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

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

FORM N-CSRS

CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES

Investment Company Act file number 811-07288

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: 3/31/21

Item 1. Reports to Stockholders.

a.)

The following is a copy of the report transmitted to shareholders pursuant to Rule30e-1 under the Investment Company Act of 1940, as amended (the “1940 Act”) (17 CFR 270.30e-1.)

b.)

A copy of the notice transmitted to shareholders in reliance on Rule 30e-3 under the 1940 Act that contains disclosures specified by paragraph (c)(3) of that rule is included in the Annual Report. Not Applicable.

SEMIANNUAL

REPORT

AND

SHAREHOLDER

LETTER

Franklin

Strategic

Mortgage

Portfolio

March

31,

2021

Sign

up

for

electronic

delivery

at

franklintempleton.com/edelivery

Not

FDIC

Insured

May

Lose

Value

No

Bank

Guarantee

franklintempleton.com

Not

part

of

the

semiannual

report

1

Shareholder

Letter

Dear

Shareholder:

During

the

six

months

ended

March

31,

2021,

the

U.S.

economy

continued

to

recover

from

the

effects

of

the

novel

coronavirus

(COVID-19)

pandemic.

U.S.

gross

domestic

product

(GDP)

reported

in

2020’s

third

and

fourth

quarters

showed

a

substantial

recovery

from

the

contraction

experienced

in

2020’s

first

half,

based

on

increased

business

and

residential

investment

and

consumer

spending.

The

U.S.

economy

also

showed

signs

of

strength

during

2021’s

first

quarter

as

federal

assistance

programs,

the

acceleration

of

COVID-19

vaccinations

and

robust

corporate

earnings

boosted

U.S.

equity

markets.

Before

the

reporting

period,

the

U.S.

Federal

Reserve,

in

its

efforts

to

support

U.S.

economic

activity,

lowered

the

federal

funds

rate

twice

in

March

2020

and

implemented

broad

quantitative

easing

measures

to

support

credit

markets.

During

the

reporting

period,

the

Federal

Reserve

held

its

key

rate

unchanged

at

0.25%,

but

it

continued

quantitative

easing

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

0.69%

on

September

30,

2020,

and

it

increased

to

1.74%

by

the

end

of

March

2021.

In

this

environment,

investment-grade

bonds,

as

measured

by

the

Bloomberg

Barclays

U.S.

Aggregate

Bond

Index,

posted

a

-2.73%

total

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

semiannual

report

includes

more

detail

about

prevailing

conditions

and

a

discussion

about

investment

decisions

during

the

period.

Please

remember

all

securities

markets

fluctuate,

as

do

mutual

fund

share

prices.

We

thank

you

for

investing

with

Franklin

Templeton,

welcome

your

questions

and

comments,

and

look

forward

to

serving

your

investment

needs

in

the

years

ahead.

Sincerely,

Sonal

Desai,

Ph.D.

Executive

Vice

President,

Chief

Investment

Officer

Franklin

Templeton

Fixed

Income

This

letter

reflects

our

analysis

and

opinions

as

of

March

31,

2021,

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

index

is

unmanaged

and

includes

reinvestment

of

any

income

or

distributions.

See

www.franklintempletondatasources.com

for

additional

data

provider

information.

franklintempleton.com

Semiannual

Report

2

Contents

Semiannual

Report

Franklin

Strategic

Mortgage

Portfolio

3

Performance

Summary

6

Your

Fund’s

Expenses

8

Financial

Highlights

and

Statement

of

Investments

9

Financial

Statements

20

Notes

to

Financial

Statements

24

Shareholder

Information

34

Visit

franklintempleton.com

for

fund

updates,

to

access

your

account,

or

to

find

helpful

financial

planning

tools.

3

franklintempleton.com

Semiannual

Report

SEMIANNUAL

REPORT

Franklin

Strategic

Mortgage

Portfolio

This

semiannual

report

for

Franklin

Strategic

Mortgage

Portfolio

covers

the

period

ended

March

31

,

202

1

.

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

six

months

ended

March

31,

2021,

the

Fund’s

Class

A

shares

posted

a

-0.76%

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

-0.86%

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

-0.88%

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,

posted

modestly

negative

total

returns

during

the

six

months

ended

March

31,

2021,

as

continued

economic

recovery

and

additional

government

stimulus

led

to

higher

yields

(which

move

inversely

to

prices)

for

most

bonds.

As

the

period

began,

investors

continued

to

adjust

to

the

disruption

caused

by

the

novel

coronavirus

(COVID-19)

pandemic.

Before

the

period,

investor

flight

to

perceived

safety

had

driven

the

10-year

U.S.

Treasury

yield

to

near

record

lows.

During

the

period,

however,

the

implementation

of

mass

vaccination

programs

alongside

improving

economic

indicators

prompted

investors

to

anticipate

that

increased

inflation

would

lead

to

higher

interest

rates.

The

U.S.

Federal

Reserve

(Fed)

maintained

the

federal

funds

target

rate

at

a

range

of

0.00%–0.25%

and

continued

its

program

of

open-ended

purchasing

of

government-

backed

and

corporate

bonds

as

necessary

to

provide

liquidity

to

bond

markets.

Furthermore,

the

Fed

reiterated

that

interest

rates

would

potentially

remain

low,

even

if

inflation

moderately

exceeded

the

Fed’s

2%

target

for

some

time.

U.S.

Treasury

bonds,

as

measured

by

the

Bloomberg

Barclays

U.S.

Treasury

Index,

posted

negative

total

returns

for

the

period.

The

10-year

U.S.

Treasury

yield

rose

from

near-record

lows

at

the

beginning

of

the

reporting

period

amid

a

significant

U.S.

federal

budget

deficit

and

high

Portfolio

Composition

3/31/21

%

of

Total

Net

Assets

Mortgage-Backed

Securities

78.6%

Residential

Mortgage-Backed

Securities

9.3%

Asset-Backed

Securities

4.8%

Commercial

Mortgage-Backed

Securities

1.6%

Other

1.0%

Short-Term

Investments

&

Other

Net

Assets

4.7%

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

14

.

Franklin

Strategic

Mortgage

Portfolio

4

franklintempleton.com

Semiannual

Report

levels

of

issuance.

The

Fed’s

inflation

policy

also

pressured

Treasuries,

as

renewed

economic

strength

prompted

investors

to

increase

their

inflation

expectations.

Mortgage-

backed

securities

(MBS),

as

measured

by

the

Bloomberg

Barclays

MBS

Index,

posted

marginally

negative

total

returns

for

the

period

despite

Fed

support,

as

low

interest

rates

led

to

accelerated

prepayments

from

mortgage

refinancing.

U.S.

corporate

bond

performance

varied

significantly

based

on

credit

rating,

reflecting

the

recovery

of

credit

markets

following

the

onset

of

the

pandemic.

While

the

strengthening

economy

pressured

corporate

bonds

generally,

it

also

had

the

effect

of

tempering

concerns

about

credit

quality,

which

benefited

lower-quality

bonds.

Consequently,

high-

yield

corporate

bonds,

as

represented

by

the

Bloomberg

Barclays

U.S.

Corporate

High

Yield

Bond

Index,

posted

a

solid

advance,

while

investment-grade

corporate

bonds,

as

represented

by

the

Bloomberg

Barclays

U.S.

Corporate

Bond

Index,

were

down

slightly.

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

Interest-rates

continued

to

decline

over

the

period,

reaching

a

record

low

in

early

January

2021

as

COVID-19

pandemic

caseloads

increased

and

the

economy

weakened.

However,

by

period-end,

interest-rates

began

to

climb

based

on

the

anticipation

of

rising

inflation

as

the

economy

began

a

slow

recovery,

benefited

by

two

rounds

of

fiscal

stimulus

over

the

period.

The

10-year

Treasury

rose

over

the

six

months,

ending

the

period

at

1.74%.

For

the

Bloomberg

Barclays

indexes

in

which

the

Fund

invests,

all

sectors

posted

negative

total

returns

over

the

six-month

period

but

outperformed

U.S

Treasuries,

with

the

exception

of

GNMA.

Within

the

agency

mortgage-backed

securities

(MBS)

sector,

Fannie

Mae

(FNMA)

and

Freddie

Mac

(FHLMC)

MBS

were

the

best

performers,

while

GNMA

lagged

with

negative

excess

returns.

Conventional

15-

year

MBS

outperformed

their

30-year

counterparts

and

the

conventional

30-year

MBS

sector

outperformed

comparable

30-year

GNMA

MBS

on

an

excess

return

basis.

Across

the

conventional

coupon

stack,

higher

coupon

4.5%

and

5.0%

coupons

were

the

best

performers,

while

lower

coupon

2.0%,

and

2.5%

coupons

lagged.

Fundamentally,

the

U.S.

housing

market

remains

strong

and

housing

activity

firm.

The

rate

selloff

toward

period-end

led

to

a

slight

increase

in

mortgage

rates

from

a

record

low

level

reached

in

January

2021.

However,

mortgage

rates

at

close

to

3.0%

remain

historically

low

and

should

not

materially

impact

housing

affordability

over

the

near-term.

From

a

historical

perspective,

mortgage

rates

only

began

negatively

impacting

housing

affordability

and

housing

activity

prominently

in

the

third

quarter

and

fourth

quarter

of

2018

when

mortgage

rates

approached

5.0%.

Overall

prepayment

activity

in

agency

MBS

remained

elevated

relative

to

past

prepayments

waves

despite

wider

primary

and

secondary

market

spreads

but

forbearance

requests

have

been

declining,

which

could

lead

to

lower

involuntary

prepayments

in

the

coming

months.

After

the

recent

selloff

in

rates,

only

slightly

less

than

half

of

the

agency

MBS

universe

has

an

incentive

to

refinance.

However,

refinance

applications

have

remained

stubbornly

high,

and

we

believe

prepayments

should

remain

elevated

in

the

coming

months.

As

we

progress

through

the

year

and

economic

activity

continues

to

increase,

we

expect

prepayments

to

slow.

At

the

same

time,

however,

Franklin

Strategic

Mortgage

Portfolio

5

franklintempleton.com

Semiannual

Report

quantitative

easing

taper-related

discussions

should

gain

market

focus,

which

could

exert

pressure

on

agency

MBS

spreads.

Through

the

end

of

March

2021,

the

Federal

Reserve

(Fed)

had

purchased

over

$1.84

trillion

of

agency

MBS.

Their

sizable

purchases

of

agency

MBS

should

continue

to

support

the

market,

potentially

limiting

spread

widening

and

keeping

spreads

range

bound,

which

could

benefit

lower

coupons

and

their

mortgage

dollar

rolls.

In

portfolio

sector

allocation,

we

maintained

our

largest

allocations

in

fixed-rate

agency

MBS

but

remained

underweight

the

sector

relative

to

the

benchmark.

The

elevated

prepayment

risk,

combined

with

yield

spreads

below

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

with

the

largest

allocation

in

FNMA

30-year

securities.

The

portfolio

was

positioned

up

in

the

coupon

holding

an

underweight

allocation

to

1.5%

and

2.0%

coupons

and

an

overweight

in

2.5%,

through

3.5%

and

4.5%

coupons.

The

portfolio

maintained

an

overweight

allocation

to

RMBS,

but

pared

exposure

over

the

period.

Our

exposure

remains

in

securities

that

have

significantly

deleveraged

structures

and

contain

locked-in

home

equity.

Fundamentally,

we

expect

the

U.S.

housing

sector

to

remain

strong

with

firm

activity

over

the

near-term

and

believe

RMBS

should

provide

consistent

risk-adjusted

returns.

We

reduced

allocation

to

CMBS

and

maintained

a

cautious

outlook

on

the

sector

as

downside

risks

outweigh

upside

potential.

We

remain

positioned

higher

in

the

capital

structure

in

transactions

with

solid

credit

fundamentals.

Sector

allocation

to

RMBS

was

the

top

contributor

to

performance,

followed

by

security

selection

in

agency

MBS.

Our

duration

positioning

benefited

returns.

Conversely,

the

underweight

allocation

to

agency

MBS

detracted

from

performance.

Thank

you

for

your

continued

participation

in

Franklin

Strategic

Mortgage

Portfolio.

We

look

forward

to

serving

your

future

investment

needs.

Neil

Dhruv

David

Yuen,

CFA,

FRM

Paul

Varunok

Portfolio

Management

Team

The

foregoing

information

reflects

our

analysis,

opinions

and

portfolio

holdings

as

of

March

31,

2021,

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

March

31,

2021

Franklin

Strategic

Mortgage

Portfolio

6

franklintempleton.com

Semiannual

Report

The

performance

tables

do

not

reflect

any

taxes

that

a

shareholder

would

pay

on

Fund

dividends,

capital

gain

distributions,

if

any,

or

any

realized

gains

on

the

sale

of

Fund

shares.

Total

return

reflects

reinvestment

of

the

Fund’s

dividends

and

capital

gain

distributions,

if

any,

and

any

unrealized

gains

or

losses.

Your

dividend

income

will

vary

depending

on

dividends

or

interest

paid

by

securities

in

the

Fund’s

portfolio,

adjusted

for

operating

expenses

of

each

class.

Capital

gain

distributions

are

net

profits

realized

from

the

sale

of

portfolio

securities.

Performance

as

of

3/31/21

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

6-Month

-0.76%

-4.46%

1-Year

+1.30%

-2.51%

5-Year

+10.71%

+1.28%

10-Year

+33.07%

+2.51%

Advisor

6

6-Month

-0.53%

-0.53%

1-Year

+1.66%

+1.66%

5-Year

+12.22%

+2.33%

10-Year

+36.44%

+3.16%

30-Day

Standardized

Yield

8

Share

Class

Distribution

Rate

7

(with

fee

waiver)

(without

fee

waiver)

A

1.52%

1.36%

1.11%

Advisor

1.83%

1.66%

1.41%

See

page

7

for

Performance

Summary

footnotes.

Franklin

Strategic

Mortgage

Portfolio

Performance

Summary

7

franklintempleton.com

Semiannual

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.

Events

such

as

the

spread

of

deadly

diseases,

disasters,

and

financial,

political

or

social

disruptions,

may

heighten

risks

and

adversely

affect

performance.

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

1/31/22.

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

31

days

of

March

and

the

maximum

offering

price

(NAV

for

Advisor

Class)

on

3/31/21.

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.

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

(10/1/20–3/31/21)

Share

Class

Net

Investment

Income

A

$0.069356

A1

$0.080940

C

$0.050861

R6

$0.086976

Advisor

$0.080987

Total

Annual

Operating

Expenses

9

Share

Class

With

Fee

Waiver

Without

Fee

Waiver

A

1.01%

1.31%

Advisor

0.76%

1.06%

Your

Fund’s

Expenses

Franklin

Strategic

Mortgage

Portfolio

8

franklintempleton.com

Semiannual

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

182/365

to

reflect

the

one-half

year

period.

2.

Reflects

expenses

after

fee

waivers

and

expense

reimbursements.

Does

not

include

acquired

fund

fees

and

expenses.

Actual

(actual

return

after

expenses)

Hypothetical

(5%

annual

return

before

expenses)

Share

Class

Beginning

Account

Value

10/1/20

Ending

Account

Value

3/31/21

Expenses

Paid

During

Period

10/1/20–3/31/21

1,2

Ending

Account

Value

3/31/21

Expenses

Paid

During

Period

10/1/20–3/31/21

1,2

a

Net

Annualized

Expense

Ratio

2

A

$1,000

$992.35

$4.94

$1,019.97

$5.01

0.99%

A1

$1,000

$994.67

$3.71

$1,021.22

$3.76

0.75%

C

$1,000

$990.38

$6.92

$1,017.98

$7.02

1.40%

R6

$1,000

$996.39

$3.08

$1,021.85

$3.12

0.62%

Advisor

$1,000

$994.67

$3.72

$1,021.21

$3.76

0.75%

Franklin

Strategic

Mortgage

Portfolio

Financial

Highlights

franklintempleton.com

The

accompanying

notes

are

an

integral

part

of

these

financial

statements.

Semiannual

Report

9

a

Six

Months

Ended

March

31,

2021

(unaudited)

Year

Ended

September

30,

2020

2019

2018

2017

2016

Class

A

Per

share

operating

performance

(for

a

share

outstanding

throughout

the

period)

Net

asset

value,

beginning

of

period

.....

$9.31

$9.25

$8.93

$9.34

$9.57

$9.49

Income

from

investment

operations

a

:

Net

investment

income

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

0.015

b

0.188

0.267

0.243

b

0.147

0.144

Net

realized

and

unrealized

gains

(losses)

(0.086)

0.090

0.355

(0.359)

(0.106)

0.135

Total

from

investment

operations

........

(0.071)

0.278

0.622

(0.116)

0.041

0.279

Less

distributions

from:

Net

investment

income

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

(0.069)

(0.218)

(0.302)

(0.294)

(0.267)

(0.199)

Tax

return

of

capital

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

—

—

—

—

(0.004)

—

Total

distributions

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

(0.069)

(0.218)

(0.302)

(0.294)

(0.271)

(0.199)

Net

asset

value,

end

of

period

..........

$9.17

$9.31

$9.25

$8.93

$9.34

$9.57

Total

return

c

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

(0.76)%

3.05%

7.08%

(1.25)%

0.45%

2.98%

Ratios

to

average

net

assets

d

Expenses

before

waiver

and

payments

by

affiliates

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

1.21%

1.31%

1.24%

1.21%

1.17%

1.00%

Expenses

net

of

waiver

and

payments

by

affiliates

e

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

0.99%

1.00%

1.00%

1.06%

1.16%

0.99%

Net

investment

income

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

0.32%

1.85%

2.93%

2.67%

1.82%

1.47%

Supplemental

data

Net

assets,

end

of

period

(000’s)

........

$23,767

$24,153

$18,313

$16,303

$21,143

$34,191

Portfolio

turnover

rate

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

157.46%

249.94%

223.36%

243.65%

244.09%

551.77%

Portfolio

turnover

rate

excluding

mortgage

dollar

rolls

f

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

55.46%

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,

and

is

not

annualized

for

periods

less

than

one

year.

d

Ratios

are

annualized

for

periods

less

than

one

year.

e

Benefit

of

expense

reduction

rounds

to

less

than

0.01%.

f

See

Note

1(e)

regarding

mortgage

dollar

rolls.

Franklin

Strategic

Mortgage

Portfolio

Financial

Highlights

franklintempleton.com

Semiannual

Report

The

accompanying

notes

are

an

integral

part

of

these

financial

statements.

10

a

Six

Months

Ended

March

31,

2021

(unaudited)

Year

Ended

September

30,

2020

2019

2018

2017

2016

Class

A1

Per

share

operating

performance

(for

a

share

outstanding

throughout

the

period)

Net

asset

value,

beginning

of

period

.....

$9.31

$9.25

$8.94

$9.35

$9.58

$9.49

Income

from

investment

operations

a

:

Net

investment

income

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

0.026

b

0.191

0.285

0.268

b

0.177

0.160

Net

realized

and

unrealized

gains

(losses)

(0.075)

0.110

0.349

(0.360)

(0.113)

0.153

Total

from

investment

operations

........

(0.049)

0.301

0.634

(0.092)

0.064

0.313

Less

distributions

from:

Net

investment

income

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

(0.081)

(0.241)

(0.324)

(0.318)

(0.289)

(0.223)

Tax

return

of

capital

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

—

—

—

—

(0.005)

—

Total

distributions

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

(0.081)

(0.241)

(0.324)

(0.318)

(0.294)

(0.223)

Net

asset

value,

end

of

period

..........

$9.18

$9.31

$9.25

$8.94

$9.35

$9.58

Total

return

c

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

(0.53)%

3.30%

7.22%

(1.00)%

0.70%

3.34%

Ratios

to

average

net

assets

d

Expenses

before

waiver

and

payments

by

affiliates

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

0.96%

1.05%

0.99%

0.96%

0.92%

0.75%

Expenses

net

of

waiver

and

payments

by

affiliates

e

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

0.75%

0.75%

0.75%

0.81%

0.91%

0.74%

Net

investment

income

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

0.57%

2.14%

3.18%

2.92%

2.07%

1.72%

Supplemental

data

Net

assets,

end

of

period

(000’s)

........

$26,065

$27,530

$29,286

$32,802

$40,844

$53,432

Portfolio

turnover

rate

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

157.46%

249.94%

223.36%

243.65%

244.09%

551.77%

Portfolio

turnover

rate

excluding

mortgage

dollar

rolls

f

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

55.46%

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,

and

is

not

annualized

for

periods

less

than

one

year.

d

Ratios

are

annualized

for

periods

less

than

one

year.

e

Benefit

of

expense

reduction

rounds

to

less

than

0.01%.

f

See

Note

1(e)

regarding

mortgage

dollar

rolls.

Franklin

Strategic

Mortgage

Portfolio

Financial

Highlights

franklintempleton.com

The

accompanying

notes

are

an

integral

part

of

these

financial

statements.

Semiannual

Report

11

a

Six

Months

Ended

March

31,

2021

(unaudited)

Year

Ended

September

30,

2020

2019

2018

2017

2016

Class

C

Per

share

operating

performance

(for

a

share

outstanding

throughout

the

period)

Net

asset

value,

beginning

of

period

.....

$9.31

$9.25

$8.93

$9.34

$9.57

$9.49

Income

from

investment

operations

a

:

Net

investment

income

(loss)

.........

(0.004)

b

0.138

0.230

0.207

b

0.112

0.112

Net

realized

and

unrealized

gains

(losses)

(0.085)

0.103

0.355

(0.359)

(0.109)

0.130

Total

from

investment

operations

........

(0.089)

0.241

0.585

(0.152)

0.003

0.242

Less

distributions

from:

Net

investment

income

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

(0.051)

(0.181)

(0.265)

(0.258)

(0.229)

(0.162)

Tax

return

of

capital

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

—

—

—

—

(0.004)

—

Total

distributions

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

(0.051)

(0.181)

(0.265)

(0.258)

(0.233)

(0.162)

Net

asset

value,

end

of

period

..........

$9.17

$9.31

$9.25

$8.93

$9.34

$9.57

Total

return

c

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

(0.96)%

2.64%

6.65%

(1.64)%

0.06%

2.57%

Ratios

to

average

net

assets

d

Expenses

before

waiver

and

payments

by

affiliates

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

1.62%

1.70%

1.64%

1.61%

1.57%

1.40%

Expenses

net

of

waiver

and

payments

by

affiliates

e

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

1.40%

1.40%

1.40%

1.46%

1.56%

1.39%

Net

investment

income

(loss)

..........

(0.08)%

1.47%

2.53%

2.27%

1.42%

1.07%

Supplemental

data

Net

assets,

end

of

period

(000’s)

........

$3,591

$3,960

$3,843

$4,513

$6,308

$9,468

Portfolio

turnover

rate

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

157.46%

249.94%

223.36%

243.65%

244.09%

551.77%

Portfolio

turnover

rate

excluding

mortgage

dollar

rolls

f

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

55.46%

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,

and

is

not

annualized

for

periods

less

than

one

year.

d

Ratios

are

annualized

for

periods

less

than

one

year.

e

Benefit

of

expense

reduction

rounds

to

less

than

0.01%.

f

See

Note

1(e)

regarding

mortgage

dollar

rolls.

Franklin

Strategic

Mortgage

Portfolio

Financial

Highlights

franklintempleton.com

Semiannual

Report

The

accompanying

notes

are

an

integral

part

of

these

financial

statements.

12

a

Six

Months

Ended

March

31,

2021

(unaudited)

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

period)

Net

asset

value,

beginning

of

period

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

$9.29

$9.24

$8.92

$9.33

$9.38

Income

from

investment

operations

b

:

Net

investment

income

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

0.033

c

0.222

0.296

0.282

c

0.003

Net

realized

and

unrealized

gains

(losses)

...........

(0.076

)

0.081

0.360

(0.363)

(0.002)

Total

from

investment

operations

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

(0.043)

0.303

0.656

(0.081)

0.001

Less

distributions

from:

Net

investment

income

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

(0.087)

(0.253)

(0.336)

(0.329)

(0.050)

Tax

return

of

capital

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

—

—

—

—

(0.001)

Total

distributions

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

(0.087)

(0.253)

(0.336)

(0.329)

(0.051)

Net

asset

value,

end

of

period

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

$9.16

$9.29

$9.24

$8.92

$9.33

Total

return

d

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

(0.36)%

3.33%

7.49%

(0.87)%

0.01%

Ratios

to

average

net

assets

e

Expenses

before

waiver

and

payments

by

affiliates

......

0.97%

1.07%

1.00%

1.01%

1.83%

Expenses

net

of

waiver

and

payments

by

affiliates

f

......

0.62%

0.62%

0.62%

0.69%

0.75%

Net

investment

income

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

0.70%

2.17%

3.31%

3.04%

2.23%

Supplemental

data

Net

assets,

end

of

period

(000’s)

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

$493

$559

$383

$432

$5

Portfolio

turnover

rate

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

157.46%

249.94%

223.36%

243.65%

244.09%

Portfolio

turnover

rate

excluding

mortgage

dollar

rolls

g

....

55.46%

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

Ratios

are

annualized

for

periods

less

than

one

year,

except

for

non-recurring

expenses,

if

any.

f

Benefit

of

expense

reduction

rounds

to

less

than

0.01%.

g

See

Note

1(e)

regarding

mortgage

dollar

rolls.

Franklin

Strategic

Mortgage

Portfolio

Financial

Highlights

franklintempleton.com

The

accompanying

notes

are

an

integral

part

of

these

financial

statements.

Semiannual

Report

13

a

Six

Months

Ended

March

31,

2021

(unaudited)

Year

Ended

September

30,

2020

2019

2018

2017

2016

Advisor

Class

Per

share

operating

performance

(for

a

share

outstanding

throughout

the

period)

Net

asset

value,

beginning

of

period

.....

$9.30

$9.24

$8.93

$9.33

$9.57

$9.48

Income

from

investment

operations

a

:

Net

investment

income

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

0.026

b

0.192

0.284

0.268

b

0.187

0.146

Net

realized

and

unrealized

gains

(losses)

(0.075)

0.109

0.350

(0.351)

(0.133)

0.166

Total

from

investment

operations

........

(0.049)

0.301

0.634

(0.083)

0.054

0.312

Less

distributions

from:

Net

investment

income

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

(0.081)

(0.241)

(0.324)

(0.317)

(0.289)

(0.222)

Tax

return

of

capital

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

—

—

—

—

(0.005)

—

Total

distributions

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

(0.081)

(0.241)

(0.324)

(0.317)

(0.294)

(0.222)

Net

asset

value,

end

of

period

..........

$9.17

$9.30

$9.24

$8.93

$9.33

$9.57

Total

return

c

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

(0.53)%

3.30%

7.23%

(1.00)%

0.70%

3.34%

Ratios

to

average

net

assets

d

Expenses

before

waiver

and

payments

by

affiliates

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

0.97%

1.05%

0.99%

0.96%

0.92%

0.75%

Expenses

net

of

waiver

and

payments

by

affiliates

e

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

0.75%

0.75%

0.75%

0.81%

0.91%

0.74%

Net

investment

income

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

0.57%

2.14%

3.18%

2.92%

2.07%

1.72%

Supplemental

data

Net

assets,

end

of

period

(000’s)

........

$8,701

$9,609

$10,907

$6,574

$7,632

$8,264

Portfolio

turnover

rate

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

157.46%

249.94%

223.36%

243.65%

244.09%

551.77%

Portfolio

turnover

rate

excluding

mortgage

dollar

rolls

f

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

55.46%

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

is

not

annualized

for

periods

less

than

one

year.

d

Ratios

are

annualized

for

periods

less

than

one

year.

e

Benefit

of

expense

reduction

rounds

to

less

than

0.01%.

f

See

Note

1(e)

regarding

mortgage

dollar

rolls.

Franklin

Strategic

Mortgage

Portfolio

Statement

of

Investments

(unaudited),

March

31,

2021

franklintempleton.com

Semiannual

Report

The

accompanying

notes

are

an

integral

part

of

these

financial

statements.

14

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

$

109,765

Insurance

0.0%

†

a,b

Ambac

Assurance

Corp.

,

Sub.

Bond

,

144A,

5.1

%

,

Perpetual

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

237

326

b,c

Ambac

LSNI

LLC

,

Senior

Note

,

144A,

FRN

,

6

%

,

(

3-month

USD

LIBOR

+

5

%

),

2/12/23

861

864

1,190

Total

Corporate

Bonds

(Cost

$100,689)

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

110,955

U.S.

Government

and

Agency

Securities

0.8%

U.S.

Treasury

Bonds

,

4.75%,

2/15/37

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

225,000

307,819

4.25%,

11/15/40

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

131,000

173,378

Total

U.S.

Government

and

Agency

Securities

(Cost

$466,767)

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

481,197

Asset-Backed

Securities

4.8%

Diversified

Financial

Services

4.5%

b

American

Homes

4

Rent

Trust

,

2015-SFR1

,

A

,

144A,

3.467

%

,

4/17/52

...........

143,512

153,774

b

CF

Hippolyta

LLC

,

2020-1,

A1,

144A,

1.69%,

7/15/60

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

114,525

115,530

2021-1A,

A1,

144A,

1.53%,

3/15/61

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

100,000

99,771

d

CWABS,

Inc.

,

2004-1

,

M1

,

FRN

,

0.859

%

,

(

1-month

USD

LIBOR

+

0.75

%

),

3/25/34

..

24,079

24,044

b

FirstKey

Homes

Trust

,

2020-SFR2

,

A

,

144A,

1.266

%

,

10/19/37

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

149,669

148,415

b,d

Invitation

Homes

Trust

,

2018-SFR4

,

A

,

144A,

FRN

,

1.208

%

,

(

1-month

USD

LIBOR

+

1.1

%

),

1/17/38

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

177,289

178,137

b,e

Mill

City

Mortgage

Loan

Trust

,

2016-1,

A1,

144A,

FRN,

2.5%,

4/25/57

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

31,108

31,377

2018-2,

A1,

144A,

FRN,

3.5%,

5/25/58

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

116,024

119,556

2018-1,

A1,

144A,

FRN,

3.25%,

5/25/62

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

86,533

89,324

2018-4,

A1B,

144A,

FRN,

3.5%,

4/25/66

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

155,363

162,794

b

Progress

Residential

Trust

,

2018-SFR2

,

A

,

144A,

3.712

%

,

8/17/35

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

200,000

201,469

e

RASC

Trust

,

2004-KS8

,

AI6

,

FRN

,

4.79

%

,

9/25/34

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

12

12

b

Towd

Point

Mortgage

Trust

,

e

2015-2,

1A12,

144A,

FRN,

2.75%,

11/25/60

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

37,551

37,622

e

2016-1,

A1,

144A,

FRN,

3.5%,

2/25/55

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

36,597

36,906

e

2016-3,

A1,

144A,

FRN,

2.25%,

4/25/56

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

60,542

61,051

e

2016-4,

A1,

144A,

FRN,

2.25%,

7/25/56

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

87,333

88,156

e

2016-5,

A1,

144A,

FRN,

2.5%,

10/25/56

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

195,005

198,891

e

2017-1,

A1,

144A,

FRN,

2.75%,

10/25/56

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

142,416

144,918

d

2017-5,

A1,

144A,

FRN,

0.709%,

(1-month

USD

LIBOR

+

0.6%),

2/25/57

........

42,069

42,090

e

2017-2,

A1,

144A,

FRN,

2.75%,

4/25/57

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

38,250

38,870

e

2017-4,

A1,

144A,

FRN,

2.75%,

6/25/57

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

186,025

192,093

e

2018-1,

A1,

144A,

FRN,

3%,

1/25/58

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

49,937

51,491

e

2018-2,

A1,

144A,

FRN,

3.25%,

3/25/58

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

112,902

117,855

e

2019-1,

A1,

144A,

FRN,

3.735%,

3/25/58

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

198,169

210,240

e

2018-6,

A1A,

144A,

FRN,

3.75%,

3/25/58

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

90,089

93,675

e

2015-3,

A1B,

144A,

FRN,

3%,

3/25/54

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

2,309

2,311

e

2017-1,

A2,

144A,

FRN,

3.5%,

10/25/56

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

165,000

175,117

2,815,489

a

a

a

a

a

Thrifts

&

Mortgage

Finance

0.3%

e

Conseco

Finance

Corp.

,

1998-4,

A7,

FRN,

6.87%,

4/01/30

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

14,238

14,495

1998-6,

A8,

FRN,

6.66%,

6/01/30

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

12,392

12,471

Franklin

Strategic

Mortgage

Portfolio

Statement

of

Investments

(unaudited)

franklintempleton.com

The

accompanying

notes

are

an

integral

part

of

these

financial

statements.

Semiannual

Report

15

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

.......

$

182,418

$

192,258

219,224

a

a

a

a

a

Total

Asset-Backed

Securities

(Cost

$2,970,641)

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

3,034,713

Commercial

Mortgage-Backed

Securities

1.6%

Diversified

Financial

Services

1.5%

b,f

Anthracite

Ltd.

,

2004-HY1A

,

E

,

144A,

7.147

%

,

6/20/41

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

1,598,000

24

b,d

BX

Commercial

Mortgage

Trust

,

2020-FOX,

A,

144A,

FRN,

1.106%,

(1-month

USD

LIBOR

+

1%),

11/15/32

.......

165,000

165,525

2018-IND,

A,

144A,

FRN,

0.856%,

(1-month

USD

LIBOR

+

0.75%),

11/15/35

.....

45,740

45,796

2019-XL,

A,

144A,

FRN,

1.026%,

(1-month

USD

LIBOR

+

0.92%),

10/15/36

......

159,887

160,182

2020-BXLP,

A,

144A,

FRN,

0.906%,

(1-month

USD

LIBOR

+

0.8%),

12/15/36

.....

199,595

199,924

b,d

Cold

Storage

Trust

,

2020-ICE5

,

A

,

144A,

FRN

,

1.006

%

,

(

1-month

USD

LIBOR

+

0.9

%

),

11/15/37

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

324,387

325,340

e

Commercial

Mortgage

Trust

,

2006-GG7

,

AJ

,

FRN

,

5.61

%

,

7/10/38

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

39,434

35,501

932,292

a

a

a

a

a

Thrifts

&

Mortgage

Finance

0.1%

d

FNMA

,

2007-1

,

NF

,

FRN

,

0.359

%

,

(

1-month

USD

LIBOR

+

0.25

%

),

2/25/37

........

53,713

53,811

Total

Commercial

Mortgage-Backed

Securities

(Cost

$1,032,362)

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

986,103

Mortgage-Backed

Securities

78.6%

Federal

Home

Loan

Mortgage

Corp.

(FHLMC)

Fixed

Rate

14.8%

FHLMC

Gold

Pools,

30

Year,

4.5%,

4/01/40

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

309,459

347,438

FHLMC

Gold

Pools,

30

Year,

4.5%,

1/01/49

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

584,693

654,195

FHLMC

Gold

Pools,

30

Year,

5%,

10/01/33

-

2/01/39

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

208,231

240,251

FHLMC

Gold

Pools,

30

Year,

5.5%,

9/01/33

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

21,090

24,410

FHLMC

Gold

Pools,

30

Year,

6%,

7/01/28

-

11/01/36

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

62,530

72,998

FHLMC

Gold

Pools,

30

Year,

6.5%,

11/01/27

-

7/01/32

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

31,957

35,926

FHLMC

Gold

Pools,

30

Year,

7.5%,

1/01/26

-

3/01/32

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

54,795

57,729

FHLMC

Gold

Pools,

30

Year,

8%,

7/01/24

-

5/01/30

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

78,095

82,031

FHLMC

Gold

Pools,

30

Year,

9%,

9/01/30

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

6,447

6,475

FHLMC

Gold

Pools,

30

Year,

9.5%,

8/01/21

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

11

10

FHLMC

Pool,

30

Year,

2.5%,

10/01/50

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

2,050,494

2,112,824

FHLMC

Pool,

30

Year,

3%,

2/01/50

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

462,277

488,999

FHLMC

Pool,

30

Year,

3%,

5/01/50

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

1,209,915

1,279,882

FHLMC

Pool,

30

Year,

3%,

8/01/50

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

883,621

940,386

FHLMC

Pool,

30

Year,

3.5%,

7/01/49

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

1,674,554

1,797,082

FHLMC

Pool,

30

Year,

4%,

5/01/50

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

139,496

152,346

FHLMC

Pool,

30

Year,

4.5%,

10/01/48

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

892,376

988,270

9,281,252

g

Federal

National

Mortgage

Association

(FNMA)

Adjustable

Rate

0.9%

FNMA,

1.367%

-

4.75%,

(6-month

USD

LIBOR

+/-

MBS

Margin),

3/01/22

-

7/01/38

..

587,463

590,400

590,400

Federal

National

Mortgage

Association

(FNMA)

Fixed

Rate

56.7%

FNMA,

3.5%,

7/01/56

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

765,508

840,217

FNMA,

15

Year,

2.5%,

3/01/29

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

423,248

441,597

FNMA,

30

Year,

2.5%,

9/01/50

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

2,167,495

2,234,492

FNMA,

30

Year,

2.5%,

9/01/50

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

2,148,635

2,223,184

FNMA,

30

Year,

2.5%,

10/01/50

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

876,832

902,740

FNMA,

30

Year,

3%,

11/01/48

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

2,391,730

2,514,164

Franklin

Strategic

Mortgage

Portfolio

Statement

of

Investments

(unaudited)

franklintempleton.com

Semiannual

Report

The

accompanying

notes

are

an

integral

part

of

these

financial

statements.

16

a

a

Principal

Amount

a

Value

a

a

a

a

a

Mortgage-Backed

Securities

(continued)

Federal

National

Mortgage

Association

(FNMA)

Fixed

Rate

(continued)

FNMA,

30

Year,

3%,

9/01/49

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

$

402,869

$

424,937

FNMA,

30

Year,

3%,

9/01/49

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

416,757

439,195

FNMA,

30

Year,

3%,

3/01/50

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

569,492

598,806

FNMA,

30

Year,

3%,

7/01/50

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

596,876

627,324

FNMA,

30

Year,

3%,

7/01/50

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

1,240,466

1,317,932

FNMA,

30

Year,

3%,

8/01/50

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

736,978

780,220

FNMA,

30

Year,

3%,

9/01/50

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

725,408

766,641

FNMA,

30

Year,

3%,

9/01/50

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

713,931

757,083

FNMA,

30

Year,

3.5%,

11/01/46

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

560,623

608,227

FNMA,

30

Year,

3.5%,

8/01/49

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

1,856,872

1,988,971

FNMA,

30

Year,

3.5%,

8/01/49

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

605,402

649,234

FNMA,

30

Year,

3.5%,

9/01/49

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

1,714,392

1,823,843

FNMA,

30

Year,

3.5%,

1/01/50

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

424,223

456,301

FNMA,

30

Year,

3.5%,

2/01/50

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

396,636

425,311

FNMA,

30

Year,

3.5%,

4/01/50

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

540,791

583,028

FNMA,

30

Year,

3.5%,

11/01/50

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

369,911

397,991

FNMA,

30

Year,

4%,

11/01/45

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

3,118,285

3,426,302

h

FNMA,

30

Year,

4%,

9/01/49

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

1,051,364

1,147,616

FNMA,

30

Year,

4.5%,

11/01/47

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

844,146

935,226

FNMA,

30

Year,

5%,

4/01/34

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

71,262

79,644

FNMA,

30

Year,

5.5%,

9/01/33

-

11/01/35

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

610,829

697,102

FNMA,

30

Year,

6%,

10/01/34

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

268,657

321,193

FNMA,

30

Year,

6%,

12/01/23

-

8/01/35

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

390,445

453,294

FNMA,

30

Year,

6.5%,

12/01/27

-

8/01/32

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

294,151

333,023

FNMA,

30

Year,

7.5%,

8/01/25

-

5/01/32

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

12,742

14,932

FNMA,

30

Year,

8%,

1/01/25

-

7/01/31

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

19,993

23,133

FNMA,

30

Year,

8.5%,

11/01/28

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

2,594

2,605

FNMA,

30

Year,

9%,

8/01/24

-

4/01/25

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

613

665

FNMA,

30

Year,

9.5%,

11/01/21

-

4/01/30

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

23,045

23,519

h,i

FNMA,

Single-family,

15

Year,

2%,

4/25/36

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

4,656,000

4,778,688

h,i

FNMA,

Single-family,

30

Year,

2%,

4/25/51

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

1,400,000

1,397,484

35,435,864

Government

National

Mortgage

Association

(GNMA)

Fixed

Rate

6.2%

GNMA

I,

30

Year,

7%,

11/15/29

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

1,841

2,166

GNMA

I,

30

Year,

8%,

11/15/25

-

12/15/26

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

6,525

7,097

GNMA

I,

Single-family,

30

Year,

6.5%,

1/15/24

-

9/15/32

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

60,915

68,075

GNMA

I,

Single-family,

30

Year,

7%,

6/15/23

-

2/15/32

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

13,555

13,956

GNMA

I,

Single-family,

30

Year,

7.5%,

10/15/23

-

10/15/29

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

18,147

19,013

GNMA

I,

Single-family,

30

Year,

8%,

1/15/22

-

9/15/27

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

3,479

3,562

GNMA

I,

Single-family,

30

Year,

8.5%,

7/15/24

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

49

49

h,i

GNMA

II,

Single-family,

30

Year,

2%,

4/15/51

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

1,098,000

1,108,723

GNMA

II,

Single-family,

30

Year,

2.5%,

10/20/50

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

981,356

1,013,569

h,i

GNMA

II,

Single-family,

30

Year,

2.5%,

4/15/51

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

1,441,000

1,486,932

GNMA

II,

Single-family,

30

Year,

6.5%,

1/20/26

-

1/20/33

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

91,250

106,206

GNMA

II,

Single-family,

30

Year,

7.5%,

11/20/22

-

7/20/32

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

51,218

59,701

GNMA

II,

Single-family,

30

Year,

8%,

8/20/26

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

43

48

GNMA

II,

Single-family,

30

Year,

9%,

12/20/21

-

3/20/25

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

232

237

3,889,334

Total

Mortgage-Backed

Securities

(Cost

$48,766,297)

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

49,196,850

Residential

Mortgage-Backed

Securities

9.3%

Capital

Markets

0.1%

d

Merrill

Lynch

Mortgage

Investors

Trust

,

2003-A

,

1A

,

FRN

,

0.849

%

,

(

1-month

USD

LIBOR

+

0.74

%

),

3/25/28

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

55,402

54,781

Franklin

Strategic

Mortgage

Portfolio

Statement

of

Investments

(unaudited)

franklintempleton.com

The

accompanying

notes

are

an

integral

part

of

these

financial

statements.

Semiannual

Report

17

a

a

Principal

Amount

a

Value

a

a

a

a

a

Residential

Mortgage-Backed

Securities

(continued)

Diversified

Financial

Services

1.8%

d

American

Home

Mortgage

Investment

Trust

,

2005-1

,

6A

,

FRN

,

2.204

%

,

(

6-month

USD

LIBOR

+

2

%

),

6/25/45

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

$

53,109

$

54,669

b

BRAVO

Residential

Funding

Trust

,

2019-1,

A1C,

144A,

3.5%,

3/25/58

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

68,993

71,057

e

2019-2,

A3,

144A,

FRN,

3.5%,

10/25/44

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

95,499

99,803

b

CIM

Trust

,

e

2019-INV1,

A1,

144A,

FRN,

4%,

2/25/49

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

61,166

62,370

d

2019-INV2,

A11,

144A,

FRN,

1.068%,

(1-month

USD

LIBOR

+

0.95%),

5/25/49

...

156,129

156,282

e

2019-INV2,

A3,

144A,

FRN,

4%,

5/25/49

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

98,361

100,961

e

2018-INV1,

A4,

144A,

FRN,

4%,

8/25/48

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

59,384

60,856

b,e

Citigroup

Mortgage

Loan

Trust

,

2013-A

,

A

,

144A,

FRN

,

3

%

,

5/25/42

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

8,043

8,095

b,e

CSMC

Trust

,

2014-OAK1

,

1A1

,

144A,

FRN

,

3

%

,

11/25/29

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

57,618

58,982

b,e

Flagstar

Mortgage

Trust

,

2018-6RR

,

1A3

,

144A,

FRN

,

4

%

,

10/25/48

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

15,509

15,554

b,e

J.P.

Morgan

Mortgage

Trust

,

2013-3

,

A3

,

144A,

FRN

,

3.384

%

,

7/25/43

...........

102,592

105,518

b,d

OBX

Trust

,

2018-1

,

A2

,

144A,

FRN

,

0.759

%

,

(

1-month

USD

LIBOR

+

0.65

%

),

6/25/57

56,652

56,836

b,e

Provident

Funding

Mortgage

Trust

,

2019-1,

A3,

144A,

FRN,

3%,

12/25/49

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

16,372

16,434

2020-1,

A3,

144A,

FRN,

3%,

2/25/50

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

26,302

26,414

b,e

Sequoia

Mortgage

Trust

,

2021-1,

A1,

144A,

FRN,

2.5%,

3/25/51

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

200,555

203,201

2016-2,

A4,

144A,

FRN,

3.5%,

8/25/46

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

46,725

46,865

b,e

Wells

Fargo

Mortgage

Backed

Securities

Trust

,

2018-1

,

A3

,

144A,

FRN

,

3.5

%

,

7/25/47

18,741

18,819

1,162,716

a

a

a

a

a

Thrifts

&

Mortgage

Finance

7.4%

d

FHLMC

Structured

Agency

Credit

Risk

Debt

Notes

,

2013-DN2,

M2,

FRN,

4.359%,

(1-month

USD

LIBOR

+

4.25%),

11/25/23

........

140,886

141,002

2017-DNA1,

M2,

FRN,

3.359%,

(1-month

USD

LIBOR

+

3.25%),

7/25/29

........

237,953

245,518

2017-HQA1,

M2,

FRN,

3.659%,

(1-month

USD

LIBOR

+

3.55%),

8/25/29

........

211,083

217,405

2017-DNA2,

M2,

FRN,

3.559%,

(1-month

USD

LIBOR

+

3.45%),

10/25/29

.......

250,000

260,223

2017-DNA3,

M2,

FRN,

2.609%,

(1-month

USD

LIBOR

+

2.5%),

3/25/30

.........

250,000

255,865

2017-HQA3,

M2,

FRN,

2.459%,

(1-month

USD

LIBOR

+

2.35%),

4/25/30

........

180,893

183,983

2014-DN2,

M3,

FRN,

3.709%,

(1-month

USD

LIBOR

+

3.6%),

4/25/24

..........

213,729

213,475

2014-DN3,

M3,

FRN,

4.109%,

(1-month

USD

LIBOR

+

4%),

8/25/24

...........

85,817

87,424

2014-HQ1,

M3,

FRN,

4.209%,

(1-month

USD

LIBOR

+

4.1%),

8/25/24

..........

66,927

67,888

2014-DN4,

M3,

FRN,

4.659%,

(1-month

USD

LIBOR

+

4.55%),

10/25/24

........

153,834

157,194

2014-HQ3,

M3,

FRN,

4.859%,

(1-month

USD

LIBOR

+

4.75%),

10/25/24

........

46,751

47,418

2015-DN1,

M3,

FRN,

4.259%,

(1-month

USD

LIBOR

+

4.15%),

1/25/25

.........

11,847

11,853

2015-HQ2,

M3,

FRN,

3.359%,

(1-month

USD

LIBOR

+

3.25%),

5/25/25

.........

191,051

194,645

2016-DNA2,

M3,

FRN,

4.759%,

(1-month

USD

LIBOR

+

4.65%),

10/25/28

.......

172,541

181,289

2016-HQA2,

M3,

FRN,

5.259%,

(1-month

USD

LIBOR

+

5.15%),

11/25/28

.......

212,876

222,659

2016-DNA4,

M3,

FRN,

3.909%,

(1-month

USD

LIBOR

+

3.8%),

3/25/29

.........

236,395

246,679

d

FNMA

Connecticut

Avenue

Securities

,

2014-C04,

1M2,

FRN,

5.009%,

(1-month

USD

LIBOR

+

4.9%),

11/25/24

.........

140,977

145,775

2015-C01,

1M2,

FRN,

4.409%,

(1-month

USD

LIBOR

+

4.3%),

2/25/25

.........

189,362

192,347

2016-C04,

1M2,

FRN,

4.359%,

(1-month

USD

LIBOR

+

4.25%),

1/25/29

........

205,092

214,199

2017-C05,

1M2,

FRN,

2.309%,

(1-month

USD

LIBOR

+

2.2%),

1/25/30

.........

180,527

183,010

2017-C06,

1M2,

FRN,

2.759%,

(1-month

USD

LIBOR

+

2.65%),

2/25/30

........

184,368

186,666

2014-C02,

2M2,

FRN,

2.709%,

(1-month

USD

LIBOR

+

2.6%),

5/25/24

.........

164,568

166,149

2014-C03,

2M2,

FRN,

3.009%,

(1-month

USD

LIBOR

+

2.9%),

7/25/24

.........

78,224

79,175

2015-C01,

2M2,

FRN,

4.659%,

(1-month

USD

LIBOR

+

4.55%),

2/25/25

........

26,944

27,047

2016-C05,

2M2,

FRN,

4.559%,

(1-month

USD

LIBOR

+

4.45%),

1/25/29

........

97,632

101,956

2017-C02,

2M2,

FRN,

3.759%,

(1-month

USD

LIBOR

+

3.65%),

9/25/29

........

185,968

191,714

2013-C01,

M2,

FRN,

5.359%,

(1-month

USD

LIBOR

+

5.25%),

10/25/23

........

151,040

156,050

Franklin

Strategic

Mortgage

Portfolio

Statement

of

Investments

(unaudited)

franklintempleton.com

Semiannual

Report

The

accompanying

notes

are

an

integral

part

of

these

financial

statements.

18

a

a

Principal

Amount

a

Value

a

a

a

a

a

Residential

Mortgage-Backed

Securities

(continued)

Thrifts

&

Mortgage

Finance

(continued)

d

FNMA

Connecticut

Avenue

Securities,

(continued)

2014-C01,

M2,

FRN,

4.509%,

(1-month

USD

LIBOR

+

4.4%),

1/25/24

..........

$

148,406

$

152,261

b

Virginia

Housing

Development

Authority

,

2020-A

,

A

,

144A,

2.85

%

,

12/25/49

........

84,134

86,852

4,617,721

a

a

a

a

a

Total

Residential

Mortgage-Backed

Securities

(Cost

$5,914,291)

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

5,835,218

Total

Long

Term

Investments

(Cost

$59,251,047)

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

59,645,036

a

a

a

a

a

Short

Term

Investments

20.6%

U.S.

Government

and

Agency

Securities

3.7%

j

U.S.

Treasury

Bills,

4/29/21

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

2,300,000

2,299,991

Total

U.S.

Government

and

Agency

Securities

(Cost

$2,299,905)

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

2,299,991

Shares

a

Money

Market

Funds

5.0%

k,l

Institutional

Fiduciary

Trust

-

Money

Market

Portfolio,

0.01%

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

3,128,452

3,128,452

Total

Money

Market

Funds

(Cost

$3,128,452)

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

3,128,452

Principal

Amount

Repurchase

Agreements

11.9%

m

Joint

Repurchase

Agreement,

0.004%,

4/01/21

(Maturity

Value

$7,442,185)

BNP

Paribas

Securities

Corp.

(Maturity

Value

$4,339,389)

Deutsche

Bank

Securities,

Inc.

(Maturity

Value

$1,041,534)

HSBC

Securities

(USA),

Inc.

(Maturity

Value

$2,061,262)

Collateralized

by

U.S.

Government

Agency

Securities,

2.25%

-

5%,

9/20/42

-

3/15/56;

U.S.

Treasury

Bonds,

6.25%

-

8.13%,

5/15/21

-

2/15/25;

and

U.S.

Treasury

Note,

1.63%,

11/15/22

(valued

at

$7,594,584)

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

7,442,184

7,442,184

Total

Repurchase

Agreements

(Cost

$7,442,184)

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

7,442,184

Total

Short

Term

Investments

(Cost

$12,870,541

)

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

12,870,627

a

Total

Investments

(Cost

$72,121,588)

115.9%

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

$72,515,663

Other

Assets,

less

Liabilities

(15.9)%

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

(9,898,792)

Net

Assets

100.0%

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

$62,616,871

†

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

March

31,

2021,

the

aggregate

value

of

these

securities

was

$4,884,313,

representing

7.7%

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).

Franklin

Strategic

Mortgage

Portfolio

Statement

of

Investments

(unaudited)

franklintempleton.com

The

accompanying

notes

are

an

integral

part

of

these

financial

statements.

Semiannual

Report

19

At

March

31,

2021,

the

Fund

had

the

following futures

contracts

outstanding.

See

Note

1(d). 

See

Abbreviations

on

page

33

.

h

A

portion

or

all

of

the

security

purchased

on

a

delayed

delivery

basis.

See

Note

1(c).

i

Security

purchased

on

a

to-be-announced

(TBA)

basis.

See

Note

1(c).

j

The

security

was

issued

on

a

discount

basis

with

no

stated

coupon

rate.

k

See

Note

3(f)

regarding

investments

in

affiliated

management

investment

companies.

l

The

rate

shown

is

the

annualized

seven-day

effective

yield

at

period

end.

m

See

Note

1(b)

regarding

joint

repurchase

agreement.

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

15

$

1,964,062

6/21/21

$

44,933

U.S.

Treasury

10

Year

Ultra

Notes

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

Long

8

1,149,500

6/21/21

(40,089)

U.S.

Treasury

2

Year

Notes

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

Long

7

1,545,086

6/30/21

(1,336)

U.S.

Treasury

5

Year

Notes

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

Long

23

2,838,164

6/30/21

(25,216)

U.S.

Treasury

Long

Bonds

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

Long

4

618,375

6/21/21

(8,881)

U.S.

Treasury

Ultra

Bonds

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

Short

2

362,438

6/21/21

15,153

Total

Futures

Contracts

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

$(15,436)

*

As

of

period

end.

Franklin

Strategic

Mortgage

Portfolio

Financial

Statements

Statement

of

Assets

and

Liabilities

March

31,

2021

(unaudited)

franklintempleton.com

Semiannual

Report

The

accompanying

notes

are

an

integral

part

of

these

financial

statements.

20

Franklin

Strategic

Mortgage

Portfolio

Assets:

Investments

in

securities:

Cost

-

Unaffiliated

issuers

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

$61,550,952

Cost

-

Non-controlled

affiliates

(Note

3

f

)

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

3,128,452

Cost

-

Unaffiliated

repurchase

agreements

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

7,442,184

Value

-

Unaffiliated

issuers

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

$61,945,027

Value

-

Non-controlled

affiliates

(Note

3

f

)

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

3,128,452

Value

-

Unaffiliated

repurchase

agreements

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

7,442,184

Receivables:

Capital

shares

sold

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

68,958

Interest

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

121,970

Deposits

with

brokers

for:

Futures

contracts

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

31,426

Total

assets

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

72,738,017

Liabilities:

Payables:

Investment

securities

purchased

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

9,949,427

Capital

shares

redeemed

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

76,413

Management

fees

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

15,754

Distribution

fees

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

7,120

Transfer

agent

fees

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

14,008

Distributions

to

shareholders

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

5,104

Variation

margin

on

futures

contracts

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

2,329

Accrued

expenses

and

other

liabilities

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

50,991

Total

liabilities

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

10,121,146

Net

assets,

at

value

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

$62,616,871

Net

assets

consist

of:

Paid-in

capital

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

$65,952,659

Total

distributable

earnings

(losses)

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

(3,335,788)

Net

assets,

at

value

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

$62,616,871

Franklin

Strategic

Mortgage

Portfolio

Financial

Statements

Statement

of

Assets

and

Liabilities

(continued)

March

31,

2021

(unaudited)

franklintempleton.com

The

accompanying

notes

are

an

integral

part

of

these

financial

statements.

Semiannual

Report

21

Franklin

Strategic

Mortgage

Portfolio

Class

A:

Net

assets,

at

value

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

$23,766,908

Shares

outstanding

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

2,590,760

Net

asset

value

per

share

a

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

$9.17

Maximum

offering

price

per

share

(net

asset

value

per

share

÷

96.25%)

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

$9.53

Class

A1:

Net

assets,

at

value

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

$26,065,371

Shares

outstanding

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

2,839,818

Net

asset

value

per

share

a

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

$9.18

Maximum

offering

price

per

share

(net

asset

value

per

share

÷

96.25%)

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

$9.54

Class

C:

Net

assets,

at

value

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

$3,590,670

Shares

outstanding

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

391,391

Net

asset

value

and

maximum

offering

price

per

share

a

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

$9.17

Class

R6:

Net

assets,

at

value

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

$493,010

Shares

outstanding

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

53,821

Net

asset

value

and

maximum

offering

price

per

share

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

$9.16

Advisor

Class:

Net

assets,

at

value

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

$8,700,912

Shares

outstanding

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

949,221

Net

asset

value

and

maximum

offering

price

per

share

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

$9.17

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

six

months

ended

March

31,

2021

(unaudited)

franklintempleton.com

Semiannual

Report

The

accompanying

notes

are

an

integral

part

of

these

financial

statements.

22

Franklin

Strategic

Mortgage

Portfolio

Investment

income:

Dividends:

Non-controlled

affiliates

(Note

3

f

)

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

$25

Interest:

Unaffiliated

issuers:

Paydown

gain

(loss)

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

(339,468)

Paid

in

cash

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

762,416

Total

investment

income

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

422,973

Expenses:

Management

fees

(Note

3

a

)

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

128,485

Distribution

fees:

(Note

3c

)

    Class

A

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

30,792

    Class

C

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

12,700

Transfer

agent

fees:

(Note

3e

)

    Class

A

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

19,524

    Class

A1

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

21,054

    Class

C

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

3,103

    Class

R6

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

433

    Advisor

Class

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

6,831

Custodian

fees

(Note

4

)

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

408

Reports

to

shareholders

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

11,744

Registration

and

filing

fees

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

48,633

Professional

fees

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

53,085

Trustees'

fees

and

expenses

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

550

Other

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

15,806

Total

expenses

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

353,148

Expense

reductions

(Note

4

)

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

(1)

Expenses

waived/paid

by

affiliates

(Note

3

f

and

3

g

)

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

(70,661)

Net

expenses

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

282,486

Net

investment

income

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

140,487

Realized

and

unrealized

gains

(losses):

Net

realized

gain

(loss)

from:

Investments:

Unaffiliated

issuers

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

(168,743)

Futures

contracts

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

195,166

TBA

sale

commitments

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

49,656

Net

realized

gain

(loss)

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

76,079

Net

change

in

unrealized

appreciation

(depreciation)

on:

Investments:

Unaffiliated

issuers

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

(596,301)

Futures

contracts

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

(10,013)

Net

change

in

unrealized

appreciation

(depreciation)

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

(606,314)

Net

realized

and

unrealized

gain

(loss)

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

(530,235)

Net

increase

(decrease)

in

net

assets

resulting

from

operations

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

$(389,748)

Franklin

Strategic

Mortgage

Portfolio

Financial

Statements

Statements

of

Changes

in

Net

Assets

franklintempleton.com

The

accompanying

notes

are

an

integral

part

of

these

financial

statements.

Semiannual

Report

23

Franklin

Strategic

Mortgage

Portfolio

Six

Months

Ended

March

31,

2021

(unaudited)

Year

Ended

September

30,

2020

Increase

(decrease)

in

net

assets:

Operations:

Net

investment

income

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

$140,487

$1,465,728

Net

realized

gain

(loss)

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

76,079

628,981

Net

change

in

unrealized

appreciation

(depreciation)

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

(606,314)

(186,481)

Net

increase

(decrease)

in

net

assets

resulting

from

operations

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

(389,748)

1,908,228

Distributions

to

shareholders:

Class

A

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

(184,500)

(467,449)

Class

A1

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

(231,704)

(733,773)

Class

C

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

(21,409)

(76,504)

Class

R6

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

(4,962)

(14,155)

Advisor

Class

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

(74,943)

(264,418)

Total

distributions

to

shareholders

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

(517,518)

(1,556,299)

Capital

share

transactions:

(Note

2

)

Class

A

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

(38,536)

5,713,303

Class

A1

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

(1,086,862)

(1,919,968)

Class

C

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

(316,200)

91,588

Class

R6

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

(58,542)

167,731

Advisor

Class

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

(785,872)

(1,326,727)

Total

capital

share

transactions

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

(2,286,012)

2,725,927

Net

increase

(decrease)

in

net

assets

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

(3,193,278)

3,077,856

Net

assets:

Beginning

of

period

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

65,810,149

62,732,293

End

of

period

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

$62,616,871

$65,810,149

Franklin

Strategic

Mortgage

Portfolio

Notes

to

Financial

Statements

(unaudited)

24

franklintempleton.com

Semiannual

Report

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.

Investments

in

repurchase

agreements

are

valued

at

cost,

which

approximates

fair

value.

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.

Joint

Repurchase

Agreement

The

Fund

enters

into

a

joint

repurchase

agreement

whereby

its

uninvested

cash

balance

is

deposited

into

a

joint

cash

account

with

other

funds

managed

by

the

investment

manager

or

an

affiliate

of

the

investment

manager

and

is

used

to

invest

in

one

or

more

repurchase

agreements.

The

value

and

face

amount

of

the

joint

repurchase

agreement

are

allocated

to

the

funds

based

on

their

pro-rata

interest.

A

repurchase

agreement

is

accounted

for

as

a

loan

by

the

Fund

to

the

seller,

collateralized

by

securities

which

are

delivered

to

the

Fund's

custodian.

The

fair

value,

including

accrued

interest,

of

the

initial

collateralization

is

required

to

be

at

least

102%

of

the

dollar

amount

invested

by

the

funds,

with

the

value

of

the

underlying

securities

marked

to

market

daily

to

maintain

coverage

of

at

least

100%.

Repurchase

agreements

are

subject

to

the

terms

of

Master

Repurchase

Agreements

(MRAs)

with

approved

counterparties

(sellers).

The

MRAs

contain

various

provisions,

including

but

not

limited

to

events

of

default

and

maintenance

of

collateral

for

repurchase

agreements.

In

the

event

of

default

by

either

the

seller

or

the

Fund,

certain

MRAs

may

permit

the

non-

Franklin

Strategic

Mortgage

Portfolio

Notes

to

Financial

Statements

(unaudited)

25

franklintempleton.com

Semiannual

Report

defaulting

party

to

net

and

close-out

all

transactions,

if

any,

traded

under

such

agreements.

The

Fund

may

sell

securities

it

holds

as

collateral

and

apply

the

proceeds

towards

the

repurchase

price

and

any

other

amounts

owed

by

the

seller

to

the

Fund

in

the

event

of

default

by

the

seller.

This

could

involve

costs

or

delays

in

addition

to

a

loss

on

the

securities

if

their

value

falls

below

the

repurchase

price

owed

by

the

seller.

The

joint

repurchase

agreement

held

by

the Fund

at

period

end,

as

indicated

in

the

Statement

of

Investments,

had

been

entered

into

on

March

31,

2021.

c.

Securities

Purchased

on

a

Delayed

Delivery

and

TBA

Basis

The

Fund

purchases

securities

on

a

delayed

delivery

and

to-be-announced

(TBA)

basis,

with

payment

and

delivery

scheduled

for

a

future

date.

These

transactions

are

subject

to

market

fluctuations

and

are

subject

to

the

risk

that

the

value

at

delivery

may

be

more

or

less

than

the

trade

date

purchase

price.

Although

the

Fund

will

generally

purchase

these

securities

with

the

intention

of

holding

the

securities,

it

may

sell

the

securities

before

the

settlement

date.

Sufficient

assets

have

been

segregated

for

these

securities.

d.

Derivative

Financial

Instruments

The

Fund invested

in

derivative

financial

instruments

in

order

to

manage

risk

or

gain

exposure

to

various

other

investments

or

markets.

Derivatives

are

financial

contracts

based

on

an

underlying

or

notional

amount,

require

no

initial

investment

or

an

initial

net

investment

that

is

smaller

than

would

normally

be

required

to

have

a

similar

response

to

changes

in

market

factors,

and

require

or

permit

net

settlement.

Derivatives

contain

various

risks

including

the

potential

inability

of

the

counterparty

to

fulfill

their

obligations

under

the

terms

of

the

contract,

the

potential

for

an

illiquid

secondary

market,

and/or

the

potential

for

market

movements

which

expose

the

Fund

to

gains

or

losses

in

excess

of

the

amounts

shown

in

the

Statement

of

Assets

and

Liabilities.

Realized

gain

and

loss

and

unrealized

appreciation

and

depreciation

on

these

contracts

for

the

period

are

included

in

the

Statement

of

Operations.

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.

e.

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.

f.

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.

1.

Organization

and

Significant

Accounting

Policies

(continued)

b.

Joint

Repurchase

Agreement

(continued)

Franklin

Strategic

Mortgage

Portfolio

Notes

to

Financial

Statements

(unaudited)

26

franklintempleton.com

Semiannual

Report

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

March

31,

2021,

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. 

g.

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

in

the

Statement

of

Operations.

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

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.

h.

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.

1.

Organization

and

Significant

Accounting

Policies

(continued)

f.

Income

Taxes

(continued)

Franklin

Strategic

Mortgage

Portfolio

Notes

to

Financial

Statements

(unaudited)

27

franklintempleton.com

Semiannual

Report

i.

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

March

31,

2021,

there

were

an

unlimited

number

of

shares

authorized

(without

par

value).

Transactions

in

the

Fund’s

shares

were

as

follows:

Six

Months

Ended

March

31,

2021

Year

Ended

September

30,

2020

Shares

Amount

Shares

Amount

Class

A

Shares:

Shares

sold

a

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

476,204

$4,424,423

1,217,338

$11,282,025

Shares

issued

in

reinvestment

of

distributions

..........

19,208

178,084

48,077

445,344

Shares

redeemed

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

(499,870)

(4,641,043)

(650,222)

(6,014,066)

Net

increase

(decrease)

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

(4,458)

$(38,536)

615,193

$5,713,303

Class

A1

Shares:

Shares

sold

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

143,329

$1,330,979

227,011

$2,109,187

Shares

issued

in

reinvestment

of

distributions

..........

23,606

218,980

74,833

693,377

Shares

redeemed

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

(283,613)

(2,636,821)

(510,027)

(4,722,532)

Net

increase

(decrease)

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

(116,678)

$(1,086,862)

(208,183)

$(1,919,968)

Class

C

Shares:

Shares

sold

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

51,786

$481,512

178,031

$1,646,733

Shares

issued

in

reinvestment

of

distributions

..........

2,279

21,133

7,919

73,342

Shares

redeemed

a

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

(88,094)

(818,845)

(176,057)

(1,628,487)

Net

increase

(decrease)

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

(34,029)

$(316,200)

9,893

$91,588

Class

R6

Shares:

Shares

sold

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

5,408

$50,218

54,969

$504,354

Shares

issued

in

reinvestment

of

distributions

..........

536

4,962

1,529

14,153

Shares

redeemed

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

(12,240)

(113,722)

(37,825)

(350,776)

Net

increase

(decrease)

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

(6,296)

$(58,542)

18,673

$167,731

Advisor

Class

Shares:

Shares

sold

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

129,786

$1,200,724

494,956

$4,579,523

Shares

issued

in

reinvestment

of

distributions

..........

7,247

67,142

27,704

256,284

Shares

redeemed

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

(221,049)

(2,053,738)

(669,850)

(6,162,534)

Net

increase

(decrease)

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

(84,016)

$(785,872)

(147,190)

$(1,326,727)

a

May

include

a

portion

of

Class

C

shares

that

were

automatically

converted

to

Class

A.

1.

Organization

and

Significant

Accounting

Policies

(continued)

Franklin

Strategic

Mortgage

Portfolio

Notes

to

Financial

Statements

(unaudited)

28

franklintempleton.com

Semiannual

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:

For

the

period

ended

March

31,

2021,

the

annualized

gross

effective

investment

management

fee

rate

was

0.400%

of

the

Fund’s

average

daily

net

assets. 

b.

Administrative

Fees

Under

an

agreement

with

Advisers,

FT

Services

provides

administrative

services

to

the

Fund.

The

fee

is

paid

by

Advisers

based

on

the

Fund's

average

daily

net

assets,

and

is

not

an

additional

expense

of

the

Fund.

c.

Distribution

Fees

The

Board

has

adopted

distribution

plans

for

Class

A

and

Class

C

shares,

pursuant

to

Rule

12b-1

under

the

1940

Act.

Under

the

Fund’s

Class

A

reimbursement

distribution

plan,

the

Fund

reimburses

Distributors

for

costs

incurred

in

connection

with

the

servicing,

sale

and

distribution

of the

Fund's

shares

up

to

the

maximum

annual

plan

rate.

Under

the

Class

A

reimbursement

distribution

plan,

costs

exceeding

the

maximum

for

the

current

plan

year

cannot

be

reimbursed

in

subsequent

periods.

In

addition,

under

the

Fund’s

Class

C

compensation

distribution

plan,

the

Fund

pays

Distributors

for

costs

incurred

in

connection

with

the

servicing,

sale

and

distribution

of

the

Fund's

shares

up

to

the

maximum

annual

plan

rate.

The

plan

year,

for

purposes

of

monitoring

compliance

with

the

maximum

annual

plan

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:

d.

Sales

Charges/Underwriting

Agreements

Front-end

sales

charges

and

contingent

deferred

sales

charges

(CDSC)

do

not

represent

expenses

of

the

Fund.

These

charges

are

deducted

from

the

proceeds

of

sales

of

Fund

shares

prior

to

investment

or

from

redemption

proceeds

prior

to

remittance,

as

applicable.

Distributors

has

advised

the

Fund

of

the

following

commission

transactions

related

to

the

sales

and

redemptions

of

the

Fund's

shares

for

the

period:

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

Class  A

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

0.25%

Class  C

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

0.65%

Sales

charges

retained

net

of

commissions

paid

to

unaffiliated

brokers/dealers

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

$617

CDSC

retained

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

$200

Franklin

Strategic

Mortgage

Portfolio

Notes

to

Financial

Statements

(unaudited)

29

franklintempleton.com

Semiannual

Report

e.

Transfer

Agent

Fees

Each

class

of

shares pays

transfer

agent

fees

to

Investor

Services

for

its

performance

of

shareholder

servicing

obligations.

The

fees

are

based

on

an

annualized

asset

based

fee

of

0.02%

plus

a

transaction

based

fee.

In

addition,

each

class reimburses

Investor

Services

for

out

of

pocket

expenses

incurred

and,

except

for

Class

R6,

reimburses

shareholder

servicing

fees

paid

to

third

parties.

These

fees

are

allocated

daily

based

upon

their

relative

proportion

of

such

classes'

aggregate

net

assets.

Class

R6

pays

Investor

Services

transfer

agent

fees

specific

to

that

class.

For

the

period

ended

March

31,

2021,

the

Fund

paid

transfer

agent

fees

of

$50,945,

of

which $28,771

was

retained

by

Investor

Services.

f.

Investments

in

Affiliated

Management

Investment

Companies

The

Fund

invests

in

one

or

more

affiliated

management

investment

companies.

As

defined

in

the

1940

Act,

an

investment

is

deemed

to

be

a

“Controlled

Affiliate”

of

a

fund

when

a

fund

owns,

either

directly

or

indirectly,

25%

or

more

of

the

affiliated

fund’s

outstanding

shares

or

has

the

power

to

exercise

control

over

management

or

policies

of

such

fund.

The

Funds

do

not

invest

for

purposes

of

exercising

a

controlling

influence

over

the

management

or

policies.

Management

fees

paid

by

the

Fund

are

waived

on

assets

invested

in

the

affiliated

management

investment

companies,

as

noted

in

the

Statement

of

Operations,

in

an

amount

not

to

exceed

the

management

and

administrative

fees

paid

directly

or

indirectly

by

each

affiliate.

During

the

period

ended

March

31,

2021,

the

Fund

held

investments

in

affiliated

management

investment

companies

as

follows:

g.

Waiver

and

Expense

Reimbursements

Advisers

contractually

agreed

in

advance

to

waive

or

limit

its

fees

and

to

assume

as

its

own

expense

certain

expenses

otherwise

payable

by

the

Fund

so

that

the

operating

expenses

(excluding

distribution

fees,

acquired

fund

fees

and

expenses,

and

certain

non-routine

expenses

or

costs,

including

those

relating

to

litigation,

indemnification,

reorganizations,

and

liquidations)

for

each

Class

of

the

Fund

does

not

exceed

0.75%

based

on

the

average

net

assets

of

each

class

until

January

31,

2022.

Total

expenses

waived

or

paid

are

not

subject

to

recapture

subsequent

to

the

Fund's

fiscal

year

end.

Investor

Services

has

contractually

agreed

in

advance

to

waive

or

limit

its

fees

so

that

the

Class

R6

transfer

agent

fees

do

not

exceed

0.03%

based

on

the

average

net

assets

of

the

class

until

January

31,

2022.

Investor

Services

may

discontinue

this

waiver

in

the

future.

4.

Expense

Offset

Arrangement

The Fund has

entered

into

an

arrangement

with

its

custodian

whereby

credits

realized

as

a

result

of

uninvested

cash

balances

are

used

to

reduce

a

portion

of

the

Fund's

custodian

expenses.

During

the

period

ended

March

31,

2021,

the

custodian

fees

were

reduced

as

noted

in

the

Statement

of

Operations. 

    aa

Value

at

Beginning

of

Period

Purchases

Sales

Realized

Gain

(Loss)

Net

Change

in

Unrealized

Appreciation

(Depreciation)

Value

at

End

of

Period

Number

of

Shares

Held

at

End

of

Period

Investment

Income

a      

a  

a  

a  

a  

a  

a  

a  

Franklin

Strategic

Mortgage

Portfolio

Non-Controlled

Affiliates

Dividends

Institutional

Fiduciary

Trust

-

Money

Market

Portfolio,

0.01%

.......

$2,589,379

$7,457,661

$(6,918,588)

$—

$—

$3,128,452

3,128,452

$25

Total

Affiliated

Securities

....

$2,589,379

$7,457,661

$(6,918,588)

$—

$—

$3,128,452

$25

3.

Transactions

with

Affiliates

(continued)

Franklin

Strategic

Mortgage

Portfolio

Notes

to

Financial

Statements

(unaudited)

30

franklintempleton.com

Semiannual

Report

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:

At

March

31,

2021,

the

cost

of

investments

and

net

unrealized

appreciation

(depreciation)

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.

6.

Investment

Transactions

Purchases

and

sales

of

investments

(excluding

short

term

securities)

for

the

period

ended

March

31,

2021,

aggregated

$98,585,695

and

$108,877,050,

respectively.

7.

Defaulted

Securities

The

Fund

held

a

defaulted

security

and/or

other

securities

for

which

the

income

has

been

deemed

uncollectible.

At

March

31,

2021,

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.

Capital

loss

carryforwards

not

subject

to

expiration:

Short

term

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

$2,301,829

Long

term

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

1,063,922

Total

capital

loss

carryforwards

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

$3,365,751

Cost

of

investments

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

$72,167,633

Unrealized

appreciation

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

$1,054,808

Unrealized

depreciation

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

(722,214)

Net

unrealized

appreciation

(depreciation)

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

$332,594

Franklin

Strategic

Mortgage

Portfolio

Notes

to

Financial

Statements

(unaudited)

31

franklintempleton.com

Semiannual

Report

9.

Other

Derivative

Information

At

March

31,

2021,

the

Fund's

investments

in

derivative

contracts

are

reflected

in

the

Statement of

Assets

and

Liabilities

as

follows:

For

the

period

ended

March

31,

2021,

the

effect

of

derivative

contracts

in

the

Statement

of

Operations

was

as

follows:

For

the

period

ended

March

31,

2021,

the

average

month

end

notional

amount

of

futures

contracts

represented

$8,450,682.

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

$2.675

billion

(Global

Credit

Facility)

which

matures

on

February

4,

2022.

This

Global

Credit

Facility

provides

a

source

of

funds

to

the

Borrowers

for

temporary

and

emergency

purposes,

including

the

ability

to

meet

future

unanticipated

or

unusually

large

redemption

requests. 

Under

the

terms

of

the

Global

Credit

Facility,

the

Fund

shall,

in

addition

to

interest

charged

on

any

borrowings

made

by

the

Fund

and

other

costs

incurred

by

the

Fund,

pay

its

share

of

fees

and

expenses

incurred

in

connection

with

the

implementation

and

maintenance

of

the

Global

Credit

Facility,

based

upon

its

relative

share

of

the

aggregate

net

assets

of

all

of

the

Borrowers,

including

an

annual

commitment

fee

of

0.15%

based

upon

the

unused

portion

of

the

Global

Credit

Facility.

These

fees

are

reflected

in

other

expenses

in

the

Statement

of

Operations.

During

the

period

ended

March

31,

2021,

the Fund

did

not

use

the

Global

Credit

Facility.

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

$

60,086

a

Variation

margin

on

futures

contracts

$

75,522

a

Total

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

$60,086

$75,522

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

period

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

Period

Statement

of

Operations

Location

Net

Change

in

Unrealized

Appreciation

(Depreciation)

for

the

Period

Franklin

Strategic

Mortgage

Portfolio

Net

realized

gain

(loss)

from:

Net

change

in

unrealized

  appreciation

(depreciation)

on:

Interest

rate

contracts

.......

Futures

contracts

$195,166

Futures

contracts

$(10,013)

Total

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

$195,166

$(10,013)

Franklin

Strategic

Mortgage

Portfolio

Notes

to

Financial

Statements

(unaudited)

32

franklintempleton.com

Semiannual

Report

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

March

31,

2021,

in

valuing

the

Fund's

assets

and

liabilities

carried

at

fair

value,

is

as

follows:

12.

New

Accounting

Pronouncements

In

March

2020,

the

Financial

Accounting

Standards

Board

(FASB)

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.

Level

1

Level

2

Level

3

Total

Franklin

Strategic

Mortgage

Portfolio

Assets:

Investments

in

Securities:

a

Corporate

Bonds

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

$

—

$

110,955

$

—

$

110,955

U.S.

Government

and

Agency

Securities

.......

—

481,197

—

481,197

Asset-Backed

Securities

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

—

3,034,713

—

3,034,713

Commercial

Mortgage-Backed

Securities

......

—

986,103

—

986,103

Mortgage-Backed

Securities

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

—

49,196,850

—

49,196,850

Residential

Mortgage-Backed

Securities

......

—

5,835,218

—

5,835,218

Short

Term

Investments

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

5,428,443

7,442,184

—

12,870,627

Total

Investments

in

Securities

...........

$5,428,443

$67,087,220

$—

$72,515,663

Other

Financial

Instruments:

Futures

contracts

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

$

60,086

$

—

$

—

$

60,086

Total

Other

Financial

Instruments

.........

$60,086

$—

$—

$60,086

Liabilities:

Other

Financial

Instruments:

Futures

contracts

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

$

75,522

$

—

$

—

$

75,522

$—

$—

$—

$—

a

For

detailed

categories,

see

the

accompanying

Statement

of

Investments.

Franklin

Strategic

Mortgage

Portfolio

Notes

to

Financial

Statements

(unaudited)

33

franklintempleton.com

Semiannual

Report

Abbreviations

Cu

r

rency

USD

United

States

Dollar

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

MBS

Mortgage-Backed

Security

Franklin

Strategic

Mortgage

Portfolio

Shareholder

Information

34

franklintempleton.com

Semiannual

Report

Board

Approval

of

Investment

Management

Agreements

FRANKLIN

STRATEGIC

MORTGAGE

PORTFOLIO

(Fund)

At

a

meeting

held

on

February

23,

2021

(Meeting),

the

Board

of

Trustees

(Board)

of

the

Fund,

including

a

majority

of

the

trustees

who

are

not

“interested

persons”

as

defined

in

the

Investment

Company

Act

of

1940

(Independent

Trustees),

reviewed

and

approved

the

continuance

of

the

investment

management

agreement

between

Franklin

Advisers,

Inc.

(Manager)

and

the

Fund

(Management

Agreement)

for

an

additional

one-year

period.

The

Independent

Trustees

received

advice

from

and

met

separately

with

Independent

Trustee

counsel

in

considering

whether

to

approve

the

continuation

of

the

Management

Agreement.

In

considering

the

continuation

of

the

Management

Agreement,

the

Board

reviewed

and

considered

information

provided

by

the

Manager

at

the

Meeting

and

throughout

the

year

at

meetings

of

the

Board

and

its

committees.

The

Board

also

reviewed

and

considered

information

provided

in

response

to

a

detailed

set

of

requests

for

information

submitted

to

the

Manager

by

Independent

Trustee

counsel

on

behalf

of

the

Independent

Trustees

in

connection

with

the

annual

contract

renewal

process.

In

addition,

prior

to

the

Meeting,

the

Independent

Trustees

held

a

telephonic

contract

renewal

meeting

at

which

the

Independent

Trustees

conferred

amongst

themselves

and

Independent

Trustee

counsel

about

contract

renewal

matters

and,

in

some

cases,

requested

additional

information

from

the

Manager

relating

to

the

contract.

The

Board

reviewed

and

considered

all

of

the

factors

it

deemed

relevant

in

approving

the

continuance

of

the

Management

Agreement,

including,

but

not

limited

to:

(i)

the

nature,

extent

and

quality

of

the

services

provided

by

the

Manager;

(ii)

the

investment

performance

of

the

Fund;

(iii)

the

costs

of

the

services

provided

and

profits

realized

by

the

Manager

and

its

affiliates

from

the

relationship

with

the

Fund;

(iv)

the

extent

to

which

economies

of

scale

are

realized

as

the

Fund

grows;

and

(v)

whether

fee

levels

reflect

these

economies

of

scale

for

the

benefit

of

Fund

investors.

In

approving

the

continuance

of

the

Management

Agreement,

the

Board,

including

a

majority

of

the

Independent

Trustees,

determined

that

the

terms

of

the

Management

Agreement

are

fair

and

reasonable

and

that

the

continuance

of

such

Management

Agreement

is

in

the

best

interests

of

the

Fund

and

its

shareholders.

While

attention

was

given

to

all

information

furnished,

the

following

discusses

some

primary

factors

relevant

to

the

Board’s

determination.

Nature,

Extent

and

Quality

of

Services

The

Board

reviewed

and

considered

information

regarding

the

nature,

extent

and

quality

of

investment

management

services

provided

by

the

Manager

and

its

affiliates

to

the

Fund

and

its

shareholders.

This

information

included,

among

other

things,

the

qualifications,

background

and

experience

of

the

senior

management

and

investment

personnel

of

the

Manager,

as

well

as

information

on

succession

planning

where

appropriate;

the

structure

of

investment

personnel

compensation;

oversight

of

third-

party

service

providers;

investment

performance

reports

and

related

financial

information

for

the

Fund;

reports

on

expenses

and

shareholder

services;

legal

and

compliance

matters;

risk

controls;

pricing

and

other

services

provided

by

the

Manager

and

its

affiliates;

and

management

fees

charged

by

the

Manager

and

its

affiliates

to

US

funds

and

other

accounts,

including

management’s

explanation

of

differences

among

accounts

where

relevant.

The

Board

also

reviewed

and

considered

an

annual

report

on

payments

made

by

Franklin

Templeton

(FT)

or

the

Fund

to

financial

intermediaries,

as

well

as

a

memorandum

relating

to

third-

party

servicing

arrangements,

which

included

discussion

of

the

changing

distribution

landscape

for

the

Fund.

The

Board

noted

management’s

continuing

efforts

and

expenditures

in

establishing

effective

business

continuity

plans

and

developing

strategies

to

address

areas

of

heightened

concern

in

the

mutual

fund

industry,

such

as

cybersecurity

in

the

current

work-from-home

environment

and

liquidity

risk

management.

The

Board

also

reviewed

and

considered

the

benefits

provided

to

Fund

shareholders

of

investing

in

a

fund

that

is

part

of

the

FT

family

of

funds.

The

Board

noted

the

financial

position

of

Franklin

Resources,

Inc.

(FRI),

the

Manager’s

parent,

and

its

commitment

to

the

mutual

fund

business

as

evidenced

by

its

reassessment

of

the

fund

offerings

in

response

to

the

market

environment

and

project

initiatives

and

capital

investments

relating

to

the

services

provided

to

the

Fund

by

the

FT

organization.

The

Board

specifically

noted

FT’s

commitment

to

enhancing

services

and

controlling

costs,

as

reflected

in

its

outsourcing

of

certain

administrative

functions,

and

growth

opportunities,

Franklin

Strategic

Mortgage

Portfolio

Shareholder

Information

35

franklintempleton.com

Semiannual

Report

as

evidenced

by

its

recent

acquisition

of

the

Legg

Mason

companies.

The

Board

also

noted

FT’s

attention

focused

on

expanding

the

distribution

opportunities

for

all

funds

in

the

FT

family

of

funds.

Following

consideration

of

such

information,

the

Board

was

satisfied

with

the

nature,

extent

and

quality

of

services

provided

by

the

Manager

and

its

affiliates

to

the

Fund

and

its

shareholders.

Fund

Performance

The

Board

reviewed

and

considered

the

performance

results

of

the

Fund

over

various

time

periods

ended

November

30,

2020.

The

Board

considered

the

performance

returns

for

the

Fund

in

comparison

to

the

performance

returns

of

mutual

funds

deemed

comparable

to

the

Fund

included

in

a

universe

(Performance

Universe)

selected

by

Broadridge

Financial

Solutions,

Inc.

(Broadridge),

an

independent

provider

of

investment

company

data.

The

Board

received

a

description

of

the

methodology

used

by

Broadridge

to

select

the

mutual

funds

included

in

a

Performance

Universe.

The

Board

also

reviewed

and

considered

Fund

performance

reports

provided

and

discussions

that

occurred

with

portfolio

managers

at

Board

meetings

throughout

the

year.

A

summary

of

the

Fund’s

performance

results

is

below.

The

Performance

Universe

for

the

Fund

included

the

Fund

and

all

retail

and

institutional

US

mortgage

funds.

The

Board

noted

that

the

Fund’s

annualized

income

return

for

the

three-,

five-

and

10-year

periods

was

above

the

median

of

its

Performance

Universe,

but

for

the

one-year

period

was

below

the

median

of

the

Performance

Universe.

The

Board

also

noted

that

the

Fund’s

annualized

total

return

for

the

one-,

three-

and

five-year

periods

was

below

the

median

of

its

Performance

Universe,

but

for

the

10-year

period

was

above

the

median

of

its

Performance

Universe.

The

Board

discussed

this

performance

with

management

and

noted

management’s

explanation

that

the

Fund,

consistent

with

its

principal

investment

strategies,

has

a

greater

exposure

to

conventional

mortgage-backed

securities

in

comparison

to

its

peers,

which

contributed

to

the

Fund’s

shorter-term

underperformance.

The

Board

further

noted

management’s

steps

to

address

the

underperformance

of

the

Fund,

including

changes

to

the

Fund’s

exposure

to

certain

holdings

and

enhancements

to

the

securities

selection

process.

The

Board

also

noted

that,

while

below

the

median,

the

Fund’s

one-,

three-

five-

and

10-year

annualized

total

return

was

3.25%,

3.20%,

2.74%

and

3.50%,

respectively.

The

Board

concluded

that

the

Fund’s

Management

Agreement

should

be

continued

for

an

additional

one-year

period,

and

management’s

efforts

should

continue

to

be

closely

monitored.

Comparative

Fees

and

Expenses

The

Board

reviewed

and

considered

information

regarding

the

Fund’s

actual

total

expense

ratio

and

its

various

components,

including,

as

applicable,

management

fees;

transfer

agent

expenses;

underlying

fund

expenses;

Rule

12b-1

and

non-Rule

12b-1

service

fees;

and

other

non-

management

fees.

The

Board

also

noted

the

quarterly

and

annual

reports

it

receives

on

all

marketing

support

payments

made

by

FT

to

financial

intermediaries.

The

Board

considered

the

actual

total

expense

ratio

and,

separately,

the

contractual

management

fee

rate,

without

the

effect

of

fee

waivers,

if

any

(Management

Rate)

of

the

Fund

in

comparison

to

the

median

expense

ratio

and

median

Management

Rate,

respectively,

of

other

mutual

funds

deemed

comparable

to

and

with

a

similar

expense

structure

to

the

Fund

selected

by

Broadridge

(Expense

Group).

Broadridge

fee

and

expense

data

is

based

upon

information

taken

from

each

fund’s

most

recent

annual

report,

which

reflects

historical

asset

levels

that

may

be

quite

different

from

those

currently

existing,

particularly

in

a

period

of

market

volatility.

While

recognizing

such

inherent

limitation

and

the

fact

that

expense

ratios

and

Management

Rates

generally

increase

as

assets

decline

and

decrease

as

assets

grow,

the

Board

believed

the

independent

analysis

conducted

by

Broadridge

to

be

an

appropriate

measure

of

comparative

fees

and

expenses.

The

Broadridge

Management

Rate

includes

administrative

charges,

and

the

actual

total

expense

ratio,

for

comparative

consistency,

was

shown

for

Class

A1

shares

for

the

Fund

and

for

Class

A

shares

for

the

other

funds

in

the

Expense

Group.

The

Board

received

a

description

of

the

methodology

used

by

Broadridge

to

select

the

mutual

funds

included

in

an

Expense

Group.

The

Expense

Group

for

the

Fund

included

the

Fund

and

nine

other

US

mortgage

funds.

The

Board

noted

that

the

Management

Rate

and

actual

total

expense

ratio

for

the

Fund

were

below

the

medians

and

in

the

first

quintile

(least

expensive)

of

its

Expense

Group.

The

Board

noted

that

the

actual

total

expense

ratio

for

the

Fund

reflected

a

fee

waiver

from

management.

For

these

reasons,

the

Board

concluded

that

the

Management

Rate

charged

to

the

Fund

is

reasonable.

Profitability

The

Board

reviewed

and

considered

information

regarding

the

profits

realized

by

the

Manager

and

its

affiliates

in

connection

with

the

operation

of

the

Fund.

In

this

respect,

the

Board

considered

the

Fund

profitability

analysis

provided

by

the

Manager

that

addresses

the

overall

profitability

of

FT’s

US

fund

business,

as

well

as

its

profits

in

providing

investment

management

and

other

services

to

each

of

the

individual

funds

during

the

12-month

period

ended

Franklin

Strategic

Mortgage

Portfolio

Shareholder

Information

36

franklintempleton.com

Semiannual

Report

September

30,

2020,

being

the

most

recent

fiscal

year-

end

for

FRI.

The

Board

noted

that

although

management

continually

makes

refinements

to

its

methodologies

used

in

calculating

profitability

in

response

to

organizational

and

product-related

changes,

the

overall

methodology

has

remained

consistent

with

that

used

in

the

Fund’s

profitability

report

presentations

from

prior

years.

The

Board

further

noted

management’s

representation

that

the

profitability

analysis

excluded

the

impact

of

the

recent

acquisition

of

the

Legg

Mason

companies

and

that

management

expects

to

incorporate

the

legacy

Legg

Mason

companies

into

the

profitability

analysis

beginning

next

year.

Additionally,

PricewaterhouseCoopers

LLP,

auditor

to

FRI

and

certain

FT

funds,

has

been

engaged

by

the

Manager

to

periodically

review

and

assess

the

allocation

methodologies

to

be

used

solely

by

the

Fund’s

Board

with

respect

to

the

profitability

analysis.

The

Board

noted

management’s

belief

that

costs

incurred

in

establishing

the

infrastructure

necessary

for

the

type

of

mutual

fund

operations

conducted

by

the

Manager

and

its

affiliates

may

not

be

fully

reflected

in

the

expenses

allocated

to

the

Fund

in

determining

its

profitability,

as

well

as

the

fact

that

the

level

of

profits,

to

a

certain

extent,

reflected

operational

cost

savings

and

efficiencies

initiated

by

management.

As

part

of

this

evaluation,

the

Board

considered

management’s

outsourcing

certain

operations,

which

effort

has

required

considerable

up

front

expenditures

by

the

Manager

but,

over

the

long

run

is

expected

to

result

in

greater

efficiencies.

The

Board

also

noted

management’s

expenditures

in

improving

shareholder

services

provided

to

the

Fund,

as

well

as

the

need

to

implement

systems

and

meet

additional

regulatory

and

compliance

requirements

resulting

from

recent

US

Securities

and

Exchange

Commission

and

other

regulatory

requirements.

The

Board

also

considered

the

extent

to

which

the

Manager

and

its

affiliates

might

derive

ancillary

benefits

from

fund

operations,

including

revenues

generated

from

transfer

agent

services,

potential

benefits

resulting

from

personnel

and

systems

enhancements

necessitated

by

fund

growth,

as

well

as

increased

leverage

with

service

providers

and

counterparties.

Based

upon

its

consideration

of

all

these

factors,

the

Board

concluded

that

the

level

of

profits

realized

by

the

Manager

and

its

affiliates

from

providing

services

to

the

Fund

was

not

excessive

in

view

of

the

nature,

extent

and

quality

of

services

provided

to

the

Fund.

Economies

of

Scale

The

Board

reviewed

and

considered

the

extent

to

which

the

Manager

may

realize

economies

of

scale,

if

any,

as

the

Fund

grows

larger

and

whether

the

Fund’s

management

fee

structure

reflects

any

economies

of

scale

for

the

benefit

of

shareholders.

With

respect

to

possible

economies

of

scale,

the

Board

noted

the

existence

of

management

fee

breakpoints,

which

operate

generally

to

share

any

economies

of

scale

with

the

Fund’s

shareholders

by

reducing

the

Fund’s

effective

management

fees

as

the

Fund

grows

in

size.

The

Board

considered

the

Manager’s

view

that

any

analyses

of

potential

economies

of

scale

in

managing

a

particular

fund

are

inherently

limited

in

light

of

the

joint

and

common

costs

and

investments

the

Manager

incurs

across

the

FT

family

of

funds

as

a

whole.

The

Board

noted

that

the

Fund

does

not

have

an

asset

size

that

would

likely

enable

the

Fund

to

achieve

economies

of

scale,

but

concluded

that

to

the

extent

economies

of

scale

may

be

realized

by

the

Manager

and

its

affiliates,

the

Fund’s

management

fee

structure

provided

a

sharing

of

benefits

with

the

Fund

and

its

shareholders

as

the

Fund

grows.

Conclusion

Based

on

its

review,

consideration

and

evaluation

of

all

factors

it

believed

relevant,

including

the

above-described

factors

and

conclusions,

the

Board

unanimously

approved

the

continuation

of

the

Management

Agreement

for

an

additional

one-year

period.

Proxy

Voting

Policies

and

Procedures

The

Fund’s

investment

manager

has

established

Proxy

Voting

Policies

and

Procedures

(Policies)

that

the

Fund

uses

to

determine

how

to

vote

proxies

relating

to

portfolio

securities.

Shareholders

may

view

the

Fund’s

complete

Policies

online

at

franklintempleton.com.

Alternatively,

shareholders

may

request

copies

of

the

Policies

free

of

charge

by

calling

the

Proxy

Group

collect

at

(954)

527-

7678

or

by

sending

a

written

request

to:

Franklin

Templeton

Companies,

LLC,

300

S.E.

2nd

Street,

Fort

Lauderdale,

FL

33301,

Attention:

Proxy

Group.

Copies

of

the

Fund’s

proxy

voting

records

are

also

made

available

online

at

franklintempleton.com

and

posted

on

the

U.S.

Securities

and

Exchange

Commission’s

website

at

sec.gov

and

reflect

the

most

recent

12-month

period

ended

June

30.

Quarterly

Statement

of

Investments

The

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.

Franklin

Strategic

Mortgage

Portfolio

Shareholder

Information

37

franklintempleton.com

Semiannual

Report

Householding

of

Reports

and

Prospectuses

You

will

receive,

or

receive

notice

of

the

availability

of,

the

Fund’s

financial

reports

every

six

months.

In

addition,

you

will

receive

an

annual

updated

summary

prospectus

(detail

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

(to

the

extent

received

by

mail)

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

S

05/21

©

2021

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.

Semiannual

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.

N/A

Item 5. Audit Committee

 

of Listed Registrants.                   N/A

Item 6. Schedule of Investments.                                  N/A

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

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

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

Affiliated Purchasers.             N/A

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

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

Item 11. Controls and Procedures.

(a) Evaluation of Disclosure Controls and Procedures

. The Registrant maintains disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed in the Registrant’s filings under the Securities Exchange Act of 1934, as amended, and the Investment Company Act of 1940 is recorded, processed, summarized and reported within the periods specified in the rules and forms of the Securities and Exchange Commission. Such information is accumulated and communicated to the Registrant’s management, including its principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. The Registrant’s management, including the principal executive officer and the principal financial officer, recognizes that any set of controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.

Within 90 days prior to the filing date of this Shareholder Report on Form N-CSR, the Registrant had carried out an evaluation, under the supervision and with the participation of the Registrant’s management, including the Registrant’s principal executive officer and the Registrant’s principal financial officer, of the effectiveness of the design and operation of the Registrant’s disclosure controls and procedures. Based on such evaluation, the Registrant’s principal executive officer and principal financial officer concluded that the Registrant’s disclosure controls and procedures are effective.

(b) Changes in Internal Controls

. There have been no changes in the Registrant’s internal control over financial reporting that occurred during the period covered by this report that has materially affected or is reasonably likely to materially affect the internal control over financial reporting.

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

Item 13. Exhibits.

(a) (1) Code of Ethics

codeofethics

(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 Robert G. Kubilis, Chief Financial Officer and Chief Accounting Officer

section302

(b)   Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of

Matthew T. Hinkle

, Chief Executive Officer - Finance and Administration, and Robert G. Kubilis, Chief Financial Officer and Chief Accounting Officer

section906

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  May 26, 2021

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  May 26, 2021

By __S\Robert G. Kubilis _____

      Chief Financial Officer

and Chief Accounting Officer

Date  May 26, 2021