shares outstanding.
cTotal return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year.
dRatios are annualized for periods less than one year.
eBenefit of expense reduction rounds to less than 0.01%.
fBenefit of waiver and payments by affiliates rounds to less than 0.01%.
| | | | |
| | | |
16 | | Semiannual Report | The accompanying notes are an integral part of these financial statements. | | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
FINANCIAL HIGHLIGHTS
Franklin Biotechnology Discovery Fund (continued)
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Six Months Ended | | | | | | | | | | | | | | | |
| | | October 31, 2018 | | | Year Ended April 30, | |
| | | (unaudited) | | | 2018 | | | 2017 | | | 2016 | | | 2015 | | | 2014a |
| | | | | | |
Class C | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | |
Per share operating performance | | | | | | | | | | | | | | | | | | | | | | | | |
(for a share outstanding throughout the period) | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | |
Net asset value, beginning of period | | | $141.75 | | | | $143.98 | | | | $125.99 | | | | $180.67 | | | | $129.11 | | | | $159.15 | |
| | | | | | |
Income from investment operationsb: | | | | | | | | | | | | | | | | | | | | | | | | |
Net investment income (loss)c | | | (1.08 | ) | | | (1.90 | ) | | | (1.81 | ) | | | (2.11 | ) | | | (2.38 | ) | | | (0.34 | ) |
Net realized and unrealized gains (losses) | | | (6.32 | ) | | | 3.27 | | | | 25.29 | | | | (38.79 | ) | | | 60.61 | | | | (29.70 | ) |
| | | | | | |
Total from investment operations | | | (7.40) | | | | 1.37 | | | | 23.48 | | | | (40.90 | ) | | | 58.23 | | | | (30.04 | ) |
| | | | | | |
Less distributions from: | | | | | | | | | | | | | | | | | | | | | | | | |
Net investment income | | | — | | | | — | | | | (1.29 | ) | | | — | | | | — | | | | — | |
Net realized gains | | | — | | | | (3.60 | ) | | | (4.20 | ) | | | (13.78 | ) | | | (6.67 | ) | | | — | |
| | | | | | |
Total distributions | | | — | | | | (3.60 | ) | | | (5.49 | ) | | | (13.78 | ) | | | (6.67 | ) | | | — | |
| | | | | | |
Net asset value, end of period | | | $134.35 | | | | $141.75 | | | | $143.98 | | | | $125.99 | | | | $180.67 | | | | $129.11 | |
| | | | | | |
Total returnd | | | (5.22)% | | | | 0.93% | | | | 19.14% | | | | (24.09)% | | | | 45.76% | | | | (18.88)% | |
| | | | | | |
Ratios to average net assetse | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | |
Expenses before waiver and payments by affiliates | | | 1.77% | | | | 1.80% | | | | 1.79% | | | | 1.71% | | | | 1.75% | | | | 1.82% | |
| | | | | | |
Expenses net of waiver and payments by affiliatesf | | | 1.75% | | | | 1.78% | | | | 1.77% | | | | 1.70% | | | | 1.75% | g | | | 1.82% | g |
| | | | | | | |
Net investment income (loss) | | | (1.42)% | | | | (1.28)% | | | | (1.33)% | | | | (1.28)% | | | | (1.42)% | | | | (1.52)% | |
| | | | | | |
Supplemental data | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | |
Net assets, end of period (000’s) | | | $49,921 | | | | $58,433 | | | | $53,935 | | | | $17,562 | | | | $23,051 | | | | $5,486 | |
| | | | | | |
Portfolio turnover rate | | | 13.48% | | | | 26.95% | | | | 34.12% | | | | 22.13% | | | | 41.43% | | | | 48.70% | |
aFor the period March 4, 2014 (effective date) to April 30, 2014.
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.
cBased on average daily shares outstanding.
dTotal return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year.
eRatios are annualized for periods less than one year.
fBenefit of expense reduction rounds to less than 0.01%.
gBenefit of waiver and payments by affiliates rounds to less than 0.01%.
| | | | |
| | | |
| franklintempleton.com | | The accompanying notes are an integral part of these financial statements. | Semiannual Report | | 17 |
FRANKLIN STRATEGIC SERIES
FINANCIAL HIGHLIGHTS
Franklin Biotechnology Discovery Fund (continued)
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Six Months Ended | | | | | | | | | | | | | | | |
| | | October 31, 2018 | | | Year Ended April 30, | |
| | | (unaudited) | | | 2018 | | | 2017 | | | 2016 | | | 2015 | | | 2014a |
| | | | | | |
Class R6 | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | |
Per share operating performance | | | | | | | | | | | | | | | | | | | | | | | | |
(for a share outstanding throughout the period) | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | |
Net asset value, beginning of period | | | $150.65 | | | | $151.03 | | | | $131.37 | | | | $185.75 | | | | $131.09 | | | | $104.56 | |
| | | | | | |
Income from investment operationsb: | | | | | | | | | | | | | | | | | | | | | | | | |
Net investment income (loss)c | | | (0.24 | ) | | | (0.17 | ) | | | (0.25 | ) | | | (0.32 | ) | | | (0.45 | ) | | | (0.49 | ) |
Net realized and unrealized gains (losses) | | | (6.81 | ) | | | 3.39 | | | | 26.41 | | | | (40.28 | ) | | | 61.78 | | | | 35.81 | |
| | | | | | |
Total from investment operations | | | (7.05 | ) | | | 3.22 | | | | 26.16 | | | | (40.60 | ) | | | 61.33 | | | | 35.32 | |
| | | | | | |
Less distributions from: | | | | | | | | | | | | | | | | | | | | | | | | |
Net investment income | | | — | | | | — | | | | (2.30 | ) | | | — | | | | — | | | | — | |
Net realized gains | | | — | | | | (3.60 | ) | | | (4.20 | ) | | | (13.78 | ) | | | (6.67 | ) | | | (8.79 | ) |
| | | | | | |
Total distributions | | | — | | | | (3.60 | ) | | | (6.50 | ) | | | (13.78 | ) | | | (6.67 | ) | | | (8.79 | ) |
| | | | | | |
Net asset value, end of period | | | $143.60 | | | | $150.65 | | | | $151.03 | | | | $131.37 | | | | $185.75 | | | | $131.09 | |
| | | | | | |
Total returnd | | | (4.68)% | | | | 2.11% | | | | 20.50% | | | | (23.24)% | | | | 47.40% | | | | 34.10% | |
| | | | | | |
Ratios to average net assetse | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | |
Expenses before waiver and payments by affiliates | | | 0.69% | | | | 0.65% | | | | 0.63% | | | | 0.60% | | | | 0.60% | | | | 0.63% | |
| | | | | | |
Expenses net of waiver and payments by affiliatesf | | | 0.63% | | | | 0.61% | | | | 0.61% | | | | 0.59% | | | | 0.60% | g | | | 0.63% | g |
| | | | | | | |
Net investment income (loss) | | | (0.30)% | | | | (0.11)% | | | | (0.17)% | | | | (0.17)% | | | | (0.27)% | | | | (0.35)% | |
| | | | | | |
Supplemental data | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | |
Net assets, end of period (000’s) | | | $6,824 | | | | $8,307 | | | | $8,891 | | | | $5,568 | | | | $76,436 | | | | $50,846 | |
| | | | | | |
Portfolio turnover rate | | | 13.48% | | | | 26.95% | | | | 34.12% | | | | 22.13% | | | | 41.43% | | | | 48.70% | |
aFor the year May 1, 2013 (effective date) to April 30, 2014.
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.
cBased on average daily shares outstanding.
dTotal return is not annualized for periods less than one year.
eRatios are annualized for periods less than one year.
fBenefit of expense reduction rounds to less than 0.01%.
gBenefit of waiver and payments by affiliates rounds to less than 0.01%.
| | | | |
| | | |
18 | | Semiannual Report | The accompanying notes are an integral part of these financial statements. | | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
FINANCIAL HIGHLIGHTS
Franklin Biotechnology Discovery Fund (continued)
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Six Months Ended | | | | | | | | | | | | | | | |
| | | October 31, 2018 | | | | | | Year Ended April 30, | | | | | | |
| | | (unaudited) | | | 2018 | | | 2017 | | | 2016 | | | 2015 | | | 2014 |
| | | | | | |
Advisor Class | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | |
Per share operating performance | | | | | | | | | | | | | | | | | | | | | | | | |
(for a share outstanding throughout the period) | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | |
Net asset value, beginning of period | | | $149.54 | | | | $150.20 | | | | $130.67 | | | | $185.12 | | | | $130.86 | | | | $106.86 | |
| | | | | | |
Income from investment operationsa: | | | | | | | | | | | | | | | | | | | | | | | | |
Net investment income (loss)b | | | (0.34 | ) | | | (0.45 | ) | | | (0.46 | ) | | | (0.55 | ) | | | (0.70 | ) | | | (0.69 | ) |
Net realized and unrealized gains (losses) | | | (6.74 | ) | | | 3.39 | | | | 26.27 | | | | (40.12 | ) | | | 61.63 | | | | 33.48 | |
| | | | | | |
Total from investment operations | | | (7.08 | ) | | | 2.94 | | | | 25.81 | | | | (40.67 | ) | | | 60.93 | | | | 32.79 | |
| | | | | | |
Less distributions from: | | | | | | | | | | | | | | | | | | | | | | | | |
Net investment income | | | — | | | | — | | | | (2.08 | ) | | | — | | | | — | | | | — | |
Net realized gains | | | — | | | | (3.60 | ) | | | (4.20 | ) | | | (13.78 | ) | | | (6.67 | ) | | | (8.79 | ) |
| | | | | | |
Total distributions | | | — | | | | (3.60 | ) | | | (6.28 | ) | | | (13.78 | ) | | | (6.67 | ) | | | (8.79 | ) |
| | | | | | |
Net asset value, end of period | | | $142.46 | | | | $149.54 | | | | $150.20 | | | | $130.67 | | | | $185.12 | | | | $130.86 | |
| | | | | | |
Total returnc | | | (4.73)% | | | | 1.94% | | | | 20.32% | | | | (23.36)% | | | | 47.17% | | | | 31.02% | |
| | | | | | |
Ratios to average net assetsd | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | |
Expenses before waiver and payments by affiliates | | | 0.77% | | | | 0.80% | | | | 0.79% | | | | 0.75% | | | | 0.75% | | | | 0.80% | |
| | | | | | |
Expenses net of waiver and payments by affiliatese | | | 0.75% | | | | 0.78% | | | | 0.77% | | | | 0.74% | | | | 0.75% | f | | | 0.80%f | |
| | | | | | |
Net investment income (loss) | | | (0.42)% | | | | (0.28)% | | | | (0.33)% | | | | (0.32)% | | | | (0.42)% | | | | (0.52)% | |
| | | | | | |
Supplemental data | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | |
Net assets, end of period (000’s) | | | $172,130 | | | | $180,219 | | | | $159,894 | | | | $93,263 | | | | $167,035 | | | | $91,012 | |
| | | | | | |
Portfolio turnover rate | | | 13.48% | | | | 26.95% | | | | 34.12% | | | | 22.13% | | | | 41.43% | | | | 48.70% | |
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.
bBased on average daily shares outstanding.
cTotal return is not annualized for periods less than one year.
dRatios are annualized for periods less than one year.
eBenefit of expense reduction rounds to less than 0.01%.
fBenefit of waiver and payments by affiliates rounds to less than 0.01%.
| | | | |
| | | |
| franklintempleton.com | | The accompanying notes are an integral part of these financial statements. | Semiannual Report | | 19 |
FRANKLIN STRATEGIC SERIES
Statement of Investments, October 31, 2018 (unaudited)
Franklin Biotechnology Discovery Fund
| | | | | | | | | | | | |
| | | Country | | | Shares/
Warrants | | | Value | |
| | | |
Common Stocks and Other Equity Interests 96.6% | | | | | | | | | | | | |
Biotechnology 77.7% | | | | | | | | | | | | |
aAcceleron Pharma Inc. | | | United States | | | | 166,700 | | | $ | 8,463,359 | |
aAimmune Therapeutics Inc. | | | United States | | | | 119,100 | | | | 3,165,678 | |
aAlexion Pharmaceuticals Inc. | | | United States | | | | 793,800 | | | | 88,961,166 | |
a,b,cAllogene Therapeutics Inc., 144A | | | United States | | | | 326,797 | | | | 6,863,893 | |
Amgen Inc. | | | United States | | | | 232,300 | | | | 44,785,117 | |
aAmicus Therapeutics Inc. | | | United States | | | | 890,000 | | | | 9,950,200 | |
aAnaptysBio Inc. | | | United States | | | | 111,900 | | | | 8,361,168 | |
a,bARCA biopharma Inc., wts., 6/16/22 | | | United States | | | | 1,338,619 | | | | 49,090 | |
aArgenx SE, ADR | | | Netherlands | | | | 191,903 | | | | 15,354,159 | |
aArray BioPharma Inc. | | | United States | | | | 2,769,500 | | | | 44,865,900 | |
aAscendis Pharma AS, ADR | | | Denmark | | | | 180,300 | | | | 11,591,487 | |
aAudentes Therapeutics Inc. | | | United States | | | | 146,600 | | | | 4,134,120 | |
a,dAurinia Pharmaceuticals Inc. | | | Canada | | | | 749,600 | | | | 4,077,824 | |
aAvrobio Inc. | | | United States | | | | 33,900 | | | | 1,019,034 | |
aBiogen Inc. | | | United States | | | | 245,061 | | | | 74,564,710 | |
aBioMarin Pharmaceutical Inc. | | | United States | | | | 341,156 | | | | 31,444,349 | |
aBluebird Bio Inc. | | | United States | | | | 79,300 | | | | 9,095,710 | |
a,dCara Therapeutics Inc. | | | United States | | | | 159,600 | | | | 2,990,904 | |
aCelgene Corp. | | | United States | | | | 1,087,900 | | | | 77,893,640 | |
aChemoCentryx Inc. | | | United States | | | | 563,208 | | | | 6,093,911 | |
aConcert Pharmaceuticals Inc. | | | United States | | | | 207,400 | | | | 3,094,408 | |
aCRISPR Therapeutics AG | | | Switzerland | | | | 195,814 | | | | 6,416,825 | |
aCytomX Therapeutics Inc. | | | United States | | | | 125,100 | | | | 1,783,926 | |
a,bDelMar Pharmaceuticals Inc., wts., 4/12/22 | | | Canada | | | | 291,578 | | | | 3,500 | |
aDynavax Technologies Corp. | | | United States | | | | 771,870 | | | | 7,633,794 | |
aExelixis Inc. | | | United States | | | | 656,600 | | | | 9,107,042 | |
aFate Therapeutics Inc. | | | United States | | | | 1,994,946 | | | | 24,857,027 | |
aG1 Therapeutics Inc. | | | United States | | | | 412,426 | | | | 16,501,164 | |
Gilead Sciences Inc. | | | United States | | | | 624,500 | | | | 42,578,410 | |
aGlobal Blood Therapeutics Inc. | | | United States | | | | 197,500 | | | | 6,930,275 | |
aGlycoMimetics Inc. | | | United States | | | | 776,900 | | | | 9,773,402 | |
aHeron Therapeutics Inc. | | | United States | | | | 1,328,677 | | | | 36,884,074 | |
aHomology Medicines Inc. | | | United States | | | | 138,400 | | | | 2,604,688 | |
aImmunomedics Inc. | | | United States | | | | 266,300 | | | | 5,999,739 | |
a,b,cIntarcia Therapeutics Inc., DD | | | United States | | | | 80,195 | | | | 1,672,893 | |
aIntercept Pharmaceuticals Inc. | | | United States | | | | 47,700 | | | | 4,579,677 | |
aIovance Biotherapeutics Inc. | | | United States | | | | 2,187,900 | | | | 19,866,132 | |
aKaryopharm Therapeutics Inc. | | | United States | | | | 463,154 | | | | 4,881,643 | |
a,dKezar Life Sciences Inc. | | | United States | | | | 131,900 | | | | 3,261,887 | |
aLoxo Oncology Inc. | | | United States | | | | 76,500 | | | | 11,678,490 | |
aMacroGenics Inc. | | | United States | | | | 180,200 | | | | 2,966,092 | |
aMinerva Neurosciences Inc. | | | United States | | | | 492,400 | | | | 5,401,628 | |
aMolecular Templates Inc., wts., 2/12/20 | | | United States | | | | 439,500 | | | | — | |
aNeurocrine Biosciences Inc. | | | United States | | | | 338,200 | | | | 36,238,130 | |
a,bNorthwest Biotherapeutics Inc., wts., 2/20/19 | | | United States | | | | 223,880 | | | | — | |
aNovavax Inc. | | | United States | | | | 2,282,500 | | | | 4,017,200 | |
aPfenex Inc. | | | United States | | | | 870,884 | | | | 3,457,409 | |
aPortola Pharmaceuticals Inc. | | | United States | | | | 286,500 | | | | 5,641,185 | |
aPrincipia Biopharma Inc. | | | United States | | | | 92,600 | | | | 2,129,800 | |
aPTC Therapeutics Inc. | | | United States | | | | 365,600 | | | | 14,082,912 | |
aRegeneron Pharmaceuticals Inc. | | | United States | | | | 143,809 | | | | 48,785,765 | |
aREGENXBIO Inc. | | | United States | | | | 243,276 | | | | 16,219,211 | |
| | | | |
| | | |
20 | | Semiannual Report | | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS (UNAUDITED)
Franklin Biotechnology Discovery Fund (continued)
| | | | | | | | | | | | |
| | | Country | | | Shares/
Warrants | | | Value | |
| | | |
Common Stocks and Other Equity Interests (continued) | | | | | | | | | | | | |
Biotechnology (continued) | | | | | | | | | | | | |
aReplimune Group Inc. | | | United States | | | | 29,515 | | | $ | 380,153 | |
a,dRocket Pharmaceuticals Inc. | | | United States | | | | 88,300 | | | | 1,398,672 | |
aRubius Therapeutics Inc. | | | United States | | | | 174,200 | | | | 2,862,106 | |
aSage Therapeutics Inc. | | | United States | | | | 132,570 | | | | 17,059,108 | |
aSarepta Therapeutics Inc. | | | United States | | | | 120,300 | | | | 16,091,328 | |
aTG Therapeutics Inc. | | | United States | | | | 339,700 | | | | 1,545,635 | |
auniQure NV | | | Netherlands | | | | 84,700 | | | | 2,179,331 | |
aVertex Pharmaceuticals Inc. | | | United States | | | | 395,400 | | | | 67,004,484 | |
aXencor Inc. | | | United States | | | | 196,232 | | | | 6,420,711 | |
a,dZymeworks Inc. | | | Canada | | | | 267,520 | | | | 3,416,230 | |
| | | | | | | | | | | | |
| | | | | | | | | | | 931,131,505 | |
| | | | | | | | | | | | |
Health Care Providers & Services 0.1% | | | | | | | | | | | | |
a,dGuardant Health Inc. | | | United States | | | | 22,000 | | | | 736,560 | |
| | | | | | | | | | | | |
Life Sciences Tools & Services 5.7% | | | | | | | | | | | | |
aIllumina Inc. | | | United States | | | | 200,300 | | | | 62,323,345 | |
aMorphoSys AG, ADR | | | Germany | | | | 275,700 | | | | 6,346,614 | |
| | | | | | | | | | | | |
| | | | | | | | | | | 68,669,959 | |
| | | | | | | | | | | | |
Pharmaceuticals 13.1% | | | | | | | | | | | | |
aAclaris Therapeutics Inc. | | | United States | | | | 995,662 | | | | 11,838,421 | |
aAratana Therapeutics Inc. | | | United States | | | | 1,158,300 | | | | 6,880,302 | |
aAssembly Biosciences Inc. | | | United States | | | | 78,600 | | | | 1,798,368 | |
aBioPharmX Corp. | | | United States | | | | 1,991,575 | | | | 336,178 | |
a,eBioPharmX Corp., 144A | | | United States | | | | 1,945,737 | | | | 328,440 | |
a,bBioPharmX Corp., wts., 3/29/21 | | | United States | | | | 108,000 | | | | 53 | |
a,bBioPharmX Corp., wts., 11/22/23 | | | United States | | | | 1,679,900 | | | | 45,186 | |
aCollegium Pharmaceutical Inc. | | | United States | | | | 403,450 | | | | 6,475,373 | |
aCymabay Therapeutics Inc. | | | United States | | | | 678,300 | | | | 7,156,065 | |
aDermira Inc. | | | United States | | | | 825,300 | | | | 10,357,515 | |
aFoamix Pharmaceuticals Ltd. | | | Israel | | | | 750,900 | | | | 3,266,415 | |
aIntra-Cellular Therapies Inc. | | | United States | | | | 216,100 | | | | 3,669,378 | |
aIterum Therapeutics PLC | | | United States | | | | 144,737 | | | | 882,172 | |
aJazz Pharmaceuticals PLC | | | United States | | | | 172,700 | | | | 27,428,214 | |
aLogicBio Therapeutics Inc. | | | United States | | | | 280,700 | | | | 3,000,683 | |
aMarinus Pharmaceuticals Inc. | | | United States | | | | 734,420 | | | | 3,437,086 | |
aNektar Therapeutics | | | United States | | | | 260,800 | | | | 10,087,744 | |
aNeos Therapeutics Inc. | | | United States | | | | 489,765 | | | | 1,532,964 | |
a,dNovan Inc. | | | United States | | | | 120,969 | | | | 300,003 | |
a,dOdonate Therapeutics Inc. | | | United States | | | | 404,482 | | | | 5,864,989 | |
a,dOptinose Inc. | | | United States | | | | 230,300 | | | | 2,436,574 | |
aReata Pharmaceuticals Inc. | | | United States | | | | 232,200 | | | | 13,683,546 | |
aRevance Therapeutics Inc. | | | United States | | | | 463,800 | | | | 10,096,926 | |
a,dTherapeuticsMD Inc. | | | United States | | | | 2,847,040 | | | | 13,922,026 | |
aZogenix Inc. | | | United States | | | | 275,215 | | | | 11,492,978 | |
| | | | | | | | | | | | |
| | | | | | | | | | | 156,317,599 | |
| | | | | | | | | | | | |
Total Common Stocks and Other Equity Interests
(Cost $718,716,761) | | | | | | | | | | | 1,156,855,623 | |
| | | | | | | | | | | | |
| | | | |
| | | |
| franklintempleton.com | | Semiannual Report | | 21 |
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS (UNAUDITED)
Franklin Biotechnology Discovery Fund (continued)
| | | | | | | | | | | | |
| | | Country | | | Shares | | | Value | |
| | | |
Preferred Stocks 0.5% | | | | | | | | | | | | |
Biotechnology 0.5% | | | | | | | | | | | | |
a,b,cMetacrine Inc. | | | United States | | | | 1,330,687 | | | $ | 2,821,056 | |
a,b,cPrecision BioSciences Inc., Series B | | | United States | | | | 750,193 | | | | 3,758,467 | |
| | | | | | | | | | | | |
| | | | | | | | | | | 6,579,523 | |
| | | | | | | | | | | | |
| | | |
Escrows and Litigation Trusts (Cost $2,486,601) 0.1% | | | | | | | | | | | | |
a,bTrue North Therapeutics Inc., Escrow Account | | | United States | | | | 759,880 | | | | 1,212,087 | |
| | | | | | | | | | | | |
| | | |
Total Investments before Short Term Investments
(Cost $727,782,885) | | | | | | | | | | | 1,164,647,233 | |
| | | | | | | | | | | | |
| | | |
Short Term Investments 5.7% | | | | | | | | | | | | |
| | | |
Money Market Funds (Cost $41,249,953) 3.5% | | | | | | | | | | | | |
f,gInstitutional Fiduciary Trust Money Market Portfolio, 1.83% | | | United States | | | | 41,249,953 | | | | 41,249,953 | |
| | | | | | | | | | | | |
hInvestments from Cash Collateral Received for Loaned Securities (Cost $26,778,635) 2.2% | | | | | | | | | | | | |
Money Market Funds 2.2% | | | | | | | | | | | | |
f,gInstitutional Fiduciary Trust Money Market Portfolio, 1.83% | | | United States | | | | 26,778,635 | | | | 26,778,635 | |
| | | | | | | | | | | | |
| | | |
Total Investments (Cost $795,811,473) 102.9% | | | | | | | | | | | 1,232,675,821 | |
Other Assets, less Liabilities (2.9)% | | | | | | | | | | | (34,558,017 | ) |
| | | | | | | | | | | | |
Net Assets 100.0% | | | | | | | | | | $ | 1,198,117,804 | |
| | | | | | | | | | | | |
See Abbreviations on page 45.
aNon-income producing.
bFair valued using significant unobservable inputs. See Note 10 regarding fair value measurements.
cSee Note 8 regarding restricted securities.
dA portion or all of the security is on loan at October 31, 2018. See Note 1(c).
eSecurity was purchased pursuant to Rule 144A under the Securities Act of 1933 and may be sold in transactions exempt from registration only to qualified institutional buyers or in a public offering registered under the Securities Act of 1933. These securities have been deemed liquid under guidelines approved by the Trust’s Board of Trustees. At October 31, 2018, the aggregate value of these securities was $328,440, representing less than 0.1% of net assets.
fSee Note 3(f) regarding investments in affiliated management investment companies.
gThe rate shown is the annualized seven-day effective yield at period end.
hSee Note 1(c) regarding securities on loan.
| | | | |
| | | |
22 | | Semiannual Report | The accompanying notes are an integral part of these financial statements. | | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
Financial Highlights
Franklin Natural Resources Fund
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Six Months Ended | | | | | | | | | | | | | | | | |
| | | October 31, 2018 | | | Year Ended April 30, | |
| | | (unaudited) | | | 2018 | | | 2017 | | | 2016 | | | 2015 | | | 2014 | |
| | | | | | |
Class A | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | |
Per share operating performance | | | | | | | | | | | | | | | | | | | | | | | | |
(for a share outstanding throughout the period) | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | |
Net asset value, beginning of period | | | $27.96 | | | | $25.11 | | | | $25.02 | | | | $31.46 | | | | $39.79 | | | | $33.03 | |
| | | | | | |
Income from investment operationsa: | | | | | | | | | | | | | | | | | | | | | | | | |
Net investment incomeb | | | 0.13 | | | | 0.39 | c | | | 0.20 | | | | 0.29 | | | | 0.23 | | | | 0.19 | |
Net realized and unrealized gains (losses) | | | (3.85 | ) | | | 2.77 | | | | 0.17 | | | | (6.55 | ) | | | (8.27 | ) | | | 6.65 | |
| | | | | | |
Total from investment operations | | | (3.72 | ) | | | 3.16 | | | | 0.37 | | | | (6.26 | ) | | | (8.04 | ) | | | 6.84 | |
| | | | | | |
Less distributions from net investment income | | | — | | | | (0.31 | ) | | | (0.28 | ) | | | (0.18 | ) | | | (0.29 | ) | | | (0.08 | ) |
| | | | | | |
Net asset value, end of period | | | $24.24 | | | | $27.96 | | | | $25.11 | | | | $25.02 | | | | $31.46 | | | | $39.79 | |
| | | | | | |
Total returnd | | | (13.30)% | | | | 12.74% | | | | 1.37% | | | | (19.80)% | | | | (20.07)% | | | | 20.74% | |
| | | | | | |
Ratios to average net assetse | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | |
Expenses before waiver and payments by affiliates | | | 1.02% | | | | 1.13% | | | | 1.06% | | | | 1.14% | | | | 1.08% | | | | 1.07% | |
| | | | | | |
Expenses net of waiver and payments by affiliates | | | 1.01% | f | | | 1.13% | f,g | | | 1.05% | f | | | 1.13% | | | | 1.08% | f,g | | | 1.07% | f,g |
| | | | | | | |
Net investment income | | | 0.95% | | | | 1.56% | c | | | 0.79% | | | | 1.22% | | | | 0.67% | | | | 0.53% | |
| | | | | | |
Supplemental data | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | |
Net assets, end of period (000’s) | | | $277,018 | | | | $344,695 | | | | $398,703 | | | | $461,596 | | | | $572,518 | | | | $624,250 | |
| | | | | | |
Portfolio turnover rate | | | 18.47% | | | | 29.98% | | | | 29.74% | | | | 35.77% | | | | 30.05% | | | | 21.03% | |
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.
bBased on average daily shares outstanding.
cNet investment income per share includes approximately $0.16 per share related to income received in the form of special dividends in connection with certain Fund holdings. Excluding this amount, the ratio of net investment income to average net assets would have been 0.91%.
dTotal return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year.
eRatios are annualized for periods less than one year.
fBenefit of expense reduction rounds to less than 0.01%.
gBenefit of waiver and payments by affiliates rounds to less than 0.01%.
| | | | |
| | | |
| franklintempleton.com | | The accompanying notes are an integral part of these financial statements. | Semiannual Report | | 23 |
FRANKLIN STRATEGIC SERIES
FINANCIAL HIGHLIGHTS
Franklin Natural Resources Fund (continued)
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Six Months Ended | | | | | | | | | | | | | | | | |
| | | October 31, 2018 | | | Year Ended April 30, | |
| | | (unaudited) | | | 2018 | | | 2017 | | | 2016 | | | 2015 | | | 2014 | |
| | | | | | |
Class C | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | |
Per share operating performance | | | | | | | | | | | | | | | | | | | | | | | | |
(for a share outstanding throughout the period) | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | |
Net asset value, beginning of period | | | $27.17 | | | | $24.28 | | | | $24.25 | | | | $30.46 | | | | $38.39 | | | | $32.02 | |
| | | | | | |
Income from investment operationsa: | | | | | | | | | | | | | | | | | | | | | | | | |
Net investment income (loss)b | | | 0.03 | | | | 0.20 | c | | | 0.01 | | | | 0.11 | | | | (0.01 | ) | | | (0.06 | ) |
Net realized and unrealized gains (losses) | | | (3.74 | ) | | | 2.69 | | | | 0.15 | | | | (6.31 | ) | | | (7.91 | ) | | | 6.43 | |
| | | | | | |
Total from investment operations | | | (3.71 | ) | | | 2.89 | | | | 0.16 | | | | (6.20 | ) | | | (7.92 | ) | | | 6.37 | |
| | | | | | |
Less distributions from net investment income | | | — | | | | — | | | | (0.13 | ) | | | (0.01 | ) | | | (0.01 | ) | | | — | |
| | | | | | |
Net asset value, end of period | | | $23.46 | | | | $27.17 | | | | $24.28 | | | | $24.25 | | | | $30.46 | | | | $38.39 | |
| | | | | | |
Total returnd | | | (13.65)% | | | | 11.90% | | | | 0.63% | | | | (20.37)% | | | | (20.63)% | | | | 19.89% | |
| | | | | | |
Ratios to average net assetse | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | |
Expenses before waiver and payments by affiliates | | | 1.77% | | | | 1.88% | | | | 1.81% | | | | 1.87% | | | | 1.78% | | | | 1.76% | |
| | | | | | |
Expenses net of waiver and payments by affiliates | | | 1.76% | f | | | 1.88% | f,g | | | 1.80% | f | | | 1.86% | | | | 1.78% | f,g | | | 1.76% | f,g |
| | | | | | | |
Net investment income (loss) | | | 0.20% | | | | 0.81% | c | | | 0.04% | | | | 0.49% | | | | (0.03)% | | | | (0.16)% | |
| | | | | | |
Supplemental data | | | | | | | | | | | | | | | | | | | | | | | | |
Net assets, end of period (000’s) | | | $56,462 | | | | $83,814 | | | | $96,835 | | | | $107,724 | | | | $123,735 | | | | $126,651 | |
Portfolio turnover rate | | | 18.47% | | | | 29.98% | | | | 29.74% | | | | 35.77% | | | | 30.05% | | | | 21.03% | |
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.
bBased on average daily shares outstanding.
cNet investment income per share includes approximately $0.16 per share related to income received in the form of special dividends in connection with certain Fund holdings. Excluding this amount, the ratio of net investment income to average net assets would have been 0.16%.
dTotal return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year.
eRatios are annualized for periods less than one year.
fBenefit of expense reduction rounds to less than 0.01%.
gBenefit of waiver and payments by affiliates rounds to less than 0.01%.
| | | | |
| | | |
24 | | Semiannual Report | The accompanying notes are an integral part of these financial statements. | | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
FINANCIAL HIGHLIGHTS
Franklin Natural Resources Fund (continued)
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Six Months Ended | | | | | | | | | | | | | | | | |
| | | October 31, 2018 | | | Year Ended April 30, | |
| | | (unaudited) | | | 2018 | | | 2017 | | | 2016 | | | 2015 | | | 2014a | |
| | | | | | |
Class R6 | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | |
Per share operating performance | | | | | | | | | | | | | | | | | | | | | | | | |
(for a share outstanding throughout the period) | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | |
Net asset value, beginning of period | | | $29.79 | | | | $26.87 | | | | $26.73 | | | | $33.62 | | | | $42.58 | | | | $38.28 | |
| | | | | | |
Income from investment operationsb: | | | | | | | | | | | | | | | | | | | | | | | | |
Net investment incomec | | | 0.20 | | | | 0.57 | d | | | 0.47 | | | | 0.51 | | | | 0.46 | | | | 0.19 | |
Net realized and unrealized gains (losses) | | | (4.11 | ) | | | 2.95 | | | | 0.04 | | | | (7.06 | ) | | | (8.92 | ) | | | 4.31 | |
| | | | | | |
Total from investment operations | | | (3.91 | ) | | | 3.52 | | | | 0.51 | | | | (6.55 | ) | | | (8.46 | ) | | | 4.50 | |
| | | | | | |
Less distributions from net investment income | | | — | | | | (0.60 | ) | | | (0.37 | ) | | | (0.34 | ) | | | (0.50 | ) | | | (0.20 | ) |
| | | | | | |
Net asset value, end of period | | | $25.88 | | | | $29.79 | | | | $26.87 | | | | $26.73 | | | | $33.62 | | | | $42.58 | |
| | | | | | |
Total returne | | | (13.13)% | | | | 13.37% | | | | 1.89% | | | | (19.31)% | | | | (19.61)% | | | | 11.83% | |
| | | | | | |
Ratios to average net assetsf | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | |
Expenses before waiver and payments by affiliates | | | 0.60% | | | | 0.64% | | | | 0.83% | | | | 0.60% | | | | 0.55% | | | | 0.55% | |
| | | | | | |
Expenses net of waiver and payments by affiliates | | | 0.57% | g | | | 0.57% | g | | | 0.54% | g | | | 0.55% | | | | 0.54% | g | | | 0.53% | g |
| | | | | | | |
Net investment income | | | 1.39% | | | | 2.12% | d | | | 1.30% | | | | 1.80% | | | | 1.21% | | | | 1.07% | |
| | | | | | |
Supplemental data | | | | | | | | | | | | | | | | | | | | | | | | |
Net assets, end of period (000’s) | | | $15,688 | | | | $15,866 | | | | $218 | | | | $15 | | | | $439 | | | | $939 | |
Portfolio turnover rate | | | 18.47% | | | | 29.98% | | | | 29.74% | | | | 35.77% | | | | 30.05% | | | | 21.03% | |
aFor the period September 20, 2013 (effective date) to April 30, 2014.
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.
cBased on average daily shares outstanding.
dNet investment income per share includes approximately $0.16 per share related to income received in the form of special dividends in connection with certain Fund holdings. Excluding this amount, the ratio of net investment income to average net assets would have been 1.47%.
eTotal return is not annualized for periods less than one year.
fRatios are annualized for periods less than one year.
gBenefit of expense reduction rounds to less than 0.01%.
| | | | |
| | | |
| franklintempleton.com | | The accompanying notes are an integral part of these financial statements. | Semiannual Report | | 25 |
FRANKLIN STRATEGIC SERIES
FINANCIAL HIGHLIGHTS
Franklin Natural Resources Fund (continued)
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Six Months Ended | | | | | | | | | | | | | | | | |
| | | October 31, 2018 | | | Year Ended April 30, | |
| | | (unaudited) | | | 2018 | | | 2017 | | | 2016 | | | 2015 | | | 2014 | |
| | | | | | |
Advisor Class | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | |
Per share operating performance | | | | | | | | | | | | | | | | | | | | | | | | |
(for a share outstanding throughout the period) | | | | | �� | | | | | | | | | | | | | | | | | | | |
| | | | | | |
Net asset value, beginning of period | | | $29.80 | | | | $26.81 | | | | $26.71 | | | | $33.63 | | | | $42.52 | | | | $35.31 | |
| | | | | | |
Income from investment operationsa: | | | | | | | | | | | | | | | | | | | | | | | | |
Net investment incomeb | | | 0.18 | | | | 0.49 | c | | | 0.29 | | | | 0.36 | | | | 0.35 | | | | 0.31 | |
Net realized and unrealized gains (losses) | | | (4.11 | ) | | | 2.95 | | | | 0.17 | | | | (7.00 | ) | | | (8.85 | ) | | | 7.10 | |
| | | | | | |
Total from investment operations | | | (3.93 | ) | | | 3.44 | | | | 0.46 | | | | (6.64 | ) | | | (8.50 | ) | | | 7.41 | |
| | | | | | |
Less distributions from net investment income | | | — | | | | (0.45 | ) | | | (0.36 | ) | | | (0.28 | ) | | | (0.39 | ) | | | (0.20 | ) |
| | | | | | |
Net asset value, end of period | | | $25.87 | | | | $29.80 | | | | $26.81 | | | | $26.71 | | | | $33.63 | | | | $42.52 | |
| | | | | | |
Total returnd | | | (13.19)% | | | | 13.04% | | | | 1.64% | | | | (19.60)% | | | | (19.81)% | | | | 21.07% | |
| | | | | | |
Ratios to average net assetse | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | |
Expenses before waiver and payments by affiliates | | | 0.77% | | | | 0.88% | | | | 0.81% | | | | 0.87% | | | | 0.78% | | | | 0.77% | |
| | | | | | |
Expenses net of waiver and payments by affiliates | | | 0.76% | f | | | 0.88% | f,g | | | 0.80% | f | | | 0.86% | | | | 0.78% | f,g | | | 0.77% | f,g |
| | | | | | | |
Net investment income | | | 1.20% | | | | 1.81% | c | | | 1.04% | | | | 1.49% | | | | 0.97% | | | | 0.83% | |
| | | | | | |
Supplemental data | | | | | | | | | | | | | | | | | | | | | | | | |
Net assets, end of period (000’s) | | | $66,563 | | | | $78,443 | | | | $94,070 | | | | $90,185 | | | | $79,307 | | | | $94,651 | |
Portfolio turnover rate | | | 18.47% | | | | 29.98% | | | | 29.74% | | | | 35.77% | | | | 30.05% | | | | 21.03% | |
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.
bBased on average daily shares outstanding.
cNet investment income per share includes approximately $0.16 per share related to income received in the form of special dividends in connection with certain Fund holdings. Excluding this amount, the ratio of net investment income to average net assets would have been 1.16%.
dTotal return is not annualized for periods less than one year.
eRatios are annualized for periods less than one year.
fBenefit of expense reduction rounds to less than 0.01%.
gBenefit of waiver and payments by affiliates rounds to less than 0.01%.
| | | | |
| | | |
26 | | Semiannual Report | The accompanying notes are an integral part of these financial statements. | | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
Statement of Investments, October 31, 2018 (unaudited)
Franklin Natural Resources Fund
| | | | | | | | | | | | |
| | | Country | | | Shares | | | Value | |
| |
Common Stocks 98.4% | | | | | | | | | | | | |
Aluminum 0.4% | | | | | | | | | | | | |
aAlcoa Corp. | | | United States | | | | 42,500 | | | | $ 1,487,075 | |
Construction Materials 0.4% | | | | | | | | | | | | |
aCemex SAB de CV, CPO, ADR | | | Mexico | | | | 367,000 | | | | 1,849,680 | |
Copper 4.9% | | | | | | | | | | | | |
Antofagasta PLC | | | United Kingdom | | | | 614,300 | | | | 6,157,656 | |
First Quantum Minerals Ltd. | | | Zambia | | | | 321,900 | | | | 3,213,742 | |
Freeport-McMoRan Inc. | | | United States | | | | 416,400 | | | | 4,851,060 | |
aImperial Metals Corp. | | | Canada | | | | 364,500 | | | | 365,566 | |
Lundin Mining Corp. | | | Chile | | | | 665,200 | | | | 2,734,287 | |
Sandfire Resources NL | | | Australia | | | | 622,467 | | | | 2,930,078 | |
| | | | | | | | | | | 20,252,389 | |
| | | | | | | | | | | | |
Diversified Chemicals 1.2% | | | | | | | | | | | | |
BASF SE | | | Germany | | | | 34,200 | | | | 2,634,322 | |
DowDuPont Inc. | | | United States | | | | 44,400 | | | | 2,394,048 | |
| | | | | | | | | | | | |
| | | | | | | | | | | 5,028,370 | |
Diversified Metals & Mining 9.3% | | | | | | | | | | | | |
Anglo American PLC | | | United Kingdom | | | | 129,000 | | | | 2,760,147 | |
BHP Billiton PLC, ADR | | | United Kingdom | | | | 283,400 | | | | 11,406,850 | |
Glencore PLC | | | Switzerland | | | | 2,002,800 | | | | 8,156,426 | |
Hudbay Minerals Inc. | | | Canada | | | | 236,500 | | | | 929,001 | |
aNautilus Minerals Inc. | | | Canada | | | | 3,895,831 | | | | 251,602 | |
Nexa Resources SA | | | Peru | | | | 202,200 | | | | 2,254,530 | |
Rio Tinto PLC, ADR | | | Australia | | | | 99,000 | | | | 4,879,710 | |
South32 Ltd. | | | Australia | | | | 1,050,000 | | | | 2,690,538 | |
Teck Resources Ltd., B | | | Canada | | | | 252,400 | | | | 5,217,108 | |
| | | | | | | | | | | 38,545,912 | |
Fertilizers & Agricultural Chemicals 0.7% | | | | | | | | | | | | |
Nutrien Ltd. | | | Canada | | | | 57,700 | | | | 3,054,061 | |
Gold 5.3% | | | | | | | | | | | | |
Agnico Eagle Mines Ltd. | | | Canada | | | | 99,200 | | | | 3,504,768 | |
Alamos Gold Inc., A | | | Canada | | | | 741,400 | | | | 2,963,009 | |
aB2Gold Corp. | | | Canada | | | | 1,778,900 | | | | 4,392,679 | |
Barrick Gold Corp. | | | Canada | | | | 255,400 | | | | 3,205,270 | |
Goldcorp Inc. | | | Canada | | | | 240,000 | | | | 2,164,800 | |
aGuyana Goldfields Inc. | | | Canada | | | | 1,303,900 | | | | 1,753,526 | |
Newcrest Mining Ltd. | | | Australia | | | | 142,400 | | | | 2,077,443 | |
OceanaGold Corp. | | | Australia | | | | 402,310 | | | | 1,158,496 | |
Randgold Resources Ltd., ADR | | | United Kingdom | | | | 5,400 | | | | 424,116 | |
aTahoe Resources Inc. | | | Canada | | | | 229,382 | | | | 542,019 | |
| | | | | | | | | | | 22,186,126 | |
Integrated Oil & Gas 15.3% | | | | | | | | | | | | |
Chevron Corp. | | | United States | | | | 124,000 | | | | 13,844,600 | |
Exxon Mobil Corp. | | | United States | | | | 189,900 | | | | 15,131,232 | |
Occidental Petroleum Corp. | | | United States | | | | 154,700 | | | | 10,375,729 | |
Petroleo Brasileiro SA, ADR | | | Brazil | | | | 63,900 | | | | 1,038,375 | |
Royal Dutch Shell PLC, A, ADR | | | United Kingdom | | | | 184,821 | | | | 11,678,839 | |
Suncor Energy Inc. | | | Canada | | | | 218,200 | | | | 7,321,135 | |
Total SA, B, ADR | | | France | | | | 75,510 | | | | 4,424,886 | |
| | | | | | | | | | | 63,814,796 | |
| | | | |
| | | |
| franklintempleton.com | | Semiannual Report | | 27 |
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS (UNAUDITED)
Franklin Natural Resources Fund (continued)
| | | | | | | | | | | | |
| | | Country | | | Shares | | | Value | |
| |
Common Stocks (continued) | | | | | | | | | | | | |
Oil & Gas Drilling 2.6% | | | | | | | | | | | | |
Patterson-UTI Energy Inc. | | | United States | | | | 384,000 | | | $ | 6,389,760 | |
aPioneer Energy Services Corp. | | | United States | | | | 806,746 | | | | 2,396,036 | |
aRowan Cos. PLC | | | United States | | | | 119,100 | | | | 1,894,881 | |
| | | | | | | | | | | | |
| | | | | | | | | | | 10,680,677 | |
| | | | | | | | | | | | |
Oil & Gas Equipment & Services 16.9% | | | | | | | | | | | | |
Baker Hughes a GE Co., A | | | United States | | | | 226,600 | | | | 6,047,954 | |
aC&J Energy Services Inc. | | | United States | | | | 116,700 | | | | 2,191,626 | |
aDril-Quip Inc. | | | United States | | | | 44,300 | | | | 1,885,408 | |
Halliburton Co. | | | United States | | | | 295,435 | | | | 10,245,686 | |
Hunting PLC | | | United Kingdom | | | | 87,100 | | | | 750,927 | |
Liberty Oilfield Services Inc., A | | | United States | | | | 71,800 | | | | 1,362,764 | |
Mammoth Energy Services Inc. | | | United States | | | | 116,808 | | | | 2,915,528 | |
aNine Energy Service Inc. | | | United States | | | | 76,800 | | | | 2,843,904 | |
aOceaneering International Inc. | | | United States | | | | 127,400 | | | | 2,412,956 | |
aOil States International Inc. | | | United States | | | | 158,366 | | | | 3,526,811 | |
aRanger Energy Services Inc. | | | United States | | | | 170,831 | | | | 1,110,401 | |
RPC Inc. | | | United States | | | | 76,400 | | | | 1,136,832 | |
Schlumberger Ltd. | | | United States | | | | 315,347 | | | | 16,180,455 | |
aSelect Energy Services Inc. | | | United States | | | | 127,100 | | | | 1,215,076 | |
aSuperior Energy Services Inc. | | | United States | | | | 675,900 | | | | 5,292,297 | |
TechnipFMC PLC | | | United Kingdom | | | | 402,800 | | | | 10,593,640 | |
aWeatherford International PLC | | | United States | | | | 511,300 | | | | 690,255 | |
| | | | | | | | | | | | |
| | | | | | | | | | | 70,402,520 | |
| | | | | | | | | | | | |
Oil & Gas Exploration & Production 27.5% | | | | | | | | | | | | |
Anadarko Petroleum Corp. | | | United States | | | | 102,600 | | | | 5,458,320 | |
Cabot Oil & Gas Corp., A | | | United States | | | | 627,800 | | | | 15,211,594 | |
aCairn Energy PLC | | | United Kingdom | | | | 1,490,200 | | | | 3,759,132 | |
aCallon Petroleum Co. | | | United States | | | | 752,800 | | | | 7,505,416 | |
Canadian Natural Resources Ltd. | | | Canada | | | | 210,800 | | | | 5,785,128 | |
aConcho Resources Inc. | | | United States | | | | 79,100 | | | | 11,002,019 | |
ConocoPhillips | | | United States | | | | 90,300 | | | | 6,311,970 | |
Diamondback Energy Inc. | | | United States | | | | 103,300 | | | | 11,606,788 | |
EOG Resources Inc. | | | United States | | | | 69,700 | | | | 7,342,198 | |
EQT Corp. | | | United States | | | | 221,300 | | | | 7,517,561 | |
Hess Corp. | | | United States | | | | 116,500 | | | | 6,687,100 | |
a,bJagged Peak Energy Inc. | | | United States | | | | 511,316 | | | | 6,299,413 | |
Noble Energy Inc. | | | United States | | | | 367,300 | | | | 9,127,405 | |
Pioneer Natural Resources Co. | | | United States | | | | 49,500 | | | | 7,289,865 | |
aRing Energy Inc. | | | United States | | | | 483,500 | | | | 3,447,355 | |
| | | | | | | | | | | | |
| | | | | | | | | | | 114,351,264 | |
| | | | | | | | | | | | |
Oil & Gas Refining & Marketing 3.3% | | | | | | | | | | | | |
HollyFrontier Corp. | | | United States | | | | 31,500 | | | | 2,124,360 | |
Marathon Petroleum Corp. | | | United States | | | | 63,500 | | | | 4,473,575 | |
Phillips 66 | | | United States | | | | 39,700 | | | | 4,081,954 | |
Valero Energy Corp. | | | United States | | | | 31,200 | | | | 2,842,008 | |
| | | | | | | | | | | | |
| | | | | | | | | | | 13,521,897 | |
| | | | | | | | | | | | |
Oil & Gas Storage & Transportation 8.1% | | | | | | | | | | | | |
Enbridge Inc. | | | Canada | | | | 136,647 | | | | 4,251,088 | |
Kinder Morgan Inc. | | | United States | | | | 533,200 | | | | 9,075,064 | |
ONEOK Inc. | | | United States | | | | 70,400 | | | | 4,618,240 | |
| | | | |
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28 | | Semiannual Report | | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS (UNAUDITED)
Franklin Natural Resources Fund (continued)
| | | | | | | | | | |
| | | Country | | Shares | | | Value | |
Common Stocks (continued) | | | | | | | | | | |
Oil & Gas Storage & Transportation (continued) | | | | | | | | | | |
Targa Resources Corp. | | United States | | | 167,100 | | | | $ 8,634,057 | |
TransCanada Corp. | | Canada | | | 67,800 | | | | 2,557,416 | |
The Williams Cos. Inc. | | United States | | | 181,800 | | | | 4,423,194 | |
| | | | | | | | | 33,559,059 | |
Paper Packaging 0.5% | | | | | | | | | | |
Packaging Corp. of America | | United States | | | 24,100 | | | | 2,212,621 | |
Pharmaceuticals 0.1% | | | | | | | | | | |
aElanco Animal Health Inc. | | United States | | | 17,600 | | | | 536,448 | |
| | | | | | | | | | |
Specialty Chemicals 1.4% | | | | | | | | | | |
Albemarle Corp. | | United States | | | 41,800 | | | | 4,147,396 | |
Umicore SA | | Belgium | | | 32,200 | | | | 1,516,306 | |
| | | | | | | | | 5,663,702 | |
Trading Companies & Distributors 0.5% | | | | | | | | | | |
aUnivar Inc. | | United States | | | 82,900 | | | | 2,040,998 | |
| | | | | | | | | | |
Total Common Stocks (Cost $362,775,516) | | | | | | | | | 409,187,595 | |
| | | | | | | | | | |
Convertible Preferred Stocks 0.2% | | | | | | | | | | |
Oil & Gas Exploration & Production 0.2% | | | | | | | | | | |
Sanchez Energy Corp., 4.875%, cvt. pfd., A | | United States | | | 62,700 | | | | 367,554 | |
Sanchez Energy Corp., 6.50%, cvt. pfd., B | | United States | | | 39,800 | | | | 261,120 | |
Total Convertible Preferred Stocks (Cost $4,441,628) | | | | | | | | | 628,674 | |
| | | | | | | | | | |
Total Investments before Short Term Investments
(Cost $367,217,144) | | | | | | | | | 409,816,269 | |
| | | | | | | | | | |
| | | |
Short Term Investments 2.5% | | | | | | | | | | |
| | | |
Money Market Funds (Cost $6,802,640) 1.6% | | | | | | | | | | |
c,dInstitutional Fiduciary Trust Money Market Portfolio, 1.83% | | United States | | | 6,802,640 | | | | 6,802,640 | |
| | | | | | | | | | |
eInvestments from Cash Collateral Received for Loaned Securities (Cost $3,692,500) 0.9% | | | | | | | | | | |
Money Market Funds 0.9% | | | | | | | | | | |
c,dInstitutional Fiduciary Trust Money Market Portfolio, 1.83% | | United States | | | 3,692,500 | | | | 3,692,500 | |
| | | | | | | | | | |
Total Investments (Cost $377,712,284) 101.1% | | | | | | | | | 420,311,409 | |
Other Assets, less Liabilities (1.1)% | | | | | | | | | (4,580,179 | ) |
| | | | | | | | | | |
Net Assets 100.0% | | | | | | | | | $415,731,230 | |
| | | | | | | | | | |
See Abbreviations on page 45.
aNon-income producing.
bA portion or all of the security is on loan at October 31, 2018. See Note 1(c).
cSee Note 3(f) regarding investments in affiliated management investment companies.
dThe rate shown is the annualized seven-day effective yield at period end.
eSee Note 1(c) regarding securities on loan.
| | | | |
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| franklintempleton.com | | The accompanying notes are an integral part of these financial statements. | Semiannual Report | | 29 |
FRANKLIN STRATEGIC SERIES
Financial Statements
Statements of Assets and Liabilities
October 31, 2018 (unaudited)
| | | | |
| | | Franklin Biotechnology Discovery Fund | | Franklin Natural Resources Fund |
|
| | |
Assets: | | | | |
+Investments in securities: | | | | |
Cost - Unaffiliated issuers | | $ 727,782,885 | | $ 367,217,144 |
Cost - Non-controlled affiliates (Note 3f) | | 68,028,588 | | 10,495,140 |
| | |
Value - Unaffiliated issuers | | $1,164,647,233 | | $ 409,816,269 |
Value - Non-controlled affiliates (Note 3f) | | 68,028,588 | | 10,495,140 |
Cash | | — | | 30,227 |
Receivables: | | | | |
Investment securities sold ** | | 2,189,562 | | 1,598,298 |
Capital shares sold | | 631,137 | | 116,386 |
Dividends and interest | | 63,042 | | 396,960 |
Due from custodian | | 612,075 | | — |
Other assets | | 426 | | 159 |
| | |
Total assets | | 1,236,172,063 | | 422,453,439 |
| | |
| | |
Liabilities: | | | | |
Payables: | | | | |
Investment securities purchased | | 7,617,115 | | 1,821,717 |
Capital shares redeemed | | 1,604,088 | | 611,751 |
Management fees | | 626,621 | | 191,639 |
Distribution fees | | 268,468 | | 120,441 |
Transfer agent fees | | 442,477 | | 224,891 |
Payable upon return of securities loaned | | 27,390,710 | | 3,692,500 |
Accrued expenses and other liabilities. | | 104,780 | | 59,270 |
| | |
Total liabilities | | 38,054,259 | | 6,722,209 |
| | |
Net assets, at value | | $1,198,117,804 | | $ 415,731,230 |
| | |
| | |
Net assets consist of: | | | | |
Paid-in capital | | $ 737,556,314 | | $ 518,859,148 |
Total distributable earnings (loss) | | 460,561,490 | | (103,127,918) |
| | |
Net assets, at value | | $1,198,117,804 | | $ 415,731,230 |
| | |
| | | | |
| | |
+Includes securities loaned | | $ 26,011,284 | | $ 3,639,328 |
**Includes securities loaned | | $ 53,884 | | $ — |
| | | | |
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30 | | Semiannual Report | The accompanying notes are an integral part of these financial statements. | | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
FINANCIAL STATEMENTS
Statements of Assets and Liabilities (continued)
October 31, 2018 (unaudited)
| | | | | | |
| | | Franklin Biotechnology Discovery Fund | | | Franklin Natural Resources Fund |
Class A: | | | | | | |
Net assets, at value | | | $969,243,020 | | | $277,018,370 |
Shares outstanding | | | 6,971,195 | | | 11,427,293 |
Net asset value per sharea | | | $139.04 | | | $24.24 |
Maximum offering price per share (net asset value per share ÷ 94.50%) | | | $147.13 | | | $25.65 |
Class C: | | | | | | |
Net assets, at value | | | $ 49,921,444 | | | $ 56,462,043 |
Shares outstanding | | | 371,582 | | | 2,406,292 |
Net asset value and maximum offering price per sharea | | | $134.35 | | | $23.46 |
Class R6: | | | | | | |
Net assets, at value | | | $ 6,823,691 | | | $ 15,687,583 |
Shares outstanding | | | 47,519 | | | 606,090 |
Net asset value and maximum offering price per share | | | $143.60 | | | $25.88 |
Advisor Class: | | | | | | |
Net assets, at value | | | $172,129,649 | | | $ 66,563,234 |
Shares outstanding | | | 1,208,299 | | | 2,573,431 |
Net asset value and maximum offering price per share | | | $142.46 | | | $25.87 |
aRedemption price is equal to net asset value less contingent deferred sales charges, if applicable.
| | | | |
| | | |
| franklintempleton.com | | The accompanying notes are an integral part of these financial statements. | Semiannual Report | | 31 |
FRANKLIN STRATEGIC SERIES
FINANCIAL STATEMENTS
Statements of Operations
for the six months ended October 31, 2018 (unaudited)
| | | | | | | | |
| | | Franklin
Biotechnology
Discovery Fund | | | Franklin Natural
Resources Fund | |
Investment income: | | | | | | | | |
Dividends: (net of foreign taxes)* | | | | | | | | |
Unaffiliated issuers | | | $ 1,459,622 | | | | $ 4,732,691 | |
Non-controlled affiliates (Note 3f) | | | 264,302 | | | | 74,548 | |
Income from securities loaned (net of fees and rebates) | | | 554,107 | | | | 86,807 | |
| | | | |
Total investment income | | | 2,278,031 | | | | 4,894,046 | |
| | | | |
Expenses: | | | | | | | | |
Management fees (Note 3a) | | | 4,084,690 | | | | 1,250,737 | |
Distribution fees: (Note 3c) | | | | | | | | |
Class A | | | 1,413,200 | | | | 408,883 | |
Class C | | | 311,074 | | | | 390,500 | |
Transfer agent fees: (Note 3e) | | | | | | | | |
Class A | | | 852,149 | | | | 351,373 | |
Class C | | | 46,921 | | | | 84,295 | |
Class R6 | | | 2,849 | | | | 3,951 | |
Advisor Class | | | 148,034 | | | | 83,291 | |
Custodian fees (Note 4) | | | 7,858 | | | | 6,295 | |
Reports to shareholders | | | 76,843 | | | | 54,661 | |
Registration and filing fees | | | 58,401 | | | | 42,428 | |
Professional fees | | | 28,338 | | | | 20,856 | |
Trustees’ fees and expenses | | | 8,512 | | | | 3,159 | |
Other | | | 16,277 | | | | 9,279 | |
| | | | |
Total expenses | | | 7,055,146 | | | | 2,709,708 | |
Expense reductions (Note 4) | | | (658 | ) | | | (85 | ) |
Expenses waived/paid by affiliates (Note 3f and 3g) | | | (121,550 | ) | | | (29,528 | ) |
| | | | |
Net expenses | | | 6,932,938 | | | | 2,680,095 | |
| | | | |
Net investment income (loss) | | | (4,654,907 | ) | | | 2,213,951 | |
| | | | |
Realized and unrealized gains (losses): | | | | | | | | |
Net realized gain (loss) from: | | | | | | | | |
Investments: | | | | | | | | |
Unaffiliated issuers | | | (6,082,635 | ) | | | 7,482,975 | |
Foreign currency transactions | | | — | | | | (4,164 | ) |
| | | | |
Net realized gain (loss) | | | (6,082,635 | ) | | | 7,478,811 | |
| | | | |
Net change in unrealized appreciation (depreciation) on: | | | | | | | | |
Investments: | | | | | | | | |
Unaffiliated issuers | | | (46,169,170 | ) | | | (74,531,985 | ) |
Translation of other assets and liabilities denominated in foreign currencies | | | — | | | | 6,607 | |
| | | | |
Net change in unrealized appreciation (depreciation) | | | (46,169,170 | ) | | | (74,525,378 | ) |
| | | | |
Net realized and unrealized gain (loss) | | | (52,251,805 | ) | | | (67,046,567 | ) |
| | | | |
Net increase (decrease) in net assets resulting from operations | | | $(56,906,712 | ) | | | $(64,832,616 | ) |
| | | | |
| | |
| | | | | | | | |
*Foreign taxes withheld on dividends | | | $ — | | | | $ 202,419 | |
| | | | |
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32 | | Semiannual Report | The accompanying notes are an integral part of these financial statements. | | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
FINANCIAL STATEMENTS
Statements of Changes in Net Assets
| | | | | | | | | | | | | | | | |
| | | Franklin Biotechnology | | | Franklin Natural | |
| | | Discovery Fund | | | Resources Fund | |
| | | Six Months Ended | | | | | | Six Months Ended | | | | |
| | | October 31, 2018 | | | Year Ended | | | October 31, 2018 | | | Year Ended | |
| | | (unaudited) | | | April 30, 2018 | | | (unaudited) | | | April 30, 2018 | |
Increase (decrease) in net assets: | | | | | | | | | | | | | | | | |
Operations: | | | | | | | | | | | | | | | | |
Net investment income (loss) | | $ | (4,654,907 | ) | | $ | (7,400,442 | ) | | $ | 2,213,951 | | | $ | 7,807,287 | |
Net realized gain (loss) | | | (6,082,635 | ) | | | 54,362,893 | | | | 7,478,811 | | | | (12,640,009 | ) |
Net change in unrealized appreciation (depreciation) | | | (46,169,170 | ) | | | (22,596,221 | ) | | | (74,525,378 | ) | | | 63,514,023 | |
| | | | |
Net increase (decrease) in net assets resulting from operations | | | (56,906,712 | ) | | | 24,366,230 | | | | (64,832,616 | ) | | | 58,681,301 | |
| | | | |
Distributions to shareholders: (Note 1e) | | | | | | | | | | | | | | | | |
Class A | | | — | | | | (27,114,653 | ) | | | — | | | | (4,171,579 | ) |
Class C | | | — | | | | (1,417,301 | ) | | | — | | | | — | |
Class R6 | | | — | | | | (199,407 | ) | | | — | | | | (26,407 | ) |
Advisor Class | | | — | | | | (4,208,617 | ) | | | — | | | | (1,426,444 | ) |
| | | | |
Total distributions to shareholders | | | — | | | | (32,939,978 | ) | | | — | | | | (5,624,430 | ) |
| | | | |
Capital share transactions: (Note 2) | | | | | | | | | | | | | | | | |
Class A | | | (67,717,611 | ) | | | (88,622,240 | ) | | | (25,108,427 | ) | | | (89,055,299 | ) |
Class C | | | (5,870,067 | ) | | | 5,540,101 | | | | (17,655,311 | ) | | | (22,010,700 | ) |
Class R6 | | | (1,172,032 | ) | | | (555,474 | ) | | | 2,194,141 | | | | 14,973,208 | |
Advisor Class | | | 942,002 | | | | 21,646,333 | | | | (1,684,169 | ) | | | (23,972,393 | ) |
| | | | |
Total capital share transactions | | | (73,817,708 | ) | | | (61,991,280 | ) | | | (42,253,766 | ) | | | (120,065,184 | ) |
| | | | |
Net increase (decrease) in net assets | | | (130,724,420 | ) | | | (70,565,028 | ) | | | (107,086,382 | ) | | | (67,008,313 | ) |
Net assets: | | | | | | | | | | | | | | | | |
Beginning of period | | | 1,328,842,224 | | | | 1,399,407,252 | | | | 522,817,612 | | | | 589,825,925 | |
| | | | |
End of period (Note 1e) | | $ | 1,198,117,804 | | | $ | 1,328,842,224 | | | $ | 415,731,230 | | | $ | 522,817,612 | |
| | | | |
| | | | |
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| franklintempleton.com | | The accompanying notes are an integral part of these financial statements. | Semiannual Report | | 33 |
FRANKLIN STRATEGIC SERIES
Notes to Financial Statements (unaudited)
1. Organization and Significant Accounting Policies
Franklin Strategic Series (Trust) is registered under the Investment Company Act of 1940 (1940 Act) as an open-end management investment company, consisting of eight separate funds, two of which are included in this report (Funds) and applies the specialized accounting and reporting guidance in U.S. Generally Accepted Accounting Principles (U.S. GAAP). The Funds offer four classes of shares: Class A, Class C, Class R6, and Advisor Class. Beginning on October 19, 2018, Class C shares automatically convert to Class A shares after they have been held for 10 years. Each class of shares may differ by its initial sales load, contingent deferred sales charges, voting rights on matters affecting a single class, its exchange privilege and fees due to differing arrangements for distribution and transfer agent fees.
The following summarizes the Funds’ significant accounting policies.
a. Financial Instrument Valuation
The Funds’ investments in financial instruments are carried at fair value daily. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date. The Funds calculate the net asset value (NAV) per share each business day as of 4 p.m. Eastern time or the regularly scheduled close of the New York Stock Exchange (NYSE), whichever is earlier. Under compliance policies and procedures approved by the Trust’s Board of Trustees (the Board), the Funds’ administrator has responsibility for oversight of valuation, including leading the cross-functional Valuation Committee (VC). The VC provides administration and oversight of the Funds’ valuation policies and procedures, which are approved annually by the Board. Among other things, these procedures allow the Funds to utilize independent pricing services, quotations from securities and financial instrument dealers, and other market sources to determine fair value.
Equity securities listed on an exchange or on the NASDAQ National Market System are valued at the last quoted sale price or the official closing price of the day, respectively. Foreign equity securities are valued as of the close of trading on the foreign stock exchange on which the security is primarily traded, or as of 4 p.m. Eastern time. The value is then converted into its U.S. dollar equivalent at the foreign exchange rate in effect at 4 p.m. Eastern time on the day that the value of the
security is determined. Over-the-counter (OTC) securities are valued within the range of the most recent quoted bid and ask prices. Securities that trade in multiple markets or on multiple exchanges are valued according to the broadest and most representative market. Certain equity securities are valued based upon fundamental characteristics or relationships to similar securities.
Investments in open-end mutual funds are valued at the closing NAV.
The Funds have procedures to determine the fair value of financial instruments for which market prices are not reliable or readily available. Under these procedures, the VC convenes on a regular basis to review such financial instruments and considers a number of factors, including significant unobservable valuation inputs, when arriving at fair value. The VC primarily employs a market-based approach which may use related or comparable assets or liabilities, recent transactions, market multiples, book values, and other relevant information for the investment to determine the fair value of the investment. An income-based valuation approach may also be used in which the anticipated future cash flows of the investment are discounted to calculate fair value. Discounts may also be applied due to the nature or duration of any restrictions on the disposition of the investments. Due to the inherent uncertainty of valuations of such investments, the fair values may differ significantly from the values that would have been used had an active market existed. The VC employs various methods for calibrating these valuation approaches including a regular review of key inputs and assumptions, transactional back-testing or disposition analysis, and reviews of any related market activity.
Trading in securities on foreign securities stock exchanges and OTC markets may be completed before 4 p.m. Eastern time. In addition, trading in certain foreign markets may not take place on every Funds’ business day. Occasionally, events occur between the time at which trading in a foreign security is completed and 4 p.m. Eastern time that might call into question the reliability of the value of a portfolio security held by the Fund. As a result, differences may arise between the value of the Funds’ portfolio securities as determined at the foreign market close and the latest indications of value at 4 p.m. Eastern time. In order to minimize the potential for these differences, the VC monitors price movements following the close of trading in foreign stock markets through a series of country specific market proxies (such as baskets of American
| | | | |
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34 | | Semiannual Report | | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
Depositary Receipts, futures contracts and exchange traded funds). These price movements are measured against established trigger thresholds for each specific market proxy to assist in determining if an event has occurred that may call into question the reliability of the values of the foreign securities held by the Funds. If such an event occurs, the securities may be valued using fair value procedures, which may include the use of independent pricing services.
When the last day of the reporting period is a non-business day, certain foreign markets may be open on those days that the Funds’ NAV is not calculated, which could result in differences between the value of the Funds’ portfolio securities on the last business day and the last calendar day of the reporting period. Any significant security valuation changes due to an open foreign market are adjusted and reflected by the Funds for financial reporting purposes.
b. Foreign Currency Translation
Portfolio securities and other assets and liabilities denominated in foreign currencies are translated into U.S. dollars based on the exchange rate of such currencies against U.S. dollars on the date of valuation. The Funds may enter into foreign currency exchange contracts to facilitate transactions denominated in a foreign currency. Purchases and sales of securities, income and expense items denominated in foreign currencies are translated into U.S. dollars at the exchange rate in effect on the transaction date. Portfolio securities and assets and liabilities denominated in foreign currencies contain risks that those currencies will decline in value relative to the U.S. dollar. Occasionally, events may impact the availability or reliability of foreign exchange rates used to convert the U.S. dollar equivalent value. If such an event occurs, the foreign exchange rate will be valued at fair value using procedures established and approved by the Board.
The Funds do not separately report the effect of changes in foreign exchange rates from changes in market prices on securities held. Such changes are included in net realized and unrealized gain or loss from investments in the Statements of Operations.
Realized foreign exchange gains or losses arise from sales of foreign currencies, currency gains or losses realized between the trade and settlement dates on securities transactions and the difference between the recorded amounts of dividends, interest, and foreign withholding taxes and the U.S. dollar equivalent of the amounts actually received or paid. Net unrealized foreign
exchange gains and losses arise from changes in foreign exchange rates on foreign denominated assets and liabilities other than investments in securities held at the end of the reporting period.
c. Securities Lending
Certain or all Funds participate in an agency based securities lending program to earn additional income. The Fund receives cash collateral against the loaned securities in an amount equal to at least 102% of the fair value of the loaned securities. Collateral is maintained over the life of the loan in an amount not less than 100% of the fair value of loaned securities, as determined at the close of Fund business each day; any additional collateral required due to changes in security values is delivered to the Fund on the next business day. The collateral is deposited into a joint cash account with other funds and is used to invest in a money market fund managed by Franklin Advisers, Inc., an affiliate of the Funds. The Fund may receive income from the investment of cash collateral, in addition to lending fees and rebates paid by the borrower. Income from securities loaned, net of fees paid to the securities lending agent and/or third-party vendor, is reported separately in the Statements of Operations. The Fund bears the market risk with respect to the collateral investment, securities loaned, and the risk that the agent may default on its obligations to the Fund. If the borrower defaults on its obligation to return the securities loaned, the Fund has the right to repurchase the securities in the open market using the collateral received. The securities lending agent has agreed to indemnify the Fund in the event of default by a third party borrower.
d. Income and Deferred Taxes
It is each Fund’s policy to qualify as a regulated investment company under the Internal Revenue Code. Each Fund intends to distribute to shareholders substantially all of its taxable income and net realized gains to relieve it from federal income and excise taxes. As a result, no provision for U.S. federal income taxes is required.
The Funds may be subject to foreign taxation related to income received, capital gains on the sale of securities and certain foreign currency transactions in the foreign jurisdictions in which the Funds invest. Foreign taxes, if any, are recorded based on the tax regulations and rates that exist in the foreign markets in which the Funds invest. When a capital gain tax is
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FRANKLIN STRATEGIC SERIES
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
1. Organization and Significant Accounting Policies (continued)
d. Income and Deferred Taxes (continued)
determined to apply, certain or all Funds record an estimated deferred tax liability in an amount that would be payable if the securities were disposed of on the valuation date.
Each Fund may recognize an income tax liability related to its uncertain tax positions under U.S. GAAP when the uncertain tax position has a less than 50% probability that it will be sustained upon examination by the tax authorities based on its technical merits. As of October 31, 2018, each Fund has determined that no tax liability is required in its financial statements related to uncertain tax positions for any open tax years (or expected to be taken in future tax years). Open tax years are those that remain subject to examination and are based on the statute of limitations in each jurisdiction in which the Fund invests.
e. Security Transactions, Investment Income, Expenses and Distributions
Security transactions are accounted for on trade date. Realized gains and losses on security transactions are determined on a specific identification basis. Interest income and estimated expenses are accrued daily. Dividend income is recorded on the ex-dividend date except for certain dividends from securities where the dividend rate is not available. In such cases, the dividend is recorded as soon as the information is received by the Funds. Distributions to shareholders are recorded on the ex-dividend date. Distributable earnings are determined according to income tax regulations (tax basis) and may differ from earnings recorded in accordance with U.S. GAAP. These differences may be permanent or temporary. Permanent differences are reclassified among capital accounts to reflect their tax character. These reclassifications have no impact on net assets or the results of operations. Temporary differences are not reclassified, as they may reverse in subsequent periods.*
Common expenses incurred by the Trust are allocated among the Funds based on the ratio of net assets of each Fund to the combined net assets of the Trust or based on the ratio of number of shareholders of each Fund to the combined number of shareholders of the Trust. Fund specific expenses are charged directly to the Fund that incurred the expense.
Realized and unrealized gains and losses and net investment income, excluding class specific expenses, are allocated daily to each class of shares based upon the relative proportion of net assets of each class. Differences in per share distributions by class are generally due to differences in class specific expenses.
f. Accounting Estimates
The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the amounts of income and expenses during the reporting period. Actual results could differ from those estimates.
g. Guarantees and Indemnifications
Under the Trust’s organizational documents, its officers and trustees are indemnified by the Trust against certain liabilities arising out of the performance of their duties to the Trust. Additionally, in the normal course of business, the Trust, on behalf of the Funds, enters into contracts with service providers that contain general indemnification clauses. The Trust’s maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Trust that have not yet occurred. Currently, the Trust expects the risk of loss to be remote.
*Effective during the current reporting period, it is no longer required to present certain line items on the Statements of Changes in Net Assets. Such disclosure changes are included in the Statements of Changes in Net Assets, therefore prior period amounts are presented below.
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FRANKLIN STRATEGIC SERIES
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
For the year ended April 30, 2018, distributions to shareholders were as follows:
| | | | | | | | |
| | | Franklin Biotechnology
Discovery Fund | | | Franklin Natural
Resources Fund | |
| | |
Distributions from net investment income: | | | | | | | | |
Class A | | | $ — | | | | $(4,171,579) | |
Class R6 | | | — | | | | (26,407) | |
Advisor Class | | | — | | | | (1,426,444) | |
Distributions from net realized gains: | | | | | | | | |
Class A | | | (27,114,653) | | | | — | |
Class C | | | (1,417,301) | | | | — | |
Class R6 | | | (199,407) | | | | — | |
Advisor Class | | | (4,208,617) | | | | — | |
For the year ended April 30, 2018, undistributed net investment income(loss) included in net assets were as follows:
| | | | |
| Fund | | Undistributed net
investment income (loss) | |
| |
Franklin Biotechnology Discovery Fund | | | $(8,318,907) | |
Franklin Natural Resources Fund | | | $ 4,345,619 | |
2. Shares of Beneficial Interest
At October 31, 2018, there were an unlimited number of shares authorized (without par value). Transactions in the Funds’ shares were as follows:
| | | | | | | | | | | | | | | | |
| | | Franklin Biotechnology
Discovery Fund | | | Franklin Natural Resources Fund | |
| | | | |
| | | Shares | | | Amount | | | Shares | | | Amount | |
| | | | |
Class A Shares: | | | | | | | | | | | | | | | | |
Six Months ended October 31, 2018 | | | | | | | | | | | | | | | | |
Shares solda | | | 398,985 | | | $ | 62,153,412 | | | | 798,608 | | | $ | 21,736,904 | |
Shares redeemed | | | (831,000 | ) | | | (129,871,023 | ) | | | (1,697,702 | ) | | | (46,845,331 | ) |
| | | | |
Net increase (decrease) | | | (432,015 | ) | | $ | (67,717,611 | ) | | | (899,094 | ) | | $ | (25,108,427 | ) |
| | | | |
Year ended April 30, 2018 | | | | | | | | | | | | | | | | |
Shares sold | | | 1,057,237 | | | $ | 160,996,348 | | | | 1,583,808 | | | $ | 40,230,459 | |
Shares issued in reinvestment of distributions | | | 175,206 | | | | 25,819,984 | | | | 164,031 | | | | 4,090,940 | |
Shares redeemed | | | (1,821,677 | ) | | | (275,438,572 | ) | | | (5,298,641 | ) | | | (133,376,698 | ) |
| | | | |
Net increase (decrease) | | | (589,234 | ) | | $ | (88,622,240 | ) | | | (3,550,802 | ) | | $ | (89,055,299 | ) |
| | | | |
Class C Shares: | | | | | | | | | | | | | | | | |
Six Months ended October 31, 2018 | | | | | | | | | | | | | | | | |
Shares sold | | | 40,777 | | | $ | 6,186,511 | | | | 170,166 | | | $ | 4,591,281 | |
Shares redeemeda | | | (81,428 | ) | | | (12,056,578 | ) | | | (848,550 | ) | | | (22,246,592 | ) |
| | | | |
Net increase (decrease) | | | (40,651 | ) | | $ | (5,870,067 | ) | | | (678,384 | ) | | $ | (17,655,311 | ) |
| | | | |
Year ended April 30, 2018 | | | | | | | | | | | | | | | | |
Shares sold | | | 142,042 | | | $ | 21,098,664 | | | | 388,443 | | | $ | 9,522,328 | |
Shares issued in reinvestment of distributions | | | 9,827 | | | | 1,408,701 | | | | — | | | | — | |
Shares redeemed | | | (114,253 | ) | | | (16,967,264 | ) | | | (1,292,254 | ) | | | (31,533,028 | ) |
| | | | |
Net increase (decrease) | | | 37,616 | | | $ | 5,540,101 | | | | (903,811 | ) | | $ | (22,010,700 | ) |
| | | | |
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FRANKLIN STRATEGIC SERIES
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
2. Shares of Beneficial Interest (continued)
| | | | | | | | | | | | | | | | |
| | | Franklin Biotechnology
Discovery Fund | | | Franklin Natural Resources Fund | |
| | | | |
| | | Shares | | | Amount | | | Shares | | | Amount | |
| | | | |
Class R6 Shares: | | | | | | | | | | | | | | | | |
Six Months ended October 31, 2018 | | | | | | | | | | | | | | | | |
Shares sold | | | 9,097 | | | $ | 1,504,671 | | | | 157,637 | | | $ | 4,641,559 | |
Shares redeemed | | | (16,721 | ) | | | (2,676,703 | ) | | | (84,112 | ) | | | (2,447,418 | ) |
| | | | |
Net increase (decrease) | | | (7,624 | ) | | $ | (1,172,032 | ) | | | 73,525 | | | $ | 2,194,141 | |
| | | | |
Year ended April 30, 2018 | | | | | | | | | | | | | | | | |
Shares sold | | | 18,257 | | | $ | 2,841,320 | | | | 544,711 | | | $ | 15,552,699 | |
Shares issued in reinvestment of distributions | | | 1,314 | | | | 199,406 | | | | 995 | | | | 26,408 | |
Shares redeemed | | | (23,294 | ) | | | (3,596,200 | ) | | | (21,257 | ) | | | (605,899 | ) |
| | | | |
Net increase (decrease) | | | (3,723 | ) | | $ | (555,474 | ) | | | 524,449 | | | $ | 14,973,208 | |
| | | | |
Advisor Class Shares: | | | | | | | | | | | | | | | | |
Six Months ended October 31, 2018 | | | | | | | | | | | | | | | | |
Shares sold | | | 205,886 | | | $ | 33,371,953 | | | | 307,606 | | | $ | 9,097,717 | |
Shares redeemed | | | (202,712 | ) | | | (32,429,951 | ) | | | (366,527 | ) | | | (10,781,886 | ) |
| | | | |
Net increase (decrease) | | | 3,174 | | | $ | 942,002 | | | | (58,921 | ) | | $ | (1,684,169 | ) |
| | | | |
Year ended April 30, 2018 | | | | | | | | | | | | | | | | |
Shares sold | | | 444,625 | | | $ | 68,532,853 | | | | 1,055,556 | | | $ | 28,419,344 | |
Shares issued in reinvestment of distributions | | | 24,690 | | | | 3,720,072 | | | | 52,254 | | | | 1,387,336 | |
Shares redeemed | | | (328,722 | ) | | | (50,606,592 | ) | | | (1,984,254 | ) | | | (53,779,073 | ) |
| | | | |
Net increase (decrease) | | | 140,593 | | | $ | 21,646,333 | | | | (876,444 | ) | | $ | (23,972,393 | ) |
aMay include a portion of Class C shares that were automatically converted to Class A.
3. Transactions with Affiliates
Franklin Resources, Inc. is the holding company for various subsidiaries that together are referred to as Franklin Templeton Investments. Certain officers and trustees of the Trust are also officers and/or directors of the following subsidiaries:
| | |
| Subsidiary | | Affiliation |
| Franklin Advisers, Inc. (Advisers) | | Investment manager |
| Franklin Templeton Services, LLC (FT Services) | | Administrative manager |
| Franklin Templeton Distributors, Inc. (Distributors) | | Principal underwriter |
| Franklin Templeton Investor Services, LLC (Investor Services) | | Transfer agent |
| | | | |
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FRANKLIN STRATEGIC SERIES
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
a. Management Fees
Franklin Biotechnology Discovery 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 |
| 0.775% | | Up to and including $100 million |
| 0.650% | | Over $100 million, up to and including $200 million |
| 0.635% | | Over $200 million, up to and including $250 million |
| 0.585% | | Over $250 million, up to and including $700 million |
| 0.550% | | Over $700 million, up to and including $1.2 billion |
| 0.525% | | Over $1.2 billion, up to and including $7.5 billion |
| 0.515% | | Over $7.5 billion, up to and including $10 billion |
| 0.505% | | Over $10 billion, up to and including $12.5 billion |
| 0.495% | | Over $12.5 billion, up to and including $15 billion |
| 0.475% | | in excess of $15 billion |
Franklin Natural Resources Fund pays an investment management fee to Advisers based on the average daily net assets of the Fund as follows:
| | |
| Annualized Fee Rate | | Net Assets |
| 0.625% | | Up to and including $100 million |
| 0.500% | | Over $100 million, up to and including $250 million |
| 0.450% | | Over $250 million, up to and including $7.5 billion |
| 0.440% | | Over $7.5 billion, up to and including $10 billion |
| 0.430% | | Over $10 billion, up to and including $12.5 billion |
| 0.420% | | Over $12.5 billion, up to and including $15 billion |
| 0.400% | | In excess of $15 billion |
For the period ended October 31, 2018, each Fund’s annualized gross effective investment management fee rate based on average daily net assets was as follows:
| | |
Franklin Biotechnology Discovery Fund | | Franklin Natural Resources Fund |
0.585% | | 0.501% |
b. Administrative Fees
Under an agreement with Advisers, FT Services provides administrative services to the Funds. The fee is paid by Advisers based on Funds’ average daily net assets, and is not an additional expense of the Funds.
c. Distribution Fees
The Board has adopted distribution plans for each share class, with the exception of Class R6 and Advisor Class shares, pursuant to Rule 12b-1 under the 1940 Act. Under the Funds’ Class A reimbursement distribution plans, the Funds reimburse Distributors for costs incurred in connection with the servicing, sale and distribution of each Fund’s shares up to the maximum annual plan rate for each class. Under the Class A reimbursement distribution plans, costs exceeding the maximum for the current plan year cannot be reimbursed in subsequent periods. In addition, under the Funds’ Class C compensation distribution plans, the Funds pay Distributors
| | | | |
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| franklintempleton.com | | Semiannual Report | | 39 |
FRANKLIN STRATEGIC SERIES
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
3. Transactions with Affiliates (continued)
c. Distribution Fees (continued)
for costs incurred in connection with the servicing, sale and distribution of each Fund’s shares up to the maximum annual plan rate for each class. The plan year, for purposes of monitoring compliance with the maximum annual plan rates, is February 1 through January 31 for each Fund.
The maximum annual plan rates, based on the average daily net assets, for each class, are as follows:
| | | | |
Class A | | | 0.35 | % |
Class C | | | 1.00 | % |
The Board has set the current rate at 0.25% per year for Class A shares until further notice and approval by the Board.
d. Sales Charges/Underwriting Agreements
Front-end sales charges and contingent deferred sales charges (CDSC) do not represent expenses of the Funds. 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 Funds of the following commission transactions related to the sales and redemptions of the Funds’ shares for the period:
| | | | | | | | |
| | | Franklin Biotechnology Discovery Fund | | | Franklin Natural Resources Fund | |
| | |
Sales charges retained net of commissions paid to unaffiliated brokers/dealers | | | $ 117,719 | | | | $ 22,338 | |
CDSC retained | | | $ 17,544 | | | | $ 1,522 | |
Effective September 10, 2018, the Board approved changes to certain front-end sales charges and dealer commissions on Class A shares. Further details are disclosed in the Funds’ Prospectus.
e. Transfer Agent Fees
Each class of shares pays transfer agent fees to Investor Services for its performance of shareholder servicing obligations. The fees are based on an annualized asset based fee of 0.02% plus a transaction based fee. In addition, each class reimburses Investor Services for out of pocket expenses incurred and, except for Class R6, reimburses 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 period ended October 31, 2018, the Funds paid transfer agent fees as noted in the Statements of Operations of which the following amounts were retained by Investor Services:
| | | | | | | | |
| | | Franklin Biotechnology Discovery Fund | | | Franklin Natural Resources Fund | |
| | |
Transfer agent fees | | | $337,151 | | | | $182,584 | |
| | | | |
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FRANKLIN STRATEGIC SERIES
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
f. Investments in Affiliated Management Investment Companies
Certain or all Funds invest 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 Funds are waived on assets invested in the affiliated management investment companies, as noted in the Statements of Operations, in an amount not to exceed the management and administrative fees paid directly or indirectly by each affiliate. During the period ended October 31, 2018, investments in affiliated management investment companies were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Number of Shares Held at Beginning of Period | | | Gross Additions | | | Gross Reductions | | | Number of Shares Held at End of Period | | | Value at End of Period | | | Dividend Income | | | Realized Gain (Loss) | | | Net Change in Unrealized Appreciation (Depreciation) | |
| | | | | | | | |
Franklin Biotechnology Discovery Fund | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Non-Controlled Affiliates | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Institutional Fiduciary Trust Money Market Portfolio, 1.83% | | | 80,026,544 | | | | 265,085,948 | | | | (277,083,904 | ) | | | 68,028,588 | | | | $68,028,588 | | | | $264,302 | | | | $ — | | | | $ — | |
| | | | | | | | | | | | | | | | | | | | |
Franklin Natural Resources Fund | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Non-Controlled Affiliates | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Institutional Fiduciary Trust Money Market Portfolio, 1.83% | | | 17,288,464 | | | | 109,715,983 | | | | (116,509,307 | ) | | | 10,495,140 | | | | $10,495,140 | | | | $ 74,548 | | | | $ — | | | | $ — | |
| | | | | | | | | | | | | | | | | | | | |
g. Waiver and Expense Reimbursements
Investor Services has contractually agreed in advance to waive or limit its fees so that the Class R6 transfer agent fees do not exceed 0.03% until August 31, 2019.
4. Expense Offset Arrangement
The Funds have entered into an arrangement with their custodian whereby credits realized as a result of uninvested cash balances are used to reduce a portion of the Funds’ custodian expenses. During the period ended October 31, 2018, the custodian fees were reduced as noted in the Statements of Operations.
5. Income Taxes
For tax purposes, capital losses may be carried over to offset future capital gains. Capital loss carryforwards with no expiration, if any, must be fully utilized before those losses with expiration dates.
At April 30, 2018, the capital loss carryforwards were as follows:
| | | | |
| | | Franklin Natural Resources Fund | |
| |
Capital loss carryforwards not subject to expiration: | | | | |
Short Term | | $ | 11,809,756 | |
Long Term | | | 133,011,661 | |
| | | | |
Total capital loss carryforwards | | $ | 144,821,417 | |
| | | | |
| | | | |
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FRANKLIN STRATEGIC SERIES
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
5. Income Taxes (continued)
At October 31, 2018, the cost of investments and net unrealized appreciation (depreciation) for income tax purposes were as follows:
| | | | | | | | |
| | | Franklin Biotechnology Discovery Fund | | | Franklin Natural Resources Fund | |
Cost of investments | | | $809,568,613 | | | | $396,289,499 | |
| | |
Unrealized appreciation | | | $514,477,293 | | | | $ 85,031,081 | |
Unrealized depreciation | | | (91,370,085 | ) | | | (61,009,171 | ) |
Net unrealized appreciation (depreciation) | | | $423,107,208 | | | | $ 24,021,910 | |
Differences between income and/or capital gains as determined on a book basis and a tax basis are primarily due to differing treatments of passive foreign investment company shares and wash sales.
6. Investment Transactions
Purchases and sales of investments (excluding short term securities) for the period ended October 31, 2018, were as follows:
| | | | | | | | |
| | | Franklin Biotechnology Discovery Fund | | | Franklin Natural Resources Fund | |
Purchases | | | $180,304,513 | | | | $ 89,166,663 | |
Sales | | | $244,844,972 | | | | $123,609,194 | |
At October 31, 2018, in connection with securities lending transactions, certain or all Funds loaned investments and received cash collateral as follows:
| | | | | | | | |
| | | Franklin Biotechnology Discovery Fund | | | Franklin Natural Resources Fund | |
| | |
Securities lending transactionsa: | | | | | | | | |
Equity Investmentsb | | | $27,390,710 | | | | $3,692,500 | |
aThe agreements can be terminated at any time.
bThe gross amount of recognized liability for such transactions is included in payable upon return of securities loaned in the Statements of Assets and Liabilities.
7. Concentration of Risk
Investing in foreign securities may include certain risks and considerations not typically associated with investing in U.S. securities, such as fluctuating currency values and changing local and regional economic, political and social conditions, which may result in greater market volatility. In addition, certain foreign securities may not be as liquid as U.S. securities.
8. Restricted Securities
Certain or all Funds invest in securities that are restricted under the Securities Act of 1933 (1933 Act). Restricted securities are often purchased in private placement transactions, and cannot be sold without prior registration unless the sale is pursuant to an exemption under the 1933 Act. Disposal of these securities may require greater effort and expense, and prompt sale at an acceptable price may be difficult. The Funds may have registration rights for restricted securities. The issuer generally incurs all registration costs.
| | | | |
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FRANKLIN STRATEGIC SERIES
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
At October 31, 2018, investments in restricted securities, excluding securities exempt from registration under the 1933 Act deemed to be liquid, were as follows:
| | | | | | | | | | | | | | | | |
| Shares | | | Issuer | | Acquisition Date | | | Cost | | | Value | |
| Franklin Biotechnology Discovery Fund | | | | | | | | | | | | |
| | 326,797 | | | Allogene Therapeutics Inc., 144A | | | 9/05/18 | | | $ | 5,000,000 | | | $ | 6,863,893 | |
| | 80,195 | | | Intarcia Therapeutics Inc., DD | | | 3/26/14 | | | | 2,597,516 | | | | 1,672,893 | |
| | 1,330,687 | | | Metacrine Inc. | | | 6/04/18 | | | | 2,821,056 | | | | 2,821,056 | |
| | 750,193 | | | Precision BioSciences Inc., Series B | | | 5/25/18 | | | | 3,758,467 | | | | 3,758,467 | |
| | | | Total Restricted Securities (Value is 1.3% of Net Assets) | | | | | | $ | 14,177,039 | | | $ | 15,116,309 | |
9. Credit Facility
The Funds, 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 8, 2019. 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 Funds shall, in addition to interest charged on any borrowings made by the Funds and other costs incurred by the Funds, pay their share of fees and expenses incurred in connection with the implementation and maintenance of the Global Credit Facility, based upon their 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 Statements of Operations. During the period ended October 31, 2018, the Funds did not use the Global Credit Facility.
10. Fair Value Measurements
The Funds follow a fair value hierarchy that distinguishes between market data obtained from independent sources (observable inputs) and the Funds’ own market assumptions (unobservable inputs). These inputs are used in determining the value of the Funds’ 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 Funds’ 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 Funds have adopted a policy of recognizing the transfers as of the date of the underlying event which caused the movement.
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| franklintempleton.com | | Semiannual Report | | 43 |
FRANKLIN STRATEGIC SERIES
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
10. Fair Value Measurements (continued)
A summary of inputs used as of October 31, 2018, in valuing the Funds’ assets carried at fair value, is as follows:
| | | | | | | | | | | | | | | | |
| | | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
| Franklin Biotechnology Discovery Fund | | | | | | | | | | | | | | | | |
Assets: | | | | | | | | | | | | | | | | |
Investments in Securities:a | | | | | | | | | | | | | | | | |
Equity Investments:b | | | | | | | | | | | | | | | | |
Biotechnology | | $ | 922,542,129 | | | $ | — | c | | $ | 15,168,899 | c | | $ | 937,711,028 | |
Pharmaceuticals | | | 156,272,360 | | | | — | | | | 45,239 | | | | 156,317,599 | |
All Other Equity Investments | | | 69,406,519 | | | | — | | | | — | | | | 69,406,519 | |
Escrows and Litigation Trusts | | | — | | | | — | | | | 1,212,087 | | | | 1,212,087 | |
Short Term Investments | | | 68,028,588 | | | | — | | | | — | | | | 68,028,588 | |
| | | | |
Total Investments in Securities | | $ | 1,216,249,596 | | | $ | — | | | $ | 16,426,225 | | | $ | 1,232,675,821 | |
| | | | |
Franklin Natural Resources Fund | | | | | | | | | | | | | | | | |
Assets: | | | | | | | | | | | | | | | | |
Investments in Securities:a | | | | | | | | | | | | | | | | |
Equity Investments:b | | | | | | | | | | | | | | | | |
Oil & Gas Exploration & Production | | $ | 114,351,264 | | | $ | 628,674 | | | $ | — | | | $ | 114,979,938 | |
All Other Equity Investments | | | 294,836,331 | | | | — | | | | — | | | | 294,836,331 | |
Short Term Investments | | | 10,495,140 | | | | — | | | | — | | | | 10,495,140 | |
| | | | |
Total Investments in Securities | | $ | 419,682,735 | | | $ | 628,674 | | | $ | — | | | $ | 420,311,409 | |
aFor detailed categories, see the accompanying Statement of Investments.
bIncludes common and convertible preferred stocks as well as other equity investments.
cIncludes securities determined to have no value at October 31, 2018.
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 beginning and/or end of the period. At October 31, 2018, the reconciliation of assets is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | Net Change in | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | Unrealized | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | Appreciation | |
| | | | | | | | | | | | Transfer | | | | | | Net | | | Net | | | | | | (Depreciation) | |
| | | Balance at | | | | | | | | | Into | | | | | | Realized | | | Unrealized | | | Balance | | | on Assets | |
| | | Beginning of | | | | | | | | | (Out of) | | | Cost Basis | | | Gain | | | Appreciation | | | at End | | | Held at | |
| | | Period | | | Purchases | | | Sales | | | Level 3a | | | Adjustments | | | (Loss) | | | (Depreciation) | | | of Period | | | Period End | |
Franklin Biotechnology Discovery Fund | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Assets: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Investments in Securities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Equity Investments:b | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Biotechnology | | | $1,877,026 | | | | $14,107,232 | | | | $— | | | $ | — | | | | $— | | | | $— | | | $ | (815,359 | ) | | | $15,168,899 | c | | $ | (815,359 | ) |
Pharmaceuticals | | | 3,976,061 | | | | — | | | | — | | | | (2,799,991 | ) | | | — | | | | — | | | | (1,130,831 | ) | | | 45,239 | | | | (98,854 | ) |
Escrows and Litigation Trusts | | | 1,411,906 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (199,819 | ) | | | 1,212,087 | | | | (199,819 | ) |
Total Investments in Securities | | | $7,264,993 | | | | $14,107,232 | | | | $— | | | $ | (2,799,991 | ) | | | $— | | | | $— | | | $ | (2,146,009 | ) | | | $16,426,225 | | | $ | (1,114,032 | ) |
aThe investments were transferred out of Level 3 as a result of the availability of other significant observable valuation inputs.
bIncludes common and preferred stocks as well as other equity investments.
cIncludes securities determined to have no value.
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FRANKLIN STRATEGIC SERIES
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
Significant unobservable valuation inputs for material Level 3 financial instruments and impact to fair value as a result of changes in unobservable valuation inputs as of October 31, 2018, are as follows:
| | | | | | | | | | | | | | | | |
| Description | | Fair Value at End of Period | | | Valuation Technique | | | Unobservable Inputs | | Amount / Range | | | Impact to Fair Value if Input Increasesa |
Franklin Biotechnology Discovery Fund | | | | | | | | | | | | | | | | |
Assets: | | | | | | | | | | | | | | | | |
Investments in Securities: | | | | | | | | | | | | | | | | |
Equity Investments: | | | | | | | | | | | | | | | | |
Biotechnology | | $ | 8,536,786 | | | | Discounted Cash Flow | | | Free Cash flow | | | $ 70.7 / share | | | Increaseb |
| | | | | | | | | | Discount for lack of marketability | | | 12.5% - 35.0% | | | Decreaseb |
| | | | | | | | | | Weighted average cost of capital | | | 9.7% | | | Decreaseb |
| | | | | | | | | | | Probability rate | | | 50.0% | | | Increaseb |
Escrows and Litigation Trusts | | | 1,212,087 | | | | Discounted Cash Flow | | | Probability rate | | | 0.0% - 75.0%c | | | Increaseb |
| | | | | | | | | | | Weighted average cost of capital | | | 10.0% | | | Decrease |
| | | | | |
All Other Investmentsd | | | 6,677,352 | | | | | | | | | | | | | |
| | | | | |
Total | | $ | 16,426,225 | | | | | | | | | | | | | |
aRepresents the directional change in the fair value of the Level 3 financial instruments that would result from a significant and reasonable increase in the corresponding input. A significant and reasonable decrease in the input would have the opposite effect. Significant impacts, if any, to fair value and/or net assets have been indicated.
bRepresents a significant impact to fair value but not net assets.
cIncludes probability assumptions for various outcomes of milestone payments for clinical trials and regulatory approvals.
dIncludes financial instruments with values derived using private transaction prices or non-public third party pricing information which is unobservable. May also include fair value of immaterial financial instruments and developed using various valuation techniques and unobservable inputs.
11. New Accounting Pronouncements
In August 2018, the Financial Accounting Standards Board issued Accounting Standards Update (ASU) No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurements. The amendments in the ASU modify the disclosure requirements on fair value measurements in Topic 820. The ASU is effective for interim and annual reporting periods beginning after December 15, 2019. Management has reviewed the requirements and believes the adoption of this ASU will not have a material impact on the financial statements.
12. Subsequent Events
The Funds have evaluated subsequent events through the issuance of the financial statements and determined that no events have occurred that require disclosure.
Abbreviations
| | |
Selected Portfolio |
ADR | | American Depositary Receipt |
CPO | | Certificate of Ordinary Participation (usually Mexico) |
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FRANKLIN STRATEGIC SERIES
Shareholder Information
Proxy Voting Policies and Procedures
The Trust’s investment manager has established Proxy Voting Policies and Procedures (Policies) that the Trust uses to determine how to vote proxies relating to portfolio securities. Shareholders may view the Trust’s complete Policies online at franklintempleton.com. Alternatively, shareholders may request copies of the Policies free of charge by calling the Proxy Group collect at (954) 527-7678 or by sending a written request to: Franklin Templeton Companies, LLC, 300 S.E. 2nd Street, Fort Lauderdale, FL 33301, Attention: Proxy Group. Copies of the Trust’s proxy voting records are also made available online at franklintempleton.com and posted on the U.S. Securities and Exchange Commission’s website at sec.gov and reflect the most recent 12-month period ended June 30.
Quarterly Statement of Investments
The Trust files a complete statement of investments with the U.S. Securities and Exchange Commission for the first and third quarters for each fiscal year on Form N-Q. Shareholders may view the filed Form N-Q by visiting the Commission’s website at sec.gov. The filed form may also be viewed and copied at the Commission’s Public Reference Room in Washington, DC. Information regarding the operations of the Public Reference Room may be obtained by calling (800) SEC-0330.
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| | | | | Semiannual Report and Shareholder Letter Franklin Strategic Series 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. |
| | © 2018 Franklin Templeton Investments. All rights reserved. | | | | FSS2 S 12/18 |
| | |
 | | Semiannual Report and Shareholder Letter October 31, 2018 |
Sign up for electronic delivery at franklintempleton.com/edelivery
Franklin Templeton Investments
Successful investing begins with ambition. And achievement only comes when you reach for it. That’s why we continually strive to deliver better outcomes for investors. No matter what your goals are, our deep, global investment expertise allows us to offer solutions that can help.
During our more than 70 years of experience, we’ve managed through all kinds of markets—up, down and those in between. We’re always preparing for what may come next. It’s because of this, combined with our strength as one of the world’s largest asset managers that we’ve earned the trust of millions of investors around the world.
Dear Shareholder:
During the six months ended October 31, 2018, the U.S. economy grew, while annual inflation began and ended the period at the same level. With these factors in mind, the U.S. Federal Reserve (Fed) raised its target range for the federal funds rate 0.25% at its June and September 2018 meetings. Overall, the 10-year Treasury yield, which moves inversely to price, increased during the period. The yield rose to multi-year highs in May and October 2018 amid investor concerns about inflation and Fed actions, but declined at certain points during the period due to uncertainty surrounding political tensions and economic turmoil in the U.S. and other countries. The U.S. dollar also rose against its major trading partners during the period. In this environment, global government bonds, as measured by the FTSE World Government Bond Index, had modest losses in U.S. dollar terms.
We are committed to our long-term perspective and disciplined investment approach as we conduct a rigorous, fundamental analysis of securities with a regular emphasis on investment risk management.
We believe active, professional investment management serves investors well. We also recognize the important role of financial advisors in today’s markets and encourage investors to continue to seek their advice. Amid changing markets and economic conditions, we are confident investors with a well-diversified portfolio and a patient, long-term outlook should be well positioned for the years ahead.
In addition, Franklin Flexible Alpha Bond Fund’s semiannual report includes more detail about prevailing conditions and a discussion about investment decisions during the period. Please remember all securities markets fluctuate, as do mutual fund share prices.
We thank you for investing with Franklin Templeton, welcome your questions and comments, and look forward to serving your investment needs in the years ahead.
Sincerely,
Edward B. Jamieson
President and Chief Executive Officer –
Investment Management
Franklin Strategic Series
This letter reflects our analysis and opinions as of October 31, 2018, unless otherwise indicated. The information is not a complete analysis of every aspect of any market, country, industry, security or fund. Statements of fact are from sources considered reliable.
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Not FDIC Insured | May Lose Value | No Bank Guarantee |
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| franklintempleton.com | | Not part of the semiannual report | | 1 |
Visit franklintempleton.com for fund updates, to access your account, or to find helpful financial planning tools.
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2 | | Semiannual Report | | franklintempleton.com |
Semiannual Report
Franklin Flexible Alpha Bond Fund
This semiannual report for Franklin Flexible Alpha Bond Fund covers the period ended October 31, 2018.
Your Fund’s Goal and Main Investments
The Fund seeks to provide total return through a combination of current income and capital appreciation by investing at least 80% of its net assets in bonds and investments that provide exposure to bonds, including debt obligations of any credit quality, maturity or duration, all varieties of fixed income, variable rate and floating-rate debt securities and investments, money market instruments and derivatives. The Fund aims to provide attractive risk-adjusted total returns over a full market cycle. A full market cycle is a period of time that spans a full business and economic cycle, which may include periods of rising and declining interest rates.
|
What is duration? Duration is a measure of a bond’s price sensitivity to interest-rate changes. In general, a portfolio of securities with a lower duration can be expected to be less sensitive to interest-rate changes than a portfolio with a higher duration. |
Performance Overview
For the six months under review, the Fund’s Class A shares delivered a +1.00% cumulative total return. In comparison, the LIBOR USD 3-Month Rate Index posted a +2.16% total return.1 The index tracks the interest rate at which banks offer to lend to one another in the wholesale money markets in London and is used to set the cost of various variable-rate loans. You can find more of the Fund’s performance data in the Performance Summary beginning on page 7.
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.
Sector Exposure*
10/31/18
| | | | |
| | | % of Total Net Assets | |
| |
Collateralized Loan Obligations | | | 22.2% | |
| |
Residential Mortgage-Backed Securities | | | 21.9% | |
| |
Floating-Rate Loans | | | 17.0% | |
| |
Investment-Grade Corporate Securities | | | 12.4% | |
| |
International Bonds | | | 8.6% | |
| |
Commercial Mortgage-Backed Securities | | | 6.1% | |
| |
Covered Bonds | | | 4.8% | |
| |
High-Yield Corporate Securities | | | 3.7% | |
| |
Treasury Inflation-Protected Securities | | | 2.9% | |
| |
Municipal Bonds | | | 2.4% | |
| |
Asset-Backed Securities | | | 0.0% | ** |
| |
Other | | | 0.0% | ** |
| |
Agency Mortgage-Backed Securities | | | 0.0% | ** |
| |
Interest-Rate Derivatives | | | -34.7% | |
| |
Cash & Cash Equivalents | | | 19.1% | |
| |
*Sector Exposure is intended to estimate the portfolio’s exposure to various sectors, including any hedged or increased exposure through certain derivatives held in the portfolio (or their underlying reference assets) and may not total 100% or may be negative due to rounding, use of any derivatives, unsettled trades or other factors. Interest-Rate Derivatives sector consists of Treasury, interest-rate and other derivatives that are primarily used for duration management; a negative number indicates that the Fund is seeking to hedge interest-rate risk.
**Rounds to less than 0.1%.
Economic and Market Overview
The U.S. economy grew during the six months under review. The economy grew faster in 2018’s second quarter, driven by consumer spending, business investment, exports and government spending, but moderated in the third quarter due to declines in exports and housing investment. The manufacturing and services sectors expanded during the period. The unemployment rate declined from 3.9% in April 2018, as reported at the beginning of the six-month period, to a nearly 49-year low of 3.7% at period-end.2 Annual inflation, as measured by the Consumer Price Index, was 2.5% in April
1. Source: Bloomberg LP.
The index is unmanaged and includes reinvestment of any income or distributions. It does 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.
2. 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 FLEXIBLE ALPHA BOND FUND
2018, as reported at the beginning of the period, and while it varied during the six months under review, it ended the period at 2.5%.2
Dividend Distributions*
5/1/18–10/31/18
| | | | | | | | | | | | | | | | | | |
| | | | | | Dividend per Share (cents) | | | |
| Month | | Class A | | | Class C | | | Class R | | | Class R6 | | | Advisor Class |
May | | | 1.2601 | | | | 1.1178 | | | | 1.4491 | | | | 1.8198 | | | 1.9819 |
June | | | 1.3402 | | | | 1.2697 | | | | 1.1372 | | | | 1.4877 | | | 1.3418 |
July | | | 1.5761 | | | | 1.4688 | | | | 1.5959 | | | | 2.2257 | | | 1.9702 |
August | | | 1.7712 | | | | 1.4283 | | | | 1.5541 | | | | 2.1787 | | | 1.9776 |
September | | | 1.3435 | | | | 1.0819 | | | | 1.1739 | | | | 1.6741 | | | 1.5259 |
October | | | 2.4119 | | | | 2.3123 | | | | 2.3735 | | | | 2.1809 | | | 2.8921 |
Total | | | 9.7030 | | | | 8.6788 | | | | 9.2837 | | | | 11.5669 | | | 11.6895 |
*The distribution amount is the sum of all estimated tax-basis net investment income distributions for the period shown. A portion or all of the distribution may be reclassified as return of capital or short-term or long-term capital gains once final tax designations are known. Assumes shares were purchased and held for the entire accrual period. Since dividends accrue daily, your actual distributions will vary depending on the date you purchased your shares and any account activity. All Fund distributions will vary depending upon current market conditions, and past distributions are not indicative of future trends.
The U.S. Federal Reserve (Fed) raised its target range for the federal funds rate 0.25% at its June 2018 meeting and continued to reduce its balance sheet as part of its ongoing plan to normalize monetary policy. In his congressional testimony in July 2018 and at the Fed symposium in August, Fed Chair Jerome Powell reiterated the Fed’s intention to gradually raise interest rates. At its September 2018 meeting, the Fed raised its target range for the federal funds rate 0.25% to 2.00%–2.25%, as widely expected. Furthermore, the Fed raised its forecast for U.S. economic growth in 2018 and 2019 and projected one more rate increase in 2018. Minutes from the Fed’s September meeting (released in October) indicated that a few officials expected monetary policy to become modestly restrictive of economic growth, while some officials seemed to favor increasing the federal funds rate temporarily above what they consider to be its longer-term level to reduce the risk of overshooting the Fed’s inflation objective. In contrast, some officials indicated they would not favor a restrictive policy unless they see clear signs of an overheating economy and rising inflation.
The 10-year Treasury yield, which moves inversely to its price, increased during the period. The yield rose to multi-year highs in May and October 2018 amid investor concerns about higher inflation and the Fed’s interest-rate path. Expectations that other central banks might scale back monetary stimulus and better-than-expected U.S. economic reports also pushed the yield higher. However, some factors weighed on the Treasury
yield at certain points during the period, including concerns about political turmoil in Italy, political uncertainties in the U.S., tensions between the U.S. and North Korea, the Trump administration’s protectionist trade policies, U.S. trade disputes with its allies and China, and economic turmoil in Turkey and Argentina. Overall, the 10-year Treasury yield rose from 2.95% at the beginning of the period to 3.15% at period-end.
Currency Composition*
10/31/18
| | | | |
| | | % of Total Net Assets | |
| |
North America | | | 99.8% | |
| |
U.S. Dollar | | | 99.8% | |
| |
Mexican Peso | | | 0.5% | |
| |
Canadian Dollar | | | -0.5% | |
| |
Europe | | | 0.4% | |
| |
Swedish Krona | | | 0.3% | |
| |
Polish Zloty | | | 0.1% | |
| |
Norwegian Krone | | | 0.0% | ** |
| |
British Pound | | | 0.0% | ** |
| |
Euro | | | 0.0% | ** |
| |
Asia | | | 0.1% | |
| |
India Rupee | | | 0.3% | |
| |
Indonesia Rupiah | | | 0.3% | |
| |
Chinese Renminbi | | | -0.2% | |
| |
Philipine Peso | | | -0.3% | |
| |
Australia & New Zealand | | | -0.3% | |
| |
Australian Dollar | | | -0.3% | |
| |
*Currency Composition is intended to estimate the portfolio’s exposure to various currencies, including any hedged or increased exposure through certain derivatives held in the portfolio (or their underlying reference assets) and may not total 100% or may be negative due to rounding, use of any derivatives, unsettled trades or other factors.
**Rounds to less than 0.1%.
Investment Strategy
The Fund seeks to generate returns from various sources, other than solely from interest income, by allocating its portfolio across various risks (such as credit, currency and duration risks). In employing this strategy, the Fund has the flexibility to invest across all debt asset classes without regard to country, sector, quality, maturity or duration and without reference to a benchmark index.
The Fund may engage in active and frequent trading as part of its investment strategies and, at any given time, may have a
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4 | | Semiannual Report | | franklintempleton.com |
FRANKLIN FLEXIBLE ALPHA BOND FUND
substantial amount of its assets invested in any class of debt securities, including, but not limited to: U.S. government and agency securities; foreign government and supranational debt securities; corporate bonds; corporate loans (and loan participations); collateralized debt and loan obligations; preferred securities; various types of mortgage-backed securities and other asset-backed securities (including covered bonds); municipal securities; and derivatives and other instruments with similar economic characteristics, or that provide exposure, to such debt securities.
Manager’s Discussion
Over the six-month period, the Fund delivered a positive total return and outperformed its benchmark on a gross basis. The Fund’s yield curve and duration positioning was the primary source of positive alpha, driven primarily by duration exposure in the U.S. The Fund’s spread-sector exposure also enhanced results, driven primarily by the Fund’s exposure to floating-rate bank loans (including collateralized loan obligations), residential mortgage-backed securities (RMBS), as well as investment-grade and high-yield corporate securities. The Fund’s sovereign emerging markets debt exposure and basis-trade positions (taking opposing long and short positions in two securities to profit from the convergence of their values) also contributed to returns. In contrast, the Fund’s exposure to covered bonds, Treasury Inflation-Protected Securities (TIPS), and foreign currency exposure were the primary detractors from returns over the period.
|
|
What is the yield curve? A yield curve is a line that plots the yield to maturity of bonds having equal credit quality against their maturity dates. |
At period-end, we continued to invest in a broad set of global fixed income sectors, with a goal of achieving more consistent positive alpha with a risk-diversified portfolio. Additionally, we maintained the Fund’s risk profile at a conservative level. We remained overweighted in the investment-grade corporate bond sector as well as securitized sectors including RMBS and commercial mortgage-backed securities. We also continued to find what we considered value in credit-hedged corporate positions. We sought to hedge all of the high-yield corporate beta (or risk) in the Fund, although we retained exposure to select corporate loans and collateralized loan obligations. We also retained positions in TIPS as well as covered bonds. Overall, portfolio duration remained relatively neutral toward U.S. interest-rate and non-U.S. duration positions.
The Fund maintained an overweighting to the U.S. dollar versus a basket of developed market and commodity-related currencies for most of the period. Overall currency allocation did not represent a significant portion of the Fund’s risk allocation.
The Fund utilized derivatives, including credit default and currency swaps, currency forwards, futures, interest-rate swaps, total return swaps and inflation index swaps, principally as a tool for efficient portfolio management and to manage overall portfolio risk. These derivative transactions may provide the same, or similar, net long or short exposure to select currencies, interest rates, countries, duration or credit risks in a less expensive way than by directly purchasing securities. In those markets where portfolio securities are readily available, the cost difference in normal market conditions may be small. Overall, the portfolio continued to meet its risk-adjusted return target and remained in the lower end of our targeted risk range. Much of the Fund’s derivatives positioning was to hedge various risks in the portfolio and achieve the goal of a stable return profile.
|
|
What are swap agreements? |
Swap agreements, such as interest-rate, currency and credit default swaps, are contracts between the Fund and another party (the swap counterparty). In a basic swap transaction, the Fund agrees with the swap counterparty to exchange the returns (or differentials in rates of return) earned or realized on a particular “notional amount” of underlying instruments. The notional amount is the set amount selected by the parties as the basis on which to calculate the obligations that they have agreed to exchange. The parties typically do not actually exchange the notional amount. Instead, they agree to exchange the returns that would be earned or realized if the notional amount were invested in given instruments or at given interest rates. |
|
|
What is a currency forward contract? |
A currency forward contract is an agreement between the Fund and a counterparty to buy or sell a foreign currency in exchange for another currency at a specific exchange rate on a future date. Currency forward contracts are privately traded in the interbank market, not on a centralized exchange. |
|
|
What is a futures contract? |
A futures contract is an agreement between the Fund and a counterparty made through a U.S. or foreign futures exchange to buy or sell an underlying instrument or asset at a specific price on a future date. |
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| franklintempleton.com | | Semiannual Report | | 5 |
FRANKLIN FLEXIBLE ALPHA BOND FUND
Thank you for your participation in Franklin Flexible Alpha Bond Fund. We look forward to serving your future investment needs.
| | |
 | |  |
| | David Yuen, CFA, FRM |
| | |
 | |  |
| | Michael J. Materasso |
| |
| | Portfolio Management Team |
The foregoing information reflects our analysis, opinions and portfolio holdings as of October 31, 2018, the end of the reporting period. The way we implement our main investment strategies and the resulting portfolio holdings may change depending on factors such as market and economic conditions. These opinions may not be relied upon as investment advice or an offer for a particular security. The information is not a complete analysis of every aspect of any market, country, industry, security or the Fund. Statements of fact are from sources considered reliable, but the investment manager makes no representation or warranty as to their completeness or accuracy. Although historical performance is no guarantee of future results, these insights may help you understand our investment management philosophy.
CFA® is a trademark owned by CFA Institute.
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6 | | Semiannual Report | | franklintempleton.com |
FRANKLIN FLEXIBLE ALPHA BOND FUND
Performance Summary as of October 31, 2018
The performance tables 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 10/31/181
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 | |
| | |
| A | | | | | | | | |
6-Month | | | +1.00%4 | | | | -3.26% | |
1-Year | | | +1.23% | | | | -3.10% | |
3-Year | | | +3.92% | | | | -0.16% | |
Since Inception (8/3/15) | | | +3.61% | | | | -0.23% | |
| | |
| Advisor | | | | | | | | |
6-Month | | | +0.89% | | | | +0.89% | |
1-Year | | | +1.54% | | | | +1.54% | |
3-Year | | | +4.09% | | | | +1.35% | |
Since Inception (8/3/15) | | | +3.89% | | | | +1.18% | |
| | | | | | | | | | | | |
| | | Distribution Rate5 | | | 30-Day Standardized Yield6 | |
| Share Class | | (with waiver) | | | (without waiver) | |
A | | | 2.78% | | | | 2.31% | | | | 2.20% | |
Advisor | | | 3.38% | | | | 2.69% | | | | 2.56% | |
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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| franklintempleton.com | | Semiannual Report | | 7 |
FRANKLIN FLEXIBLE ALPHA BOND FUND
PERFORMANCE SUMMARY
Distributions (5/1/18–10/31/18)
| | |
| Share Class | | Net Investment Income |
A | | $0.097030 |
C | | $0.086788 |
R | | $0.092837 |
R6 | | $0.115669 |
Advisor | | $0.116895 |
Total Annual Operating Expenses7
| | | | | | | | |
| Share Class | | With Waiver | | | Without Waiver | |
| A | | | 1.19% | | | | 1.24% | |
| Advisor | | | 0.94% | | | | 0.99% | |
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. Changes in the financial strength of a bond issuer or in a bond’s credit rating may affect its value. Interest rate movements and mortgage prepayments will affect the Fund’s share price and yield. 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 the 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. The risks associated with higher-yielding, lower-rated securities (commonly called junk bonds) include higher risk of default and loss of principal. Derivatives, including currency management strategies, involve costs and can create economic leverage in the portfolio, which may result in significant volatility and cause the Fund to participate in losses (as well as enable gains) in an amount that exceeds the Fund’s initial investment. The Fund may not achieve the anticipated benefits, and may realize losses when a counterparty fails to perform as intended. 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 an expense reduction and a fee waiver associated with any investments it makes in a Franklin Templeton money fund and/or other Franklin Templeton fund, contractually guaranteed through 8/31/19. Fund investment results reflect the expense reduction and fee waiver; without these reductions, 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. Total return information is based on net asset values calculated for shareholder transactions. Certain adjustments were made to the net assets of the Fund at 4/30/18 for financial reporting purposes, and as a result, the total returns based on those net asset values differ from the adjusted total returns reported in the Financial Highlights.
5. Distribution rate is based on an annualization of the sum of the respective class’s past 30 days’ daily distributions and the maximum offering price (NAV for Advisor Class) per share on 10/31/18.
6. 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.
7. 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.
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8 | | Semiannual Report | | franklintempleton.com |
FRANKLIN FLEXIBLE ALPHA BOND FUND
Your Fund’s Expenses
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 Value 5/1/18 | | | | Ending Account Value 10/31/18 | | Expenses Paid During Period 5/1/18–10/31/181,2 | | | | Ending Account Value 10/31/18 | | Expenses Paid During Period 5/1/18–10/31/181,2 | | | | Net Annualized Expense Ratio2 |
| A | | $1,000 | | | | $1,007.90 | | $4.56 | | | | $1,020.67 | | $4.58 | | | | 0.90% |
| C | | $1,000 | | | | $1,005.90 | | $6.37 | | | | $1,018.85 | | $6.41 | | | | 1.26% |
| R | | $1,000 | | | | $1,006.40 | | $5.71 | | | | $1,019.51 | | $5.75 | | | | 1.13% |
| R6 | | $1,000 | | | | $1,008.80 | | $2.99 | | | | $1,022.23 | | $3.01 | | | | 0.59% |
| Advisor | | $1,000 | | | | $1,008.90 | | $3.09 | | | | $1,022.13 | | $3.11 | | | | 0.61% |
1. 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 184/365 to reflect the one-half year period.
2. Reflects expenses after fee waivers and expense reimbursements. Does not include acquired fund fees and expenses.
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| franklintempleton.com | | Semiannual Report | | 9 |
FRANKLIN STRATEGIC SERIES
Financial Highlights
Franklin Flexible Alpha Bond Fund
| | | | | | | | | | | | | | |
| | | Six Months Ended October 31, 2018 (unaudited) | | | Year Ended April 30, |
| | | 2018 | | | 2017 | | | 2016a |
| | | | |
Class A | | | | | | | | | | | | | | |
| | | | |
Per share operating performance | | | | | | | | | | | | | | |
(for a share outstanding throughout the period) | | | | | | | | | | | | | | |
Net asset value, beginning of period | | | $ 9.79 | | | | $ 9.86 | | | | $ 9.88 | | | $ 10.00 |
| | | | |
Income from investment operationsb: | | | | | | | | | | | | | | |
Net investment income | | | 0.118 | c | | | 0.166 | c | | | 0.180 | | | 0.099 |
Net realized and unrealized gains (losses) | | | (0.051 | ) | | | (0.066 | ) | | | 0.017 | | | (0.123) |
| | | | |
Total from investment operations | | | 0.067 | | | | 0.100 | | | | 0.197 | | | (0.024) |
| | | | |
Less distributions from: | | | | | | | | | | | | | | |
| | | | |
Net investment income | | | (0.097 | ) | | | (0.160 | ) | | | (0.217 | ) | | (0.096) |
Net realized gains | | | — | | | | (0.010 | ) | | | — | | | — |
| | | | |
Total distributions | | | (0.097 | ) | | | (0.170 | ) | | | (0.217 | ) | | (0.096) |
| | | | |
Net asset value, end of period | | | $ 9.76 | | | | $ 9.79 | | | | $ 9.86 | | | $ 9.88 |
| | | | |
Total returnd | | | 0.79% | | | | 1.02% | | | | 2.22% | | | (0.34)% |
| | | | |
Ratios to average net assetse | | | | | | | | | | | | | | |
Expenses before waiver and payments by affiliates | | | 1.19% | | | | 0.97% | | | | 3.17% | | | 3.47% |
Expenses net of waiver and payments by affiliatesf | | | 0.90% | | | | 0.79% | | | | 0.67% | | | 0.84% |
Net investment income | | | 2.42% | | | | 1.80% | | | | 1.83% | | | 1.37% |
| | | | |
Supplemental data | | | | | | | | | | | | | | |
Net assets, end of period (000’s) | | | $2,142 | | | | $1,132 | | | | $10,443 | | | $10,200 |
Portfolio turnover rate | | | 7.34% | | | | 48.04% | | | | 90.37% | | | 40.12% |
Portfolio turnover rate excluding mortgage dollar rollsg | | | 6.58% | | | | 19.40% | | | | 57.79% | | | 30.05% |
aFor the period August 3, 2015 (commencement of operations) to April 30, 2016.
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.
cBased on average daily shares outstanding.
dTotal return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year.
eRatios are annualized for periods less than one year, except for non-recurring expenses, if any.
fBenefit of expense reduction rounds to less than 0.01%.
gSee Note 1(f) regarding mortgage dollar rolls.
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10 | | Semiannual Report | The accompanying notes are an integral part of these financial statements. | | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
FINANCIAL HIGHLIGHTS
Franklin Flexible Alpha Bond Fund (continued)
| | | | | | | | | | | | | | |
| | | Six Months Ended | | | | | | | | | |
| | | October 31, 2018 | | | Year Ended April 30, |
| | | (unaudited) | | | 2018 | | | 2017 | | | 2016a |
| | | | |
Class C | | | | | | | | | | | | | | |
| | | | |
Per share operating performance | | | | | | | | | | | | | | |
(for a share outstanding throughout the period) | | | | | | | | | | | | | | |
Net asset value, beginning of period | | | $ 9.73 | | | | $ 9.80 | | | | $ 9.86 | | | $ 10.00 |
| | | | |
Income from investment operationsb: | | | | | | | | | | | | | | |
Net investment income | | | 0.100 | c | | | 0.120 | | | | 0.130 | | | 0.072 |
Net realized and unrealized gains (losses) | | | (0.043 | ) | | | (0.062 | ) | | | (0.006 | ) | | (0.131) |
| | | | |
Total from investment operations | | | 0.057 | | | | 0.058 | | | | 0.124 | | | (0.059) |
| | | | |
Less distributions from: | | | | | | | | | | | | | | |
| | | | |
Net investment income | | | (0.087 | ) | | | (0.118 | ) | | | (0.184 | ) | | (0.081) |
Net realized gains | | | — | | | | (0.010 | ) | | | — | | | — |
| | | | |
Total distributions | | | (0.087 | ) | | | (0.128 | ) | | | (0.184 | ) | | (0.081) |
| | | | |
Net asset value, end of period | | | $ 9.70 | | | | $ 9.73 | | | | $ 9.80 | | | $ 9.86 |
| | | | |
Total returnd | | | 0.59% | | | | 0.49% | | | | 1.47% | | | (0.69)% |
| | | | |
Ratios to average net assetse | | | | | | | | | | | | | | |
Expenses before waiver and payments by affiliates | | | 1.55% | | | | 1.58% | | | | 3.88% | | | 3.98% |
Expenses net of waiver and payments by affiliatesf | | | 1.26% | | | | 1.40% | | | | 1.38% | | | 1.34% |
Net investment income | | | 2.06% | | | | 1.19% | | | | 1.12% | | | 0.87% |
| | | | |
Supplemental data | | | | | | | | | | | | | | |
Net assets, end of period (000’s) | | | $303 | | | | $279 | | | | $245 | | | $204 |
Portfolio turnover rate | | | 7.34% | | | | 48.04% | | | | 90.37% | | | 40.12% |
Portfolio turnover rate excluding mortgage dollar rollsg | | | 6.58% | | | | 19.40% | | | | 57.79% | | | 30.05% |
aFor the period August 3, 2015 (commencement of operations) to April 30, 2016.
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.
cBased on average daily shares outstanding.
dTotal return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year.
eRatios are annualized for periods less than one year, except for non-recurring expenses, if any.
fBenefit of expense reduction rounds to less than 0.01%.
gSee Note 1(f) regarding mortgage dollar rolls.
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| | | |
| franklintempleton.com | | The accompanying notes are an integral part of these financial statements. | Semiannual Report | | 11 |
FRANKLIN STRATEGIC SERIES
FINANCIAL HIGHLIGHTS
Franklin Flexible Alpha Bond Fund (continued)
| | | | | | | | | | | | | | |
| | | Six Months Ended | | | | | | | | | |
| | | October 31, 2018 | | | Year Ended April 30, |
| | | (unaudited) | | | 2018 | | | 2017 | | | 2016a |
| | | | |
Class R | | | | | | | | | | | | | | |
| | | | |
Per share operating performance | | | | | | | | | | | | | | |
(for a share outstanding throughout the period) | | | | | | | | | | | | | | |
Net asset value, beginning of period | | | $ 9.78 | | | | $ 9.86 | | | | $ 9.86 | | | $ 10.00 |
| | | | |
Income from investment operationsb: | | | | | | | | | | | | | | |
Net investment income | | | 0.107 | c | | | 0.112 | | | | 0.112 | | | 0.072 |
Net realized and unrealized gains (losses) | | | (0.044 | ) | | | (0.058 | ) | | | 0.095 | | | (0.127) |
| | | | |
Total from investment operations | | | 0.063 | | | | 0.054 | | | | 0.207 | | | (0.055) |
| | | | |
Less distributions from: | | | | | | | | | | | | | | |
| | | | |
Net investment income | | | (0.093 | ) | | | (0.124 | ) | | | (0.207 | ) | | (0.085) |
Net realized gains | | | — | | | | (0.010 | ) | | | — | | | — |
| | | | |
Total distributions | | | (0.093 | ) | | | (0.134 | ) | | | (0.207 | ) | | (0.085) |
| | | | |
Net asset value, end of period | | | $ 9.75 | | | | $ 9.78 | | | | $ 9.86 | | | $ 9.86 |
| | | | |
Total returnd | | | 0.64% | | | | 0.54% | | | | 2.21% | | | (0.65)% |
| | | | |
Ratios to average net assetse | | | | | | | | | | | | | | |
| | | | |
Expenses before waiver and payments by affiliates | | | 1.42% | | | | 1.47% | | | | 3.36% | | | 3.84% |
| | | | |
Expenses net of waiver and payments by affiliatesf | | | 1.13% | | | | 1.29% | | | | 0.86% | | | 1.22% |
| | | | |
Net investment income | | | 2.19% | | | | 1.30% | | | | 1.64% | | | 0.99% |
| | | | |
Supplemental data | | | | | | | | | | | | | | |
Net assets, end of period (000’s) | | | $52 | | | | $51 | | | | $60 | | | $10 |
Portfolio turnover rate | | | 7.34% | | | | 48.04% | | | | 90.37% | | | 40.12% |
Portfolio turnover rate excluding mortgage dollar rollsg | | | 6.58% | | | | 19.40% | | | | 57.79% | | | 30.05% |
aFor the period August 3, 2015 (commencement of operations) to April 30, 2016.
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.
cBased on average daily shares outstanding.
dTotal return is not annualized for periods less than one year
eRatios are annualized for periods less than one year, except for non-recurring expenses, if any.
fBenefit of expense reduction rounds to less than 0.01%.
gSee Note 1(f) regarding mortgage dollar rolls.
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12 | | Semiannual Report | The accompanying notes are an integral part of these financial statements. | | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
FINANCIAL HIGHLIGHTS
Franklin Flexible Alpha Bond Fund (continued)
| | | | | | | | | | | | | | |
| | | Six Months Ended October 31, 2018 (unaudited) | | | | | | | | | |
| | | Year Ended April 30, |
| | | 2018 | | | 2017 | | | 2016a |
| | | | |
Class R6 | | | | | | | | | | | | | | |
| | | | |
Per share operating performance | | | | | | | | | | | | | | |
(for a share outstanding throughout the period) | | | | | | | | | | | | | | |
Net asset value, beginning of period | | | $ 9.79 | | | | $ 9.86 | | | | $ 9.88 | | | $ 10.00 |
| | | | |
Income from investment operationsb: | | | | | | | | | | | | | | |
Net investment income | | | 0.135 | c | | | 0.204 | | | | 0.177 | | | 0.108 |
Net realized and unrealized gains (losses) | | | (0.049 | ) | | | (0.088 | ) | | | 0.022 | | | (0.124) |
| | | | |
Total from investment operations | | | 0.086 | | | | 0.116 | | | | 0.199 | | | (0.016) |
| | | | |
Less distributions from: | | | | | | | | | | | | | | |
| | | | |
Net investment income | | | (0.116 | ) | | | (0.176 | ) | | | (0.219 | ) | | (0.104) |
Net realized gains | | | — | | | | (0.010 | ) | | | — | | | — |
| | | | |
Total distributions | | | (0.116 | ) | | | (0.186 | ) | | | (0.219 | ) | | (0.104) |
| | | | |
Net asset value, end of period | | | $ 9.76 | | | | $ 9.79 | | | | $ 9.86 | | | $ 9.88 |
| | | | |
Total returnd | | | 0.88% | | | | 1.18% | | | | 2.03% | | | (0.15)% |
| | | | |
Ratios to average net assetse | | | | | | | | | | | | | | |
Expenses before waiver and payments by affiliates | | | 0.66% | | | | 0.86% | | | | 5.23% | | | 3.72% |
Expenses net of waiver and payments by affiliatesf | | | 0.59% | | | | 0.71% | | | | 0.71% | | | 0.71% |
Net investment income | | | 2.73% | | | | 1.88% | | | | 1.79% | | | 1.50% |
| | | | |
Supplemental data | | | | | | | | | | | | | | |
Net assets, end of period (000’s) | | | $411,574 | | | | $210,808 | | | | $10 | | | $10 |
Portfolio turnover rate | | | 7.34% | | | | 48.04% | | | | 90.37% | | | 40.12% |
Portfolio turnover rate excluding mortgage dollar rollsg | | | 6.58% | | | | 19.40% | | | | 57.79% | | | 30.05% |
aFor the period August 3, 2015 (commencement of operations) to April 30, 2016.
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.
cBased on average daily shares outstanding.
dTotal return is not annualized for periods less than one year.
eRatios are annualized for periods less than one year, except for non-recurring expenses, if any.
fBenefit of expense reduction rounds to less than 0.01%.
gSee Note 1(f) regarding mortgage dollar rolls.
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| | | |
| franklintempleton.com | | The accompanying notes are an integral part of these financial statements. | Semiannual Report | | 13 |
FRANKLIN STRATEGIC SERIES
FINANCIAL HIGHLIGHTS
Franklin Flexible Alpha Bond Fund (continued)
| | | | | | | | | | | | | | |
| | | Six Months Ended | | | | | | | | | |
| | | October 31, 2018 | | | Year Ended April 30, |
| | | (unaudited) | | | 2018 | | | 2017 | | | 2016a |
| | | | |
Advisor Class | | | | | | | | | | | | | | |
| | | | |
Per share operating performance | | | | | | | | | | | | | | |
(for a share outstanding throughout the period) | | | | | | | | | | | | | | |
Net asset value, beginning of period | | | $ 9.79 | | | | $ 9.85 | | | | $ 9.88 | | | $ 10.00 |
| | | | |
Income from investment operationsb: | | | | | | | | | | | | | | |
Net investment income | | | 0.133 | c | | | 0.194 | | | | 0.166 | | | 0.107 |
Net realized and unrealized gains (losses) | | | (0.046 | ) | | | (0.072 | ) | | | 0.023 | | | (0.129) |
| | | | |
Total from investment operations | | | 0.087 | | | | 0.122 | | | | 0.189 | | | (0.022) |
| | | | |
Less distributions from: | | | | | | | | | | | | | | |
| | | | |
Net investment income | | | (0.117 | ) | | | (0.172 | ) | | | (0.219 | ) | | (0.098) |
Net realized gains | | | — | | | | (0.010 | ) | | | — | | | — |
| | | | |
Total distributions | | | (0.117 | ) | | | (0.182 | ) | | | (0.219 | ) | | (0.098) |
| | | | |
Net asset value, end of period | | | $ 9.76 | | | | $ 9.79 | | | | $ 9.85 | | | $ 9.88 |
| | | | |
Total returnd | | | 0.89% | | | | 1.14% | | | | 2.13% | | | (0.31)% |
| | | | |
Ratios to average net assetse | | | | | | | | | | | | | | |
| | | | |
Expenses before waiver and payments by affiliates | | | 0.90% | | | | 0.93% | | | | 3.22% | | | 3.34% |
| | | | |
Expenses net of waiver and payments by affiliatesf | | | 0.61% | | | | 0.75% | | | | 0.72% | | | 0.71% |
| | | | |
Net investment income | | | 2.71% | | | | 1.84% | | | | 1.78% | | | 1.50% |
| | | | |
Supplemental data | | | | | | | | | | | | | | |
Net assets, end of period (000’s) | | | $389 | | | | $425 | | | | $232 | | | $344 |
Portfolio turnover rate | | | 7.34% | | | | 48.04% | | | | 90.37% | | | 40.12% |
Portfolio turnover rate excluding mortgage dollar rollsg | | | 6.58% | | | | 19.40% | | | | 57.79% | | | 30.05% |
aFor the period August 3, 2015 (commencement of operations) to April 30, 2016.
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.
cBased on average daily shares outstanding.
dTotal return is not annualized for periods less than one year.
eRatios are annualized for periods less than one year, except for non-recurring expenses, if any.
fBenefit of expense reduction rounds to less than 0.01%.
gSee Note 1(f) regarding mortgage dollar rolls.
| | | | |
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14 | | Semiannual Report | The accompanying notes are an integral part of these financial statements. | | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
Statement of Investments, October 31, 2018 (unaudited)
Franklin Flexible Alpha Bond Fund
| | | | | | | | | | | | | | |
| | | Country | | | Shares | | | | | Value | |
Management Investment Companies (Cost $4,549,803) 1.1% | | | | | | | | | | | | | | |
Diversified Financials 1.1% | | | | | | | | | | | | | | |
Invesco Senior Loan ETF | | | United States | | | | 196,765 | | | | | $ | 4,527,563 | |
| | | | | | | | | | | | | | |
| | | | | | Principal
Amount* | | | | �� | | |
Corporate Bonds 26.0% | | | | | | | | | | | | | | |
Automobiles & Components 0.2% | | | | | | | | | | | | | | |
Aptiv Corp., senior bond, 4.15%, 3/15/24 | | | United States | | | | 900,000 | | | | | | 896,604 | |
| | | | | | | | | | | | | | |
Banks 8.7% | | | | | | | | | | | | | | |
aBanca Monte dei Paschi di Siena SpA, | | | | | | | | | | | | | | |
secured note, Reg S, 2.875%, 7/16/62 | | | Italy | | | | 1,500,000 | | | EUR | | | 1,816,115 | |
secured note, Reg S, 2.125%, 11/26/63 | | | Italy | | | | 2,000,000 | | | EUR | | | 2,314,398 | |
aBanca Popolare di Milano Scarl, | | | | | | | | | | | | | | |
secured note, Reg S, 0.875%, 9/14/23 | | | Italy | | | | 900,000 | | | EUR | | | 1,016,900 | |
secured note, Reg S, 0.625%, 6/08/24 | | | Italy | | | | 2,800,000 | | | EUR | | | 3,087,682 | |
aBanco BPM SpA, secured note, Reg S, 0.75%, 3/31/23 | | | Italy | | | | 1,700,000 | | | EUR | | | 1,918,117 | |
aBanco Comercial Portugues SA, secured note, Reg S, 0.75%, 5/31/23 | | | Portugal | | | | 900,000 | | | EUR | | | 1,031,707 | |
Bank of America Corp., | | | | | | | | | | | | | | |
senior bond, 5.50%, 12/04/19 | | | United States | | | | 75,000 | | | GBP | | | 100,005 | |
senior note, 3.50%, 4/19/26 | | | United States | | | | 2,300,000 | | | | | | 2,190,254 | |
senior note, 3.55% to 3/05/23, FRN thereafter, 3/05/24 | | | United States | | | | 1,400,000 | | | | | | 1,374,786 | |
Bank of Nova Scotia, secured note, 1.875%, 4/26/22 | | | Canada | | | | 100,000 | | | | | | 96,661 | |
Caixa Geral de Depositos SA, | | | | | | | | | | | | | | |
secured note, 3.00%, 1/15/20 | | | Portugal | | | | 2,000,000 | | | EUR | | | 2,278,879 | |
asecured note, Reg S, 1.00%, 1/27/23 | | | Portugal | | | | 100,000 | | | EUR | | | 115,712 | |
Citigroup Inc., | | | | | | | | | | | | | | |
senior note, 2.65%, 10/26/20 | | | United States | | | | 1,050,000 | | | | | | 1,034,458 | |
senior note, 3.40%, 5/01/26 | | | United States | | | | 2,300,000 | | | | | | 2,162,527 | |
HSBC Holdings PLC, | | | | | | | | | | | | | | |
senior note, 4.30%, 3/08/26 | | | United Kingdom | | | | 1,400,000 | | | | | | 1,380,722 | |
senior note, 3.262% to 3/13/22, FRN thereafter, 3/13/23 | | | United Kingdom | | | | 1,400,000 | | | | | | 1,369,270 | |
bICICI Bank Ltd./Dubai, senior note, 144A, 3.80%, 12/14/27 | | | India | | | | 500,000 | | | | | | 449,127 | |
Industrial & Commercial Bank of China Ltd., senior note, 2.452%, 10/20/21 | | | China | | | | 1,900,000 | | | | | | 1,823,468 | |
JPMorgan Chase & Co., | | | | | | | | | | | | | | |
senior bond, 3.30%, 4/01/26 | | | United States | | | | 2,300,000 | | | | | | 2,174,460 | |
senior note, 2.40%, 6/07/21 | | | United States | | | | 400,000 | | | | | | 389,851 | |
bKookmin Bank, secured note, 144A, 2.25%, 2/03/22 | | | South Korea | | | | 1,800,000 | | | | | | 1,739,860 | |
PHH Corp., senior note, 7.375%, 9/01/19 | | | United States | | | | 200,000 | | | | | | 205,750 | |
Royal Bank of Canada, secured note, 2.10%, 10/14/21 | | | Canada | | | | 100,000 | | | | | | 97,861 | |
bStandard Chartered PLC, senior note, 144A, 3.885% to 3/15/23, FRN thereafter, 3/15/24 | | | United Kingdom | | | | 1,200,000 | | | | | | 1,167,450 | |
bThe Toronto-Dominion Bank, secured note, 144A, 2.25%, 3/15/22 | | | Canada | | | | 200,000 | | | | | | 195,333 | |
aTurkiye Vakiflar Bankasi TAO, secured note, Reg S, 2.375%, 11/04/22 | | | Turkey | | | | 3,800,000 | | | EUR | | | 4,142,387 | |
Wells Fargo & Co., senior note, 3.00%, 4/22/26 | | | United States | | | | 600,000 | | | | | | 553,567 | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | 36,227,307 | |
| | | | | | | | | | | | | | |
Consumer Durables & Apparel 0.0%† | | | | | | | | | | | | | | |
KB Home, senior note, 8.00%, 3/15/20 | | | United States | | | | 100,000 | | | | | | 104,875 | |
| | | | | | | | | | | | | | |
Consumer Services 0.1% | | | | | | | | | | | | | | |
bWynn Las Vegas LLC/Wynn Las Vegas Capital Corp., senior bond, 144A, 5.50%, 3/01/25 | | | United States | | | | 525,000 | | | | | | 500,719 | |
| | | | | | | | | | | | | | |
| | | | |
| | | |
| franklintempleton.com | | Semiannual Report | | 15 |
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS (UNAUDITED)
Franklin Flexible Alpha Bond Fund (continued)
| | | | | | | | | | | | |
| | | Country | | | Principal
Amount* | | | Value | |
Corporate Bonds (continued) | | | | | | | | | | | | |
Diversified Financials 2.2% | | | | | | | | | | | | |
Capital One Financial Corp., | | | | | | | | | | | | |
senior note, 3.05%, 3/09/22 | | | United States | | | | 1,200,000 | | | $ | 1,171,653 | |
senior note, 3.20%, 2/05/25 | | | United States | | | | 3,100,000 | | | | 2,900,692 | |
cDeutsche Bank AG, senior note, FRN, 3.632%, (3-month USD LIBOR + 1.31%), 8/20/20 | | | Germany | | | | 100,000 | | | | 99,888 | |
bDexia Credit Local SA, senior note, 144A, 2.375%, 9/20/22 | | | France | | | | 250,000 | | | | 241,159 | |
The Goldman Sachs Group Inc., | | | | | | | | | | | | |
senior note, 3.75%, 5/22/25 | | | United States | | | | 2,000,000 | | | | 1,939,387 | |
csenior note, FRN, 3.534%, (3-month USD LIBOR + 1.20%), 9/15/20 | | | United States | | | | 500,000 | | | | 507,086 | |
bICBCIL Finance Co. Ltd., senior note, 144A, 2.50%, 9/29/21 | | | China | | | | 500,000 | | | | 476,120 | |
Morgan Stanley, senior note, 3.70%, 10/23/24 | | | United States | | | | 1,400,000 | | | | 1,367,872 | |
Navient Corp., senior bond, 8.00%, 3/25/20 | | | United States | | | | 400,000 | | | | 418,500 | |
Springleaf Finance Corp., senior note, 6.00%, 6/01/20 | | | United States | | | | 60,000 | | | | 61,500 | |
| | | | | | | | | | | | |
| | | | | | | | | | | 9,183,857 | |
| | | | | | | | | | | | |
Energy 2.5% | | | | | | | | | | | | |
Anadarko Petroleum Corp., senior bond, 3.45%, 7/15/24 | | | United States | | | | 1,350,000 | | | | 1,284,220 | |
CNOOC Finance 2015 USA LLC, senior note, 3.50%, 5/05/25 | | | China | | | | 1,700,000 | | | | 1,618,391 | |
bCNPC General Capital Ltd., senior note, 144A, 3.40%, 4/16/23 | | | China | | | | 2,100,000 | | | | 2,046,891 | |
Energy Transfer LP, senior bond, first lien, 7.50%, 10/15/20 | | | United States | | | | 750,000 | | | | 795,939 | |
Enterprise Products Operating LLC, senior note, 3.35%, 3/15/23 | | | United States | | | | 1,450,000 | | | | 1,421,325 | |
Exxon Mobil Corp., senior note, 2.222%, 3/01/21 | | | United States | | | | 100,000 | | | | 97,738 | |
Oceaneering International Inc., senior note, 4.65%, 11/15/24 | | | United States | | | | 50,000 | | | | 46,489 | |
Sabine Pass Liquefaction LLC, senior secured note, first lien, 5.625%, 4/15/23 | | | United States | | | | 1,250,000 | | | | 1,317,267 | |
bSinopec Group Overseas Development 2015 Ltd., senior note, 144A, 2.50%, 4/28/20 | | | China | | | | 1,800,000 | | | | 1,773,873 | |
bWoodside Finance Ltd., senior note, 144A, 3.65%, 3/05/25 | | | Australia | | | | 100,000 | | | | 95,952 | |
| | | | | | | | | | | | |
| | | | | | | | | | | 10,498,085 | |
| | | | | | | | | | | | |
Food & Staples Retailing 0.3% | | | | | | | | | | | | |
Safeway Inc., senior bond, 5.00%, 8/15/19 | | | United States | | | | 1,000,000 | | | | 1,010,000 | |
| | | | | | | | | | | | |
Food, Beverage & Tobacco 1.0% | | | | | | | | | | | | |
Anheuser-Busch Inbev Finance Inc., senior bond, 3.65%, 2/01/26 | | | Belgium | | | | 1,400,000 | | | | 1,329,961 | |
Bunge Ltd. Finance Corp., senior note, 3.25%, 8/15/26 | | | United States | | | | 50,000 | | | | 44,886 | |
bImperial Brands Finance PLC, senior note, 144A, 4.25%, 7/21/25 | | | United Kingdom | | | | 1,695,000 | | | | 1,667,093 | |
Kraft Heinz Foods Co., | | | | | | | | | | | | |
senior bond, 3.00%, 6/01/26 | | | United States | | | | 600,000 | | | | 536,456 | |
senior note, 3.50%, 7/15/22 | | | United States | | | | 350,000 | | | | 346,008 | |
Reynolds American Inc., senior note, 4.45%, 6/12/25 | | | United Kingdom | | | | 100,000 | | | | 99,634 | |
| | | | | | | | | | | | |
| | | | | | | | | | | 4,024,038 | |
| | | | | | | | | | | | |
Health Care Equipment & Services 1.1% | | | | | | | | | | | | |
Anthem Inc., senior note, 2.95%, 12/01/22 | | | United States | | | | 600,000 | | | | 580,323 | |
bCentene Corp., senior note, 144A, 5.375%, 6/01/26 | | | United States | | | | 1,000,000 | | | | 1,017,500 | |
CVS Health Corp., senior note, 3.70%, 3/09/23 | | | United States | | | | 1,700,000 | | | | 1,681,289 | |
Edwards Lifesciences Corp., senior note, 4.30%, 6/15/28 | | | United States | | | | 300,000 | | | | 298,451 | |
HCA Inc., senior secured bond, first lien, 5.875%, 3/15/22 | | | United States | | | | 950,000 | | | | 996,312 | |
Tenet Healthcare Corp., senior note, 5.50%, 3/01/19 | | | United States | | | | 90,000 | | | | 90,563 | |
bUniversal Health Services Inc., senior secured note, first lien, 144A, 3.75%, 8/01/19 | | | United States | | | | 50,000 | | | | 50,031 | |
| | | | | | | | | | | | |
| | | | | | | | | | | 4,714,469 | |
| | | | | | | | | | | | |
| | | | |
| | | |
16 | | Semiannual Report | | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS (UNAUDITED)
Franklin Flexible Alpha Bond Fund (continued)
| | | | | | | | | | | | |
| | | Country | | | Principal
Amount* | | | Value | |
Corporate Bonds (continued) | | | | | | | | | | | | |
Insurance 0.5% | | | | | | | | | | | | |
bAthene Global Funding, secured note, 144A, 3.00%, 7/01/22 | | | United States | | | | 1,850,000 | | | $ | 1,791,245 | |
bJackson National Life Global Funding, | | | | | | | | | | | | |
secured note, 144A, 2.25%, 4/29/21 | | | United States | | | | 50,000 | | | | 48,606 | |
secured note, 144A, 2.10%, 10/25/21 | | | United States | | | | 25,000 | | | | 23,970 | |
| | | | | | | | | | | | |
| | | | | | | | | | | 1,863,821 | |
| | | | | | | | | | | | |
Materials 1.1% | | | | | | | | | | | | |
Freeport-McMoRan Inc., senior note, 4.00%, 11/14/21 | | | United States | | | | 915,000 | | | | 894,412 | |
bGlencore Funding LLC, senior note, 144A, 3.00%, 10/27/22 | | | Switzerland | | | | 1,300,000 | | | | 1,245,192 | |
LYB International Finance BV, senior note, 4.00%, 7/15/23 | | | United States | | | | 1,500,000 | | | | 1,496,475 | |
bSealed Air Corp., senior bond, 144A, 5.25%, 4/01/23 | | | United States | | | | 950,000 | | | | 945,250 | |
| | | | | | | | | | | | |
| | | | | | | | | | | 4,581,329 | |
| | | | | | | | | | | | |
Media & Entertainment 0.3% | | | | | | | | | | | | |
bTencent Holdings Ltd., senior note, 144A, 2.985%, 1/19/23 | | | China | | | | 1,200,000 | | | | 1,157,172 | |
| | | | | | | | | | | | |
Pharmaceuticals, Biotechnology & Life Sciences 1.1% | | | | | | | | | | | | |
Allergan Funding SCS, senior bond, 3.80%, 3/15/25 | | | United States | | | | 900,000 | | | | 868,486 | |
Amgen Inc., | | | | | | | | | | | | |
senior note, 2.60%, 8/19/26 | | | United States | | | | 1,100,000 | | | | 986,137 | |
senior note, 3.20%, 11/02/27 | | | United States | | | | 550,000 | | | | 506,846 | |
bBayer U.S. Finance II LLC, senior note, 144A, 3.875%, 12/15/23 | | | Germany | | | | 400,000 | | | | 394,391 | |
Celgene Corp., | | | | | | | | | | | | |
senior bond, 3.875%, 8/15/25 | | | United States | | | | 200,000 | | | | 193,254 | |
senior bond, 3.45%, 11/15/27 | | | United States | | | | 1,100,000 | | | | 1,004,449 | |
bSABIC Capital II BV, senior note, 144A, 4.50%, 10/10/28 | | | Saudi Arabia | | | | 400,000 | | | | 392,628 | |
| | | | | | | | | | | | |
| | | | | | | | | | | 4,346,191 | |
| | | | | | | | | | | | |
Real Estate 0.6% | | | | | | | | | | | | |
American Homes 4 Rent LP, senior bond, 4.25%, 2/15/28 | | | United States | | | | 400,000 | | | | 379,897 | |
American Tower Corp., | | | | | | | | | | | | |
senior bond, 3.50%, 1/31/23 | | | United States | | | | 500,000 | | | | 490,083 | |
senior bond, 3.375%, 10/15/26 | | | United States | | | | 700,000 | | | | 644,207 | |
Crown Castle International Corp., senior note, 3.15%, 7/15/23 | | | United States | | | | 600,000 | | | | 576,532 | |
Prologis LP, senior note, 4.25%, 8/15/23 | | | United States | | | | 200,000 | | | | 205,754 | |
| | | | | | | | | | | | |
| | | | | | | | | | | 2,296,473 | |
| | | | | | | | | | | | |
Retailing 0.4% | | | | | | | | | | | | |
Alibaba Group Holding Ltd., senior note, 2.80%, 6/06/23 | | | China | | | | 1,100,000 | | | | 1,053,926 | |
Amazon.com Inc., senior note, 2.40%, 2/22/23 | | | United States | | | | 300,000 | | | | 286,891 | |
bPetSmart Inc., senior note, 144A, 7.125%, 3/15/23 | | | United States | | | | 550,000 | | | | 387,750 | |
| | | | | | | | | | | | |
| | | | | | | | | | | 1,728,567 | |
| | | | | | | | | | | | |
Semiconductors & Semiconductor Equipment 0.3% | | | | | | | | | | | | |
Maxim Integrated Products Inc., senior note, 3.45%, 6/15/27 | | | United States | | | | 1,300,000 | | | | 1,211,616 | |
| | | | | | | | | | | | |
Software & Services 0.3% | | | | | | | | | | | | |
Fiserv Inc., senior bond, 3.85%, 6/01/25 | | | United States | | | | 1,400,000 | | | | 1,382,721 | |
| | | | | | | | | | | | |
Technology Hardware & Equipment 0.0%† | | | | | | | | | | | | |
bSanmina Corp., senior note, first lien, 144A, 4.375%, 6/01/19 | | | United States | | | | 100,000 | | | | 100,125 | |
Tech Data Corp., senior bond, 4.95%, 2/15/27 | | | United States | | | | 50,000 | | | | 48,341 | |
| | | | | | | | | | | | |
| | | | | | | | | | | 148,466 | |
| | | | | | | | | | | | |
| | | | |
| | | |
| franklintempleton.com | | Semiannual Report | | 17 |
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS (UNAUDITED)
Franklin Flexible Alpha Bond Fund (continued)
| | | | | | | | | | | | | | | | |
| | | Country | | | Principal
Amount* | | | | | | Value | |
Corporate Bonds (continued) | | | | | | | | | | | | | | | | |
Telecommunication Services 0.8% | | | | | | | | | | | | | | | | |
Telefonica Emisiones S.A.U., senior note, 4.103%, 3/08/27 | | | Spain | | | | 1,800,000 | | | | | | | $ | 1,713,492 | |
Verizon Communications Inc., senior note, 2.45%, 11/01/22 | | | United States | | | | 1,650,000 | | | | | | | | 1,578,517 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | 3,292,009 | |
| | | | | | | | | | | | | | | | |
Transportation 0.6% | | | | | | | | | | | | | | | | |
bAir Canada 2017-1AA PTT, secured bond, 144A, 3.30%, 7/15/31 | | | Canada | | | | 100,000 | | | | | | | | 93,956 | |
bAmerican Airlines Group Inc., senior note, 144A, 5.50%, 10/01/19 | | | United States | | | | 530,000 | | | | | | | | 537,287 | |
American Airlines Pass Through Trust, first lien, 2016-2, AA, 3.20%, 12/15/29 | | | United States | | | | 46,100 | | | | | | | | 43,576 | |
FedEx Corp., senior bond, 3.20%, 2/01/25 | | | United States | | | | 1,450,000 | | | | | | | | 1,387,456 | |
bTransurban Finance Co. Pty. Ltd., senior secured bond, 144A, 3.375%, 3/22/27 | | | Australia | | | | 500,000 | | | | | | | | 460,578 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | 2,522,853 | |
| | | | | | | | | | | | | | | | |
Utilities 3.9% | | | | | | | | | | | | | | | | |
Calpine Corp., senior note, 5.375%, 1/15/23 | | | United States | | | | 35,000 | | | | | | | | 33,294 | |
aCGNPC International Ltd., senior note, Reg S, 3.75%, 12/11/27 | | | China | | | | 2,100,000 | | | | | | | | 1,965,222 | |
bColbun SA, senior note, 144A, 3.95%, 10/11/27 | | | Chile | | | | 200,000 | | | | | | | | 184,393 | |
Dominion Energy Inc., | | | | | | | | | | | | | | | | |
senior bond, 3.90%, 10/01/25 | | | United States | | | | 50,000 | | | | | | | | 48,855 | |
senior bond, 2.85%, 8/15/26 | | | United States | | | | 2,500,000 | | | | | | | | 2,267,526 | |
Duke Energy Indiana Inc., senior secured bond, 3.75%, 7/15/20 | | | United States | | | | 100,000 | | | | | | | | 100,952 | |
b,dEDF SA, junior sub. bond, 144A, 5.625% to 1/22/24, FRN thereafter, Perpetual | | | France | | | | 2,200,000 | | | | | | | | 2,136,695 | |
bIsrael Electric Corp. Ltd., secured bond, 144A, 4.25%, 8/14/28 | | | Israel | | | | 1,400,000 | | | | | | | | 1,328,082 | |
bKorea East-West Power Co. Ltd., senior note, 144A, 3.875%, 7/19/23 | | | South Korea | | | | 500,000 | | | | | | | | 499,083 | |
The Southern Co., senior bond, 3.25%, 7/01/26 | | | United States | | | | 2,350,000 | | | | | | | | 2,182,907 | |
bState Grid Overseas Investment 2016 Ltd., senior note, 144A, 3.50%, 5/04/27 | | | China | | | | 3,500,000 | | | | | | | | 3,289,020 | |
bThree Gorges Finance I Cayman Islands Ltd., senior note, 144A, 3.70%, 6/10/25 | | | China | | | | 2,100,000 | | | | | | | | 2,029,997 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | 16,066,026 | |
| | | | | | | | | | | | | | | | |
Total Corporate Bonds (Cost $111,317,668) | | | | | | | | | | | | | | | 107,757,198 | |
| | | | | | | | | | | | | | | | |
| | | | |
Foreign Government and Agency Securities 1.9% | | | | | | | | | | | | | | | | |
bThe Export-Import Bank of China, | | | | | | | | | | | | | | | | |
senior note, 144A, 2.50%, 7/31/19 | | | China | | | | 200,000 | | | | | | | | 198,871 | |
senior note, 144A, 3.625%, 7/31/24 | | | China | | | | 2,100,000 | | | | | | | | 2,059,974 | |
bThe Export-Import Bank of India, senior note, 144A, 3.875%, 2/01/28 | | | India | | | | 3,400,000 | | | | | | | | 3,125,035 | |
The Export-Import Bank of Korea, senior note, 2.875%, 1/21/25 | | | South Korea | | | | 1,100,000 | | | | | | | | 1,029,028 | |
Government of Indonesia, senior bond, FR70, 8.375%, 3/15/24 | | | Indonesia | | | | 263,000,000 | | | | IDR | | | | 17,226 | |
bHarvest Operations Corp., senior note, 144A, 4.20%, 6/01/23 | | | South Korea | | | | 1,000,000 | | | | | | | | 1,011,285 | |
The Korea Development Bank, senior note, 3.375%, 3/12/23 | | | South Korea | | | | 600,000 | | | | | | | | 590,907 | |
| | | | | | | | | | | | | | | | |
Total Foreign Government and Agency Securities
(Cost $8,220,570) | | | | | | | | | | | | | | | 8,032,326 | |
| | | | | | | | | | | | | | | | |
| | | | |
U.S. Government and Agency Securities 1.0% | | | | | | | | | | | | | | | | |
eU.S. Treasury Note, | | | | | | | | | | | | | | | | |
Index Linked, 0.25%, 1/15/25 | | | United States | | | | 1,426,489 | | | | | | | | 1,355,864 | |
Index Linked, 0.125%, 7/15/26 | | | United States | | | | 2,945,316 | | | | | | | | 2,742,653 | |
| | | | | | | | | | | | | | | | |
Total U.S. Government and Agency Securities
(Cost $4,252,958) | | | | | | | | | | | | | | | 4,098,517 | |
| | | | | | | | | | | | | | | | |
| | | | |
| | | |
18 | | Semiannual Report | | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS (UNAUDITED)
Franklin Flexible Alpha Bond Fund (continued)
| | | | | | | | | | | | | | | | |
| | | Country | | | Principal Amount* | | | | | | Value | |
Asset-Backed Securities and Commercial Mortgage-Backed
Securities 50.2% | | | | | | | | | | | | | | | | |
Banks 0.4% | | | | | | | | | | | | | | | | |
b,fDBCG Mortgage Trust, 2017-BBG, A, 144A, FRN, 2.98%, (1-month USD LIBOR + 0.70%), 6/15/34 | | | United States | | | | 1,500,000 | | | | | | | $ | 1,500,754 | |
fImpac Secured Assets Corp., 2004-4, M1, FRN, 3.046%, (1-month USD LIBOR + 0.765%), 2/25/35 | | | United States | | | | 21,522 | | | | | | | | 21,587 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | 1,522,341 | |
| | | | | | | | | | | | | | | | |
Diversified Financials 49.6% | | | | | | | | | | | | | | | | |
b,fAlinea CLO Ltd., 2018-1A, B, 144A, FRN, 3.957%, (3-month USD LIBOR + 1.65%), 7/20/31 | | | United States | | | | 2,300,000 | | | | | | | | 2,298,873 | |
b,fAMMC CLO 21 Ltd., 2017-21A, C, 144A, FRN, 4.449%, (3-month USD LIBOR + 2.10%), 11/02/30 | | | United States | | | | 400,000 | | | | | | | | 395,408 | |
b,fAntares CLO Ltd., 2018-1A, B, 144A, FRN, 4.119%, (3-month USD LIBOR + 1.65%), 4/20/31 | | | United States | | | | 600,000 | | | | | | | | 600,330 | |
b,fAtrium XIII, | | | | | | | | | | | | | | | | |
2013A, B, 144A, FRN, 3.977%, (3-month USD LIBOR + 1.50%), 11/21/30 | | | United States | | | | 2,000,000 | | | | | | | | 1,996,600 | |
2013A, C, 144A, FRN, 4.277%, (3-month USD LIBOR + 1.80%), 11/21/30 | | | United States | | | | 600,000 | | | | | | | | 595,452 | |
bBAMLL Commercial Mortgage Securities Trust, | | | | | | | | | | | | | | | | |
2012-PARK, A, 144A, 2.959%, 12/10/30 | | | United States | | | | 100,000 | | | | | | | | 98,586 | |
2015-200P, A, 144A, 3.218%, 4/14/33 | | | United States | | | | 600,000 | | | | | | | | 579,876 | |
Banc of America Commercial Mortgage Trust, 2015-UBS7, A4, 3.705%, 9/15/48 | | | United States | | | | 100,000 | | | | | | | | 99,301 | |
b,fBellemeade Re Ltd., 2018-1A, M1B, 144A, FRN, 3.881%, (1-month USD LIBOR + 1.60%), 4/25/28 | | | Bermuda | | | | 1,320,000 | | | | | | | | 1,327,581 | |
gBENCHMARK Mortgage Trust, 2018-B1, A5, FRN, 3.666%, 1/15/51 | | | United States | | | | 1,542,000 | | | | | | | | 1,509,330 | |
b,fBetony CLO 2 Ltd., 2018-1A, C, 144A, FRN, 5.42%, (3-month USD LIBOR + 2.90%), 4/30/31 | | | United States | | | | 500,000 | | | | | | | | 499,500 | |
b,gBlueMountain CLO Ltd., | | | | | | | | | | | | | | | | |
2018-3A, B, 144A, FRN, 4.206%, 10/25/30 | | | United States | | | | 3,000,000 | | | | | | | | 2,999,460 | |
2018-3A, C, 144A, FRN, 4.636%, 10/25/30 | | | United States | | | | 1,428,570 | | | | | | | | 1,428,313 | |
b,h,iBlueMountain CLO XXIII Ltd., | | | | | | | | | | | | | | | | |
2018-23A, B, 144A, FRN, 10/20/31 | | | United States | | | | 1,000,000 | | | | | | | | 1,000,000 | |
2018-23A, C, 144A, FRN, 10/20/31 | | | United States | | | | 694,444 | | | | | | | | 694,444 | |
b,fBlueMountain Fuji U.S. CLO I Ltd., 2017-1A, C, 144A, FRN, 4.819%, (3-month USD LIBOR + 2.35%), 7/20/29 | | | United States | | | | 60,000 | | | | | | | | 60,350 | |
b,fBlueMountain Fuji U.S. CLO II Ltd., 2017-2A, A1A, 144A, FRN, 3.548%, (3-month USD LIBOR + 1.20%), 10/20/30 | | | United States | | | | 250,000 | | | | | | | | 251,245 | |
b,fBlueMountain Fuji U.S. CLO III Ltd., 2017-3A, C, 144A, FRN, 4.039%, (3-month USD LIBOR + 1.70%), 1/15/30 | | | United States | | | | 1,900,000 | | | | | | | | 1,878,245 | |
b,gBX Commercial Mortgage Trust, 2018-IND, A, 144A, FRN, 3.03%, 11/15/35 | | | United States | | | | 1,020,000 | | | | | | | | 1,029,807 | |
bBXP Trust, 2017-GM, A, 144A, 3.379%, 6/13/39 | | | United States | | | | 2,000,000 | | | | | | | | 1,916,055 | |
fCapital One Multi-Asset Execution Trust, 2004-B3, B3, FRN, 3.01%, (1-month USD LIBOR + 0.73%), 1/18/22 | | | United States | | | | 150,000 | | | | | | | | 150,302 | |
b,fCarlyle Global Market Strategies CLO Ltd., | | | | | | | | | | | | | | | | |
2014-4RA, A1B, 144A, FRN, 3.786%, (3-month USD LIBOR + 1.35%), 7/15/30 | | | United States | | | | 2,750,000 | | | | | | | | 2,749,697 | |
2014-4RA, C, 144A, FRN, 5.336%, (3-month USD LIBOR + 2.90%), 7/15/30 | | | United States | | | | 750,000 | | | | | | | | 744,465 | |
| | | | |
| | | |
| franklintempleton.com | | Semiannual Report | | 19 |
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS (UNAUDITED)
Franklin Flexible Alpha Bond Fund (continued)
| | | | | | | | | | | | | | | | |
| | | Country | | | Principal Amount* | | | | | | Value | |
Asset-Backed Securities and Commercial Mortgage-Backed
Securities (continued) | | | | | | | | | | | | | | | | |
Diversified Financials (continued) | | | | | | | | | | | | | | | | |
b,gCarlyle GMS Finance MM CLO LLC, 2015-1A, A2R, 144A, FRN, 4.636%, 10/15/31 | | | United States | | | | 800,000 | | | | | | | $ | 801,400 | |
b,fCarlyle U.S. CLO Ltd., | | | | | | | | | | | | | | | | |
2017-2A, B, 144A, FRN, 4.869%, (3-month USD LIBOR + 2.40%), 7/20/31 | | | United States | | | | 60,000 | | | | | | | | 60,188 | |
2017-4A, B, 144A, FRN, 4.286%, (3-month USD LIBOR + 1.85%), 1/15/30 | | | United States | | | | 1,107,000 | | | | | | | | 1,103,125 | |
2017-4A, C, 144A, FRN, 5.236%, (3-month USD LIBOR + 2.80%), 1/15/30 | | | United States | | | | 400,000 | | | | | | | | 394,088 | |
gCD Mortgage Trust, 2016-CD2, A4, FRN, 3.526%, 11/10/49 | | | United States | | | | 1,500,000 | | | | | | | | 1,459,247 | |
b,gCGRBS Commercial Mortgage Trust, 2013-VN05, C, 144A, FRN, 3.584%, 3/13/35 | | | United States | | | | 450,000 | | | | | | | | 441,086 | |
b,gCIM Trust, 2018-INV1, A4, 144A, FRN, 4.00%, 8/25/48 | | | United States | | | | 1,324,289 | | | | | | | | 1,316,427 | |
b,gColombia Cent CLO 27 Ltd., 2018-27A, A2A, 144A, FRN, 4.899%, 10/25/28 | | | United States | | | | 769,231 | | | | | | | | 769,616 | |
bCOMM Mortgage Trust, | | | | | | | | | | | | | | | | |
g2014-277P, A, 144A, FRN, 3.611%, 8/10/49 | | | United States | | | | 900,000 | | | | | | | | 897,607 | |
2015-3BP, A, 144A, 3.178%, 2/10/35 | | | United States | | | | 600,000 | | | | | | | | 579,054 | |
gConseco Finance Securitizations Corp., 2002-2, M1, FRN, 7.424%, 3/01/33 | | | United States | | | | 66,097 | | | | | | | | 72,303 | |
bCore Industrial Trust, 2015-CALW, A, 144A, 3.04%, 2/10/34 | | | United States | | | | 28,460 | | | | | | | | 28,166 | |
b,fDorchester Park CLO Ltd., 2015-1A, CR, 144A, FRN, 4.219%, (3-month USD LIBOR + 1.75%), 4/20/28 | | | United States | | | | 1,350,000 | | | | | | | | 1,346,760 | |
b,gDryden 38 Senior Loan Fund, 2015-38A, CR, 144A, FRN, 4.436%, 7/15/30 | | | United States | | | | 2,500,000 | | | | | | | | 2,486,675 | |
b,gDryden 45 Senior Loan Fund, | | | | | | | | | | | | | | | | |
2016-45A, A2R, 144A, FRN, 3.836%, 10/15/30 | | | United States | | | | 1,000,000 | | | | | | | | 1,000,040 | |
2016-45A, BR, 144A, FRN, 4.136%, 10/15/30 | | | United States | | | | 1,000,000 | | | | | | | | 1,000,050 | |
2016-45A, CR, 144A, FRN, 4.636%, 10/15/30 | | | United States | | | | 1,250,000 | | | | | | | | 1,250,050 | |
b,fDryden 49 Senior Loan Fund, 2017-49A, C, 144A, FRN, 4.799%, (3-month USD LIBOR + 2.35%), 7/18/30 | | | United States | | | | 60,000 | | | | | | | | 60,127 | |
b,fDryden 53 CLO Ltd., | | | | | | | | | | | | | | | | |
2017-53A, B, 144A, FRN, 3.836%, (3-month USD LIBOR + 1.40%), 1/15/31 | | | United States | | | | 1,000,000 | | | | | | | | 989,900 | |
2017-53A, C, 144A, FRN, 4.136%, (3-month USD LIBOR + 1.70%), 1/15/31 | | | United States | | | | 1,000,000 | | | | | | | | 987,100 | |
b,h,iDryden 61 CLO Ltd., 61A, A2, FRN, 1/17/32 | | | United States | | | | 2,000,000 | | | | | | | | 2,000,000 | |
b,fDryden 64 CLO Ltd., | | | | | | | | | | | | | | | | |
2018-64A, A, 144A, FRN, 3.415%, (3-month USD LIBOR + 0.97%), 4/18/31 | | | United States | | | | 3,000,000 | | | | | | | | 2,985,270 | |
2018-64A, C, 144A, FRN, 4.195%, (3-month USD LIBOR + 1.75%), 4/18/31 | | | United States | | | | 750,000 | | | | | | | | 743,842 | |
b,gEleven Madison Trust Mortgage Trust, 2015-11MD, A, 144A, FRN, 3.555%, 9/10/35 | | | United States | | | | 2,005,000 | | | | | | | | 1,980,105 | |
b,fEllington CLO III Ltd., 2018-3A, A1, 144A, FRN, 4.119%, (3-month USD LIBOR + 1.65%), 7/20/30 | | | United States | | | | 500,000 | | | | | | | | 499,715 | |
fFHLMC Structured Agency Credit Risk Debt Notes, | | | | | | | | | | | | | | | | |
2014-DN1, M2, FRN, 4.481%, (1-month USD LIBOR + 2.20%), 2/25/24 | | | United States | | | | 430,828 | | | | | | | | 442,130 | |
2014-DN2, M3, FRN, 5.881%, (1-month USD LIBOR + 3.60%), 4/25/24 | | | United States | | | | 2,000,000 | | | | | | | | 2,206,550 | |
2014-DN3, M3, FRN, 6.281%, (1-month USD LIBOR + 4.00%), 8/25/24 | | | United States | | | | 203,490 | | | | | | | | 221,225 | |
2014-DN4, M3, FRN, 6.831%, (1-month USD LIBOR + 4.55%), 10/25/24 | | | United States | | | | 1,703,728 | | | | | | | | 1,884,060 | |
2014-HQ2, M2, FRN, 4.481%, (1-month USD LIBOR + 2.20%), 9/25/24 | | | United States | | | | 430,224 | | | | | | | | 442,267 | |
2014-HQ2, M3, FRN, 6.031%, (1-month USD LIBOR + 3.75%), 9/25/24 | | | United States | | | | 2,500,000 | | | | | | | | 2,865,922 | |
2014-HQ3, M3, FRN, 7.031%, (1-month USD LIBOR + 4.75%), 10/25/24 | | | United States | | | | 270,871 | | | | | | | | 299,151 | |
2015-DN1, M3, FRN, 6.431%, (1-month USD LIBOR + 4.15%), 1/25/25 | | | United States | | | | 681,604 | | | | | | | | 730,312 | |
2015-DNA1, M2, FRN, 4.131%, (1-month USD LIBOR + 1.85%), 10/25/27 | | | United States | | | | 213,380 | | | | | | | | 216,811 | |
2015-DNA1, M3, FRN, 5.581%, (1-month USD LIBOR + 3.30%), 10/25/27 | | | United States | | | | 2,000,000 | | | | | | | | 2,239,388 | |
2015-DNA2, M2, FRN, 4.881%, (1-month USD LIBOR + 2.60%), 12/25/27 | | | United States | | | | 126,898 | | | | | | | | 129,365 | |
2015-DNA2, M3, FRN, 6.181%, (1-month USD LIBOR + 3.90%), 12/25/27 | | | United States | | | | 2,850,000 | | | | | | | | 3,144,406 | |
2015-DNA3, M2, FRN, 5.131%, (1-month USD LIBOR + 2.85%), 4/25/28 | | | United States | | | | 433,386 | | | | | | | | 447,388 | |
2015-DNA3, M3, FRN, 6.981%, (1-month USD LIBOR + 4.70%), 4/25/28 | | | United States | | | | 2,500,000 | | | | | | | | 2,958,575 | |
| | | | |
| | | |
20 | | Semiannual Report | | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS (UNAUDITED)
Franklin Flexible Alpha Bond Fund (continued)
| | | | | | | | | | | | | | | | |
| | | Country | | | Principal Amount* | | | | | | Value | |
Asset-Backed Securities and Commercial Mortgage-Backed
Securities (continued) | | | | | | | | | | | | | | | | |
Diversified Financials (continued) | | | | | | | | | | | | | | | | |
fFHLMC Structured Agency Credit Risk Debt Notes, (continued) | | | | | | | | | | | | | | | | |
2015-HQ1, M2, FRN, 4.487%, (1-month USD LIBOR + 2.20%), 3/25/25 | | | United States | | | | 84,178 | | | | | | | $ | 84,403 | |
2015-HQ1, M3, FRN, 6.087%, (1-month USD LIBOR + 3.80%), 3/25/25 | | | United States | | | | 550,000 | | | | | | | | 583,058 | |
2015-HQ2, M3, FRN, 5.537%, (1-month USD LIBOR + 3.25%), 5/25/25 | | | United States | | | | 1,500,000 | | | | | | | | 1,669,014 | |
2015-HQA1, M3, FRN, 6.981%, (1-month USD LIBOR + 4.70%), 3/25/28 | | | United States | | | | 2,000,000 | | | | | | | | 2,277,563 | |
2015-HQA2, M2, FRN, 5.081%, (1-month USD LIBOR + 2.80%), 5/25/28 | | | United States | | | | 272,839 | | | | | | | | 280,170 | |
2015-HQA2, M3, FRN, 7.081%, (1-month USD LIBOR + 4.80%), 5/25/28 | | | United States | | | | 2,000,000 | | | | | | | | 2,312,272 | |
2016-DNA1, M3, FRN, 7.837%, (1-month USD LIBOR + 5.55%), 7/25/28 | | | United States | | | | 1,550,000 | | | | | | | | 1,865,316 | |
2016-DNA2, M2, FRN, 4.481%, (1-month USD LIBOR + 2.20%), 10/25/28 | | | United States | | | | 300,946 | | | | | | | | 303,842 | |
2016-DNA2, M3, FRN, 6.931%, (1-month USD LIBOR + 4.65%), 10/25/28 | | | United States | | | | 1,800,000 | | | | | | | | 2,066,134 | |
2016-DNA3, M2, FRN, 4.281%, (1-month USD LIBOR + 2.00%), 12/25/28 | | | United States | | | | 311,101 | | | | | | | | 314,624 | |
2016-HQA2, M2, FRN, 4.531%, (1-month USD LIBOR + 2.25%), 11/25/28 | | | United States | | | | 455,537 | | | | | | | | 464,825 | |
2016-HQA2, M3, FRN, 7.431%, (1-month USD LIBOR + 5.15%), 11/25/28 | | | United States | | | | 2,000,000 | | | | | | | | 2,349,024 | |
2016-HQA3, M1, FRN, 3.081%, (1-month USD LIBOR + 0.80%), 3/25/29 | | | United States | | | | 110,793 | | | | | | | | 110,870 | |
2016-HQA3, M2, FRN, 3.631%, (1-month USD LIBOR + 1.35%), 3/25/29 | | | United States | | | | 2,350,000 | | | | | | | | 2,384,981 | |
2016-HQA4, M2, FRN, 3.581%, (1-month USD LIBOR + 1.30%), 4/25/29 | | | United States | | | | 700,000 | | | | | | | | 708,386 | |
2013-DN2, M2, FRN, 6.531%, (1-month USD LIBOR + 4.25%), 11/25/23 | | | United States | | | | 1,835,477 | | | | | | | | 2,030,484 | |
b,fFlagship CLO VIII Ltd., 2014-8A, CRR, 144A, FRN, 4.236%, (3-month USD LIBOR + 1.80%), 1/16/26 | | | United States | | | | 1,400,000 | | | | | | | | 1,394,568 | |
b,gFlagstar Mortgage Trust, 2018-6RR, 1A3, 144A, FRN, 4.00%, 10/25/48 | | | United States | | | | 1,450,000 | | | | | | | | 1,452,890 | |
fFNMA Connecticut Avenue Securities, | | | | | | | | | | | | | | | | |
2013-C01, M1, FRN, 4.281%, (1-month USD LIBOR + 2.00%), 10/25/23 | | | United States | | | | 1,572 | | | | | | | | 1,574 | |
2013-C01, M2, FRN, 7.531%, (1-month USD LIBOR + 5.25%), 10/25/23 | | | United States | | | | 2,000,000 | | | | | | | | 2,291,768 | |
2014-C01, M2, FRN, 6.681%, (1-month USD LIBOR + 4.40%), 1/25/24 | | | United States | | | | 3,300,000 | | | | | | | | 3,736,180 | |
2014-C02, 1M2, FRN, 4.881%, (1-month USD LIBOR + 2.60%), 5/25/24 | | | United States | | | | 1,820,000 | | | | | | | | 1,935,890 | |
2014-C02, 2M2, FRN, 4.881%, (1-month USD LIBOR + 2.60%), 5/25/24 | | | United States | | | | 2,819,215 | | | | | | | | 2,984,871 | |
2014-C03, 1M2, FRN, 5.281%, (1-month USD LIBOR + 3.00%), 7/25/24 | | | United States | | | | 1,313,579 | | | | | | | | 1,400,270 | |
2014-C03, 2M2, FRN, 5.181%, (1-month USD LIBOR + 2.90%), 7/25/24 | | | United States | | | | 2,665,343 | | | | | | | | 2,850,286 | |
2014-C04, 1M1, FRN, 7.181%, (1-month USD LIBOR + 4.90%), 11/25/24 | | | United States | | | | 714,333 | | | | | | | | 816,783 | |
2014-C04, 2M2, FRN, 7.281%, (1-month USD LIBOR + 5.00%), 11/25/24 | | | United States | | | | 498,779 | | | | | | | | 562,583 | |
2015-C01, 1M2, FRN, 6.581%, (1-month USD LIBOR + 4.30%), 2/25/25 | | | United States | | | | 32,410 | | | | | | | | 35,588 | |
2015-C01, 2M2, FRN, 6.831%, (1-month USD LIBOR + 4.55%), 2/25/25 | | | United States | | | | 129,896 | | | | | | | | 140,160 | |
2015-C02, 1M2, FRN, 6.281%, (1-month USD LIBOR + 4.00%), 5/25/25 | | | United States | | | | 468,090 | | | | | | | | 513,465 | |
2015-C02, 2M2, FRN, 6.281%, (1-month USD LIBOR + 4.00%), 5/25/25 | | | United States | | | | 147,746 | | | | | | | | 159,401 | |
2015-C03, 1M2, FRN, 7.281%, (1-month USD LIBOR + 5.00%), 7/25/25 | | | United States | | | | 2,786,680 | | | | | | | | 3,137,063 | |
2015-C03, 2M2, FRN, 7.281%, (1-month USD LIBOR + 5.00%), 7/25/25 | | | United States | | | | 731,959 | | | | | | | | 813,727 | |
2016-C01, 1M2, FRN, 9.031%, (1-month USD LIBOR + 6.75%), 8/25/28 | | | United States | | | | 2,666,493 | | | | | | | | 3,200,770 | |
2017-C01, 1B1, FRN, 8.031%, (1-month USD LIBOR + 5.75%), 7/25/29 | | | United States | | | | 33,000 | | | | | | | | 39,898 | |
2018-C04, 2M1, FRN, 3.031%, (1-month USD LIBOR + 0.75%), 12/25/30 | | | United States | | | | 757,865 | | | | | | | | 758,182 | |
b,gFREMF Mortgage Trust, 2018-K72, B, 144A, FRN, 3.992%, 12/25/50 | | | United States | | | | 450,000 | | | | | | | | 432,511 | |
b,h,iGalaxy XXVI CLO Ltd., | | | | | | | | | | | | | | | | |
2018-26A, A, 144A, FRN, 11/22/31 | | | United States | | | | 685,921 | | | | | | | | 685,921 | |
2018-26A, B, 144A, FRN, 11/22/31 | | | United States | | | | 600,000 | | | | | | | | 600,000 | |
b,fGalaxy XXVII CLO Ltd., | | | | | | | | | | | | | | | | |
2018-27A, A, 144A, FRN, 3.335%, (3-month USD LIBOR + 1.02%), 5/16/31 | | | United States | | | | 2,500,000 | | | | | | | | 2,488,800 | |
2018-27A, C, 144A, FRN, 4.115%, (3-month USD LIBOR + 1.80%), 5/16/31 | | | United States | | | | 1,450,000 | | | | | | | | 1,448,608 | |
2018-27A, C, 144A, FRN, 5.065%, (3-month USD LIBOR + 2.75%), 5/16/31 | | | United States | | | | 300,000 | | | | | | | | 298,965 | |
b,fGilbert Park CLO Ltd., | | | | | | | | | | | | | | | | |
2017-1A, B, 144A, FRN, 4.036%, (3-month USD LIBOR + 1.60%), 10/15/30 | | | United States | | | | 3,000,000 | | | | | | | | 3,001,650 | |
2017-1A, D, 144A, FRN, 5.386%, (3-month USD LIBOR + 2.95%), 10/15/30 | | | United States | | | | 400,000 | | | | | | | | 400,500 | |
| | | | |
| | | |
| franklintempleton.com | | Semiannual Report | | 21 |
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS (UNAUDITED)
Franklin Flexible Alpha Bond Fund (continued)
| | | | | | | | | | |
| | | Country | | Principal
Amount* | | | Value | |
Asset-Backed Securities and Commercial Mortgage-Backed Securities (continued) | | | | | | | | | | |
Diversified Financials (continued) | | | | | | | | | | |
GS Mortgage Securities Trust, | | | | | | | | | | |
2016-GS3, A4, 2.85%, 10/10/49 | | United States | | | 600,000 | | | $ | 558,455 | |
2017-GS5, A4, 3.674%, 3/10/50 | | United States | | | 2,600,000 | | | | 2,552,273 | |
2017-GS6, A3, 3.433%, 5/10/50 | | United States | | | 2,000,000 | | | | 1,923,658 | |
b,fHalcyon Loan Advisors Funding Ltd., 2018-1A, A2, 144A, FRN, 4.183%, (3-month USD LIBOR + 1.80%), 7/21/31 | | United States | | | 400,000 | | | | 398,752 | |
bInvitation Homes Trust, | | | | | | | | | | |
f 2017-SFR2, A, 144A, FRN, 3.14%, (1-month USD LIBOR + 0.85%), 12/17/36 | | United States | | | 3,345,149 | | | | 3,353,808 | |
f 2018-SFR1, A, 144A, FRN, 2.99%, (1-month USD LIBOR + 0.70%), 3/17/37 | | United States | | | 1,588,306 | | | | 1,588,326 | |
f 2018-SFR3, A, 144A, FRN, 3.29%, (1-month USD LIBOR + 1.00%), 7/17/37 | | United States | | | 1,129,791 | | | | 1,130,530 | |
g,h 2018-SFR4, A, 144A, FRN, 3.35%, 1/17/38 | | United States | | | 1,370,000 | | | | 1,370,000 | |
b,gJ.P. Morgan Chase Commercial Mortgage Securities Trust, 2016-NINE, A, 144A, FRN, 2.854%, 10/06/38 | | United States | | | 600,000 | | | | 556,104 | |
JPMBB Commercial Mortgage Securities Trust, | | | | | | | | | | |
2015-C30, A5, 3.822%, 7/15/48 | | United States | | | 1,500,000 | | | | 1,496,731 | |
g 2015-C30, AS, FRN, 4.226%, 7/15/48 | | United States | | | 450,000 | | | | 452,855 | |
2016-C1, A5, 3.576%, 3/15/49 | | United States | | | 1,500,000 | | | | 1,468,565 | |
JPMCC Commercial Mortgage Securities Trust, 2017-JP6, A5, 3.49%, 7/15/50 | | United States | | | 2,100,000 | | | | 2,024,547 | |
g,jJPMDB Commercial Mortgage Securities Trust, 2017-C5, XA, IO, FRN, 1.018%, 3/15/50 | | United States | | | 196,407 | | | | 12,034 | |
b,fLCM 26 Ltd., 26A, C, 144A, FRN, 4.269%, (3-month USD LIBOR + 1.80%), 1/20/31 | | United States | | | 400,000 | | | | 395,596 | |
b,h,iLCM 28 Ltd., | | | | | | | | | | |
28A, B, 144A, FRN, 10/20/30 | | United States | | | 1,000,000 | | | | 1,000,000 | |
28A, C, 144A, FRN, 10/20/30 | | United States | | | 500,000 | | | | 500,000 | |
b,fLong Point Park CLO Ltd., | | | | | | | | | | |
2017-1A, A2, 144A, FRN, 3.824%, (3-month USD LIBOR + 1.375%), 1/17/30 | | United States | | | 1,000,000 | | | | 991,220 | |
2017-1A, B, 144A, FRN, 4.149%, (3-month USD LIBOR + 1.70%), 1/17/30 | | United States | | | 1,000,000 | | | | 982,140 | |
b,h,iMadison Park Funding XXIX Ltd., | | | | | | | | | | |
2018-29A, A2, 144A, FRN, 10/18/30 | | United States | | | 1,468,182 | | | | 1,468,182 | |
2018-29A, B, 144A, FRN, 10/18/30 | | United States | | | 3,000,000 | | | | 3,000,000 | |
2018-29A, C, 144A, FRN, 10/18/30 | | United States | | | 766,129 | | | | 766,129 | |
2018-29A, D, 144A, FRN, 10/18/30 | | United States | | | 600,000 | | | | 600,000 | |
b,gMadison Park Funding XIV Ltd., | | | | | | | | | | |
2014-14A, A2RR, 144A, FRN, 3.869%, 10/22/30 | | United States | | | 1,000,000 | | | | 999,940 | |
2014-14A, BRR, 144A, FRN, 4.169%, 10/22/30 | | United States | | | 1,500,000 | | | | 1,499,580 | |
2014-14A, CRR, 144A, FRN, 4.669%, 10/22/30 | | United States | | | 562,500 | | | | 562,331 | |
b,fMagnetite XVIII Ltd., 2016-18A, C, 144A, FRN, 4.664%, (3-month USD LIBOR + 2.35%), 11/15/28 | | United States | | | 1,867,000 | | | | 1,868,662 | |
b,gMill City Mortgage Loan Trust, 2018-1, A1, 144A, FRN, 3.25%, 5/25/62 | | United States | | | 2,358,529 | | | | 2,337,534 | |
bMorgan Stanley Capital I Trust, 2014-150E, A, 144A, 3.912%, 9/09/32 | | United States | | | 450,000 | | | | 449,835 | |
b,fNeuberger Berman Loan Advisers CLO Ltd., 2017-26A, B, 144A, FRN, 3.945%, (3-month USD LIBOR + 1.50%), 10/18/30 | | United States | | | 539,475 | | | | 536,540 | |
b,fOctagon Investment Partners 18-R Ltd., 2018-18A, C, 144A, FRN, 5.136%, (3-month USD LIBOR + 2.70%), 4/16/31 | | United States | | | 350,000 | | | | 347,039 | |
b,gOctagon Investment Partners 27 Ltd., 2016-1A, CR, 144A, FRN, 4.536%, 7/15/30 | | United States | | | 1,565,000 | | | | 1,562,715 | |
| | | | |
| | | |
22 | | Semiannual Report | | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS (UNAUDITED)
Franklin Flexible Alpha Bond Fund (continued)
| | | | | | | | | | |
| | | Country | | Principal
Amount* | | | Value | |
Asset-Backed Securities and Commercial Mortgage-Backed Securities (continued) | | | | | | | | | | |
Diversified Financials (continued) | | | | | | | | | | |
b,fOctagon Investment Partners 33 Ltd., | | | | | | | | | | |
2017-1A, A2, 144A, FRN, 3.969%, (3-month USD LIBOR + 1.50%), 1/20/31 | | United States | | | 2,000,000 | | | $ | 1,992,740 | |
2017-1A, B, 144A, FRN, 4.319%, (3-month USD LIBOR + 1.85%), 1/20/31 | | United States | | | 500,000 | | | | 495,710 | |
2017-1A, C, 144A, FRN, 5.219%, (3-month USD LIBOR + 2.75%), 1/20/31 | | United States | | | 250,000 | | | | 248,297 | |
b,fOctagon Investment Partners XX Ltd., 2014-1A, AR, 144A, FRN, 3.468%, (3-month USD LIBOR + 1.13%), 8/12/26 | | United States | | | 500,000 | | | | 500,660 | |
b,fOctagon Investment Partners XXIII Ltd., | | | | | | | | | | |
2015-1A, BR, 144A, FRN, 3.636%, (3-month USD LIBOR + 1.20%), 7/15/27 | | United States | | | 1,200,000 | | | | 1,198,836 | |
2015-1A, CR, 144A, FRN, 4.286%, (3-month USD LIBOR + 1.85%), 7/15/27 | | United States | | | 2,000,000 | | | | 2,002,640 | |
2015-1A, DR, 144A, FRN, 4.986%, (3-month USD LIBOR + 2.55%), 7/15/27 | | United States | | | 300,000 | | | | 298,491 | |
bProgress Residential Trust, 2018-SFR2, A, 144A, 3.712%, 8/17/35 | | United States | | | 290,000 | | | | 287,100 | |
b,gRace Point X CLO Ltd., 2016-10A, C1R, 144A, FRN, 4.49%, 7/25/31 | | United States | | | 1,700,000 | | | | 1,694,645 | |
b,fRadnor RE Ltd., 2018-1, M1, 144A, FRN, 3.681%, (1-month USD LIBOR + 1.40%), 3/25/28 | | United States | | | 630,000 | | | | 631,269 | |
b,fTCI-Cent CLO Income Note Issuer Ltd., 2017-1A, B, 144A, FRN, 4.84%, (3-month USD LIBOR + 2.35%), 7/25/30 | | United States | | | 2,000,000 | | | | 2,007,460 | |
bTCI-Flatiron CLO Ltd., | | | | | | | | | | |
g2017-1A, A, 144A, FRN, 3.512%, 11/17/30 | | United States | | | 2,000,000 | | | | 2,001,520 | |
f2017-1A, B, 144A, FRN, 3.872%, (3-month USD LIBOR + 1.56%), 11/17/30 | | United States | | | 2,000,000 | | | | 1,994,060 | |
f2017-1A, C, 144A, FRN, 4.162%, (3-month USD LIBOR + 1.85%), 11/17/30 | | United States | | | 1,200,000 | | | | 1,190,196 | |
f2017-1A, D, 144A, FRN, 5.062%, (3-month USD LIBOR + 2.75%), 11/17/30 | | United States | | | 250,000 | | | | 246,660 | |
gThornburg Mortgage Securities Trust, 2005-1, A3, FRN, 3.518%, 4/25/45 | | United States | | | 26,673 | | | | 26,989 | |
bTowd Point Mortgage Trust, | | | | | | | | | | |
g2015-2, 2A1, 144A, FRN, 3.75%, 11/25/57 | | United States | | | 385,264 | | | | 385,782 | |
g2016-3, A1, 144A, FRN, 2.25%, 4/25/56 | | United States | | | 1,919,268 | | | | 1,877,366 | |
g2016-4, A1, 144A, FRN, 2.25%, 7/25/56 | | United States | | | 1,215,792 | | | | 1,183,846 | |
g 2016-5, A1, 144A, FRN, 2.50%, 10/25/56 | | United States | | | 468,775 | | | | 457,463 | |
g2017-1, A1, 144A, FRN, 2.75%, 10/25/56 | | United States | | | 1,421,414 | | | | 1,392,526 | |
g2017-2, A1, 144A, FRN, 2.75%, 4/25/57 | | United States | | | 1,390,986 | | | | 1,362,446 | |
g2017-4, A1, 144A, FRN, 2.75%, 6/25/57 | | United States | | | 272,917 | | | | 265,728 | |
f2017-5, A1, 144A, FRN, 2.887%, (1-month USD LIBOR + 0.60%), 2/25/57 | | United States | | | 159,816 | | | | 160,038 | |
g2018-1, A1, 144A, FRN, 3.00%, 1/25/58 | | United States | | | 620,657 | | | | 608,420 | |
g2018-2, A1, 144A, FRN, 3.25%, 3/25/58 | | United States | | | 302,008 | | | | 298,063 | |
g2018-4, A1, 144A, FRN, 3.00%, 6/25/58 | | United States | | | 1,959,199 | | | | 1,903,975 | |
g2018-5, A1A, 144A, FRN, 3.25%, 7/25/58 | | United States | | | 652,576 | | | | 645,038 | |
bVoya CLO Ltd., | | | | | | | | | | |
f2013-2A, A1R, 144A, FRN, 3.46%, (3-month USD LIBOR + 0.97%), 4/25/31 | | United States | | | 2,000,000 | | | | 1,990,000 | |
f2013-2A, BR, 144A, FRN, 4.34%, (3-month USD LIBOR + 1.85%), 4/25/31 | | United States | | | 2,000,000 | | | | 1,990,600 | |
f2014-1A, BR2, 144A, FRN, 4.345%, (3-month USD LIBOR + 1.90%), 4/18/31 | | United States | | | 2,750,000 | | | | 2,746,700 | |
g2016-3A, A2R, 144A, FRN, 3.871%, 10/18/31 | | United States | | | 1,636,364 | | | | 1,636,364 | |
f2017-2A, B, 144A, FRN, 4.786%, (3-month USD LIBOR + 2.35%), 6/07/30 | | United States | | | 1,000,000 | | | | 1,002,770 | |
| | | | |
| | | |
| franklintempleton.com | | Semiannual Report | | 23 |
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS (UNAUDITED)
Franklin Flexible Alpha Bond Fund (continued)
| | | | | | | | | | |
| | | Country | | Principal
Amount* | | | Value | |
Asset-Backed Securities and Commercial Mortgage-Backed Securities (continued) | | | | | | | | | | |
Diversified Financials (continued) | | | | | | | | | | |
b,fWebster Park CLO Ltd., 2015-1A, BR, 144A, FRN, 4.269%, (3-month USD LIBOR + 1.80%), 7/20/30 | | United States | | | 2,000,000 | | | $ | 1,993,660 | |
Wells Fargo Commercial Mortgage Trust, 2016-NXS6, A4, 2.918%, 11/15/49 | | United States | | | 1,500,000 | | | | 1,400,227 | |
b,gWells Fargo Mortgage Backed Securities, 2018-1, A3, 144A, FRN, 3.50%, 7/25/47 | | United States | | | 910,000 | | | | 895,985 | |
b,fWest CLO Ltd., 2014-1A, A2R, 144A, FRN, 3.795%, (3-month USD LIBOR + 1.35%), 7/18/26 | | United States | | | 170,000 | | | | 170,000 | |
| | | | | | | | | | |
| | | | | | | | | 205,708,900 | |
| | | | | | | | | | |
Real Estate 0.2% | | | | | | | | | | |
b American Homes 4 Rent, 2014-SFR3, A, 144A, 3.678%, 12/17/36 | | United States | | | 754,475 | | | | 746,086 | |
b,f Colony American Homes, 2015-1A, A, 144A, FRN, 3.487%, (1-month USD LIBOR + 1.20%), 7/17/32 | | United States | | | 100,589 | | | | 100,678 | |
| | | | | | | | | | |
| | | | | | | | | 846,764 | |
| | | | | | | | | | |
Total Asset-Backed Securities and Commercial Mortgage-Backed Securities (Cost $209,277,277) | | | | | | | | | 208,078,005 | |
| | | | | | | | | | |
Mortgage-Backed Securities (Cost $258,612) 0.1% | | | | | | | | | | |
Federal National Mortgage Association (FNMA) Fixed Rate 0.1% | | | | | | | | | | |
FNMA, 3.50%, 7/01/56 | | United States | | | 251,403 | | | | 244,228 | |
| | | | | | | | | | |
Municipal Bonds 0.2% | | | | | | | | | | |
Cincinnati GO, Various Purpose, Improvement and Refunding, Series A, 5.00%, 12/01/25 | | United States | | | 100,000 | | | | 113,844 | |
Citizens Property Insurance Corp. Revenue, Coastal Account, senior secured, Series A-1, 5.00%, 6/01/22 | | United States | | | 125,000 | | | | 134,748 | |
Colorado State Board of Governors University Enterprise System Revenue, Green Bonds, Series E-2, 5.00%, 3/01/25 | | United States | | | 100,000 | | | | 114,173 | |
Orlando Health Obligated Group, 3.777%, 10/01/28 | | United States | | | 105,000 | | | | 102,049 | |
Providence St. Joseph Health Obligated Group, 2.746%, 10/01/26 | | United States | | | 15,000 | | | | 13,751 | |
San Jose RDA Successor Agency Tax Allocation, Senior, Refunding, Series A-T, 3.226%, 8/01/27 | | United States | | | 190,000 | | | | 182,119 | |
Teays Valley Local School District GO, Pickaway Fairfield and Franklin Counties, Refunding, 4.00%, 12/01/26 | | United States | | | 100,000 | | | | 105,256 | |
Texas State GO, Transportation Commission Highway Improvement, Series A, 5.00%, 4/01/21 | | United States | | | 5,000 | | | | 5,332 | |
| | | | | | | | | | |
Total Municipal Bonds (Cost $782,888) | | | | | | | | | 771,272 | |
| | | | | | | | | | |
| | | |
| | | Number of Contracts | | Notional
Amount* | | | | |
Options Purchased 0.1% | | | | | | | | | | |
Puts - Over-the-Counter | | | | | | | | | | |
Credit Default Swaptions 0.1% | | | | | | | | | | |
Buy protection on CDX.NA.HY.31, Premium Rate 5.00%, Strike Price $106.50, Counterparty SMB, Expires 2/20/19 | | 1 | | | 7,000,000 | | | | 202,811 | |
Buy Protection on CDX.NA.IG.30, Premium Rate 1.00%, Strike Price $60, Counterparty JPHQ, Expires 12/19/18 | | 1 | | | 13,000,000 | | | | 37,076 | |
Buy protection on CDX.NA.IG.30, Premium Rate 1.00%, Strike Price $62.50, Counterparty SMB, Expires 11/21/18 | | 1 | | | 8,750,000 | | | | 13,825 | |
| | | | | | | | | | |
| | | | | | | | | 253,712 | |
| | | | | | | | | | |
| | | | |
| | | |
24 | | Semiannual Report | | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS (UNAUDITED)
Franklin Flexible Alpha Bond Fund (continued)
| | | | | | | | | | | | |
| | | Number of
Contracts | | | Notional
Amount* | | | Value | |
Options Purchased (continued) | | | | | | | | | | | | |
Puts - Over-the-Counter (continued) | | | | | | | | | | | | |
Interest Rate Swaptions 0.0%† | | | | | | | | | | | | |
Receive float 1 year USD LIBOR, Pay fixed 3.60%, Counterparty SMB, Expires 1/22/19 | | | 1 | | | | 13,500,000 | | | $ | 124,119 | |
Receive float 3 month USD LIBOR, Pay fixed 3.42%, Counterparty SMB, Expires 2/05/19 | | | 1 | | | | 8,000,000 | | | | 40,904 | |
| | | | | | | | | | | | |
| | | | | | | | | | | 165,023 | |
| | | | | | | | | | | | |
Total Options Purchased (Cost $319,777) | | | | | | | | | | | 418,735 | |
| | | | | | | | | | | | |
Total Investments before Short Term Investments
(Cost $338,979,553) | | | | | | | | | | | 333,927,844 | |
| | | | | | | | | | | | |
| | | |
| | | Country | | | Principal
Amount* | | | | |
Short Term Investments 24.2% | | | | | | | | | | | | |
| | | |
Corporate Bonds (Cost $300,851) 0.0%† | | | | | | | | | | | | |
Diversified Financials 0.0%† | | | | | | | | | | | | |
Navient Corp., senior note, 5.50%, 1/15/19 | | | United States | | | | 300,000 | | | | 301,500 | |
| | | | | | | | | | | | |
Total Investments before Money Market Funds
(Cost $339,280,404) | | | | | | | | | | | 334,229,344 | |
| | | | | | | | | | | | |
| | | |
| | | | | | Shares | | | | |
Money Market Funds (Cost $100,219,262) 24.2% | | | | | | | | | | | | |
k,lInstitutional Fiduciary Trust Money Market Portfolio, 1.83% | | | United States | | | | 100,219,262 | | | | 100,219,262 | |
| | | | | | | | | | | | |
Total Investments (Cost $439,499,666) 104.8% | | | | | | | | | | | 434,448,606 | |
Options Written (0.0)%† | | | | | | | | | | | (123,469 | ) |
TBA Sale Commitments (0.1)% | | | | | | | | | | | (292,066 | ) |
Other Assets, less Liabilities (4.7)% | | | | | | | | | | | (19,573,538 | ) |
| | | | | | | | | | | | |
Net Assets 100.0% | | | | | | | | | | $ | 414,459,533 | |
| | | | | | | | | | | | |
| | | |
| | | | | | Principal
Amount* | | | | |
TBA Sale Commitments (Proceeds $293,344) (0.1)% | | | | | | | | | | | | |
Federal National Mortgage Association (FNMA) Fixed Rate (0.1)% | | | | | | | | | | | | |
mFNMA 30 Year, 3.50%, 10/01/48 | | | United States | | | | 300,000 | | | $ | (292,066 | ) |
| | | | | | | | | | | | |
| | | | |
| | | |
| franklintempleton.com | | Semiannual Report | | 25 |
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS (UNAUDITED)
Franklin Flexible Alpha Bond Fund (continued)
| | | | | | | | | | | | |
| | | Number of
Contracts | | | Notional
Amount* | | | Value | |
nOptions Written (0.0)%† | | | | | | | | | | | | |
Puts - Over-the-Counter | | | | | | | | | | | | |
Credit Default Swaptions (0.0)%† | | | | | | | | | | | | |
Buy protection on CDX.NA.HY.31, Premium Rate 5.00%, Strike Price $104.50, Counterparty SMB, Expires 2/20/19 | | | 1 | | | | 7,000,000 | | | $ | (111,594 | ) |
Buy Protection on CDX.NA.IG.30, Premium Rate 1.00%, Strike Price $75, Counterparty JPHQ, Expires 12/19/18 | | | 1 | | | | 13,000,000 | | | | (10,361 | ) |
Buy protection on CDX.NA.IG.30, Premium Rate 1.00%, Strike Price $80, Counterparty SMB, Expires 11/21/18 | | | 1 | | | | 8,750,000 | | | | (1,514 | ) |
| | | | | | | | | | | | |
Total Options Written (Premiums received $62,463) | | | | | | | | | | $ | (123,469 | ) |
| | | | | | | | | | | | |
†Rounds to less than 0.1% of net assets.
*The principal/notional amount is stated in U.S. dollars unless otherwise indicated.
aSecurity was purchased pursuant to Regulation S under the Securities Act of 1933, which exempts from registration securities offered and sold outside of the United States. Such a security cannot be sold in the United States without either an effective registration statement filed pursuant to the Securities Act of 1933, or pursuant to an exemption from registration. These securities have been deemed liquid under guidelines approved by the Trust’s Board of Trustees. At October 31, 2018, the aggregate value of these securities was $17,408,240, representing 4.2% of net assets.
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 Trust’s Board of Trustees. At October 31, 2018, the aggregate value of these securities was $164,300,319, representing 39.6% of net assets.
cThe coupon rate shown represents the rate at period end.
dPerpetual security with no stated maturity date.
ePrincipal amount of security is adjusted for inflation. See Note 1(h).
fThe coupon rate shown represents the rate inclusive of any caps or floors, if applicable, in effect at period end.
gAdjustable 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. The coupon rate shown represents the rate at period end.
hSecurity purchased on a when-issued basis. See Note 1(c).
iThe coupon rate will be determined at time of issue.
jInvestment 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.
kSee Note 3(f) regarding investments in affiliated management investment companies.
lThe rate shown is the annualized seven-day effective yield at period end.
mSecurity sold on a to-be-announced (TBA) basis resulting in a short position. As such, the Fund is not subject to fees and expenses associated with short sale transactions.
nSee Note 1(d) regarding written options.
| | | | |
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26 | | Semiannual Report | | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS (UNAUDITED)
Franklin Flexible Alpha Bond Fund (continued)
At October 31, 2018, 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 | | | | | | | | | | | | | | | | | | | | |
Australian 10 Yr. Bond | | | Long | | | | 63 | | | $ | 5,771,100 | | | | 12/17/18 | | | | $ 10,572 | |
Canadian 10 Yr. Bond | | | Long | | | | 55 | | | | 5,522,357 | | | | 12/18/18 | | | | (53,369 | ) |
Euro-Bund | | | Short | | | | 69 | | | | 12,520,352 | | | | 12/06/18 | | | | (67,518 | ) |
U.S. Treasury 2 Yr. Note | | | Short | | | | 308 | | | | 64,882,125 | | | | 12/31/18 | | | | 125,886 | |
U.S. Treasury 5 Yr. Note | | | Short | | | | 308 | | | | 34,613,906 | | | | 12/31/18 | | | | 177,023 | |
U.S. Treasury 10 Yr. Note | | | Short | | | | 187 | | | | 22,147,813 | | | | 12/19/18 | | | | 171,974 | |
Ultra 10 Yr. U.S. Treasury Note | | | Long | | | | 11 | | | | 1,376,203 | | | | 12/19/18 | | | | (32,685 | ) |
| | | | | | | | | | | | | | | | | | | | |
Total Futures Contracts | | | | | | | | | | | | | | | | | | | $331,883 | |
| | | | | | | | | | | | | | | | | | | | |
*As of period end.
At October 31, 2018, the Fund had the following forward exchange contracts outstanding. See Note 1(d).
Forward Exchange Contracts
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Currency | | Counterpartya | | | Type | | | Quantity | | | Contract Amount* | | | Settlement Date | | | Unrealized Appreciation | | | Unrealized Depreciation | |
OTC Forward Exchange Contracts | | | | | | | | | | | | | | | | | | | | | | | | | |
Canadian Dollar | | | UBSW | | | | Buy | | | | 26,000 | | | | 27,915 | AUD | | | 11/02/18 | | | $ | — | | | $ | (5 | ) |
Canadian Dollar | | | UBSW | | | | Sell | | | | 26,000 | | | | 26,805 | AUD | | | 11/02/18 | | | | — | | | | (781 | ) |
Indonesian Rupiah | | | JPHQ | | | | Buy | | | | 16,736,500,000 | | | | 1,124,182 | | | | 11/27/18 | | | | — | | | | (28,758 | ) |
Mexican Peso | | | RBS | | | | Buy | | | | 23,658,000 | | | | 1,232,197 | | | | 11/28/18 | | | | — | | | | (73,047 | ) |
Philippine Peso | | | JPHQ | | | | Sell | | | | 67,100,000 | | | | 1,233,972 | | | | 11/29/18 | | | | — | | | | (21,871 | ) |
Japanese Yen | | | JPHQ | | | | Buy | | | | 188,300,000 | | | | 1,681,527 | | | | 11/30/18 | | | | — | | | | (9,810 | ) |
Japanese Yen | | | JPHQ | | | | Sell | | | | 188,300,000 | | | | 1,684,860 | | | | 11/30/18 | | | | 13,144 | | | | — | |
Polish Zloty | | | RBS | | | | Buy | | | | 1,550,000 | | | | 425,252 | | | | 12/03/18 | | | | — | | | | (21,068 | ) |
Swedish Krona | | | UBSW | | | | Buy | | | | 19,735,000 | | | | 2,203,179 | | | | 12/05/18 | | | | — | | | | (40,922 | ) |
Swedish Krona | | | UBSW | | | | Sell | | | | 7,000,000 | | | | 799,360 | | | | 12/05/18 | | | | 32,409 | | | | — | |
Canadian Dollar | | | UBSW | | | | Sell | | | | 2,557,000 | | | | 1,968,634 | | | | 12/06/18 | | | | 24,471 | | | | — | |
Japanese Yen | | | JPHQ | | | | Buy | | | | 35,719,260 | | | | 324,259 | | | | 12/17/18 | | | | — | | | | (6,514 | ) |
Japanese Yen | | | JPHQ | | | | Sell | | | | 35,719,260 | | | | 324,187 | | | | 12/17/18 | | | | 6,442 | | | | — | |
Australian Dollar | | | UBSW | | | | Sell | | | | 1,820,000 | | | | 1,310,768 | | | | 12/27/18 | | | | 21,651 | | | | — | |
Euro | | | UBSW | | | | Sell | | | | 2,177,000 | | | | 2,574,607 | | | | 12/27/18 | | | | 96,199 | | | | — | |
Norwegian Krone | | | UBSW | | | | Buy | | | | 1,690,000 | | | | 206,669 | | | | 1/15/19 | | | | — | | | | (5,527 | ) |
British Pound | | | UBSW | | | | Sell | | | | 82,000 | | | | 108,839 | | | | 1/18/19 | | | | 3,646 | | | | — | |
Indian Rupee | | | RBS | | | | Buy | | | | 87,750,000 | | | | 1,183,181 | | | | 1/29/19 | | | | — | | | | (13,025 | ) |
Canadian Dollar | | | RBS | | | | Sell | | | | 91,000 | | | | 69,705 | | | | 1/30/19 | | | | 434 | | | | — | |
Mexican Peso | | | JPHQ | | | | Buy | | | | 16,500,000 | | | | 811,768 | | | | 2/05/19 | | | | — | | | | (12,682 | ) |
Canadian Dollar | | | UBSW | | | | Sell | | | | 26,000 | | | | 27,934 | AUD | | | 2/11/19 | | | | 7 | | | | — | |
Euro | | | JPHQ | | | | Buy | | | | 1,200,000 | | | | 1,383,657 | | | | 3/14/19 | | | | — | | | | (7,939 | ) |
Euro | | | JPHQ | | | | Sell | | | | 1,200,000 | | | | 1,403,160 | | | | 3/14/19 | | | | 27,443 | | | | — | |
Euro | | | JPHQ | | | | Buy | | | | 1,500,000 | | | | 1,729,746 | | | | 3/15/19 | | | | — | | | | (9,950 | ) |
Chinese Yuan Renminbi | | | JPHQ | | | | Sell | | | | 5,800,000 | | | | 827,862 | | | | 4/26/19 | | | | 2,661 | | | | — | |
| | | | |
| | | |
| franklintempleton.com | | Semiannual Report | | 27 |
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS (UNAUDITED)
Franklin Flexible Alpha Bond Fund (continued)
Forward Exchange Contracts (continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Currency | | Counterpartya | | | Type | | | Quantity | | | Contract Amount* | | | Settlement Date | | | Unrealized Appreciation | | | Unrealized Depreciation | |
OTC Forward Exchange Contracts (continued) | | | | | | | | | | | | | | | | | | | | | | | | | |
British Pound | | | JPHQ | | | | Sell | | | | 86,300 | | | | 115,081 | | | | 8/15/19 | | | $ | 3,184 | | | $ | — | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total Forward Exchange Contracts | | | | | | | | | | | | | | | | | | | | | | $ | 231,691 | | | $ | (251,899 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Net unrealized appreciation (depreciation) | | | | | | | | | | | | | | | | | | | | | | | $ | (20,208 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
*In U.S. dollars unless otherwise indicated.
aMay be comprised of multiple contracts with the same counterparty, currency and settlement date.
At October 31, 2018, the Fund had the following credit default swap contracts outstanding. See Note 1(d).
Credit Default Swap Contracts
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Description | | Periodic
Payment Rate
Received
(Paid) | | | Payment
Frequency | | | Counter-
party | | | Maturity
Date | | | Notional
Amounta | | | Value | | | Unamortized
Upfront
Payments
(Receipts) | | | Unrealized
Appreciation
(Depreciation) | | | Ratingb | |
Centrally Cleared Swap Contracts | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Contracts to Buy Protectionc | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Single Name | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Navient Corp. | | | (5.00)% | | | | Quarterly | | | | | | | | 3/20/19 | | | $ | 300,000 | | | $ | (7,129 | ) | | $ | (4,746 | ) | | $ | (2,383 | ) | | | | |
Contracts to Sell Protectionc,d | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Traded Index | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
CDX.EM.30 | | | 1.00% | | | | Quarterly | | | | | | | | 12/20/23 | | | | 400,000 | | | | (18,566 | ) | | | (17,477 | ) | | | (1,089 | ) | | | Investment | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Grade | |
Total Centrally Cleared Swap Contracts. | | | | | | | $ | (25,695 | ) | | $ | (22,223 | ) | | $ | (3,472 | ) | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | |
OTC Swap Contracts | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | |
Contracts to Buy Protectionc | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | |
Single Name | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
The AES Corp. | | | (5.00)% | | | | Quarterly | | | | JPHQ | | | | 6/20/22 | | | $ | 35,000 | | | $ | (5,250 | ) | | $ | (3,435 | ) | | $ | (1,815 | ) | | | | |
Ally Financial Inc. | | | (5.00)% | | | | Quarterly | | | | CITI | | | | 12/20/22 | | | | 150,000 | | | | (22,859 | ) | | | (22,652 | ) | | | (207 | ) | | | | |
Ally Financial Inc. | | | (5.00)% | | | | Quarterly | | | | JPHQ | | | | 12/20/22 | | | | 100,000 | | | | (15,240 | ) | | | (15,272 | ) | | | 32 | | | | | |
Ally Financial Inc. | | | (5.00)% | | | | Quarterly | | | | JPHQ | | | | 12/20/22 | | | | 150,000 | | | | (22,859 | ) | | | (22,770 | ) | | | (89 | ) | | | | |
American Airlines Group Inc. | | | (5.00)% | | | | Quarterly | | | | BZWS | | | | 12/20/19 | | | | 400,000 | | | | (22,826 | ) | | | (18,955 | ) | | | (3,871 | ) | | | | |
American Airlines Group Inc. | | | (5.00)% | | | | Quarterly | | | | CITI | | | | 12/20/19 | | | | 130,000 | | | | (7,418 | ) | | | (6,082 | ) | | | (1,336 | ) | | | | |
Boyd Gaming Corp. | | | (5.00)% | | | | Quarterly | | | | BZWS | | | | 6/20/22 | | | | 525,000 | | | | (74,497 | ) | | | (72,027 | ) | | | (2,470 | ) | | | | |
Dish DBS Corp. | | | (5.00)% | | | | Quarterly | | | | BZWS | | | | 12/20/20 | | | | 175,000 | | | | (12,946 | ) | | | (10,873 | ) | | | (2,073 | ) | | | | |
Dish DBS Corp. | | | (5.00)% | | | | Quarterly | | | | JPHQ | | | | 6/20/21 | | | | 470,000 | | | | (31,403 | ) | | | (18,153 | ) | | | (13,250 | ) | | | | |
Energy Transfer LP | | | (5.00)% | | | | Quarterly | | | | MSCO | | | | 12/20/20 | | | | 750,000 | | | | (77,204 | ) | | | (67,501 | ) | | | (9,703 | ) | | | | |
Government of Italy | | | (1.00)% | | | | Quarterly | | | | BZWS | | | | 6/20/23 | | | | 700,000 | | | | 15,528 | | | | 7,070 | | | | 8,458 | | | | | |
Government of Turkey | | | (1.00)% | | | | Quarterly | | | | BZWS | | | | 12/20/19 | | | | 166,667 | | | | 3,944 | | | | 8,850 | | | | (4,906 | ) | | | | |
KB Home | | | (5.00)% | | | | Quarterly | | | | JPHQ | | | | 3/20/20 | | | | 100,000 | | | | (6,662 | ) | | | (4,933 | ) | | | (1,729 | ) | | | | |
Nabors Industries Inc. | | | (1.00)% | | | | Quarterly | | | | JPHQ | | | | 6/20/20 | | | | 5,000 | | | | (10 | ) | | | 74 | | | | (84 | ) | | | | |
Navient Corp. | | | (5.00)% | | | | Quarterly | | | | JPHQ | | | | 3/20/20 | | | | 400,000 | | | | (26,247 | ) | | | (20,145 | ) | | | (6,102 | ) | | | | |
PHH Corp. | | | (5.00)% | | | | Quarterly | | | | BZWS | | | | 9/20/19 | | | | 200,000 | | | | (9,552 | ) | | | (796 | ) | | | (8,756 | ) | | | | |
Safeway Inc. | | | (5.00)% | | | | Quarterly | | | | BZWS | | | | 6/20/19 | | | | 1,000,000 | | | | (34,272 | ) | | | (22,457 | ) | | | (11,815 | ) | | | | |
Sanmina Corp. | | | (5.00)% | | | | Quarterly | | | | BZWS | | | | 6/20/19 | | | | 100,000 | | | | (3,628 | ) | | | (2,735 | ) | | | (893 | ) | | | | |
| | | | |
| | | |
28 | | Semiannual Report | | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS (UNAUDITED)
Franklin Flexible Alpha Bond Fund (continued)
Credit Default Swap Contracts (continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Description | | Periodic
Payment Rate
Received
(Paid) | | | Payment
Frequency | | | Counter-
party | | | Maturity
Date | | | Notional
Amounta | | | Value | | | Unamortized
Upfront
Payments
(Receipts) | | | Unrealized
Appreciation
(Depreciation) | | | Ratingb | |
OTC Swap Contracts (continued) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Contracts to Buy Protectionc (continued) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Single Name (continued) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Springleaf Finance Corp. | | | (5.00)% | | | | Quarterly | | | | GSCO | | | | 6/20/20 | | | | 60,000 | | | | (4,378 | ) | | | (1,186 | ) | | | (3,192 | ) | | | | |
Tenet Healthcare Corp. | | | (5.00)% | | | | Quarterly | | | | BZWS | | | | 3/20/19 | | | | 90,000 | | | | (2,135 | ) | | | (782 | ) | | | (1,353 | ) | | | | |
Universal Health Services Inc. | | | (5.00)% | | | | Quarterly | | | | BZWS | | | | 9/20/19 | | | | 50,000 | | | | (2,449 | ) | | | (1,841 | ) | | | (608 | ) | | | | |
Contracts to Sell Protectionc,d | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | |
Single Name | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
American Tower Corp. | | | 1.00% | | | | Quarterly | | | | GSCO | | | | 3/20/21 | | | $ | 100,000 | | | $ | (59 | ) | | $ | (894 | ) | | $ | 835 | | | | BBB- | |
Capital One Financial Corp. | | | 1.00% | | | | Quarterly | | | | JPHQ | | | | 12/20/22 | | | | 150,000 | | | | 2,509 | | | | 2,153 | | | | 356 | | | | BBB | |
Dish DBS Corp. | | | 5.00% | | | | Quarterly | | | | BZWS | | | | 12/20/22 | | | | 175,000 | | | | 3,840 | | | | 7,473 | | | | (3,633 | ) | | | B | |
Dish DBS Corp. | | | 5.00% | | | | Quarterly | | | | JPHQ | | | | 6/20/23 | | | | 470,000 | | | | (2,271 | ) | | | (5,767 | ) | | | 3,496 | | | | B | |
General Electric Co. | | | 1.00% | | | | Quarterly | | | | BZWS | | | | 12/20/23 | | | | 400,000 | | | | (8,226 | ) | | | (1,649 | ) | | | (6,577 | ) | | | BBB+ | |
General Electric Co. | | | 1.00% | | | | Quarterly | | | | CITI | | | | 12/20/23 | | | | 840,000 | | | | (17,275 | ) | | | 4,080 | | | | (21,355 | ) | | | BBB+ | |
General Electric Co. | | | 1.00% | | | | Quarterly | | | | CITI | | | | 12/20/23 | | | | 440,000 | | | | (9,049 | ) | | | (2,120 | ) | | | (6,929 | ) | | | BBB+ | |
General Electric Co. | | | 1.00% | | | | Quarterly | | | | JPHQ | | | | 12/20/23 | | | | 200,000 | | | | (3,838 | ) | | | (4,071 | ) | | | 233 | | | | BBB+ | |
Goldman Sachs Group Inc. | | | 1.00% | | | | Quarterly | | | | BZWS | | | | 12/20/22 | | | | 250,000 | | | | 4,063 | | | | 3,904 | | | | 159 | | | | BBB+ | |
Goldman Sachs Group Inc. | | | 1.00% | | | | Quarterly | | | | JPHQ | | | | 12/20/22 | | | | 150,000 | | | | 2,438 | | | | 2,318 | | | | 120 | | | | BBB+ | |
Government of Argentina | | | 5.00% | | | | Quarterly | | | | CITI | | | | 12/20/23 | | | | 630,000 | | | | (24,024 | ) | | | (36,656 | ) | | | 12,632 | | | | B+ | |
Government of China | | | 1.00% | | | | Quarterly | | | | CITI | | | | 12/20/23 | | | | 4,150,000 | | | | 59,579 | | | | 74,343 | | | | (14,764 | ) | | | A+ | |
Government of Indonesia | | | 1.00% | | | | Quarterly | | | | CITI | | | | 12/20/23 | | | | 2,925,000 | | | | (72,600 | ) | | | (65,012 | ) | | | (7,588 | ) | | | BBB- | |
Government of Italy | | | 1.00% | | | | Quarterly | | | | BZWS | | | | 6/20/23 | | | | 700,000 | | | | (44,217 | ) | | | (31,002 | ) | | | (13,215 | ) | | | NR | |
Morgan Stanley | | | 1.00% | | | | Quarterly | | | | BZWS | | | | 12/20/22 | | | | 250,000 | | | | 4,752 | | | | 4,377 | | | | 375 | | | | BBB+ | |
Nabors Industries Inc. | | | 1.00% | | | | Quarterly | | | | JPHQ | | | | 6/20/22 | | | | 5,000 | | | | (304 | ) | | | (475 | ) | | | 171 | | | | BB | |
Sprint Communications Inc. | | | 5.00% | | | | Quarterly | | | | JPHQ | | | | 9/20/20 | | | | 12,000 | | | | 999 | | | | — | | | | 999 | | | | B | |
| | | | | | | | | |
Traded Index | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
eBNP Paribas Bespoke Bordeaux Index, Mezzanine Tranche 5-7% | | | 2.00% | | | | Quarterly | | | | BNDP | | | | 12/20/20 | | | | 500,000 | | | | (5,005 | ) | | | — | | | | (5,005 | ) | | | Non- | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Investment
Grade |
|
eBNP Paribas Bespoke Bordeaux Index, Mezzanine Tranche 7-10% | | | 2.10% | | | | Quarterly | | | | BNDP | | | | 6/20/20 | | | | 300,000 | | | | 243 | | | | — | | | | 243 | | | | Non- | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Investment
Grade |
|
eCitibank Bespoke Bogota Index, Mezzanine Tranche 7-10% | | | 1.35% | | | | Quarterly | | | | CITI | | | | 6/20/20 | | | | 1,650,000 | | | | 4,919 | | | | — | | | | 4,919 | | | | Non- | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Investment
Grade |
|
eCitibank Bespoke Boulder Index, Mezzanine Tranche 5-10% | | | 1.18% | | | | Quarterly | | | | CITI | | | | 12/20/19 | | | | 3,000,000 | | | | 12,582 | | | | — | | | | 12,582 | | | | Non- | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Investment
Grade |
|
| | | | |
| | | |
| franklintempleton.com | | Semiannual Report | | 29 |
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS (UNAUDITED)
Franklin Flexible Alpha Bond Fund (continued)
Credit Default Swap Contracts (continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Description | | Periodic
Payment Rate
Received
(Paid) | | Payment
Frequency | | | Counter-
party | | | Maturity
Date | | | Notional
Amounta | | | Value | | | Unamortized
Upfront
Payments
(Receipts) | | | Unrealized
Appreciation
(Depreciation) | | | Ratingb | |
OTC Swap Contracts (continued) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Contracts to Sell Protectionc,d (continued) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Traded Index (continued) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
eCitibank Bespoke Boulder Index, Mezzanine Tranche 5-15% | | 1.24% | | | Quarterly | | | | CITI | | | | 12/20/19 | | | $ | 1,600,000 | | | $ | 11,914 | | | $ | — | | | | $ 11,914 | | | | Non- | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Investment
Grade |
|
eCitibank Bespoke Broker Index, Mezzanine Tranche 3-7% | | 1.30% | | | Quarterly | | | | CITI | | | | 6/20/19 | | | | 1,900,000 | | | | 4,049 | | | | — | | | | 4,049 | | | | Non- | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Investment
Grade |
|
eCitibank Bespoke Broker Index, Mezzanine Tranche 3-7% | | 1.40% | | | Quarterly | | | | CITI | | | | 6/20/19 | | | | 1,500,000 | | | | 4,316 | | | | — | | | | 4,316 | | | | Non- | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Investment
Grade |
|
eCitibank Bespoke Cambridge Index, Equity Tranche 0-3% | | 0.00% | | | Quarterly | | | | CITI | | | | 12/20/19 | | | | 500,000 | | | | (87,430 | ) | | | (46,534 | ) | | | (40,896 | ) | | | Non- | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Investment
Grade |
|
eCitibank Bespoke Hong Kong Index, Mezzanine Tranche 3-5% | | 1.00% | | | Quarterly | | | | CITI | | | | 12/20/18 | | | | 30,000 | | | | 39 | | | | (88 | ) | | | 127 | | | | Non- | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Investment
Grade |
|
eCitibank Bespoke Index, Mezzanine Tranche 6-10% | | 0.63% | | | Quarterly | | | | CITI | | | | 12/20/18 | | | | 1,000,000 | | | | 599 | | | | — | | | | 599 | | | | Non- | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Investment
Grade |
|
eCitibank Bespoke Lima Index, Mezzanine Tranche 5-7% | | 2.13% | | | Quarterly | | | | CITI | | | | 12/20/19 | | | | 650,000 | | | | 3,815 | | | | — | | | | 3,815 | | | | Non- | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Investment
Grade |
|
eCitibank Bespoke Lisbon Index, Equity Tranche 0-3% | | 0.00% | | | Quarterly | | | | CITI | | | | 6/20/19 | | | | 10,000 | | | | (638 | ) | | | (752 | ) | | | 114 | | | | Non- | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Investment
Grade |
|
eCitibank Bespoke Lisbon Index, Mezzanine Tranche 3-7% | | 0.79% | | | Quarterly | | | | CITI | | | | 6/20/19 | | | | 1,100,000 | | | | (1,957 | ) | | | — | | | | (1,957 | ) | | | Non- | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Investment
Grade |
|
eCitibank Bespoke Verona Index, Equity Tranche 0-3% | | 0.00% | | | Quarterly | | | | CITI | | | | 12/20/19 | | | | 15,000 | | | | (2,199 | ) | | | (1,713 | ) | | | (486 | ) | | | Non- | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Investment
Grade |
|
| | | | |
| | | |
30 | | Semiannual Report | | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS (UNAUDITED)
Franklin Flexible Alpha Bond Fund (continued)
Credit Default Swap Contracts (continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Description | | Periodic Payment
Rate Received (Paid) | | | Payment Frequency | | | Counter- party | | | Maturity Date | | | Notional Amounta | | | Value | | | Unamortized Upfront Payments (Receipts) | | | Unrealized Appreciation (Depreciation) | | | Ratingb | |
OTC Swap Contracts (continued) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Contracts to Sell Protectionc,d (continued) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Traded Index (continued) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
eCitibank Bespoke Verona Index, Mezzanine Tranche 7-15% | | | 0.40% | | | | Quarterly | | | | CITI | | | | 12/20/19 | | | $ | 280,000 | | | $ | 825 | | | $ | — | | | $ | 825 | | | | Non- | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Investment
Grade |
|
MCDX.NA.30 | | | 1.00% | | | | Quarterly | | | | CITI | | | | 6/20/23 | | | | 7,100,000 | | | | 177,856 | | | | 154,075 | | | | 23,781 | | | | Investment | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Grade | |
MCDX.NA.30 | | | 1.00% | | | | Quarterly | | | | CITI | | | | 6/20/28 | | | | 2,000,000 | | | | 50,100 | | | | 19,444 | | | | 30,656 | | | | Investment | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Grade | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total OTC Swap Contracts | | | | | | | | | | | | | | | | | | | | | | $ | (292,018) | | | $ | (221,167) | | | $ | (70,851) | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total Credit Default Swap Contracts | | | | | | | | | | | | | | | | | | | $ | (317,713) | | | $ | (243,390) | | | $ | (74,323) | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
aIn U.S. dollars unless otherwise indicated. For contracts to sell protection, the notional amount is equal to the maximum potential amount of the future payments and no recourse provisions have been entered into in association with the contracts.
bBased on Standard and Poor’s (S&P) Rating for single name swaps and internal ratings for index swaps. Internal ratings based on mapping into equivalent ratings from external vendors.
cPerformance triggers for settlement of contract include default, bankruptcy or restructuring for single name swaps, and failure to pay or bankruptcy of the underlying securities for traded index swaps.
dThe Fund enters contracts to sell protection to create a long credit position.
eRepresents a custom index comprised of a basket of underlying instruments.
At October 31, 2018, the Fund had the following cross-currency swap contracts outstanding. See Note 1(d).
Cross-Currency Swap Contracts
| | | | | | | | | | | | | | | | | | | | | | | | |
| Description | | Payment Frequency | | | Counter- party | | | Maturity Date | | | Notional Amount | | | | | | Value/ Unrealized Appreciation (Depreciation) | |
OTC Swap Contracts | | | | | | | | | | | | | | | | | | | | | | | | |
Receive Floating 3-month USD LIBOR + 0.728% | | | Quarterly | | | | | | | | | | | | 1,185,000 | | | | USD | | | | | |
Pay Fixed 0.10% | | | Annual | | | | HSBK | | | | 1/15/19 | | | | 1,000,000 | | | | EUR | | | $ | 52,943 | |
Receive Floating 3-month USD LIBOR + 1.894% | | | Quarterly | | | | | | | | | | | | 2,460,000 | | | | USD | | | | | |
Pay Fixed 1.50% | | | Annual | | | | CITI | | | | 5/04/21 | | | | 2,000,000 | | | | EUR | | | | 229,459 | |
Receive Floating 3-month USD LIBOR + 1.850% | | | Quarterly | | | | | | | | | | | | 617,500 | | | | USD | | | | | |
Pay Fixed 1.50% | | | Annual | | | | CITI | | | | 5/04/21 | | | | 500,000 | | | | EUR | | | | 59,603 | |
Receive Floating 3-month USD LIBOR + 2.870% | | | Quarterly | | | | | | | | | | | | 232,400 | | | | USD | | | | | |
Pay Fixed 2.50% | | | Annual | | | | CITI | | | | 5/04/21 | | | | 200,000 | | | | EUR | | | | 6,980 | |
Receive Floating 3-month USD LIBOR + 1.303% | | | Quarterly | | | | | | | | | | | | 496,000 | | | | USD | | | | | |
Pay Fixed 1.00% | | | Annual | | | | JPHQ | | | | 5/04/21 | | | | 400,000 | | | | EUR | | | | 49,684 | |
Receive Floating 3-month USD LIBOR + 1.123% | | | Quarterly | | | | | | | | | | | | 111,500 | | | | USD | | | | | |
Pay Fixed 0.75% | | | Annual | | | | HSBK | | | | 4/01/22 | | | | 100,000 | | | | EUR | | | | (1,077 | ) |
| | | | |
| | | |
| franklintempleton.com | | Semiannual Report | | 31 |
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS (UNAUDITED)
Franklin Flexible Alpha Bond Fund (continued)
Cross-Currency Swap Contracts (continued)
| | | | | | | | | | | | | | | | | | | | | | | | |
| Description | | Payment
Frequency | | | Counter-
party | | | Maturity
Date | | | Notional
Amount | | | | | | Value/
Unrealized
Appreciation
(Depreciation) | |
OTC Swap Contracts (continued) | | | | | | | | | | | | | | | | | | | | | | | | |
Receive Floating 3-month USD LIBOR + 1.045% | | | Quarterly | | | | | | | | | | | | 1,552,200 | | | | USD | | | | | |
Pay Fixed 0.75% | | | Annual | | | | HSBK | | | | 5/31/22 | | | | 1,300,000 | | | | EUR | | | | $ 93,566 | |
Receive Floating 3-month USD LIBOR + 0.849% | | | Quarterly | | | | | | | | | | | | 3,472,000 | | | | USD | | | | | |
Pay Fixed 0.75% | | | Annual | | | | DBAB | | | | 9/14/22 | | | | 2,800,000 | | | | EUR | | | | 350,096 | |
Receive Floating 3-month USD LIBOR + 0.821% | | | Quarterly | | | | | | | | | | | | 466,000 | | | | USD | | | | | |
Pay Fixed 0.625% | | | Annual | | | | BNDP | | | | 6/08/23 | | | | 400,000 | | | | EUR | | | | 18,132 | |
Receive Floating 3-month USD LIBOR + 0.783% | | | Quarterly | | | | | | | | | | | | 957,600 | | | | USD | | | | | |
Pay Fixed 0.625% | | | Annual | | | | HSBK | | | | 6/08/23 | | | | 800,000 | | | | EUR | | | | 61,836 | |
Receive Floating 3-month USD LIBOR + 0.825% | | | Quarterly | | | | | | | | | | | | 4,616,000 | | | | USD | | | | | |
Pay Fixed 1.00% | | | Annual | | | | CITI | | | | 7/16/24 | | | | 4,000,000 | | | | EUR | | | | 64,775 | |
Receive Floating 3-month USD LIBOR + 0.730% | | | Quarterly | | | | | | | | | | | | 466,000 | | | | USD | | | | | |
Pay Fixed 1.00% | | | Annual | | | | CITI | | | | 11/26/25 | | | | 400,000 | | | | EUR | | | | 15,305 | |
Receive Floating 3-month USD LIBOR + 1.395% | | | Quarterly | | | | | | | | | | | | 358,500 | | | | USD | | | | | |
Pay Fixed 1.50% | | | Annual | | | | HSBK | | | | 11/26/25 | | | | 300,000 | | | | EUR | | | | 21,291 | |
Receive Floating 3-month USD LIBOR + 1.415% | | | Quarterly | | | | | | | | | | | | 598,500 | | | | USD | | | | | |
Pay Fixed 1.50% | | | Annual | | | | HSBK | | | | 11/26/25 | | | | 500,000 | | | | EUR | | | | 36,596 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total Cross Currency Swap Contracts | | | | | | | | | | | | | | | | | | | | | | | $1,059,189 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
At October 31, 2018, the Fund had the following interest rate swap contracts outstanding. See Note 1(d).
Interest Rate Swap Contracts
| | | | | | | | | | | | | | | | | | | | | | | | |
| Description | | Payment
Frequency | | | Maturity
Date | | | Notional
Amount | | | Value | | | Unamortized
Upfront
Payments
(Receipts) | | | Unrealized
Appreciation
(Depreciation) | |
Centrally Cleared Swap Contracts | | | | | | | | | | | | | | | | | | | | | | | | |
Receive Floating 3-month USD LIBOR | | | Quarterly | | | | | | | | | | | | | | | | | | | | | |
Pay Fixed 2.788% | | | Semi-Annual | | | | 3/26/23 | | | $ | 7,900,000 | | | | $ 105,085 | | | | $ — | | | | $105,085 | |
Receive Floating 3-month USD LIBOR | | | Quarterly | | | | | | | | | | | | | | | | | | | | | |
Pay Fixed 2.790% | | | Semi-Annual | | | | 3/28/23 | | | | 7,900,000 | | | | 104,682 | | | | — | | | | 104,682 | |
Receive Floating 3-month USD LIBOR | | | Quarterly | | | | | | | | | | | | | | | | | | | | | |
Pay Fixed 2.713% | | | Semi-Annual | | | | 3/29/23 | | | | 4,700,000 | | | | 77,786 | | | | — | | | | 77,786 | |
Receive Floating 3-month USD LIBOR | | | Quarterly | | | | | | | | | | | | | | | | | | | | | |
Pay Fixed 2.806% | | | Semi-Annual | | | | 4/17/23 | | | | 5,800,000 | | | | 75,836 | | | | — | | | | 75,836 | |
Receive Floating 3-month USD LIBOR | | | Quarterly | | | | | | | | | | | | | | | | | | | | | |
Pay Fixed 2.00% | | | Semi-Annual | | | | 6/20/25 | | | | 11,100,000 | | | | 716,619 | | | | 597,834 | | | | 118,785 | |
Receive Floating 3-month USD LIBOR | | | Quarterly | | | | | | | | | | | | | | | | | | | | | |
Pay Fixed 3.082% | | | Semi-Annual | | | | 9/28/25 | | | | 8,000,000 | | | | 31,251 | | | | — | | | | 31,251 | |
| | | | | | | | | | | | | | | | |
Total Interest Rate Swap Contracts | | | | | | | | | | | | | | | $1,111,259 | | | | $597,834 | | | | $513,425 | |
| | | | | | | | | | | | | | | | |
| | | | |
| | | |
32 | | Semiannual Report | | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS (UNAUDITED)
Franklin Flexible Alpha Bond Fund (continued)
At October 31, 2018, the Fund had the following inflation index swap contracts outstanding. See Note 1(d).
Inflation Index Swap Contracts
| | | | | | | | | | | | | | | | |
| Description | | Payment
Frequency | | | Maturity
Date | | | Notional
Amount | | | Value/
Unrealized
Appreciation
(Depreciation) | |
Centrally Cleared Swap Contracts | | | | | | | | | | | | | | | | |
Receive variable change in USA-CPI-U | | | At maturity | | | | | | | | | | | | | |
Pay Fixed 2.079% | | | At maturity | | | | 9/18/24 | | | $ | 1,770,000 | | | | $ 24,763 | |
Receive variable change in USA-CPI-U | | | At maturity | | | | | | | | | | | | | |
Pay Fixed 2.35% | | | At maturity | | | | 9/20/26 | | | | 5,200,000 | | | | (50,794 | ) |
Receive variable change in USA-CPI-U | | | At maturity | | | | | | | | | | | | | |
Pay Fixed 2.313% | | | At maturity | | | | 6/01/28 | | | | 1,400,000 | | | | (6,455 | ) |
| | | | | | | | | | | | | | | | |
Total Inflation Index Swap Contracts | | | | | | | | | | | | | | | $(32,486 | ) |
| | | | | | | | | | | | | | | | |
At October 31, 2018, the Fund had the following total return swap contracts outstanding. See Note 1(d).
Total Return Swap Contracts
| | | | | | | | | | | | | | | | | | | | | | | | |
| Underlying Instruments | | Financing Rate | | | Payment
Frequency | | | Counterparty | | | Maturity
Date | | | Notional
Value | | | Value/
Unrealized
Appreciation
(Depreciation) | |
OTC Swap Contracts | | | | | | | | | | | | | | | | | | | | | | | | |
Longa | | | | | | | | | | | | | | | | | | | | | | | | |
Markit iBoxx USD Liquid Leveraged Loan Index | | | 3-month USD LIBOR | | | | Quarterly | | | | FBCO | | | | 12/20/18 | | | | $ 4,500,000 | | | | $ 71,787 | |
Markit iBoxx USD Liquid Leveraged Loan Index | | | 3-month USD LIBOR | | | | Quarterly | | | | GSCO | | | | 12/20/18 | | | | 5,160,000 | | | | 98,099 | |
Markit iBoxx USD Liquid Leveraged Loan Index | | | 3-month USD LIBOR | | | | Quarterly | | | | FBCO | | | | 3/20/19 | | | | 5,300,000 | | | | 82,025 | |
Markit iBoxx USD Liquid Leveraged Loan Index | | | 3-month USD LIBOR | | | | Quarterly | | | | GSCO | | | | 3/20/19 | | | | 4,000,000 | | | | 60,272 | |
Markit iBoxx USD Liquid Leveraged Loan Index | | | 3-month USD LIBOR | | | | Quarterly | | | | JPHQ | | | | 3/20/19 | | | | 1,050,000 | | | | 16,775 | |
Markit iBoxx USD Liquid Leveraged Loan Index | | | 3-month USD LIBOR | | | | Quarterly | | | | JPHQ | | | | 6/20/19 | | | | 22,800,000 | | | | 6,178 | |
Markit iBoxx USD Liquid Leveraged Loan Index | | | 3-month USD LIBOR | | | | Quarterly | | | | MSCO | | | | 6/20/19 | | | | 900,000 | | | | 1,020 | |
Markit iBoxx USD Liquid Leveraged Loan Index | | | 3-month USD LIBOR | | | | Quarterly | | | | CITI | | | | 9/20/19 | | | | 4,200,000 | | | | (33,482 | ) |
Markit iBoxx USD Liquid Leveraged Loan Index | | | 3-month USD LIBOR | | | | Quarterly | | | | GSCO | | | | 9/20/19 | | | | 14,000,000 | | | | (122,567 | ) |
Markit iBoxx USD Liquid Leveraged Loan Index | | | 3-month USD LIBOR | | | | Quarterly | | | | JPHQ | | | | 9/20/19 | | | | 4,200,000 | | | | (26,289 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total Total Return Swap Contracts | | | | | | | | | | | | | | | | | | | | | | | $ 153,818 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
a The Fund receives the total return on the underlying instrument and pays a variable financing rate.
See Note 8 regarding other derivative information.
See Abbreviations on page 53.
| | | | |
| | | |
| franklintempleton.com | | The accompanying notes are an integral part of these financial statements. | Semiannual Report | | 33 |
FRANKLIN STRATEGIC SERIES
Financial Statements
Statement of Assets and Liabilities
October 31, 2018 (unaudited)
Franklin Flexible Alpha Bond Fund
| | | | |
Assets: | | | | |
Investments in securities: | | | | |
Cost - Unaffiliated issuers | | | $339,280,404 | |
Cost - Non-controlled affiliates (Note 3f) | | | 100,219,262 | |
| | | | |
Value - Unaffiliated issuers | | | $334,229,344 | |
Value - Non-controlled affiliates (Note 3f) | | | 100,219,262 | |
Cash | | | 316,796 | |
Restricted cash for OTC derivative contracts (Note 1e) | | | 1,090,000 | |
Foreign currency, at value (cost $219,345) | | | 219,470 | |
Receivables: | | | | |
Investment securities sold | | | 293,693 | |
Capital shares sold | | | 95 | |
Interest | | | 1,259,050 | |
Deposits with brokers for: | | | | |
Futures contracts | | | 908,252 | |
Centrally cleared swap contracts | | | 1,216,075 | |
Variation margin on futures contracts | | | 132,164 | |
Variation margin on centrally cleared swap contracts | | | 101,707 | |
OTC swap contracts (upfront payments $317,135) | | | 288,161 | |
Unrealized appreciation on OTC forward exchange contracts | | | 231,691 | |
Unrealized appreciation on OTC swap contracts | | | 1,522,228 | |
Other assets | | | 69,365 | |
| | | | |
Total assets | | | 442,097,353 | |
| | | | |
Liabilities: | | | | |
Payables: | | | | |
Investment securities purchased | | | 23,658,111 | |
Capital shares redeemed | | | 557 | |
Management fees | | | 159,435 | |
Distribution fees | | | 822 | |
Transfer agent fees | | | 5,955 | |
Distributions to shareholders | | | 898,417 | |
Deposits from brokers for: | | | | |
OTC derivative contracts | | | 1,310,000 | |
OTC swap contracts (upfront receipts $719,624) | | | 509,328 | |
Options written, at value (premiums received $62,463) | | | 123,469 | |
TBA sale commitments, at value (proceeds $293,344) | | | 292,066 | |
Unrealized depreciation on OTC forward exchange contracts | | | 251,899 | |
Unrealized depreciation on OTC swap contracts | | | 380,072 | |
Accrued expenses and other liabilities | | | 47,689 | |
| | | | |
Total liabilities | | | 27,637,820 | |
| | | | |
Net assets, at value | | | $414,459,533 | |
| | | | |
Net assets consist of: | | | | |
Paid-in capital | | | $416,804,664 | |
Total distributable earnings (loss) | | | (2,345,131 | ) |
| | | | |
Net assets, at value | | | $414,459,533 | |
| | | | |
| | | | |
| | | |
34 | | Semiannual Report | The accompanying notes are an integral part of these financial statements. | | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
FINANCIAL STATEMENTS
Statement of Assets and Liabilities (continued)
October 31, 2018 (unaudited)
Franklin Flexible Alpha Bond Fund
| | | | |
Class A: | | | | |
Net assets, at value | | $ | 2,141,549 | |
| | | | |
Shares outstanding | | | 219,412 | |
| | | | |
Net asset value per sharea | | | $9.76 | |
| | | | |
Maximum offering price per share (net asset value per share ÷ 95.75%) | | | $10.19 | |
| | | | |
Class C: | | | | |
Net assets, at value | | $ | 303,467 | |
| | | | |
Shares outstanding | | | 31,292 | |
| | | | |
Net asset value and maximum offering price per sharea | | | $9.70 | |
| | | | |
Class R: | | | | |
Net assets, at value | | $ | 52,092 | |
| | | | |
Shares outstanding | | | 5,344 | |
| | | | |
Net asset value and maximum offering price per share | | | $9.75 | |
| | | | |
Class R6: | | | | |
Net assets, at value | | $ | 411,573,641 | |
| | | | |
Shares outstanding | | | 42,177,376 | |
| | | | |
Net asset value and maximum offering price per share | | | $9.76 | |
| | | | |
Advisor Class: | | | | |
Net assets, at value | | $ | 388,784 | |
| | | | |
Shares outstanding | | | 39,848 | |
| | | | |
Net asset value and maximum offering price per share | | | $9.76 | |
| | | | |
aRedemption price is equal to net asset value less contingent deferred sales charges, if applicable.
| | | | |
| | | |
| franklintempleton.com | | The accompanying notes are an integral part of these financial statements. | Semiannual Report | | 35 |
FRANKLIN STRATEGIC SERIES
FINANCIAL STATEMENTS
Statement of Operations
for the six months ended October 31, 2018 (unaudited)
Franklin Flexible Alpha Bond Fund
| | | | |
Investment income: | | | | |
Dividends: | | | | |
Unaffiliated issuers | | $ | 93,022 | |
Non-controlled affiliates (Note 3f) | | | 466,014 | |
Interest: (net of foreign taxes)~ | | | | |
Unaffiliated issuers | | | 4,278,602 | |
| | | | |
Total investment income | | | 4,837,638 | |
| | | | |
Expenses: | | | | |
Management fees (Note 3a) | | | 799,250 | |
Distribution fees: (Note 3c) | | | | |
Class A | | | 2,150 | |
Class C | | | 891 | |
Class R | | | 139 | |
Transfer agent fees: (Note 3e) | | | | |
Class A | | | 1,691 | |
Class C | | | 360 | |
Class R | | | 68 | |
Class R6 | | | 28,985 | |
Advisor Class | | | 515 | |
Custodian fees (Note 4) | | | 8,702 | |
Reports to shareholders | | | 3,242 | |
Registration and filing fees | | | 41,296 | |
Professional fees | | | 45,608 | |
Trustees’ fees and expenses | | | 576 | |
Other | | | 29,333 | |
| | | | |
Total expenses | | | 962,806 | |
Expense reductions (Note 4) | | | (305 | ) |
Expenses waived/paid by affiliates (Note 3f and 3g) | | | (102,250 | ) |
| | | | |
Net expenses | | | 860,251 | |
| | | | |
Net investment income | | | 3,977,387 | |
| | | | |
Realized and unrealized gains (losses): | | | | |
Net realized gain (loss) from: | | | | |
Investments: | | | | |
Unaffiliated issuers | | | (184,671 | ) |
Written options | | | 45,318 | |
Foreign currency transactions | | | (97,218 | ) |
Forward exchange contracts | | | 45,641 | |
Futures contracts | | | (102,835 | ) |
TBA sale commitments | | | 4,758 | |
Swap contracts | | | 21,468 | |
| | | | |
Net realized gain (loss) | | | (267,539 | ) |
| | | | |
Net change in unrealized appreciation (depreciation) on: | | | | |
Investments: | | | | |
Unaffiliated issuers | | | (3,170,472 | ) |
Translation of other assets and liabilities denominated in foreign currencies | | | 1,750 | |
Forward exchange contracts | | | 3,379 | |
Written options | | | (65,786 | ) |
Futures contracts | | | 208,995 | |
| | | | |
| | | |
36 | | Semiannual Report | The accompanying notes are an integral part of these financial statements. | | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
FINANCIAL STATEMENTS
Statement of Operations (continued)
for the six months ended October 31, 2018 (unaudited)
Franklin Flexible Alpha Bond Fund
| | | | |
TBA sale commitments | | | 1,277 | |
Swap contracts | | | 1,336,585 | |
| | | | |
Net change in unrealized appreciation (depreciation) | | | (1,684,272 | ) |
| | | | |
Net realized and unrealized gain (loss) | | | (1,951,811 | ) |
| | | | |
Net increase (decrease) in net assets resulting from operations | | $ | 2,025,576 | |
| | | | |
| | | | |
~Foreign taxes withheld on interest | | $ | 1,435 | |
| | | | |
| | | |
| franklintempleton.com | | The accompanying notes are an integral part of these financial statements. | Semiannual Report | | 37 |
FRANKLIN STRATEGIC SERIES
FINANCIAL STATEMENTS
Statements of Changes in Net Assets
Franklin Flexible Alpha Bond Fund
| | | | | | | | |
| | | Six Months Ended October 31, 2018
(unaudited) | | | Year Ended April 30, 2018 | |
| |
Increase (decrease) in net assets: | | | | | | | | |
Operations: | | | | | | | | |
Net investment income | | | $ 3,977,387 | | | | $ 1,642,692 | |
Net realized gain (loss) | | | (267,539 | ) | | | 1,033,175 | |
Net change in unrealized appreciation (depreciation) | | | (1,684,272 | ) | | | (1,558,393 | ) |
| | | | |
Net increase (decrease) in net assets resulting from operations | | | 2,025,576 | | | | 1,117,474 | |
| | | | |
Distributions to shareholders: (Note 1h) | | | | | | | | |
Class A | | | (13,076 | ) | | | (103,600 | ) |
Class C | | | (2,400 | ) | | | (3,159 | ) |
Class R | | | (489 | ) | | | (745 | ) |
Class R6 | | | (3,448,779 | ) | | | (1,711,598 | ) |
Advisor Class | | | (4,658 | ) | | | (6,239 | ) |
| | | | |
Total distributions to shareholders | | | (3,469,402 | ) | | | (1,825,341 | ) |
| | | | |
Capital share transactions: (Note 2) | | | | | | | | |
Class A | | | 1,016,665 | | | | (9,288,308 | ) |
Class C | | | 25,280 | | | | 35,861 | |
Class R | | | 1,704 | | | | (9,156 | ) |
Class R6 | | | 202,199,383 | | | | 211,478,984 | |
Advisor Class | | | (35,105 | ) | | | 195,749 | |
| | | | |
Total capital share transactions | | | 203,207,927 | | | | 202,413,130 | |
| | | | |
Net increase (decrease) in net assets | | | 201,764,101 | | | | 201,705,263 | |
Net assets: | | | | | | | | |
Beginning of period | | | 212,695,432 | | | | 10,990,169 | |
| | | | |
End of period (Note 1h) | | | $414,459,533 | | | | $212,695,432 | |
| | | | |
| | | | |
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38 | | Semiannual Report | The accompanying notes are an integral part of these financial statements. | | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
Notes to Financial Statements (unaudited)
Franklin Flexible Alpha Bond Fund
1. Organization and Significant Accounting Policies
Franklin Strategic Series (Trust) is registered under the Investment Company Act of 1940 (1940 Act) as an open-end management investment company, consisting of eight separate funds and applies the specialized accounting and reporting guidance in U.S. Generally Accepted Accounting Principles (U.S. GAAP). Franklin Flexible Alpha Bond Fund (Fund) is included in this report. The Fund offers five classes of shares: Class A, Class C, Class R, Class R6, and Advisor Class. Beginning on October 19, 2018, Class C shares automatically convert to Class A shares after they have been held for 10 years. Each class of shares may differ by its initial sales load, contingent deferred sales charges, voting rights on matters affecting a single class, its exchange privilege and fees due to differing arrangements for distribution and transfer agent fees.
The following summarizes the Fund’s significant accounting policies.
a. Financial Instrument Valuation
The Fund’s investments in financial instruments are carried at fair value daily. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date. The Fund calculates the net asset value (NAV) per share each business day as of 4 p.m. Eastern time or the regularly scheduled close of the New York Stock Exchange (NYSE), whichever is earlier. Under compliance policies and procedures approved by the Trust’s Board of Trustees (the Board), the Fund’s administrator has responsibility for oversight of valuation, including leading the cross-functional Valuation Committee (VC). The VC provides administration and oversight of the Fund’s valuation policies and procedures, which are approved annually by the Board. Among other things, these procedures allow the Fund to utilize independent pricing services, quotations from securities and financial instrument dealers, and other market sources to determine fair value.
Equity securities, exchange traded funds, and derivative financial instruments listed on an exchange or on the NASDAQ National Market System are valued at the last quoted sale price or the official closing price of the day, respectively.
Over-the-counter (OTC) securities are valued within the range of the most recent quoted bid and ask prices. Securities that trade in multiple markets or on multiple exchanges are valued
according to the broadest and most representative market. Certain equity securities are valued based upon fundamental characteristics or relationships to similar securities.
Debt securities generally trade in the OTC market rather than on a securities exchange. The Fund’s pricing services use multiple valuation techniques to determine fair value. In instances where sufficient market activity exists, the pricing services may utilize a market-based approach through which quotes from market makers are used to determine fair value. In instances where sufficient market activity may not exist or is limited, the pricing services also utilize proprietary valuation models which may consider market characteristics such as benchmark yield curves, credit spreads, estimated default rates, anticipated market interest rate volatility, coupon rates, anticipated timing of principal repayments, underlying collateral, and other unique security features in order to estimate the relevant cash flows, which are then discounted to calculate the fair value. Securities denominated in a foreign currency are converted into their U.S. dollar equivalent at the foreign exchange rate in effect at 4 p.m. Eastern time on the date that the values of the foreign debt securities are determined.
Investments in open-end mutual funds are valued at the closing NAV.
Certain derivative financial instruments are centrally cleared or trade in the OTC market. The Fund’s pricing services use various techniques including industry standard option pricing models and proprietary discounted cash flow models to determine the fair value of those instruments. The Fund’s net benefit or obligation under the derivative contract, as measured by the fair value of the contract, is included in net assets.
The Fund has procedures to determine the fair value of financial instruments for which market prices are not reliable or readily available. Under these procedures, the VC convenes on a regular basis to review such financial instruments and considers a number of factors, including significant unobservable valuation inputs, when arriving at fair value. The VC primarily employs a market-based approach which may use related or comparable assets or liabilities, recent transactions, market multiples, book values, and other relevant information for the investment to determine the fair value of the investment. An income-based valuation approach may also be used in which the anticipated future cash flows of the investment are discounted to calculate fair value. Discounts may also be applied due to the nature or duration of any restrictions on the disposition of the
| | | | |
| | | |
| franklintempleton.com | | Semiannual Report | | 39 |
FRANKLIN STRATEGIC SERIES
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
Franklin Flexible Alpha Bond Fund (continued)
1. Organization and Significant Accounting Policies (continued)
a. Financial Instrument Valuation (continued)
investments. Due to the inherent uncertainty of valuations of such investments, the fair values may differ significantly from the values that would have been used had an active market existed. The VC employs various methods for calibrating these valuation approaches including a regular review of key inputs and assumptions, transactional back-testing or disposition analysis, and reviews of any related market activity.
b. Foreign Currency Translation
Portfolio securities and other assets and liabilities denominated in foreign currencies are translated into U.S. dollars based on the exchange rate of such currencies against U.S. dollars on the date of valuation. The Fund may enter into foreign currency exchange contracts to facilitate transactions denominated in a foreign currency. Purchases and sales of securities, income and expense items denominated in foreign currencies are translated into U.S. dollars at the exchange rate in effect on the transaction date. Portfolio securities and assets and liabilities denominated in foreign currencies contain risks that those currencies will decline in value relative to the U.S. dollar. Occasionally, events may impact the availability or reliability of foreign exchange rates used to convert the U.S. dollar equivalent value. If such an event occurs, the foreign exchange rate will be valued at fair value using procedures established and approved by the Board.
The Fund does not separately report the effect of changes in foreign exchange rates from changes in market prices on securities held. Such changes are included in net realized and unrealized gain or loss from investments in the Statement of Operations.
Realized foreign exchange gains or losses arise from sales of foreign currencies, currency gains or losses realized between the trade and settlement dates on securities transactions and the difference between the recorded amounts of dividends, interest, and foreign withholding taxes and the U.S. dollar equivalent of the amounts actually received or paid. Net unrealized foreign exchange gains and losses arise from changes in foreign exchange rates on foreign denominated assets and liabilities other than investments in securities held at the end of the reporting period.
c. Securities Purchased on a When-Issued Basis
The Fund purchases securities on a when-issued basis, with payment and delivery scheduled for a future date. These transactions are subject to market fluctuations and are subject to the risk that the value at delivery may be more or less than the trade date purchase price. Although the Fund will generally purchase these securities with the intention of holding the securities, it may sell the securities before the settlement date. Sufficient assets have been segregated for these securities.
d. Derivative Financial Instruments
The Fund invested in derivative financial instruments in order to manage risk or gain exposure to various other investments or markets. Derivatives are financial contracts based on an underlying or notional amount, require no initial investment or an initial net investment that is smaller than would normally be required to have a similar response to changes in market factors, and require or permit net settlement. Derivatives contain various risks including the potential inability of the counterparty to fulfill their obligations under the terms of the contract, the potential for an illiquid secondary market, and/or the potential for market movements which expose the Fund to gains or losses in excess of the amounts shown in the Statement of Assets and Liabilities. Realized gain and loss and unrealized appreciation and depreciation on these contracts for the period are included in the Statement of Operations.
Derivative counterparty credit risk is managed through a formal evaluation of the creditworthiness of all potential counter-parties. The Fund attempts to reduce its exposure to counterparty credit risk on OTC derivatives, whenever possible, by entering into International Swaps and Derivatives Association (ISDA) master agreements with certain counterparties. These agreements contain various provisions, including but not limited to collateral requirements, events of default, or early termination. Termination events applicable to the counterparty include certain deteriorations in the credit quality of the counterparty. Termination events applicable to the Fund include failure of the Fund to maintain certain net asset levels and/or limit the decline in net assets over various periods of time. In the event of default or early termination, the ISDA master agreement gives the non-defaulting party the right to net and close-out all transactions traded, whether or not arising under the ISDA agreement, to one net amount payable by one counterparty to the other. However, absent an event of default or early termination, OTC derivative assets and liabilities are presented gross and not offset in the Statement of Assets and
| | | | |
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40 | | Semiannual Report | | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
Franklin Flexible Alpha Bond Fund (continued)
Liabilities. Early termination by the counterparty may result in an immediate payment by the Fund of any net liability owed to that counterparty under the ISDA agreement.
Collateral requirements differ by type of derivative. Collateral or initial margin requirements are set by the broker or exchange clearing house for exchange traded and centrally cleared derivatives. Initial margin deposited is held at the exchange and can be in the form of cash and/or securities. For OTC derivatives traded under an ISDA master agreement, posting of collateral is required by either the Fund or the applicable counterparty if the total net exposure of all OTC derivatives with the applicable counterparty exceeds the minimum transfer amount, which typically ranges from $100,000 to $250,000, and can vary depending on the counterparty and the type of the agreement. Generally, collateral is determined at the close of Fund business each day and any additional collateral required due to changes in derivative values may be delivered by the Fund or the counterparty the next business day, or within a few business days. Collateral pledged and/or received by the Fund for OTC derivatives, if any, is held in segregated accounts with the Fund’s custodian/counterparty broker and can be in the form of cash and/or securities. Unrestricted cash may be invested according to the Fund’s investment objectives. To the extent that the amounts due to the Fund from its counterparties are not subject to collateralization or are not fully collateralized, the Fund bears the risk of loss from counterparty non-performance.
The Fund entered into exchange traded futures contracts primarily to manage and/or gain exposure to interest rate risk. A futures contract is an agreement between the Fund and a counterparty to buy or sell an asset at a specified price on a future date. Required initial margins are pledged by the Fund, and the daily change in fair value is accounted for as a variation margin payable or receivable in the Statement of Assets and Liabilities.
The Fund entered into OTC forward exchange contracts primarily to manage and/or gain exposure to certain foreign currencies. A forward exchange contract is an agreement between the Fund and a counterparty to buy or sell a foreign currency at a specific exchange rate on a future date.
The Fund entered into credit default swap contracts primarily to manage and/or gain exposure to credit risk. A credit default swap is an agreement between the Fund and a counterparty whereby the buyer of the contract receives credit protection and the seller of the contract guarantees the credit worthiness of a
referenced debt obligation. These agreements may be privately negotiated in the over-the-counter market (OTC credit default swaps) or may be executed in a multilateral trade facility platform, such as a registered exchange (centrally cleared credit default swaps). The underlying referenced debt obligation may be a single issuer of corporate or sovereign debt, a credit index, a basket of issuers or indices, or a tranche of a credit index or basket of issuers or indices. In the event of a default of the underlying referenced debt obligation, the buyer is entitled to receive the notional amount of the credit default swap contract from the seller in exchange for the referenced debt obligation, a net settlement amount equal to the notional amount of the credit default swap less the recovery value of the referenced debt obligation, or other agreed upon amount. For centrally cleared credit default swaps, required initial margins are pledged by the Fund, and the daily change in fair value is accounted for as a variation margin payable or receivable in the Statement of Assets and Liabilities. Over the term of the contract, the buyer pays the seller a periodic stream of payments, provided that no event of default has occurred. Such periodic payments are accrued daily as an unrealized appreciation or depreciation until the payments are made, at which time they are realized. Upfront payments and receipts are reflected in the Statement of Assets and Liabilities and represent compensating factors between stated terms of the credit default swap agreement and prevailing market conditions (credit spreads and other relevant factors). These upfront payments and receipts are amortized over the term of the contract as a realized gain or loss in the Statement of Operations.
The Fund entered into OTC cross currency swap contracts primarily to manage and/or gain exposure to interest rate risk and certain foreign currencies. A cross currency swap is an agreement between the Fund and a counterparty to exchange cash flows (determined using either a fixed or floating rate) based on the notional amounts of two different currencies. The notional amounts are typically determined based on the spot exchange rates at the opening of the contract. Cross currency swaps may require the exchange of notional amounts at the opening and/or closing of the contract. Over the term of the contract, contractually required payments to be paid and to be received are accrued daily and recorded as unrealized depreciation and appreciation until the payments are made, at which time they are realized. Upfront payments and receipts are reflected in the Statement of Assets and Liabilities and represent compensating factors between stated terms of the cross currency swap contract and prevailing market conditions (interest rate
| | | | |
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| franklintempleton.com | | Semiannual Report | | 41 |
FRANKLIN STRATEGIC SERIES
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
Franklin Flexible Alpha Bond Fund (continued)
1. Organization and Significant Accounting Policies (continued)
d. Derivative Financial Instruments (continued)
spreads and other relevant factors). These upfront payments and receipts are amortized over the term of the contract as a realized gain or loss in the Statement of Operations.
The Fund entered into inflation index swap contracts primarily to manage and/or gain exposure to inflation risk. An inflation index swap is an agreement between the Fund and a counterparty to exchange cash flows whereby one party makes payments based on the percentage change in an index that serves as a measure of inflation and the other party makes a regular payment based on a compounded fixed rate, applied to a notional amount. These agreements may be privately negotiated in the over-the-counter market (OTC inflation index swap) or may be executed on a registered exchange (centrally cleared inflation index swap). For centrally cleared inflation index swaps, required initial margins are pledged by the Fund, and the daily change in fair value is accounted for as a variation margin payable or receivable. Over the term of the contract, contractually required payments to be paid and to be received are accrued daily and recorded as unrealized depreciation and appreciation until the payments are made, at which time they are realized. Typically, an inflation index swap has payment obligations netted and exchanged upon maturity.
The Fund entered into interest rate swap contracts primarily to manage interest rate risk. An interest rate swap is an agreement between the Fund and a counterparty to exchange cash flows based on the difference between two interest rates, applied to a notional amount. These agreements may be privately negotiated in the over-the-counter market (OTC interest rate swaps) or may be executed on a registered exchange (centrally cleared interest rate swaps). For centrally cleared interest rate swaps, required initial margins are pledged by the Fund, and the daily change in fair value is accounted for as a variation margin payable or receivable in the Statement of Assets and Liabilities. Over the term of the contract, contractually required payments to be paid and to be received are accrued daily and recorded as unrealized depreciation and appreciation until the payments are made, at which time they are realized.
The Fund entered into OTC total return swap contracts primarily to manage and/or gain exposure to interest rate risk of an underlying instrument such as a stock, bond, index or basket of securities or indices. A total return swap is an agreement
between the Fund and a counterparty to exchange a return linked to an underlying instrument for a floating or fixed rate payment, both based upon a notional amount. Over the term of the contract, contractually required payments to be paid or received are accrued daily and recorded as unrealized appreciation or depreciation until the payments are made, at which time they are recognized as realized gain or loss.
The Fund purchased or wrote exchange traded and/or OTC option contracts primarily to manage and/or gain exposure to interest rate, foreign exchange rate and credit risk. An option is a contract entitling the holder to purchase or sell a specific amount of shares or units of an asset or notional amount of a swap (swaption), at a specified price. When an option is purchased or written, an amount equal to the premium paid or received is recorded as an asset or liability, respectively. Certain option contracts are marked-to-market daily and the daily change in fair value is accounted for as variation margin payable or receivable in the Statement of Assets and Liabilities. Upon exercise of an option, the acquisition cost or sales proceeds of the underlying investment is adjusted by any premium received or paid. Upon expiration of an option, any premium received or paid is recorded as a realized gain or loss. Upon closing an option other than through expiration or exercise, the difference between the premium received or paid and the cost to close the position is recorded as a realized gain or loss.
See Note 8 regarding other derivative information.
e. Restricted Cash
At October 31, 2018, the Fund held restricted cash in connection with investments in certain derivative securities. Restricted cash is held in a segregated account with the Fund’s custodian and is reflected in the Statement of Assets and Liabilities.
f. Mortgage Dollar Rolls
The Fund enters into mortgage dollar rolls, typically on a TBA basis. Mortgage dollar rolls are agreements between the Fund and a financial institution where the Fund sells (or buys) mortgage-backed securities for delivery on a specified date and simultaneously contracts to repurchase (or sell) substantially similar (same type, coupon, and maturity) securities at a future date and at a predetermined price. Gains or losses are realized on the initial sale, and the difference between the repurchase price and the sale price is recorded as an unrealized gain or loss
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42 | | Semiannual Report | | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
Franklin Flexible Alpha Bond Fund (continued)
to the Fund upon entering into the mortgage dollar roll. In addition, the Fund may invest the cash proceeds that are received from the initial sale. During the period between the sale and repurchase, the Fund is not entitled to principal and interest paid on the mortgage backed securities. Transactions in mortgage dollar rolls are accounted for as purchases and sales and may result in an increase to the Fund’s portfolio turnover rate. The risks of mortgage dollar roll transactions include the potential inability of the counterparty to fulfill its obligations.
g. Income and Deferred Taxes
It is the Fund’s policy to qualify as a regulated investment company under the Internal Revenue Code. The Fund intends to distribute to shareholders substantially all of its taxable income and net realized gains to relieve it from federal income and excise taxes. As a result, no provision for U.S. federal income taxes is required.
The Fund may be subject to foreign taxation related to income received, capital gains on the sale of securities and certain foreign currency transactions in the foreign jurisdictions in which it invests. Foreign taxes, if any, are recorded based on the tax regulations and rates that exist in the foreign markets in which the Fund invests. When a capital gain tax is determined to apply, the Fund records an estimated deferred tax liability in an amount that would be payable if the securities were disposed of on the valuation date.
The Fund may recognize an income tax liability related to its uncertain tax positions under U.S. GAAP when the uncertain tax position has a less than 50% probability that it will be sustained upon examination by the tax authorities based on its technical merits. As of October 31, 2018, the Fund has determined that no tax liability is required in its financial statements related to uncertain tax positions for any open tax years (or expected to be taken in future tax years). Open tax years are those that remain subject to examination and are based on the statute of limitations in each jurisdiction in which the Fund invests.
h. Security Transactions, Investment Income, Expenses and Distributions
Security transactions are accounted for on trade date. Realized gains and losses on security transactions are determined on a specific identification basis. Interest income and estimated expenses are accrued daily. Amortization of premium and accretion of discount on debt securities are included in interest
income. Paydown gains and losses are recorded as an adjustment to interest income. Dividend income is recorded on the ex-dividend date. Dividends from net investment income are normally declared daily; these dividends may be reinvested or paid monthly to shareholders. Distributions from realized capital gains and other distributions, if any, are recorded on the ex-dividend date. Distributable earnings are determined according to income tax regulations (tax basis) and may differ from earnings recorded in accordance with U.S. GAAP. These differences may be permanent or temporary. Permanent differences are reclassified among capital accounts to reflect their tax character. These reclassifications have no impact on net assets or the results of operations. Temporary differences are not reclassified, as they may reverse in subsequent periods.*
Common expenses incurred by the Trust are allocated among the Funds based on the ratio of net assets of each Fund to the combined net assets of the Trust or based on the ratio of number of shareholders of each Fund to the combined number of shareholders of the Trust. Fund specific expenses are charged directly to the Fund that incurred the expense.
Net investment income, excluding class specific expenses, is allocated daily to each class of shares based upon the relative value of the settled shares of each class. Realized and unrealized gains and losses are allocated daily to each class of shares based upon the relative proportion of net assets of each class. Differences in per share distributions by class are generally due to differences in class specific expenses.
Inflation-indexed bonds are adjusted for inflation through periodic increases or decreases in the security’s interest accruals, face amount, or principal redemption value, by amounts corresponding to the rate of inflation as measured by an index. Any increase or decrease in the face amount or principal redemption value will be included as interest income in the Statement of Operations.
i. Accounting Estimates
The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the amounts of income and expenses during the reporting period. Actual results could differ from those estimates.
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| franklintempleton.com | | Semiannual Report | | 43 |
FRANKLIN STRATEGIC SERIES
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
Franklin Flexible Alpha Bond Fund (continued)
1. Organization and Significant Accounting Policies (continued)
j. Guarantees and Indemnifications
Under the Trust’s organizational documents, its officers and trustees are indemnified by the Trust against certain liabilities arising out of the performance of their duties to the Trust. Additionally, in the normal course of business, the Trust, on
behalf of the Fund, enters into contracts with service providers that contain general indemnification clauses. The Trust’s maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Trust that have not yet occurred. Currently, the Trust expects the risk of loss to be remote.
*Effective during the current reporting period, it is no longer required to present certain line items on the Statements of Changes in Net Assets. Such disclosure changes are included in the Statements of Changes in Net Assets, therefore prior period amounts are presented below.
For the year ended April 30, 2018, distributions to shareholders were as follows:
| | | | |
Distributions from net investment income: | | | | |
Class A | | $ | (102,670 | ) |
Class C | | | (2,927 | ) |
Class R | | | (695 | ) |
Class R6 | | | (1,603,614 | ) |
Advisor Class | | | (5,822 | ) |
Distributions from net realized gains: | | | | |
Class A | | | (930 | ) |
Class C | | | (232 | ) |
Class R | | | (50 | ) |
Class R6 | | | (107,984 | ) |
Advisor Class | | | (417 | ) |
For the year ended April 30, 2018, undistributed net investment income included in net assets was $58,013.
2. Shares of Beneficial Interest
At October 31, 2018, there were an unlimited number of shares authorized (without par value). Transactions in the Fund’s shares were as follows:
| | | | | | | | | | | | | | | | |
| | | Six Months Ended | | | Year Ended | |
| | | October 31, 2018 | | | April 30, 2018 | |
| | | Shares | | | Amount | | | Shares | | | Amount | |
Class A Shares: | | | | | | | | | | | | | | | | |
Shares solda | | | 112,051 | | | $ | 1,097,858 | | | | 71,706 | | | $ | 705,410 | |
Shares issued in reinvestment of distributions | | | 1,320 | | | | 12,915 | | | | 2,584 | | | | 25,433 | |
Shares redeemed | | | (9,609 | ) | | | (94,108 | ) | | | (1,017,579 | ) | | | (10,019,151 | ) |
| | | | |
Net increase (decrease) | | | 103,762 | | | $ | 1,016,665 | | | | (943,289 | ) | | $ | (9,288,308 | ) |
Class C Shares: | | | | | | | | | | | | | | | | |
Shares sold | | | 13,163 | | | $ | 127,939 | | | | 28,772 | | | $ | 281,596 | |
Shares issued in reinvestment of distributions | | | 247 | | | | 2,400 | | | | 318 | | | | 3,106 | |
Shares redeemeda | | | (10,801 | ) | | | (105,059 | ) | | | (25,418 | ) | | | (248,841 | ) |
| | | | |
Net increase (decrease) | | | 2,609 | | | $ | 25,280 | | | | 3,672 | | | $ | 35,861 | |
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44 | | Semiannual Report | | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
Franklin Flexible Alpha Bond Fund (continued)
| | | | | | | | | | | | | | | | |
| | | Six Months Ended | | | Year Ended | |
| | | October 31, 2018 | | | April 30, 2018 | |
| | | Shares | | | Amount | | | Shares | | | Amount | |
| | | | |
Class R Shares: | | | | | | | | | | | | | | | | |
Shares sold | | | 124 | | | $ | 1,216 | | | | — | | | $ | — | |
Shares issued in reinvestment of distributions | | | 50 | | | | 488 | | | | 71 | | | | 695 | |
Shares redeemed | | | — | | | | — | | | | (1,001 | ) | | | (9,851 | ) |
| | | | |
Net increase (decrease) | | | 174 | | | $ | 1,704 | | | | (930 | ) | | $ | (9,156 | ) |
| | | | |
Class R6 Shares: | | | | | | | | | | | | | | | | |
Shares sold | | | 20,683,370 | | | $ | 202,592,000 | | | | 21,649,534 | | | $ | 212,625,650 | |
Shares issued in reinvestment of distributions | | | 11,779 | | | | 115,199 | | | | 9,792 | | | | 96,166 | |
Shares redeemed | | | (51,867 | ) | | | (507,816 | ) | | | (126,232 | ) | | | (1,242,832 | ) |
| | | | |
Net increase (decrease) | | | 20,643,282 | | | $ | 202,199,383 | | | | 21,533,094 | | | $ | 211,478,984 | |
| | | | |
Advisor Class Shares: | | | | | | | | | | | | | | | | |
Shares sold | | | — | | | $ | — | | | | 19,425 | | | $ | 191,301 | |
Shares issued in reinvestment of distributions | | | 477 | | | | 4,658 | | | | 635 | | | | 6,240 | |
Shares redeemed | | | (4,066 | ) | | | (39,763 | ) | | | (181 | ) | | | (1,792 | ) |
| | | | |
Net increase (decrease) | | | (3,589 | ) | | $ | (35,105 | ) | | | 19,879 | | | $ | 195,749 | |
aMay include a portion of Class C shares that were automatically converted to Class A.
3. Transactions with Affiliates
Franklin Resources, Inc. is the holding company for various subsidiaries that together are referred to as Franklin Templeton Investments. Certain officers and trustees of the Trust are also officers and/or directors of the following subsidiaries:
| | | | |
| Subsidiary | | Affiliation | | |
| | |
| Franklin Advisers, Inc. (Advisers) | | Investment manager | | |
| | |
| Franklin Templeton Institutional, LLC (FT Institutional) | | Investment manager | | |
| | |
| Franklin Templeton Services, LLC (FT Services) | | Administrative manager | | |
| | |
| Franklin Templeton Distributors, Inc. (Distributors) | | Principal underwriter | | |
| | |
| Franklin Templeton Investor Services, LLC (Investor Services) | | Transfer agent | | |
a. Management Fees
The Fund pays an investment management fee to Advisers based on the average daily net assets of the Fund as follows:
| | | | |
| Annualized Fee Rate | | Net Assets | | |
| | |
| 0.550% | | Up to and including $1 billion | | |
| | |
| 0.500% | | Over $1 billion, up to and including $5 billion | | |
| | |
| 0.450% | | Over $5 billion, up to and including $10 billion | | |
| | |
| 0.445% | | Over $10 billion, up to and including $15 billion | | |
| | |
| 0.440% | | Over $15 billion, up to and including $20 billion | | |
| | |
| 0.435% | | In excess of $20 billion | | |
For the period ended October 31, 2018, the annualized gross effective investment management fee rate was 0.550% of the Fund’s average daily net assets.
| | | | |
| | | |
| franklintempleton.com | | Semiannual Report | | 45 |
FRANKLIN STRATEGIC SERIES
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
Franklin Flexible Alpha Bond Fund (continued)
3. Transactions with Affiliates (continued)
a. Management Fees (continued)
Under a subadvisory agreement, FT Instituitional, an affiliate of Advisers, provides subadvisory services to the Fund. The subadvisory fee is paid by Advisers based on the Fund’s average daily net assets, and is not an additional expense of the Fund.
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 each share class, with the exception of Class R6 and Advisor Class shares, pursuant to Rule 12b-1 under the 1940 Act. Under the Fund’s Class A reimbursement distribution plan, the Fund reimburses Distributors for costs incurred in connection with the servicing, sale and distribution of the Fund’s shares up to the maximum annual plan rate. Under the Class A reimbursement distribution plan, costs exceeding the maximum for the current plan year cannot be reimbursed in subsequent periods. In addition, under the Fund’s Class C and R compensation distribution plans, the Fund pays Distributors for costs incurred in connection with the servicing, sale and distribution of the Fund’s shares up to the maximum annual plan rate for each class. The plan year, for purposes of monitoring compliance with the maximum annual plan rates, 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 | % |
Class R | | | 0.50 | % |
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 period:
| | | | |
Sales charges retained net of commissions paid to unaffiliated brokers/dealers | | $ | 179 | |
CDSC retained | | $ | 2 | |
Effective September 10, 2018, the Board approved changes to certain front-end sales charges and dealer commissions on Class A shares. Further details are disclosed in the Funds’ Prospectus.
e. Transfer Agent Fees
Each class of shares pays transfer agent fees to Investor Services for its performance of shareholder servicing obligations. The fees are based on an annualized asset based fee of 0.02% plus a transaction based fee. In addition, each class reimburses Investor Services for out of pocket expenses incurred and, except for Class R6, reimburses 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 period ended October 31, 2018, the Fund paid transfer agent fees of $31,619, of which $29,470 was retained by Investor Services.
| | | | |
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FRANKLIN STRATEGIC SERIES
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
Franklin Flexible Alpha Bond Fund (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. During the period ended October 31, 2018, the Fund held investments in affiliated management investment companies as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Number of
Shares Held
at Beginning
of Period | | | Gross
Additions | | | Gross
Reductions | | | Number of Shares Held at End of Period | | | Value at End of Period | | | Dividend
Income | | | Realized
Gain
(Loss) | | | Net Change in
Unrealized
Appreciation
(Depreciation) | |
Non-Controlled Affiliates | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Institutional Fiduciary Trust Money Market Portfolio, 1.83% | | | 44,846,991 | | | | 211,312,068 | | | | (155,939,797 | ) | | | 100,219,262 | | | | $100,219,262 | | | | $466,014 | | | | $ — | | | | $ — | |
| | | | | | | | | | | | |
g. Waiver and Expense Reimbursements
Advisers has contractually agreed in advance to waive or limit its fees and to assume as its own expense certain expenses otherwise payable by the Fund so that the expenses (excluding distribution fees, and acquired fund fees and expenses, and certain non-routine expenses or costs, including those relating to litigation, indemnification, reorganizations, and liquidations) for Class A, Class C, Class R, and Advisor Class of the Fund do not exceed 0.85%, and for Class R6 do not exceed 0.81%, based on the average net assets of each class until August 31, 2019. Total expenses waived or paid are not subject to recapture subsequent to the Fund’s fiscal year end.
Prior to September 1, 2018, expenses (excluding certain fees and expenses as previously disclosed) for Class R6 were limited to 0.85% based on the average net assets of the class.
Investor Services has voluntarily agreed in advance to waive or limit its fees so that the new transfer agent fee arrangement effective November 1, 2017 will not increase the fees retained by more than 0.02% based on the average net assets of the class. Investor Services may discontinue this waiver in the future.
h. Other Affiliated Transactions
At October 31, 2018, the shares of the Fund were owned by the following entities/investment companies:
| | | | | | | | |
| | | Shares | | | Percentage of
Outstanding Sharesa | |
Franklin Resources, Inc. | | | 31,020,441 | | | | 73.0% | |
Franklin Total Return Fund | | | 10,172,940 | | | | 24.0% | |
| | | | |
| | | 41,193,381 | | | | 97.0% | |
| | | | |
aInvestment activities of significant shareholders could have a material impact on the Fund.
4. Expense Offset Arrangement
The Fund has entered into an arrangement with its custodian whereby credits realized as a result of uninvested cash balances are used to reduce a portion of the Fund’s custodian expenses. During the period ended October 31, 2018, the custodian fees were reduced as noted in the Statement of Operations.
| | | | |
| | | |
| franklintempleton.com | | Semiannual Report | | 47 |
FRANKLIN STRATEGIC SERIES
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
Franklin Flexible Alpha Bond Fund (continued)
5. Income Taxes
At October 31, 2018, the cost of investments, net unrealized appreciation (depreciation) for income tax purposes were as follows:
| | | | |
Cost of investments | | $ | 439,832,402 | |
| |
Unrealized appreciation | | $ | 3,079,507 | |
Unrealized depreciation | | | (6,580,418 | ) |
| |
Net unrealized appreciation (depreciation) | | $ | (3,500,911 | ) |
Differences between income and/or capital gains as determined on a book basis and a tax basis are primarily due to differing treatments of paydown losses, bond discounts and premiums, swaps and financial futures transactions.
6. Investment Transactions
Purchases and sales of investments (excluding short term securities) for the period ended October 31, 2018, aggregated $184,634,594 and $17,163,249, respectively.
7. Credit Risk
At October 31, 2018, the Fund had 8.4% 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.
8. Other Derivative Information
At October 31, 2018, 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 | | Investments in securities, at value | | | $ 165,023 | a | | Options written, at value | | $ — |
| | Variation margin on futures contracts | | | 485,455 | b | | Variation margin on futures contracts | | 153,572b |
| | Variation margin on centrally cleared swap contracts | | | 513,425 | b | | Variation margin on centrally cleared swap contracts | | — |
| | Unrealized appreciation on OTC swap contracts | | | 1,396,422 | | | Unrealized depreciation on OTC swap contracts | | 183,415 |
Foreign exchange contracts | | Unrealized appreciation on OTC forward exchange contracts | | | 231,691 | | | Unrealized depreciation on OTC forward exchange contracts | | 251,899 |
Credit contracts | | Investments in securities, at value | | | 253,712 | a | | Options written, at value | | 123,469 |
| | Variation margin on centrally cleared swap contracts | | | — | | | Variation margin on centrally cleared swap contracts | | 3,472b |
| | OTC swap contracts (upfront payments) | | | 288,161 | | | OTC swap contracts (upfront receipts) | | 509,328 |
| | Unrealized appreciation on OTC swap contracts | | | 125,806 | | | Unrealized depreciation on OTC swap contracts | | 196,657 |
| | | | |
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48 | | Semiannual Report | | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
Franklin Flexible Alpha Bond Fund (continued)
| | | | | | | | | | |
| | | 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 |
Inflation contracts | | Variation margin on centrally cleared swap contracts | | | $ 24,763 | b | | Variation margin on centrally cleared swap contracts | | $ 57,249b |
| | | | | | | | | | |
Totals | | | | | $3,484,458 | | | | | $1,479,061 |
| | | | | | | | | | |
aPurchased option contracts are included in investments in securities, at value in the Statement of Assets and Liabilities.
bThis amount reflects the cumulative appreciation (depreciation) of futures contracts and centrally cleared swap 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.
For the period ended October 31, 2018, 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 Period | | | Statement of Operations Location | | Net Change in
Unrealized
Appreciation
(Depreciation)
for the
Period |
| | Net realized gain (loss) from: | | | | | | Net change in unrealized appreciation (depreciation) on: | | |
Interest rate contracts | | Investments | | $ | 44,224 | a | | Investments | | $ (56,773)a |
| | Written options | | | 15,180 | | | Written options | | (1,380) |
| | Futures contracts | | | (102,836) | | | Futures contracts | | 208,995 |
| | Swap contracts | | | (216,624) | | | Swap contracts | | 1,406,524 |
Foreign exchange contracts | | Forward exchange contracts | | | 45,641 | | | Forward exchange contracts | | 3,379 |
Credit contracts | | Investments | | | (57,719) | a | | Investments | | 123,675a |
| | Written options | | | 30,138 | | | Written options | | (64,406) |
| | Swap contracts | | | 238,108 | | | Swap contracts | | 1,955 |
Inflation contracts | | Swap contracts | | | (16) | | | Swap contracts | | (71,894) |
| | | | | | | | | | |
Totals | | | | $ | (3,904) | | | | | $1,550,075 |
| | | | | | | | | | |
aPurchased option contracts are included in net realized gain (loss) from investments and net change in unrealized appreciation (depreciation) on investments in the Statement of Operations.
For the period ended October 31, 2018, the average month end notional amount of futures contracts, options and swap contracts, and the average month end contract value for forward exchange contracts, were as follows:
| | | | |
Futures contracts | | $ | 99,762,506 | |
Options | | | 57,876,857 | |
Swap contracts | | | 135,185,178 | |
Forward exchange contracts | | | 18,005,341 | |
At October 31, 2018, the Fund’s OTC derivative assets and liabilities are as follows:
| | | | | | | | |
| | | Gross Amounts of Assets and Liabilities Presented
in the Statement of Assets and Liabilities | |
| | | Assetsa | | | Liabilitiesa | |
Derivatives | | | | | | | | |
Forward exchange contracts | | | $231,691 | | | | $ 251,899 | |
Options purchased | | | 418,735 | | | | — | |
Options written | | | — | | | | 123,469 | |
Swap contracts | | | 1,810,389 | | | | 889,400 | |
Total | | | $2,460,815 | | | | $1,264,768 | |
aAbsent an event of default or early termination, OTC derivative assets and liabilities are presented gross and not offset in the Statement of Assets and Liabilities.
| | | | |
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| franklintempleton.com | | Semiannual Report | | 49 |
FRANKLIN STRATEGIC SERIES
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
Franklin Flexible Alpha Bond Fund (continued)
8. Other Derivative Information (continued)
At October 31, 2018, the Fund’s OTC derivative assets, which may be offset against the Fund’s OTC derivative liabilities and collateral received from the counterparty, are as follows:
| | | | | | | | | | | | | | | | | | | | |
| | | | | | Amounts Not Offset in the Statement of Assets and Liabilities | | | |
| | | Gross Amounts of Assets Presented in the Statement of Assets and Liabilities | | | Financial Instruments Available for Offset | | | Financial Instruments Collateral Received | | | Cash Collateral Receiveda | | | Net Amount (Not less than zero) |
Counterparty | | | | | | | | | | | | | | | | | | | | |
BNDP | | | $ 18,375 | | | | $ (5,005 | ) | | | $ — | | | | $ — | | | | $ 13,370 | |
BZWS | | | 40,666 | | | | (40,666 | ) | | | — | | | | — | | | | — | |
CITI | | | 1,120,053 | | | | (423,716 | ) | | | — | | | | (696,337 | ) | | | — | |
DBAB | | | 350,096 | | | | — | | | | — | | | | (290,000 | ) | | | 60,096 | |
FBCO | | | 153,812 | | | | — | | | | — | | | | (153,812 | ) | | | — | |
GSCO | | | 159,206 | | | | (127,839 | ) | | | — | | | | (31,367 | ) | | | — | |
HSBK | | | 266,232 | | | | (1,077 | ) | | | — | | | | — | | | | 265,155 | |
JPHQ | | | 172,538 | | | | (172,538 | ) | | | — | | | | — | | | | — | |
MSCO | | | 1,020 | | | | (1,020 | ) | | | — | | | | — | | | | — | |
RBS | | | 434 | | | | (434 | ) | | | — | | | | — | | | | — | |
UBSW | | | 178,383 | | | | (47,235 | ) | | | — | | | | — | | | | 131,148 | |
| | | | |
Total | | | $2,460,815 | | | | $(819,530 | ) | | | $ — | | | | $(1,171,516 | ) | | | $469,769 | |
| | | | |
aIn some instances, the collateral amount disclosed in the table above was adjusted due to the requirement to limit collateral amount to avoid the effect of overcollateralization. Actual collateral received and/or pledged may be more than the amount disclosed herein.
At October 31, 2018, the Fund’s OTC derivative liabilities, which may be offset against the Fund’s OTC derivative assets and collateral pledged to the counterparty, are as follows:
| | | | | | | | | | | | | | | | | | | | |
| | | | | | Amounts Not Offset in the Statement of Assets and Liabilities | | | | |
| | | Gross Amounts of Liabilities Presented in the Statement of Assets and Liabilities | | | Financial Instruments Available for Offset | | | Financial Instruments Collateral Pledged | | | Cash Collateral Pledged | | | Net Amount (Not less than zero) | |
Counterparty | | | | | | | | | | | | | | | | | | | | |
BNDP | | | $ 5,005 | | | | $ (5,005 | ) | | | $ — | | | | $ — | | | | $ — | |
BZWS | | | 223,288 | | | | (40,666 | ) | | | — | | | | — | | | | 182,622 | |
CITI | | | 423,716 | | | | (423,716 | ) | | | — | | | | — | | | | — | |
DBAB | | | — | | | | — | | | | — | | | | — | | | | — | |
FBCO | | | — | | | | — | | | | — | | | | — | | | | — | |
GSCO | | | 127,839 | | | | (127,839 | ) | | | — | | | | — | | | | — | |
HSBK | | | 1,077 | | | | (1,077 | ) | | | — | | | | — | | | | — | |
JPHQ | | | 252,264 | | | | (172,538 | ) | | | — | | | | — | | | | 79,726 | |
MSCO | | | 77,204 | | | | (1,020 | ) | | | — | | | | — | | | | 76,184 | |
RBS | | | 107,140 | | | | (434 | ) | | | — | | | | — | | | | 106,706 | |
UBSW | | | 47,235 | | | | (47,235 | ) | | | — | | | | — | | | | — | |
| | | | |
Total | | | $1,264,768 | | | | $(819,530 | ) | | | $ — | | | | $ — | | | | $445,238 | |
| | | | |
See Note 1(d) regarding derivative financial instruments.
See Abbreviations on page 53.
| | | | |
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FRANKLIN STRATEGIC SERIES
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
Franklin Flexible Alpha Bond Fund (continued)
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 8, 2019. 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 period ended October 31, 2018, 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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| franklintempleton.com | | Semiannual Report | | 51 |
FRANKLIN STRATEGIC SERIES
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
Franklin Flexible Alpha Bond Fund (continued)
10. Fair Value Measurements (continued)
A summary of inputs used as of October 31, 2018, 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:a | | | | | | | | | | | | | | | | |
Management Investment Companies | | $ | 4,527,563 | | | $ | — | | | $ | — | | | $ | 4,527,563 | |
Corporate Bonds | | | — | | | | 107,757,198 | | | | — | | | | 107,757,198 | |
Foreign Government and Agency Securities | | | — | | | | 8,032,326 | | | | — | | | | 8,032,326 | |
U.S. Government and Agency Securities | | | — | | | | 4,098,517 | | | | — | | | | 4,098,517 | |
Asset-Backed Securities and Commercial Mortgage-Backed Securities | | | — | | | | 208,078,005 | | | | — | | | | 208,078,005 | |
Mortgage-Backed Securities | | | — | | | | 244,228 | | | | — | | | | 244,228 | |
Municipal Bonds | | | — | | | | 771,272 | | | | — | | | | 771,272 | |
Options Purchased | | | — | | | | 418,735 | | | | — | | | | 418,735 | |
Short Term Investments | | | 100,219,262 | | | | 301,500 | | | | — | | | | 100,520,762 | |
| | | | |
Total Investments in Securities | | $ | 104,746,825 | | | $ | 329,701,781 | | | $ | — | | | $ | 434,448,606 | |
| | | | |
| | | | |
Other Financial Instruments: | | | | | | | | | | | | | | | | |
Futures Contracts | | $ | 485,455 | | | $ | — | | | $ | — | | | $ | 485,455 | |
Forward Exchange Contracts | | | — | | | | 231,691 | | | | — | | | | 231,691 | |
Swap Contracts. | | | — | | | | 2,060,416 | | | | — | | | | 2,060,416 | |
| | | | |
Total Other Financial Instruments | | $ | 485,455 | | | $ | 2,292,107 | | | $ | — | | | $ | 2,777,562 | |
| | | | |
| | | | |
Liabilities: | | | | | | | | | | | | | | | | |
Other Financial Instruments: | | | | | | | | | | | | | | | | |
Options Written | | $ | — | | | $ | 123,469 | | | $ | — | | | $ | 123,469 | |
TBA Sales Commitments | | | — | | | | 292,066 | | | | — | | | | 292,066 | |
Futures Contracts | | | 153,572 | | | | — | | | | — | | | | 153,572 | |
Forward Exchange Contracts | | | — | | | | 251,899 | | | | — | | | | 251,899 | |
Swap Contracts | | | — | | | | 440,793 | | | | — | | | | 440,793 | |
| | | | |
Total Other Financial Instruments | | $ | 153,572 | | | $ | 1,108,227 | | | $ | — | | | $ | 1,261,799 | |
| | | | |
aFor detailed categories, see the accompanying Statement of Investments.
11. New Accounting Pronouncements
In August 2018, the Financial Accounting Standards Board issued Accounting Standards Update (ASU) No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurements. The amendments in the ASU modify the disclosure requirements on fair value measurements in Topic 820. The ASU is effective for interim and annual reporting periods beginning after December 15, 2019. Management has reviewed the requirements and believes the adoption of this ASU will not have a material impact on the financial statements.
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.
| | | | |
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52 | | Semiannual Report | | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
Franklin Flexible Alpha Bond Fund (continued)
Abbreviations
| | | | | | | | | | |
| Counterparty/Exchange | | Currency | | Selected Portfolio |
| | | | | |
| BNDP | | BNP Paribas | | AUD | | Australian Dollar | | CLO | | Collateralized Loan Obligation |
| BZWS | | Barclays Bank PLC | | EUR | | Euro | | CPI | | Consumer Price Index |
| CITI | | Citigroup, Inc. | | GBP | | British Pound | | ETF | | Exchange Traded Fund |
| DBAB | | Deutsche Bank AG | | IDR | | Indonesian Rupiah | | FHLMC | | Federal Home Loan Mortgage Corp. |
| FBCO | | Credit Suisse International | | USD | | United States Dollar | | FRN | | Floating Rate Note |
| GSCO | | Goldman Sachs Group, Inc. | | | | | | GO | | General Obligation |
| HSBK | | HSBC Bank PLC | | | | | | IO | | Interest Only |
| JPHQ | | JP Morgan Chase & Co. | | | | | | LIBOR | | London InterBank Offered Rate |
| MSCO | | Morgan Stanley | | | | | | RDA | | Redevelopment Agency/Authority |
| RBS | | Royal Bank of Scotland PLC | | | | | | SFR | | Single Family Revenue |
| SMB | | Citigroup Global Markets | | | | | | | | |
| UBSW | | UBS AG | | | | | | | | |
| | |
| Index | | |
| |
| CDX.EM.30 | | CDX Emerging Markets Index |
| CDX.NA.HY.Series number | | CDX North America High Yield Index |
| CDX.NA.IG.Series number | | CDX North America Investment Grade Index |
| MCDX.NA.Series number | | MCDX North America Index |
| | | | |
| | | |
| franklintempleton.com | | Semiannual Report | | 53 |
FRANKLIN STRATEGIC SERIES
FRANKLIN FLEXIBLE ALPHA BOND FUND
Shareholder Information
Proxy Voting Policies and Procedures
The Fund’s investment manager has established Proxy Voting Policies and Procedures (Policies) that the Fund uses to determine how to vote proxies relating to portfolio securities. Shareholders may view the Fund’s complete Policies online at franklintempleton.com. Alternatively, shareholders may request copies of the Policies free of charge by calling the Proxy Group collect at (954) 527-7678 or by sending a written request to: Franklin Templeton Companies, LLC, 300 S.E. 2nd Street, Fort Lauderdale, FL 33301, Attention: Proxy Group. Copies of the Fund’s proxy voting records are also made available online at franklintempleton.com and posted on the U.S. Securities and Exchange Commission’s website at sec.gov and reflect the most recent 12-month period ended June 30.
Quarterly Statement of Investments
The Trust, on behalf of the Fund, files a complete statement of investments with the U.S. Securities and Exchange Commission for the first and third quarters for each fiscal year on Form N-Q. Shareholders may view the filed Form N-Q by visiting the Commission’s website at sec.gov. The filed form may also be viewed and copied at the Commission’s Public Reference Room in Washington, DC. Information regarding the operations of the Public Reference Room may be obtained by calling (800) SEC-0330.
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| | Semiannual Report and Shareholder Letter Franklin Flexible Alpha Bond Fund Investment Manager Franklin Advisers, Inc. Subadvisor Franklin Templeton Institutional, LLC 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.
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© 2018 Franklin Templeton Investments. All rights reserved. | | 953 S 12/18 |
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and Shareholder Letter October 31, 2018 | | |
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| | Franklin Strategic Income Fund A SERIES OF FRANKLIN STRATEGIC SERIES |
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Sign up for electronic delivery at franklintempleton.com/edelivery
Franklin Templeton Investments
Successful investing begins with ambition. And achievement only comes when you reach for it. That’s why we continually strive to deliver better outcomes for investors. No matter what your goals are, our deep, global investment expertise allows us to offer solutions that can help.
During our more than 70 years of experience, we’ve managed through all kinds of markets—up, down and those in between. We’re always preparing for what may come next. It’s because of this, combined with our strength as one of the world’s largest asset managers that we’ve earned the trust of millions of investors around the world.
Dear Shareholder:
The six months ended October 31, 2018, benefited from mostly upbeat economic data as the U.S. job market continued to improve and the unemployment rate declined. During the second and third quarters, U.S. corporate profits rose, supported by healthy economic growth and tax cuts.
In September 2018, the Standard & Poor’s 500® Index (S&P 500®) reached an all-time high, but experienced heightened volatility near period-end due to investor concerns about U.S. Federal Reserve interest-rate policies, higher U.S. Treasury yields, trade tensions, a potentially slower economy and some weaker-than-expected fourth-quarter 2018 revenue guidance. Within this environment, U.S. stocks, as measured by the S&P 500, generated a modest positive total return for the six-month period. Investment-grade bonds, as measured by the Bloomberg Barclays U.S. Aggregate Bond Index, had a slightly negative total return for the same period.
We are committed to our long-term perspective and disciplined investment approach as we conduct a rigorous, fundamental analysis of securities with a regular emphasis on investment risk management.
We believe active, professional investment management serves investors well. We also recognize the important role of financial advisors in today’s markets and encourage investors to continue to seek their advice. Amid changing markets and economic conditions, we are confident investors with a well- diversified portfolio and a patient, long-term outlook should be well positioned for the years ahead.
In addition, Franklin Strategic Income Fund’s annual report includes more detail about prevailing conditions and a discussion about investment decisions during the period. Please remember all securities markets fluctuate, as do mutual fund share prices.
We thank you for investing with Franklin Templeton, welcome your questions and comments, and look forward to serving your future investment needs.
Sincerely,
Edward B. Jamieson
President and Chief Executive Officer –
Investment Management
Franklin Strategic Series
This letter reflects our analysis and opinions as of October 31, 2018, unless otherwise indicated. The information is not a complete analysis of every aspect of any market, country, industry, security or fund. Statements of fact are from sources considered reliable.
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| Not FDIC Insured | | | | | May Lose Value | | | | | No Bank Guarantee |
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| franklintempleton.com | | Not part of the semiannual report | | 1 |
Contents
Semiannual Report
Visit franklintempleton.com for fund updates, to access your account, or to find helpful financial planning tools.
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Semiannual Report
Franklin Strategic Income Fund
We are pleased to bring you Franklin Strategic Income Fund’s semiannual report for the period ended October 31, 2018.
Your Fund’s Goal and Main Investments
The Fund seeks a high level of current income, with capital appreciation over the long term as a secondary objective. The Fund uses an active asset allocation process and under normal market conditions invests at least 65% of its assets in U.S. and foreign debt securities, including those in emerging markets.
The Fund may invest in all varieties of fixed, variable and floating rate income securities, including bonds, U.S. and foreign government and agency securities, corporate loans (and loan participations), mortgage-backed securities and other asset-backed securities and convertible securities.
Performance Overview
The Fund’s Class A shares delivered a +0.41%% cumulative total return for the six months under review. In comparison, the Bloomberg Barclays U.S. Aggregate Bond Index, which represents the U.S. investment-grade fixed rate taxable bond market, had a -0.19% total return.1 The Lipper Multi-Sector Income Funds Classification Average, which consists of funds chosen by Lipper that seek current income by allocating assets among different fixed income securities sectors, with a significant portion rated below investment grade, produced a -0.34% total return.2 You can find more of the Fund’s performance data in the Performance Summary beginning on page 7.
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.
Economic and Market Overview
The U.S. economy grew during the six months under review. The economy grew faster in 2018’s second quarter, driven by consumer spending, business investment, exports and government spending, but moderated in the third quarter due to declines in exports and housing investment. The manufacturing and services sectors expanded during the period. The unemployment rate declined from 3.9% in April 2018, as reported at the beginning of the six-month period, to a nearly 49-year low of 3.7% at period-end.3 Annual inflation, as measured by the Consumer Price Index, was 2.5% in April 2018, as reported at the beginning of the period, and while it varied during the six months under review, it ended the period at 2.5%.3
The U.S. Federal Reserve (Fed) raised its target range for the federal funds rate 0.25% at its June 2018 meeting and continued to reduce its balance sheet as part of its ongoing plan to normalize monetary policy. In his congressional testimony in July 2018 and at the Fed symposium in August, Fed Chair Jerome Powell reiterated the Fed’s intention to gradually raise interest rates. At its September 2018 meeting, the Fed raised its target range for the federal funds rate 0.25% to 2.00%–2.25%, as widely expected. Furthermore, the Fed raised its forecast for U.S. economic growth in 2018 and 2019 and projected one more rate increase in 2018. Minutes from the Fed’s September meeting (released in October) indicated that a few officials expected monetary policy to become modestly restrictive of economic growth, while some officials seemed to favor increasing the federal funds rate temporarily above what they consider to be its longer-term level to reduce the risk of overshooting the Fed’s inflation objective. In contrast, some officials indicated they would not favor a restrictive policy unless they see clear signs of an overheating economy and rising inflation.
1. Source: Morningstar.
2. Source: Lipper, a Thomson Reuters Company. For the six-month period ended 10/31/18, this category consisted of 328 funds. Lipper calculations do not include sales charges or expense subsidization by a fund’s manager. Fund performance relative to the average may have differed if these or other factors had been considered.
The 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.
3. 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 Consolidated Statement of Investments (SOI). The Consolidated SOI begins on page 15.
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FRANKLIN STRATEGIC INCOME FUND
The 10-year Treasury yield, which moves inversely to its price, increased during the period. The yield rose to multi-year highs in May and October 2018 amid investor concerns about higher inflation and the Fed’s interest-rate path. Expectations that other central banks might scale back monetary stimulus and better-than-expected U.S. economic reports also pushed the yield higher. However, some factors weighed on the Treasury yield at certain points during the period, including concerns about political turmoil in Italy, political uncertainties in the U.S., tensions between the U.S. and North Korea, the Trump administration’s protectionist trade policies, U.S. trade disputes with its allies and China, and economic turmoil in Turkey and Argentina. Overall, the 10-year Treasury yield rose from 2.95% at the beginning of the period to 3.15% at period-end.
Portfolio Composition*
Based on Consolidated Net Assets
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| | | | 10/31/18 | | | | 4/30/18 | |
High-Yield Corporate Bonds | | | 25.7% | | | | 32.0% | |
Mortgage-Backed Securities | | | 17.9% | | | | 14.7% | |
Investment Grade Corporate Bonds | | | 17.2% | | | | 16.2% | |
Floating-Rate Loans | | | 16.2% | | | | 15.6% | |
International Government & Agency Bonds | | | 7.9% | | | | 8.8% | |
Collateral Loan Obligations | | | 7.6% | | | | 5.5% | |
Commercial Mortgage-Backed Securities | | | 2.5% | | | | 2.4% | |
Treasury Inflation-Protected Securities | | | 2.2% | | | | 2.0% | |
Asset-Backed Securities | | | 2.1% | | | | 2.4% | |
U.S. Treasury Securities | | | 2.1% | | | | 2.0% | |
Municipal Bonds | | | 1.5% | | | | 1.2% | |
Other | | | 1.2% | | | | 0.7% | |
Marketplace Loans | | | 0.2% | | | | 0.0% | |
Covered Bonds | | | 0.1% | | | | 0.0% | |
Short-Term Investments & Other Net Assets | | | -4.4% | | | | -3.5% | |
*Figures reflect certain derivatives held in the portfolio (or their underlying reference assets) and may not total 100% or may be negative due to rounding, use of any derivatives, unsettled trades or other factors. The composition may not match the SOI.
Investment Strategy
We use an active asset allocation strategy to try to achieve the Fund’s investment goals. We employ a top-down analysis of macroeconomic trends combined with a bottom-up fundamental analysis of market sectors, industries and issuers to try to take advantage of varying sector reactions to economic events. We regularly enter into various currency-related transactions involving derivative instruments, including currency and cross currency forwards, currency swaps, currency and currency index futures contracts and currency options. We may also enter into interest-rate and credit-related transactions involving derivative instruments, including
interest-rate, fixed income total return and credit default swaps and interest rate and/or bond futures contracts.
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What is a currency forward contract? A currency forward contract is an agreement between the Fund and a counterparty to buy or sell a foreign currency in exchange for another currency at a specific exchange rate on a future date. Currency forward contracts are privately traded in the interbank market, not on a centralized exchange. |
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What are swap agreements? Swap agreements, such as interest-rate, currency and credit default swaps, are contracts between the Fund and another party (the swap counterparty). In a basic swap transaction, the Fund agrees with the swap counterparty to exchange the returns (or differentials in rates of return) earned or realized on a particular “notional amount” of underlying instruments. The notional amount is the set amount selected by the parties as the basis on which to calculate the obligations that they have agreed to exchange. The parties typically do not actually exchange the notional amount. Instead, they agree to exchange the returns that would be earned or realized if the notional amount were invested in given instruments or at given interest rates. |
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What is a futures contract? A futures contract is an agreement between the Fund and a counterparty made through a U.S. or foreign futures exchange to buy or sell an underlying instrument or asset at a specific price on a future date. |
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What is an option? An option is a contract to buy or sell a specific financial product known as the option’s underlying instrument at a specific price. The buyer of an option has the right, but not the obligation, to buy or sell the underlying instrument at or until a specified expiration date. Conversely, the seller (“writer”) of an option who opens a transaction is obligated to buy or sell the underlying instrument should the option holder exercise that right. |
Manager’s Discussion
For global fixed income markets, the six months under review began with low levels of volatility, strong risk appetite and relatively low interest rates. The Fed raised its rates in June and September 2018 and projected one more increase in 2018 citing a continued strengthening of the economy and strong labor market conditions. Divergences in monetary policy stances as well as long-term yields contributed to U.S. dollar appreciation, which resulted in marginally tighter, localized pressures due to currency depreciation in emerging market countries such as
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FRANKLIN STRATEGIC INCOME FUND
Argentina and Turkey during the period. However, investors were encouraged by an overall easing of tensions in the Korean Peninsula, a U.S.-EU agreement to try to reduce trade barriers and a trade deal between the U.S., Mexico and Canada. By period-end, the market experienced heightened volatility amid investor concerns with increased interest rates, the Trump administrations protectionist policies and the potential impact of the U.S.-China trade tensions.
In this environment, senior secured floating rate loans, high-yield corporate credit, commercial mortgage-backed securities (CMBS) and U.S. agency bonds outpaced U.S. Treasuries on a duration-matched basis. Senior secured floating rate loans and high yield bonds were the strongest performers, as were CMBS.
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What is duration? Duration is a measure of a bond’s price sensitivity to interest-rate changes. In general, a portfolio of securities with a lower duration can be expected to be less sensitive to interest-rate changes than a portfolio with a higher duration. |
Dividend Distributions*
5/1/18–10/31/18
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| | | Dividend per Share (cents) | |
| Month | | Class A | | | Class C | | | Class R | | | Class R6 | | | Advisor
Class | |
May | | | 3.11 | | | | 2.79 | | | | 2.92 | | | | 3.39 | | | | 3.31 | |
June | | | 3.46 | | | | 3.12 | | | | 3.25 | | | | 3.79 | | | | 3.67 | |
July | | | 3.61 | | | | 3.29 | | | | 3.41 | | | | 3.92 | | | | 3.81 | |
August | | | 3.61 | | | | 3.27 | | | | 3.40 | | | | 3.94 | | | | 3.82 | |
September | | | 3.61 | | | | 3.31 | | | | 3.43 | | | | 3.90 | | | | 3.79 | |
October | | | 3.62 | | | | 3.14 | | | | 3.38 | | | | 3.97 | | | | 3.84 | |
Total | | | 21.02 | | | | 18.92 | | | | 19.79 | | | | 22.91 | | | | 22.24 | |
* The distribution amount is the sum of all estimated tax-basis net investment income distributions for the period shown. A portion or all of the distribution may be reclassified as return of capital or short-term or long-term capital gains once final tax designations are known. All Fund distributions will vary depending upon current market conditions, and past distributions are not indicative of future trends.
During the period, the Fund’s U.S. duration exposure was a significant boost to performance. Additionally, our exposure to non-dollar developed securities also added to results. Senior secured floating rate loans, sovereign emerging markets securities and tax-exempt municipal bonds also benefited returns. Our exposure to foreign currencies, fixed-rate agency mortgage-backed securities (MBS) and sovereign developed securities hurt performance.
During the period, the Fund’s corporate credit exposure (inclusive of high-yield and investment-grade corporate credit, senior secured floating-rate bank loans and collateralized loan
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What is the yield curve? A yield curve is a line that plots the yield to maturity of bonds having equal credit quality against their maturity dates. |
obligations), benefited from strong performance across corporate sectors. U.S. duration exposure was a significant boost to performance. Additionally, our exposure to non-dollar developed and sovereign emerging markets securities also added to results. Foreign currency exposure was largely negative for overall for returns with positive returns from our Australian dollar and Canadian dollar shorts being offset by negative performance of our short euro and Brazilian real positions.
The Fund remained allocated across spread sectors, both corporate and securitized. Over the period, we reduced high-yield corporate credit due to strong sector performance and increased our exposure to senior secured floating-rate loans, collateralized loan obligations and investment-grade corporate bonds. In our analysis, opportunities remained in the non-agency residential MBS asset class. During the period, the portfolio added exposure to the sector where we preferred to remain allocated to the seasoned credit risk transfer, where, in our opinion, fundamental and technical forces remained positive. We maintained our CMBS exposure at the top of the capital structure as commercial real estate prices have surpassed pre-financial crisis levels, rent growth slowed and capitalization rates trended higher.
We continued to reduce our foreign-currency risk. Our foreign currency exposure was held through a basket of developed-market shorts with major positions in the Australian dollar, euro and Canadian dollar versus a basket of emerging market long positions with major positions in the Mexican peso, Indonesian rupiah and Indian rupee.
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FRANKLIN STRATEGIC INCOME FUND
Thank you for your continued participation in Franklin Strategic Income Fund. We look forward to serving your future investment needs.
The foregoing information reflects our analysis, opinions and portfolio holdings as of October 31, 2018, the end of the reporting period. The way we implement our main investment strategies and the resulting portfolio holdings may change depending on factors such as market and economic conditions. These opinions may not be relied upon as investment advice or an offer for a particular security. The information is not a complete analysis of every aspect of any market, country, industry, security or the Fund. Statements of fact are from sources considered reliable, but the investment manager makes no representation or warranty as to their completeness or accuracy. Although historical performance is no guarantee of future results, these insights may help you understand our investment management philosophy.
CFA® is a trademark owned by CFA Institute.
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FRANKLIN STRATEGIC INCOME FUND
Performance Summary as of October 31, 2018
The performance tables 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 10/31/181
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.
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| Share Class | | Cumulative
Total Return2 | | | Average Annual
Total Return3 | |
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| A | | | | | | | | |
6-Month | | | +0.41 | % | | | -3.89 | % |
1-Year | | | -0.82 | % | | | -5.04 | % |
5-Year | | | +9.40 | % | | | +0.93 | % |
10-Year | | | +86.29 | % | | | +5.96 | % |
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| Advisor | | | | | | | | |
6-Month | | | +0.65 | % | | | +0.65 | % |
1-Year | | | -0.57 | % | | | -0.57 | % |
5-Year | | | +10.77 | % | | | +2.07 | % |
10-Year | | | +90.91 | % | | | +6.68 | % |
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| Share Class | | Distribution
Rate4 | | | 30-Day Standardized Yield5 | |
| | (with waiver) | | | (without waiver) | |
A | | | 3.85 | % | | | 4.34 | % | | | 4.28 | % |
Advisor | | | 4.28 | % | | | 4.79 | % | | | 4.73 | % |
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 INCOME FUND
PERFORMANCE SUMMARY
Distributions (5/1/18–10/31/18)
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| Share Class | | Net Investment
Income | |
| A | | | $0.2102 | |
| C | | | $0.1892 | |
| R | | | $0.1979 | |
| R6 | | | $0.2291 | |
| Advisor | | | $0.2224 | |
Total Annual Operating Expenses6
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| Share Class | | With Waiver | | | Without Waiver | |
| A | | | 0.88% | | | | 0.93% | |
| Advisor | | | 0.63% | | | | 0.68% | |
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. 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. Changes in the financial strength of a bond issuer or in a bond’s credit rating may affect its value. High yields reflect the higher credit risks associated with certain lower rated securities held in the portfolio. Floating rate loans and high yield corporate bonds are rated below investment grade and are subject to greater risk of default, which could result in loss of principal—a risk that may be heightened in a slowing economy. The risks of foreign securities include currency fluctuations and political uncertainty. Investments in developing markets involve heightened risks related to the same factors, in addition to those associated with their relatively small size and lesser liquidity. Investing in derivative securities and the use of foreign currency techniques involve special risks as such may not achieve the anticipated benefits and/or may result in losses to the Fund. 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 8/31/19. 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. Distribution rate is based on the sum of the respective class’s dividend distributions over the past 12 months and the maximum offering price (NAV for Advisor Class) per share on 10/31/18.
5. 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.
6. 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 Consolidated 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.
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FRANKLIN STRATEGIC INCOME FUND
Your Fund’s Expenses
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.
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| | | | | Actual
(actual return after expenses) | | Hypothetical
(5% annual return before expenses) | | |
Share Class | | Beginning
Account
Value 5/1/18 | | Ending
Account
Value 10/31/18 | | Expenses Paid During Period
5/1/18–10/31/181,2 | | Ending
Account
Value 10/31/18 | | Expenses Paid During Period
5/1/18–10/31/181,2 | | Net
Annualized
Expense
Ratio2 |
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| A | | $1,000 | | $1,004.10 | | $4.19 | | $1,021.02 | | $4.23 | | 0.83% |
| C | | $1,000 | | $1,003.00 | | $6.21 | | $1,019.00 | | $6.26 | | 1.23% |
| R | | $1,000 | | $1,002.90 | | $5.45 | | $1,019.76 | | $5.50 | | 1.08% |
| R6 | | $1,000 | | $1,006.10 | | $2.22 | | $1,022.99 | | $2.24 | | 0.44% |
| Advisor | | $1,000 | | $1,006.50 | | $2.93 | | $1,022.28 | | $2.96 | | 0.58% |
1. 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 184/365 to reflect the one-half year period.
2. Reflects expenses after fee waivers and expense reimbursements. Does not include acquired fund fees and expenses.
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FRANKLIN STRATEGIC SERIES
Consolidated Financial Highlights
Franklin Strategic Income Fund
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| | | Six Months Ended
October 31, 2018
(unaudited) | | | Year Ended April 30, | |
| | | 2018 | | | 2017 | | | 2016 | | | 2015 | | | 2014 | |
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Class A | | | | | | | | | | | | | | | | | | | | | | | | |
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Per share operating performance | | | | | | | | | | | | | | | | | | | | | | | | |
(for a share outstanding throughout the period) | | | | | | | | | | | | | | | | | | | | | | | | |
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Net asset value, beginning of period | | | $ 9.61 | | | | $ 9.84 | | | | $ 9.32 | | | | $10.04 | | | | $10.57 | | | | $10.86 | |
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| | | | | | |
Income from investment operationsa: | | | | | | | | | | | | | | | | | | | | | | | | |
Net investment incomeb | | | 0.21 | | | | 0.39 | | | | 0.39 | | | | 0.42 | | | | 0.42 | | | | 0.44 | |
Net realized and unrealized gains (losses) | | | (0.17 | ) | | | (0.32 | ) | | | 0.30 | | | | (0.74 | ) | | | (0.30 | ) | | | (0.18 | ) |
| | | | |
| | | | | | |
Total from investment operations | | | 0.04 | | | | 0.07 | | | | 0.69 | | | | (0.32 | ) | | | 0.12 | | | | 0.26 | |
| | | | |
| | | | | | |
Less distributions from: | | | | | | | | | | | | | | | | | | | | | | | | |
Net investment income and net foreign currency gains | | | (0.21 | ) | | | (0.30 | ) | | | (0.17 | ) | | | (0.40 | ) | | | (0.55 | ) | | | (0.45 | ) |
Net realized gains | | | — | | | | — | | | | — | | | | — | | | | (0.10 | ) | | | (0.10 | ) |
| | | | |
| | | | | | |
Total distributions | | | (0.21 | ) | | | (0.30 | ) | | | (0.17 | ) | | | (0.40 | ) | | | (0.65 | ) | | | (0.55 | ) |
| | | | |
| | | | | | |
Net asset value, end of period | | | $ 9.44 | | | | $ 9.61 | | | | $ 9.84 | | | | $ 9.32 | | | | $10.04 | | | | $10.57 | |
| | | | |
| | | | | | |
Total returnc | | | 0.41% | | | | 0.64% | | | | 7.50% | | | | (3.14)% | | | | 1.16% | | | | 2.52% | |
| | | | | | |
Ratios to average net assetsd | | | | | | | | | | | | | | | | | | | | | | | | |
Expenses before waiver and payments by affiliates | | | 0.89% | | | | 0.90% | | | | 0.88% | | | | 0.88% | | | | 0.86% | | | | 0.86% | |
Expenses net of waiver and payments by affiliatese | | | 0.83% | | | | 0.85% | | | | 0.82% | | | | 0.84% | | | | 0.85% | | | | 0.86% | f |
Net investment income | | | 4.30% | | | | 3.93% | | | | 4.08% | | | | 4.44% | | | | 4.03% | | | | 4.16% | |
| | | | | | |
Supplemental data | | | | | | | | | | | | | | | | | | | | | | | | |
Net assets, end of period (000’s) | | | $3,182,735 | | | | $3,291,002 | | | | $3,833,786 | | | | $4,500,752 | | | | $5,242,844 | | | | $5,182,490 | |
Portfolio turnover rate | | | 51.80% | | | | 115.94% | | | | 140.83% | | | | 88.04% | | | | 72.51% | | | | 54.11% | |
Portfolio turnover rate excluding mortgage dollar rollsg | | | 15.14% | | | | 47.40% | | | | 87.33% | | | | 48.33% | | | | 49.36% | | | | 54.11% | |
aThe amount shown for a share outstanding throughout the period may not correlate with the Consolidated 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.
bBased on average daily shares outstanding.
cTotal return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year.
dRatios are annualized for periods less than one year.
eBenefit of expense reduction rounds to less than 0.01%.
fBenefit of waiver and payments by affiliates rounds to less than 0.01%.
gSee Note 1(i) regarding mortgage dollar rolls.
| | | | |
| | | |
10 | | Semiannual Report | The accompanying notes are an integral part of these consolidated financial statements. | | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
CONSOLIDATED FINANCIAL HIGHLIGHTS
Franklin Strategic Income Fund (continued)
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Six Months Ended
October 31, 2018
(unaudited) | | | Year Ended April 30, | |
| | | 2018 | | | 2017 | | | 2016 | | | 2015 | | | 2014 | |
| | | | | | |
Class C | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | |
Per share operating performance | | | | | | | | | | | | | | | | | | | | | | | | |
(for a share outstanding throughout the period) | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | |
Net asset value, beginning of period | | | $ 9.60 | | | | $ 9.84 | | | | $ 9.31 | | | | $10.04 | | | | $10.57 | | | | $10.85 | |
| | | | |
| | | | | | |
Income from investment operationsa: | | | | | | | | | | | | | | | | | | | | | | | | |
Net investment incomeb | | | 0.19 | | | | 0.35 | | | | 0.35 | | | | 0.38 | | | | 0.38 | | | | 0.40 | |
Net realized and unrealized gains (losses) | | | (0.16 | ) | | | (0.33 | ) | | | 0.31 | | | | (0.75 | ) | | | (0.30 | ) | | | (0.17 | ) |
| | | | |
| | | | | | |
Total from investment operations | | | 0.03 | | | | 0.02 | | | | 0.66 | | | | (0.37 | ) | | | 0.08 | | | | 0.23 | |
| | | | |
| | | | | | |
Less distributions from: | | | | | | | | | | | | | | | | | | | | | | | | |
Net investment income and net foreign currency gains | | | (0.19 | ) | | | (0.26 | ) | | | (0.13 | ) | | | (0.36 | ) | | | (0.51 | ) | | | (0.41 | ) |
Net realized gains | | | — | | | | — | | | | — | | | | — | | | | (0.10 | ) | | | (0.10 | ) |
| | | | |
| | | | | | |
Total distributions | | | (0.19 | ) | | | (0.26 | ) | | | (0.13 | ) | | | (0.36 | ) | | | (0.61 | ) | | | (0.51 | ) |
| | | | |
| | | | | | |
Net asset value, end of period | | | $ 9.44 | | | | $ 9.60 | | | | $ 9.84 | | | | $ 9.31 | | | | $10.04 | | | | $10.57 | |
| | | | |
| | | | | | |
Total returnc | | | 0.30% | | | | 0.14% | | | | 7.19% | | | | (3.64)% | | | | 0.76% | | | | 2.20% | |
| | | | | | |
Ratios to average net assetsd | | | | | | | | | | | | | | | | | | | | | | | | |
Expenses before waiver and payments by affiliates | | | 1.29% | | | | 1.30% | | | | 1.28% | | | | 1.28% | | | | 1.26% | | | | 1.26% | |
Expenses net of waiver and payments by affiliatese | | | 1.23% | | | | 1.25% | | | | 1.22% | | | | 1.24% | | | | 1.25% | | | | 1.26% | f |
Net investment income | | | 3.90% | | | | 3.53% | | | | 3.68% | | | | 4.04% | | | | 3.63% | | | | 3.76% | |
| | | | | | |
Supplemental data | | | | | | | | | | | | | | | | | | | | | | | | |
Net assets, end of period (000’s) | | | $788,868 | | | | $1,078,890 | | | | $1,385,981 | | | | $1,645,852 | | | | $2,070,739 | | | | $2,109,049 | |
Portfolio turnover rate | | | 51.80% | | | | 115.94% | | | | 140.83% | | | | 88.04% | | | | 72.51% | | | | 54.11% | |
Portfolio turnover rate excluding mortgage dollar rollsg | | | 15.14% | | | | 47.40% | | | | 87.33% | | | | 48.33% | | | | 49.36% | | | | 54.11% | |
aThe amount shown for a share outstanding throughout the period may not correlate with the Consolidated 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.
bBased on average daily shares outstanding.
cTotal return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year.
dRatios are annualized for periods less than one year.
eBenefit of expense reduction rounds to less than 0.01%.
fBenefit of waiver and payments by affiliates rounds to less than 0.01%.
gSee Note 1(i) regarding mortgage dollar rolls.
| | | | |
| | | |
| franklintempleton.com | | The accompanying notes are an integral part of these consolidated financial statements. | Semiannual Report | | 11 |
FRANKLIN STRATEGIC SERIES
CONSOLIDATED FINANCIAL HIGHLIGHTS
Franklin Strategic Income Fund (continued)
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Six Months Ended
October 31, 2018
(unaudited) | | | Year Ended April 30, | |
| | | 2018 | | | 2017 | | | 2016 | | | 2015 | | | 2014 | |
| | | | | | |
Class R | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | |
Per share operating performance | | | | | | | | | | | | | | | | | | | | | | | | |
(for a share outstanding throughout the period) | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | |
Net asset value, beginning of period | | | $ 9.57 | | | | $ 9.81 | | | | $ 9.28 | | | | $10.01 | | | | $10.54 | | | | $10.82 | |
| | | | |
| | | | | | |
Income from investment operationsa: | | | | | | | | | | | | | | | | | | | | | | | | |
Net investment incomeb | | | 0.19 | | | | 0.36 | | | | 0.37 | | | | 0.39 | | | | 0.39 | | | | 0.41 | |
Net realized and unrealized gains (losses) | | | (0.16 | ) | | | (0.33 | ) | | | 0.31 | | | | (0.74 | ) | | | (0.29 | ) | | | (0.17 | ) |
| | | | |
Total from investment operations | | | 0.03 | | | | 0.03 | | | | 0.68 | | | | (0.35 | ) | | | 0.10 | | | | 0.24 | |
| | | | |
| | | | | | |
Less distributions from: | | | | | | | | | | | | | | | | | | | | | | | | |
Net investment income and net foreign currency gains | | | (0.20 | ) | | | (0.27 | ) | | | (0.15 | ) | | | (0.38 | ) | | | (0.53 | ) | | | (0.42 | ) |
Net realized gains | | | — | | | | — | | | | — | | | | — | | | | (0.10 | ) | | | (0.10 | ) |
| | | | | | |
Total distributions | | | (0.20 | ) | | | (0.27 | ) | | | (0.15 | ) | | | (0.38 | ) | | | (0.63 | ) | | | (0.52 | ) |
| | | | |
| | | | | | |
Net asset value, end of period | | | $ 9.40 | | | | $ 9.57 | | | | $ 9.81 | | | | $ 9.28 | | | | $10.01 | | | | $10.54 | |
| | | | |
| | | | | | |
Total returnc | | | 0.29% | | | | 0.29% | | | | 7.38% | | | | (3.50)% | | | | 0.91% | | | | 2.36% | |
| | | | | | |
Ratios to average net assetsd | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | |
Expenses before waiver and payments by affiliates | | | 1.14% | | | | 1.15% | | | | 1.13% | | | | 1.13% | | | | 1.11% | | | | 1.11% | |
| | | | | | |
Expenses net of waiver and payments by affiliatese | | | 1.08% | | | | 1.10% | | | | 1.07% | | | | 1.09% | | | | 1.10% | | | | 1.11% | f |
| | | | | | | |
Net investment income | | | 4.05% | | | | 3.68% | | | | 3.83% | | | | 4.19% | | | | 3.78% | | | | 3.91% | |
| | | | | | |
Supplemental data | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | |
Net assets, end of period (000’s) | | | $95,193 | | | | $105,692 | | | | $146,552 | | | | $181,671 | | | | $223,758 | | | | $227,359 | |
| | | | | | |
Portfolio turnover rate | | | 51.80% | | | | 115.94% | | | | 140.83% | | | | 88.04% | | | | 72.51% | | | | 54.11% | |
| | | | | | |
Portfolio turnover rate excluding mortgage dollar rollsg | | | 15.14% | | | | 47.40% | | | | 87.33% | | | | 48.33% | | | | 49.36% | | | | 54.11% | |
aThe amount shown for a share outstanding throughout the period may not correlate with the Consolidated 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.
bBased on average daily shares outstanding.
cTotal return is not annualized for periods less than one year.
dRatios are annualized for periods less than one year.
eBenefit of expense reduction rounds to less than 0.01%.
fBenefit of waiver and payments by affiliates rounds to less than 0.01%.
gSee Note 1(i) regarding mortgage dollar rolls.
| | | | |
| | | |
12 | | Semiannual Report | The accompanying notes are an integral part of these consolidated financial statements. | | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
CONSOLIDATED FINANCIAL HIGHLIGHTS
Franklin Strategic Income Fund (continued)
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Six Months Ended
October 31, 2018
(unaudited) | | | Year Ended April 30, | |
| | | 2018 | | | 2017 | | | 2016 | | | 2015 | | | 2014a | |
| | | | | | |
Class R6 | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | |
Per share operating performance | | | | | | | | | | | | | | | | | | | | | | | | |
(for a share outstanding throughout the period) | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | |
Net asset value, beginning of period | | | $ 9.62 | | | | $ 9.86 | | | | $ 9.33 | | | | $10.05 | | | | $10.58 | | | | $10.87 | |
| | | | |
| | | | | | |
Income from investment operationsb: | | | | | | | | | | | | | | | | | | | | | | | | |
Net investment incomec | | | 0.23 | | | | 0.43 | | | | 0.43 | | | | 0.46 | | | | 0.46 | | | | 0.49 | |
Net realized and unrealized gains (losses) | | | (0.17 | ) | | | (0.34 | ) | | | 0.31 | | | | (0.74 | ) | | | (0.30 | ) | | | (0.19 | ) |
| | | | |
| | | | | | |
Total from investment operations | | | 0.06 | | | | 0.09 | | | | 0.74 | | | | (0.28 | ) | | | 0.16 | | | | 0.30 | |
| | | | |
| | | | | | |
Less distributions from: | | | | | | | | | | | | | | | | | | | | | | | | |
Net investment income and net foreign currency gains | | | (0.23 | ) | | | (0.33 | ) | | | (0.21 | ) | | | (0.44 | ) | | | (0.59 | ) | | | (0.49 | ) |
Net realized gains | | | — | | | | — | | | | — | | | | — | | | | (0.10 | ) | | | (0.10 | ) |
| | | | |
| | | | | | |
Total distributions | | | (0.23 | ) | | | (0.33 | ) | | | (0.21 | ) | | | (0.44 | ) | | | (0.69 | ) | | | (0.59 | ) |
| | | | |
| | | | | | |
Net asset value, end of period | | | $ 9.45 | | | | $ 9.62 | | | | $ 9.86 | | | | $ 9.33 | | | | $10.05 | | | | $10.58 | |
| | | | |
| | | | | | |
Total returnd | | | 0.61% | | | | 0.95% | | | | 8.03% | | | | (2.76)% | | | | 1.54% | | | | 2.90% | |
| | | | | | |
Ratios to average net assetse | | | | | | | | | | | | | | | | | | | | | | | | |
Expenses before waiver and payments by affiliates | | | 0.51% | | | | 0.50% | | | | 0.48% | | | | 0.49% | | | | 0.48% | | | | 0.48% | |
Expenses net of waiver and payments by affiliatesf | | | 0.44% | | | | 0.45% | | | | 0.42% | | | | 0.45% | | | | 0.47% | | | | 0.48% | g |
Net investment income | | | 4.69% | | | | 4.33% | | | | 4.48% | | | | 4.83% | | | | 4.41% | | | | 4.54% | |
| | | | | | |
Supplemental data | | | | | | | | | | | | | | | | | | | | | | | | |
Net assets, end of period (000’s) | | | $430,953 | | | | $433,068 | | | | $369,106 | | | | $286,503 | | | | $253,929 | | | | $247,007 | |
Portfolio turnover rate | | | 51.80% | | | | 115.94% | | | | 140.83% | | | | 88.04% | | | | 72.51% | | | | 54.11% | |
Portfolio turnover rate excluding mortgage dollar rollsh | | | 15.14% | | | | 47.40% | | | | 87.33% | | | | 48.33% | | | | 49.36% | | | | 54.11% | |
aFor the year May 1, 2013 (effective date) to April 30, 2014.
bThe amount shown for a share outstanding throughout the period may not correlate with the Consolidated 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.
cBased on average daily shares outstanding.
dTotal return is not annualized for periods less than one year.
eRatios are annualized for periods less than one year.
fBenefit of expense reduction rounds to less than 0.01%.
gBenefit of waiver and payments by affiliates rounds to less than 0.01%.
hSee Note 1(i) regarding mortgage dollar rolls.
| | | | |
| | | |
| franklintempleton.com | | The accompanying notes are an integral part of these consolidated financial statements. | Semiannual Report | | 13 |
FRANKLIN STRATEGIC SERIES
CONSOLIDATED FINANCIAL HIGHLIGHTS
Franklin Strategic Income Fund (continued)
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Six Months Ended
October 31, 2018
(unaudited) | | | Year Ended April 30, | |
| | | 2018 | | | 2017 | | | 2016 | | | 2015 | | | 2014 | |
| | | | | | |
Advisor Class | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | |
Per share operating performance | | | | | | | | | | | | | | | | | | | | | | | | |
(for a share outstanding throughout the period) | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | |
Net asset value, beginning of period | | | $ 9.62 | | | | $ 9.85 | | | | $ 9.33 | | | | $10.05 | | | | $10.58 | | | | $10.86 | |
| | | | |
| | | | | | |
Income from investment operationsa: | | | | | | | | | | | | | | | | | | | | | | | | |
Net investment incomeb | | | 0.22 | | | | 0.41 | | | | 0.42 | | | | 0.44 | | | | 0.44 | | | | 0.47 | |
Net realized and unrealized gains (losses) | | | (0.17 | ) | | | (0.32 | ) | | | 0.30 | | | | (0.74 | ) | | | (0.29 | ) | | | (0.17 | ) |
| | | | |
| | | | | | |
Total from investment operations | | | 0.05 | | | | 0.09 | | | | 0.72 | | | | (0.30 | ) | | | 0.15 | | | | 0.30 | |
| | | | |
| | | | | | |
Less distributions from: | | | | | | | | | | | | | | | | | | | | | | | | |
Net investment income and net foreign currency gains | | | (0.22 | ) | | | (0.32 | ) | | | (0.20 | ) | | | (0.42 | ) | | | (0.58 | ) | | | (0.48 | ) |
Net realized gains | | | — | | | | — | | | | — | | | | — | | | | (0.10 | ) | | | (0.10 | ) |
| | | | |
| | | | | | |
Total distributions | | | (0.22 | ) | | | (0.32 | ) | | | (0.20 | ) | | | (0.42 | ) | | | (0.68 | ) | | | (0.58 | ) |
| | | | |
| | | | | | |
Net asset value, end of period | | | $ 9.45 | | | | $ 9.62 | | | | $ 9.85 | | | | $ 9.33 | | | | $10.05 | | | | $10.58 | |
| | | | |
| | | | | | |
Total returnc | | | 0.65% | | | | 0.79% | | | | 7.76% | | | | (2.89)% | | | | 1.41% | | | | 2.87% | |
| | | | | | |
Ratios to average net assetsd | | | | | | | | | | | | | | | | | | | | | | | | |
Expenses before waiver and payments by affiliates | | | 0.64% | | | | 0.65% | | | | 0.63% | | | | 0.63% | | | | 0.61% | | | | 0.61% | |
Expenses net of waiver and payments by affiliatese | | | 0.58% | | | | 0.60% | | | | 0.57% | | | | 0.59% | | | | 0.60% | | | | 0.61% | f |
Net investment income | | | 4.55% | | | | 4.18% | | | | 4.33% | | | | 4.69% | | | | 4.28% | | | | 4.41% | |
| | | | | | |
Supplemental data | | | | | | | | | | | | | | | | | | | | | | | | |
Net assets, end of period (000’s) | | | $880,470 | | | | $933,747 | | | | $1,070,103 | | | | $904,899 | | | | $1,130,796 | | | | $1,010,755 | |
Portfolio turnover rate | | | 51.80% | | | | 115.94% | | | | 140.83% | | | | 88.04% | | | | 72.51% | | | | 54.11% | |
Portfolio turnover rate excluding mortgage dollar rollsg | | | 15.14% | | | | 47.40% | | | | 87.33% | | | | 48.33% | | | | 49.36% | | | | 54.11% | |
aThe amount shown for a share outstanding throughout the period may not correlate with the Consolidated 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.
bBased on average daily shares outstanding.
cTotal return is not annualized for periods less than one year.
dRatios are annualized for periods less than one year.
eBenefit of expense reduction rounds to less than 0.01%.
fBenefit of waiver and payments by affiliates rounds to less than 0.01%.
gSee Note 1(i) regarding mortgage dollar rolls.
| | | | |
| | | |
14 | | Semiannual Report | The accompanying notes are an integral part of these consolidated financial statements. | | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
Consolidated Statement of Investments, October 31, 2018 (unaudited)
Franklin Strategic Income Fund
| | | | | | | | | | | | |
| | | Country | | | Shares/
Warrants | | | Value | |
| | | |
Common Stocks and Other Equity Interests 0.4% | | | | | | | | | | | | |
Consumer Services 0.0%† | | | | | | | | | | | | |
a,aa,bTurtle Bay Resort | | | United States | | | | 5,579,939 | | | $ | 122,759 | |
| | | | | | | | | | | | |
Energy 0.4% | | | | | | | | | | | | |
aBirch Permian Holdings Inc. | | | United States | | | | 94,570 | | | | 1,205,768 | |
aBirch Permian Holdings Inc. | | | United States | | | | 737,192 | | | | 9,214,900 | |
aChaparral Energy Inc. | | | United States | | | | 94,305 | | | | 1,461,727 | |
a,cChaparral Energy Inc., A, 144A | | | United States | | | | 3,418 | | | | 51,817 | |
a,bEnergy XXI Gulf Coast Inc., wts., 12/30/21 | | | United States | | | | 47,227 | | | | — | |
aHalcon Resources Corp. | | | United States | | | | 955,276 | | | | 3,171,516 | |
aHalcon Resources Corp., wts., 9/09/20 | | | United States | | | | 75,770 | | | | 3,349 | |
aMidstates Petroleum Co. Inc. | | | United States | | | | 6,993 | | | | 50,420 | |
a,bMidstates Petroleum Co. Inc., wts., 4/21/20 | | | United States | | | | 49,552 | | | | 85 | |
aRiviera Resources Inc. | | | United States | | | | 88,309 | | | | 1,882,748 | |
aRoan Resources Inc. | | | United States | | | | 88,309 | | | | 1,436,787 | |
| | | | | | | | | | | | |
| | | | | | | | | | | 18,479,117 | |
| | | | | | | | | | | | |
Materials 0.0%† | | | | | | | | | | | | |
aVerso Corp., A | | | United States | | | | 38,905 | | | | 1,093,620 | |
aVerso Corp., wts., 7/25/23 | | | United States | | | | 4,095 | | | | 26,617 | |
| | | | | | | | | | | | |
| | | | | | | | | | | 1,120,237 | |
| | | | | | | | | | | | |
Retailing 0.0%† | | | | | | | | | | | | |
a,b,dK2016470219 South Africa Ltd., A | | | South Africa | | | | 125,940,079 | | | | 85,367 | |
a,b,dK2016470219 South Africa Ltd., B | | | South Africa | | | | 12,532,821 | | | | 8,495 | |
| | | | | | | | | | | | |
| | | | | | | | | | | 93,862 | |
| | | | | | | | | | | | |
Transportation 0.0%† | | | | | | | | | | | | |
a,bCEVA Logistics AG | | | Switzerland | | | | 50,632 | | | | 1,462,003 | |
| | | | | | | | | | | | |
Total Common Stocks and Other Equity Interests
(Cost $69,675,318) | | | | | | | | | | | 21,277,978 | |
| | | | | | | | | | | | |
Management Investment Companies 8.3% | | | | | | | | | | | | |
Diversified Financials 8.3% | | | | | | | | | | | | |
eFranklin Lower Tier Floating Rate Fund | | | United States | | | | 25,361,119 | | | | 242,705,906 | |
eFranklin Middle Tier Floating Rate Fund | | | United States | | | | 21,833,687 | | | | 205,236,662 | |
| | | | | | | | | | | | |
Total Management Investment Companies
(Cost $470,958,729) | | | | | | | | | | | 447,942,568 | |
| | | | | | | | | | | | |
| | | |
| | | | | |
| Principal
Amount |
* | | | | |
Corporate Bonds 44.8% | | | | | | | | | | | | |
Automobiles & Components 0.2% | | | | | | | | | | | | |
Fiat Chrysler Automobiles NV, senior note, 5.25%, 4/15/23 | | | United Kingdom | | | | 10,000,000 | | | | 9,970,650 | |
Banks 3.7% | | | | | | | | | | | | |
Bank of America Corp., | | | | | | | | | | | | |
senior bond, 3.248%, 10/21/27 | | | United States | | | | 5,000,000 | | | | 4,599,186 | |
senior note, 3.50%, 4/19/26 | | | United States | | | | 46,000,000 | | | | 43,805,078 | |
Citigroup Inc., | | | | | | | | | | | | |
senior note, 3.30%, 4/27/25 | | | United States | | | | 2,500,000 | | | | 2,385,905 | |
senior note, 3.40%, 5/01/26 | | | United States | | | | 23,300,000 | | | | 21,907,341 | |
senior note, 3.20%, 10/21/26 | | | United States | | | | 20,000,000 | | | | 18,346,776 | |
sub. bond, 5.50%, 9/13/25 | | | United States | | | | 10,000,000 | | | | 10,503,853 | |
| | | | |
| | | |
| franklintempleton.com | | Semiannual Report | | 15 |
FRANKLIN STRATEGIC SERIES
CONSOLIDATED STATEMENT OF INVESTMENTS (UNAUDITED)
Franklin Strategic Income Fund (continued)
| | | | | | | | | | | | | | | | |
| | | | Country | | |
| Principal
Amount |
* | | | | | | | Value | |
Corporate Bonds (continued) | | | | | | | | | | | | | | | | |
Banks (continued) | | | | | | | | | | | | | | | | |
Citigroup Inc., (continued) | | | | | | | | | | | | | | | | |
sub. note, 4.05%, 7/30/22 | | | United States | | | | 5,000,000 | | | | | | | $ | 5,026,152 | |
cICICI Bank Ltd./Dubai, senior note, 144A, 3.80%, 12/14/27 | | | India | | | | 15,800,000 | | | | | | | | 14,192,405 | |
cIntesa Sanpaolo SpA, senior note, 144A, 6.50%, 2/24/21 | | | Italy | | | | 1,400,000 | | | | | | | | 1,432,298 | |
JPMorgan Chase & Co., | | | | | | | | | | | | | | | | |
fjunior sub. bond, R, 6.00% to 8/01/23, FRN thereafter, Perpetual | | | United States | | | | 10,000,000 | | | | | | | | 10,075,000 | |
fjunior sub. bond, X, 6.10% to 10/01/24, FRN thereafter, Perpetual | | | United States | | | | 5,000,000 | | | | | | | | 5,089,000 | |
senior bond, 3.30%, 4/01/26 | | | United States | | | | 10,000,000 | | | | | | | | 9,454,172 | |
sub. note, 3.375%, 5/01/23 | | | United States | | | | 10,000,000 | | | | | | | | 9,757,367 | |
sub. note, 3.875%, 9/10/24 | | | United States | | | | 10,000,000 | | | | | | | | 9,833,753 | |
Royal Bank of Scotland Group PLC, sub. note, 5.125%, 5/28/24 | | | United Kingdom | | | | 7,600,000 | | | | | | | | 7,512,866 | |
gTurkiye Vakiflar Bankasi TAO, secured note, Reg S, 2.375%, 11/04/22 | | | Turkey | | | | 3,900,000 | | | | EUR | | | | 4,251,398 | |
fWells Fargo & Co., junior sub. bond, S, 5.90% to 6/15/24, FRN thereafter, Perpetual | | | United States | | | | 21,000,000 | | | | | | | | 21,078,120 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | 199,250,670 | |
| | | | | | | | | | | | | | | | |
Capital Goods 1.4% | | | | | | | | | | | | | | | | |
Aircastle Ltd., senior note, 4.125%, 5/01/24 | | | United States | | | | 23,000,000 | | | | | | | | 22,369,296 | |
cBeacon Roofing Supply Inc., senior note, 144A, 4.875%, 11/01/25 | | | United States | | | | 15,000,000 | | | | | | | | 13,537,500 | |
CNH Industrial NV, senior bond, 3.85%, 11/15/27 | | | United Kingdom | | | | 6,600,000 | | | | | | | | 6,149,385 | |
Legrand France SA, senior bond, 8.50%, 2/15/25 | | | France | | | | 200,000 | | | | | | | | 242,706 | |
cTerex Corp., senior note, 144A, 5.625%, 2/01/25 | | | United States | | | | 14,600,000 | | | | | | | | 13,906,500 | |
cVertiv Group Corp., senior note, 144A, 9.25%, 10/15/24 | | | United States | | | | 16,900,000 | | | | | | | | 16,900,000 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | 73,105,387 | |
| | | | | | | | | | | | | | | | |
Commercial & Professional Services 0.9% | | | | | | | | | | | | | | | | |
cIHS Markit Ltd., senior note, 144A, 4.00%, 3/01/26 | | | United States | | | | 11,700,000 | | | | | | | | 11,027,250 | |
United Rentals North America Inc., senior bond, 5.875%, 9/15/26 | | | United States | | | | 20,500,000 | | | | | | | | 20,166,875 | |
cWest Corp., senior note, 144A, 8.50%, 10/15/25 | | | United States | | | | 20,300,000 | | | | | | | | 18,422,250 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | 49,616,375 | |
| | | | | | | | | | | | | | | | |
Consumer Durables & Apparel 0.9% | | | | | | | | | | | | | | | | |
cHanesbrands Inc., senior bond, 144A, 4.875%, 5/15/26 | | | United States | | | | 25,100,000 | | | | | | | | 23,907,750 | |
KB Home, | | | | | | | | | | | | | | | | |
senior bond, 7.50%, 9/15/22 | | | United States | | | | 5,000,000 | | | | | | | | 5,300,000 | |
senior note, 7.00%, 12/15/21. | | | United States | | | | 10,000,000 | | | | | | | | 10,437,500 | |
PulteGroup Inc., senior bond, 5.00%, 1/15/27 | | | United States | | | | 12,000,000 | | | | | | | | 11,145,000 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | 50,790,250 | |
| | | | | | | | | | | | | | | | |
Consumer Services 1.6% | | | | | | | | | | | | | | | | |
c1011778 BC ULC/New Red Finance Inc., | | | | | | | | | | | | | | | | |
secured note, second lien, 144A, 5.00%, 10/15/25 | | | Canada | | | | 11,500,000 | | | | | | | | 10,810,000 | |
senior secured note, first lien, 144A, 4.25%, 5/15/24 | | | Canada | | | | 4,000,000 | | | | | | | | 3,760,000 | |
cGolden Nugget Inc., senior note, 144A, 6.75%, 10/15/24 | | | United States | | | | 13,200,000 | | | | | | | | 13,200,000 | |
cInternational Game Technology PLC, | | | | | | | | | | | | | | | | |
senior secured bond, 144A, 6.50%, 2/15/25 | | | United States | | | | 13,200,000 | | | | | | | | 13,431,000 | |
senior secured note, 144A, 6.25%, 2/15/22 | | | United States | | | | 5,000,000 | | | | | | | | 5,162,500 | |
cKFC Holding Co./Pizza Hut Holdings LLC/Taco Bell of | | | | | | | | | | | | | | | | |
America LLC, | | | | | | | | | | | | | | | | |
senior note, 144A, 5.00%, 6/01/24 | | | United States | | | | 8,900,000 | | | | | | | | 8,799,875 | |
senior note, 144A, 5.25%, 6/01/26 | | | United States | | | | 9,100,000 | | | | | | | | 8,963,500 | |
| | | | |
| | | |
16 | | Semiannual Report | | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
CONSOLIDATED STATEMENT OF INVESTMENTS (UNAUDITED)
Franklin Strategic Income Fund (continued)
| | | | | | | | | | | | | | | | |
| | | | Country | | |
| Principal
Amount |
* | | | | | | | Value | |
Corporate Bonds (continued) | | | | | | | | | | | | | | | | |
Consumer Services (continued) | | | | | | | | | | | | | | | | |
cStars Group Holdings BV/Stars Group U.S. Co-Borrower LLC, senior note, 144A, 7.00%, 7/15/26 | | | Canada | | | | 6,600,000 | | | | | | | $ | 6,715,500 | |
cWynn Las Vegas LLC/Wynn Las Vegas Capital Corp., senior bond, 144A, 5.50%, 3/01/25 | | | United States | | | | 13,700,000 | | | | | | | | 13,066,375 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | 83,908,750 | |
| | | | | | | | | | | | | | | | |
Diversified Financials 2.8% | | | | | | | | | | | | | | | | |
Capital One Financial Corp., senior note, 3.20%, 2/05/25 | | | United States | | | | 20,000,000 | | | | | | | | 18,714,146 | |
The Goldman Sachs Group Inc., | | | | | | | | | | | | | | | | |
senior note, 3.50%, 1/23/25 | | | United States | | | | 33,800,000 | | | | | | | | 32,384,739 | |
senior note, 3.75%, 2/25/26 | | | United States | | | | 15,000,000 | | | | | | | | 14,414,979 | |
cLincoln Finance Ltd., senior secured note, 144A, 6.875%, 4/15/21 | | | Netherlands | | | | 8,400,000 | | | | EUR | | | | 9,846,635 | |
Morgan Stanley, | | | | | | | | | | | | | | | | |
senior bond, 3.591% to 7/22/27, FRN thereafter, 7/22/28 | | | United States | | | | 10,000,000 | | | | | | | | 9,377,430 | |
senior note, 3.875%, 1/27/26 | | | United States | | | | 43,100,000 | | | | | | | | 41,797,500 | |
Navient Corp., | | | | | | | | | | | | | | | | |
senior note, 5.875%, 3/25/21 | | | United States | | | | 5,000,000 | | | | | | | | 5,068,750 | |
senior note, 6.625%, 7/26/21 | | | United States | | | | 8,000,000 | | | | | | | | 8,250,000 | |
senior note, 6.125%, 3/25/24 | | | United States | | | | 10,000,000 | | | | | | | | 9,787,500 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | 149,641,679 | |
| | | | | | | | | | | | | | | | |
Energy 5.0% | | | | | | | | | | | | | | | | |
Anadarko Petroleum Corp., senior bond, 3.45%, 7/15/24 | | | United States | | | | 6,000,000 | | | | | | | | 5,707,644 | |
cCalifornia Resources Corp., secured note, second lien, 144A, 8.00%, 12/15/22 | | | United States | | | | 7,852,000 | | | | | | | | 7,007,910 | |
Cheniere Corpus Christi Holdings LLC, | | | | | | | | | | | | | | | | |
senior secured note, first lien, 7.00%, 6/30/24 | | | United States | | | | 8,800,000 | | | | | | | | 9,537,000 | |
senior secured note, first lien, 5.875%, 3/31/25 | | | United States | | | | 8,200,000 | | | | | | | | 8,446,000 | |
Cheniere Energy Partners LP, senior secured note, first lien, 5.25%, 10/01/25 | | | United States | | | | 11,900,000 | | | | | | | | 11,706,625 | |
CNOOC Finance 2015 USA LLC, senior note, 3.50%, 5/05/25 | | | China | | | | 12,800,000 | | | | | | | | 12,185,536 | |
CONSOL Energy Inc., senior note, 5.875%, 4/15/22 | | | United States | | | | 20,000,000 | | | | | | | | 19,687,600 | |
Energy Transfer LP, senior bond, first lien, 7.50%, 10/15/20 | | | United States | | | | 11,000,000 | | | | | | | | 11,673,750 | |
Energy Transfer Operating LP, | | | | | | | | | | | | | | | | |
senior bond, 4.05%, 3/15/25 | | | United States | | | | 1,300,000 | | | | | | | | 1,247,678 | |
senior note, 5.20%, 2/01/22 | | | United States | | | | 10,000,000 | | | | | | | | 10,345,202 | |
Energy Transfer Partners LP/Regency Energy Finance Corp., senior note, 5.00%, 10/01/22 | | | United States | | | | 10,000,000 | | | | | | | | 10,312,385 | |
c,hEnQuest PLC, senior note, 144A, PIK, 7.00%, 4/15/22 | | | United Kingdom | | | | 12,855,122 | | | | | | | | 11,698,161 | |
Exxon Mobil Corp., senior note, 2.222%, 3/01/21 | | | United States | | | | 3,000,000 | | | | | | | | 2,932,133 | |
c,iGaz Capital SA, (OJSC Gazprom), loan participation, senior note, 144A, 3.85%, 2/06/20 | | | Russia | | | | 20,000,000 | | | | | | | | 19,915,300 | |
Kinder Morgan Inc., | | | | | | | | | | | | | | | | |
senior bond, 4.30%, 6/01/25 | | | United States | | | | 17,000,000 | | | | | | | | 16,933,954 | |
senior note, 3.15%, 1/15/23 | | | United States | | | | 9,000,000 | | | | | | | | 8,686,675 | |
Martin Midstream Partners LP/Martin Midstream Finance Corp., senior note, 7.25%, 2/15/21 | | | United States | | | | 20,000,000 | | | | | | | | 19,950,000 | |
Oceaneering International Inc., senior note, 4.65%, 11/15/24 | | | United States | | | | 2,100,000 | | | | | | | | 1,952,546 | |
Sabine Pass Liquefaction LLC, | | | | | | | | | | | | | | | | |
senior secured note, first lien, 5.625%, 2/01/21 | | | United States | | | | 20,000,000 | | | | | | | | 20,703,767 | |
senior secured note, first lien, 5.625%, 4/15/23 | | | United States | | | | 6,200,000 | | | | | | | | 6,533,643 | |
senior secured note, first lien, 5.625%, 3/01/25 | | | United States | | | | 5,000,000 | | | | | | | | 5,227,029 | |
Sanchez Energy Corp., senior note, 6.125%, 1/15/23 | | | United States | | | | 6,000,000 | | | | | | | | 2,265,000 | |
| | | | |
| | | |
| franklintempleton.com | | Semiannual Report | | 17 |
FRANKLIN STRATEGIC SERIES
CONSOLIDATED STATEMENT OF INVESTMENTS (UNAUDITED)
Franklin Strategic Income Fund (continued)
| | | | | | | | | | | | | | | | |
| | | | Country | | |
| Principal
Amount |
* | | | | | | | Value | |
Corporate Bonds (continued) | | | | | | | | | | | | | | | | |
Energy (continued) | | | | | | | | | | | | | | | | |
cSinopec Group Overseas Development 2016 Ltd., senior note, 144A, 2.75%, 9/29/26 | | | China | | | | 12,800,000 | | | | | | | $ | 11,355,904 | |
cSunoco LP/Sunoco Finance Corp., senior note, 144A, 4.875%, 1/15/23 | | | United States | | | | 5,900,000 | | | | | | | | 5,700,875 | |
Weatherford International Ltd., | | | | | | | | | | | | | | | | |
senior note, 7.75%, 6/15/21 | | | United States | | | | 9,000,000 | | | | | | | | 7,481,250 | |
senior note, 8.25%, 6/15/23 | | | United States | | | | 10,500,000 | | | | | | | | 8,085,000 | |
cWoodside Finance Ltd., | | | | | | | | | | | | | | | | |
senior bond, 144A, 3.70%, 3/15/28 | | | Australia | | | | 7,100,000 | | | | | | | | 6,598,385 | |
senior note, 144A, 3.70%, 9/15/26 | | | Australia | | | | 5,400,000 | | | | | | | | 5,087,671 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | 268,964,623 | |
| | | | | | | | | | | | | | | | |
Food & Staples Retailing 0.9% | | | | | | | | | | | | | | | | |
cAramark Services Inc., senior bond, 144A, 5.00%, 2/01/28 | | | United States | | | | 7,600,000 | | | | | | | | 7,229,500 | |
Kroger Co., senior bond, 2.65%, 10/15/26 | | | United States | | | | 15,300,000 | | | | | | | | 13,415,261 | |
Walgreens Boots Alliance Inc., senior note, 3.80%, 11/18/24 | | | United States | | | | 30,000,000 | | | | | | | | 29,307,019 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | 49,951,780 | |
| | | | | | | | | | | | | | | | |
Food, Beverage & Tobacco 1.5% | | | | | | | | | | | | | | | | |
Bunge Ltd. Finance Corp., senior note, 3.25%, 8/15/26 | | | United States | | | | 2,000,000 | | | | | | | | 1,795,442 | |
cImperial Brands Finance PLC, senior note, 144A, 3.50%, 2/11/23 | | | United Kingdom | | | | 20,400,000 | | | | | | | | 19,854,443 | |
Kraft Heinz Foods Co., senior bond, 3.00%, 6/01/26 | | | United States | | | | 25,400,000 | | | | | | | | 22,709,973 | |
cLamb Weston Holdings Inc., senior note, 144A, 4.875%, 11/01/26 | | | United States | | | | 16,500,000 | | | | | | | | 15,984,375 | |
cPost Holdings Inc., | | | | | | | | | | | | | | | | |
senior bond, 144A, 5.625%, 1/15/28 | | | United States | | | | 10,000,000 | | | | | | | | 9,428,000 | |
senior note, 144A, 5.50%, 3/01/25 | | | United States | | | | 8,000,000 | | | | | | | | 7,765,000 | |
Reynolds American Inc., senior note, 4.45%, 6/12/25 | | | United Kingdom | | | | 1,900,000 | | | | | | | | 1,893,042 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | 79,430,275 | |
| | | | | | | | | | | | | | | | |
Health Care Equipment & Services 2.6% | | | | | | | | | | | | | | | | |
cAvantor Inc., senior secured note, first lien, 144A, 6.00%, 10/01/24 | | | United States | | | | 18,000,000 | | | | | | | | 18,000,000 | |
Centene Corp., | | | | | | | | | | | | | | | | |
senior note, 4.75%, 5/15/22 | | | United States | | | | 12,000,000 | | | | | | | | 12,075,000 | |
csenior note, 144A, 5.375%, 6/01/26 | | | United States | | | | 8,600,000 | | | | | | | | 8,750,500 | |
CHS/Community Health Systems Inc., | | | | | | | | | | | | | | | | |
senior note, 6.875%, 2/01/22 | | | United States | | | | 7,223,000 | | | | | | | | 3,638,586 | |
csenior note, 144A, 8.125%, 6/30/24 | | | United States | | | | 2,807,000 | | | | | | | | 2,231,565 | |
senior secured note, first lien, 6.25%, 3/31/23 | | | United States | | | | 3,900,000 | | | | | | | | 3,601,455 | |
CVS Health Corp., senior bond, 4.30%, 3/25/28 | | | United States | | | | 9,600,000 | | | | | | | | 9,382,076 | |
DaVita Inc., | | | | | | | | | | | | | | | | |
senior bond, 5.125%, 7/15/24 | | | United States | | | | 10,000,000 | | | | | | | | 9,575,000 | |
senior bond, 5.00%, 5/01/25 | | | United States | | | | 9,300,000 | | | | | | | | 8,788,500 | |
Edwards Lifesciences Corp., senior note, 4.30%, 6/15/28 | | | United States | | | | 2,700,000 | | | | | | | | 2,686,055 | |
HCA Inc., | | | | | | | | | | | | | | | | |
senior bond, 5.875%, 2/15/26 | | | United States | | | | 3,000,000 | | | | | | | | 3,075,000 | |
senior secured bond, first lien, 5.25%, 4/15/25 | | | United States | | | | 10,000,000 | | | | | | | | 10,237,500 | |
senior secured bond, first lien, 5.50%, 6/15/47 | | | United States | | | | 12,000,000 | | | | | | | | 11,838,000 | |
| | | | |
| | | |
18 | | Semiannual Report | | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
CONSOLIDATED STATEMENT OF INVESTMENTS (UNAUDITED)
Franklin Strategic Income Fund (continued)
| | | | | | | | | | | | | | | | |
| | | | Country | | |
| Principal
Amount |
* | | | | | | | Value | |
Corporate Bonds (continued) | | | | | | | | | | | | | | | | |
Health Care Equipment & Services (continued) | | | | | | | | | | | | | | | | |
cMPH Acquisition Holdings LLC, senior note, 144A, 7.125%, 6/01/24 | | | United States | | | | 11,100,000 | | | | | | | $ | 11,303,352 | |
c,hPolaris Intermediate Corp., senior note, 144A, PIK, 8.50%, 12/01/22 | | | United States | | | | 2,900,000 | | | | | | | | 2,983,375 | |
Stryker Corp., senior bond, 3.50%, 3/15/26 | | | United States | | | | 4,800,000 | | | | | | | | 4,587,112 | |
Tenet Healthcare Corp., | | | | | | | | | | | | | | | | |
senior note, 5.50%, 3/01/19 | | | United States | | | | 7,000,000 | | | | | | | | 7,043,750 | |
senior note, 8.125%, 4/01/22 | | | United States | | | | 5,000,000 | | | | | | | | 5,225,000 | |
senior note, 6.75%, 6/15/23 | | | United States | | | | 2,700,000 | | | | | | | | 2,702,565 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | 137,724,391 | |
| | | | | | | | | | | | | | | | |
Insurance 0.6% | | | | | | | | | | | | | | | | |
cNippon Life Insurance Co., sub. bond, 144A, 5.10% to 10/16/24, FRN thereafter, 10/16/44 | | | Japan | | | | 35,000,000 | | | | | | | | 35,156,800 | |
| | | | | | | | | | | | | | | | |
Materials 6.0% | | | | | | | | | | | | | | | | |
ArcelorMittal, | | | | | | | | | | | | | | | | |
senior note, 5.50%, 3/01/21 | | | France | | | | 17,600,000 | | | | | | | | 18,210,808 | |
senior note, 6.125%, 6/01/25 | | | France | | | | 2,700,000 | | | | | | | | 2,891,531 | |
hARD Finance SA, secured note, PIK, 7.125%, 9/15/23 | | | Luxembourg | | | | 1,300,000 | | | | | | | | 1,270,750 | |
cArdagh Packaging Finance PLC/Ardagh MP Holdings USA Inc., senior note, 144A, 6.00%, 2/15/25 | | | Luxembourg | | | | 11,500,000 | | | | | | | | 10,795,625 | |
cBWAY Holding Co., senior note, 144A, 7.25%, 4/15/25 | | | United States | | | | 21,200,000 | | | | | | | | 20,140,000 | |
cCemex SAB de CV, | | | | | | | | | | | | | | | | |
senior secured bond, first lien, 144A, 5.70%, 1/11/25 | | | Mexico | | | | 15,000,000 | | | | | | | | 14,615,475 | |
senior secured bond, first lien, 144A, 6.125%, 5/05/25 | | | Mexico | | | | 4,000,000 | | | | | | | | 3,986,260 | |
The Chemours Co., senior note, 6.625%, 5/15/23 | | | United States | | | | 10,860,000 | | | | | | | | 11,131,500 | |
cCrown Americas LLC/Crown Americas Capital Corp., senior note, 144A, 4.75%, 2/01/26 | | | United States | | | | 7,100,000 | | | | | | | | 6,718,375 | |
cFirst Quantum Minerals Ltd., | | | | | | | | | | | | | | | | |
senior note, 144A, 7.00%, 2/15/21 | | | Zambia | | | | 8,000,000 | | | | | | | | 7,840,000 | |
senior note, 144A, 7.25%, 4/01/23 | | | Zambia | | | | 7,200,000 | | | | | | | | 6,678,000 | |
cFMG Resources (August 2006) Pty. Ltd., | | | | | | | | | | | | | | | | |
senior note, 144A, 5.125%, 3/15/23 | | | Australia | | | | 3,600,000 | | | | | | | | 3,483,000 | |
senior note, 144A, 5.125%, 5/15/24 | | | Australia | | | | 7,700,000 | | | | | | | | 7,348,803 | |
Freeport-McMoRan Inc., senior note, 4.55%, 11/14/24 | | | United States | | | | 20,000,000 | | | | | | | | 18,575,000 | |
cGlencore Finance Canada Ltd., senior bond, 144A, 4.95%, 11/15/21 | | | Switzerland | | | | 13,300,000 | | | | | | | | 13,657,762 | |
cGlencore Funding LLC, | | | | | | | | | | | | | | | | |
senior note, 144A, 4.125%, 5/30/23 | | | Switzerland | | | | 5,000,000 | | | | | | | | 4,945,348 | |
senior note, 144A, 4.625%, 4/29/24 | | | Switzerland | | | | 2,500,000 | | | | | | | | 2,504,255 | |
cINVISTA Finance LLC, senior secured note, 144A, 4.25%, 10/15/19 | | | United States | | | | 10,000,000 | | | | | | | | 10,071,000 | |
LYB International Finance BV, senior note, 4.00%, 7/15/23 | | | United States | | | | 20,400,000 | | | | | | | | 20,352,060 | |
cNew Gold Inc., senior note, 144A, 6.375%, 5/15/25 | | | Canada | | | | 6,900,000 | | | | | | | | 5,563,125 | |
cNorthwest Acquisitions ULC/Dominion Finco Inc., secured note, second lien, 144A, 7.125%, 11/01/22 | | | Canada | | | | 3,800,000 | | | | | | | | 3,835,530 | |
cNovelis Corp., senior bond, 144A, 5.875%, 9/30/26 | | | United States | | | | 19,400,000 | | | | | | | | 18,333,000 | |
cOwens-Brockway Glass Container Inc., | | | | | | | | | | | | | | | | |
senior note, 144A, 5.00%, 1/15/22 | | | United States | | | | 7,800,000 | | | | | | | | 7,731,750 | |
senior note, 144A, 5.875%, 8/15/23 | | | United States | | | | 12,500,000 | | | | | | | | 12,500,000 | |
| | | | |
| | | |
| franklintempleton.com | | Semiannual Report | | 19 |
FRANKLIN STRATEGIC SERIES
CONSOLIDATED STATEMENT OF INVESTMENTS (UNAUDITED)
Franklin Strategic Income Fund (continued)
| | | | | | | | | | | | | | |
| | | Country | |
| Principal
Amount |
* | | | | | | | Value | |
Corporate Bonds (continued) | | | | | | | | | | | | | | |
Materials (continued) | | | | | | | | | | | | | | |
Reynolds Group Issuer Inc./Reynolds Group Issuer LLC/Reynolds Group Issuer Luxembourg SA, | | | | | | | | | | | | | | |
csenior note, 144A, 7.00%, 7/15/24 | | United States | | | 5,600,000 | | | | | | | $ | 5,624,500 | |
senior secured note, first lien, 5.75%, 10/15/20 | | United States | | | 6,396,111 | | | | | | | | 6,404,106 | |
csenior secured note, first lien, 144A, 5.125%, 7/15/23 | | United States | | | 5,900,000 | | | | | | | | 5,782,000 | |
c,jsenior secured note, first lien, 144A, FRN, 5.936%, (3-month USD LIBOR + 3.50%), 7/15/21 | | United States | | | 6,500,000 | | | | | | | | 6,581,250 | |
cSealed Air Corp., | | | | | | | | | | | | | | |
senior bond, 144A, 5.125%, 12/01/24 | | United States | | | 11,300,000 | | | | | | | | 11,074,000 | |
senior bond, 144A, 5.50%, 9/15/25 | | United States | | | 2,600,000 | | | | | | | | 2,561,000 | |
senior note, 144A, 4.875%, 12/01/22 | | United States | | | 9,000,000 | | | | | | | | 8,943,750 | |
cSociedad Quimica y Minera de Chile SA, senior note, 144A, 3.625%, 4/03/23 | | Chile | | | 1,500,000 | | | | | | | | 1,455,443 | |
Steel Dynamics Inc., | | | | | | | | | | | | | | |
senior bond, 5.50%, 10/01/24 | | United States | | | 9,700,000 | | | | | | | | 9,784,875 | |
senior note, 5.125%, 10/01/21 | | United States | | | 9,200,000 | | | | | | | | 9,280,500 | |
cSunCoke Energy Partners LP/SunCoke Energy Partners Finance Corp., senior note, 144A, 7.50%, 6/15/25 | | United States | | | 19,500,000 | | | | | | | | 19,890,000 | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | 320,560,381 | |
| | | | | | | | | | | | | | |
Media & Entertainment 5.0% | | | | | | | | | | | | | | |
cAltice Financing SA, secured bond, 144A, 7.50%, 5/15/26 | | Luxembourg | | | 3,000,000 | | | | | | | | 2,835,000 | |
cAltice US Finance I Corp., senior secured note, first lien, 144A, 5.50%, 5/15/26 | | United States | | | 22,000,000 | | | | | | | | 21,484,320 | |
CCO Holdings LLC/CCO Holdings Capital Corp., | | | | | | | | | | | | | | |
senior bond, 5.25%, 9/30/22 | | United States | | | 8,500,000 | | | | | | | | 8,558,437 | |
csenior bond, 144A, 5.375%, 5/01/25 | | United States | | | 13,000,000 | | | | | | | | 12,756,250 | |
Clear Channel Worldwide Holdings Inc., | | | | | | | | | | | | | | |
senior note, 6.50%, 11/15/22 | | United States | | | 3,000,000 | | | | | | | | 3,026,250 | |
senior note, 6.50%, 11/15/22 | | United States | | | 5,000,000 | | | | | | | | 5,101,000 | |
senior sub. note, 7.625%, 3/15/20 | | United States | | | 900,000 | | | | | | | | 901,125 | |
senior sub. note, 7.625%, 3/15/20 | | United States | | | 6,400,000 | | | | | | | | 6,416,000 | |
CSC Holdings LLC, senior note, 6.75%, 11/15/21 | | United States | | | 17,000,000 | | | | | | | | 17,844,050 | |
DISH DBS Corp., | | | | | | | | | | | | | | |
senior bond, 5.875%, 7/15/22 | | United States | | | 2,000,000 | | | | | | | | 1,897,500 | |
senior bond, 5.00%, 3/15/23 | | United States | | | 10,000,000 | | | | | | | | 8,787,500 | |
senior note, 5.875%, 11/15/24 | | United States | | | 8,000,000 | | | | | | | | 6,830,000 | |
kiHeartCommunications Inc., | | | | | | | | | | | | | | |
senior secured bond, first lien, 9.00%, 3/01/21 | | United States | | | 8,000,000 | | | | | | | | 5,820,000 | |
senior secured note, first lien, 9.00%, 9/15/22 | | United States | | | 3,100,000 | | | | | | | | 2,247,500 | |
Netflix Inc., | | | | | | | | | | | | | | |
senior bond, 5.875%, 2/15/25 | | United States | | | 10,000,000 | | | | | | | | 10,187,500 | |
senior bond, 4.375%, 11/15/26 | | United States | | | 11,800,000 | | | | | | | | 10,863,375 | |
cNexstar Broadcasting Inc., senior note, 144A, 5.625%, 8/01/24 | | United States | | | 21,300,000 | | | | | | | | 20,394,750 | |
Tegna Inc., | | | | | | | | | | | | | | |
senior bond, 6.375%, 10/15/23 | | United States | | | 12,000,000 | | | | | | | | 12,315,000 | |
csenior bond, 144A, 5.50%, 9/15/24 | | United States | | | 2,800,000 | | | | | | | | 2,807,000 | |
senior note, 5.125%, 7/15/20 | | United States | | | 7,800,000 | | | | | | | | 7,809,750 | |
Time Warner Inc., senior bond, 2.95%, 7/15/26 | | United States | | | 25,400,000 | | | | | | | | 22,516,806 | |
cUnitymedia KabelBW GmbH, senior bond, 144A, 6.125%, 1/15/25 | | Germany | | | 18,000,000 | | | | | | | | 18,652,500 | |
cUnivision Communications Inc., senior secured note, first lien, 144A, 5.125%, 2/15/25 | | United States | | | 25,000,000 | | | | | | | | 22,912,500 | |
| | | | |
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20 | | Semiannual Report | | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
CONSOLIDATED STATEMENT OF INVESTMENTS (UNAUDITED)
Franklin Strategic Income Fund (continued)
| | | | | | | | | | | | | | | | |
| | | | Country | | |
| Principal
Amount |
* | | | | | | | Value | |
Corporate Bonds (continued) | | | | | | | | | | | | | | | | |
Media & Entertainment (continued) | | | | | | | | | | | | | | | | |
cVirgin Media Finance PLC, senior bond, 144A, 6.375%, 10/15/24 | | | United Kingdom | | | | 9,600,000 | | | | GBP | | | $ | 12,687,936 | |
cVirgin Media Secured Finance PLC, senior secured bond, first lien, 144A, 5.50%, 1/15/25 | | | United Kingdom | | | | 14,000,000 | | | | | | | | 13,685,000 | |
cZiggo Secured Finance BV, senior secured bond, 144A, 4.25%, 1/15/27 | | | Netherlands | | | | 8,600,000 | | | | EUR | | | | 9,675,469 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | 269,012,518 | |
| | | | | | | | | | | | | | | | |
Pharmaceuticals, Biotechnology & Life Sciences 1.8% | | | | | | | | | | | | | | | | |
Allergan Funding SCS, senior bond, 3.80%, 3/15/25 | | | United States | | | | 25,000,000 | | | | | | | | 24,124,618 | |
Amgen Inc., senior bond, 4.95%, 10/01/41 | | | United States | | | | 1,600,000 | | | | | | | | 1,587,384 | |
cBausch Health Cos. Inc., | | | | | | | | | | | | | | | | |
senior bond, 144A, 6.125%, 4/15/25 | | | United States | | | | 3,100,000 | | | | | | | | 2,858,820 | |
senior note, 144A, 4.50%, 5/15/23 | | | United States | | | | 8,000,000 | | | | EUR | | | | 8,806,595 | |
senior note, 144A, 8.50%, 1/31/27 | | | United States | | | | 5,000,000 | | | | | | | | 5,100,000 | |
senior note, first lien, 144A, 7.00%, 3/15/24 | | | United States | | | | 2,100,000 | | | | | | | | 2,204,349 | |
cBayer US Finance II LLC, senior bond, 144A, 4.375%, 12/15/28 | | | Germany | | | | 11,700,000 | | | | | | | | 11,353,218 | |
Celgene Corp., senior bond, 3.45%, 11/15/27 | | | United States | | | | 7,900,000 | | | | | | | | 7,213,773 | |
c,hEagle Holdings Co. II LLC, senior note, 144A, PIK, 7.625%, 5/15/22 | | | United States | | | | 3,300,000 | | | | | | | | 3,324,750 | |
cEndo DAC/Endo Finance LLC/Endo Finco Inc., | | | | | | | | | | | | | | | | |
senior bond, 144A, 6.00%, 2/01/25 | | | United States | | | | 11,900,000 | | | | | | | | 10,025,750 | |
senior note, 144A, 6.00%, 7/15/23 | | | United States | | | | 5,000,000 | | | | | | | | 4,336,000 | |
cJaguar Holding Co. II/Pharmaceutical Product Development LLC, | | | | | | | | | | | | | | | | |
senior note, 144A, 6.375%, 8/01/23 | | | United States | | | | 12,900,000 | | | | | | | | 12,928,380 | |
cSABIC Capital II BV, senior note, 144A, 4.50%, 10/10/28 | | | Saudi Arabia | | | | 5,500,000 | | | | | | | | 5,398,635 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | 99,262,272 | |
| | | | | | | | | | | | | | | | |
Real Estate 1.3% | | | | | | | | | | | | | | | | |
American Homes 4 Rent LP, senior bond, 4.25%, 2/15/28 | | | United States | | | | 8,000,000 | | | | | | | | 7,597,937 | |
American Tower Corp., senior bond, 3.375%, 10/15/26 | | | United States | | | | 28,900,000 | | | | | | | | 26,596,577 | |
Equinix Inc., senior bond, 5.375%, 4/01/23 | | | United States | | | | 20,000,000 | | | | | | | | 20,437,200 | |
MPT Operating Partnership LP/MPT Finance Corp., | | | | | | | | | | | | | | | | |
senior bond, 5.25%, 8/01/26 | | | United States | | | | 4,200,000 | | | | | | | | 4,074,000 | |
senior bond, 5.00%, 10/15/27 | | | United States | | | | 10,700,000 | | | | | | | | 10,081,540 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | 68,787,254 | |
| | | | | | | | | | | | | | | | |
Retailing 0.8% | | | | | | | | | | | | | | | | |
Amazon.com Inc., senior note, 2.80%, 8/22/24 | | | United States | | | | 8,900,000 | | | | | | | | 8,500,264 | |
Home Depot Inc., senior note, 2.125%, 9/15/26 | | | United States | | | | 15,000,000 | | | | | | | | 13,366,542 | |
JD.com Inc., senior note, 3.125%, 4/29/21 | | | China | | | | 2,000,000 | | | | | | | | 1,931,250 | |
b,d,hK2016470219 South Africa Ltd., senior secured note, 144A, PIK, 3.00%, 12/31/22 | | | South Africa | | | | 9,688,700 | | | | | | | | 11,991 | |
d,hK2016470260 South Africa Ltd., senior secured note, 144A, PIK, 25.00%, 12/31/22 | | | South Africa | | | | 1,873,803 | | | | | | | | 138,373 | |
cParty City Holdings Inc., senior note, 144A, 6.625%, 8/01/26 | | | United States | | | | 5,300,000 | | | | | | | | 5,167,500 | |
cPetSmart Inc., senior note, 144A, 7.125%, 3/15/23 | | | United States | | | | 20,000,000 | | | | | | | | 14,100,000 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | 43,215,920 | |
| | | | | | | | | | | | | | | | |
Semiconductors & Semiconductor Equipment 0.1% | | | | | | | | | | | | | | | | |
Maxim Integrated Products Inc., senior note, 3.375%, 3/15/23 | | | United States | | | | 1,800,000 | | | | | | | | 1,760,474 | |
cQorvo Inc., senior note, 144A, 5.50%, 7/15/26 | | | United States | | | | 5,600,000 | | | | | | | | 5,628,000 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | 7,388,474 | |
| | | | | �� | | | | | | | | | | | |
| | | | |
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| franklintempleton.com | | Semiannual Report | | 21 |
FRANKLIN STRATEGIC SERIES
CONSOLIDATED STATEMENT OF INVESTMENTS (UNAUDITED)
Franklin Strategic Income Fund (continued)
| | | | | | | | | | | | |
| | | | Country | | |
| Principal
Amount |
* | | | Value | |
Corporate Bonds (continued) | | | | | | | | | | | | |
Software & Services 0.7% | | | | | | | | | | | | |
Fiserv Inc., senior bond, 3.85%, 6/01/25 | | | United States | | | | 8,400,000 | | | $ | 8,296,326 | |
Infor (U.S.) Inc., senior note, 6.50%, 5/15/22 | | | United States | | | | 20,000,000 | | | | 20,050,000 | |
cSymantec Corp., senior note, 144A, 5.00%, 4/15/25 | | | United States | | | | 9,500,000 | | | | 8,961,225 | |
| | | | | | | | | | | | |
| | | | | | | | | | | 37,307,551 | |
| | | | | | | | | | | | |
Technology Hardware & Equipment 0.6% | | | | | | | | | | | | |
cCommScope Technologies LLC, senior bond, 144A, 6.00%, 6/15/25 | | | United States | | | | 16,600,000 | | | | 16,226,500 | |
cDell International LLC/EMC Corp., | | | | | | | | | | | | |
senior note, 144A, 5.875%, 6/15/21 | | | United States | | | | 2,500,000 | | | | 2,540,733 | |
senior note, 144A, 7.125%, 6/15/24 | | | United States | | | | 12,600,000 | | | | 13,345,375 | |
Juniper Networks Inc., senior bond, 5.95%, 3/15/41 | | | United States | | | | 1,200,000 | | | | 1,171,968 | |
Tech Data Corp., senior bond, 4.95%, 2/15/27 | | | United States | | | | 1,900,000 | | | | 1,836,966 | |
| | | | | | | | | | | | |
| | | | | | | | | | | 35,121,542 | |
| | | | | | | | | | | | |
Telecommunication Services 2.1% | | | | | | | | | | | | |
cDigicel Group Ltd., | | | | | | | | | | | | |
senior note, 144A, 8.25%, 9/30/20 | | | Bermuda | | | | 5,000,000 | | | | 3,600,000 | |
senior note, 144A, 7.125%, 4/01/22 | | | Bermuda | | | | 3,000,000 | | | | 1,890,000 | |
cDigicel Ltd., senior note, 144A, 6.00%, 4/15/21 | | | Bermuda | | | | 10,000,000 | | | | 9,148,150 | |
Hughes Satellite Systems Corp., senior bond, 6.625%, 8/01/26 | | | United States | | | | 17,200,000 | | | | 16,426,000 | |
Sprint Communications Inc., | | | | | | | | | | | | |
senior note, 6.00%, 11/15/22 | | | United States | | | | 10,000,000 | | | | 10,118,750 | |
csenior note, 144A, 7.00%, 3/01/20 | | | United States | | | | 5,000,000 | | | | 5,193,750 | |
cSprint Spectrum Co. LLC, senior secured bond, first lien, 144A, 5.152%, 9/20/29 | | | United States | | | | 15,300,000 | | | | 15,338,250 | |
T-Mobile USA Inc., | | | | | | | | | | | | |
senior bond, 6.50%, 1/15/24 | | | United States | | | | 5,000,000 | | | | 5,187,500 | |
senior bond, 6.375%, 3/01/25 | | | United States | | | | 14,700,000 | | | | 15,196,125 | |
senior note, 5.125%, 4/15/25 | | | United States | | | | 6,000,000 | | | | 5,925,000 | |
Verizon Communications Inc., senior note, 5.15%, 9/15/23 | | | United States | | | | 22,000,000 | | | | 23,372,081 | |
| | | | | | | | | | | | |
| | | | | | | | | | | 111,395,606 | |
| | | | | | | | | | | | |
Transportation 0.8% | | | | | | | | | | | | |
cDAE Funding LLC, | | | | | | | | | | | | |
senior note, 144A, 4.50%, 8/01/22 | | | United Arab Emirates | | | | 6,000,000 | | | | 5,895,000 | |
senior note, 144A, 5.00%, 8/01/24 | | | United Arab Emirates | | | | 14,000,000 | | | | 13,650,000 | |
cTransurban Finance Co. Pty. Ltd., senior secured bond, 144A, 3.375%, 3/22/27 | | | Australia | | | | 11,400,000 | | | | 10,501,167 | |
United Airlines Pass Through Trust, second lien, 2016-1, A, 3.45%, 1/07/30 | | | United States | | | | 13,071,862 | | | | 12,454,983 | |
| | | | | | | | | | | | |
| | | | | | | | | | | 42,501,150 | |
| | | | | | | | | | | | |
Utilities 3.5% | | | | | | | | | | | | |
Calpine Corp., | | | | | | | | | | | | |
senior bond, 5.75%, 1/15/25 | | | United States | | | | 9,000,000 | | | | 8,075,700 | |
senior note, 5.375%, 1/15/23 | | | United States | | | | 10,000,000 | | | | 9,512,500 | |
csenior secured bond, first lien, 144A, 5.875%, 1/15/24 | | | United States | | | | 2,000,000 | | | | 2,005,000 | |
| | | | |
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22 | | Semiannual Report | | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
CONSOLIDATED STATEMENT OF INVESTMENTS (UNAUDITED)
Franklin Strategic Income Fund (continued)
| | | | | | | | | | | | |
| | | | Country | | |
| Principal
Amount |
* | | | Value | |
Corporate Bonds (continued) | | | | | | | | | | | | |
Utilities (continued) | | | | | | | | | | | | |
cClearway Energy Operating LLC, senior note, 144A, 5.75%, 10/15/25 | | | United States | | | | 12,800,000 | | | $ | 12,640,000 | |
cColbun SA, senior note, 144A, 3.95%, 10/11/27 | | | Chile | | | | 6,200,000 | | | | 5,716,183 | |
Dominion Energy Inc., senior bond, 2.85%, 8/15/26 | | | United States | | | | 11,400,000 | | | | 10,339,919 | |
c,fEDF SA, | | | | | | | | | | | | |
junior sub. bond, 144A, 5.625% to 1/22/24, FRN thereafter, Perpetual | | | France | | | | 5,000,000 | | | | 4,856,125 | |
junior sub. note, 144A, 5.25% to 1/29/23, FRN thereafter, Perpetual | | | France | | | | 25,000,000 | | | | 24,260,375 | |
Exelon Corp., senior bond, 3.95%, 6/15/25 | | | United States | | | | 18,500,000 | | | | 18,236,256 | |
cInterGen NV, secured bond, 144A, 7.00%, 6/30/23 | | | Netherlands | | | | 4,800,000 | | | | 4,716,000 | |
cIsrael Electric Corp. Ltd., secured bond, 144A, 4.25%, 8/14/28 | | | Israel | | | | 9,200,000 | | | | 8,727,396 | |
The Southern Co., senior bond, 3.25%, 7/01/26 | | | United States | | | | 32,300,000 | | | | 30,003,365 | |
cState Grid Overseas Investment 2016 Ltd., senior note, 144A, 3.50%, 5/04/27 | | | China | | | | 12,800,000 | | | | 12,028,416 | |
cTalen Energy Supply LLC, | | | | | | | | | | | | |
senior note, 144A, 9.50%, 7/15/22 | | | United States | | | | 15,900,000 | | | | 16,218,000 | |
senior note, 144A, 10.50%, 1/15/26 | | | United States | | | | 8,100,000 | | | | 7,148,250 | |
cThree Gorges Finance I Cayman Islands Ltd., senior note, 144A, 3.15%, 6/02/26 | | | China | | | | 12,800,000 | | | | 11,815,296 | |
Virginia Electric & Power Co., senior bond, 6.35%, 11/30/37 | | | United States | | | | 820,000 | | | | 994,645 | |
| | | | | | | | | | | | |
| | | | | | | | | | | 187,293,426 | |
| | | | | | | | | | | | |
Total Corporate Bonds (Cost $2,525,329,686) | | | | | | | | | | | 2,409,357,724 | |
| | | | | | | | | | | | |
| | | |
j,lSenior Floating Rate Interests 8.7% | | | | | | | | | | | | |
Automobiles & Components 0.2% | | | | | | | | | | | | |
Allison Transmission Inc., New Term Loans, 4.04%, (1-month USD LIBOR + 1.75%), 9/23/22 | | | United States | | | | 2,269,668 | | | | 2,283,853 | |
TI Group Automotive Systems LLC, Initial US Term Loan, 4.802%, (1-month USD LIBOR + 2.50%), 6/30/22 | | | United States | | | | 9,315,471 | | | | 9,280,538 | |
| | | | | | | | | | | | |
| | | | | | | | | | | 11,564,391 | |
| | | | | | | | | | | | |
Capital Goods 0.1% | | | | | | | | | | | | |
Altra Industrial Motion Corp., Term Loan, 4.302%, (1-month USD LIBOR + 2.00%), 10/01/25 | | | United States | | | | 757,197 | | | | 756,251 | |
Doncasters U.S. Finance LLC, Second Lien Term Loan, 10.636%, (3-month USD LIBOR + 8.25%), 10/09/20 | | | United States | | | | 736,591 | | | | 624,261 | |
Harsco Corp., Term Loan B-2, 4.563%, (1-month USD LIBOR + 2.25%), 12/10/24 | | | United States | | | | 4,280,788 | | | | 4,302,192 | |
| | | | | | | | | | | | |
| | | | | | | | | | | 5,682,704 | |
| | | | | | | | | | | | |
Commercial & Professional Services 0.2% | | | | | | | | | | | | |
KAR Auction Services Inc., Tranche B-5 Term Loans, 4.938%, (3-month USD LIBOR + 2.50%), 3/09/23 | | | United States | | | | 7,307,255 | | | | 7,323,148 | |
m,nUnited Rentals North America Inc., Initial Term Loans, TBD, 10/30/25 | | | United States | | | | 3,784,673 | | | | 3,805,962 | |
Ventia Pty. Ltd., Term B Loans (USD), 5.886%, (3-month USD LIBOR + 3.50%), 5/21/22 | | | Australia | | | | 833,442 | | | | 839,693 | |
| | | | | | | | | | | | |
| | | | | | | | | | | 11,968,803 | |
| | | | | | | | | | | | |
| | | | |
| | | |
| franklintempleton.com | | Semiannual Report | | 23 |
FRANKLIN STRATEGIC SERIES
CONSOLIDATED STATEMENT OF INVESTMENTS (UNAUDITED)
Franklin Strategic Income Fund (continued)
| | | | | | | | | | | | |
| | | | Country | | |
| Principal
Amount |
* | | | Value | |
j,lSenior Floating Rate Interests (continued) | | | | | | | | | | | | |
Consumer Services 0.3% | | | | | | | | | | | | |
Aristocrat Technologies Inc., Term B-3 Loans, 4.219%, (3-month USD LIBOR + 1.75%), 10/19/24 | | | United States | | | | 1,556,965 | | | $ | 1,553,337 | |
Avis Budget Car Rental LLC, Tranche B Term Loans, 4.31%, (1-month USD LIBOR + 2.00%), 2/13/25 | | | United States | | | | 6,359,788 | | | | 6,351,647 | |
Eldorado Resorts Inc., Initial Term Loan, 4.563%, (1-month USD LIBOR + 2.25%), 4/17/24 | | | United States | | | | 3,508,476 | | | | 3,517,248 | |
Greektown Holdings LLC, Initial Term Loan, 5.052%, (1-month USD LIBOR + 2.75%), 4/25/24 | | | United States | | | | 3,002,874 | | | | 3,001,622 | |
| | | | | | | | | | | | |
| | | | | | | | | | | 14,423,854 | |
| | | | | | | | | | | | |
Diversified Financials 0.2% | | | | | | | | | | | | |
m,nFirst Eagle Holdings Inc., Initial Term Loans, TBD, 12/01/24 | | | United States | | | | 5,177,798 | | | | 5,190,742 | |
Trans Union LLC, 2017 Replacement Term A-2 Loans, 4.052%, (1-month USD LIBOR + 1.75%), 8/09/22 | | | United States | | | | 3,452,284 | | | | 3,458,758 | |
| | | | | | | | | | | | |
| | | | | | | | | | | 8,649,500 | |
| | | | | | | | | | | | |
Energy 2.0% | | | | | | | | | | | | |
Bowie Resource Holdings LLC, | | | | | | | | | | | | |
First Lien Initial Term Loan, 8.052%, (1-month USD LIBOR + 5.75%), 8/14/20 | | | United States | | | | 22,547,970 | | | | 22,078,228 | |
Second Lien Initial Term Loan, 13.052%, (1-month USD LIBOR + 10.75%), 2/16/21 | | | United States | | | | 16,760,827 | | | | 16,090,394 | |
Fieldwood Energy LLC, Closing Date Loans, 7.552%, (1-month USD LIBOR + 5.25%), 4/11/22 | | | United States | | | | 49,391,396 | | | | 49,792,948 | |
Foresight Energy LLC, Term Loans, 8.277%, (3-month USD LIBOR + 5.75%), 3/28/22 | | | United States | | | | 10,218,614 | | | | 10,259,059 | |
OSG Bulk Ships Inc., Initial Term Loan, 6.77%, (6-month USD LIBOR + 4.25%), 8/05/19 | | | United States | | | | 7,897,976 | | | | 7,832,187 | |
| | | | | | | | | | | | |
| | | | | | | | | | | 106,052,816 | |
| | | | | | | | | | | | |
Food & Staples Retailing 0.3% | | | | | | | | | | | | |
Aramark Corp., U.S. Term B-3 Loan, 4.052%, (1-month USD LIBOR + 1.75%), 3/11/25 | | | United States | | | | 3,656,382 | | | | 3,663,238 | |
Smart & Final Stores LLC, First Lien Term Loan, 5.802%, (1-month USD LIBOR + 3.50%), 11/15/22 | | | United States | | | | 11,875,171 | | | | 11,489,228 | |
| | | | | | | | | | | | |
| | | | | | | | | | | 15,152,466 | |
| | | | | | | | | | | | |
Food, Beverage & Tobacco 0.7% | | | | | | | | | | | | |
CSM Bakery Supplies LLC, | | | | | | | | | | | | |
Second Lien Term Loan, 10.16%, (3-month USD LIBOR + 7.75%), 7/03/21 | | | United States | | | | 8,170,000 | | | | 7,598,100 | |
Term Loans, 6.41%, (3-month USD LIBOR + 4.00%), 7/03/20 | | | United States | | | | 1,830,000 | | | | 1,765,950 | |
JBS USA LUX SA, New Initial Term Loans, 4.837% - 4.886%, (3-month USD LIBOR + 2.50%), 10/30/22 | | | United States | | | | 26,331,643 | | | | 26,362,503 | |
| | | | | | | | | | | | |
| | | | | | | | | | | 35,726,553 | |
| | | | | | | | | | | | |
Health Care Equipment & Services 0.0%† | | | | | | | | | | | | |
IQVIA Inc., Term B-3 Dollar Loans, 4.136%, (3-month USD LIBOR + 1.75%), 6/11/25 | | | United States | | | | 1,458,999 | | | | 1,456,810 | |
U.S. Renal Care Inc., Initial Term Loan, 6.636%, (3-month USD LIBOR + 4.25%), 12/31/22 | | | United States | | | | 983,530 | | | | 956,893 | |
| | | | | | | | | | | | |
| | | | | | | | | | | 2,413,703 | |
| | | | | | | | | | | | |
| | | | |
| | | |
24 | | Semiannual Report | | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
CONSOLIDATED STATEMENT OF INVESTMENTS (UNAUDITED)
Franklin Strategic Income Fund (continued)
| | | | | | | | | | | | | | | | |
| | | | Country | | |
| Principal
Amount |
* | | | | | | | Value | |
j,lSenior Floating Rate Interests (continued) | | | | | | | | | | | | | | | | |
Household & Personal Products 0.1% | | | | | | | | | | | | | | | | |
Spectrum Brands, Inc., | | | | | | | | | | | | | | | | |
USD Term Loans, 4.31%, (1-month USD LIBOR + 2.00%), 6/23/22 | | | United States | | | | 1,342,695 | | | | | | | $ | 1,345,772 | |
USD Term Loans, 4.33% - 4.40%, (2-month USD LIBOR + 2.00%), 6/23/22 | | | United States | | | | 1,784,681 | | | | | | | | 1,788,772 | |
USD Term Loans, 4.35%, (3-month USD LIBOR + 2.00%), 6/23/22 | | | United States | | | | 1,007,021 | | | | | | | | 1,009,329 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | 4,143,873 | |
| | | | | | | | | | | | | | | | |
Materials 0.8% | | | | | | | | | | | | | | | | |
Ashland LLC, Term B Loan, 4.03% - 4.052%, (1-month USD LIBOR + 1.75%), 5/17/24 | | | United States | | | | 4,092,812 | | | | | | | | 4,107,730 | |
Axalta Coating Systems U.S. Holdings Inc., Term B-3 Dollar Loan, 4.136%, (3-month USD LIBOR + 1.75%), 6/01/24 | | | United States | | | | 4,824,915 | | | | | | | | 4,819,560 | |
Chemours Co., Tranche B-2 US$ Term Loan, 4.05%, (1-month USD LIBOR + 1.75%), 4/03/25 | | | United States | | | | 11,501,349 | | | | | | | | 11,451,031 | |
Crown Americas LLC, Dollar Term B Loan, 4.283%, (1-month USD LIBOR + 2.00%), 4/03/25 | | | United States | | | | 942,904 | | | | | | | | 946,145 | |
Oxbow Carbon LLC, | | | | | | | | | | | | | | | | |
Second Lien Term Loan, 9.802%, (1-month USD LIBOR + 7.50%), 1/04/24 | | | United States | | | | 2,161,171 | | | | | | | | 2,209,797 | |
Tranche A Term Loan, 4.552%, (1-month USD LIBOR + 2.25%), 1/04/22 | | | United States | | | | 12,603,125 | | | | | | | | 12,634,633 | |
Tranche B Term Loan, 5.802%, (1-month USD LIBOR + 3.50%), 1/04/23 | | | United States | | | | 7,536,375 | | | | | | | | 7,564,636 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | 43,733,532 | |
| | | | | | | | | | | | | | | | |
Media & Entertainment 0.7% | | | | | | | | | | | | | | | | |
Altice U.S. Finance I Corp., March 2017 Refinancing Term Loan Commitments, 4.552%, (1-month USD LIBOR + 2.25%), 7/28/25 | | | United States | | | | 1,961,283 | | | | | | | | 1,959,649 | |
AMC Entertainment Holdings Inc., | | | | | | | | | | | | | | | | |
2016 Incremental Term Loans, 4.53%, (1-month USD LIBOR + 2.25%), 12/15/23 | | | United States | | | | 4,528,536 | | | | | | | | 4,537,027 | |
Initial Term Loans, 4.53%, (1-month USD LIBOR + 2.25%), 12/15/22 | | | United States | | | | 5,926,610 | | | | | | | | 5,937,722 | |
Charter Communications Operating LLC, Term A-2 Loan, 3.81%, (1-month USD LIBOR + 1.50%), 3/31/23 | | | United States | | | | 8,964,978 | | | | | | | | 8,977,583 | |
CSC Holdings LLC, March 2017 Incremental Term Loans, 4.53%, (1-month USD LIBOR + 2.25%), 7/17/25 | | | United States | | | | 12,764,223 | | | | | | | | 12,716,204 | |
Lions Gate Capital Holdings LLC, Term A Loan, 4.052%, (1-month USD LIBOR + 1.75%), 3/22/23 | | | Canada | | | | 2,541,660 | | | | | | | | 2,544,837 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | 36,673,022 | |
| | | | | | | | | | | | | | | | |
Pharmaceuticals, Biotechnology & Life Sciences 0.8% | | | | | | | | | | | | | | | | |
Bausch Health Cos. Inc., Initial Term Loans, 5.274%, (1-month USD LIBOR + 3.00%), 6/02/25 | | | United States | | | | 3,141,757 | | | | | | | | 3,148,958 | |
Endo Luxembourg Finance Co. I S.A.R.L. and Endo LLC, Initial Term Loans, 6.563%, (1-month USD LIBOR + 4.25%), 4/29/24 | | | United States | | | | 19,761,060 | | | | | | | | 19,851,466 | |
Grifols Worldwide Operations USA Inc., Tranche B Term Loan, 4.467%, (1-week USD LIBOR + 2.25%), 1/31/25 | | | United States | | | | 12,856,862 | | | | | | | | 12,883,373 | |
Syneos Health Inc., Initial Term B Loans, 4.302%, (1-month USD LIBOR + 2.00%), 8/01/24 | | | United States | | | | 8,679,807 | | | | | | | | 8,670,173 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | 44,553,970 | |
| | | | | | | | | | | | | | | | |
| | | | |
| | | |
| franklintempleton.com | | Semiannual Report | | 25 |
FRANKLIN STRATEGIC SERIES
CONSOLIDATED STATEMENT OF INVESTMENTS (UNAUDITED)
Franklin Strategic Income Fund (continued)
| | | | | | | | | | | | | | | | |
| | | | Country | | |
| Principal
Amount |
* | | | | | | | Value | |
j,lSenior Floating Rate Interests (continued) | | | | | | | | | | | | | | | | |
Retailing 1.1% | | | | | | | | | | | | | | | | |
Ascena Retail Group Inc., Tranche B Term Loan, 6.813%, (1-month USD LIBOR + 4.50%), 8/21/22 | | | United States | | | | 30,640,905 | | | | | | | $ | 29,805,941 | |
General Nutrition Centers Inc., | | | | | | | | | | | | | | | | |
Tranche B-2 Term Loans, 11.56%, (1-month USD LIBOR + 9.25%), 3/04/21 | | | United States | | | | 13,385,549 | | | | | | | | 13,102,779 | |
Tranche B-2 Term Loans, 13.50%, (Prime + 7.75%), 3/04/21 | | | United States | | | | 2,339,167 | | | | | | | | 2,289,752 | |
Jo-Ann Stores Inc., Initial Loans, 7.477%, (3-month USD LIBOR + 5.00%), 10/23/23 | | | United States | | | | 12,371,375 | | | | | | | | 12,389,412 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | 57,587,884 | |
| | | | | | | | | | | | | | | | |
Semiconductors & Semiconductor Equipment 0.3% | | | | | | | | | | | | | | | | |
MKS Instruments Inc., Tranche B-4 Term Loan, 4.052%, (1-month USD LIBOR + 1.75%), 4/29/23 | | | United States | | | | 2,722,325 | | | | | | | | 2,731,689 | |
ON Semiconductor Corp., 2018 New Replacement Term B-3 Loans, 4.052%, (1-month USD LIBOR + 1.75%), 3/31/23 | | | United States | | | | 11,425,542 | | | | | | | | 11,421,978 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | 14,153,667 | |
| | | | | | | | | | | | | | | | |
Software & Services 0.1% | | | | | | | | | | | | | | | | |
Rackspace Hosting Inc., Term B Loans, 5.348%, (3-month USD LIBOR + 3.00%), 11/03/23 | | | United States | | | | 3,808,245 | | | | | | | | 3,704,318 | |
Wex Inc., Term B-2 Loan, 4.552%, (1-month USD LIBOR + 2.25%), 7/01/23 | | | United States | | | | 1,862,877 | | | | | | | | 1,868,365 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | 5,572,683 | |
| | | | | | | | | | | | | | | | |
Technology Hardware & Equipment 0.0%† | | | | | | | | | | | | | | | | |
CommScope Inc., Tranche 5 Term Loans, 4.302%, (1-month USD LIBOR + 2.00%), 12/29/22 | | | United States | | | | 447,087 | | | | | | | | 448,764 | |
| | | | | | | | | | | | | | | | |
Telecommunication Services 0.0%† | | | | | | | | | | | | | | | | |
Global Tel*Link Corp., Term Loan, 6.386%, (3-month USD LIBOR + 4.00%), 5/23/20 | | | United States | | | | 2,749,354 | | | | | | | | 2,761,382 | |
| | | | | | | | | | | | | | | | |
Transportation 0.5% | | | | | | | | | | | | | | | | |
Air Canada, Term Loan, 4.295%, (1-month USD LIBOR + 2.00%), 10/06/23 | | | Canada | | | | 545,053 | | | | | | | | 546,870 | |
Hertz Corp., Tranche B-1 Term Loan, 5.06%, (1-month USD LIBOR + 2.75%), 6/30/23 | | | United States | | | | 8,998,987 | | | | | | | | 8,965,943 | |
International Seaways Operating Corp., Initial Term Loans, 8.26%, (1-month USD LIBOR + 5.50%), 6/22/22 | | | United States | | | | 6,709,072 | | | | | | | | 6,751,003 | |
Navios Maritime Midstream Partners LP, Initial Term Loan, 6.84%, (3-month USD LIBOR + 4.50%), 6/18/20 | | | Marshall Islands | | | | 13,094,864 | | | | | | | | 12,636,544 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | 28,900,360 | |
| | | | | | | | | | | | | | | | |
Utilities 0.3% | | | | | | | | | | | | | | | | |
EFS Cogen Holdings I LLC (Linden), Term B Advance, 5.64%, (3-month USD LIBOR + 3.25%), 6/28/23 | | | United States | | | | 6,145,674 | | | | | | | | 6,145,127 | |
NRG Energy Inc., Term Loan B, 4.136%, (3-month USD LIBOR + 1.75%), 6/30/23 | | | United States | | | | 8,435,825 | | | | | | | | 8,411,572 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | 14,556,699 | |
| | | | | | | | | | | | | | | | |
Total Senior Floating Rate Interests (Cost $463,230,300) | | | | | | | | | | | | | | | 464,720,626 | |
| | | | | | | | | | | | | | | | |
| | | | |
| | | |
26 | | Semiannual Report | | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
CONSOLIDATED STATEMENT OF INVESTMENTS (UNAUDITED)
Franklin Strategic Income Fund (continued)
| | | | | | | | | | | | | | | | |
| | | | Country | | |
| Principal
Amount |
* | | | | | | | Value | |
Foreign Government and Agency Securities 5.8% | | | | | | | | | | | | | | | | |
cThe Export-Import Bank of India, senior note, 144A, 3.875%, 2/01/28 | | | India | | | | 16,000,000 | | | | | | | $ | 14,706,048 | |
Government of Hungary, 5.375%, 2/21/23 | | | Hungary | | | | 16,250,000 | | | | | | | | 17,104,750 | |
Government of Indonesia, | | | | | | | | | | | | | | | | |
senior bond, FR34, 12.80%, 6/15/21 | | | Indonesia | | | | 169,210,000,000 | | | | IDR | | | | 12,413,736 | |
senior bond, FR36, 11.50%, 9/15/19 | | | Indonesia | | | | 35,400,000,000 | | | | IDR | | | | 2,422,404 | |
senior bond, FR39, 11.75%, 8/15/23 | | | Indonesia | | | | 29,150,000,000 | | | | IDR | | | | 2,167,961 | |
senior bond, FR44, 10.00%, 9/15/24 | | | Indonesia | | | | 8,340,000,000 | | | | IDR | | | | 585,460 | |
senior bond, FR56, 8.375%, 9/15/26 | | | Indonesia | | | | 363,988,000,000 | | | | IDR | | | | 23,602,656 | |
Government of Mexico, | | | | | | | | | | | | | | | | |
senior bond, M, 6.50%, 6/10/21 | | | Mexico | | | | 4,690,000 | o | | | MXN | | | | 21,957,848 | |
senior note, M 10, 8.50%, 12/13/18 | | | Mexico | | | | 16,200,000 | o | | | MXN | | | | 79,772,291 | |
cGovernment of Serbia, | | | | | | | | | | | | | | | | |
senior note, 144A, 4.875%, 2/25/20 | | | Serbia | | | | 29,400,000 | | | | | | | | 29,688,855 | |
senior note, 144A, 7.25%, 9/28/21 | | | Serbia | | | | 15,000,000 | | | | | | | | 16,206,600 | |
cGovernment of Ukraine, | | | | | | | | | | | | | | | | |
144A, 7.75%, 9/01/22 | | | Ukraine | | | | 2,200,000 | | | | | | | | 2,137,850 | |
144A, 7.75%, 9/01/23 | | | Ukraine | | | | 4,355,000 | | | | | | | | 4,156,303 | |
144A, 7.75%, 9/01/24 | | | Ukraine | | | | 4,355,000 | | | | | | | | 4,098,839 | |
144A, 7.75%, 9/01/25 | | | Ukraine | | | | 4,355,000 | | | | | | | | 4,020,188 | |
144A, 7.75%, 9/01/26 | | | Ukraine | | | | 4,355,000 | | | | | | | | 3,947,916 | |
a,p144A, VRI, GDP Linked Security, 5/31/40 | | | Ukraine | | | | 20,490,000 | | | | | | | | 10,567,923 | |
Nota Do Tesouro Nacional, | | | | | | | | | | | | | | | | |
10.00%, 1/01/21 | | | Brazil | | | | 97,200 | q | | | BRL | | | | 27,005,405 | |
10.00%, 1/01/23 | | | Brazil | | | | 34,402 | q | | | BRL | | | | 9,469,621 | |
rIndex Linked, 6.00%, 5/15/23 | | | Brazil | | | | 19,500 | q | | | BRL | | | | 17,457,271 | |
senior note, 10.00%, 1/01/19 | | | Brazil | | | | 25,000 | q | | | BRL | | | | 6,744,604 | |
| | | | | | | | | | | | | | | | |
Total Foreign Government and Agency Securities
(Cost $347,723,653) | | | | | | | | | | | | | | | 310,234,529 | |
| | | | | | | | | | | | | | | | |
| | | | |
U.S. Government and Agency Securities 4.1% | | | | | | | | | | | | | | | | |
U.S. Treasury Bond, | | | | | | | | | | | | | | | | |
7.125%, 2/15/23 | | | United States | | | | 3,000,000 | | | | | | | | 3,500,508 | |
6.25%, 8/15/23 | | | United States | | | | 4,000,000 | | | | | | | | 4,583,047 | |
6.875%, 8/15/25 | | | United States | | | | 1,000,000 | | | | | | | | 1,232,793 | |
6.50%, 11/15/26 | | | United States | | | | 34,000,000 | | | | | | | | 42,223,750 | |
5.25%, 2/15/29 | | | United States | | | | 1,750,000 | | | | | | | | 2,068,999 | |
3.00%, 11/15/45 | | | United States | | | | 50,000,000 | | | | | | | | 46,570,312 | |
sIndex Linked, 0.625%, 1/15/24 | | | United States | | | | 24,800,209 | | | | | | | | 24,274,503 | |
U.S. Treasury Note, | | | | | | | | | | | | | | | | |
2.375%, 8/15/24 | | | United States | | | | 5,000,000 | | | | | | | | 4,826,758 | |
sIndex Linked, 0.125%, 7/15/24 | | | United States | | | | 96,143,526 | | | | | | | | 91,634,208 | |
| | | | | | | | | | | | | | | | |
Total U.S. Government and Agency Securities
(Cost $231,304,738) | | | | | | | | | | | | | | | 220,914,878 | |
| | | | | | | | | | | | | | | | |
| | | | |
| | | |
| franklintempleton.com | | Semiannual Report | | 27 |
FRANKLIN STRATEGIC SERIES
CONSOLIDATED STATEMENT OF INVESTMENTS (UNAUDITED)
Franklin Strategic Income Fund (continued)
| | | | | | | | | | | | | | | | |
| | | | Country | | |
| Principal
Amount |
* | | | | | | | Value | |
Asset-Backed Securities and Commercial Mortgage-Backed
Securities 20.1% | | | | | | | | | | | | | | | | |
Banks 0.5% | | | | | | | | | | | | | | | | |
Citigroup Commercial Mortgage Trust, 2006-C5, AJ, 5.482%, 10/15/49 | | | United States | | | | 4,962,854 | | | | | | | $ | 4,803,149 | |
tCommercial Mortgage Trust, 2006-GG7, AJ, FRN, 5.667%, 7/10/38 | | | United States | | | | 10,783,000 | | | | | | | | 9,937,646 | |
CSAIL Commercial Mortgage Trust, 2015-C1, A4, 3.505%, 4/15/50 | | | United States | | | | 10,050,000 | | | | | | | | 9,908,754 | |
tCWABS Asset-Backed Certificates Trust, 2005-11, AF4, FRN, 4.436%, 3/25/34 | | | United States | | | | 2,579,575 | | | | | | | | 2,599,588 | |
uMerrill Lynch Mortgage Investors Trust, 2005-A6, 2A3, FRN, 2.661%, (1-month USD LIBOR + 0.38%), 8/25/35 | | | United States | | | | 1,431,189 | | | | | | | | 1,437,509 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | 28,686,646 | |
| | | | | | | | | | | | | | | | |
Diversified Financials 19.6% | | | | | | | | | | | | | | | | |
c,uAMMC CLO XI Ltd., | | | | | | | | | | | | | | | | |
2012-11A, BR2, 144A, FRN, 4.12%, (3-month USD LIBOR + 1.60%), 4/30/31 | | | United States | | | | 3,000,000 | | | | | | | | 2,952,540 | |
2012-11A, CR2, 144A, FRN, 4.42%, (3-month USD LIBOR + 1.90%), 4/30/31 | | | United States | | | | 1,000,000 | | | | | | | | 998,750 | |
2012-11A, DR2, 144A, FRN, 5.37%, (3-month USD LIBOR + 2.85%), 4/30/31 | | | United States | | | | 1,450,000 | | | | | | | | 1,424,784 | |
c,uAntares CLO Ltd., 2018-1A, B, 144A, FRN, 4.119%, (3-month USD LIBOR + 1.65%), 4/20/31 | | | United States | | | | 17,500,000 | | | | | | | | 17,509,625 | |
c,uAres CLO Ltd., 2018-48A, D, 144A, FRN, 5.039%, (3-month USD LIBOR + 2.70%), 7/20/30 | | | United States | | | | 3,550,000 | | | | | | | | 3,510,950 | |
c,uAres XLIII CLO Ltd., 2017-43A, A, 144A, FRN, 3.656%, (3-month USD LIBOR + 1.22%), 10/15/29 | | | United States | | | | 3,870,000 | | | | | | | | 3,873,986 | |
c,uAtrium VIII, | | | | | | | | | | | | | | | | |
8A, BR, 144A, FRN, 4.377%, (3-month USD LIBOR + 1.90%), 10/23/24 | | | United States | | | | 4,520,000 | | | | | | | | 4,527,006 | |
8A, CR, 144A, FRN, 4.977%, (3-month USD LIBOR + 2.50%), 10/23/24 | | | United States | | | | 6,080,000 | | | | | | | | 6,101,949 | |
c,uAtrium XI, 2011A, CR, 144A, FRN, 4.627%, (3-month USD LIBOR + 2.15%), 10/23/25 | | | United States | | | | 15,440,000 | | | | | | | | 15,479,218 | |
c,tAtrium XIV LLC, 14A, D, 144A, FRN, 5.26%, 8/23/30 | | | United States | | | | 3,750,000 | | | | | | | | 3,734,400 | |
Banc of America Commercial Mortgage Trust, | | | | | | | | | | | | | | | | |
2015-UBS7, A3, 3.441%, 9/15/48 | | | United States | | | | 10,920,000 | | | | | | | | 10,692,425 | |
2015-UBS7, A4, 3.705%, 9/15/48 | | | United States | | | | 12,450,000 | | | | | | | | 12,362,937 | |
t2015-UBS7, B, FRN, 4.362%, 9/15/48 | | | United States | | | | 6,740,000 | | | | | | | | 6,797,353 | |
c,tBBC Middle Market CLO LLC, 2018-1A, A2, 144A, FRN, 4.369%, 10/20/30 | | | United States | | | | 6,300,000 | | | | | | | | 6,298,362 | |
c,tBCAP LLC Trust, 2009-RR1, 2A2, 144A, FRN, 4.286%, 5/26/35 | | | United States | | | | 7,305,115 | | | | | | | | 7,105,781 | |
c,uBetony CLO 2 Ltd., 2018-1A, C, 144A, FRN, 5.42%, (3-month USD LIBOR + 2.90%), 4/30/31 | | | United States | | | | 4,000,000 | | | | | | | | 3,996,000 | |
cBlueMountain CLO Ltd., | | | | | | | | | | | | | | | | |
u2012-2A, BR, 144A, FRN, 4.222%, (3-month USD LIBOR + 1.90%), 11/20/28 | | | United States | | | | 6,710,000 | | | | | | | | 6,722,212 | |
u2012-2A, CR, 144A, FRN, 4.922%, (3-month USD LIBOR + 2.60%), 11/20/28 | | | United States | | | | 2,730,000 | | | | | | | | 2,727,952 | |
t2014-2A, CR2, 144A, FRN, 4.669%, 10/20/30 | | | United States | | | | 3,800,000 | | | | | | | | 3,800,000 | |
t2018-1A, D, 144A, FRN, 5.57%, 7/30/30 | | | United States | | | | 5,000,000 | | | | | | | | 5,000,500 | |
| | | | |
| | | |
28 | | Semiannual Report | | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
CONSOLIDATED STATEMENT OF INVESTMENTS (UNAUDITED)
Franklin Strategic Income Fund (continued)
| | | | | | | | | | | | | | | | |
| | | | Country | | |
| Principal
Amount |
* | | | | | | | Value | |
Asset-Backed Securities and Commercial Mortgage-Backed Securities (continued) | | | | | | | | | | | | | | | | |
Diversified Financials (continued) | | | | | | | | | | | | | | | | |
c,uBlueMountain Fuji U.S. CLO II Ltd., 2017-2A, A1A, 144A, FRN, 3.548%, (3-month USD LIBOR + 1.20%), 10/20/30 | | | United States | | | | 4,200,000 | | | | | | | $ | 4,220,916 | |
c,uBlueMountain Fuji U.S. CLO III Ltd., 2017-3A, A2, 144A, FRN, 3.489%, (3-month USD LIBOR + 1.15%), 1/15/30 | | | United States | | | | 4,600,000 | | | | | | | | 4,606,486 | |
c,uBurnham Park CLO Ltd., | | | | | | | | | | | | | | | | |
2016-1A, A, 144A, FRN, 3.899%, (3-month USD LIBOR + 1.43%), 10/20/29 | | | United States | | | | 4,590,000 | | | | | | | | 4,617,861 | |
2016-1A, B, 144A, FRN, 4.269%, (3-month USD LIBOR + 1.80%), 10/20/29 | | | United States | | | | 6,000,000 | | | | | | | | 6,006,660 | |
2016-1A, C, 144A, FRN, 4.869%, (3-month USD LIBOR + 2.40%), 10/20/29 | | | United States | | | | 6,000,000 | | | | | | | | 6,012,120 | |
c,tButtermilk Park CLO Ltd., 2018-1A, C, 144A, FRN, 4.438%, 10/15/31 | | | United States | | | | 9,730,950 | | | | | | | | 9,723,846 | |
uCapital One Multi-Asset Execution Trust, | | | | | | | | | | | | | | | | |
2014-A3, A3, FRN, 2.66%, (1-month USD LIBOR + 0.38%), 1/18/22 | | | United States | | | | 4,265,000 | | | | | | | | 4,269,105 | |
2016-A1, A1, FRN, 2.73%, (1-month USD LIBOR + 0.45%), 2/15/22 | | | United States | | | | 32,250,000 | | | | | | | | 32,300,187 | |
2016-A2, A2, FRN, 2.91%, (1-month USD LIBOR + 0.63%), 2/15/24 | | | United States | | | | 44,033,000 | | | | | | | | 44,472,925 | |
c,uCarlyle Global Market Strategies CLO Ltd., | | | | | | | | | | | | | | | | |
2012-4A, BR, 144A, FRN, 4.369%, (3-month USD LIBOR + 1.90%), 1/20/29 | | | United States | | | | 6,540,000 | | | | | | | | 6,563,806 | |
2012-4A, C1R, 144A, FRN, 5.069%, (3-month USD LIBOR + 2.60%), 1/20/29 | | | United States | | | | 6,330,000 | | | | | | | | 6,358,548 | |
2014-4RA, C, 144A, FRN, 5.336%, (3-month USD LIBOR + 2.90%), 7/15/30 | | | United States | | | | 3,000,000 | | | | | | | | 2,977,860 | |
c,tCarlyle GMS Finance MM CLO LLC, 2015-1A, A2R, 144A, FRN, 4.636%, 10/15/31 | | | United States | | | | 12,000,000 | | | | | | | | 12,021,000 | |
c,uCarlyle U.S. CLO Ltd., 2017-2A, A1B, 144A, FRN, 3.689%, (3-month USD LIBOR + 1.22%), 7/20/31 | | | United States | | | | 8,500,000 | | | | | | | | 8,518,615 | |
c,uCatamaran CLO Ltd., 2014-2A, BR, 144A, FRN, 5.395%, (3-month USD LIBOR + 2.95%), 10/18/26 | | | United States | | | | 11,770,000 | | | | | | | | 11,809,429 | |
c,uCent CLO LP, | | | | | | | | | | | | | | | | |
2014-22A, A2AR, 144A, FRN, 4.293%, (3-month USD LIBOR + 1.95%), 11/07/26 | | | United States | | | | 5,224,000 | | | | | | | | 5,230,426 | |
2014-22A, BR, 144A, FRN, 5.293%, (3-month USD LIBOR + 2.95%), 11/07/26 | | | United States | | | | 4,416,410 | | | | | | | | 4,425,287 | |
c,tCGRBS Commercial Mortgage Trust, 2013-VN05, C, 144A, FRN, 3.584%, 3/13/35 | | | United States | | | | 7,700,000 | | | | | | | | 7,547,466 | |
c,uCole Park CLO Ltd., 2015-1A, B, 144A, FRN, 4.719%, (3-month USD LIBOR + 2.25%), 10/20/28 | | | United States | | | | 3,530,000 | | | | | | | | 3,541,014 | |
tCOMM Mortgage Trust, 2014-CR19, B, FRN, 4.703%, 8/10/47 | | | United States | | | | 7,700,000 | | | | | | | | 7,797,173 | |
c,tConsumer Loan Underlying Bond (CLUB) Certificate Issuer Trust I, 2018-14, PT, 144A, FRN, 9.57%, 9/16/41 | | | United States | | | | 10,158,338 | | | | | | | | 10,131,517 | |
cCore Industrial Trust, 2015-CALW, A, 144A, 3.04%, 2/10/34 | | | United States | | | | 14,291,734 | | | | | | | | 14,143,951 | |
uDiscover Card Execution Note Trust, 2016-A2, A2, FRN, 2.82%, (1-month USD LIBOR + 0.54%), 9/15/21 | | | United States | | | | 32,250,000 | | | | | | | | 32,301,797 | |
| | | | |
| | | |
| franklintempleton.com | | Semiannual Report | | 29 |
FRANKLIN STRATEGIC SERIES
CONSOLIDATED STATEMENT OF INVESTMENTS (UNAUDITED)
Franklin Strategic Income Fund (continued)
| | | | | | | | | | | | | | | | |
| | | | Country | | |
| Principal
Amount |
* | | | | | | | Value | |
Asset-Backed Securities and Commercial Mortgage-Backed Securities (continued) | | | | | | | | | | | | | | | | |
Diversified Financials (continued) | | | | | | | | | | | | | | | | |
c,uDryden 33 Senior Loan Fund, | | | | | | | | | | | | | | | | |
2014-33A, BR, 144A, FRN, 4.286%, (3-month USD LIBOR + 1.85%), 10/15/28 | | | United States | | | | 7,030,000 | | | | | | | $ | 7,045,958 | |
2014-33A, CR, 144A, FRN, 4.936%, (3-month USD LIBOR + 2.50%), 10/15/28 | | | United States | | | | 3,530,000 | | | | | | | | 3,539,990 | |
c,tDryden 38 Senior Loan Fund, | | | | | | | | | | | | | | | | |
2015-38A, CR, 144A, FRN, 4.436%, 7/15/30 | | | United States | | | | 7,186,000 | | | | | | | | 7,147,699 | |
2015-38A, DR, 144A, FRN, 5.436%, 7/15/30 | | | United States | | | | 4,556,000 | | | | | | | | 4,568,575 | |
c,uDryden 42 Senior Loan Fund, 2016-42A, DR, 144A, FRN, 5.366%, (3-month USD LIBOR + 2.93%), 7/15/30 | | | United States | | | | 8,400,000 | | | | | | | | 8,326,584 | |
c,uDryden 55 CLO Ltd., | | | | | | | | | | | | | | | | |
2018-55A, A1, 144A, FRN, 3.456%, (3-month USD LIBOR + 1.02%), 4/15/31 | | | United States | | | | 6,000,000 | | | | | | | | 5,989,440 | |
2018-55A, D, 144A, FRN, 5.286%, (3-month USD LIBOR + 2.85%), 4/15/31 | | | United States | | | | 3,000,000 | | | | | | | | 2,998,830 | |
c,uDryden 64 CLO Ltd., | | | | | | | | | | | | | | | | |
2018-64A, A, 144A, FRN, 3.415%, (3-month USD LIBOR + 0.97%), 4/18/31 | | | United States | | | | 5,070,000 | | | | | | | | 5,045,106 | |
2018-64A, D, 144A, FRN, 5.095%, (3-month USD LIBOR + 2.65%), 4/18/31 | | | United States | | | | 2,200,000 | | | | | | | | 2,158,662 | |
c,tEaton Vance CLO Ltd., | | | | | | | | | | | | | | | | |
2014-1RA, C, 144A, FRN, 4.257%, 7/15/30 | | | United States | | | | 1,972,575 | | | | | | | | 1,964,073 | |
2014-1RA, D, 144A, FRN, 5.207%, 7/15/30 | | | United States | | | | 3,653,850 | | | | | | | | 3,652,973 | |
c,tEleven Madison Trust Mortgage Trust, 2015-11MD, A, 144A, FRN, 3.555%, 9/10/35 | | | United States | | | | 14,920,000 | | | | | | | | 14,734,746 | |
FHLMC Structured Agency Credit Risk Debt Notes, | | | | | | | | | | | | | | | | |
u2013-DN2, M2, FRN, 6.531%, (1-month USD LIBOR + 4.25%), 11/25/23 | | | United States | | | | 2,253,049 | | | | | | | | 2,492,420 | |
u2014-DN1, M2, FRN, 4.481%, (1-month USD LIBOR + 2.20%), 2/25/24 | | | United States | | | | 8,616,562 | | | | | | | | 8,842,591 | |
u2014-DN2, M3, FRN, 5.881%, (1-month USD LIBOR + 3.60%), 4/25/24 | | | United States | | | | 13,890,000 | | | | | | | | 15,324,490 | |
u2014-DN3, M3, FRN, 6.281%, (1-month USD LIBOR + 4.00%), 8/25/24 | | | United States | | | | 1,263,505 | | | | | | | | 1,373,626 | |
u2014-DN4, M3, FRN, 6.831%, (1-month USD LIBOR + 4.55%), 10/25/24 | | | United States | | | | 13,709,333 | | | | | | | | 15,160,401 | |
u2014-HQ1, M3, FRN, 6.381%, (1-month USD LIBOR + 4.10%), 8/25/24 | | | United States | | | | 3,660,000 | | | | | | | | 3,992,617 | |
u2014-HQ2, M2, FRN, 4.481%, (1-month USD LIBOR + 2.20%), 9/25/24 | | | United States | | | | 10,468,786 | | | | | | | | 10,761,831 | |
u2014-HQ3, M3, FRN, 7.031%, (1-month USD LIBOR + 4.75%), 10/25/24 | | | United States | | | | 7,669,031 | | | | | | | | 8,469,708 | |
u2015-DNA1, M3, FRN, 5.581%, (1-month USD LIBOR + 3.30%), 10/25/27 | | | United States | | | | 2,830,000 | | | | | | | | 3,168,735 | |
u2015-DNA3, M3, FRN, 6.981%, (1-month USD LIBOR + 4.70%), 4/25/28 | | | United States | | | | 18,411,581 | | | | | | | | 21,788,819 | |
u2015-HQ1, M2, FRN, 4.487%, (1-month USD LIBOR + 2.20%), 3/25/25 | | | United States | | | | 648,066 | | | | | | | | 649,794 | |
u2015-HQ1, M3, FRN, 6.087%, (1-month USD LIBOR + 3.80%), 3/25/25 | | | United States | | | | 9,580,000 | | | | | | | | 10,155,805 | |
| | | | |
| | | |
30 | | Semiannual Report | | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
CONSOLIDATED STATEMENT OF INVESTMENTS (UNAUDITED)
Franklin Strategic Income Fund (continued)
| | | | | | | | | | | | | | | | |
| | | | Country | | |
| Principal
Amount |
* | | | | | | | Value | |
Asset-Backed Securities and Commercial Mortgage-Backed Securities (continued) | | | | | | | | | | | | | | | | |
Diversified Financials (continued) | | | | | | | | | | | | | | | | |
FHLMC Structured Agency Credit Risk Debt Notes, (continued) | | | | | | | | | | | | | | | | |
u2015-HQA1, M3, FRN, 6.981%, (1-month USD LIBOR + 4.70%), 3/25/28 | | | United States | | | | 18,830,000 | | | | | | | $ | 21,443,256 | |
u2016-DNA2, M3, FRN, 6.931%, (1-month USD LIBOR + 4.65%), 10/25/28 | | | United States | | | | 17,820,000 | | | | | | | | 20,454,723 | |
tHQA1, M2, FRN, 5.831%, 8/25/29 | | | United States | | | | 19,800,000 | | | | | | | | 21,627,207 | |
c,uFlagship CLO VIII Ltd., | | | | | | | | | | | | | | | | |
2014-8A, ARR, 144A, FRN, 3.286%, (3-month USD LIBOR + 0.85%), 1/16/26 | | | United States | | | | 6,880,000 | | | | | | | | 6,870,918 | |
2014-8A, DR, 144A, FRN, 5.486%, (3-month USD LIBOR + 3.05%), 1/16/26 | | | United States | | | | 3,000,000 | | | | | | | | 2,997,270 | |
uFNMA Connecticut Avenue Securities, | | | | | | | | | | | | | | | | |
2013-C01, M2, FRN, 7.531%, (1-month USD LIBOR + 5.25%), 10/25/23 | | | United States | | | | 16,865,000 | | | | | | | | 19,325,337 | |
2014-C01, M2, FRN, 6.681%, (1-month USD LIBOR + 4.40%), 1/25/24 | | | United States | | | | 17,420,000 | | | | | | | | 19,722,504 | |
2014-C02, 1M2, FRN, 4.881%, (1-month USD LIBOR + 2.60%), 5/25/24 | | | United States | | | | 14,572,000 | | | | | | | | 15,499,888 | |
2014-C03, 1M2, FRN, 5.281%, (1-month USD LIBOR + 3.00%), 7/25/24 | | | United States | | | | 30,730,588 | | | | | | | | 32,758,690 | |
2014-C03, 2M2, FRN, 5.181%, (1-month USD LIBOR + 2.90%), 7/25/24 | | | United States | | | | 4,742,695 | | | | | | | | 5,071,781 | |
2015-C01, 1M2, FRN, 6.581%, (1-month USD LIBOR + 4.30%), 2/25/25 | | | United States | | | | 7,233,972 | | | | | | | | 7,943,348 | |
2015-C01, 2M2, FRN, 6.831%, (1-month USD LIBOR + 4.55%), 2/25/25 | | | United States | | | | 12,999,698 | | | | | | | | 14,026,935 | |
2015-C02, 1M2, FRN, 6.281%, (1-month USD LIBOR + 4.00%), 5/25/25 | | | United States | | | | 26,916,321 | | | | | | | | 29,525,455 | |
2015-C02, 2M2, FRN, 6.281%, (1-month USD LIBOR + 4.00%), 5/25/25 | | | United States | | | | 14,652,201 | | | | | | | | 15,808,081 | |
2015-C03, 1M2, FRN, 7.281%, (1-month USD LIBOR + 5.00%), 7/25/25 | | | United States | | | | 27,278,041 | | | | | | | | 30,707,840 | |
2015-C03, 2M2, FRN, 7.281%, (1-month USD LIBOR + 5.00%), 7/25/25 | | | United States | | | | 17,952,641 | | | | | | | | 19,958,141 | |
2017-C01, 1M2, FRN, 5.831%, (1-month USD LIBOR + 3.55%), 7/25/29 | | | United States | | | | 20,720,000 | | | | | | | | 22,463,236 | |
c,uGalaxy XVIII CLO Ltd., 2018-28A, C, 144A, FRN, 4.289%, (3-month USD LIBOR + 1.95%), 7/15/31 | | | United States | | | | 3,070,000 | | | | | | | | 3,050,997 | |
c,uGalaxy XXV CLO Ltd., 2018-25A, D, 144A, FRN, 5.875%, (3-month USD LIBOR + 3.10%), 10/25/31 | | | United States | | | | 4,734,850 | | | | | | | | 4,683,240 | |
c,uGalaxy XXVII CLO Ltd., 2018-27A, C, 144A, FRN, 5.065%, (3-month USD LIBOR + 2.75%), 5/16/31 | | | United States | | | | 5,750,000 | | | | | | | | 5,730,162 | |
GS Mortgage Securities Trust, | | | | | | | | | | | | | | | | |
t2016-GS3, B, FRN, 3.395%, 10/10/49 | | | United States | | | | 8,037,000 | | | | | | | | 7,601,342 | |
2017-GS6, B, 3.869%, 5/10/50 | | | United States | | | | 7,700,000 | | | | | | | | 7,460,452 | |
| | | | |
| | | |
| franklintempleton.com | | Semiannual Report | | 31 |
FRANKLIN STRATEGIC SERIES
CONSOLIDATED STATEMENT OF INVESTMENTS (UNAUDITED)
Franklin Strategic Income Fund (continued)
| | | | | | | | | | | | |
| | | | Country | | |
| Principal
Amount |
* | | | Value | |
Asset-Backed Securities and Commercial Mortgage-Backed Securities (continued) | | | | | | | | | | | | |
Diversified Financials (continued) | | | | | | | | | | | | |
c,tHPS Loan Management Ltd., 2013A-18, C, 144A, FRN, 4.586%, 10/15/30 | | | United States | | | | 4,950,000 | | | $ | 4,949,158 | |
c,tJ.P. Morgan Chase Commercial Mortgage Securities Trust, 2016-NINE, B, 144A, FRN, 2.854%, 10/06/38 | | | United States | | | | 9,600,000 | | | | 8,722,791 | |
JPMCC Commercial Mortgage Securities Trust, 2017-JP6, B, 3.946%, 7/15/50 | | | United States | | | | 9,250,000 | | | | 8,931,000 | |
c,uLCM XVI LP, 2016A, BR, 144A, FRN, 3.936%, (3-month USD LIBOR + 1.50%), 7/15/26 | | | United States | | | | 6,900,000 | | | | 6,894,963 | |
c,tLCM XVII LP, | | | | | | | | | | | | |
2017A, BRR, 144A, FRN, 4.026%, 10/15/31 | | | United States | | | | 4,590,000 | | | | 4,591,423 | |
2017A, CRR, 144A, FRN, 4.526%, 10/15/31 | | | United States | | | | 4,240,000 | | | | 4,239,915 | |
c,uLCM XVIII LP, 2018A, DR, 144A, FRN, 5.269%, (3-month USD LIBOR + 2.80%), 4/20/31 | | | United States | | | | 6,860,000 | | | | 6,852,454 | |
c,uLCM XXIV Ltd., 24A, A, 144A, FRN, 3.779%, (3-month USD LIBOR + 1.31%), 3/20/30 | | | United States | | | | 4,300,000 | | | | 4,320,382 | |
c,uMadison Park Funding XXIII Ltd., | | | | | | | | | | | | |
2017-23A, B, 144A, FRN, 4.209%, (3-month USD LIBOR + 1.70%), 7/27/30 | | | United States | | | | 2,400,000 | | | | 2,399,472 | |
2017-23A, C, 144A, FRN, 4.859%, (3-month USD LIBOR + 2.35%), 7/27/30 | | | United States | | | | 5,000,000 | | | | 5,018,750 | |
c,tMagnetite Ltd., 2015-14RA, A1, 144A, FRN, 3.559%, 10/18/31 | | | United States | | | | 2,000,000 | | | | 1,999,940 | |
c,uMagnetite XVIII Ltd., 2016-18A, B, 144A, FRN, 4.064%, (3-month USD LIBOR + 1.75%), 11/15/28 | | | United States | | | | 2,090,000 | | | | 2,092,592 | |
uMortgageIT Trust, | | | | | | | | | | | | |
2004-1, A2, FRN, 3.181%, (1-month USD LIBOR + 0.90%), 11/25/34 | | | United States | | | | 2,237,500 | | | | 2,206,429 | |
2005-5, A1, FRN, 2.541%, (1-month USD LIBOR + 0.26%), 12/25/35 | | | United States | | | | 1,923,251 | | | | 1,910,000 | |
c,tNeuberger Berman CLO Ltd., 2016-22A, CR, 144A, FRN, 4.649%, 10/17/30 | | | United States | | | | 2,129,630 | | | | 2,129,609 | |
c,uNZCG Funding Ltd., 2015-1A, A2R, 144A, FRN, 3.861%, (3-month USD LIBOR + 1.55%), 2/26/31 | | | United States | | | | 15,500,000 | | | | 15,372,435 | |
c,uOctagon Investment Partners 30 Ltd., 144A, FRN, 3.789%, (3-month USD LIBOR + 1.32%), 3/17/30 | | | United States | | | | 4,300,000 | | | | 4,315,953 | |
c,uOctagon Investment Partners 37 Ltd., 2018-2A, C, 144A, FRN, 5.21%, (3-month USD LIBOR + 2.85%), 7/25/30 | | | United States | | | | 4,000,000 | | | | 3,981,120 | |
c,tOctagon Investment Partners 38 Ltd., 2018-1A, C, 144A, FRN, 5.137%, 7/20/30 | | | United States | | | | 5,000,000 | | | | 4,995,650 | |
c,uOctagon Investment Partners XVI Ltd., 2013-1A, DR, 144A, FRN, 5.336%, (3-month USD LIBOR + 3.00%), 7/17/30 | | | United States | | | | 6,000,000 | | | | 5,964,240 | |
c,uOctagon Investment Partners XX Ltd., 2014-1A, AR, 144A, FRN, 3.468%, (3-month USD LIBOR + 1.13%), 8/12/26 | | | United States | | | | 6,100,000 | | | | 6,108,052 | |
c,uOctagon Investment Partners XXIII Ltd., | | | | | | | | | | | | |
2015-1A, BR, 144A, FRN, 3.636%, (3-month USD LIBOR + 1.20%), 7/15/27 | | | United States | | | | 4,590,000 | | | | 4,585,548 | |
2015-1A, DR, 144A, FRN, 4.986%, (3-month USD LIBOR + 2.55%), 7/15/27 | | | United States | | | | 6,400,000 | | | | 6,367,808 | |
| | | | |
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32 | | Semiannual Report | | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
CONSOLIDATED STATEMENT OF INVESTMENTS (UNAUDITED)
Franklin Strategic Income Fund (continued)
| | | | | | | | | | | | | | | | |
| | | | Country | | |
| Principal
Amount |
* | | | | | | | Value | |
Asset-Backed Securities and Commercial Mortgage-Backed Securities (continued) | | | | | | | | | | | | | | | | |
Diversified Financials (continued) | | | | | | | | | | | | | | | | |
uOpteum Mortgage Acceptance Corp. Trust, 2005-4, 1APT, FRN, 2.591%, (1-month USD LIBOR + 0.31%), 11/25/35 | | | United States | | | | 2,583,468 | | | | | | | $ | 2,572,286 | |
uStructured Asset Securities Corp., 2005-2XS, 2A2, FRN, 3.756%, (1-month USD LIBOR + 1.50%), 2/25/35 | | | United States | | | | 2,121,028 | | | | | | | | 2,094,774 | |
tThornburg Mortgage Securities Trust, 2005-1, A3, FRN, 3.518%, 4/25/45 | | | United States | | | | 3,345,513 | | | | | | | | 3,385,087 | |
c,tVoya CLO 2015-2 Ltd., 2A, BR, 144A, FRN, 3.977%, 7/23/27 | | | United States | | | | 9,290,000 | | | | | | | | 9,295,853 | |
c,uVoya CLO Ltd., | | | | | | | | | | | | | | | | |
2013-2A, BR, 144A, FRN, 4.34%, (3-month USD LIBOR + 1.85%), 4/25/31 | | | United States | | | | 5,770,000 | | | | | | | | 5,742,881 | |
2014-1A, CR2, 144A, FRN, 5.245%, (3-month USD LIBOR + 2.80%), 4/18/31 | | | United States | | | | 8,000,000 | | | | | | | | 7,960,080 | |
2017-2A, B, 144A, FRN, 4.786%, (3-month USD LIBOR + 2.35%), 6/07/30 | | | United States | | | | 19,200,000 | | | | | | | | 19,253,184 | |
2018-2A, D, 144A, FRN, 5.124%, (3-month USD LIBOR + 2.75%), 7/15/31 | | | United States | | | | 2,900,000 | | | | | | | | 2,855,108 | |
Wells Fargo Mortgage Backed Securities Trust, | | | | | | | | | | | | | | | | |
t2004-W, A9, FRN, 4.69%, 11/25/34 | | | United States | | | | 1,139,628 | | | | | | | | 1,174,291 | |
2007-3, 3A1, 5.50%, 4/25/22 | | | United States | | | | 212,911 | | | | | | | | 216,489 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | 1,052,798,718 | |
| | | | | | | | | | | | | | | | |
Total Asset-Backed Securities and Commercial
Mortgage-Backed Securities
(Cost $1,086,390,981) | | | | | | | | | | | | | | | 1,081,485,364 | |
| | | | | | | | | | | | | | | | |
| | | | |
Mortgage-Backed Securities 9.7% | | | | | | | | | | | | | | | | |
| | | | |
vFederal Home Loan Mortgage Corp. (FHLMC) Adjustable Rate 0.0%† | | | | | | | | | | | | | | | | |
FHLMC, 3.679%, (US 1 Year CMT T-Note +/- MBS Margin), 1/01/33 | | | United States | | | | 17,907 | | | | | | | | 18,454 | |
| | | | | | | | | | | | | | | | |
| | | | |
Federal Home Loan Mortgage Corp. (FHLMC) Fixed Rate 6.0% | | | | | | | | | | | | | | | | |
FHLMC Gold 15 Year, 4.50%, 2/01/19 - 9/01/19 | | | United States | | | | 29,198 | | | | | | | | 29,664 | |
FHLMC Gold 15 Year, 5.00%, 4/01/19 - 7/01/22 | | | United States | | | | 94,389 | | | | | | | | 96,549 | |
FHLMC Gold 15 Year, 5.50%, 2/01/19 | | | United States | | | | 71 | | | | | | | | 71 | |
FHLMC Gold 30 Year, 3.50%, 12/01/47 | | | United States | | | | 14,415,593 | | | | | | | | 14,049,802 | |
wFHLMC Gold 30 Year, 3.50%, 10/01/48 | | | United States | | | | 139,600,000 | | | | | | | | 135,925,172 | |
FHLMC Gold 30 Year, 4.00%, 5/01/48 | | | United States | | | | 70,592,273 | | | | | | | | 70,687,484 | |
wFHLMC Gold 30 Year, 4.00%, 11/01/48 | | | United States | | | | 98,700,000 | | | | | | | | 98,741,920 | |
FHLMC Gold 30 Year, 4.50%, 10/01/40 | | | United States | | | | 155,377 | | | | | | | | 161,073 | |
FHLMC Gold 30 Year, 5.00%, 5/01/27 - 2/01/38 | | | United States | | | | 1,217,567 | | | | | | | | 1,281,963 | |
FHLMC Gold 30 Year, 5.50%, 6/01/33 - 6/01/36 | | | United States | | | | 881,374 | | | | | | | | 943,813 | |
FHLMC Gold 30 Year, 6.00%, 6/01/33 - 6/01/37 | | | United States | | | | 275,158 | | | | | | | | 299,453 | |
FHLMC Gold 30 Year, 6.50%, 10/01/21 - 6/01/36 | | | United States | | | | 143,703 | | | | | | | | 158,369 | |
FHLMC Gold 30 Year, 7.00%, 9/01/21 - 8/01/32 | | | United States | | | | 25,772 | | | | | | | | 26,631 | |
FHLMC Gold 30 Year, 7.50%, 1/01/26 - 1/01/31 | | | United States | | | | 6,042 | | | | | | | | 6,849 | |
FHLMC Gold 30 Year, 8.00%, 11/01/25 - 1/01/26 | | | United States | | | | 77 | | | | | | | | 77 | |
FHLMC Gold 30 Year, 9.00%, 12/01/24 | | | United States | | | | 77 | | | | | | | | 83 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | 322,408,973 | |
| | | | | | | | | | | | | | | | |
| | | | |
| | | |
| franklintempleton.com | | Semiannual Report | | 33 |
FRANKLIN STRATEGIC SERIES
CONSOLIDATED STATEMENT OF INVESTMENTS (UNAUDITED)
Franklin Strategic Income Fund (continued)
| | | | | | | | | | | | |
| | | | Country | | |
| Principal
Amount |
* | | | Value | |
Mortgage-Backed Securities (continued) | | | | | | | | | | | | |
vFederal National Mortgage Association (FNMA) Adjustable Rate 0.0%† | | | | | | | | | | | | |
FNMA, 3.824%, (US 1 Year CMT T-Note +/- MBS Margin), 12/01/34 | | | United States | | | | 150,203 | | | $ | 158,501 | |
| | | |
Federal National Mortgage Association (FNMA) Fixed Rate 2.7% | | | | | | | | | | | | |
FNMA 15 Year, 2.50%, 7/01/27 | | | United States | | | | 298,215 | | | | 287,986 | |
FNMA 15 Year, 4.50%, 3/01/20 | | | United States | | | | 13,197 | | | | 13,391 | |
FNMA 15 Year, 5.50%, 3/01/21 - 4/01/22 | | | United States | | | | 41,422 | | | | 41,829 | |
FNMA 30 Year, 3.50%, 11/01/47 | | | United States | | | | 36,917,185 | | | | 35,978,380 | |
wFNMA 30 Year, 3.50%, 10/01/48 | | | United States | | | | 107,000,000 | | | | 104,170,355 | |
FNMA 30 Year, 4.50%, 3/01/28 - 2/01/41 | | | United States | | | | 499,745 | | | | 517,222 | |
FNMA 30 Year, 5.00%, 9/01/23 - 10/01/35 | | | United States | | | | 1,329,950 | | | | 1,400,644 | |
FNMA 30 Year, 5.50%, 9/01/33 - 12/01/35 | | | United States | | | | 1,190,523 | | | | 1,275,555 | |
FNMA 30 Year, 6.00%, 6/01/34 - 5/01/38 | | | United States | | | | 2,467,445 | | | | 2,679,398 | |
FNMA 30 Year, 6.50%, 3/01/28 - 10/01/37 | | | United States | | | | 352,989 | | | | 391,079 | |
FNMA 30 Year, 7.50%, 10/01/29 | | | United States | | | | 5,796 | | | | 6,604 | |
FNMA 30 Year, 8.00%, 1/01/25 - 5/01/26 | | | United States | | | | 3,157 | | | | 3,463 | |
| | | | | | | | | | | | |
| | | | | | | | | | | 146,765,906 | |
| | | | | | | | | | | | |
| | | |
Government National Mortgage Association (GNMA) Fixed Rate 1.0% | | | | | | | | | | | | |
GNMA I SF 30 Year, 4.50%, 9/20/48 | | | United States | | | | 29,947,227 | | | | 30,774,927 | |
wGNMA I SF 30 Year, 4.50%, 11/01/48 | | | United States | | | | 19,000,000 | | | | 19,491,700 | |
GNMA I SF 30 Year, 5.00%, 6/15/34 - 7/15/34 | | | United States | | | | 158,879 | | | | 168,343 | |
GNMA I SF 30 Year, 5.50%, 2/15/33 - 6/15/36 | | | United States | | | | 416,746 | | | | 446,881 | |
GNMA I SF 30 Year, 6.00%, 8/15/36 | | | United States | | | | 23,344 | | | | 25,376 | |
GNMA I SF 30 Year, 6.50%, 2/15/29 - 3/15/32 | | | United States | | | | 40,506 | | | | 44,191 | |
GNMA I SF 30 Year, 7.00%, 11/15/27 - 5/15/28 | | | United States | | | | 10,948 | | | | 11,150 | |
GNMA I SF 30 Year, 7.50%, 9/15/23 - 5/15/27 | | | United States | | | | 750 | | | | 769 | |
GNMA I SF 30 Year, 8.00%, 2/15/25 - 9/15/27 | | | United States | | | | 3,860 | | | | 4,105 | |
GNMA I SF 30 Year, 8.50%, 8/15/24 | | | United States | | | | 51 | | | | 52 | |
GNMA I SF 30 Year, 9.00%, 1/15/25 | | | United States | | | | 222 | | | | 223 | |
GNMA I SF 30 Year, 9.50%, 6/15/25 | | | United States | | | | 429 | | | | 430 | |
GNMA II SF 30 Year, 5.00%, 9/20/33 - 11/20/33 | | | United States | | | | 221,217 | | | | 236,226 | |
GNMA II SF 30 Year, 5.50%, 6/20/34 | | | United States | | | | 112,331 | | | | 120,164 | |
GNMA II SF 30 Year, 6.00%, 11/20/34 | | | United States | | | | 107,733 | | | | 116,710 | |
GNMA II SF 30 Year, 6.50%, 7/20/28 - 12/20/31 | | | United States | | | | 60,032 | | | | 66,500 | |
GNMA II SF 30 Year, 7.50%, 4/20/32 | | | United States | | | | 16,979 | | | | 18,500 | |
| | | | | | | | | | | | |
| | | | | | | | | | | 51,526,247 | |
| | | | | | | | | | | | |
Total Mortgage-Backed Securities (Cost $526,961,676) | | | | | | | | | | | 520,878,081 | |
| | | | | | | | | | | | |
| | | |
Municipal Bonds 1.5% | | | | | | | | | | | | |
California State GO, Various Purpose, Refunding, 5.00%, 9/01/29 | | | United States | | | | 17,200,000 | | | | 19,804,424 | |
New Jersey EDA Revenue, School Facilities Construction, Refunding, Series NN, 5.00%, 3/01/30 | | | United States | | | | 5,200,000 | | | | 5,446,740 | |
New York City HDC Capital Fund Grant Program Revenue, New York City Housing Authority Program, Series B1, 5.00%, 7/01/33 | | | United States | | | | 3,500,000 | | | | 3,731,700 | |
Orlando Health Obligated Group, 3.777%, 10/01/28 | | | United States | | | | 3,870,000 | | | | 3,761,251 | |
Port Authority of New York and New Jersey Revenue,
Consolidated, One Hundred Ninety-First Series, 4.823%, 6/01/45 | | | United States | | | | 14,165,000 | | | | 14,563,886 | |
| | | | |
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34 | | Semiannual Report | | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
CONSOLIDATED STATEMENT OF INVESTMENTS (UNAUDITED)
Franklin Strategic Income Fund (continued)
| | | | | | | | | | | | |
| | | | Country | | |
| Principal
Amount |
* | | | Value | |
Municipal Bonds (continued) | | | | | | | | | | | | |
kPuerto Rico Electric Power Authority Power Revenue, | | | | | | | | | | | | |
Series A, 6.75%, 7/01/36 | | | United States | | | | 30,900,000 | | | $ | 20,007,750 | |
Series XX, 5.25%, 7/01/40 | | | United States | | | | 15,000,000 | | | | 9,600,000 | |
San Jose RDA Successor Agency Tax Allocation, Senior, Refunding, Series A-T, 3.25%, 8/01/29 | | | United States | | | | 5,675,000 | | | | 5,325,534 | |
| | | | | | | | | | | | |
Total Municipal Bonds (Cost $89,767,691) | | | | | | | | | | | 82,241,285 | |
| | | | | | | | | | | | |
| | | |
| | | | | | Shares | | | | |
Escrows and Litigation Trusts 0.0%† | | | | | | | | | | | | |
a,bMidstates Petroleum Co. Inc./Midstates Petroleum Co. LLC, Escrow Account | | | United States | | | | 15,000,000 | | | | — | |
a,bNewPage Corp., Litigation Trust | | | United States | | | | 14,000,000 | | | | — | |
aPenn Virginia Corp., Escrow Account | | | United States | | | | 15,000,000 | | | | 39,375 | |
a,bT-Mobile USA Inc., Escrow Account | | | United States | | | | 29,900,000 | | | | — | |
aVistra Energy Corp., Escrow Account | | | United States | | | | 30,000,000 | | | | 150,000 | |
| | | | | | | | | | | | |
Total Escrows and Litigation Trusts (Cost $952,711) | | | | | | | | | | | 189,375 | |
| | | | | | | | | | | | |
Total Investments before Short Term Investments (Cost $5,812,295,483) | | | | | | | | | | | 5,559,242,408 | |
| | | | | | | | | | | | |
| | | |
| | | | | |
| Principal
Amount |
* | | | | |
Short Term Investments 2.0% | | | | | | | | | | | | |
U.S. Government and Agency Securities (Cost $4,999,723) 0.1% | | | | | | | | | | | | |
xU.S. Treasury Bill, 11/01/18 | | | United States | | | | 5,000,000 | | | | 5,000,000 | |
| | | | | | | | | | | | |
Total Investments before Money Market Funds and Repurchase Agreement (Cost $5,817,295,206) | | | | | | | | | | | 5,564,242,408 | |
| | | | | | | | | | | | |
| | | |
| | | | | | Shares | | | | |
Money Market Funds (Cost $80,992,803) 1.5% | | | | | | | | | | | | |
e,yInstitutional Fiduciary Trust Money Market Portfolio, 1.83% | | | United States | | | | 80,992,803 | | | | 80,992,803 | |
| | | | | | | | | | | | |
| | | | |
| | | |
| franklintempleton.com | | Semiannual Report | | 35 |
FRANKLIN STRATEGIC SERIES
CONSOLIDATED STATEMENT OF INVESTMENTS (UNAUDITED)
Franklin Strategic Income Fund (continued)
| | | | | | | | | | | | |
| | | | Country | | |
| Principal
Amount |
* | | | Value | |
Short Term Investments (continued) | | | | | | | | | | | | |
Repurchase Agreements (Cost $20,825,536) 0.4% | | | | | | | | | | | | |
zJoint Repurchase Agreement, 2.191%, 11/01/18
(Maturity Value $20,826,804) | | | | | | | | | | | | |
BNP Paribas Securities Corp. (Maturity Value $9,623,650) | | | | | | | | | | | | |
Deutsche Bank Securities Inc. (Maturity Value $2,782,669) | | | | | | | | | | | | |
HSBC Securities (USA) Inc. (Maturity Value $8,420,485)
Collateralized by U.S. Government Agency Securities, 3.00% - 4.50%, 6/15/39 - 6/20/48; U.S. Treasury Bond, 2.50%, 8/15/23; and U.S. Treasury Note, 1.00% - 3.50%, 11/15/19 - 7/31/23 (valued at $21,244,845) | | | United States | | | | 20,825,536 | | | $ | 20,825,536 | |
| | | | | | | | | | | | |
Total Investments (Cost $5,919,113,545) 105.4% | | | | | | | | | | | 5,666,060,747 | |
Other Assets, less Liabilities (5.4)% | | | | | | | | | | | (287,841,309 | ) |
| | | | | | | | | | | | |
Net Assets 100.0% | | | | | | | | | | $ | 5,378,219,438 | |
| | | | | | | | | | | | |
| | | | |
| | | |
36 | | Semiannual Report | | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
CONSOLIDATED STATEMENT OF INVESTMENTS (UNAUDITED)
Franklin Strategic Income Fund (continued)
†Rounds to less than 0.1% of net assets.
*The principal amount is stated in U.S. dollars unless otherwise indicated.
aNon-income producing.
aaThe security is owned by FT Holdings Corporation ll, a wholly-owned subsidiary of the Fund. See Note 1(h).
bFair valued using significant unobservable inputs. See Note 11 regarding fair value measurements.
cSecurity was purchased pursuant to Rule 144A under the Securities Act of 1933 and may be sold in transactions exempt from registration only to qualified institutional buyers or in a public offering registered under the Securities Act of 1933. These securities have been deemed liquid under guidelines approved by the Trust’s Board of Trustees. At October 31, 2018, the aggregate value of these securities was $1,636,653,364, representing 30.4% of net assets.
dSee Note 8 regarding restricted securities.
eSee Note 3(f) regarding investments in affiliated management investment companies.
fPerpetual security with no stated maturity date.
gSecurity was purchased pursuant to Regulation S under the Securities Act of 1933, which exempts from registration securities offered and sold outside of the United States. Such a security cannot be sold in the United States without either an effective registration statement filed pursuant to the Securities Act of 1933, or pursuant to an exemption from registration. This security has been deemed liquid under guidelines approved by the Trust’s Board of Trustees. At October 31, 2018, the value of this security was $4,251,398, representing 0.1% of net assets.
hIncome may be received in additional securities and/or cash.
iSee Note 1(g) regarding loan participation notes.
jThe coupon rate shown represents the rate at period end.
kSee Note 7 regarding defaulted securities.
lSee Note 1(j) regarding senior floating rate interests.
mSecurity purchased on a delayed delivery basis. See Note 1(d).
nA portion or all of the security represents an unsettled loan commitment. The coupon rate is to-be determined (TBD) at the time of settlement and will be based upon a reference index/floor plus a spread.
oPrincipal amount is stated in 100 Mexican Peso Units.
pThe principal represents the notional amount. See Note 1(e) regarding value recovery instruments.
qPrincipal amount is stated in 1,000 Brazilian Real Units.
rRedemption price at maturity and coupon payment is adjusted for inflation. See Note 1(l).
sPrincipal amount of security is adjusted for inflation. See Note 1(l).
tAdjustable 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. The coupon rate shown represents the rate at period end.
uThe coupon rate shown represents the rate inclusive of any caps or floors, if applicable, in effect at period end.
vAdjustable 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).
wSecurity purchased on a to-be-announced (TBA) basis. See Note 1(d).
xThe security was issued on a discount basis with no stated coupon rate.
yThe rate shown is the annualized seven-day effective yield at period end.
zSee Note 1(c) regarding joint repurchase agreement.
| | | | |
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| franklintempleton.com | | Semiannual Report | | 37 |
FRANKLIN STRATEGIC SERIES
CONSOLIDATED STATEMENT OF INVESTMENTS (UNAUDITED)
Franklin Strategic Income Fund (continued)
At October 31, 2018, the Fund had the following futures contracts outstanding. See Note 1(e).
Futures Contracts
| | | | | | | | | | | | | | | | | | | | |
| Description | | | Type | | |
| Number of
Contracts |
| |
| Notional
Amount |
* | |
| Expiration
Date |
| |
| Value/
Unrealized
Appreciation
(Depreciation) |
|
| |
| | | | | |
Interest Rate Contracts | | | | | | | | | | | | | | | | | | | | |
Euro-Bund | | | Short | | | | 444 | | | $ | 80,565,745 | | | | 12/06/18 | | | | $ (207,144 | ) |
Long Gilt | | | Long | | | | 496 | | | | 77,548,691 | | | | 12/27/18 | | | | 265,310 | |
U.S. Treasury 5 Yr. Note | | | Short | | | | 1,184 | | | | 133,061,250 | | | | 12/31/18 | | | | 413,231 | |
U.S. Treasury 30 Yr. Bond | | | Long | | | | 310 | | | | 42,818,750 | | | | 12/19/18 | | | | (407,712 | ) |
Ultra 10 Yr. U.S. Treasury Note | | | Long | | | | 690 | | | | 86,325,469 | | | | 12/19/18 | | | | (2,050,266 | ) |
| | | | | | | | | | | | | | | | | | | | |
Total Futures Contracts | | | | $(1,986,581 | ) |
| | | | | | | | | | | | | | | | | | | | |
*As of period end.
At October 31, 2018, the Fund had the following forward exchange contracts outstanding. See Note 1(e).
Forward Exchange Contracts
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Currency | | | Counterparty | a | | | Type | | | | Quantity | | |
| Contract
Amount |
| |
| Settlement
Date |
| |
| Unrealized
Appreciation |
| |
| Unrealized
Depreciation |
|
| |
|
OTC Forward Exchange Contracts | |
Australian Dollar | | | JPHQ | | | | Buy | | | | 6,000,000 | | | $ | 4,370,178 | | | | 11/13/18 | | | $ | — | | | $ | (122,465 | ) |
Australian Dollar | | | JPHQ | | | | Sell | | | | 41,450,000 | | | | 30,648,462 | | | | 11/13/18 | | | | 1,303,841 | | | | — | |
Brazilian Real | | | JPHQ | | | | Buy | | | | 10,000,000 | | | | 2,651,676 | | | | 11/13/18 | | | | 29,143 | | | | — | |
Brazilian Real | | | JPHQ | | | | Sell | | | | 97,000,000 | | | | 25,189,963 | | | | 11/13/18 | | | | — | | | | (813,981 | ) |
British Pound | | | JPHQ | | | | Sell | | | | 4,600,000 | | | | 5,940,417 | | | | 11/13/18 | | | | 61,701 | | | | — | |
Euro | | | JPHQ | | | | Buy | | | | 3,900,000 | | | | 4,597,183 | | | | 11/13/18 | | | | — | | | | (176,850 | ) |
Euro | | | JPHQ | | | | Sell | | | | 35,200,000 | | | | 40,975,968 | | | | 11/13/18 | | | | 1,079,625 | | | | — | |
Indian Rupee | | | JPHQ | | | | Buy | | | | 2,200,000,000 | | | | 31,645,570 | | | | 11/13/18 | | | | — | | | | (1,964,106 | ) |
Indian Rupee | | | JPHQ | | | | Sell | | | | 1,970,000,000 | | | | 27,730,466 | | | | 11/13/18 | | | | 1,152,064 | | | | — | |
Polish Zloty | | | JPHQ | | | | Buy | | | | 60,000,000 | | | | 16,235,304 | | | | 11/13/18 | | | | — | | | | (596,855 | ) |
Polish Zloty | | | JPHQ | | | | Sell | | | | 60,000,000 | | | | 15,740,678 | | | | 11/13/18 | | | | 102,229 | | | | — | |
Swedish Krona | | | JPHQ | | | | Buy | | | | 228,000,000 | | | | 25,558,647 | | | | 11/13/18 | | | | — | | | | (628,777 | ) |
Swedish Krona | | | JPHQ | | | | Sell | | | | 135,000,000 | | | | 15,158,163 | | | | 11/13/18 | | | | 397,055 | | | | — | |
Indonesian Rupiah | | | JPHQ | | | | Sell | | | | 246,000,000,000 | | | | 16,544,489 | | | | 11/21/18 | | | | 425,655 | | | | — | |
Australian Dollar | | | JPHQ | | | | Sell | | | | 19,500,000 | | | | 14,000,707 | | | | 1/14/19 | | | | 184,135 | | | | — | |
Brazilian Real | | | JPHQ | | | | Sell | | | | 23,000,000 | | | | 5,447,655 | | | | 1/18/19 | | | | — | | | | (685,427 | ) |
Australian Dollar | | | DBAB | | | | Sell | | | | 3,000,000 | | | | 2,160,600 | | | | 2/04/19 | | | | 34,139 | | | | — | |
Brazilian Real | | | JPHQ | | | | Sell | | | | 61,000,000 | | | | 15,212,349 | | | | 2/04/19 | | | | — | | | | (1,030,408 | ) |
Canadian Dollar | | | JPHQ | | | | Sell | | | | 15,200,000 | | | | 11,879,269 | | | | 2/04/19 | | | | 307,923 | | | | — | |
Indian Rupee | | | DBAB | | | | Buy | | | | 1,326,000,000 | | | | 17,931,034 | | | | 2/04/19 | | | | — | | | | (262,499 | ) |
Indian Rupee | | | JPHQ | | | | Buy | | | | 212,000,000 | | | | 2,833,656 | | | | 2/04/19 | | | | — | | | | (8,823 | ) |
Mexican Peso | | | JPHQ | | | | Buy | | | | 150,000,000 | | | | 7,379,711 | | | | 2/05/19 | | | | — | | | | (115,295 | ) |
Mexican Peso | | | JPHQ | | | | Sell | | | | 1,340,000,000 | | | | 69,918,759 | | | | 2/05/19 | | | | 5,023,307 | | | | — | |
South Korean Won | | | JPHQ | | | | Sell | | | | 18,600,000,000 | | | | 16,340,156 | | | | 2/07/19 | | | | — | | | | (12,498 | ) |
Norwegian Krone | | | JPHQ | | | | Buy | | | | 137,300,000 | | | | 16,903,652 | | | | 2/19/19 | | | | — | | | | (537,054 | ) |
British Pound | | | JPHQ | | | | Sell | | | | 4,800,000 | | | | 6,343,584 | | | | 3/14/19 | | | | 169,274 | | | | — | |
Canadian Dollar | | | JPHQ | | | | Sell | | | | 27,000,000 | | | | 20,811,253 | | | | 3/14/19 | | | | 246,240 | | | | — | |
Euro | | | DBAB | | | | Buy | | | | 800,000 | | | | 952,960 | | | | 3/14/19 | | | | — | | | | (35,815 | ) |
| | | | |
| | | |
38 | | Semiannual Report | | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
CONSOLIDATED STATEMENT OF INVESTMENTS (UNAUDITED)
Franklin Strategic Income Fund (continued)
Forward Exchange Contracts (continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Currency | | | Counterparty | a | | | Type | | | | Quantity | | |
| Contract
Amount |
| |
| Settlement
Date |
| |
| Unrealized
Appreciation |
| |
| Unrealized
Depreciation |
|
| |
|
OTC Forward Exchange Contracts (continued) | |
Euro | | | DBAB | | | | Sell | | | | 800,000 | | | $ | 948,240 | | | | 3/14/19 | | | $ | 31,095 | | | $ | — | |
Euro | | | JPHQ | | | | Sell | | | | 6,825,400 | | | | 8,096,767 | | | | 3/14/19 | | | | 271,916 | | | | — | |
Swedish Krona | | | JPHQ | | | | Buy | | | | 50,700,000 | | | | 5,691,833 | | | | 3/14/19 | | | | — | | | | (83,441 | ) |
Chinese Yuan Renminbi | | | JPHQ | | | | Sell | | | | 110,000,000 | | | | 15,704,190 | | | | 4/11/19 | | | | 46,540 | | | | — | |
Philippine Peso | | | JPHQ | | | | Sell | | | | 600,000,000 | | | | 10,902,153 | | | | 4/11/19 | | | | — | | | | (207,724 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total Forward Exchange Contracts | | | $ | 10,865,882 | | | $ | (7,282,018 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net unrealized appreciation (depreciation) | | | $ | 3,583,864 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
aMay be comprised of multiple contracts with the same counterparty, currency and settlement date.
At October 31, 2018, the Fund had the following credit default swap contracts outstanding. See Note 1(e).
Credit Default Swap Contracts
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Description | |
| Periodic
Payment Rate
Received
(Paid) |
| |
| Payment
Frequency |
| |
| Counter-
party |
| |
| Maturity
Date |
| |
| Notional
Amount |
a | | | Value | | |
| Unamortized
Upfront
Payments
(Receipts) |
| |
| Unrealized
Appreciation
(Depreciation) |
| | | Rating | b |
| |
|
Centrally Cleared Swap Contracts | |
|
Contracts to Sell Protectionc,d | |
|
Traded Index | |
CDX.EM.30 | | | 1.00% | | | | Quarterly | | | | | | | | 12/20/23 | | | $ | 83,150,000 | | | $ | (3,859,329) | | | $ | (3,663,021 | ) | | $ | (196,308 | ) | | | Investment Grade | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
|
OTC Swap Contracts | |
|
Contracts to Buy Protectionc | |
|
Single Name | |
Ally Financial Inc. | | | (5.00)% | | | | Quarterly | | | | CITI | | | | 12/20/22 | | | $ | 7,350,000 | | | $ | (1,120,113 | ) | | $ | (1,109,973 | ) | | $ | (10,140 | ) | | | | |
Ally Financial Inc. | | | (5.00)% | | | | Quarterly | | | | JPHQ | | | | 12/20/22 | | | | 3,700,000 | | | | (563,866 | ) | | | (565,031 | ) | | | 1,165 | | | | | |
Ally Financial Inc. | | | (5.00)% | | | | Quarterly | | | | JPHQ | | | | 12/20/22 | | | | 8,750,000 | | | | (1,333,468 | ) | | | (1,328,280 | ) | | | (5,188 | ) | | | | |
Government of Italy | | | (1.00)% | | | | Quarterly | | | | BZWS | | | | 6/20/23 | | | | 14,200,000 | | | | 315,002 | | | | 143,418 | | | | 171,584 | | | | | |
Government of Turkey | | | (1.00)% | | | | Quarterly | | | | BZWS | | | | 12/20/19 | | | | 9,100,000 | | | | 215,326 | | | | 483,205 | | | | (267,879 | ) | | | | |
Government of Turkey | | | (1.00)% | | | | Quarterly | | | | BZWS | | | | 12/20/23 | | | | 12,472,500 | | | | 1,501,062 | | | | 1,586,520 | | | | (85,458 | ) | | | | |
|
Contracts to Sell Protectionc,d | |
|
Single Name | |
General Electric Co. | | | 1.00% | | | | Quarterly | | | | JPHQ | | | | 12/20/23 | | | | 5,325,000 | | | | (102,191 | ) | | | (108,404 | ) | | | 6,213 | | | | BBB+ | |
Government of Argentina | | | 5.00% | | | | Quarterly | | | | MSCO | | | | 6/20/23 | | | | 48,600,000 | | | | (1,591,803 | ) | | | 4,500,166 | | | | (6,091,969 | ) | | | B+ | |
Government of Brazil | | | 1.00% | | | | Quarterly | | | | CITI | | | | 12/20/23 | | | | 21,400,000 | | | | (978,740 | ) | | | (1,870,917 | ) | | | 892,177 | | | | BB- | |
Government of Colombia | | | 1.00% | | | | Quarterly | | | | JPHQ | | | | 12/20/23 | | | | 19,400,000 | | | | (233,396 | ) | | | (136,822 | ) | | | (96,574 | ) | | | BBB- | |
Government of Indonesia | | | 1.00% | | | | Quarterly | | | | BOFA | | | | 12/20/23 | | | | 16,700,000 | | | | (414,500 | ) | | | (261,558 | ) | | | (152,942 | ) | | | BBB- | |
Government of Indonesia | | | 1.00% | | | | Quarterly | | | | CITI | | | | 12/20/23 | | | | 17,000,000 | | | | (421,946 | ) | | | (377,846 | ) | | | (44,100 | ) | | | BBB- | |
Government of Italy | | | 1.00% | | | | Quarterly | | | | BZWS | | | | 6/20/23 | | | | 14,200,000 | | | | (896,977 | ) | | | (628,909 | ) | | | (268,068 | ) | | | NR | |
Government of Mexico | | | 1.00% | | | | Quarterly | | | | CITI | | | | 12/20/23 | | | | 32,600,000 | | | | (628,104 | ) | | | (264,388 | ) | | | (363,716 | ) | | | BBB+ | |
| | | | |
| | | |
| franklintempleton.com | | Semiannual Report | | 39 |
FRANKLIN STRATEGIC SERIES
CONSOLIDATED STATEMENT OF INVESTMENTS (UNAUDITED)
Franklin Strategic Income Fund (continued)
Credit Default Swap Contracts (continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Description | |
| Periodic
Payment Rate
Received
(Paid) |
| |
| Payment
Frequency |
| |
| Counter-
party |
| |
| Maturity
Date |
| |
| Notional
Amount |
a | | | Value | | |
| Unamortized
Upfront
Payments
(Receipts) |
| |
| Unrealized
Appreciation
(Depreciation) |
| | | Rating | b |
| | | | | | | |
OTC Swap Contracts (continued) | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | |
Contracts to Sell Protectionc,d (continued) | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | |
Traded Index | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
eBNP Paribas Bespoke Bordeaux Index, Mezzanine Tranche 7-10% | | | 2.10% | | | | Quarterly | | | | BNDP | | | | 6/20/20 | | | $ | 6,850,000 | | | $ | 5,543 | | | $ | — | | | $ | 5,543 | | |
| Non-
Investment
Grade |
|
eCitibank Bespoke Bogota Index, Mezzanine Tranche 7-10% | | | 1.35% | | | | Quarterly | | | | CITI | | | | 6/20/20 | | | | 7,000,000 | | | | 20,869 | | | | — | | | | 20,869 | | |
| Non-
Investment
Grade |
|
eCitibank Bespoke Broker Index, Mezzanine Tranche 3-7% | | | 1.30% | | | | Quarterly | | | | CITI | | | | 6/20/19 | | | | 16,200,000 | | | | 34,527 | | | | — | | | | 34,527 | | |
| Non-
Investment
Grade |
|
eCitibank Bespoke Broker Index, Mezzanine Tranche 3-7% | | | 1.40% | | | | Quarterly | | | | CITI | | | | 6/20/19 | | | | 13,200,000 | | | | 37,985 | | | | — | | | | 37,985 | | |
| Non-
Investment
Grade |
|
eCitibank Bespoke Cambridge Index, Equity Tranche 0-3% | | | 0.00% | | | | Quarterly | | | | CITI | | | | 12/20/19 | | | | 27,300,000 | | | | (4,773,657 | ) | | | (2,540,748 | ) | | | (2,232,909 | ) | |
| Non-
Investment
Grade |
|
eCitibank Bespoke Lisbon Index, Equity Tranche 0-3% | | | 0.00% | | | | Quarterly | | | | CITI | | | | 6/20/19 | | | | 5,440,000 | | | | (347,234 | ) | | | (409,077 | ) | | | 61,843 | | |
| Non-
Investment
Grade |
|
eCitibank Bespoke Verona Index, Equity Tranche 0-3% | | | 0.00% | | | | Quarterly | | | | CITI | | | | 12/20/19 | | | | 10,900,000 | | | | (1,598,205 | ) | | | (1,245,234 | ) | | | (352,971 | ) | |
| Non-
Investment
Grade |
|
eCitibank Bespoke Verona Index, Mezzanine Tranche 7-15% | | | 0.40% | | | | Quarterly | | | | CITI | | | | 12/20/19 | | | | 31,000,000 | | | | 91,297 | | | | — | | | | 91,297 | | |
| Non-
Investment
Grade |
|
| | | | |
| | | |
40 | | Semiannual Report | | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
CONSOLIDATED STATEMENT OF INVESTMENTS (UNAUDITED)
Franklin Strategic Income Fund (continued)
Credit Default Swap Contracts (continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Description | | Periodic
Payment Rate
Received
(Paid) | | | Payment
Frequency | | | Counter-
party | | | Maturity
Date | | | Notional
Amounta | | | Value | | | Unamortized
Upfront
Payments
(Receipts) | | | Unrealized
Appreciation
(Depreciation) | | | Ratingb | |
| | | | | | |
OTC Swap Contracts (continued) | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | |
Contracts to Sell Protectionc,d (continued) | | | | | | | | | | | | | | | | | | | | | |
| | | | | |
Traded Index (continued) | | | | | | | | | | | | | | | | | | | | | |
MCDX.NA.30 | | | 1.00% | | | | Quarterly | | | | CITI | | | | 6/20/23 | | | $ | 23,060,000 | | | $ | 577,655 | | | $ | 500,418 | | | $ | 77,237 | | | | Investment Grade | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total OTC Swap Contracts. | | | | | | | | | | | $ | (12,204,934 | ) | | $ | (3,633,460 | ) | | $ | (8,571,474 | ) | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total Credit Default Swap Contracts | | | | | | | | | | | $ | (16,064,263 | ) | | $ | (7,296,481 | ) | | $ | (8,767,782 | ) | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
aFor contracts to sell protection, the notional amount is equal to the maximum potential amount of the future payments and no recourse provisions have been entered into in association with the contracts.
bBased on Standard and Poor’s (S&P) Rating for single name swaps and internal ratings for index swaps. Internal ratings based on mapping into equivalent ratings from external vendors.
cPerformance triggers for settlement of contract include default, bankruptcy or restructuring for single name swaps and failure to pay or bankruptcy of the underlying securities for traded index swaps.
dThe fund enters contracts to sell protection to create a long credit position.
eRepresents a custom index comprised of a basket of underlying issuers.
At October 31, 2018, the Fund had the following cross-currency swap contracts outstanding. See Note 1(e).
Cross-Currency Swap Contracts
| | | | | | | | | | | | | | | | | | | | | | | | |
| Description | | Payment
Frequency | | | Counter-
party | | | Maturity
Date | | | Notional
Amount | | | | | | Value/
Unrealized
Appreciation
(Depreciation) | |
| | | | | | |
OTC Swap Contracts | | | | | | | | | | | | | | | | | | | | | | | | |
Receive Floating 3-month USD LIBOR + 2.87% | | | Quarterly | | | | | | | | | | | | 3,834,600 | | | | USD | | | | | |
Pay Fixed 2.50%. | | | Annual | | | | CITI | | | | 5/04/21 | | | | 3,300,000 | | | | EUR | | | | $115,296 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
At October 31, 2018, the Fund had the following total return swap contracts outstanding. See Note 1(e).
Total Return Swap Contracts
| | | | | | | | | | | | | | | | | | | | | | | | |
| Underlying Instruments | | Financing Rate | | | Payment
Frequency | | | Counterparty | | | Maturity
Date | | | Notional
Value | | | Value/
Unrealized
Appreciation
(Depreciation) | |
| | | | | | |
OTC Swap Contracts | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | |
Longa | | | | | | | | | | | | | | | | | | | | | | | | |
iBoxx USD Liquid High Yield Index | | | 3-month USD LIBOR | | | | Quarterly | | | | BNDP | | | | 3/20/19 | | | $ | 23,000,000 | | | | $ (175,590 | ) |
iBoxx USD Liquid High Yield Index | | | 3-month USD LIBOR | | | | Quarterly | | | | FBCO | | | | 3/20/19 | | | | 38,000,000 | | | | (305,441 | ) |
iBoxx USD Liquid High Yield Index | | | 3-month USD LIBOR | | | | Quarterly | | | | BOFA | | | | 6/20/19 | | | | 14,000,000 | | | | (47,311 | ) |
iBoxx USD Liquid High Yield Index | | | 3-month USD LIBOR | | | | Quarterly | | | | CITI | | | | 6/20/19 | | | | 38,000,000 | | | | (209,662 | ) |
Markit iBoxx USD Liquid Leveraged Loan Index | | | 3-month USD LIBOR | | | | Quarterly | | | | GSCO | | | | 6/20/19 | | | | 170,000,000 | | | | 1,872,851 | |
| | | | |
| | | |
| franklintempleton.com | | Semiannual Report | | 41 |
FRANKLIN STRATEGIC SERIES
CONSOLIDATED STATEMENT OF INVESTMENTS (UNAUDITED)
Franklin Strategic Income Fund (continued)
Total Return Swap Contracts (continued)
| | | | | | | | | | | | | | | | | | | | | | | | |
| Underlying Instruments | | Financing Rate | | | Payment
Frequency | | | Counterparty | | | Maturity
Date | | | Notional
Value | | | Value/
Unrealized
Appreciation
(Depreciation) | |
| | | | | | |
OTC Swap Contracts (continued) | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | |
Longa (continued) | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | |
Markit iBoxx USD Liquid Leveraged Loan Index | | | 3-month USD LIBOR | | | | Quarterly | | | | JPHQ | | | | 9/20/19 | | | $ | 25,000,000 | | | | $ (156,482 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total Total Return Swap Contracts | | | | | | | | | | | | | | | | | | | | | | | $ 978,365 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| aThe | Fund receives the total return on the underlying instrument and pays a variable financing rate. |
See Note 9 regarding other derivative information.
See Abbreviations on page 63.
| | | | |
| | | |
42 | | Semiannual Report | | The accompanying notes are an integral part of these financial statements franklintempleton.com |
FRANKLIN STRATEGIC SERIES
Consolidated Financial Statements
Consolidated Statement of Assets and Liabilities
October 31, 2018 (unaudited)
Franklin Strategic Income Fund
| | | | |
Assets: | | | | |
Investments in securities: | | | | |
Cost - Unaffiliated issuers | | $ | 5,346,336,477 | |
Cost - Controlled affiliates (Note 3f) | | | 470,958,729 | |
Cost - Non-controlled affiliates (Note 3f) | | | 80,992,803 | |
Cost - Unaffiliated repurchase agreements | | | 20,825,536 | |
| | | | |
| |
Value - Unaffiliated issuers | | $ | 5,116,299,840 | |
Value - Controlled affiliates (Note 3f) | | | 447,942,568 | |
Value - Non-controlled affiliates (Note 3f) | | | 80,992,803 | |
Value - Unaffiliated repurchase agreements | | | 20,825,536 | |
Cash | | | 25,116,399 | |
Restricted cash for OTC derivative contracts (Note 1f) | | | 2,130,000 | |
Receivables: | | | | |
Investment securities sold | | | 4,614 | |
Capital shares sold | | | 2,327,784 | |
Dividends and interest | | | 46,745,155 | |
Deposits with brokers for: | | | | |
OTC derivative contracts | | | 17,970,532 | |
TBA transactions | | | 1,164,000 | |
Centrally cleared swap contracts | | | 13,078,343 | |
OTC swap contracts (upfront payments $8,014,111) | | | 7,213,727 | |
Unrealized appreciation on OTC forward exchange contracts | | | 10,865,882 | |
Unrealized appreciation on OTC swap contracts | | | 3,388,587 | |
FT Subsidiary deferred tax benefit (Note 1h) | | | 532,014 | |
Other assets | | | 4,890 | |
| | | | |
Total assets | | | 5,796,602,674 | |
| | | | |
| |
Liabilities: | | | | |
Payables: | | | | |
Investment securities purchased | | | 369,563,785 | |
Capital shares redeemed | | | 10,855,759 | |
Management fees | | | 1,849,093 | |
Distribution fees | | | 1,199,532 | |
Transfer agent fees | | | 1,356,734 | |
Distributions to shareholders | | | 1,377,037 | |
Variation margin on futures contracts. | | | 472,821 | |
Variation margin on centrally cleared swap contracts | | | 41,622 | |
Deposits from brokers for: | | | | |
OTC derivative contracts | | | 2,130,000 | |
OTC swap contracts (upfront receipts $15,969,720) | | | 10,847,187 | |
Unrealized depreciation on OTC forward exchange contracts | | | 7,282,018 | |
Unrealized depreciation on OTC swap contracts | | | 10,866,400 | |
Deferred tax. | | | 65,472 | |
Accrued expenses and other liabilities. | | | 475,776 | |
| | | | |
Total liabilities | | | 418,383,236 | |
| | | | |
Net assets, at value | | $ | 5,378,219,438 | |
| | | | |
| |
Net assets consist of: | | | | |
Paid-in capital | | $ | 6,080,343,839 | |
Total distributable earnings (loss) | | | (702,124,401 | ) |
| | | | |
Net assets, at value | | $ | 5,378,219,438 | |
| | | | |
| | | | |
| | | |
| franklintempleton.com | | The accompanying notes are an integral part of these consolidated financial statements. | Semiannual Report | | 43 |
FRANKLIN STRATEGIC SERIES
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Statement of Assets and Liabilities (continued)
October 31, 2018 (unaudited)
Franklin Strategic Income Fund
| | | | |
Class A: | | | | |
Net assets, at value | | | $3,182,735,218 | |
| | | | |
Shares outstanding | | | 337,172,776 | |
| | | | |
Net asset value per sharea | | | $9.44 | |
| | | | |
Maximum offering price per share (net asset value per share ÷ 95.75%) | | | $9.86 | |
| | | | |
Class C: | | | | |
Net assets, at value | | | $ 788,868,464 | |
| | | | |
Shares outstanding | | | 83,577,506 | |
| | | | |
Net asset value and maximum offering price per sharea | | | $9.44 | |
| | | | |
Class R: | | | | |
Net assets, at value | | | $ 95,193,181 | |
| | | | |
Shares outstanding | | | 10,123,912 | |
| | | | |
Net asset value and maximum offering price per share | | | $9.40 | |
| | | | |
Class R6: | | | | |
Net assets, at value | | | $ 430,952,846 | |
| | | | |
Shares outstanding | | | 45,589,285 | |
| | | | |
Net asset value and maximum offering price per share | | | $9.45 | |
| | | | |
Advisor Class: | | | | |
Net assets, at value | | | $ 880,469,729 | |
| | | | |
Shares outstanding | | | 93,181,573 | |
| | | | |
Net asset value and maximum offering price per share | | | $9.45 | |
| | | | |
aRedemption price is equal to net asset value less contingent deferred sales charges, if applicable.
| | | | |
| | | |
44 | | Semiannual Report | The accompanying notes are an integral part of these consolidated financial statements. | | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Statement of Operations
for the six months ended October 31, 2018 (unaudited)
Franklin Strategic Income Fund
| | | | |
Investment income: | | | | |
Dividends: | | | | |
Unaffiliated issuers | | $ | 890,189 | |
Controlled affiliates (Note 3f) | | | 18,199,994 | |
Non-controlled affiliates (Note 3f) | | | 1,022,234 | |
Interest: (net of foreign taxes)~ | | | | |
Unaffiliated issuers | | | 124,335,526 | |
Other income (Note 1h) | | | 1,064,430 | |
| | | | |
Total investment income | | | 145,512,373 | |
| | | | |
Expenses: | | | | |
Management fees (Note 3a) | | | 12,899,957 | |
Distribution fees: (Note 3c) | | | | |
Class A | | | 4,004,740 | |
Class C | | | 3,268,390 | |
Class R | | | 255,636 | |
Transfer agent fees: (Note 3e) | | | | |
Class A | | | 2,512,769 | |
Class C | | | 792,640 | |
Class R | | | 80,235 | |
Class R6 | | | 62,431 | |
Advisor Class | | | 720,810 | |
Custodian fees (Note 4) | | | 106,553 | |
Reports to shareholders | | | 283,311 | |
Registration and filing fees | | | 96,689 | |
Professional fees | | | 115,478 | |
Trustees’ fees and expenses | | | 38,632 | |
Other | | | 93,985 | |
| | | | |
Total expenses | | | 25,332,256 | |
Expense reductions (Note 4) | | | (64,682 | ) |
Expenses waived/paid by affiliates (Note 3f and 3g) | | | (1,584,189 | ) |
| | | | |
Net expenses | | | 23,683,385 | |
| | | | |
Net investment income | | | 121,828,988 | |
| | | | |
Realized and unrealized gains (losses): | | | | |
Net realized gain (loss) from: | | | | |
Investments:# | | | | |
Unaffiliated issuers | | | (10,436,685 | ) |
Foreign currency transactions | | | (1,304,275 | ) |
Forward exchange contracts | | | (298,087 | ) |
Futures contracts | | | 2,465,362 | |
Swap contracts | | | 2,274,122 | |
| | | | |
Net realized gain (loss) | | | (7,299,563 | ) |
| | | | |
Net change in unrealized appreciation (depreciation) on: | | | | |
Investments: | | | | |
Unaffiliated issuers | | | (72,019,987 | ) |
Controlled affiliates (Note 3f) | | | (9,171,969 | ) |
Translation of other assets and liabilities
denominated in foreign currencies | | | (18,875 | ) |
Forward exchange contracts | | | 3,272,653 | |
Futures contracts | | | (3,021,787 | ) |
Swap contracts | | | (6,461,655 | ) |
| | | | |
| | | |
| franklintempleton.com | | The accompanying notes are an integral part of these consolidated financial statements. | Semiannual Report | | 45 |
FRANKLIN STRATEGIC SERIES
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Statement of Operations (continued)
for the six months ended October 31, 2018 (unaudited)
Franklin Strategic Income Fund
| | | | |
Change in FT Subsidiary deferred tax benefit (Note 1h) | | | (858,525 | ) |
Change in deferred taxes on unrealized appreciation | | | 254,256 | |
| | | | |
Net change in unrealized appreciation (depreciation) | | | (88,025,889 | ) |
| | | | |
Net realized and unrealized gain (loss) | | | (95,325,452 | ) |
| | | | |
Net increase (decrease) in net assets resulting from operations | | $ | 26,503,536 | |
| | | | |
| | | | |
~Foreign taxes withheld on interest | | | $ 206,238 | |
#Net of foreign taxes | | | $ 21,122 | |
| | | | |
| | | |
46 | | Semiannual Report | The accompanying notes are an integral part of these consolidated financial statements. | | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Statements of Changes in Net Assets
Franklin Strategic Income Fund
| | | | | | | | |
| | | Six Months Ended
October 31, 2018
(unaudited) | | | Year Ended
April 30, 2018 | |
Increase (decrease) in net assets: | | | | | | | | |
Operations: | | | | | | | | |
Net investment income. | | $ | 121,828,988 | | | $ | 249,545,798 | |
Net realized gain (loss) | | | (7,299,563 | ) | | | (113,213,321 | ) |
Net change in unrealized appreciation (depreciation) | | | (88,025,889 | ) | | | (92,950,330 | ) |
| | | | |
Net increase (decrease) in net assets resulting from operations | | | 26,503,536 | | | | 43,382,147 | |
| | | | |
Distributions to shareholders: (Note 1l) | | | | | | | | |
Class A | | | (69,612,378 | ) | | | (106,537,907 | ) |
Class C | | | (19,223,579 | ) | | | (31,329,580 | ) |
Class R | | | (2,090,290 | ) | | | (3,355,206 | ) |
Class R6 | | | (10,431,726 | ) | | | (13,824,604 | ) |
Advisor Class | | | (21,059,951 | ) | | | (32,910,570 | ) |
| | | | |
Total distributions to shareholders. | | | (122,417,924 | ) | | | (187,957,867 | ) |
| | | | |
Capital share transactions: (Note 2) | | | | | | | | |
Class A | | | (53,138,892 | ) | | | (461,379,634 | ) |
Class C | | | (274,344,996 | ) | | | (280,427,839 | ) |
Class R | | | (8,780,398 | ) | | | (38,252,437 | ) |
Class R6 | | | 5,595,857 | | | | 75,196,883 | |
Advisor Class | | | (37,596,034 | ) | | | (113,689,921 | ) |
| | | | |
Total capital share transactions | | | (368,264,463 | ) | | | (818,552,948 | ) |
| | | | |
Net increase (decrease) in net assets | | | (464,178,851 | ) | | | (963,128,668 | ) |
Net assets: | | | | | | | | |
Beginning of period | | | 5,842,398,289 | | | | 6,805,526,957 | |
| | | | |
End of period (Note 1l) | | $ | 5,378,219,438 | | | $ | 5,842,398,289 | |
| | | | |
| | | | |
| | | |
| franklintempleton.com | | The accompanying notes are an integral part of these consolidated financial statements. | Semiannual Report | | 47 |
FRANKLIN STRATEGIC SERIES
Notes to Consolidated Financial Statements (unaudited)
Franklin Strategic Income Fund
1. Organization and Significant Accounting Policies
Franklin Strategic Series (Trust) is registered under the Investment Company Act of 1940 (1940 Act) as an open-end management investment company, consisting of eight separate funds and applies the specialized accounting and reporting guidance in U.S. Generally Accepted Accounting Principles (U.S. GAAP). Franklin Strategic Income Fund (Fund) is included in this report. The Fund offers five classes of shares: Class A, Class C, Class R, Class R6, and Advisor Class. Beginning on October 19, 2018, Class C shares automatically convert to Class A shares after they have been held for 10 years. Each class of shares may differ by its initial sales load, contingent deferred sales charges, voting rights on matters affecting a single class, its exchange privilege and fees due to differing arrangements for distribution and transfer agent fees.
The following summarizes the Fund’s significant accounting policies.
a. Financial Instrument Valuation
The Fund’s investments in financial instruments are carried at fair value daily. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date. The Fund calculates the net asset value (NAV) per share each business day as of 4 p.m. Eastern time or the regularly scheduled close of the New York Stock Exchange (NYSE), whichever is earlier. Under compliance policies and procedures approved by the Trust’s Board of Trustees (the Board), the Fund’s administrator has responsibility for oversight of valuation, including leading the cross-functional Valuation Committee (VC). The VC provides administration and oversight of the Fund’s valuation policies and procedures, which are approved annually by the Board. Among other things, these procedures allow the Fund to utilize independent pricing services, quotations from securities and financial instrument dealers, and other market sources to determine fair value.
Equity securities and derivative financial instruments listed on an exchange or on the NASDAQ National Market System are valued at the last quoted sale price or the official closing price of the day, respectively. Foreign equity securities are valued as of the close of trading on the foreign stock exchange on which the security is primarily traded, or as of 4 p.m. Eastern time. The value is then converted into its U.S. dollar equivalent at the foreign exchange rate in effect at 4 p.m. Eastern time on the day
that the value of the security is determined. Over-the-counter (OTC) securities are valued within the range of the most recent quoted bid and ask prices. Securities that trade in multiple markets or on multiple exchanges are valued according to the broadest and most representative market. Certain equity securities are valued based upon fundamental characteristics or relationships to similar securities.
Debt securities generally trade in the OTC market rather than on a securities exchange. The Fund’s pricing services use multiple valuation techniques to determine fair value. In instances where sufficient market activity exists, the pricing services may utilize a market-based approach through which quotes from market makers are used to determine fair value. In instances where sufficient market activity may not exist or is limited, the pricing services also utilize proprietary valuation models which may consider market characteristics such as benchmark yield curves, credit spreads, estimated default rates, anticipated market interest rate volatility, coupon rates, anticipated timing of principal repayments, underlying collateral, and other unique security features in order to estimate the relevant cash flows, which are then discounted to calculate the fair value. Securities denominated in a foreign currency are converted into their U.S. dollar equivalent at the foreign exchange rate in effect at 4 p.m. Eastern time on the date that the values of the foreign debt securities are determined.
Investments in open-end mutual funds are valued at the closing NAV. Investments in repurchase agreements are valued at cost, which approximates fair value.
Certain derivative financial instruments are centrally cleared or trade in the OTC market. The Fund’s pricing services use various techniques including industry standard option pricing models and proprietary discounted cash flow models to determine the fair value of those instruments. The Fund’s net benefit or obligation under the derivative contract, as measured by the fair value of the contract, is included in net assets.
The Fund has procedures to determine the fair value of financial instruments for which market prices are not reliable or readily available. Under these procedures, the VC convenes on a regular basis to review such financial instruments and considers a number of factors, including significant unobservable valuation inputs, when arriving at fair value. The VC primarily employs a market-based approach which may use related or comparable assets or liabilities, recent transactions, market multiples, book values, and other relevant information for the
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48 | | Semiannual Report | | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Franklin Strategic Income Fund (continued)
investment to determine the fair value of the investment. An income-based valuation approach may also be used in which the anticipated future cash flows of the investment are discounted to calculate fair value. Discounts may also be applied due to the nature or duration of any restrictions on the disposition of the investments. Due to the inherent uncertainty of valuations of such investments, the fair values may differ significantly from the values that would have been used had an active market existed. The VC employs various methods for calibrating these valuation approaches including a regular review of key inputs and assumptions, transactional back-testing or disposition analysis, and reviews of any related market activity.
Trading in securities on foreign securities stock exchanges and OTC markets may be completed before 4 p.m. Eastern time. In addition, trading in certain foreign markets may not take place on every Fund’s business day. Occasionally, events occur between the time at which trading in a foreign security is completed and 4 p.m. Eastern time that might call into question the reliability of the value of a portfolio security held by the Fund. As a result, differences may arise between the value of the Fund’s portfolio securities as determined at the foreign market close and the latest indications of value at 4 p.m. Eastern time. In order to minimize the potential for these differences, the VC monitors price movements following the close of trading in foreign stock markets through a series of country specific market proxies (such as baskets of American Depositary Receipts, futures contracts and exchange traded funds). These price movements are measured against established trigger thresholds for each specific market proxy to assist in determining if an event has occurred that may call into question the reliability of the values of the foreign securities held by the Fund. If such an event occurs, the securities may be valued using fair value procedures, which may include the use of independent pricing services.
When the last day of the reporting period is a non-business day, certain foreign markets may be open on those days that the Fund’s NAV is not calculated, which could result in differences between the value of the Fund’s portfolio securities on the last business day and the last calendar day of the reporting period. Any significant security valuation changes due to an open foreign market are adjusted and reflected by the Fund for financial reporting purposes.
b. Foreign Currency Translation
Portfolio securities and other assets and liabilities denominated in foreign currencies are translated into U.S. dollars based on the exchange rate of such currencies against U.S. dollars on the date of valuation. The Fund may enter into foreign currency exchange contracts to facilitate transactions denominated in a foreign currency. Purchases and sales of securities, income and expense items denominated in foreign currencies are translated into U.S. dollars at the exchange rate in effect on the transaction date. Portfolio securities and assets and liabilities denominated in foreign currencies contain risks that those currencies will decline in value relative to the U.S. dollar. Occasionally, events may impact the availability or reliability of foreign exchange rates used to convert the U.S. dollar equivalent value. If such an event occurs, the foreign exchange rate will be valued at fair value using procedures established and approved by the Board.
The Fund does not separately report the effect of changes in foreign exchange rates from changes in market prices on securities held. Such changes are included in net realized and unrealized gain or loss from investments in the Consolidated Statement of Operations.
Realized foreign exchange gains or losses arise from sales of foreign currencies, currency gains or losses realized between the trade and settlement dates on securities transactions and the difference between the recorded amounts of dividends, interest, and foreign withholding taxes and the U.S. dollar equivalent of the amounts actually received or paid. Net unrealized foreign exchange gains and losses arise from changes in foreign exchange rates on foreign denominated assets and liabilities other than investments in securities held at the end of the reporting period.
c. Joint Repurchase Agreement
The Fund enters into a joint repurchase agreement whereby its uninvested cash balance is deposited into a joint cash account with other funds managed by the investment manager or an affiliate of the investment manager and is used to invest in one or more repurchase agreements. The value and face amount of the joint repurchase agreement are allocated to the funds based on their pro-rata interest. A repurchase agreement is accounted for as a loan by the Fund to the seller, collateralized by securities which are delivered to the Fund’s custodian. The fair value, including accrued interest, of the initial collateralization is required to be at least 102% of the dollar amount invested by the funds, with the value of the underlying securities marked to
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| franklintempleton.com | | Semiannual Report | | 49 |
FRANKLIN STRATEGIC SERIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Franklin Strategic Income Fund (continued)
1. Organization and Significant Accounting Policies (continued)
c. Joint Repurchase Agreement (continued)
market daily to maintain coverage of at least 100%. Repurchase agreements are subject to the terms of Master Repurchase Agreements (MRAs) with approved counterparties (sellers). The MRAs contain various provisions, including but not limited to events of default and maintenance of collateral for repurchase agreements. In the event of default by either the seller or the Fund, certain MRAs may permit the non-defaulting party to net and close-out all transactions, if any, traded under such agreements. The Fund may sell securities it holds as collateral and apply the proceeds towards the repurchase price and any other amounts owed by the seller to the Fund in the event of default by the seller. This could involve costs or delays in addition to a loss on the securities if their value falls below the repurchase price owed by the seller. The joint repurchase agreement held by the Fund at period end, as indicated in the Consolidated Statement of Investments, had been entered into on October 31, 2018.
d. Securities Purchased on a Delayed Delivery and TBA Basis
The Fund purchases securities on a delayed delivery and to-be-announced (TBA) basis, with payment and delivery scheduled for a future date. These transactions are subject to market fluctuations and are subject to the risk that the value at delivery may be more or less than the trade date purchase price. Although the Fund will generally purchase these securities with the intention of holding the securities, it may sell the securities before the settlement date. Sufficient assets have been segregated for these securities and collateral has been pledged and/or received for open TBA trades.
e. Derivative Financial Instruments
The Fund invested in derivative financial instruments in order to manage risk or gain exposure to various other investments or markets. Derivatives are financial contracts based on an underlying or notional amount, require no initial investment or an initial net investment that is smaller than would normally be required to have a similar response to changes in market factors, and require or permit net settlement. Derivatives contain various risks including the potential inability of the counterparty to fulfill their obligations under the terms of the contract, the potential for an illiquid secondary market, and/or the potential for market movements which expose the Fund to gains or losses
in excess of the amounts shown in the Consolidated Statement of Assets and Liabilities. Realized gain and loss and unrealized appreciation and depreciation on these contracts for the period are included in the Consolidated Statement of Operations.
Derivative counterparty credit risk is managed through a formal evaluation of the creditworthiness of all potential counterparties. The Fund attempts to reduce its exposure to counterparty credit risk on OTC derivatives, whenever possible, by entering into International Swaps and Derivatives Association (ISDA) master agreements with certain counterparties. These agreements contain various provisions, including but not limited to collateral requirements, events of default, or early termination. Termination events applicable to the counterparty include certain deteriorations in the credit quality of the counterparty. Termination events applicable to the Fund include failure of the Fund to maintain certain net asset levels and/or limit the decline in net assets over various periods of time. In the event of default or early termination, the ISDA master agreement gives the non-defaulting party the right to net and close-out all transactions traded, whether or not arising under the ISDA agreement, to one net amount payable by one counterparty to the other. However, absent an event of default or early termination, OTC derivative assets and liabilities are presented gross and not offset in the Consolidated Statement of Assets and Liabilities. Early termination by the counterparty may result in an immediate payment by the Fund of any net liability owed to that counterparty under the ISDA agreement.
Collateral requirements differ by type of derivative. Collateral or initial margin requirements are set by the broker or exchange clearing house for exchange traded and centrally cleared derivatives. Initial margin deposited is held at the exchange and can be in the form of cash and/or securities. For OTC derivatives traded under an ISDA master agreement, posting of collateral is required by either the Fund or the applicable counterparty if the total net exposure of all OTC derivatives with the applicable counterparty exceeds the minimum transfer amount, which typically ranges from $100,000 to $250,000, and can vary depending on the counterparty and the type of the agreement. Generally, collateral is determined at the close of Fund business each day and any additional collateral required due to changes in derivative values may be delivered by the Fund or the counterparty the next business day, or within a few business days. Collateral pledged and/or received by the Fund for OTC derivatives, if any, is held in segregated accounts with the Fund’s custodian/counterparty broker and can be in the form
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50 | | Semiannual Report | | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Franklin Strategic Income Fund (continued)
of cash and/or securities. Unrestricted cash may be invested according to the Fund’s investment objectives. To the extent that the amounts due to the Fund from its counterparties are not subject to collateralization or are not fully collateralized, the Fund bears the risk of loss from counterparty non-performance.
The Fund entered into exchange traded futures contracts primarily to manage and/or gain exposure to interest rate risk. A futures contract is an agreement between the Fund and a counterparty to buy or sell an asset at a specified price on a future date. Required initial margins are pledged by the Fund, and the daily change in fair value is accounted for as a variation margin payable or receivable in the Consolidated Statement of Assets and Liabilities.
The Fund entered into OTC forward exchange contracts primarily to manage and/or gain exposure to certain foreign currencies. A forward exchange contract is an agreement between the Fund and a counterparty to buy or sell a foreign currency at a specific exchange rate on a future date.
The Fund entered into credit default swap contracts primarily to manage and/or gain exposure to credit risk. A credit default swap is an agreement between the Fund and a counterparty whereby the buyer of the contract receives credit protection and the seller of the contract guarantees the credit worthiness of a referenced debt obligation. These agreements may be privately negotiated in the over-the-counter market (OTC credit default swaps) or may be executed in a multilateral trade facility platform, such as a registered exchange (centrally cleared credit default swaps). The underlying referenced debt obligation may be a single issuer of corporate or sovereign debt, a credit index, a basket of issuers or indices, or a tranche of a credit index or basket of issuers or indices. In the event of a default of the underlying referenced debt obligation, the buyer is entitled to receive the notional amount of the credit default swap contract from the seller in exchange for the referenced debt obligation, a net settlement amount equal to the notional amount of the credit default swap less the recovery value of the referenced debt obligation, or other agreed upon amount. For centrally cleared credit default swaps, required initial margins are pledged by the Fund, and the daily change in fair value is accounted for as a variation margin payable or receivable in the Consolidated Statement of Assets and Liabilities. Over the term of the contract, the buyer pays the seller a periodic stream of payments, provided that no event of default has occurred. Such periodic payments are accrued daily as an unrealized appreciation or depreciation until the payments are made, at
which time they are realized. Upfront payments and receipts are reflected in the Consolidated Statement of Assets and Liabilities and represent compensating factors between stated terms of the credit default swap agreement and prevailing market conditions (credit spreads and other relevant factors). These upfront payments and receipts are amortized over the term of the contract as a realized gain or loss in the Consolidated Statement of Operations.
The Fund entered into OTC cross currency swap contracts primarily to manage and/or gain exposure to interest rate risk and certain foreign currencies. A cross currency swap is an agreement between the Fund and a counterparty to exchange cash flows (determined using either a fixed or floating rate) based on the notional amounts of two different currencies. The notional amounts are typically determined based on the spot exchange rates at the opening of the contract. Cross currency swaps may require the exchange of notional amounts at the opening and/or closing of the contract. Over the term of the contract, contractually required payments to be paid and to be received are accrued daily and recorded as unrealized depreciation and appreciation until the payments are made, at which time they are realized. Upfront payments and receipts are reflected in the Consolidated Statement of Assets and Liabilities and represent compensating factors between stated terms of the cross currency swap contract and prevailing market conditions (interest rate spreads and other relevant factors). These upfront payments and receipts are amortized over the term of the contract as a realized gain or loss in the Consolidated Statement of Operations.
The Fund entered into OTC total return swap contracts primarily to manage and/or gain exposure to interest rate risk of an underlying instrument such as a stock, bond, index or basket of securities or indices. A total return swap is an agreement between the Fund and a counterparty to exchange a return linked to an underlying instrument for a floating or fixed rate payment, both based upon a notional amount. Over the term of the contract, contractually required payments to be paid or received are accrued daily and recorded as unrealized appreciation or depreciation until the payments are made, at which time they are recognized as realized gain or loss.
The Fund invests in value recovery instruments (VRI) primarily to gain exposure to economic growth. Periodic payments from VRI are dependent on established benchmarks for underlying variables. VRI has a notional amount, which is used to calculate amounts of payments to holders. Payments are recorded upon
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| franklintempleton.com | | Semiannual Report | | 51 |
FRANKLIN STRATEGIC SERIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Franklin Strategic Income Fund (continued)
1. Organization and Significant Accounting Policies (continued)
e. Derivative Financial Instruments (continued)
receipt as realized gains in the Consolidated Statement of Operations. The risks of investing in VRI include growth risk, liquidity, and the potential loss of investment.
See Note 9 regarding other derivative information.
f. Restricted Cash
At October 31, 2018, the Fund held restricted cash in connection with investments in certain derivative securities. Restricted cash is held in a segregated account with the Fund’s custodian and is reflected in the Consolidated Statement of Assets and Liabilities.
g. Loan Participation Notes
The Fund invests in loan participation notes (Participations). Participations are loans originally issued to a borrower by one or more financial institutions (the Lender) and subsequently sold to other investors, such as the Fund. Participations typically result in the Fund having a contractual relationship only with the Lender and not with the borrower. The Fund has the right to receive from the Lender any payments of principal, interest and fees which the Lender received from the borrower. The Fund generally has no rights to either enforce compliance by the borrower with the terms of the loan agreement or to any collateral relating to the original loan. As a result, the Fund assumes the credit risk of both the borrower and the Lender that is selling the Participation. The Participations may also involve interest rate risk and liquidity risk, including the potential default or insolvency of the borrower and/or the Lender.
h. FT Holdings Corporation II (FT Subsidiary)
The Fund invests in certain financial instruments through its investment in FT Subsidiary. FT Subsidiary is a Delaware Corporation, is a wholly-owned subsidiary of the Fund, and is able to invest in certain financial instruments consistent with the investment objective of the Fund. At October 31, 2018, FT Subsidiary’s investment, Turtle Bay Resort, as well as any other assets and liabilities of FT Subsidiary are reflected in the Fund’s Consolidated Statement of Investments and Consolidated Statement of Assets and Liabilities.
During the period ended October 31, 2018, Turtle Bay Resort paid a distribution to FT Subsidiary. The distribution received is reflected as other income in FT Subsidiary in the Consolidated Statement of Operations. For U.S. income tax purposes, this distribution is estimated to result in a taxable loss to FT Subsidiary, and as such an estimated tax expense was not recorded in FT Subsidiary. A deferred tax benefit has been recorded on the unrealized depreciation of the security. When the Fund disposes of the security, the deferred asset is relieved and the Fund should incur a realized tax benefit. The estimated deferred tax benefit was calculated using a federal rate of 21% and a Hawaii state rate (net of federal tax benefit) of 3%. This is reflected as FT Subsidiary deferred tax benefit in the Consolidated Statement of Assets and Liabilities.
The financial statements have been consolidated and include the accounts of the Fund and FT Subsidiary. All intercompany transactions and balances have been eliminated. At October 31, 2018, the net assets of FT Subsidiary were $18,634,166, representing less than 1% of the Fund’s consolidated net assets. The Fund’s investment in FT Subsidiary is limited to 25% of consolidated assets.
i. Mortgage Dollar Rolls
The Fund enters into mortgage dollar rolls, typically on a TBA basis. Mortgage dollar rolls are agreements between the Fund and a financial institution where the Fund sells (or buys) mortgage-backed securities for delivery on a specified date and simultaneously contracts to repurchase (or sell) substantially similar (same type, coupon, and maturity) securities at a future date and at a predetermined price. Gains or losses are realized on the initial sale, and the difference between the repurchase price and the sale price is recorded as an unrealized gain or loss to the Fund upon entering into the mortgage dollar roll. In addition, the Fund may invest the cash proceeds that are received from the initial sale. During the period between the sale and repurchase, the Fund is not entitled to principal and interest paid on the mortgage backed securities. Transactions in mortgage dollar rolls are accounted for as purchases and sales and may result in an increase to the Fund’s portfolio turnover rate. The risks of mortgage dollar roll transactions include the potential inability of the counterparty to fulfill its obligations.
j. Senior Floating Rate Interests
The Fund invests in senior secured corporate loans that pay interest at rates which are periodically reset by reference to a base lending rate plus a spread. These base lending rates are
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52 | | Semiannual Report | | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Franklin Strategic Income Fund (continued)
generally the prime rate offered by a designated U.S. bank or the London InterBank Offered Rate (LIBOR). Senior secured corporate loans often require prepayment of principal from excess cash flows or at the discretion of the borrower. As a result, actual maturity may be substantially less than the stated maturity. Senior secured corporate loans in which the Fund invests are generally readily marketable, but may be subject to certain restrictions on resale.
k. Income and Deferred Taxes
It is the Fund’s policy to qualify as a regulated investment company under the Internal Revenue Code. The Fund intends to distribute to shareholders substantially all of its taxable income and net realized gains to relieve it from federal income and excise taxes. As a result, no provision for U.S. federal income taxes is required.
The Fund may be subject to foreign taxation related to income received, capital gains on the sale of securities and certain foreign currency transactions in the foreign jurisdictions in which it invests. Foreign taxes, if any, are recorded based on the tax regulations and rates that exist in the foreign markets in which the Fund invests. When a capital gain tax is determined to apply, the Fund records an estimated deferred tax liability in an amount that would be payable if the securities were disposed of on the valuation date.
The Fund may recognize an income tax liability related to its uncertain tax positions under U.S. GAAP when the uncertain tax position has a less than 50% probability that it will be sustained upon examination by the tax authorities based on its technical merits. As of October 31, 2018, the Fund has determined that no tax liability is required in its financial statements related to uncertain tax positions for any open tax years (or expected to be taken in future tax years). Open tax years are those that remain subject to examination and are based on the statute of limitations in each jurisdiction in which the Fund invests.
l. Security Transactions, Investment Income, Expenses and Distributions
Security transactions are accounted for on trade date. Realized gains and losses on security transactions are determined on a specific identification basis. Interest income and estimated expenses are accrued daily. Amortization of premium and accretion of discount on debt securities are included in interest income. Paydown gains and losses are recorded as an
adjustment to interest income. Facility fees are recognized as income over the expected term of the loan. Dividend income is recorded on the ex-dividend date except for certain dividends from securities where the dividend rate is not available. In such cases, the dividend is recorded as soon as the information is received by the Fund. Distributions to shareholders are recorded on the ex-dividend date. Distributable earnings are determined according to income tax regulations (tax basis) and may differ from earnings recorded in accordance with U.S. GAAP. These differences may be permanent or temporary. Permanent differences are reclassified among capital accounts to reflect their tax character. These reclassifications have no impact on net assets or the results of operations. Temporary differences are not reclassified, as they may reverse in subsequent periods.*
Common expenses incurred by the Trust are allocated among the Funds based on the ratio of net assets of each Fund to the combined net assets of the Trust or based on the ratio of number of shareholders of each Fund to the combined number of shareholders of the Trust. Fund specific expenses are charged directly to the Fund that incurred the expense.
Realized and unrealized gains and losses and net investment income, excluding class specific expenses, are allocated daily to each class of shares based upon the relative proportion of net assets of each class. Differences in per share distributions by class are generally due to differences in class specific expenses.
Inflation-indexed bonds are adjusted for inflation through periodic increases or decreases in the security’s interest accruals, face amount, or principal redemption value, by amounts corresponding to the rate of inflation as measured by an index. Any increase or decrease in the face amount or principal redemption value will be included as interest income in the Consolidated Statement of Operations.
m. Accounting Estimates
The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the amounts of income and expenses during the reporting period. Actual results could differ from those estimates.
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| franklintempleton.com | | Semiannual Report | | 53 |
FRANKLIN STRATEGIC SERIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Franklin Strategic Income Fund (continued)
1. Organization and Significant Accounting Policies (continued)
n. Guarantees and Indemnifications
Under the Trust’s organizational documents, its officers and trustees are indemnified by the Trust against certain liabilities arising out of the performance of their duties to the Trust. Additionally, in the normal course of business, the Trust, on
behalf of the Fund, enters into contracts with service providers that contain general indemnification clauses. The Trust’s maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Trust that have not yet occurred. Currently, the Trust expects the risk of loss to be remote.
*Effective during the current reporting period, it is no longer required to present certain line items on the Statements of Changes in Net Assets. Such disclosure changes are included in the Statements of Changes in Net Assets, therefore prior period amounts are presented below.
For the year ended April 30, 2018, distributions to shareholders were as follows:
Distributions from net investment income:
| | | | |
Class A | | $ | (106,537,907 | ) |
Class C | | | (31,329,580 | ) |
Class R | | | (3,355,206 | ) |
Class R6 | | | (13,824,604 | ) |
Advisor Class | | | (32,910,570 | ) |
For the year ended April 30, 2018, distributions in excess of net investment income included in net assets was $39,100,421.
2. Shares of Beneficial Interest
At October 31, 2018, there were unlimited number of shares authorized (without par value). Transactions in the Fund’s shares were as follows:
| | | | | | | | | | | | | | | | |
| | | Six Months Ended October 31, 2018 | | | Year Ended April 30, 2018 | |
| | | | |
| | | Shares | | | Amount | | | Shares | | | Amount | |
| | |
Class A Shares: | | | | | | | | | | | | | | | | |
Shares solda | | | 29,822,642 | | | $ | 284,451,463 | | | | 43,921,154 | | | $ | 432,817,045 | |
Shares issued in reinvestment of distributions | | | 6,722,150 | | | | 64,175,598 | | | | 10,060,731 | | | | 98,645,567 | |
Shares redeemed | | | (41,972,704 | ) | | | (401,765,953 | ) | | | (100,902,437 | ) | | | (992,842,246) | |
| | | | |
| | | | |
Net increase (decrease) | | | (5,427,912 | ) | | $ | (53,138,892 | ) | | | (46,920,552 | ) | | $ | (461,379,634) | |
| | | | |
Class C Shares: | | | | | | | | | | | | | | | | |
Shares sold | | | 2,191,325 | | | $ | 20,963,000 | | | | 8,181,686 | | | $ | 80,552,705 | |
Shares issued in reinvestment of distributions | | | 1,876,875 | | | | 17,928,117 | | | | 2,971,594 | | | | 29,122,692 | |
Shares redeemeda | | | (32,829,383 | ) | | | (313,236,113 | ) | | | (39,654,519 | ) | | | (390,103,236) | |
| | | | |
| | | | |
Net increase (decrease) | | | (28,761,183 | ) | | $ | (274,344,996 | ) | | | (28,501,239 | ) | | $ | (280,427,839) | |
| | | | |
Class R Shares: | | | | | | | | | | | | | | | | |
Shares sold | | | 679,340 | | | $ | 6,477,667 | | | | 2,109,693 | | | $ | 20,673,849 | |
Shares issued in reinvestment of distributions | | | 214,332 | | | | 2,038,654 | | | | 334,005 | | | | 3,263,282 | |
Shares redeemed | | | (1,814,779 | ) | | | (17,296,719 | ) | | | (6,343,188 | ) | | | (62,189,568) | |
| | | | |
| | | | |
Net increase (decrease) | | | (921,107 | ) | | $ | (8,780,398 | ) | | | (3,899,490 | ) | | $ | (38,252,437) | |
| | | | |
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54 | | Semiannual Report | | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Franklin Strategic Income Fund (continued)
| | | | | | | | | | | | | | | | | | | | |
| | | Six Months Ended
October 31, 2018 | | | | | | Year Ended
April 30, 2018 | |
| | | | |
| | | Shares | | | Amount | | | | | | Shares | | | Amount | |
| | | | | |
| Class R6 Shares: | | | | | | | | | | | | | | | | | | | | |
Shares sold | | | 5,462,880 | | | $ | 52,394,485 | | | | | | | | 16,787,902 | | | $ | 165,966,032 | |
Shares issued in reinvestment of distributions | | | 1,053,167 | | | | 10,069,008 | | | | | | | | 1,355,636 | | | | 13,298,999 | |
Shares redeemed | | | (5,946,443 | ) | | | (56,867,636 | ) | | | | | | | (10,569,929 | ) | | | (104,068,148 | ) |
| | | | |
| | | | | |
Net increase (decrease) | | | 569,604 | | | $ | 5,595,857 | | | | | | | | 7,573,609 | | | $ | 75,196,883 | |
| | | | |
Advisor Class Shares: | | | | | | | | | | | | | | | | | | | | |
Shares sold | | | 10,083,699 | | | $ | 96,682,619 | | | | | | | | 27,736,896 | | | $ | 273,558,768 | |
Shares issued in reinvestment of distributions | | | 2,102,391 | | | | 20,093,944 | | | | | | | | 3,187,566 | | | | 31,290,077 | |
Shares redeemed | | | (16,113,126 | ) | | | (154,372,597 | ) | | | | | | | (42,428,324 | ) | | | (418,538,766 | ) |
| | | | |
| | | | | |
Net increase (decrease) | | | (3,927,036 | ) | | $ | (37,596,034 | ) | | | | | | | (11,503,862 | ) | | $ | (113,689,921 | ) |
| | | | |
aMay include a portion of Class C shares that were automatically converted to Class A.
3. Transactions with Affiliates
Franklin Resources, Inc. is the holding company for various subsidiaries that together are referred to as Franklin Templeton Investments. Certain officers and trustees of the Trust are also officers and/or directors of the following subsidiaries:
| | |
| Subsidiary | | Affiliation |
Franklin Advisers, Inc. (Advisers) | | Investment manager |
Franklin Templeton Services, LLC (FT Services) | | Administrative manager |
Franklin Templeton Distributors, Inc. (Distributors) | | Principal underwriter |
Franklin Templeton Investor Services, LLC (Investor Services) | | Transfer agent |
a. Management Fees
The Fund pays an investment management fee to Advisers based on the average daily net assets of the Fund as follows:
| | |
| Annualized Fee Rate | | Net Assets |
0.625% | | Up to and including $100 million |
0.500% | | Over $100 million, up to and including $250 million |
0.450% | | Over $250 million, up to and including $7.5 billion |
0.440% | | Over $7.5 billion, up to and including $10 billion |
0.430% | | Over $10 billion, up to and including $12.5 billion |
0.420% | | Over $12.5 billion, up to and including $15 billion |
0.400% | | Over $15 billion, up to and including $17.5 billion |
0.380% | | Over $17.5 billion, up to and including $20 billion |
0.360% | | Over $20 billion, up to and including $35 billion |
0.355% | | Over $35 billion, up to and including $50 billion |
0.350% | | In excess of $50 billion |
For the period ended October 31, 2018, the annualized gross effective investment management fee rate was 0.455% of the Fund’s average daily net assets.
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| franklintempleton.com | | Semiannual Report | | 55 |
FRANKLIN STRATEGIC SERIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Franklin Strategic Income Fund (continued)
3. Transactions with Affiliates (continued)
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 each share class, with the exception of Class R6 and Advisor Class shares, pursuant to Rule 12b-1 under the 1940 Act. Under the Fund’s Class A reimbursement distribution plan, the Fund reimburses Distributors for costs incurred in connection with the servicing, sale and distribution of the Fund’s shares up to the maximum annual plan rate. Under the Class A reimbursement distribution plan, costs exceeding the maximum for the current plan year cannot be reimbursed in subsequent periods. In addition, under the Fund’s Class C and R compensation distribution plans, the Fund pays Distributors for costs incurred in connection with the servicing, sale and distribution of the Fund’s shares up to the maximum annual plan rate for each class. The plan year, for purposes of monitoring compliance with the maximum annual plan rates, 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 | % |
Class R | | | 0.50 | % |
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 period:
| | | | |
Sales charges retained net of commissions paid to
unaffiliated brokers/dealers | | $ | 164,908 | |
CDSC retained | | $ | 18,788 | |
Effective September 10, 2018, the Board approved changes to certain front-end sales charges and dealer commissions on Class A shares. Further details are disclosed in the Fund’s Prospectus.
e. Transfer Agent Fees
Each class of shares pays transfer agent fees to Investor Services for its performance of shareholder servicing obligations. The fees are based on an annualized asset based fee of 0.02% plus a transaction based fee. In addition, each class reimburses Investor Services for out of pocket expenses incurred and, except for Class R6, reimburses 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 period ended October 31, 2018, the Fund paid transfer agent fees of $4,168,885, of which $1,707,496 was retained by Investor Services.
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56 | | Semiannual Report | | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Franklin Strategic Income Fund (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 Consolidated Statement of Operations, in an amount not to exceed the management and administrative fees paid directly or indirectly by each affiliate. During the period ended October 31, 2018, the Fund held investments in affiliated management investment companies as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Number of
Shares Held
at Beginning
of Period | | | Gross
Additions | | | Gross
Reductions | | | Number of
Shares
Held at End
of Period | | | Value
at End
of Period | | | Dividend
Income | | | Realized
Gain
(Loss) | | | Net Change in
Unrealized
Appreciation
(Depreciation) | |
| | | | | | | | |
Controlled Affiliates | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Franklin Lower Tier Floating Rate Fund | | | 25,361,119 | | | | — | | | | — | | | | 25,361,119 | | | $ | 242,705,906 | | | $ | 10,723,594 | | | $ | — | | | $ | (7,861,947 | ) |
Franklin Middle Tier Floating Rate Fund | | | 21,833,687 | | | | — | | | | — | | | | 21,833,687 | | | | 205,236,662 | | | | 7,476,400 | | | | — | | | | (1,310,022 | ) |
| | | | | | | | | | | | | | | | | | | | |
Total Controlled Affiliates | | | | | | | | | | | | | | | | | | $ | 447,942,568 | | | $ | 18,199,994 | | | $ | — | | | $ | (9,171,969 | ) |
| | | | | | | | | | | | | | | | | | | | |
| Non-Controlled Affiliates | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Institutional Fiduciary Trust Money Market Portfolio, 1.83% | | | 200,193,361 | | | | 224,024,084 | | | | (343,224,642 | ) | | | 80,992,803 | | | | 80,992,803 | | | | 1,022,234 | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | |
Total Affiliated Securities | | | | | | | | | | | | | | | | | | $ | 528,935,371 | | | $ | 19,222,228 | | | $ | — | | | $ | (9,171,969 | ) |
| | | | | | | | | | | | | | | | | | | | |
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 0.02% based on the average net assets of the class. Investor Services may discontinue this waiver in the future.
h. Other Affiliated Transactions
At October 31, 2018, one or more of funds in Franklin Fund Allocator Series owned 5.5% of the Fund’s outstanding shares.
4. Expense Offset Arrangement
The Fund has entered into an arrangement with its custodian whereby credits realized as a result of uninvested cash balances are used to reduce a portion of the Fund’s custodian expenses. During the period ended October 31, 2018, the custodian fees were reduced as noted in the Consolidated Statement of Operations.
5. Income Taxes
For tax purposes, capital losses may be carried over to offset future capital gains, if any. At April 30, 2018, the capital loss carryforwards were as follows:
| | | | |
Capital loss carryforwards not subject to expiration: | | | | |
Short Term | | $ | 43,255,168 | |
Long Term | | | 367,922,122 | |
| | | | |
Total capital loss carryforwards | | $ | 411,177,290 | |
| | | | |
For tax purposes, the Fund may elect to defer any portion of a late-year ordinary loss to the first day of the following fiscal year. At April 30, 2018, the Fund deferred late-year ordinary losses of $8,967,409.
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| franklintempleton.com | | Semiannual Report | | 57 |
FRANKLIN STRATEGIC SERIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Franklin Strategic Income Fund (continued)
5. Income Taxes (continued)
At October 31, 2018, the cost of investments and net unrealized appreciation (depreciation) for income tax purposes were as follows:
| | | | |
Cost of investments | | $ | 5,938,919,528 | |
| | | | |
| |
Unrealized appreciation | | $ | 49,832,152 | |
Unrealized depreciation | | | (335,581,891 | ) |
| | | | |
| |
Net unrealized appreciation (depreciation) | | $ | (285,749,739 | ) |
| | | | |
Differences between income and/or capital gains as determined on a book basis and a tax basis are primarily due to differing treatments of foreign currency transactions, bond discounts and premiums and inflation related adjustments on foreign securities.
6. Investment Transactions
Purchases and sales of investments (excluding short term securities) for the period ended October 31, 2018, aggregated $2,996,577,281 and $3,310,012,700, respectively.
7. Credit Risk and Defaulted Securities
At October 31, 2018, the Fund had 39.8% of its portfolio invested in high yield, senior secured floating rate loans, 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 defaulted securities and/or other securities for which the income has been deemed uncollectible. At October 31, 2018, the aggregate value of these securities was $37,675,250, representing 0.7% of the Fund’s net assets. The Fund discontinues accruing income on securities for which income has been deemed uncollectible and provides an estimate for losses on interest receivable. The securities have been identified in the accompanying Consolidated Statement of Investments.
8. Restricted Securities
The Fund invests in securities that are restricted under the Securities Act of 1933 (1933 Act). Restricted securities are often purchased in private placement transactions, and cannot be sold without prior registration unless the sale is pursuant to an exemption under the 1933 Act. Disposal of these securities may require greater effort and expense, and prompt sale at an acceptable price may be difficult. The Fund may have registration rights for restricted securities. The issuer generally incurs all registration costs.
At October 31, 2018, investments in restricted securities, excluding securities exempt from registration under the 1933 Act deemed to be liquid, were as follows:
| | | | | | | | | | | | | | | | |
Principal
Amount/
Shares | | | Issuer | | Acquisition
Date | | | Cost | | | Value | |
| | 125,940,079 | | | K2016470219 South Africa Ltd., A | | | 2/08/13 - 2/01/17 | | | $ | 977,122 | | | $ | 85,367 | |
| | 12,532,821 | | | K2016470219 South Africa Ltd., B | | | 2/01/17 | | | | 9,305 | | | | 8,495 | |
| | 9,688,700 | | | K2016470219 South Africa Ltd., senior secured note, 144A, PIK, 3.00%, 12/31/22 | | | 2/08/13 - 7/05/18 | | | | 15,304,198 | | | | 11,991 | |
| | 1,873,803 | | | K2016470260 South Africa Ltd., senior secured note, 144A, PIK, 25.00%, 12/31/22 | | | 2/01/17 - 7/05/18 | | | | 1,648,480 | | | | 138,373 | |
| | | | | | | | | | | | |
| | | | |
| | | | Total Restricted Securities (Value is 0.0%† of Net Assets) | | | | | | $ | 17,939,105 | | | $ | 244,226 | |
| | | | | | | | | | | | |
| | | |
| | †Rounds to less than 0.1% of net assets. | | | | | | | | | | | | |
| | | | |
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58 | | Semiannual Report | | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Franklin Strategic Income Fund (continued)
9. Other Derivative Information
At October 31, 2018, the Fund’s investments in derivative contracts are reflected in the Consolidated Statement of Assets and Liabilities as follows:
| | | | | | | | | | | | | | | | |
| | | Asset Derivatives | | | | | | Liability Derivatives | |
Derivative Contracts
Not Accounted for as
Hedging Instruments | | Consolidated Statement of
Assets and Liabilities
Location | | Fair Value | | | | | | Consolidated Statement of
Assets and Liabilities
Location | | Fair Value | |
Interest rate contracts | | Variation margin on futures contracts | | | $ 678,541 | a | | | | | | Variation margin on futures contracts | |
| $ 2,665,122
| a
|
| | Unrealized appreciation on OTC swap contracts | | | 1,988,147 | | | | | | | Unrealized depreciation on OTC swap contracts | | | 894,486 | |
Foreign exchange contracts | | Unrealized appreciation on OTC forward exchange contracts | | | 10,865,882 | | | | | | | Unrealized depreciation on OTC forward exchange contracts | | | 7,282,018 | |
Credit contracts | | Variation margin on centrally cleared swap contracts | | | — | | | | | | | Variation margin on centrally cleared swap contracts | | | 196,308 | a |
| | OTC swap contracts (upfront payments) | | | 7,213,727 | | | | | | | OTC swap contracts (upfront receipts) | | | 10,847,187 | |
| | Unrealized appreciation on OTC swap contracts | | | 1,400,440 | | | | | | | Unrealized depreciation on OTC swap contracts | | | 9,971,914 | |
Value recovery instruments | | Investments in securities, at value | | | 10,567,923 | b | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Totals | | | | | $32,714,660 | | | | | | | | | | $31,857,035 | |
| | | | | | | | | | | | | | | | |
aThis amount reflects the cumulative appreciation (depreciation) of futures contracts and centrally cleared swap contracts as reported in the Consolidated Statement of Investments. Only the variation margin receivable/payable at period end is separately reported within the Consolidated Statement of Assets and Liabilities. Prior variation margin movements were recorded to cash upon receipt or payment.
bVRI are included in investments in securities, at value in the Consolidated Statement of Assets and Liabilities.
For the period ended October 31, 2018, the effect of derivative contracts in the Fund’s Consolidated Statement of Operations was as follows:
| | | | | | | | | | | | |
Derivative Contracts
Not Accounted for as
Hedging Instruments | | Consolidated Statement of
Operations Location | | Net Realized
Gain (Loss) for
the Period
| | | Consolidated Statement of
Operations Location | | Net Change in
Unrealized
Appreciation
(Depreciation)
for the Period | |
| | Net realized gain (loss) from: | | | | | | Net change in unrealized appreciation (depreciation) on: | | | | |
Interest rate contracts | | Futures contracts | | | $ 2,465,362 | | | Futures contracts | | | $(3,021,787 | ) |
| | Swap contracts | | | (1,941,241 | ) | | Swap contracts | | | 1,093,661 | |
Foreign exchange contracts | | Forward exchange contracts | | | (298,087 | ) | | Forward exchange contracts | | | 3,272,653 | |
Credit contracts | | Swap contracts | | | 4,215,363 | | | Swap contracts | | | (7,555,316 | ) |
Value recovery instruments | | Investments | | | — | | | Investments | | | (3,326,551 | )a |
| | | | | | | | | | | | |
Totals | | | | | $ 4,441,397 | | | | | | $(9,537,340 | ) |
| | | | | | | | | | | | |
aVRI are included in net change in unrealized appreciation (depreciation) on investments in the Consolidated Statement of Operations.
For the period ended October 31, 2018, the average month end notional amount of futures contracts and swap contracts, the average month end contract value for forward exchange contracts and average month end fair value of VRI, were as follows:
| | | | |
Futures contracts | | $ | 234,541,742 | |
Swap contracts | | | 572,096,286 | |
Forward exchange contracts | | | 631,528,296 | |
VRI | | | 12,398,104 | |
| | | | |
| | | |
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FRANKLIN STRATEGIC SERIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Franklin Strategic Income Fund (continued)
9. Other Derivative Information (continued)
At October 31, 2018, the Fund’s OTC derivative assets and liabilities are as follows:
| | | | | | | | |
| | | Gross Amounts of
Assets and Liabilities Presented
in the Consolidated Statement of Assets and Liabilities | |
| | | | |
| | | Assetsa | | | Liabilitiesa | |
Derivatives | | | | | | | | |
Forward exchange contracts | | | $10,865,882 | | | | $ 7,282,018 | |
Swap contracts | | | 10,602,314 | | | | 21,713,587 | |
| | | | |
| | |
Total | | | $21,468,196 | | | | $28,995,605 | |
| | | | |
aAbsent an event of default or early termination, OTC derivative assets and liabilities are presented gross and not offset in the Consolidated Statement of Assets and Liabilities.
At October 31, 2018, the Fund’s OTC derivative assets, which may be offset against the Fund’s OTC derivative liabilities and collateral received from the counterparty, are as follows:
| | | | | | | | | | | | | | | | | | | | |
| | | | | | Amounts Not Offset in the
Statement of Assets and Liabilities | | | | |
| | | | | | | | | | | | |
| | | Gross
Amounts of
Assets Presented in
the Statement of
Assets and Liabilities | | | Financial
Instruments
Available for
Offset | | | Financial
Instruments
Collateral
Received | | | Cash
Collateral
Receiveda | | | Net Amount
(Not less
than zero) | |
Counterparty | | | | | | | | | | | | | | | | | | | | |
BNDP | | | $ 5,543 | | | $ | (5,543 | ) | | $ | — | | | $ | — | | | | $ — | |
BZWS | | | 2,384,727 | | | | (1,250,314 | ) | | | (1,134,413 | ) | | | — | | | | — | |
CITI | | | 1,831,649 | | | | (1,831,649 | ) | | | — | | | | — | | | | — | |
DBAB | | | 65,234 | | | | (65,234 | ) | | | — | | | | — | | | | — | |
GSCO | | | 1,872,851 | | | | — | | | | — | | | | (1,872,851 | ) | | | — | |
JPHQ | | | 10,808,026 | | | | (9,380,485 | ) | | | — | | | | — | | | | 1,427,541 | |
MSCO | | | 4,500,166 | | | | (4,500,166 | ) | | | — | | | | — | | | | — | |
| | | | |
Total | | | $21,468,196 | | | $ | (17,033,391 | ) | | $ | (1,134,413 | ) | | $ | (1,872,851 | ) | | | $1,427,541 | |
| | | | |
| | | | |
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FRANKLIN STRATEGIC SERIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Franklin Strategic Income Fund (continued)
At October 31, 2018, the Fund’s OTC derivative liabilities, which may be offset against the Fund’s OTC derivative assets and collateral pledged to the counterparty, are as follows:
| | | | | | | | | | | | | | | | | | | | |
| | | | | | Amounts Not Offset in the
Statement of Assets and Liabilities | | | | |
| | | Gross
Amounts of
Liabilities Presented in
the Statement of
Assets and Liabilities | | | Financial
Instruments
Available for
Offset | | | Financial
Instruments
Collateral
Pledged | | | Cash
Collateral
Pledgeda | | | Net Amount
(Not less
than zero) | |
Counterparty | | | | | | | | | | | | | | | | | | | | |
BNDP | | | $ 175,590 | | | $ | (5,543 | ) | | | $ — | | | $ | (170,047 | ) | | | $ — | |
BOFA | | | 461,811 | | | | — | | | | — | | | | (461,811 | ) | | | — | |
BZWS | | | 1,250,314 | | | | (1,250,314 | ) | | | — | | | | — | | | | — | |
CITI | | | 11,031,681 | | | | (1,831,649 | ) | | | — | | | | (9,200,032 | ) | | | — | |
DBAB | | | 298,314 | | | | (65,234 | ) | | | — | | | | (120,000 | ) | | | 113,080 | |
FBCO | | | 305,441 | | | | — | | | | — | | | | (305,441 | ) | | | — | |
JPHQ | | | 9,380,485 | | | | (9,380,485 | ) | | | — | | | | — | | | | — | |
MSCO | | | 6,091,969 | | | | (4,500,166 | ) | | | — | | | | (1,591,803 | ) | | | — | |
| | | | |
Total | | | $28,995,605 | | | $ | (17,033,391 | ) | | | $ — | | | $ | (11,849,134 | ) | | | $113,080 | |
| | | | |
aIn some instances, the collateral amounts disclosed in the table above were adjusted due to the requirement to limit collateral amounts to avoid the effect of overcollateralization. Actual collateral received and/or pledged may be more than the amounts disclosed herein.
See Note 1(e) regarding derivative financial instruments.
See Abbreviations on page 63.
10. 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 8, 2019. 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 Consolidated Statement of Operations. During the period ended October 31, 2018, the Fund did not use the Global Credit Facility.
11. 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.) |
| | | | |
| | | |
| franklintempleton.com | | Semiannual Report | | 61 |
FRANKLIN STRATEGIC SERIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Franklin Strategic Income Fund (continued)
11. Fair Value Measurements (continued)
• 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.
A summary of inputs used as of October 31, 2018, 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:a | | | | | | | | | | | | | | | | |
Equity Investments:b | | | | | | | | | | | | | | | | |
Consumer Services | | $ | — | | | $ | — | | | $ | 122,759 | | | $ | 122,759 | |
Energy | | | 6,596,637 | | | | 11,882,395 | | | | 85 | c | | | 18,479,117 | |
Retailing | | | — | | | | — | | | | 93,862 | | | | 93,862 | |
Transportation | | | — | | | | — | | | | 1,462,003 | | | | 1,462,003 | |
All Other Equity Investments | | | 449,062,805 | | | | — | | | | — | | | | 449,062,805 | |
Corporate Bonds: | | | | | | | | | | | | | | | | |
Retailing | | | — | | | | 43,203,929 | | | | 11,991 | | | | 43,215,920 | |
All Other Corporate Bonds | | | — | | | | 2,366,141,804 | | | | — | | | | 2,366,141,804 | |
Senior Floating Rate Interests | | | — | | | | 464,720,626 | | | | — | | | | 464,720,626 | |
Foreign Government and Agency Securities | | | — | | | | 310,234,529 | | | | — | | | | 310,234,529 | |
U.S. Government and Agency Securities | | | — | | | | 220,914,878 | | | | — | | | | 220,914,878 | |
Asset-Backed Securities and Commercial Mortgage-Backed Securities | | | — | | | | 1,081,485,364 | | | | — | | | | 1,081,485,364 | |
Mortgage-Backed Securities | | | — | | | | 520,878,081 | | | | — | | | | 520,878,081 | |
Municipal Bonds | | | — | | | | 82,241,285 | | | | — | | | | 82,241,285 | |
Escrows and Litigation Trusts | | | — | | | | 189,375 | | | | — | c | | | 189,375 | |
Short Term Investments | | | 85,992,803 | | | | 20,825,536 | | | | — | | | | 106,818,339 | |
Total Investments in Securities | | $ | 541,652,245 | | | $ | 5,122,717,802 | | | $ | 1,690,700 | | | $ | 5,666,060,747 | |
Other Financial Instruments: | | | | | | | | | | | | | | | | |
Futures Contracts | | $ | 678,541 | | | $ | — | | | $ | — | | | $ | 678,541 | |
Forward Exchange Contracts | | | — | | | | 10,865,882 | | | | — | | | | 10,865,882 | |
Swap Contracts | | | — | | | | 3,388,587 | | | | — | | | | 3,388,587 | |
Total Other Financial Instruments | | $ | 678,541 | | | $ | 14,254,469 | | | $ | — | | | $ | 14,933,010 | |
Liabilities: | | | | | | | | | | | | | | | | |
Other Financial Instruments: | | | | | | | | | | | | | | | | |
Futures Contracts | | $ | 2,665,122 | | | $ | — | | | $ | — | | | $ | 2,665,122 | |
Forward Exchange Contracts | | | — | | | | 7,282,018 | | | | — | | | | 7,282,018 | |
Swap Contracts | | | — | | | | 11,062,708 | | | | — | | | | 11,062,708 | |
Total Other Financial Instruments | | $ | 2,665,122 | | | $ | 18,344,726 | | | $ | — | | | $ | 21,009,848 | |
aFor detailed categories, see the accompanying Consolidated Statement of Investments.
bIncludes common and management investment companies as well as other equity interests.
cIncludes securities determined to have no value at October 31, 2018.
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 beginning and/or end of the period.
| | | | |
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FRANKLIN STRATEGIC SERIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Franklin Strategic Income Fund (continued)
12. New Accounting Pronouncements
In March 2017, the Financial Accounting Standards Board (FASB) 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 has reviewed the requirements and believes the adoption of this ASU will not have a material impact on the financial statements.
In August 2018, FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurements. The amendments in the ASU modify the disclosure requirements on fair value measurements in Topic 820. The ASU is effective for interim and annual reporting periods beginning after December 15, 2019. Management has reviewed the requirements and believes the adoption of this ASU will not have a material impact on the financial statements.
13. 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
| | | | | | | | | | |
| Counterparty | | Currency | | Selected Portfolio |
| | | | | |
| BNDP | | BNP Paribas | | BRL | | Brazilian Real | | ARM | | Adjustable Rate Mortgage |
| BOFA | | Bank of America Corp. | | EUR | | Euro | | CLO | | Collateralized Loan Obligation |
| BZWS | | Barclays Bank PLC | | GBP | | British Pound | | CMT | | Constant Maturity Treasury Index |
| CITI | | Citigroup, Inc. | | IDR | | Indonesian Rupiah | | EDA | | Economic Development Authority |
| DBAB | | Deutsche Bank AG | | MXN | | Mexican Peso | | FRN | | Floating Rate Note |
| FBCO | | Credit Suisse International | | USD | | United States Dollar | | GDP | | Gross Domestic Product |
| GSCO | | The Goldman Sachs Group, Inc. | | | | | | GO | | General Obligation |
| JPHQ | | JP Morgan Chase & Co. | | | | | | HDC | | Housing Development Corp. |
| MSCO | | Morgan Stanley | | | | | | LIBOR | | London InterBank Offered Rate |
| | | | | | | | MBS | | Mortgage-Backed Security |
| | | | | | | | PIK | | Payment-In-Kind |
| | | | | | | | RDA | | Redevelopment Agency/Authority |
| | | | | | | | SF | | Single Family |
| | | | | | | | TBD | | To be determined |
| | | | | | | | T-Note | | Treasury Note |
| | | | | | | | VRI | | Value Recovery Instruments |
| | |
| Index | | |
| |
| CDX.EM.30 | | CDX Emerging Markets Index |
| MCDX.NA.30 | | MCDX North America Index |
| | | | |
| | | |
| franklintempleton.com | | Semiannual Report | | 63 |
FRANKLIN STRATEGIC SERIES
FRANKLIN STRATEGIC INCOME FUND
Shareholder Information
Proxy Voting Policies and Procedures
The Fund’s investment manager has established Proxy Voting Policies and Procedures (Policies) that the Fund uses to determine how to vote proxies relating to portfolio securities. Shareholders may view the Fund’s complete Policies online at franklintempleton.com. Alternatively, shareholders may request copies of the Policies free of charge by calling the Proxy Group collect at (954) 527-7678 or by sending a written request to: Franklin Templeton Companies, LLC, 300 S.E. 2nd Street, Fort Lauderdale, FL 33301, Attention: Proxy Group. Copies of the Fund’s proxy voting records are also made available online at franklintempleton.com and posted on the U.S. Securities and Exchange Commission’s website at sec.gov and reflect the most recent 12-month period ended June 30.
Quarterly Statement of Investments
The Trust, on behalf of the Fund, files a complete statement of investments with the U.S. Securities and Exchange Commission for the first and third quarters for each fiscal year on Form N-Q. Shareholders may view the filed Form N-Q by visiting the Commission’s website at sec.gov. The filed form may also be viewed and copied at the Commission’s Public Reference Room in Washington, DC. Information regarding the operations of the Public Reference Room may be obtained by calling (800) SEC-0330.
| | | | |
| | | |
64 | | Semiannual Report | | franklintempleton.com |
| | |
| | Semiannual Report and Shareholder Letter |
| | Franklin Strategic Income Fund |
| | 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.
| | |
© 2018 Franklin Templeton Investments. All rights reserved. | | 194 S 12/18 |
(a) The Registrant has adopted a code of ethics that applies to its principal executive officers and principal financial and accounting officer.
(c) N/A
(d) N/A
(f) Pursuant to Item 12(a)(1), the Registrant is attaching as an exhibit a copy of its code of ethics that applies to its principal executive officers and principal financial and accounting officer.
| Item 3. | Audit Committee Financial Expert. |
(a)(1) The Registrant has an audit committee financial expert serving on its audit committee.
(2) The audit committee financial expert is John B. Wilson and he is “independent” as defined under the relevant Securities and Exchange Commission Rules and Releases.
| Item 4. | Principal Accountant Fees and Services. N/A |
| Item 5. | Audit Committee of Listed Registrants. N/A |
| Item 6. | Schedule of Investments. N/A |
| Item 7. | Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies. N/A |
| Item 8. | Portfolio Managers of Closed-End Management Investment Companies. N/A |
| Item 9. | Purchases of Equity Securities by Closed-End Management Investment Company and Affiliated Purchasers. N/A |
| Item 10. | Submission of Matters to a Vote of Security Holders. |
There have been no changes to the procedures by which shareholders may recommend nominees to the Registrant’s Board of Trustees that would require disclosure herein.
| Item 11. | Controls and Procedures. |
(a) Evaluation of Disclosure Controls and Procedures. The Registrant maintains disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed in the Registrant’s filings under the Securities Exchange Act of 1934, as amended, 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 were not effective related to internal control over financial reporting specific to the monitoring of market events following the close of trading in foreign stock markets that assist in determining the reliability of the values of the foreign securities held by the Franklin Natural Resources Fund and which may require the use of fair valuation factors to account for changes in the values of those securities subsequent to the local close of the foreign market but prior to the net asset calculation of the Funds. As a result, a material weakness exists at period end for the Franklin Natural Resources Fund. There are no misstatements to current and previously issued financial statements. However, this material weakness could result in misstatements of security values and unrealized gains or losses and associated disclosures that would result in a material misstatement of the interim or annual consolidated financial statements that would not be prevented or detected.
After October 31, 2018 and prior to the issuance of the Registrant’s financial statements, the Registrant’s controls were enhanced through the implementation of a daily secondary review of market events following the close of trading on foreign stock markets to ensure the appropriate application of market level fair value.
(b) Changes in Internal Controls. There have been no changes in the Registrant’s internal control over financial reporting that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, the internal control over financial reporting.
| Item 12. | Disclosure of Securities Lending Activities for Closed-End Management Investment Company. N/A |
(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 SERIES
| | |
| By | | /s/ MATTHEW T. HINKLE |
| | Matthew T. Hinkle |
| | Chief Executive Officer –
Finance and Administration |
| | Date December 27, 2018 |
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 December 27, 2018 |
| | |
| By | | /s/ GASTON GARDEY |
| | Gaston Gardey |
| | Chief Financial Officer and
Chief Accounting Officer |
| | Date December 27, 2018 |
