Franklin Strategic Mortgage Portfolio N-CSR Certified annual shareholder report (management investment company)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM N-CSR

CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES

            Investment Company Act file number 811-07288

Franklin Strategic Mortgage Portfolio

(Exact name of registrant as specified in charter)

One Franklin Parkway

, San Mateo, CA  94403-1906

(Address of principal executive offices)           (Zip code)

Craig S. Tyle, One Franklin Parkway, San Mateo, CA  94403-1906

(Name and address of agent for service)

Registrant's telephone number, including area code:_650 312-2000

Date of fiscal year end: 9/30

Date of reporting period: 9/30/20

Item 1. Reports to Stockholders.

ANNUAL

REPORT

AND

SHAREHOLDER

LETTER

Franklin

Strategic

Mortgage

Portfolio

September

30,

2020

Sign

up

for

electronic

delivery

at

franklintempleton.com/edelivery

Internet

Delivery

of

Fund

Reports

Unless

You

Request

Paper

Copies

:

Effective

January

1,

2021,

as

permitted

by

the

SEC,

paper

copies

of

the

Fund’s

shareholder

reports

will

no

longer

be

sent

by

mail,

unless

you

specifically

request

them

from

the

Fund

or

your

financial

intermediary.

Instead,

the

reports

will

be

made

available

on

a

website,

and

you

will

be

notified

by

mail

each

time

a

report

is

posted

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provided

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the

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charge

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Not

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Guarantee

franklintempleton.com

Not

part

of

the

annual

report

1

Shareholder

Letter

Dear

Shareholder:

During

the

12

months

ended

September

30,

2020,

the

U.S.

economy

grew

moderately

through

the

end

of

2019

amid

concerns

about

trade,

but

it

contracted

in

2020’s

first

and

second

quarters

in

response

to

the

novel

coronavirus

(COVID-19)

pandemic.

The

U.S.

Federal

Reserve

(Fed),

having

lowered

the

federal

funds

rate

twice

earlier

in

2019

amid

global

trade

tensions,

lowered

the

rate

by

0.25%

at

its

October

2019

meeting

and

then

held

it

unchanged

through

February

2020.

However,

given

larger

economic

risks

posed

by

COVID-19,

the

Federal

Reserve

lowered

its

key

rate

by

0.50%

on

March

3

and

further

by

1.00%

on

March

15,

decreasing

the

rate

during

the

period

from

2.00%

to

0.25%.

The

Federal

Reserve

also

announced

broad

quantitative

easing

measures

to

support

credit

markets

and

adjusted

its

policy

in

August

2020

to

allow

more

flexibility

to

keep

interest

rates

low,

while

maintaining

a

2%

average

inflation

target.

The

10-year

U.S.

Treasury

yield

was

1.68%

on

September

30,

2019,

and

it

decreased

to

0.69%

by

the

end

of

September

2020.

In

this

environment,

investment-grade

bonds,

as

measured

by

the

Bloomberg

Barclays

U.S.

Aggregate

Bond

Index,

posted

a

+6.98%

return.

1

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.

Franklin

Strategic

Mortgage

Portfolio’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

investment

needs

in

the

years

ahead.

Sincerely,

Sonal

Desai,

Ph.D.

Executive

Vice

President,

Chief

Investment

Officer

Franklin

Templeton

Fixed

Income

This

letter

reflects

our

analysis

and

opinions

as

of

September

30,

2020

,

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.

1.

Source:

Morningstar.

The

indexes

are

unmanaged

and

include

reinvestment

of

any

income

or

distributions.

See

www.franklintempletondatasources.com

for

additional

data

provider

information.

franklintempleton.com

Annual

Report

2

Contents

Annual

Report

Franklin

Strategic

Mortgage

Portfolio

................

3

Performance

Summary

...........................

6

Your

Fund’s

Expenses

............................

9

Financial

Highlights

and

Statement

of

Investments

....

10

Financial

Statements

.............................

21

Notes

to

Financial

Statements

.....................

25

Report

of

Independent

Registered

Public

Accounting

Firm

............................

34

Tax

Information

..................................

35

Board

Members

and

Officers

.......................

36

Shareholder

Information

..........................

41

Visit

franklintempleton.com

for

fund

updates,

to

access

your

account,

or

to

find

helpful

financial

planning

tools.

3

franklintempleton.com

Annual

Report

ANNUAL

REPORT

Franklin

Strategic

Mortgage

Portfolio

This

annual

report

for

Franklin

Strategic

Mortgage

Portfolio

covers

the

fiscal

year

ended

September

30,

2020

.

Your

Fund’s

Goal

and

Main

Investments

The

Fund

seeks

high

total

return

(a

combination

of

high

current

income

and

capital

appreciation)

relative

to

the

performance

of

the

general

mortgage

securities

market

by

investing

at

least

80%

of

its

net

assets

in

a

portfolio

of

mortgage

securities.

The

Fund

invests

substantially

in

mortgage

securities

that

are

issued

or

guaranteed

by

the

U.S.

government,

its

agencies

or

instrumentalities,

which

include

mortgage

pass-through

securities

representing

interests

in

“pools”

of

mortgage

loans

issued

or

guaranteed

by

the

Government

National

Mortgage

Association

(Ginnie

Mae),

Fannie

Mae

and

Freddie

Mac.

1

Performance

Overview

For

the

12

months

ended

September

30,

2020,

the

Fund’s

Class

A

shares

posted

a

+3.05%

total

return.

In

comparison,

the

Fund’s

primary

benchmark,

the

Bloomberg

Barclays

U.S.

Mortgage-Backed

Securities

(MBS)

Fixed

Rate

Index,

which

measures

the

performance

of

investment-grade

fixed-rate

mortgage-backed

pass-through

securities

of

Ginnie

Mae,

Fannie

Mae

and

Freddie

Mac,

posted

a

+4.36%

total

return.

2

In

comparison,

the

Fund’s

secondary

benchmark,

the

FTSE

U.S.

Broad

Investment-Grade

Mortgage

Index,

which

tracks

the

performance

of

30-

and

15-year

Ginnie

Mae,

Fannie

Mae

and

Freddie

Mac

securities,

as

well

as

Fannie

Mae

and

Freddie

Mac

balloon

mortgages,

posted

a

+4.48%

total

return.

2

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

.

Economic

and

Market

Overview

The

U.S.

bond

market,

as

measured

by

the

Bloomberg

Barclays

U.S.

Aggregate

Bond

Index,

advanced

during

the

12-month

period.

Before

the

acceleration

of

the

novel

coronavirus

(COVID-19)

outbreak

in

February

2020,

prices

for

most

U.S.

bonds

rose,

and

their

yields

declined,

driven

by

low

inflation,

interest-rate

cuts

and

strong

demand

for

yield.

In

late

February,

the

U.S.

bond

market

began

to

anticipate

the

adverse

economic

impact

of

shutdowns

and

social

distancing

measures.

Higher-quality,

longer-term

bonds

rallied,

while

riskier,

lower-rated

corporate

bonds

declined

sharply,

reflecting

a

reversal

in

many

investors’

appetite

for

risk.

Aggressive

U.S.

Federal

Reserve

(Fed)

action

along

with

phased

business

re-openings

led

to

a

recovery

in

the

corporate

bond

market

beginning

at

the

end

of

March.

However,

yields

on

most

bonds

rose

in

August,

fueled

by

a

change

in

long-standing

inflation

policy

at

the

Fed.

After

reducing

the

federal

funds

target

rate

in

late

2019

to

a

range

of

1.50%–1.75%,

the

Fed

enacted

two

emergency

rate

cuts

in

March

2020,

further

lowering

the

federal

funds

target

rate

to

a

range

of

0.00%–0.25%.

In

addition,

the

Fed

announced

unlimited,

open-ended

purchasing

of

government-backed

and

corporate

bonds

to

help

keep

markets

functioning.

In

August

2020,

the

Fed

announced

that

future

interest

rates

would

remain

low,

even

if

inflation

persistently

exceeded

the

Fed’s

2%

target.

The

announcement

was

a

major

change

in

inflation

policy

that

affirmed

the

Fed’s

commitment

to

providing

economic

stimulus.

Portfolio

Composition

9/30/20

%

of

Total

Investments

Mortgage-Backed

Securities

59.1%

Commercial

Mortgage-Backed

Securities

9.6%

Asset-Backed

Securities

4.1%

U.S.

Government

and

Agency

Securities

0.6%

Corporate

Bonds

0.1%

Short-Term

Investments

26.5%

1.

Guarantees

of

timely

payment

of

principal

and

interest

do

not

apply

to

the

market

prices

and

yield

of

the

security

or

to

the

net

asset

value

or

performance

of

the

Fund.

Ginnie

Mae

pass-through

securities

are

backed

by

the

full

faith

and

credit

of

the

U.S.

government.

Although

U.S.

government-sponsored

entities,

such

as

Fannie

Mae

and

Freddie

Mac,

may

be

chartered

or

sponsored

by

acts

of

Congress,

their

securities

are

neither

insured

nor

guaranteed

by

the

U.S.

Treasury.

Please

refer

to

the

Fund’s

pro-

spectus

for

a

detailed

discussion

regarding

various

levels

of

credit

support

for

government

agency

or

instrumentality

securities.

2.

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

15

.

Franklin

Strategic

Mortgage

Portfolio

4

franklintempleton.com

Annual

Report

U.S.

Treasury

bonds,

as

measured

by

the

Bloomberg

Barclays

U.S.

Treasury

Index,

rose

during

the

reporting

period.

Bond

purchasing

by

the

Fed

and

robust

demand

for

investments

perceived

as

safe

drove

the

U.S.

Treasury

market

higher

despite

the

widening

U.S.

federal

budget

deficit

and

a

massive

increase

in

issuance.

U.S.

corporate

bond

performance

varied

based

on

credit

rating,

as

investors

became

concerned

about

the

potential

credit

downgrades

of

many

companies.

Investment-

grade

corporate

bonds,

as

represented

by

the

Bloomberg

Barclays

U.S.

Corporate

Bond

Index,

posted

solid

returns.

Returns

for

high-yield

corporate

bonds,

as

represented

by

the

Bloomberg

Barclays

U.S.

Corporate

High

Yield

Bond

Index,

were

more

muted,

due

in

part

to

concerns

about

the

sustainability

of

the

economic

recovery.

Investment

Strategy

Under

normal

market

conditions,

we

invest

at

least

80%

of

the

Fund’s

net

assets

in

mortgage

securities.

The

Fund

invests

substantially

in

mortgage

securities

that

are

issued

or

guaranteed

by

the

U.S.

government,

its

agencies

or

instrumentalities,

which

include

mortgage

pass-through

securities

representing

interests

in

“pools”

of

mortgage

loans

issued

or

guaranteed

by

Ginnie

Mae,

Fannie

Mae

and

Freddie

Mac.

1

These

securities

may

be

fixed-rate

or

adjustable-rate

mortgage

securities

(ARMS).

The

Fund

may

purchase

or

sell

mortgage

securities

on

a

delayed

delivery

or

forward

commitment

basis

through

the

“to-be-

announced”

(TBA)

market.

We

may

also

invest

in

other

types

of

mortgage

securities

that

may

be

issued

by

private

issuers,

including,

but

not

limited

to,

certain

ARMS,

commercial

mortgage-backed

securities

(CMBS),

non-agency

residential

mortgage-backed

securities

(RMBS),

credit

risk

transfer

securities,

home

equity

loan

asset-backed

securities

(HELs),

manufactured

housing

asset-backed

securities

(MHs)

and

collateralized

mortgage

obligations

(CMOs),

as

well

as

in

other

mortgage-related

asset-backed

securities.

The

Fund

also

may

invest

in

U.S.

Treasury

securities.

The

Fund

may

invest

up

to

15%

of

its

net

assets

in

foreign

securities,

which

may

include

non-U.S.

dollar

denominated

foreign

mortgage

securities.

In

addition,

the

Fund

may

invest

up

to

20%

of

its

net

assets

in

high-yield,

lower-quality

securities

rated,

at

the

time

of

purchase,

below

BBB

by

Standard

&

Poor’s,

or

Baa

by

Moody’s,

respectively,

or,

if

unrated,

deemed

to

be

of

comparable

quality

by

the

investment

manager.

The

Fund

may

also

invest

up

to

33%

of

its

gross

assets

in

mortgage

dollar

rolls.

The

Fund

may

invest

a

small

portion

of

its

assets

directly

in

whole

mortgage

loans.

Manager’s

Discussion

For

the

Bloomberg

Barclays

indexes

in

which

the

Fund

invests,

all

sectors

posted

positive

total

returns

over

the

12-month

period.

Interest-rates

generally

were

rangebound

for

the

first

half

of

the

reporting

period

but

ended

the

period

significantly

lower

across

the

yield

curve.

As

the

seriousness

of

the

COVID-19

pandemic

became

increasingly

apparent

over

the

first

quarter

of

2020,

risk

aversion

and

volatility

in

financial

markets

rose

sharply

and

U.S.

Treasuries

rallied.

The

10-year

Treasury

declined

99

basis

points

(bps)

over

the

12-months,

ending

the

period

at

0.69%.

Securitized

sectors

posted

positive

total

returns

over

the

period

and

with

the

exception

of

CMBS,

outperformed

U.S.

Treasuries.

Within

the

MBS

sector,

Fannie

Mae

(FNMA)

MBS

was

the

best

performer,

followed

by

Freddie

Mac

(FHLMC)

MBS

and

Ginnie

Mae

(GNMA)

MBS.

Conventional

15-year

MBS

generally

outperformed

their

30-year

counterparts.

Furthermore,

the

conventional

30-year

MBS

sector

underperformed

comparable

FHLMC

and

GNMA

MBS

on

an

excess

return

basis.

Across

the

conventional

coupon

stack,

2.0%,

2.5%

and

4.5%

coupons

were

the

best

performers

while

3.0%,

and

3.5%

coupons

lagged.

The

U.S.

housing

sector

was

fundamentally

sound

coming

into

the

most

recent

economic

downturn

and

it

is

our

expectation

that

current

supply

and

demand

forces

remain

supportive

of

the

sector.

U.S.

housing

market

activity

continued

at

a

brisk

pace

in

August

2020,

as

COVID-

19’s

pent-up

demand

fueled

by

historically

low

mortgage

interest

rates

met

with

a

dwindling

supply.

New

and

existing

home

sales

continued

to

grow

in

August

2020

and

were

significantly

higher

than

2019

levels.

Pending

home

sales

also

hit

an

all-time

high.

Measures

of

future

housing

activity

including

building

permits

and

new

housing

starts

showed

some

signs

of

weakening.

In

terms

of

home

prices,

the

S&P

CoreLogic

Case-Shiller

20-City

survey

recorded

that

home

prices

increased

0.6%

in

July

2020,

and

4.0%

from

the

year

prior.

Similarly,

the

Federal

Housing

Financing

Authority

reported

home

prices

were

up

6.5%

over

the

12-month

period.

Prepayment

risk

remained

elevated

with

mortgage

rates

near

record

lows.

While

prepayments

have

increased

year-to-date,

overall

prepayment

activity

has

been

somewhat

constrained

due

to

elevated

primary

and

secondary

market

spreads.

As

the

economy

recovers,

we

expect

prepayments

to

rise

with

currently

79%

of

the

agency

MBS

universe

having

an

incentive

to

refinance

at

current

rates.

Additionally,

if

the

primary/secondary

spreads

were

to

normalize

to

historical

averages,

99%

of

the

mortgages

in

the

universe

would

have

an

incentive

to

be

refinanced.

An

increase

in

forbearance

requests

starting

in

March

2020,

contributed

to

higher

involuntary

prepayments

and

an

increase

in

overall

Franklin

Strategic

Mortgage

Portfolio

5

franklintempleton.com

Annual

Report

prepayment

speeds.

However,

forbearance

requests

have

declined

recently,

which

could

lead

to

lower

involuntary

prepayments

in

the

coming

months.

Through

the

end

of

September

2020,

the

Fed

had

purchased

over

$1.1

trillion

of

agency

MBS.

Their

sizable

purchases

of

agency

MBS

will

continue

to

support

the

market,

potentially

limiting

spread

widening

and

keeping

spreads

rangebound,

which

would

benefit

lower

coupons

and

their

mortgage

dollar

rolls.

In

terms

of

our

sector

allocation,

we

maintained

our

largest

allocations

in

fixed-rate

agency

MBS,

but

are

underweight

the

sector

relative

to

the

benchmark.

The

elevated

prepayment

risk,

combined

with

yield

spreads

near

their

long-term

averages,

led

us

to

retain

our

neutral

view

of

the

asset

class.

While

we

remain

neutral,

we

believe

there

is

room

to

add

MBS

on

market

dips,

and

the

asset

class

continues

to

provide

good

carry

and

can

benefit

from

crossover

buying.

Within

the

agency

MBS

sector,

we

favored

conventional

sectors

over

GNMA

MBS

and

increased

our

allocation

to

FNMA

2.5%

coupon

securities

and

reduced

our

exposure

to

FHLMC

3.5%

and

GNMA

II

3.5%

MBS.

The

portfolio’s

heaviest

mortgage

allocations

were

in

FNMA

3.0%

and

3.5%

coupons.

We

pared

exposure

over

the

period

but

maintained

an

overweight

allocation

to

non-agency

RMBS

as

we

still

expect

to

provide

strong

risk-adjusted

returns,

but

from

a

broader

perspective

the

potential

economic

headwinds

and

generally

supportive

valuations

balance

each

other

out.

We

expect

issuance

in

RMBS

to

remain

light

for

2020,

particularly

in

seasoned

credit

risk

transfers

(CRTs).

Overall

spreads

in

the

sector

have

recovered

80%–95%

since

the

wide’s

seen

in

March

2020,

but

early

fixed

severity

deals,

which

did

not

contain

natural

disaster

language

have

only

recovered

60%

from

its

widest

in

mid-May

2020.

Our

positioning

is

weighted

to

seasoned

CRTs,

followed

by

reperforming

loans,

2.0

prime

jumbo,

single-family

rental

and

legacy

securities.

We

anticipate

2016

CRT

cohorts

to

provide

the

highest

risk-

adjusted

return

potential.

We

reduced

allocation

to

CMBS

and

continue

to

remain

bearish

on

the

sector

as

the

downside

risks

outweigh

the

upside

potential

and

are

positioned

up

the

capital

structure

in

CMBS

transactions

with

solid

credit

fundamentals.

Sector

allocation

to

agency

MBS

was

the

top

contributor

to

performance

and

security

selection

within

the

sector.

CMBS

also

benefitted

performance.

In

contrast,

our

positions

in

non-agency

residential

MBS

and

adjustable-rate

mortgage

securities

detracted

from

results.

Our

duration

positioning

detracted

from

relative

performance

as

interest-rate

movements

hurt

the

portfolio.

Thank

you

for

your

continued

participation

in

Franklin

Strategic

Mortgage

Portfolio.

We

look

forward

to

serving

your

future

investment

needs.

Sincerely,

Neil

Dhruv

Co-Lead

Portfolio

Manager

David

Yuen,

CFA,

FRM

Co-Lead

Portfolio

Manager

Paul

Varunok

Co-Lead

Portfolio

Manager

The

foregoing

information

reflects

our

analysis,

opinions

and

portfolio

holdings

as

of

September

30,

2020,

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.

Performance

Summary

as

of

September

30,

2020

Franklin

Strategic

Mortgage

Portfolio

6

franklintempleton.com

Annual

Report

The

performance

tables

and

graphs

do

not

reflect

any

taxes

that

a

shareholder

would

pay

on

Fund

dividends,

capital

gain

distributions,

if

any,

or

any

realized

gains

on

the

sale

of

Fund

shares.

Total

return

reflects

reinvestment

of

the

Fund’s

dividends

and

capital

gain

distributions,

if

any,

and

any

unrealized

gains

or

losses.

Your

dividend

income

will

vary

depending

on

dividends

or

interest

paid

by

securities

in

the

Fund’s

portfolio,

adjusted

for

operating

expenses

of

each

class.

Capital

gain

distributions

are

net

profits

realized

from

the

sale

of

portfolio

securities.

Performance

as

of

9/30/20

1

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

3.75%

and

the

minimum

is

0%.

Class

A

:

3.75%

maximum

initial

sales

charge;

Advisor

Class:

no

sales

charges.

For

other

share

classes,

visit

franklintempleton.com.

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

.

Share

Class

Cumulative

Total

Return

2

Average

Annual

Total

Return

3

–

A

4,5

1-Year

+3.05%

-0.81%

5-Year

+12.71%

+1.64%

10-Year

+40.90%

+3.09%

Advisor

6

1-Year

+3.30%

+3.30%

5-Year

+14.12%

+2.68%

10-Year

+44.30%

+3.74%

30-Day

Standardized

Yield

8

Share

Class

Distribution

Rate

7

(with

fee

waiver)

(without

fee

waiver)

A

1.45%

1.25%

0.99%

Advisor

1.76%

1.55%

1.28%

See

page

8

for

Performance

Summary

footnotes.

Franklin

Strategic

Mortgage

Portfolio

Performance

Summary

7

franklintempleton.com

Annual

Report

See

page

8

for

Performance

Summary

footnotes.

Total

Return

Index

Comparison

for

a

Hypothetical

$10,000

Investment

1

Total

return

represents

the

change

in

value

of

an

investment

over

the

periods

shown.

It

includes

any

applicable

maximum

sales

charge,

Fund

expenses,

account

fees

and

reinvested

distributions.

The

unmanaged

indexes

include

reinvestment

of

any

income

or

distributions.

They

differ

from

the

Fund

in

composition

and

do

not

pay

management

fees

or

expenses.

One

cannot

invest

directly

in

an

index.

Class

A

(10/1/10–

9/30/20

)

Advisor

Class

(

10/1/10

–

9/30/20

)

Franklin

Strategic

Mortgage

Portfolio

Performance

Summary

8

franklintempleton.com

Annual

Report

Each

class

of

shares

is

available

to

certain

eligible

investors

and

has

different

annual

fees

and

expenses,

as

described

in

the

prospectus.

All

investments

involve

risks,

including

possible

loss

of

principal.

The

Fund’s

share

price

and

yield

will

be

affected

by

interest

rate

movements

and

mortgage

prepayments.

During

periods

of

declining

interest

rates,

principal

prepayments

tend

to

increase

as

borrowers

refinance

their

mortgages

at

lower

rates;

therefore

the

Fund

may

be

forced

to

reinvest

returned

principal

at

lower

interest

rates,

reducing

income.

Bond

prices

generally

move

in

the

opposite

direction

of

interest

rates.

Thus,

as

prices

of

bonds

in

the

Fund

adjust

to

a

rise

in

interest

rates,

the

Fund’s

share

price

may

decline.

The

Fund

may

be

affected

by

issuers

that

fail

to

make

interest

payments

and

repay

principal

when

due.

Changes

in

the

financial

strength

of

a

bond

issuer

or

in

a

bond’s

credit

rating

may

affect

its

value.

Unex-

pected

events

and

their

aftermaths,

such

as

the

spread

of

deadly

diseases;

natural,

environmental

or

man-made

disasters;

financial,

political

or

social

disrup-

tions;

terrorism

and

war;

and

other

tragedies

or

catastrophes,

can

cause

investor

fear

and

panic,

which

can

adversely

affect

the

economies

of

many

companies,

sectors,

nations,

regions

and

the

market

in

general,

in

ways

that

cannot

necessarily

be

foreseen.

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

1/31/21.

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.

Performance

quotations

for

Class

A

shares

reflect

the

following

methods

of

calculation:

(a)

For

periods

prior

to

2/1/12,

a

restated

figure

is

used

based

on

Class

A1

perfor-

mance

and

including

the

Class

A

Rule

12b-1

fee,

and

(b)

for

periods

after

2/1/12,

actual

Class

A

performance

is

used,

reflecting

all

charges

and

fees

applicable

to

that

class.

5.

Prior

to

3/1/19,

these

shares

were

offered

at

a

higher

initial

sales

charge

of

4.25%,

thus

actual

returns

(with

sales

charges)

would

have

differed.

Average

annual

total

returns

(with

sales

charges)

have

been

restated

to

reflect

the

current

maximum

initial

sales

charge

of

3.75%.

6.

Effective

2/1/12,

the

Fund

began

offering

Advisor

Class

shares,

which

do

not

have

sales

charges

or

a

Rule

12b-1

fee.

Performance

quotations

for

this

class

reflect

the

fol-

lowing

methods

of

calculation:

(a)

For

periods

prior

to

2/1/12,

a

restated

figure

is

used

based

on

the

Fund’s

oldest

share

class,

Class

A1,

excluding

the

effect

of

its

maximum

initial

sales

charge;

and

(b)

for

periods

after

2/1/12,

actual

Advisor

Class

performance

is

used,

reflecting

all

charges

and

fees

applicable

to

that

class.

7.

Distribution

rate

is

based

on

an

annualization

of

the

sum

of

distributions

per

share

for

the

30

days

of

September

and

the

maximum

offering

price

(NAV

for

Advisor

Class)

on

9/30/20.

8.

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.

9.

Source:

Morningstar.

The

Bloomberg

Barclays

U.S.

MBS

Fixed

Rate

Index

is

the

fixed-rate

component

of

the

Bloomberg

Barclays

U.S.

MBS

Index

and

includes

the

agency

mortgage-backed

pass-through

securities

of

Ginnie

Mae

(GNMA),

Fannie

Mae

(FNMA)

and

Freddie

Mac

(FHLMC).

The

FTSE

USBIG

Mortgage

Index

comprises

30-

and

15-year

GNMA,

FNMA

and

FHLMC

securities,

as

well

as

FNMA

and

FHLMC

balloon

mortgages,

and

is

reconstituted

each

month

to

reflect

new

issuance

and

principal

pay-downs.

10.

Figures

are

as

stated

in

the

Fund’s

current

prospectus

and

may

differ

from

the

expense

ratios

disclosed

in

the

Your

Fund’s

Expenses

and

Financial

Highlights

sections

in

this

report.

In

periods

of

market

volatility,

assets

may

decline

significantly,

causing

total

annual

Fund

operating

expenses

to

become

higher

than

the

figures

shown.

See

www.franklintempletondatasources.com

for

additional

data

provider

information.

Distributions

(10/1/19–9/30/20)

Share

Class

Net

Investment

Income

A

$0.218192

A1

$0.241406

C

$0.181452

R6

$0.253131

Advisor

$0.240784

Total

Annual

Operating

Expenses

10

Share

Class

With

Fee

Waiver

Without

Fee

Waiver

A

1.01%

1.25%

Advisor

0.76%

1.00%

Your

Fund’s

Expenses

Franklin

Strategic

Mortgage

Portfolio

9

franklintempleton.com

Annual

Report

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.

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

183/366

to

reflect

the

one-half

year

period.

2.

Reflects

expenses

after

fee

waivers

and

expense

reimbursements.

Does

not

include

acquired

fund

fees

and

expenses.

Actual

(actual

return

after

expenses)

Hypothetical

(5%

annual

return

before

expenses)

Share

Class

Beginning

Account

Value

4/1/20

Ending

Account

Value

9/30/20

Expenses

Paid

During

Period

4/1/20–9/30/20

1,2

Ending

Account

Value

9/30/20

Expenses

Paid

During

Period

4/1/20–9/30/20

1,2

a

Net

Annualized

Expense

Ratio

2

A

$1,000

$1,020.81

$5.05

$1,020.00

$5.05

1.00%

A1

$1,000

$1,022.05

$3.80

$1,021.24

$3.80

0.75%

C

$1,000

$1,018.80

$7.08

$1,017.99

$7.07

1.40%

R6

$1,000

$1,022.78

$2.68

$1,022.35

$2.68

0.62

%

Advisor

$1,000

$1,022.06

$3.81

$1,021.23

$3.81

0.75%

Franklin

Strategic

Mortgage

Portfolio

Financial

Highlights

franklintempleton.com

Annual

Report

The

accompanying

notes

are

an

integral

part

of

these

financial

statements.

10

a

Year

Ended

September

30,

2020

2019

2018

2017

2016

Class

A

Per

share

operating

performance

(for

a

share

outstanding

throughout

the

year)

Net

asset

value,

beginning

of

year

...................

$9.25

$8.93

$9.34

$9.57

$9.49

Income

from

investment

operations

a

:

Net

investment

income

..........................

0.188

0.267

0.243

b

0.147

0.144

Net

realized

and

unrealized

gains

(losses)

...........

0.090

0.355

(0.359)

(0.106)

0.135

Total

from

investment

operations

....................

0.278

0.622

(0.116)

0.041

0.279

Less

distributions

from:

Net

investment

income

..........................

(0.218)

(0.302)

(0.294)

(0.267)

(0.199)

Tax

return

of

capital

............................

—

—

—

(0.004)

—

Total

distributions

...............................

(0.218)

(0.302)

(0.294)

(0.271)

(0.199)

Net

asset

value,

end

of

year

.......................

$9.31

$9.25

$8.93

$9.34

$9.57

Total

return

c

...................................

3.05%

7.08%

(1.25)%

0.45%

2.98%

Ratios

to

average

net

assets

Expenses

before

waiver

and

payments

by

affiliates

......

1.31%

1.24%

1.21%

1.17%

1.00%

Expenses

net

of

waiver

and

payments

by

affiliates

d

......

1.00%

1.00%

1.06%

1.16%

0.99%

Net

investment

income

...........................

1.85%

2.93%

2.67%

1.82%

1.47%

Supplemental

data

Net

assets,

end

of

year

(000’s)

.....................

$24,153

$18,313

$16,303

$21,143

$34,191

Portfolio

turnover

rate

............................

249.94%

223.36%

243.65%

244.09%

551.77%

Portfolio

turnover

rate

excluding

mortgage

dollar

rolls

e

....

187.45%

139.83%

153.69%

111.62%

185.40%

a

The

amount

shown

for

a

share

outstanding

throughout

the

period

may

not

correlate

with

the

Statement

of

Operations

for

the

period

due

to

the

timing

of

sales

and

repurchas-

es

of

the

Fund’s

shares

in

relation

to

income

earned

and/or

fluctuating

fair

value

of

the

investments

of

the

Fund.

b

Based

on

average

daily

shares

outstanding.

c

Total

return

does

not

reflect

sales

commissions

or

contingent

deferred

sales

charges,

if

applicable.

d

Benefit

of

expense

reduction

rounds

to

less

than

0.01%.

e

See

Note

1(d)

regarding

mortgage

dollar

rolls.

Franklin

Strategic

Mortgage

Portfolio

Financial

Highlights

franklintempleton.com

The

accompanying

notes

are

an

integral

part

of

these

financial

statements.

Annual

Report

11

a

Year

Ended

September

30,

2020

2019

2018

2017

2016

Class

A1

Per

share

operating

performance

(for

a

share

outstanding

throughout

the

year)

Net

asset

value,

beginning

of

year

...................

$9.25

$8.94

$9.35

$9.58

$9.49

Income

from

investment

operations

a

:

Net

investment

income

..........................

0.191

0.285

0.268

b

0.177

0.160

Net

realized

and

unrealized

gains

(losses)

...........

0.110

0.349

(0.360)

(0.113)

0.153

Total

from

investment

operations

....................

0.301

0.634

(0.092)

0.064

0.313

Less

distributions

from:

Net

investment

income

..........................

(0.241)

(0.324)

(0.318)

(0.289)

(0.223)

Tax

return

of

capital

............................

—

—

—

(0.005)

—

Total

distributions

...............................

(0.241)

(0.324)

(0.318)

(0.294)

(0.223)

Net

asset

value,

end

of

year

.......................

$9.31

$9.25

$8.94

$9.35

$9.58

Total

return

c

...................................

3.30%

7.22%

(1.00)%

0.70%

3.34%

Ratios

to

average

net

assets

Expenses

before

waiver

and

payments

by

affiliates

......

1.05%

0.99%

0.96%

0.92%

0.75%

Expenses

net

of

waiver

and

payments

by

affiliates

d

......

0.75%

0.75%

0.81%

0.91%

0.74%

Net

investment

income

...........................

2.14%

3.18%

2.92%

2.07%

1.72%

Supplemental

data

Net

assets,

end

of

year

(000’s)

.....................

$27,530

$29,286

$32,802

$40,844

$53,432

Portfolio

turnover

rate

............................

249.94%

223.36%

243.65%

244.09%

551.77%

Portfolio

turnover

rate

excluding

mortgage

dollar

rolls

e

....

187.45%

139.83%

153.69%

111.62%

185.40%

a

The

amount

shown

for

a

share

outstanding

throughout

the

period

may

not

correlate

with

the

Statement

of

Operations

for

the

period

due

to

the

timing

of

sales

and

repurchas-

es

of

the

Fund’s

shares

in

relation

to

income

earned

and/or

fluctuating

fair

value

of

the

investments

of

the

Fund.

b

Based

on

average

daily

shares

outstanding.

c

Total

return

does

not

reflect

sales

commissions

or

contingent

deferred

sales

charges,

if

applicable.

d

Benefit

of

expense

reduction

rounds

to

less

than

0.01%.

e

See

Note

1(d)

regarding

mortgage

dollar

rolls.

Franklin

Strategic

Mortgage

Portfolio

Financial

Highlights

franklintempleton.com

Annual

Report

The

accompanying

notes

are

an

integral

part

of

these

financial

statements.

12

a

Year

Ended

September

30,

2020

2019

2018

2017

2016

Class

C

Per

share

operating

performance

(for

a

share

outstanding

throughout

the

year)

Net

asset

value,

beginning

of

year

...................

$9.25

$8.93

$9.34

$9.57

$9.49

Income

from

investment

operations

a

:

Net

investment

income

..........................

0.138

0.230

0.207

b

0.112

0.112

Net

realized

and

unrealized

gains

(losses)

...........

0.103

0.355

(0.359)

(0.109)

0.130

Total

from

investment

operations

....................

0.241

0.585

(0.152)

0.003

0.242

Less

distributions

from:

Net

investment

income

..........................

(0.181)

(0.265)

(0.258)

(0.229)

(0.162)

Tax

return

of

capital

............................

—

—

—

(0.004)

—

Total

distributions

...............................

(0.181)

(0.265)

(0.258)

(0.233)

(0.162)

Net

asset

value,

end

of

year

.......................

$9.31

$9.25

$8.93

$9.34

$9.57

Total

return

c

...................................

2.64%

6.65%

(1.64)%

0.06%

2.57%

Ratios

to

average

net

assets

Expenses

before

waiver

and

payments

by

affiliates

......

1.70%

1.64%

1.61%

1.57%

1.40%

Expenses

net

of

waiver

and

payments

by

affiliates

d

......

1.40%

1.40%

1.46%

1.56%

1.39%

Net

investment

income

...........................

1.47%

2.53%

2.27%

1.42%

1.07%

Supplemental

data

Net

assets,

end

of

year

(000’s)

.....................

$3,960

$3,843

$4,513

$6,308

$9,468

Portfolio

turnover

rate

............................

249.94%

223.36%

243.65%

244.09%

551.77%

Portfolio

turnover

rate

excluding

mortgage

dollar

rolls

e

....

187.45%

139.83%

153.69%

111.62%

185.40%

a

The

amount

shown

for

a

share

outstanding

throughout

the

period

may

not

correlate

with

the

Statement

of

Operations

for

the

period

due

to

the

timing

of

sales

and

repurchas-

es

of

the

Fund’s

shares

in

relation

to

income

earned

and/or

fluctuating

fair

value

of

the

investments

of

the

Fund.

b

Based

on

average

daily

shares

outstanding.

c

Total

return

does

not

reflect

sales

commissions

or

contingent

deferred

sales

charges,

if

applicable.

d

Benefit

of

expense

reduction

rounds

to

less

than

0.01%.

e

See

Note

1(d)

regarding

mortgage

dollar

rolls.

Franklin

Strategic

Mortgage

Portfolio

Financial

Highlights

franklintempleton.com

The

accompanying

notes

are

an

integral

part

of

these

financial

statements.

Annual

Report

13

a

Year

Ended

September

30,

Period

Ended

September

30,

2017

a

2020

2019

2018

Class

R6

Per

share

operating

performance

(for

a

share

outstanding

throughout

the

year)

Net

asset

value,

beginning

of

year

................................

$9.24

$8.92

$9.33

$9.38

Income

from

investment

operations

b

:

Net

investment

income

.......................................

0.222

0.296

0.282

c

0.003

Net

realized

and

unrealized

gains

(losses)

........................

0.081

0.360

(0.363)

(0.002)

Total

from

investment

operations

.................................

0.303

0.656

(0.081)

0.001

Less

distributions

from:

Net

investment

income

.......................................

(0.253)

(0.336)

(0.329)

(0.050)

Tax

return

of

capital

.........................................

—

—

—

(0.001)

Total

distributions

............................................

(0.253)

(0.336)

(0.329)

(0.051)

Net

asset

value,

end

of

year

....................................

$9.29

$9.24

$8.92

$9.33

Total

return

d

................................................

3.33%

7.49%

(0.87)%

0.01%

Ratios

to

average

net

assets

Expenses

before

waiver

and

payments

by

affiliates

...................

1.07%

1.00%

1.01%

1.83%

Expenses

net

of

waiver

and

payments

by

affiliates

e

...................

0.62%

0.62%

0.69%

0.75%

Net

investment

income

........................................

2.17%

3.31%

3.04%

2.23%

Supplemental

data

Net

assets,

end

of

year

(000’s)

..................................

$559

$383

$432

$5

Portfolio

turnover

rate

.........................................

249.94%

223.36%

243.65%

244.09%

Portfolio

turnover

rate

excluding

mortgage

dollar

rolls

f

.................

187.45%

139.83%

153.69%

111.62%

a

For

the

period

August

1,

2017

(effective

date)

to

September

30,

2017.

b

The

amount

shown

for

a

share

outstanding

throughout

the

period

may

not

correlate

with

the

Statement

of

Operations

for

the

period

due

to

the

timing

of

sales

and

repurchas-

es

of

the

Fund’s

shares

in

relation

to

income

earned

and/or

fluctuating

fair

value

of

the

investments

of

the

Fund.

c

Based

on

average

daily

shares

outstanding.

d

Total

return

is

not

annualized

for

periods

less

than

one

year.

e

Benefit

of

expense

reduction

rounds

to

less

than

0.01%.

f

See

Note

1(d)

regarding

mortgage

dollar

rolls.

Franklin

Strategic

Mortgage

Portfolio

Financial

Highlights

franklintempleton.com

Annual

Report

The

accompanying

notes

are

an

integral

part

of

these

financial

statements.

14

a

Year

Ended

September

30,

2020

2019

2018

2017

2016

Advisor

Class

Per

share

operating

performance

(for

a

share

outstanding

throughout

the

year)

Net

asset

value,

beginning

of

year

...................

$9.24

$8.93

$9.33

$9.57

$9.48

Income

from

investment

operations

a

:

Net

investment

income

..........................

0.192

0.284

0.268

b

0.187

0.146

Net

realized

and

unrealized

gains

(losses)

...........

0.109

0.350

(0.351)

(0.133)

0.166

Total

from

investment

operations

....................

0.301

0.634

(0.083)

0.054

0.312

Less

distributions

from:

Net

investment

income

..........................

(0.241)

(0.324)

(0.317)

(0.289)

(0.222)

Tax

return

of

capital

............................

—

—

—

(0.005)

—

Total

distributions

...............................

(0.241)

(0.324)

(0.317)

(0.294)

(0.222)

Net

asset

value,

end

of

year

.......................

$9.30

$9.24

$8.93

$9.33

$9.57

Total

return

....................................

3.30%

7.23%

(1.00)%

0.70%

3.34%

Ratios

to

average

net

assets

Expenses

before

waiver

and

payments

by

affiliates

......

1.05%

0.99%

0.96%

0.92%

0.75%

Expenses

net

of

waiver

and

payments

by

affiliates

c

......

0.75%

0.75%

0.81%

0.91%

0.74%

Net

investment

income

...........................

2.14%

3.18%

2.92%

2.07%

1.72%

Supplemental

data

Net

assets,

end

of

year

(000’s)

.....................

$9,609

$10,907

$6,574

$7,632

$8,264

Portfolio

turnover

rate

............................

249.94%

223.36%

243.65%

244.09%

551.77%

Portfolio

turnover

rate

excluding

mortgage

dollar

rolls

d

....

187.45%

139.83%

153.69%

111.62%

185.40%

a

The

amount

shown

for

a

share

outstanding

throughout

the

period

may

not

correlate

with

the

Statement

of

Operations

for

the

period

due

to

the

timing

of

sales

and

repurchas-

es

of

the

Fund’s

shares

in

relation

to

income

earned

and/or

fluctuating

fair

value

of

the

investments

of

the

Fund.

b

Based

on

average

daily

shares

outstanding.

c

Benefit

of

expense

reduction

rounds

to

less

than

0.01%.

d

See

Note

1(d)

regarding

mortgage

dollar

rolls.

Franklin

Strategic

Mortgage

Portfolio

Statement

of

Investments,

September

30,

2020

franklintempleton.com

The

accompanying

notes

are

an

integral

part

of

these

financial

statements.

Annual

Report

15

a

a

Principal

Amount

a

Value

a

a

a

a

a

Corporate

Bonds

0.2%

Equity

Real

Estate

Investment

Trusts

(REITs)

0.2%

American

Homes

4

Rent

LP

,

Senior

Note

,

4.25

%

,

2/15/28

.....................

$

100,000

$

113,435

Insurance

0.0%

†

a,b

Ambac

Assurance

Corp.

,

Sub.

Bond

,

144A

,

5.1

%

,

Perpetual

...................

237

325

b,c

Ambac

LSNI

LLC

,

Senior

Note

,

144A

,

FRN

,

6.45

%

,

(

3-month

USD

LIBOR

+

5

%

),

2/12/23

.........................................................

873

874

1,199

Total

Corporate

Bonds

(Cost

$100,667)

........................................

114,634

U.S.

Government

and

Agency

Securities

0.9%

U.S.

Treasury

Bonds

,

4.75%,

2/15/37

...................................................

225,000

354,595

4.25%,

11/15/40

...................................................

131,000

203,423

Total

U.S.

Government

and

Agency

Securities

(Cost

$469,416)

....................

558,018

Asset-Backed

Securities

5.3%

Diversified

Financial

Services

4.9%

b

American

Homes

4

Rent

Trust

,

2015-SFR1

,

A

,

144A

,

3.467

%

,

4/17/52

...........

145,067

155,352

b

CF

Hippolyta

LLC

,

2020-1

,

A1

,

144A

,

1.69

%

,

7/15/60

........................

120,000

121,675

d

CWABS,

Inc.

,

2004-1

,

M1

,

FRN

,

0.898

%

,

(

1-month

USD

LIBOR

+

0.75

%

),

3/25/34

..

34,063

33,962

b,d

Invitation

Homes

Trust

,

2018-SFR4

,

A

,

144A

,

FRN

,

1.251

%

,

(

1-month

USD

LIBOR

+

1.1

%

),

1/17/38

....................................................

180,218

180,842

b,e

Mill

City

Mortgage

Loan

Trust

,

2016-1,

A1,

144A,

FRN,

2.5%,

4/25/57

..................................

48,730

49,418

2018-2,

A1,

144A,

FRN,

3.5%,

5/25/58

..................................

147,912

154,472

2018-1,

A1,

144A,

FRN,

3.25%,

5/25/62

.................................

104,785

109,457

2018-4,

A1B,

144A,

FRN,

3.5%,

4/25/66

.................................

176,156

187,390

b

Progress

Residential

Trust

,

2018-SFR2

,

A

,

144A

,

3.712

%

,

8/17/35

..............

200,000

205,634

e

RASC

Trust

,

2004-KS8

,

AI6

,

FRN

,

4.79

%

,

9/25/34

...........................

96

96

b

Towd

Point

Mortgage

Trust

,

e

2015-2,

1A12,

144A,

FRN,

2.75%,

11/25/60

..............................

99,341

100,550

e

2016-1,

A1,

144A,

FRN,

3.5%,

2/25/55

..................................

73,560

74,910

e

2016-3,

A1,

144A,

FRN,

2.25%,

4/25/56

.................................

102,886

104,320

e

2016-4,

A1,

144A,

FRN,

2.25%,

7/25/56

.................................

119,318

121,293

e

2016-5,

A1,

144A,

FRN,

2.5%,

10/25/56

.................................

237,957

243,424

e

2017-1,

A1,

144A,

FRN,

2.75%,

10/25/56

................................

188,996

193,938

d

2017-5,

A1,

144A,

FRN,

0.748%,

(1-month

USD

LIBOR

+

0.6%),

2/25/57

........

53,125

53,053

e

2017-2,

A1,

144A,

FRN,

2.75%,

4/25/57

.................................

49,929

51,388

e

2017-4,

A1,

144A,

FRN,

2.75%,

6/25/57

.................................

219,193

227,553

e

2018-1,

A1,

144A,

FRN,

3%,

1/25/58

...................................

59,634

62,274

e

2018-2,

A1,

144A,

FRN,

3.25%,

3/25/58

.................................

130,160

136,872

e

2019-1,

A1,

144A,

FRN,

3.75%,

3/25/58

.................................

224,608

243,601

e

2018-6,

A1A,

144A,

FRN,

3.75%,

3/25/58

................................

109,786

116,363

e

2018-5,

A1A,

144A,

FRN,

3.25%,

7/25/58

................................

69,113

72,975

e

2015-3,

A1B,

144A,

FRN,

3%,

3/25/54

..................................

32,590

32,864

e

2017-1,

A2,

144A,

FRN,

3.5%,

10/25/56

.................................

165,000

178,102

3,211,778

a

a

a

a

a

Thrifts

&

Mortgage

Finance

0.4%

e

Conseco

Finance

Corp.

,

1998-4,

A7,

FRN,

6.87%,

4/01/30

......................................

23,201

23,828

1998-6,

A8,

FRN,

6.66%,

6/01/30

......................................

33,476

34,017

Franklin

Strategic

Mortgage

Portfolio

Statement

of

Investments

franklintempleton.com

Annual

Report

The

accompanying

notes

are

an

integral

part

of

these

financial

statements.

16

a

a

Principal

Amount

a

Value

a

a

a

a

a

Asset-Backed

Securities

(continued)

Thrifts

&

Mortgage

Finance

(continued)

e

Conseco

Finance

Securitizations

Corp.

,

2002-2

,

M1

,

FRN

,

7.424

%

,

3/01/33

.......

$

211,829

$

223,605

281,450

a

a

a

a

a

Total

Asset-Backed

Securities

(Cost

$3,382,160)

................................

3,493,228

Commercial

Mortgage-Backed

Securities

12.5%

Capital

Markets

0.1%

d

Merrill

Lynch

Mortgage

Investors

Trust

,

2003-A

,

1A

,

FRN

,

0.888

%

,

(

1-month

USD

LIBOR

+

0.74

%

),

3/25/28

............................................

68,734

66,892

Diversified

Financial

Services

3.7%

d

American

Home

Mortgage

Investment

Trust

,

2005-1

,

6A

,

FRN

,

2.314

%

,

(

6-month

USD

LIBOR

+

2

%

),

6/25/45

..............................................

64,319

65,030

b,f

Anthracite

Ltd.

,

2004-HY1A

,

E

,

144A

,

7.147

%

,

6/20/41

.......................

1,598,000

24

b,d

Bellemeade

Re

Ltd.

,

2018-1A

,

M1B

,

144A

,

FRN

,

1.748

%

,

(

1-month

USD

LIBOR

+

1.6

%

),

4/25/28

....................................................

63,472

62,883

b

BRAVO

Residential

Funding

Trust

,

2019-1,

A1C,

144A,

3.5%,

3/25/58

.....................................

94,438

97,910

e

2019-2,

A3,

144A,

FRN,

3.5%,

10/25/44

.................................

117,167

124,303

b,d

BX

Commercial

Mortgage

Trust

,

2018-IND,

A,

144A,

FRN,

0.902%,

(1-month

USD

LIBOR

+

0.75%),

11/15/35

.....

55,222

55,323

2019-XL,

A,

144A,

FRN,

1.072%,

(1-month

USD

LIBOR

+

0.92%),

10/15/36

......

161,381

161,719

2020-BXLP,

A,

144A,

FRN,

0.952%,

(1-month

USD

LIBOR

+

0.8%),

12/15/36

.....

199,817

200,079

b

CIM

Trust

,

e

2019-INV1,

A1,

144A,

FRN,

4%,

2/25/49

................................

103,075

106,689

d

2019-INV2,

A11,

144A,

FRN,

1.125%,

(1-month

USD

LIBOR

+

0.95%),

5/25/49

...

249,423

249,704

e

2019-INV2,

A3,

144A,

FRN,

4%,

5/25/49

................................

157,136

163,073

e

2018-INV1,

A4,

144A,

FRN,

4%,

8/25/48

................................

95,355

98,958

b,e

Citigroup

Mortgage

Loan

Trust

,

2013-A

,

A

,

144A

,

FRN

,

3

%

,

5/25/42

.............

10,059

9,661

e

Commercial

Mortgage

Trust

,

2006-GG7

,

AJ

,

FRN

,

5.655

%

,

7/10/38

..............

45,345

39,948

b,e

CSMC

Trust

,

2014-OAK1

,

1A1

,

144A

,

FRN

,

3

%

,

11/25/29

.....................

75,170

77,559

b,e

Flagstar

Mortgage

Trust

,

2018-6RR

,

1A3

,

144A

,

FRN

,

4

%

,

10/25/48

.............

56,787

57,526

e

GE

Commercial

Mortgage

Corp.

Trust

,

2007-C1

,

AM

,

FRN

,

5.606

%

,

12/10/49

......

59,561

32,786

b,e

J.P.

Morgan

Mortgage

Trust

,

2013-3

,

A3

,

144A

,

FRN

,

3.373

%

,

7/25/43

...........

148,352

157,492

b,d

OBX

Trust

,

2018-1

,

A2

,

144A

,

FRN

,

0.798

%

,

(

1-month

USD

LIBOR

+

0.65

%

),

6/25/57

66,641

66,708

b,e

Provident

Funding

Mortgage

Trust

,

2019-1,

A3,

144A,

FRN,

3%,

12/25/49

..................................

79,058

80,364

2020-1,

A3,

144A,

FRN,

3%,

2/25/50

...................................

83,732

85,491

b,d

Radnor

Re

Ltd.

,

2018-1

,

M1

,

144A

,

FRN

,

1.548

%

,

(

1-month

USD

LIBOR

+

1.4

%

),

3/25/28

.........................................................

5,888

5,884

b,e

Sequoia

Mortgage

Trust

,

2016-2

,

A4

,

144A

,

FRN

,

3.5

%

,

8/25/46

................

157,521

159,881

d

WaMu

Mortgage

Pass-Through

Trust

,

2005-AR8,

2A1A,

FRN,

0.728%,

(1-month

USD

LIBOR

+

0.58%),

7/25/45

.......

74,425

71,392

2005-AR19,

A1A1,

FRN,

0.418%,

(1-month

USD

LIBOR

+

0.27%),

12/25/45

......

122,107

120,081

b,e

Wells

Fargo

Mortgage

Backed

Securities

Trust

,

2018-1

,

A3

,

144A

,

FRN

,

3.5

%

,

7/25/47

55,664

56,350

2,406,818

a

a

a

a

a

Thrifts

&

Mortgage

Finance

8.7%

CSAIL

Commercial

Mortgage

Trust

,

2015-C1

,

A4

,

3.505

%

,

4/15/50

..............

430,000

471,514

d

FHLMC

Structured

Agency

Credit

Risk

Debt

Notes

,

2013-DN2,

M2,

FRN,

4.398%,

(1-month

USD

LIBOR

+

4.25%),

11/25/23

........

162,912

149,500

2017-DNA1,

M2,

FRN,

3.398%,

(1-month

USD

LIBOR

+

3.25%),

7/25/29

........

242,691

249,598

2017-HQA1,

M2,

FRN,

3.698%,

(1-month

USD

LIBOR

+

3.55%),

8/25/29

........

214,803

222,061

Franklin

Strategic

Mortgage

Portfolio

Statement

of

Investments

franklintempleton.com

The

accompanying

notes

are

an

integral

part

of

these

financial

statements.

Annual

Report

17

a

a

Principal

Amount

a

Value

a

a

a

a

a

Commercial

Mortgage-Backed

Securities

(continued)

Thrifts

&

Mortgage

Finance

(continued)

d

FHLMC

Structured

Agency

Credit

Risk

Debt

Notes,

(continued)

2017-DNA2,

M2,

FRN,

3.598%,

(1-month

USD

LIBOR

+

3.45%),

10/25/29

.......

$

250,000

$

258,452

2017-DNA3,

M2,

FRN,

2.648%,

(1-month

USD

LIBOR

+

2.5%),

3/25/30

.........

250,000

253,381

2017-HQA3,

M2,

FRN,

2.498%,

(1-month

USD

LIBOR

+

2.35%),

4/25/30

........

183,881

185,757

2014-DN2,

M3,

FRN,

3.748%,

(1-month

USD

LIBOR

+

3.6%),

4/25/24

..........

267,323

247,756

2014-DN3,

M3,

FRN,

4.148%,

(1-month

USD

LIBOR

+

4%),

8/25/24

...........

116,362

119,067

2014-HQ1,

M3,

FRN,

4.248%,

(1-month

USD

LIBOR

+

4.1%),

8/25/24

..........

121,464

122,818

2014-DN4,

M3,

FRN,

4.698%,

(1-month

USD

LIBOR

+

4.55%),

10/25/24

........

230,504

232,578

2014-HQ3,

M3,

FRN,

4.898%,

(1-month

USD

LIBOR

+

4.75%),

10/25/24

........

91,961

92,973

2015-DN1,

M3,

FRN,

4.298%,

(1-month

USD

LIBOR

+

4.15%),

1/25/25

.........

66,067

66,369

2015-HQ1,

M3,

FRN,

3.948%,

(1-month

USD

LIBOR

+

3.8%),

3/25/25

..........

107,675

108,332

2015-HQ2,

M3,

FRN,

3.398%,

(1-month

USD

LIBOR

+

3.25%),

5/25/25

.........

250,000

251,099

2016-DNA2,

M3,

FRN,

4.798%,

(1-month

USD

LIBOR

+

4.65%),

10/25/28

.......

176,016

183,635

2016-HQA2,

M3,

FRN,

5.298%,

(1-month

USD

LIBOR

+

5.15%),

11/25/28

.......

216,899

224,406

d

FNMA

,

2007-1

,

NF

,

FRN

,

0.398

%

,

(

1-month

USD

LIBOR

+

0.25

%

),

2/25/37

........

60,917

60,914

d

FNMA

Connecticut

Avenue

Securities

,

2014-C02,

1M2,

FRN,

2.748%,

(1-month

USD

LIBOR

+

2.6%),

5/25/24

.........

114,307

100,529

2014-C03,

1M2,

FRN,

3.148%,

(1-month

USD

LIBOR

+

3%),

7/25/24

...........

153,849

135,133

2014-C04,

1M2,

FRN,

5.048%,

(1-month

USD

LIBOR

+

4.9%),

11/25/24

.........

173,031

180,158

2015-C01,

1M2,

FRN,

4.448%,

(1-month

USD

LIBOR

+

4.3%),

2/25/25

.........

242,379

247,312

2016-C04,

1M2,

FRN,

4.398%,

(1-month

USD

LIBOR

+

4.25%),

1/25/29

........

76,773

79,841

2017-C05,

1M2,

FRN,

2.348%,

(1-month

USD

LIBOR

+

2.2%),

1/25/30

.........

184,107

182,312

2017-C06,

1M2,

FRN,

2.798%,

(1-month

USD

LIBOR

+

2.65%),

2/25/30

........

187,845

186,259

2014-C02,

2M2,

FRN,

2.748%,

(1-month

USD

LIBOR

+

2.6%),

5/25/24

.........

212,402

209,433

2014-C03,

2M2,

FRN,

3.048%,

(1-month

USD

LIBOR

+

2.9%),

7/25/24

.........

104,781

103,318

2015-C01,

2M2,

FRN,

4.698%,

(1-month

USD

LIBOR

+

4.55%),

2/25/25

........

58,322

59,030

2016-C05,

2M2,

FRN,

4.598%,

(1-month

USD

LIBOR

+

4.45%),

1/25/29

........

99,872

103,398

2017-C02,

2M2,

FRN,

3.798%,

(1-month

USD

LIBOR

+

3.65%),

9/25/29

........

189,408

192,197

2013-C01,

M2,

FRN,

5.398%,

(1-month

USD

LIBOR

+

5.25%),

10/25/23

........

199,685

195,339

2014-C01,

M2,

FRN,

4.548%,

(1-month

USD

LIBOR

+

4.4%),

1/25/24

..........

193,605

181,768

b

Virginia

Housing

Development

Authority

,

2020-A

,

A

,

144A

,

2.85

%

,

12/25/49

........

97,882

100,941

5,757,178

a

a

a

a

a

Total

Commercial

Mortgage-Backed

Securities

(Cost

$8,472,102)

.................

8,230,888

Mortgage-Backed

Securities

77.3%

Federal

Home

Loan

Mortgage

Corp.

(FHLMC)

Fixed

Rate

10.6%

FHLMC

Gold

Pools,

30

Year,

4.5%,

4/01/40

................................

381,506

429,459

FHLMC

Gold

Pools,

30

Year,

5%,

10/01/33

-

2/01/39

.........................

241,054

275,013

FHLMC

Gold

Pools,

30

Year,

5.5%,

9/01/33

................................

24,715

28,435

FHLMC

Gold

Pools,

30

Year,

6%,

7/01/28

-

11/01/36

.........................

71,329

82,483

FHLMC

Gold

Pools,

30

Year,

6.5%,

11/01/27

-

7/01/32

........................

38,588

43,215

FHLMC

Gold

Pools,

30

Year,

7.5%,

1/01/26

-

3/01/32

........................

56,658

59,919

FHLMC

Gold

Pools,

30

Year,

8%,

7/01/24

-

5/01/30

..........................

81,409

85,685

FHLMC

Gold

Pools,

30

Year,

9%,

9/01/30

.................................

8,812

8,936

FHLMC

Gold

Pools,

30

Year,

9.5%,

8/01/21

................................

84

85

FHLMC

Pool,

30

Year,

3%,

2/01/50

......................................

536,796

571,428

FHLMC

Pool,

30

Year,

3%,

5/01/50

......................................

1,406,261

1,500,917

FHLMC

Pool,

30

Year,

3.5%,

7/01/49

.....................................

2,265,669

2,430,843

FHLMC

Pool,

30

Year,

4%,

5/01/50

......................................

176,506

192,321

FHLMC

Pool,

30

Year,

4.5%,

10/01/48

....................................

1,127,036

1,258,221

6,966,960

Franklin

Strategic

Mortgage

Portfolio

Statement

of

Investments

franklintempleton.com

Annual

Report

The

accompanying

notes

are

an

integral

part

of

these

financial

statements.

18

a

a

Principal

Amount

a

Value

a

a

a

a

a

Mortgage-Backed

Securities

(continued)

g

Federal

National

Mortgage

Association

(FNMA)

Adjustable

Rate

1.0%

FNMA,

1.75%

-

4.75%,

(6-month

USD

LIBOR

+/-

MBS

Margin),

1/01/22

-

7/01/38

...

$

673,739

$

678,081

678,081

Federal

National

Mortgage

Association

(FNMA)

Fixed

Rate

62.7%

FNMA,

3.5%,

7/01/56

................................................

856,341

946,670

FNMA,

15

Year,

2.5%,

3/01/29

.........................................

504,612

528,109

FNMA,

15

Year,

2.5%,

6/01/35

.........................................

1,443,083

1,507,914

FNMA,

30

Year,

2.5%,

6/01/50

.........................................

391,198

410,747

FNMA,

30

Year,

3%,

11/01/48

..........................................

3,234,532

3,419,769

FNMA,

30

Year,

3%,

9/01/49

...........................................

493,635

522,989

FNMA,

30

Year,

3%,

9/01/49

...........................................

517,346

548,595

FNMA,

30

Year,

3.5%,

8/01/49

.........................................

2,438,321

2,609,903

FNMA,

30

Year,

3.5%,

8/01/49

.........................................

825,766

882,219

FNMA,

30

Year,

3.5%,

9/01/49

.........................................

2,364,075

2,523,357

FNMA,

30

Year,

3.5%,

1/01/50

.........................................

522,299

563,583

FNMA,

30

Year,

3.5%,

2/01/50

.........................................

507,455

545,172

FNMA,

30

Year,

4%,

11/01/45

..........................................

3,824,828

4,194,951

FNMA,

30

Year,

4.5%,

11/01/47

.........................................

1,108,891

1,226,976

FNMA,

30

Year,

5%,

4/01/34

...........................................

78,694

86,958

FNMA,

30

Year,

5.5%,

9/01/33

-

11/01/35

.................................

739,417

852,877

FNMA,

30

Year,

6%,

10/01/34

..........................................

221,288

262,154

FNMA,

30

Year,

6%,

10/01/34

..........................................

296,789

350,206

FNMA,

30

Year,

6%,

12/01/23

-

8/01/35

...................................

217,476

245,723

FNMA,

30

Year,

6.5%,

12/01/27

-

8/01/32

.................................

352,646

399,244

FNMA,

30

Year,

7.5%,

8/01/25

-

5/01/32

..................................

13,533

15,703

FNMA,

30

Year,

8%,

1/01/25

-

7/01/31

....................................

20,798

24,476

FNMA,

30

Year,

8.5%,

11/01/28

.........................................

2,998

3,004

FNMA,

30

Year,

9%,

8/01/24

-

4/01/25

....................................

712

781

FNMA,

30

Year,

9.5%,

11/01/21

-

4/01/30

.................................

24,897

25,535

FNMA,

30

Year,

10%,

4/01/21

..........................................

295

296

h

FNMA,

Single-family,

15

Year,

1.5%,

11/25/35

..............................

766,000

783,051

h

FNMA,

Single-family,

15

Year,

2%,

10/25/35

...............................

2,200,000

2,286,110

h

FNMA,

Single-family,

15

Year,

2%,

11/25/35

...............................

754,000

783,213

h

FNMA,

Single-family,

15

Year,

2.5%,

10/25/35

..............................

1,500,000

1,566,211

h

FNMA,

Single-family,

30

Year,

2%,

10/25/50

...............................

2,330,000

2,408,820

h

FNMA,

Single-family,

30

Year,

2%,

11/25/50

...............................

706,000

728,138

h

FNMA,

Single-family,

30

Year,

2.5%,

10/25/50

..............................

6,101,000

6,399,377

h

FNMA,

Single-family,

30

Year,

2.5%,

11/25/50

..............................

691,000

723,303

h

FNMA,

Single-family,

30

Year,

3%,

10/25/50

...............................

2,768,000

2,899,804

41,275,938

Government

National

Mortgage

Association

(GNMA)

Fixed

Rate

3.0%

GNMA

I,

30

Year,

7%,

11/15/29

.........................................

2,076

2,466

GNMA

I,

30

Year,

8%,

11/15/25

-

12/15/26

.................................

8,271

9,102

GNMA

I,

Single-family,

30

Year,

6.5%,

1/15/24

-

9/15/32

......................

64,582

71,456

GNMA

I,

Single-family,

30

Year,

7%,

6/15/23

-

2/15/32

........................

14,739

15,210

GNMA

I,

Single-family,

30

Year,

7.5%,

10/15/23

-

10/15/29

.....................

20,098

21,199

GNMA

I,

Single-family,

30

Year,

8%,

1/15/22

-

9/15/27

........................

5,635

5,776

GNMA

I,

Single-family,

30

Year,

8.25%,

3/15/21

.............................

723

724

GNMA

I,

Single-family,

30

Year,

8.5%,

7/15/24

..............................

56

56

h

GNMA

II,

Single-family,

30

Year,

2%,

11/15/50

..............................

698,000

723,684

h

GNMA

II,

Single-family,

30

Year,

2.5%,

11/15/50

............................

691,000

724,281

h

GNMA

II,

Single-family,

30

Year,

3%,

10/15/50

..............................

200,000

209,422

GNMA

II,

Single-family,

30

Year,

6.5%,

1/20/26

-

1/20/33

......................

101,215

117,455

GNMA

II,

Single-family,

30

Year,

7.5%,

11/20/22

-

7/20/32

.....................

57,419

67,398

GNMA

II,

Single-family,

30

Year,

8%,

8/20/26

...............................

52

60

Franklin

Strategic

Mortgage

Portfolio

Statement

of

Investments

franklintempleton.com

The

accompanying

notes

are

an

integral

part

of

these

financial

statements.

Annual

Report

19

a

a

Principal

Amount

a

Value

a

a

a

a

a

Mortgage-Backed

Securities

(continued)

Government

National

Mortgage

Association

(GNMA)

Fixed

Rate

(continued)

GNMA

II,

Single-family,

30

Year,

9%,

12/20/21

-

3/20/25

......................

$

289

$

296

1,968,585

Total

Mortgage-Backed

Securities

(Cost

$49,871,725)

............................

50,889,564

Total

Long

Term

Investments

(Cost

$62,296,070)

................................

63,286,332

a

a

a

a

a

Short

Term

Investments

34.7%

Shares

a

Money

Market

Funds

3.9%

i,j

Institutional

Fiduciary

Trust

-

Money

Market

Portfolio,

0%

......................

2,589,379

2,589,379

Total

Money

Market

Funds

(Cost

$2,589,379)

...................................

2,589,379

Principal

Amount

a

a

a

a

U.S.

Government

and

Agency

Securities

30.8%

k

U.S.

Treasury

Bills

,

10/08/20

........................................................

4,500,000

4,499,952

10/15/20

........................................................

4,500,000

4,499,873

11/19/20

........................................................

6,230,000

6,229,322

12/10/20

........................................................

3,300,000

3,299,422

12/24/20

........................................................

1,700,000

1,699,603

20,228,172

Total

U.S.

Government

and

Agency

Securities

(Cost

$20,228,058)

.................

20,228,172

Total

Short

Term

Investments

(Cost

$2

2,817,437

)

................................

22,817,551

a

Total

Investments

(Cost

$85,113,507)

130.9%

...................................

$86,103,883

Other

Assets,

less

Liabilities

(30.9)%

..........................................

(20,293,734)

Net

Assets

100.0%

...........................................................

$65,810,149

†

Rounds

to

less

than

0.1%

of

net

assets.

a

Perpetual

security

with

no

stated

maturity

date.

b

Security

was

purchased

pursuant

to

Rule

144A

or

Regulation

S

under

the

Securities

Act

of

1933.

144A

securities

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.

Regulation

S

securities

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.

At

September

30,

2020,

the

aggregate

value

of

these

securities

was

$5,357,441,

representing

8.1%

of

net

assets.

c

The

coupon

rate

shown

represents

the

rate

at

period

end.

d

The

coupon

rate

shown

represents

the

rate

inclusive

of

any

caps

or

floors,

if

applicable,

in

effect

at

period

end.

e

Adjustable

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.

f

See

Note

7

regarding

defaulted

securities.

g

Adjustable

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).

h

Security

purchased

on

a

to-be-announced

(TBA)

basis.

See

Note

1(b).

i

See

Note

3(f)

regarding

investments

in

affiliated

management

investment

companies.

j

The

rate

shown

is

the

annualized

seven-day

effective

yield

at

period

end.

k

The

security

was

issued

on

a

discount

basis

with

no

stated

coupon

rate.

Franklin

Strategic

Mortgage

Portfolio

Statement

of

Investments

franklintempleton.com

Annual

Report

The

accompanying

notes

are

an

integral

part

of

these

financial

statements.

20

At

September

30,

2020,

the

Fund

had

the

following futures

contracts

outstanding.

See

Note

1(c). 

See

Abbreviations

on

page

33

.

Futures

Contracts

Description

Type

Number

of

Contracts

Notional

Amount

*

Expiration

Date

Value/

Unrealized

Appreciation

(Depreciation)

Interest

rate

contracts

U.S.

Treasury

10

Year

Notes

....................

Short

9

$

1,255,781

12/21/20

$

(3,548)

U.S.

Treasury

10

Year

Ultra

Notes

................

Long

5

799,609

12/21/20

2,689

U.S.

Treasury

2

Year

Notes

.....................

Long

5

1,104,805

12/31/20

645

U.S.

Treasury

5

Year

Notes

.....................

Long

6

756,188

12/31/20

1,492

U.S.

Treasury

Long

Bonds

.....................

Short

2

352,562

12/21/20

(636)

U.S.

Treasury

Ultra

Bonds

......................

Short

2

443,625

12/21/20

(6,065)

Total

Futures

Contracts

......................................................................

$(5,423)

*

As

of

year

end.

Franklin

Strategic

Mortgage

Portfolio

Financial

Statements

Statement

of

Assets

and

Liabilities

September

30,

2020

franklintempleton.com

The

accompanying

notes

are

an

integral

part

of

these

financial

statements.

Annual

Report

21

Franklin

Strategic

Mortgage

Portfolio

Assets:

Investments

in

securities:

Cost

-

Unaffiliated

issuers

...................................................................

$82,524,128

Cost

-

Non-controlled

affiliates

(Not

e

3f)

........................................................

2,589,379

Value

-

Unaffiliated

issuers

..................................................................

$83,514,504

Value

-

Non-controlled

affiliates

(Not

e

3f)

........................................................

2,589,379

Cash

....................................................................................

34

Receivables:

Investment

securities

sold

...................................................................

4,464,875

Capital

shares

sold

........................................................................

89,824

Interest

.................................................................................

110,205

Deposits

with

brokers

for:

Futures

contracts

........................................................................

31,160

Variation

margin

on

futures

contracts

...........................................................

5,483

Other

assets

..............................................................................

757

Total

assets

..........................................................................

90,806,221

Liabilities:

Payables:

Investment

securities

purchased

..............................................................

24,728,540

Capital

shares

redeemed

...................................................................

168,240

Management

fees

.........................................................................

20,103

Distribution

fees

..........................................................................

6,521

Transfer

agent

fees

........................................................................

10,352

Distributions

to

shareholders

.................................................................

4,704

Accrued

expenses

and

other

liabilities

...........................................................

57,612

Total

liabilities

.........................................................................

24,996,072

Net

assets,

at

value

.................................................................

$65,810,149

Net

assets

consist

of:

Paid-in

capital

.............................................................................

$68,238,671

Total

distributable

earnings

(losses)

.............................................................

(2,428,522)

Net

assets,

at

value

.................................................................

$65,810,149

Franklin

Strategic

Mortgage

Portfolio

Financial

Statements

Statement

of

Assets

and

Liabilities

(continued)

September

30,

2020

franklintempleton.com

Annual

Report

The

accompanying

notes

are

an

integral

part

of

these

financial

statements.

22

Franklin

Strategic

Mortgage

Portfolio

Class

A:

Net

assets,

at

value

.......................................................................

$24,152,834

Shares

outstanding

........................................................................

2,595,218

Net

asset

value

per

share

a

..................................................................

$9.31

Maximum

offering

price

per

share

(net

asset

value

per

share

÷

96.25%)

................................

$9.67

Class

A1:

Net

assets,

at

value

.......................................................................

$27,530,340

Shares

outstanding

........................................................................

2,956,496

Net

asset

value

per

share

a

..................................................................

$9.31

Maximum

offering

price

per

share

(net

asset

value

per

share

÷

96.25%)

................................

$9.67

Class

C:

Net

assets,

at

value

.......................................................................

$3,959,505

Shares

outstanding

........................................................................

425,421

Net

asset

value

and

maximum

offering

price

per

share

a

.............................................

$9.31

Class

R6:

Net

assets,

at

value

.......................................................................

$558,662

Shares

outstanding

........................................................................

60,117

Net

asset

value

and

maximum

offering

price

per

share

.............................................

$9.29

Advisor

Class:

Net

assets,

at

value

.......................................................................

$9,608,808

Shares

outstanding

........................................................................

1,033,237

Net

asset

value

and

maximum

offering

price

per

share

.............................................

$9.30

a

Redemption

price

is

equal

to

net

asset

value

less

contingent

deferred

sales

charges,

if

applicable.

Franklin

Strategic

Mortgage

Portfolio

Financial

Statements

Statement

of

Operations

for

the

year

ended

September

30,

2020

franklintempleton.com

The

accompanying

notes

are

an

integral

part

of

these

financial

statements.

Annual

Report

23

Franklin

Strategic

Mortgage

Portfolio

Investment

income:

Dividends:

Non-controlled

affiliates

(Not

e

3f)

.............................................................

$14,277

Interest:

Unaffiliated

issuers:

Paydown

gain

(loss)

.....................................................................

(386,959)

Paid

in

cash

a

...........................................................................

2,384,620

Total

investment

income

...................................................................

2,011,938

Expenses:

Management

fees

(Note

3

a

)

...................................................................

251,151

Distribution

fees:

(Note

3c

)

    Class

A

................................................................................

50,484

    Class

C

................................................................................

25,509

Transfer

agent

fees:

(Note

3e

)

    Class

A

................................................................................

35,102

    Class

A1

...............................................................................

48,658

    Class

C

................................................................................

6,810

    Class

R6

...............................................................................

941

    Advisor

Class

............................................................................

17,552

Custodian

fees

(Note

4

)

......................................................................

384

Reports

to

shareholders

......................................................................

26,183

Registration

and

filing

fees

....................................................................

96,919

Professional

fees

...........................................................................

115,281

Trustees'

fees

and

expenses

..................................................................

883

Pricing

fees

...............................................................................

39,013

Other

....................................................................................

20,495

Total

expenses

.........................................................................

735,365

Expense

reductions

(Note

4

)

...............................................................

(163)

Expenses

waived/paid

by

affiliates

(Note

3

f

and

3

g

)

..............................................

(188,992)

Net

expenses

.........................................................................

546,210

Net

investment

income

................................................................

1,465,728

Realized

and

unrealized

gains

(losses):

Net

realized

gain

(loss)

from:

Investments:

Unaffiliated

issuers

......................................................................

502,652

Futures

contracts

.........................................................................

126,329

Net

realized

gain

(loss)

..................................................................

628,981

Net

change

in

unrealized

appreciation

(depreciation)

on:

Investments:

Unaffiliated

issuers

......................................................................

(188,451)

Futures

contracts

.........................................................................

1,970

Net

change

in

unrealized

appreciation

(depreciation)

............................................

(186,481)

Net

realized

and

unrealized

gain

(loss)

............................................................

442,500

Net

increase

(decrease)

in

net

assets

resulting

from

operations

..........................................

$1,908,228

a

Includes

amortization

of

premium

and

accretion

of

discount.

Franklin

Strategic

Mortgage

Portfolio

Financial

Statements

Statements

of

Changes

in

Net

Assets

franklintempleton.com

Annual

Report

The

accompanying

notes

are

an

integral

part

of

these

financial

statements.

24

Franklin

Strategic

Mortgage

Portfolio

Year

Ended

September

30,

2020

Year

Ended

September

30,

2019

Increase

(decrease)

in

net

assets:

Operations:

Net

investment

income

.................................................

$1,465,728

$1,871,445

Net

realized

gain

(loss)

.................................................

628,981

590,713

Net

change

in

unrealized

appreciation

(depreciation)

...........................

(186,481)

1,757,975

Net

increase

(decrease)

in

net

assets

resulting

from

operations

................

1,908,228

4,220,133

Distributions

to

shareholders:

Class

A

.............................................................

(467,449)

(566,480)

Class

A1

............................................................

(733,773)

(1,093,394)

Class

C

.............................................................

(76,504)

(114,658)

Class

R6

............................................................

(14,155)

(15,777)

Advisor

Class

........................................................

(264,418)

(321,953)

Total

distributions

to

shareholders

..........................................

(1,556,299)

(2,112,262)

Capital

share

transactions:

(Note

2

)

Class

A

.............................................................

5,713,303

1,414,591

Class

A1

............................................................

(1,919,968)

(4,557,614)

Class

C

.............................................................

91,588

(798,773)

Class

R6

............................................................

167,731

(64,182)

Advisor

Class

........................................................

(1,326,727)

4,005,201

Total

capital

share

transactions

............................................

2,725,927

(777)

Net

increase

(decrease)

in

net

assets

...................................

3,077,856

2,107,094

Net

assets:

Beginning

of

year

.......................................................

62,732,293

60,625,199

End

of

year

...........................................................

$65,810,149

$62,732,293

Franklin

Strategic

Mortgage

Portfolio

25

franklintempleton.com

Annual

Report

Notes

to

Financial

Statements

1.

Organization

and

Significant

Accounting

Policies

Franklin

Strategic

Mortgage

Portfolio (Trust)

is

registered

under

the

Investment

Company

Act

of

1940

(1940

Act)

as

an

open-end

management

investment

company,

consisting

of

one

fund, Franklin

Strategic

Mortgage

Portfolio

(Fund)

and

applies

the

specialized

accounting

and

reporting

guidance

in

U.S.

Generally

Accepted

Accounting

Principles

(U.S.

GAAP).

The

Fund

offers

five

classes

of

shares:

Class A,

Class A1,

Class C,

Class

R6

and

Advisor

Class.

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

Fund'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

Fund

may

utilize

independent

pricing

services,

quotations

from

securities

and

financial

instrument

dealers,

and

other

market

sources

to

determine

fair

value. 

Debt

securities

generally

trade

in

the

over-the-counter

(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.

Derivative

financial

instruments

listed

on

an

exchange

are

valued

at

the

official

closing

price

of

the

day. 

Investments

in open-end mutual

funds

are

valued

at

the

closing

NAV.

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 Fund

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.

b.

Securities

Purchased

on

a

TBA

Basis

The

Fund

purchases

securities

on

a

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.

Sufficient

assets

have

been

segregated

for

these

securities.

c.

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

Franklin

Strategic

Mortgage

Portfolio

Notes

to

Financial

Statements

26

franklintempleton.com

Annual

Report

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.

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.

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.

See

Note

9 regarding

other

derivative

information.

d.

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.

e.

Income

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

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

September

30,

2020,

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. 

f.

Security

Transactions,

Investment

Income,

Expenses

and

Distributions

Security

transactions

are

accounted

for

on

trade

date.

Realized

gains

and

losses

on

security

transactions

are

determined

on

a

specific

identification

basis.

Interest

income

and

estimated

expenses

are

accrued

daily.

Amortization

of

premium

and

accretion

of

discount

on

debt

securities

are

included

in

interest

income.

Paydown

gains

and

losses

are

recorded

separately

on

the

Statement

of

Operations.

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.

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

1.

Organization

and

Significant

Accounting

Policies

(continued)

c.

Derivative

Financial

Instruments

(continued)

Franklin

Strategic

Mortgage

Portfolio

Notes

to

Financial

Statements

27

franklintempleton.com

Annual

Report

class

of

shares

based

upon

the

relative

proportion

of

net

assets

of

each

class.

Differences

in

per

share

distributions

by

class

are

generally

due

to

differences

in

class

specific

expenses.

g.

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.

h.

Guarantees

and

Indemnifications

Under

the

Fund's

organizational

documents,

its

officers

and

trustees

are

indemnified

by

the

Fund

against

certain

liabilities

arising

out

of

the

performance

of

their

duties

to

the

Fund.

Additionally,

in

the

normal

course

of

business,

the

Fund

enters

into

contracts

with

service

providers

that

contain

general

indemnification

clauses.

The

Fund's

maximum

exposure

under

these

arrangements

is

unknown

as

this

would

involve

future

claims

that

may

be

made

against

the

Fund

that

have

not

yet

occurred.

Currently,

the

Fund

expects

the

risk

of

loss

to

be

remote.

2.

Shares

of

Beneficial

Interest

At

September

30,

2020,

there

were

an

unlimited

number

of

shares

authorized

(without

par

value).

Transactions

in

the

Fund’s

shares

were

as

follows:

Year

Ended

September

30,

2020

2019

Shares

Amount

Shares

Amount

Class

A

Shares:

Shares

sold

a

...................................

1,217,338

$11,282,025

589,470

$5,341,820

Shares

issued

in

reinvestment

of

distributions

..........

48,077

445,344

58,246

529,369

Shares

redeemed

...............................

(650,222)

(6,014,066)

(492,653)

(4,456,598)

Net

increase

(decrease)

..........................

615,193

$5,713,303

155,063

$1,414,591

Class

A1

Shares:

Shares

sold

...................................

227,011

$2,109,187

74,450

$676,501

Shares

issued

in

reinvestment

of

distributions

..........

74,833

693,377

113,202

1,028,209

Shares

redeemed

...............................

(510,027)

(4,722,532)

(692,676)

(6,262,324)

Net

increase

(decrease)

..........................

(208,183)

$(1,919,968)

(505,024)

$(4,557,614)

Class

C

Shares:

Shares

sold

...................................

178,031

$1,646,733

86,691

$788,921

Shares

issued

in

reinvestment

of

distributions

..........

7,919

73,342

11,907

108,113

Shares

redeemed

a

..............................

(176,057)

(1,628,487)

(188,273)

(1,695,807)

Net

increase

(decrease)

..........................

9,893

$91,588

(89,675)

$(798,773)

Class

R6

Shares:

Shares

sold

...................................

54,969

$504,354

8,136

$73,528

Shares

issued

in

reinvestment

of

distributions

..........

1,529

14,153

1,645

14,920

Shares

redeemed

...............................

(37,825)

(350,776)

(16,801)

(152,630)

Net

increase

(decrease)

..........................

18,673

$167,731

(7,020)

$(64,182)

1.

Organization

and

Significant

Accounting

Policies

(continued)

f.

Security

Transactions,

Investment

Income,

Expenses

and

Distributions

(continued)

Franklin

Strategic

Mortgage

Portfolio

Notes

to

Financial

Statements

28

franklintempleton.com

Annual

Report

3.

Transactions

with

Affiliates

Franklin

Resources,

Inc.

is

the

holding

company

for

various

subsidiaries

that

together

are

referred

to

as

Franklin

Templeton.

Certain

officers

and

trustees

of

the

Fund

are

also

officers

and/or

directors

of

the

following

subsidiaries:

a.

Management

Fees

The

Fund

pays

an

investment

management

fee

to

Advisers

based

on

the

average

daily

net

assets

of

the

Fund

as

follows:

b.

Administrative

Fees

Under

an

agreement

with

Advisers,

FT

Services

provides

administrative

services

to

the

Fund.

The

fee

is

paid

by

Advisers

based

on

the

Fund's

average

daily

net

assets,

and

is

not

an

additional

expense

of

the

Fund.

c.

Distribution

Fees

The

Board

has

adopted

distribution

plans

for

Class

A

and

Class

C

shares,

pursuant

to

Rule

12b-1

under

the

1940

Act.

Under

the

Fund’s

Class

A

reimbursement

distribution

plan,

the

Fund

reimburses

Distributors

for

costs

incurred

in

connection

with

the

servicing,

sale

and

distribution

of

the

Fund's

shares

up

to

the

maximum

annual

plan

rate.

Under

the

Class

A

reimbursement

distribution

plan,

costs

exceeding

the

maximum

for

the

current

plan

year

cannot

be

reimbursed

in

subsequent

periods.

In

addition,

under

the

Fund’s

Class

C

compensation

distribution

plan,

the

Fund

pays

Distributors

for

costs

incurred

in

connection

with

the

servicing,

sale

and

distribution

of

the

Fund's

shares

up

to

the

maximum

annual

plan

rate.

The

plan

year,

for

purposes

of

monitoring

compliance

with

the

maximum

annual

plan

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:

Year

Ended

September

30,

2020

2019

Shares

Amount

Shares

Amount

Advisor

Class

Shares:

Shares

sold

...................................

494,956

$4,579,523

660,524

$5,970,032

Shares

issued

in

reinvestment

of

distributions

..........

27,704

256,284

35,333

321,562

Shares

redeemed

...............................

(669,850)

(6,162,534)

(251,980)

(2,286,393)

Net

increase

(decrease)

..........................

(147,190)

$(1,326,727)

443,877

$4,005,201

a

May

include

a

portion

of

Class

C

shares

that

were

automatically

converted

to

Class

A.

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

Annualized

Fee

Rate

Net

Assets

0.400%

First

$250

million

0.380%

Over

$250

million,

up

to

and

including

$500

million

0.360%

In

excess

of

$500

million

2.

Shares

of

Beneficial

Interest

(continued)

Franklin

Strategic

Mortgage

Portfolio

Notes

to

Financial

Statements

29

franklintempleton.com

Annual

Report

d.

Sales

Charges/Underwriting

Agreements

Front-end

sales

charges

and

contingent

deferred

sales

charges

(CDSC)

do

not

represent

expenses

of

the

Fund.

These

charges

are

deducted

from

the

proceeds

of

sales

of

Fund

shares

prior

to

investment

or

from

redemption

proceeds

prior

to

remittance,

as

applicable.

Distributors

has

advised

the

Fund

of

the

following

commission

transactions

related

to

the

sales

and

redemptions

of

the

Fund's

shares

for

the

year:

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

year

ended

September

30,

2020,

the

Fund

paid

transfer

agent

fees

of

$109,063,

of

which $56,443

was

retained

by

Investor

Services.

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

year

ended

September

30,

2020,

the

Fund

held

investments

in

affiliated

management

investment

companies

as

follows:

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

the

Fund

so

that

the

operating

expenses

(excluding

distribution

fees,

acquired

fund

fees

and

expenses,

and

certain

non-routine

expenses

or

costs,

including

those

relating

to

litigation,

Class  A

...................................................................................

0.25%

Class  C

...................................................................................

0.65%

Sales

charges

retained

net

of

commissions

paid

to

unaffiliated

brokers/dealers

..............................

$1,970

CDSC

retained

..............................................................................

$374

a

Value

at

Beginning

of

Year

Purchases

Sales

Realized

Gain

(Loss)

Net

Change

in

Unrealized

Appreciation

(Depreciation)

Value

at

End

of

Year

Number

of

Shares

Held

at

End

of

Year

Investment

Income

a

a

a

a

a

a

a

a

a

Franklin

Strategic

Mortgage

Portfolio

Non-Controlled

Affiliates

Dividends

Institutional

Fiduciary

Trust

-

Money

Market

Portfolio,

0%

.........

$3,132,672

$16,275,331

$(16,818,624)

$

—

$

—

$

2,589,379

2,589,379

$

14,2

77

Total

Affiliated

Securities

....

$3,132,672

$16,275,331

$(16,818,624)

$—

$—

$2,589,379

$14,277

3.

Transactions

with

Affiliates

(continued)

c.

Distribution

Fees

(continued)

Franklin

Strategic

Mortgage

Portfolio

Notes

to

Financial

Statements

30

franklintempleton.com

Annual

Report

indemnification,

reorganizations,

and

liquidations)

for

Class

A,

Class

A1,

Class

C,

and

Advisor

Class

of

the

Fund

do

not

exceed

0.75%,

and

for

Class

R6

do

not

exceed

0.62%,

based

on

the

average

net

assets

of

each

class

until

January

31,

2021.

Total

expenses

waived

or

paid

are

not

subject

to

recapture

subsequent

to

the

Fund's

fiscal

year

end.

Prior

to

February

1,

2020,

expenses

(excluding

certain

fees

and

expenses

as

previously

disclosed)

for

Class

R6

were

limited

to

0.61%

based

on

the

average

net

assets

of

the

class.

4.

Expense

Offset

Arrangement

The Fund has

entered

into

an

arrangement

with

its

custodian

whereby

credits

realized

as

a

result

of

uninvested

cash

balances

are

used

to

reduce

a

portion

of

the

Fund's

custodian

expenses.

During

the

year

ended

September

30,

2020,

the

custodian

fees

were

reduced

as

noted

in

the

Statement

of

Operations. 

5.

Income

Taxes

For

tax

purposes,

capital

losses

may

be

carried

over

to

offset

future

capital

gains.

At

September

30,

2020,

the

capital

loss

carryforwards

were

as

follows:

During

the

year

ended September

30,

2020

the

Fund

utilized

$571,040

of

capital

loss

carryforwards.

The

tax

character

of

distributions

paid

during

the

years

ended

September

30,

2020

and

2019,

was

as

follows:

At

September

30,

2020,

the

cost

of

investments,

net

unrealized

appreciation

(depreciation),

and

undistributed

ordinary

income

for

income

tax

purposes

were

as

follows:

Differences

between

income

and/or

capital

gains

as

determined

on

a

book

basis

and

a

tax

basis

are

primarily

due

to

differing

treatment

of

amortization

and

paydowns.

Capital

loss

carryforwards

not

subject

to

expiration:

Short

term

................................................................................

$2,301,829

Long

term

................................................................................

1,063,922

Total

capital

loss

carryforwards

...............................................................

$3,365,751

2020

2019

Distributions

paid

from:

Ordinary

income

..........................................................

$1,556,299

$2,112,262

Cost

of

investments

..........................................................................

$85,156,939

Unrealized

appreciation

........................................................................

$1,433,819

Unrealized

depreciation

........................................................................

(486,875)

Net

unrealized

appreciation

(depreciation)

..........................................................

$946,944

3.

Transactions

with

Affiliates

(continued)

g.

Waiver

and

Expense

Reimbursements

(continued)

Franklin

Strategic

Mortgage

Portfolio

Notes

to

Financial

Statements

31

franklintempleton.com

Annual

Report

6.

Investment

Transactions

Purchases

and

sales

of

investments

(excluding

short

term

securities)

for

the

year

ended

September

30,

2020,

aggregated

$170,211,401

and

$169,828,635,

respectively.

7.

Defaulted

Securities

The

Fund

held

a

defaulted

security

and/or

other

securities

for

which

the

income

has

been

deemed

uncollectible.

At

September

30,

2020,

the

value

of

this

security

represents

less

than

0.1%

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

security

has

been

identified

in

the

accompanying

Statement

of

Investments.

8. Novel

Coronavirus

Pandemic 

The

global

outbreak

of

the

novel

coronavirus

disease,

known

as

COVID-19, has

caused

adverse

effects

on

many

companies,

sectors,

nations,

regions

and

the

markets

in

general, and

may

continue for

an unpredictable duration.

The

effects

of

this

pandemic

may

materially

impact

the

value

and

performance

of

the Fund, its ability

to

buy

and

sell

fund

investments

at

appropriate

valuations

and its ability

to

achieve its investment

objectives.

9.

Other

Derivative

Information

At

September

30,

2020,

the

Fund's

investments

in

derivative

contracts

are

reflected

in

the

Statement of

Assets

and

Liabilities

as

follows:

For

the

year

ended

September

30,

2020,

the

effect

of

derivative

contracts

in

the

Statement

of

Operations

was

as

follows:

For

the

year

ended

September

30,

2020,

the

average

month

end

notional

amount

of

futures

contracts

represented

$5,763,298.

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

Franklin

Strategic

Mortgage

Portfolio

Interest

rate

contracts

.......

Variation

margin

on

futures

contracts

$

4,826

a

Variation

margin

on

futures

contracts

$

10,249

a

Total

....................

$4,826

$10,249

a

This

amount

reflects

the

cumulative

appreciation

(depreciation)

of

futures

contracts

as

reported

in

the

Statement

of

Investments.

Only

the

variation

margin

receivable/

payable

at

year

end

is

separately

reported

within

the

Statement

of

Assets

and

Liabilities.

Prior

variation

margin

movements

were

recorded

to

cash

upon

receipt

or

payment.

Derivative

Contracts

Not

Accounted

for

as

Hedging

Instruments

Statement

of

Operations

Location

Net

Realized

Gain

(Loss)

for

the

Year

Statement

of

Operations

Location

Net

Change

in

Unrealized

Appreciation

(Depreciation)

for

the

Year

Net

realized

gain

(loss)

from:

Net

change

in

unrealized

  appreciation

(depreciation)

on:

Interest

rate

contracts

.......

Futures

contracts

$126,329

Futures

contracts

$1,970

Total

....................

$126,329

$1,970

Franklin

Strategic

Mortgage

Portfolio

Notes

to

Financial

Statements

32

franklintempleton.com

Annual

Report

See

Note

1(c)

regarding

derivative

financial

instruments.

10.

Credit

Facility

The

Fund,

together

with

other

U.S.

registered

and

foreign

investment

funds

(collectively,

Borrowers),

managed

by

Franklin

Templeton,

are

borrowers

in

a

joint

syndicated

senior

unsecured

credit

facility

totaling

$2

billion

(Global

Credit

Facility)

which

matures

on

February

5,

2021.

This

Global

Credit

Facility

provides

a

source

of

funds

to

the

Borrowers

for

temporary

and

emergency

purposes,

including

the

ability

to

meet

future

unanticipated

or

unusually

large

redemption

requests.

Under

the

terms

of

the

Global

Credit

Facility,

the

Fund

shall,

in

addition

to

interest

charged

on

any

borrowings

made

by

the

Fund

and

other

costs

incurred

by

the

Fund,

pay

its

share

of

fees

and

expenses

incurred

in

connection

with

the

implementation

and

maintenance

of

the

Global

Credit

Facility,

based

upon

its

relative

share

of

the

aggregate

net

assets

of

all

of

the

Borrowers,

including

an

annual

commitment

fee

of

0.15%

based

upon

the

unused

portion

of

the

Global

Credit

Facility.

These

fees

are

reflected

in

other

expenses

in

the

Statement

of

Operations.

During

the

year

ended

September

30,

2020,

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.)

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.

A

summary

of

inputs

used

as

of

September

30,

2020,

in

valuing

the

Fund's

assets

and

liabilities

carried

at

fair

value,

is

as

follows:

Level

1

Level

2

Level

3

Total

Franklin

Strategic

Mortgage

Portfolio

Assets:

Investments

in

Securities:

Corporate

Bonds

........................

$

—

$

114,634

$

—

$

114,634

U.S.

Government

and

Agency

Securities

.......

—

558,018

—

558,018

Asset-Backed

Securities

..................

—

3,493,228

—

3,493,228

Commercial

Mortgage-Backed

Securities

......

—

8,230,888

—

8,230,888

Mortgage-Backed

Securities

................

—

50,889,564

—

50,889,564

Short

Term

Investments

...................

22,817,551

—

—

22,817,551

Total

Investments

in

Securities

...........

$22,817,551

$63,286,332

$—

$86,103,883

Other

Financial

Instruments:

Futures

contracts

........................

$

4,826

$

—

$

—

$

4,826

Total

Other

Financial

Instruments

.........

$4,826

$—

$—

$4,826

9.

Other

Derivative

Information

(continued)

Franklin

Strategic

Mortgage

Portfolio

Notes

to

Financial

Statements

33

franklintempleton.com

Annual

Report

12.

New

Accounting

Pronouncements

In

March

2020,

the

Financial

Accounting

Standards

Board

issued

Accounting

Standards

Update

(ASU)

No.

2020-04,

Reference

Rate

Reform

(Topic

848)

–

Facilitation

of

the

Effects

of

Reference

Rate

Reform

on

Financial

Reporting.

The

amendments

in

the

ASU

provides

optional

temporary

financial

reporting

relief

from

the

effect

of

certain

types

of

contract

modifications

due

to

the

planned

discontinuation

of

the

London

Interbank

Offered

Rate

(LIBOR)

and

other

interbank-offered

based

reference

rates

as

of

the

end

of

2021.

The

ASU

is

effective

for

certain

reference

rate-related

contract

modifications

that

occur

during

the

period

March

12,

2020

through

December

31,

2022.

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

Level

1

Level

2

Level

3

Total

Franklin

Strategic

Mortgage

Portfolio

(continued)

Liabilities:

Other

Financial

Instruments:

Futures

contracts

........................

10,249

—

—

10,249

Total

Other

Financial

Instruments

.........

$10,249

$—

$—

$10,249

Selected

Portfolio

FHLMC

Federal

Home

Loan

Mortgage

Corp.

FNMA

Federal

National

Mortgage

Association

FRN

Floating

Rate

Note

GNMA

Government

National

Mortgage

Association

LIBOR

London

Inter-Bank

Offered

Rate

Currency

USD

United

States

Dollar

11.

Fair

Value

Measurements

(continued)

Franklin

Strategic

Mortgage

Portfolio

Report

of

Independent

Registered

Public

Accounting

Firm

34

franklintempleton.com

Annual

Report

To

the

Board

of

Trustees

and

Shareholders

of

Franklin

Strategic

Mortgage

Portfolio

Opinion

on

the

Financial

Statements

We

have

audited

the

accompanying

statement

of

assets

and

liabilities,

including

the

statement

of

investments,

of

Franklin

Strategic

Mortgage

Portfolio

(the

"Fund")

as

of

September

30,

2020,

the

related

statement

of

operations

for

the

year

ended

September

30,

2020,

the

statement

of

changes

in

net

assets

for

each

of

the

two

years

in

the

period

ended

September

30,

2020,

including

the

related

notes,

and

the

financial

highlights

for

each

of

the

periods

indicated

therein

(collectively

referred

to

as

the

“financial

statements”).

In

our

opinion,

the

financial

statements

present

fairly,

in

all

material

respects,

the

financial

position

of

the

Fund

as

of

September

30,

2020,

the

results

of

its

operations

for

the

year

then

ended,

the

changes

in

its

net

assets

for

each

of

the

two

years

in

the

period

ended

September

30,

2020

and

the

financial

highlights

for

each

of

the

periods

indicated

therein

in

conformity

with

accounting

principles

generally

accepted

in

the

United

States

of

America.

Basis

for

Opinion

These

financial

statements

are

the

responsibility

of

the

Fund’s

management.

Our

responsibility

is

to

express

an

opinion

on

the

Fund’s

financial

statements

based

on

our

audits.

We

are

a

public

accounting

firm

registered

with

the

Public

Company

Accounting

Oversight

Board

(United

States)

(PCAOB)

and

are

required

to

be

independent

with

respect

to

the

Fund

in

accordance

with

the

U.S.

federal

securities

laws

and

the

applicable

rules

and

regulations

of

the

Securities

and

Exchange

Commission

and

the

PCAOB.

We

conducted

our

audits

of

these

financial

statements

in

accordance

with

the

standards

of

the

PCAOB.

Those

standards

require

that

we

plan

and

perform

the

audit

to

obtain

reasonable

assurance

about

whether

the

financial

statements

are

free

of

material

misstatement,

whether

due

to

error

or

fraud.

Our

audits

included

performing

procedures

to

assess

the

risks

of

material

misstatement

of

the

financial

statements,

whether

due

to

error

or

fraud,

and

performing

procedures

that

respond

to

those

risks.

Such

procedures

included

examining,

on

a

test

basis,

evidence

regarding

the

amounts

and

disclosures

in

the

financial

statements.

Our

audits

also

included

evaluating

the

accounting

principles

used

and

significant

estimates

made

by

management,

as

well

as

evaluating

the

overall

presentation

of

the

financial

statements.

Our

procedures

included

confirmation

of

securities

owned

as

of

September

30,

2020

by

correspondence

with

the

custodian,

transfer

agent,

and

brokers;

when

replies

were

not

received

from

brokers,

we

performed

other

auditing

procedures.

We

believe

that

our

audits

provide

a

reasonable

basis

for

our

opinion.

PricewaterhouseCoopers

LLP

San

Francisco,

California

November

18,

2020

We

have

served

as

the

auditor

of

one

or

more

investment

companies

in

the

Franklin

Templeton

Group

of

Funds

since

1948.

Franklin

Strategic

Mortgage

Portfolio

Tax

Information

(unaudited)

35

franklintempleton.com

Annual

Report

Under

Section

871(k)(1)(C)

of

the

Internal

Revenue

Code,

the

Fund

hereby

reports

the

maximum

amount

allowable

but

no

less

than

$1,537,304

as

interest

related

dividends

for

purposes

of

the

tax

imposed

under

Section

871(a)(1)(A)

of

the

Internal

Revenue

Code

for

the

fiscal

year

ended

September

30,

2020.

Franklin

Strategic

Mortgage

Portfolio

Board

Members

and

Officers

36

franklintempleton.com

Annual

Report

The

name,

year

of

birth

and

address

of

the

officers

and

board

members,

as

well

as

their

affiliations,

positions

held

with

the

Fund,

principal

occupations

during

at

least

the

past

five

years

and

number

of

U.S.

registered

portfolios

overseen

in

the

Franklin

Templeton

fund

complex,

are

shown

below.

Generally,

each

board

member

serves

until

that

person’s

successor

is

elected

and

qualified.

Independent

Board

Members

Name,

Year

of

Birth

and

Address

Position

Length

of

Time

Served

Number

of

Portfolios

in

Fund

Complex

Overseen

by

Board

Member*

Other

Directorships

Held

During

at

Least

the

Past

5

Years

Harris

J.

Ashton

(1932)

Trustee

Since

1992

126

Bar-S

Foods

(meat

packing

company)

(1981-2010).

One

Franklin

Parkway

San

Mateo,

CA

94403-1906

Principal

Occupation

During

at

Least

the

Past

5

Years:

Director

of

various

companies;

and

formerly

,

Director,

RBC

Holdings,

Inc.

(bank

holding

company)

(until

2002);

and

President,

Chief

Executive

Officer

and

Chairman

of

the

Board,

General

Host

Corporation

(nursery

and

craft

centers)

(until

1998).

Terrence

J.

Checki

(1945)

Trustee

Since

2017

107

Hess

Corporation

(exploration

of

oil

and

gas)

(2014-present).

One

Franklin

Parkway

San

Mateo,

CA

94403-1906

Principal

Occupation

During

at

Least

the

Past

5

Years:

Member

of

the

Council

on

Foreign

Relations

(1996-present);

Member

of

the

National

Committee

on

U.S.-China

Relations

(1999-present);

member

of

the

board

of

trustees

of

the

Economic

Club

of

New

York

(2013-present);

member

of

the

board

of

trustees

of

the

Foreign

Policy

Association

(2005-present);

member

of

the

board

of

directors

of

Council

of

the

Americas

(2007-present)

and

the

Tallberg

Foundation

(2018–

present);

and

formerly

,

Executive

Vice

President

of

the

Federal

Reserve

Bank

of

New

York

and

Head

of

its

Emerging

Markets

and

Internal

Affairs

Group

and

Member

of

Management

Committee

(1995-2014);

and

Visiting

Fellow

at

the

Council

on

Foreign

Relations

(2014).

Mary

C.

Choksi

(1950)

Trustee

Since

2014

126

Omnicom

Group

Inc.

(advertising

and

marketing

communications

services)

(2011-present)

and

White

Mountains

Insurance

Group,

Ltd.

(holding

company)

(2017-present);

and

formerly

,

Avis

Budget

Group

Inc.

(car

rental)

(2007-May

2020).

One

Franklin

Parkway

San

Mateo,

CA

94403-1906

Principal

Occupation

During

at

Least

the

Past

5

Years:

Director

of

various

companies;

and

formerly

,

Founder

and

Senior

Advisor,

Strategic

Investment

Group

(investment

management

group)

(2015-2017);

Founding

Partner

and

Senior

Managing

Director,

Strategic

Investment

Group

(1987-2015);

Founding

Partner

and

Managing

Director,

Emerging

Markets

Management

LLC

(investment

management

firm)

(1987-2011);

and

Loan

Officer/Senior

Loan

Officer/Senior

Pension

Investment

Officer,

World

Bank

Group

(international

financial

institution)

(1977-1987).

Franklin

Strategic

Mortgage

Portfolio

37

franklintempleton.com

Annual

Report

Name,

Year

of

Birth

and

Address

Position

Length

of

Time

Served

Number

of

Portfolios

in

Fund

Complex

Overseen

by

Board

Member*

Other

Directorships

Held

During

at

Least

the

Past

5

Years

Edith

E.

Holiday

(1952)

Lead

Independent

Trustee

Trustee

since

2003

and

Lead

Independent

Trustee

since

2019

126

Hess

Corporation

(exploration

of

oil

and

gas)

(1993-present),

Canadian

National

Railway

(railroad)

(2001-present),

White

Mountains

Insurance

Group,

Ltd.

(holding

company)

(2004-present),

Santander

Consumer

USA

Holdings,

Inc.

(consumer

finance)

(2016-present);

Santander

Holdings

USA.

(holding

company)

(2019-present);

and

formerly

,

RTI

International

Metals,

Inc.

(manufacture

and

distribution

of

titanium)

(1999-2015)

and

H.J.

Heinz

Company

(processed

foods

and

allied

products)

(1994-2013).

One

Franklin

Parkway

San

Mateo,

CA

94403-1906

Principal

Occupation

During

at

Least

the

Past

5

Years:

Director

or

Trustee

of

various

companies

and

trusts;

and

formerly

,

Assistant

to

the

President

of

the

United

States

and

Secretary

of

the

Cabinet

(1990-1993);

General

Counsel

to

the

United

States

Treasury

Department

(1989-1990);

and

Counselor

to

the

Secretary

and

Assistant

Secretary

for

Public

Affairs

and

Public

Liaison-United

States

Treasury

Department

(1988-1989).

J.

Michael

Luttig

(1954)

Trustee

Since

2009

126

Boeing

Capital

Corporation

(aircraft

financing)

(2006-2010).

One

Franklin

Parkway

San

Mateo,

CA

94403-1906

Principal

Occupation

During

at

Least

the

Past

5

Years:

Private

investor;

and

formerly

,

Counselor

and

Senior

Advisor

to

the

Chairman,

CEO,

and

Board

of

Directors,

of

The

Boeing

Company

(aerospace

company),

and

member

of

the

Executive

Council

(May

2019-January

1,

2020);

Executive

Vice

President,

General

Counsel

and

member

of

the

Executive

Council,

The

Boeing

Company

(2006-2019);

and

Federal

Appeals

Court

Judge,

United

States

Court

of

Appeals

for

the

Fourth

Circuit

(1991-2006).

Larry

D.

Thompson

(1945)

Trustee

Since

2007

126

Graham

Holdings

Company

(education

and

media

organization)

(2011-present);

and

formerly

,

The

Southern

Company

(energy

company)

(2014-May

2020;

previously

2010-2012),

Cbeyond,

Inc.

(business

communications

provider)

(2010-2012).

One

Franklin

Parkway

San

Mateo,

CA

94403-1906

Principal

Occupation

During

at

Least

the

Past

5

Years:

Director

of

various

companies;

Counsel,

Finch

McCranie,

LLP

(law

firm)

(2015-present);

John

A.

Sibley

Professor

of

Corporate

and

Business

Law,

University

of

Georgia

School

of

Law

(2015-present;

previously

2011-2012);

and

formerly

,

Independent

Compliance

Monitor

and

Auditor,

Volkswagen

AG

(manufacturer

of

automobiles

and

commercial

vehicles)

(2017-September

2020);

Executive

Vice

President

-

Government

Affairs,

General

Counsel

and

Corporate

Secretary,

PepsiCo,

Inc.

(consumer

products)

(2012-2014);

Senior

Vice

President

-

Government

Affairs,

General

Counsel

and

Secretary,

PepsiCo,

Inc.

(2004-2011);

Senior

Fellow

of

The

Brookings

Institution

(2003-2004);

Visiting

Professor,

University

of

Georgia

School

of

Law

(2004);

and

Deputy

Attorney

General,

U.S.

Department

of

Justice

(2001-2003).

Independent

Board

Members

(continued)

Franklin

Strategic

Mortgage

Portfolio

38

franklintempleton.com

Annual

Report

Interested

Board

Members

and

Officers

Name,

Year

of

Birth

and

Address

Position

Length

of

Time

Served

Number

of

Portfolios

in

Fund

Complex

Overseen

by

Board

Member*

Other

Directorships

Held

During

at

Least

the

Past

5

Years

**Gregory

E.

Johnson

(1961)

Trustee

Since

2007

137

None

One

Franklin

Parkway

San

Mateo,

CA

94403-1906

Principal

Occupation

During

at

Least

the

Past

5

Years:

Executive

Chairman,

Chairman

of

the

Board

and

Director,

Franklin

Resources,

Inc.;

officer

and/or

director

or

trustee,

as

the

case

may

be,

of

some

of

the

other

subsidiaries

of

Franklin

Resources,

Inc.

and

of

39

of

the

investment

companies

in

Franklin

Templeton;

Vice

Chairman,

Investment

Company

Institute;

and

formerly

,

Chief

Executive

Officer

(2013-2020)

and

President

(1994-2015),

Franklin

Resources,

Inc.

**Rupert

H.

Johnson,

Jr.

(1940)

Chairman

of

the

Board

and

Trustee

Since

2013

126

None

One

Franklin

Parkway

San

Mateo,

CA

94403-1906

Principal

Occupation

During

at

Least

the

Past

5

Years:

Director

(Vice

Chairman),

Franklin

Resources,

Inc.;

Director,

Franklin

Advisers,

Inc.;

and

officer

and/or

director

or

trustee,

as

the

case

may

be,

of

some

of

the

other

subsidiaries

of

Franklin

Resources,

Inc.

and

of

37

of

the

investment

companies

in

Franklin

Templeton.

Alison

E.

Baur

(1964)

Vice

President

Since

2012

Not

Applicable

Not

Applicable

One

Franklin

Parkway

San

Mateo,

CA

94403-1906

Principal

Occupation

During

at

Least

the

Past

5

Years:

Deputy

General

Counsel,

Franklin

Templeton;

and

officer

of

some

of

the

other

subsidiaries

of

Franklin

Resources,

Inc.

and

of

41

of

the

investment

companies

in

Franklin

Templeton.

Breda

M.

Beckerle

(1958)

Chief

Compliance

Officer

Since

October

2020

Not

Applicable

Not

Applicable

280

Park

Avenue

New

York,

NY

10017

Principal

Occupation

During

at

Least

the

Past

5

Years:

Chief

Compliance

Officer,

Fiduciary

Investment

Management

International,

Inc.,

Franklin

Advisers,

Inc.,

Franklin

Advisory

Services,

LLC,

Franklin

Mutual

Advisers,

LLC,

Franklin

Templeton

Institutional,

LLC;

and

officer

of

41

of

the

investment

companies

in

Franklin

Templeton.

Sonal

Desai,

Ph.D.

(1963)

President

and

Chief

Executive

Officer

–

Investment

Management

Since

2018

Not

Applicable

Not

Applicable

One

Franklin

Parkway

San

Mateo,

CA

94403-1906

Principal

Occupation

During

at

Least

the

Past

5

Years:

Director

and

Executive

Vice

President,

Franklin

Advisers,

Inc.;

Executive

Vice

President,

Franklin

Templeton

Institutional,

LLC;

and

officer

of

17

of

the

investment

companies

in

Franklin

Templeton.

Gaston

Gardey

(1967)

Treasurer,

Chief

Financial

Officer

and

Chief

Accounting

Officer

Since

2009

Not

Applicable

Not

Applicable

One

Franklin

Parkway

San

Mateo,

CA

94403-1906

Principal

Occupation

During

at

Least

the

Past

5

Years:

Treasurer,

U.S.

Fund

Administration

&

Reporting

and

officer

of

24

of

the

investment

companies

in

Franklin

Templeton.

Franklin

Strategic

Mortgage

Portfolio

39

franklintempleton.com

Annual

Report

Name,

Year

of

Birth

and

Address

Position

Length

of

Time

Served

Number

of

Portfolios

in

Fund

Complex

Overseen

by

Board

Member*

Other

Directorships

Held

During

at

Least

the

Past

5

Years

Steven

J.

Gray

(1955)

Vice

President

and

Co-Secretary

Vice

President

since

2009

and

Co-Secretary

since

2019

Not

Applicable

Not

Applicable

One

Franklin

Parkway

San

Mateo,

CA

94403-1906

Principal

Occupation

During

at

Least

the

Past

5

Years:

Senior

Associate

General

Counsel,

Franklin

Templeton;

Vice

President,

Franklin

Templeton

Distributors,

Inc.

and

FASA,

LLC;

and

officer

of

41

of

the

investment

companies

in

Franklin

Templeton.

Matthew

T.

Hinkle

(1971)

Chief

Executive

Officer

–

Finance

and

Administration

Since

2017

Not

Applicable

Not

Applicable

One

Franklin

Parkway

San

Mateo,

CA

94403-1906

Principal

Occupation

During

at

Least

the

Past

5

Years:

Senior

Vice

President,

Franklin

Templeton

Services,

LLC;

officer

of

41

of

the

investment

companies

in

Franklin

Templeton;

and

formerly

,

Vice

President,

Global

Tax

(2012-April

2017)

and

Treasurer/Assistant

Treasurer,

Franklin

Templeton

(2009-2017).

Robert

Lim

(1948)

Vice

President

–

AML

Compliance

Since

2016

Not

Applicable

Not

Applicable

One

Franklin

Parkway

San

Mateo,

CA

94403-1906

Principal

Occupation

During

at

Least

the

Past

5

Years:

Vice

President,

Franklin

Templeton

Companies,

LLC;

Chief

Compliance

Officer,

Franklin

Templeton

Distributors,

Inc.

and

Franklin

Templeton

Investor

Services,

LLC;

and

officer

of

41

of

the

investment

companies

in

Franklin

Templeton.

Navid

J.

Tofigh

(1972)

Vice

President

Since

2015

Not

Applicable

Not

Applicable

One

Franklin

Parkway

San

Mateo,

CA

94403-1906

Principal

Occupation

During

at

Least

the

Past

5

Years:

Associate

General

Counsel

and

officer

of

41

of

the

investment

companies

in

Franklin

Templeton.

Craig

S.

Tyle

(1960)

Vice

President

Since

2005

Not

Applicable

Not

Applicable

One

Franklin

Parkway

San

Mateo,

CA

94403-1906

Principal

Occupation

During

at

Least

the

Past

5

Years:

General

Counsel

and

Executive

Vice

President,

Franklin

Resources,

Inc.;

and

officer

of

some

of

the

other

subsidiaries

of

Franklin

Resources,

Inc.

and

of

41

of

the

investment

companies

in

Franklin

Templeton.

Lori

A.

Weber

(1964)

Vice

President

and

Co-Secretary

Vice

President

since

2011

and

Co-Secretary

since

2019

Not

Applicable

Not

Applicable

300

S.E.

2nd

Street

Fort

Lauderdale,

FL

33301-

1923

Principal

Occupation

During

at

Least

the

Past

5

Years:

Senior

Associate

General

Counsel,

Franklin

Templeton;

Assistant

Secretary,

Franklin

Resources,

Inc.;

Vice

President

and

Secretary,

Templeton

Investment

Counsel,

LLC;

and

officer

of

41

of

the

investment

companies

in

Franklin

Templeton.

Interested

Board

Members

and

Officers

(continued)

Franklin

Strategic

Mortgage

Portfolio

40

franklintempleton.com

Annual

Report

*We

base

the

number

of

portfolios

on

each

separate

series

of

the

U.S.

registered

investment

companies

within

the

Franklin

Templeton

fund

complex.

These

portfolios

have

a

common

investment

manager

or

affiliated

investment

managers.

**Gregory

E.

Johnson

is

considered

to

be

an

interested

person

of

the

Fund

under

the

federal

securities

laws

due

to

his

position

as

an

officer

and

director

of

Franklin

Resources,

Inc.

(Resources),

which

is

the

parent

company

of

the

Fund’s

investment

manager

and

distributor.

Rupert

H.

Johnson,

Jr.

is

considered

to

be

an

interested

person

of

the

Fund

under

the

federal

securities

laws

due

to

his

position

as

an

officer

and

director

and

major

shareholder

of

Resources.

Note

1:

Rupert

H.

Johnson,

Jr.

is

the

uncle

of

Gregory

E.

Johnson.

Note

2:

Officer

information

is

current

as

of

the

date

of

this

report.

It

is

possible

that

after

this

date,

information

about

officers

may

change.

The

Sarbanes-Oxley

Act

of

2002

and

Rules

adopted

by

the

Securities

and

Exchange

Commission

require

the

Fund

to

disclose

whether

the

Fund’s

Audit

Committee

includes

at

least

one

member

who

is

an

audit

committee

financial

expert

within

the

meaning

of

such

Act

and

Rules.

The

Fund’s

Board

has

determined

that

there

is

at

least

one

such

financial

expert

on

the

Audit

Committee

and

has

designated

Mary

C.

Choksi

as

its

audit

committee

financial

expert.

The

Board

believes

that

Ms.

Choksi

qualifies

as

such

an

expert

in

view

of

her

extensive

business

background

and

experience.

She

served

as

a

director

of

Avis

Budget

Group,

Inc.

(2007-May

2020)

and

formerly,

Founder

and

Senior

Advisor,

Strategic

Investment

Group

(1987

to

2017).

Ms.

Choksi

has

been

a

Member

of

the

Fund’s

Audit

Committee

since

2014.

As

a

result

of

such

background

and

experience,

the

Board

believes

that

Ms.

Choksi

has

acquired

an

understanding

of

generally

accepted

accounting

principles

and

financial

statements,

the

general

application

of

such

principles

in

connection

with

the

accounting

estimates,

accruals

and

reserves,

and

analyzing

and

evaluating

financial

statements

that

present

a

breadth

and

level

of

complexity

of

accounting

issues

generally

comparable

to

those

of

the

Fund,

as

well

as

an

understanding

of

internal

controls

and

procedures

for

financial

reporting

and

an

understanding

of

audit

committee

functions.

Ms.

Choksi

is

an

independent

Board

member

as

that

term

is

defined

under

the

relevant

Securities

and

Exchange

Commission

Rules

and

Releases.

The

Statement

of

Additional

Information

(SAI)

includes

additional

information

about

the

board

members

and

is

available,

without

charge,

upon

request.

Shareholders

may

call

(800)

DIAL

BEN/342-5236

to

request

the

SAI.

Interested

Board

Members

and

Officers

(continued)

Franklin

Strategic

Mortgage

Portfolio

Shareholder

Information

41

franklintempleton.com

Annual

Report

Liquidity

Risk

Management

Program

Each

of

the

Funds

has

adopted

and

implemented

a

written

Liquidity

Risk

Management

Program

(the

“LRMP”)

as

required

by

Rule

22e-4

under

the

Investment

Company

Act

of

1940

(the

“Liquidity

Rule”).

The

LRMP

is

designed

to

assess

and

manage

each

Fund’s

liquidity

risk,

which

is

defined

as

the

risk

that

the

Fund

could

not

meet

requests

to

redeem

shares

issued

by

the

Fund

without

significant

dilution

of

remaining

investors’

interests

in

the

Fund.

In

accordance

with

the

Liquidity

Rule,

the

LRMP

includes

policies

and

procedures

that

provide

for:

(1)

assessment,

management,

and

review

(no

less

frequently

than

annually)

of

each

Fund’s

liquidity

risk;

(2)

classification

of

each

Fund’s

portfolio

holdings

into

one

of

four

liquidity

categories

(Highly

Liquid,

Moderately

Liquid,

Less

Liquid,

and

Illiquid);

(3)

for

Funds

that

do

not

primarily

hold

assets

that

are

Highly

Liquid,

establishing

and

maintaining

a

minimum

percentage

of

the

Fund’s

net

assets

in

Highly

Liquid

investments

(called

a

“Highly

Liquid

Investment

Minimum”

or

“HLIM”);

and

(4)

prohibiting

the

Fund’s

acquisition

of

Illiquid

investments

that

would

result

in

the

Fund

holding

more

than

15%

of

its

net

assets

in

Illiquid

assets.

The

LRMP

also

requires

reporting

to

the

SEC

(on

a

non-public

basis)

and

to

the

Board

if

the

Fund’s

holdings

of

Illiquid

assets

exceed

15%

of

the

Fund’s

net

assets.

Funds

with

HLIMs

must

have

procedures

for

addressing

HLIM

shortfalls,

including

reporting

to

the

Board

and,

with

respect

to

HLIM

shortfalls

lasting

more

than

seven

consecutive

calendar

days,

reporting

to

the

Securities

and

Exchange

Commission

(“SEC”)

(on

a

non-public

basis).

The

Funds’

Board

of

Trustees

approved

the

appointment

of

the

Director

of

Liquidity

Risk

within

the

Investment

Risk

Management

Group

(the

“IRMG”)

as

the

Administrator

of

the

LRMP.

The

IRMG

maintains

the

Investment

Liquidity

Committee

(the

“ILC”)

to

provide

oversight

and

administration

of

policies

and

procedures

governing

liquidity

risk

management

for

FT

products

and

portfolios.

The

ILC

includes

representatives

from

Franklin

Templeton’s

Risk,

Trading,

Global

Compliance,

Investment

Compliance,

Investment

Operations,

Valuation

Committee

and

Product

Management

groups.

In

assessing

and

managing

each

Fund’s

liquidity

risk,

the

ILC

considers,

as

relevant,

a

variety

of

factors,

including

the

Fund’s

investment

strategy

and

the

liquidity

of

its

portfolio

investments

during

both

normal

and

reasonably

foreseeable

stressed

conditions;

its

short

and

long-term

cash

flow

projections;

and

its

cash

holdings

and

access

to

other

funding

sources

including

the

Funds’

interfund

lending

facility

and

line

of

credit.

Classification

of

the

Fund’s

portfolio

holdings

in

the

four

liquidity

categories

is

based

on

the

number

of

days

it

is

reasonably

expected

to

take

to

convert

the

investment

to

cash

(for

Highly

Liquid

and

Moderately

Liquid

holdings)

or

sell

or

dispose

of

the

investment

(for

Less

Liquid

and

Illiquid

investments),

in

current

market

conditions

without

significantly

changing

the

investment’s

market

value.

The

Fund

primarily

holds

liquid

assets

that

are

defined

under

the

Liquidity

Rule

as

"Highly

Liquid

Investments,"

and

therefore

is

not

required

to

establish

an

HLIM.

Highly

Liquid

Investments

are

defined

as

cash

and

any

investment

reasonably

expected

to

be

convertible

to

cash

in

current

market

conditions

in

three

business

days

or

less

without

the

conversion

to

cash

significantly

changing

the

market

value

of

the

investment.

At

meetings

of

the

Funds’

Board

of

Trustees

held

in

May

2020,

the

Program

Administrator

provided

a

written

report

to

the

Board

addressing

the

adequacy

and

effectiveness

of

the

program

during

the

period

December

1,

2018

to

December

31,

2019.

The

Program

Administrator

report

concluded

that

(i.)

the

LRMP,

as

adopted

and

implemented,

remains

reasonably

designed

to

assess

and

manage

each

Fund’s

liquidity

risk;

(ii.)

the

LRMP,

including

the

Highly

Liquid

Investment

Minimum

(“HLIM”)

where

applicable,

was

implemented

and

operated

effectively

to

achieve

the

goal

of

assessing

and

managing

each

Fund’s

liquidity

risk;

and

(iii.)

each

Fund

was

able

to

meet

requests

for

redemption

without

significant

dilution

of

remaining

investors’

interests

in

the

Fund.

At

the

same

time,

the

Program

Administrator

also

presented

the

Fund

Board

of

Trustees

an

update

on

liquidity

during

the

first

quarter

of

2020

in

relation

to

the

COVID-19

pandemic.

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

Franklin

Strategic

Mortgage

Portfolio

Shareholder

Information

42

franklintempleton.com

Annual

Report

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

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

as

an

exhibit

to

its

report

on

Form

N-PORT.

Shareholders

may

view

the

filed

Form

N-PORT

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.

Householding

of

Reports

and

Prospectuses

You

will

receive

the

Fund’s

financial

reports

every

six

months

as

well

as

an

annual

updated

summary

prospectus

(prospectus

available

upon

request).

To

reduce

Fund

expenses,

we

try

to

identify

related

shareholders

in

a

household

and

send

only

one

copy

of

the

financial

reports

and

summary

prospectus.

This

process,

called

“householding,”

will

continue

indefinitely

unless

you

instruct

us

otherwise.

If

you

prefer

not

to

have

these

documents

householded,

please

call

us

at

(800)

632-2301.

At

any

time

you

may

view

current

prospectuses/summary

prospectuses

and

financial

reports

on

our

website.

If

you

choose,

you

may

receive

these

documents

through

electronic

delivery.

357

A

11/20

©

2020

Franklin

Templeton

Investments.

All

rights

reserved.

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.

Annual

Report

and

Shareholder

Letter

Franklin

Strategic

Mortgage

Portfolio

Investment

Manager

Distributor

Shareholder

Services

Franklin

Advisers,

Inc.

Franklin

Templeton

Distributors,

Inc.

(800)

DIAL

BEN

®

/

342-5236

franklintempleton.com

(800)

632-2301

Item 2. Code of Ethics.

(a) The Registrant has adopted a code of ethics that applies to its principal executive officers and principal financial and accounting officer. 

(c) N/A

(d) N/A

(f) Pursuant to Item 13(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 Mary C. Choksi and she is "independent" as defined under the relevant Securities and Exchange Commission Rules and Releases.

Item 4.

Principal Accountant Fees and Services.

(a)      Audit Fees

The aggregate fees paid to the principal accountant for professional services rendered by the principal accountant for the audit of the registrant’s annual financial statements or for services that are normally provided by the principal accountant in connection with statutory and regulatory filings or engagements were $44,567 for the fiscal year ended September 30, 2020 and $54,650 for the fiscal year ended September 30, 2019.

(b)      Audit-Related Fees

There were no fees paid to the principal accountant for assurance and related services rendered by the principal accountant to the registrant that are reasonably related to the performance of the audit of the registrant's financial statements and are not reported under paragraph (a) of Item 4.

There were no fees paid to the principal accountant for assurance and related services rendered by the principal accountant to the registrant's investment adviser and any entity controlling, controlled by or under common control with the investment adviser that provides ongoing services to the registrant that are reasonably related to the performance of the audit of their financial statements. 

(c)      Tax Fees

There were no fees paid to the principal accountant for professional services rendered by the principal accountant to the registrant for tax compliance, tax advice and tax planning.

The aggregate fees paid to the principal accountant for professional services rendered by the principal accountant to the registrant’s investment adviser and any entity controlling, controlled by or under common control with the investment adviser that provides ongoing services to the registrant for tax compliance, tax advice and tax planning were $0 for the fiscal year ended September 30, 2020 and $20,000 for the fiscal year ended September 30, 2019.  The services for which these fees were paid included professional fees in connection with tax treatment of equipment lease transactions and professional fees in connection with an Indonesia withholding tax refund claim.

(d)      All Other Fees

The aggregate fees paid to the principal accountant for products and services rendered by the principal accountant to the registrant not reported in paragraphs (a)-(c) of Item 4

were $0 for the fiscal year ended September 30, 2020 and $25 for the fiscal year ended September 30, 2019. The services for which these fees were paid included review of materials provided to the fund Board in connection with the investment management contract renewal process.

The aggregate fees paid to the principal accountant for products and services rendered by the principal accountant to the registrant’s investment adviser and any entity controlling, controlled by or under common control with the investment adviser that provides ongoing services to the registrant not reported in paragraphs (a)-(c) of Item 4 were $83,035 for the fiscal year ended September 30, 2020 and $114,908 for the fiscal year ended September 30, 2019.  The services for which these fees were paid included valuation services related to fair value engagement, the issuance of an Auditor’s Certificate for South Korean regulatory shareholders disclosures, benchmarking services in connection with the ICI TA Survey and assets under management certification and professional fees in connection with determining the feasibility of a U.S. direct lending structure.

(e) (1) The registrant’s audit committee is directly responsible for approving the services to be provided by the auditors, including:

      (i)   pre-approval of all audit and audit related services;

      (ii)  pre-approval of all non-audit related services to be provided to the Fund by the auditors;

      (iii) pre-approval of all non-audit related services to be provided to the registrant by the auditors to the registrant’s investment adviser or to any entity that controls, is controlled by or is under common control with the registrant’s investment adviser and that provides ongoing services to the registrant where the non-audit services relate directly to the operations or financial reporting of the registrant; and

      (iv)  establishment by the audit committee, if deemed necessary or appropriate, as an alternative to committee pre-approval of services to be provided by the auditors, as required by paragraphs (ii) and (iii) above, of policies and procedures to permit such services to be pre-approved by other means, such as through establishment of guidelines or by action of a designated member or members of the committee; provided the policies and procedures are detailed as to the particular service and the committee is informed of each service and such policies and procedures do not include delegation of audit committee responsibilities, as contemplated under the Securities Exchange Act of 1934, to management; subject, in the case of (ii) through (iv), to any waivers, exceptions or exemptions that may be available under applicable law or rules.

(e) (2) None of the services provided to the registrant described in paragraphs (b)-(d) of Item 4 were approved by the audit committee pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of regulation S-X.

(f) No disclosures are required by this Item 4(f).

(g) The aggregate non-audit fees paid to the principal accountant for services rendered by the principal accountant to the registrant and the registrant’s investment adviser and any entity controlling, controlled by or under common control with the investment adviser that provides ongoing services to the registrant were $83,035 for the fiscal year ended September 30, 2020 and $134,933 for the fiscal year ended September 30, 2019.

(h) The registrant’s audit committee of the board has considered whether the provision of non-audit services that were rendered to the registrant’s investment adviser (not including any sub-adviser whose role is primarily portfolio management and is subcontracted with or overseen by another investment adviser), and any entity controlling, controlled by, or under common control with the investment adviser that provides ongoing services to the registrant that were not pre-approved pursuant to paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X is compatible with maintaining the principal accountant’s independence.

Item 5. Audit Committee

 

of Listed Registrants.                   N/A

Item 6. Schedule of Investments.                                  N/A

Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies.                    N/A

Item 8. Portfolio Managers of Closed-End Management Investment Companies.                                              N/A

Item 9. Purchases of Equity Securities by Closed-End Management Investment Company and

Affiliated Purchasers.             N/A

Item 10. Submission of Matters to a Vote of Security Holders.

There have been no changes to the procedures by which shareholders may recommend nominees to the Registrant's Board of Trustees that would require disclosure herein.

Item 11. Controls and Procedures.

(a) Evaluation of Disclosure Controls and Procedures

. The Registrant maintains disclosure controls and procedures that are designed to 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 are effective.

(b) Changes in Internal Controls

.

During the period covered by this report, a third-party service provider commenced performing certain accounting and administrative services for the Registrant that are subject to Franklin Templeton’s oversight.

Item 12. Disclosure of Securities Lending Activities for Closed-End Management Investment Company.                            N/A

Item 13. Exhibits.

(a) (1) Code of Ethics

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

Section 302

(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

Section 906

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

FRANKLIN STRATEGIC MORTGAGE PORTFOLIO

By __S\MATTHEW T. HINKLE______

Matthew T. Hinkle

      Chief Executive Officer - Finance and Administration

Date  November 25, 2020

Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

By __S\MATTHEW T. HINKLE_____

Matthew T. Hinkle

      Chief Executive Officer - Finance and Administration

Date  November 25, 2020

By __S\GASTON GARDEY ________

      Gaston Gardey

      Chief Financial Officer

and

Chief Accounting Officer

Date  November 25, 2020