Franklin Strategic Mortgage Portfolio
Statement of Investments, December 31, 2019 (unaudited)
Principal Amount* | Value | |||
Corporate Bonds 0.2% | ||||
Insurance Brokers 0.0%† | ||||
a | Ambac Assurance Corp., Subordinated Note, 144A, 5.10%,6/07/20 | $237 | $351 | |
a,b | Ambac LSNI LLC, senior note, first lien, 144A, FRN, 6.945%, (3-month USD LIBOR + 5.00%), 2/12/23 (Cayman Islands) | 933 | 947 | |
Real Estate Services 0.2% | ||||
American Homes 4 Rent LP, senior bond, 4.25%,2/15/28 | 100,000 | 106,494 | ||
Total Corporate Bonds (Cost $100,714) | 107,792 | |||
U.S. Government and Agency Securities 0.8% | ||||
U.S. Treasury Bond, | ||||
4.75%, 2/15/37 | 225,000 | 309,401 | ||
4.25%, 11/15/40 | 131,000 | 173,241 | ||
Total U.S. Government and Agency Securities (Cost $473,347) | 482,642 | |||
Asset-Backed Securities and Commercial Mortgage-Backed Securities 25.6% | ||||
Finance 25.6% | ||||
c | American Home Mortgage Investment Trust, 2005-1, 6A, FRN, 3.894%, (6-month USD LIBOR + 2.00%), 6/25/45 | 80,972 | 83,005 | |
a | American Homes 4 Rent, 2015-SFR1, A, 144A, 3.467%, 4/17/52 | 147,275 | 151,844 | |
a,d,e | Anthracite Ltd., 2004-HY1A, E, 144A, 7.147%, 6/20/41 | 1,598,000 | 163 | |
f,g | Bank, 2018-BN13, XA, IO, FRN, 0.514%, 8/15/61 | 2,472,004 | 81,283 | |
a,c | Bellemeade Re Ltd., 2018-1A, M1B, 144A, FRN, 3.392%, (1-month USD LIBOR + 1.60%), 4/25/28 | 130,616 | 130,843 | |
a | BRAVO Residential Funding Trust, | |||
2019-1, A1C, 144A, 3.50%, 3/25/58 | 127,195 | 129,011 | ||
f 2019-2, A3, 144A, FRN, 3.50%, 10/25/44 | 143,571 | 146,138 | ||
a,f | BX Commercial Mortgage Trust, | |||
2018-IND, A, 144A, FRN, 2.49%, 11/15/35 | 79,883 | 79,908 | ||
2019-XL, A, 144A, FRN, 2.66%, 10/15/36 | 170,000 | 170,343 | ||
a,f | CIM Trust, | |||
2018-INV1, A4, 144A, FRN, 4.00%, 8/25/48 | 135,626 | 138,680 | ||
2019-INV1, A1, 144A, FRN, 4.00%, 2/25/49 | 160,883 | 163,688 | ||
2019-INV2, A3, 144A, FRN, 4.00%, 5/25/49 | 248,559 | 254,723 | ||
a,f | Citigroup Mortgage Loan Trust, 2013-A, A, 144A, FRN, 3.00%, 5/25/42 | 13,982 | 13,808 | |
f | Commercial Mortgage Trust, | |||
2006-GG7, AJ, FRN, 5.619%, 7/10/38 | 90,000 | 83,382 | ||
2006-GG7, AM, FRN, 5.619%, 7/10/38 | 30,955 | 31,166 | ||
f | Conseco Finance Securitizations Corp., 2002-2, M1, FRN, 7.424%, 3/01/33 | 255,318 | 275,766 | |
f | Conseco Financial Corp., 1998-6, A8, FRN, 6.66%, 6/01/30 | 65,737 | 67,819 | |
CSAIL Commercial Mortgage Trust, 2015-C1, A4, 3.505%, 4/15/50 | 430,000 | 451,549 | ||
a,f | CSMC, 2009-15R, 3A1, 144A, FRN, 5.148%, 3/26/36 | 7,625 | 7,642 | |
a,f | CSMC Trust, 2014-OAK1, 1A1, 144A, FRN, 3.00%, 11/25/29 | 100,158 | 100,841 | |
c | CWABS Inc. Asset-Backed Certificates, 2004-1, M1, FRN, 2.542%, (1-month USD LIBOR + 0.75%), 3/25/34 | 48,658 | 48,982 |
Quarterly Statement of Investments | See Notes to Statement of Investments. | 1
Franklin Strategic Mortgage Portfolio
Statement of Investments (unaudited)
Statement of Investments (unaudited)
Principal Amount* | Value | |||
Asset-Backed Securities and Commercial Mortgage-Backed Securities (continued) | ||||
Finance (continued) | ||||
FHLMC Structured Agency Credit Risk Debt Notes, | ||||
c 2013-DN2, M2, FRN, 6.042%, (1-month USD LIBOR + 4.25%), 11/25/23 | $196,683 | $212,117 | ||
c 2014-DN3, M3, FRN, 5.792%, (1-month USD LIBOR + 4.00%), 8/25/24 | 162,276 | 173,029 | ||
c 2014-DN4, M3, FRN, 6.342%, (1-month USD LIBOR + 4.55%), 10/25/24 | 149,166 | 160,090 | ||
c 2014-HQ1, M3, FRN, 5.892%, (1-month USD LIBOR + 4.10%), 8/25/24 | 196,786 | 208,508 | ||
c 2014-HQ3, M3, FRN, 6.542%, (1-month USD LIBOR + 4.75%), 10/25/24 | 155,895 | 165,206 | ||
c 2015-DN1, M3, FRN, 5.942%, (1-month USD LIBOR + 4.15%), 1/25/25 | 137,428 | 143,540 | ||
c 2015-HQ1, M3, FRN, 5.592%, (1-month USD LIBOR + 3.80%), 3/25/25 | 337,615 | 346,464 | ||
c 2015-HQ2, M3, FRN, 5.042%, (1-month USD LIBOR + 3.25%), 5/25/25 | 250,000 | 263,364 | ||
c 2016-DNA2, M3, FRN, 6.442%, (1-month USD LIBOR + 4.65%), 10/25/28 | 233,268 | 251,422 | ||
c 2016-HQA2, M2, FRN, 4.042%, (1-month USD LIBOR + 2.25%), 11/25/28 | 65,304 | 65,562 | ||
c 2016-HQA2, M3, FRN, 6.942%, (1-month USD LIBOR + 5.15%), 11/25/28 | 250,000 | 273,627 | ||
f 2017-DNA1, M2, FRN, 5.042%, 7/25/29 | 250,000 | 262,993 | ||
c 2017-DNA3, M2, FRN, 4.292%, (1-month USD LIBOR + 2.50%), 3/25/30 | 250,000 | 256,107 | ||
f 2017-HQA1, M2, FRN, 5.342%, 8/25/29 | 250,000 | 262,792 | ||
f 2017-HQA3, M2, FRN, 4.142%, 4/25/30 | 236,797 | 241,057 | ||
a,f | Flagstar Mortgage Trust, 2018-6RR, 1A3, 144A, FRN, 4.00%, 10/25/48 | 123,560 | 124,577 | |
c | FNMA, 2007-1, NF, FRN, 2.042%, (1-month USD LIBOR + 0.25%), 2/25/37 | 73,401 | 72,946 | |
FNMA Connecticut Avenue Securities, | ||||
c 2013-C01, M2, FRN, 7.042%, (1-month USD LIBOR + 5.25%), 10/25/23 | 170,138 | 187,910 | ||
c 2014-C01, M2, FRN, 6.192%, (1-month USD LIBOR + 4.40%), 1/25/24 | 237,603 | 258,396 | ||
c 2014-C02, 1M2, FRN, 4.392%, (1-month USD LIBOR + 2.60%), 5/25/24 | 138,051 | 143,859 | ||
c 2014-C02, 2M2, FRN, 4.392%, (1-month USD LIBOR + 2.60%), 5/25/24 | 272,692 | 282,799 | ||
c 2014-C03, 1M2, FRN, 4.792%, (1-month USD LIBOR + 3.00%), 7/25/24 | 189,376 | 199,349 | ||
c 2014-C03, 2M2, FRN, 4.692%, (1-month USD LIBOR + 2.90%), 7/25/24 | 139,837 | 145,835 | ||
c 2014-C04, 1M1, FRN, 6.692%, (1-month USD LIBOR + 4.90%), 11/25/24 | 217,569 | 239,131 | ||
c 2015-C01, 1M2, FRN, 6.092%, (1-month USD LIBOR + 4.30%), 2/25/25 | 147,715 | 157,386 | ||
c 2015-C01, 2M2, FRN, 6.342%, (1-month USD LIBOR + 4.55%), 2/25/25 | 116,679 | 121,322 | ||
c 2016-C03, 1M1, FRN, 3.792%, (1-month USD LIBOR + 2.00%), 10/25/28 | 35,642 | 35,692 | ||
f 2016-C04, 1M2, FRN, 6.042%, 1/25/29 | 115,571 | 122,980 | ||
f 2016-C05, 2M2, FRN, 6.242%, 1/25/29 | 166,668 | 176,217 | ||
c 2016-C06, 1M1, FRN, 3.092%, (1-month USD LIBOR + 1.30%), 4/25/29 | 61,404 | 61,495 | ||
c 2017-C01, 1B1, FRN, 7.542%, (1-month USD LIBOR + 5.75%), 7/25/29 | 280,000 | 331,743 | ||
c 2017-C01, 1M1, FRN, 3.092%, (1-month USD LIBOR + 1.30%), 7/25/29 | 89,158 | 89,248 | ||
f 2017-C02, 2M1, FRN, 2.942%, 9/25/29 | 100,046 | 100,133 | ||
f 2017-C02, 2M2, FRN, 5.442%, 9/25/29 | 250,000 | 263,568 | ||
f 2017-C05, 1M2, FRN, 3.992%, 1/25/30 | 250,000 | 254,503 | ||
f 2017-C06, 1M2, FRN, 4.442%, 2/25/30 | 250,000 | 256,769 | ||
f 2017-C07, 1M1, FRN, 2.442%, 5/25/30 | 137,929 | 137,936 | ||
a,f | FREMF Mortgage Trust, | |||
2011-K11, B, 144A, FRN, 4.418%, 12/25/48 | 170,000 | 172,657 | ||
2018-K72, B, 144A, FRN, 3.992%, 12/25/50 | 210,000 | 222,307 | ||
f | GE Capital Commercial Mortgage Corp. Trust, 2007-C1, AM, FRN, 5.606%, 12/10/49 | 62,789 | 54,940 | |
f | Green Tree Financial Corp., 1998-4, A7, FRN, 6.87%, 4/01/30 | 34,872 | 36,321 | |
f,g | GS Mortgage Securities Trust, 2017-GS5, XA, IO, FRN, 0.815%, 3/10/50 | 3,223,475 | 162,068 | |
c | GSAA Home Equity Trust, 2005-6, A3, FRN, 2.162%, (1-month USD LIBOR + 0.37%), 6/25/35 | 11,200 | 11,234 | |
c | GSAMP Trust, 2005-HE3, M2, FRN, 2.797%, (1-month USD LIBOR + 1.005%), 6/25/35 | 3,098 | 3,108 | |
a,f | Invitation Homes Trust, 2018-SFR4, A, 144A, FRN, 2.837%, 1/17/38 | 185,581 | 186,951 |
| 2
Franklin Strategic Mortgage Portfolio
Statement of Investments (unaudited)
Statement of Investments (unaudited)
Principal Amount* | Value | |||
Asset-Backed Securities and Commercial Mortgage-Backed Securities (continued) | ||||
Finance (continued) | ||||
a,f | JP Morgan Mortgage Trust, 2013-3, A3, 144A, FRN, 3.395%, 7/25/43 | $189,800 | $192,939 | |
f | JPMBB Commercial Mortgage Securities Trust, 2014-C24, AS, FRN, 3.914%, 11/15/47 | 250,000 | 262,271 | |
c | Merrill Lynch Mortgage Investors Trust, 2003-A, 1A, FRN, 2.532%, (1-month USD LIBOR + 0.74%), 3/25/28 | 89,445 | 89,223 | |
a,f | Mill City Mortgage Loan Trust, | |||
2016-1, A, 144A, FRN, 2.50%, 4/25/57 | 71,956 | 71,993 | ||
2018-1, A1, 144A, FRN, 3.25%, 5/25/62 | 124,828 | 127,157 | ||
2018-2, A1, 144A, FRN, 3.50%, 5/25/58 | 180,861 | 185,015 | ||
2018-4, A1B, 144A, FRN, 3.50%, 4/25/66 | 190,000 | 194,804 | ||
a | OBP Depositor LLC Trust, 2010-OBP, A, 144A, 4.646%, 7/15/45 | 250,000 | 249,792 | |
a,c | OBX Trust, 2018-1, A2, 144A, FRN, 2.442%, (1-month USD LIBOR + 0.65%), 6/25/57 | 91,026 | 90,764 | |
a | One Market Plaza Trust, 2017-1MKT, B, 144A, 3.845%, 2/10/32 | 350,000 | 358,601 | |
a | Progress Residential Trust, 2018-SFR2, A, 144A, 3.712%, 8/17/35 | 100,000 | 101,476 | |
a,f | Provident Funding Mortgage Trust 2019-1, 2019-1, A3, 144A, FRN, 3.00%, 12/25/49 | 140,000 | 141,842 | |
a,c | Radnor RE Ltd., 2018-1, M1, 144A, FRN, 3.192%, (1-month USD LIBOR + 1.40%), 3/25/28 | 67,214 | 67,226 | |
f | Residential Asset Securities Corp., 2004-KS8, AI6, FRN, 4.79%, 9/25/34 | 762 | 768 | |
a,f | Sequoia Mortgage Trust, 2016-2, A4, 144A, FRN, 3.50%, 8/25/46 | 294,785 | 301,550 | |
a | Towd Point Mortgage Trust, | |||
f 2015-1, 144A, FRN, 2.75%, 11/25/60 | 194,726 | 195,359 | ||
f 2015-3, A1B, 144A, FRN, 3.00%, 3/25/54 | 73,198 | 73,477 | ||
f 2016-3, A1, 144A, FRN, 2.25%, 4/25/56 | 146,501 | 146,488 | ||
f 2016-4, A1, 144A, FRN, 2.25%, 7/25/56 | 159,664 | 159,086 | ||
f 2016-5, A1, 144A, FRN, 2.50%, 10/25/56 | 299,451 | 300,145 | ||
f 2017-1, A1, 144A, FRN, 2.75%, 10/25/56 | 243,558 | 245,766 | ||
f 2017-1, A2, 144A, FRN, 3.50%, 10/25/56 | 165,000 | 170,340 | ||
f 2017-2, A1, 144A, FRN, 2.75%, 4/25/57 | 62,685 | 63,165 | ||
f 2017-4, A1, 144A, FRN, 2.75%, 6/25/57 | 262,488 | 264,586 | ||
c 2017-5, A1, 144A, FRN, 2.392%, (1-month USD LIBOR + 0.60%), 2/25/57 | 69,389 | 69,391 | ||
f 2018-1, A1, 144A, FRN, 3.00%, 1/25/58 | 70,153 | 71,047 | ||
f 2018-2, A1, 144A, FRN, 3.25%, 3/25/58 | 151,610 | 154,668 | ||
f 2018-5, A1A, 144A, FRN, 3.25%, 7/25/58 | 80,151 | 81,921 | ||
f 2018-6, A1A, 144A, FRN, 3.75%, 3/25/58 | 131,125 | 135,512 | ||
f 2019-1, A1, 144A, FRN, 3.75%, 3/25/58 | 257,952 | 267,981 | ||
c | WaMu Mortgage Pass-Through Certificates, | |||
2005-AR19, A1A1, FRN, 2.062%, (1-month USD LIBOR + 0.27%), 12/25/45 | 148,534 | 148,006 | ||
2005-AR8, 1A1A, FRN, 2.372%, (1-month USD LIBOR + 0.58%), 7/25/45 | 82,851 | 82,185 | ||
a,f | Wells Fargo Mortgage Backed Securities, 2018-1, A3, 144A, FRN, 3.50%, 7/25/47 | 100,721 | 102,261 | |
Total Asset-Backed Securities and Commercial Mortgage-Backed Securities (Cost $15,657,126) | 15,676,647 | |||
Mortgage-Backed Securities 70.9% | ||||
Federal Home Loan Mortgage Corp. (FHLMC) Fixed Rate 9.5% | ||||
FHLMC 30 Year, 2.50%, 4/01/49 | 892,384 | 882,304 | ||
FHLMC 30 Year, 2.50%, 5/01/49 | 206,621 | 204,226 | ||
FHLMC 30 Year, 3.00%, 12/01/49 | 1,554,975 | 1,577,364 | ||
FHLMC 30 Year, 3.50%, 10/01/47 | 1,288,239 | 1,340,124 | ||
FHLMC 30 Year, 4.50%, 8/01/48 | 664,184 | 709,222 | ||
FHLMC Gold 30 Year, 4.50%, 4/01/40 | 435,119 | 473,004 |
| 3
Franklin Strategic Mortgage Portfolio
Statement of Investments (unaudited)
Statement of Investments (unaudited)
Principal Amount* | Value | |||
Mortgage-Backed Securities (continued) | ||||
Federal Home Loan Mortgage Corp. (FHLMC) Fixed Rate (continued) | ||||
FHLMC Gold 30 Year, 5.00%, 10/01/33 - 2/01/39 | $279,024 | $306,114 | ||
FHLMC Gold 30 Year, 5.50%, 9/01/33 | 33,926 | 38,190 | ||
FHLMC Gold 30 Year, 6.00%, 7/01/28 - 11/01/36 | 81,975 | 92,303 | ||
FHLMC Gold 30 Year, 6.50%, 11/01/27 - 7/01/32 | 45,250 | 50,291 | ||
FHLMC Gold 30 Year, 7.50%, 1/01/26 - 3/01/32 | 59,316 | 62,026 | ||
FHLMC Gold 30 Year, 8.00%, 7/01/24 - 5/01/30 | 86,190 | 89,964 | ||
FHLMC Gold 30 Year, 9.00%, 9/01/30 | 13,589 | 13,751 | ||
FHLMC Gold 30 Year, 9.50%, 3/01/21 - 12/01/22 | 370 | 373 | ||
5,839,256 | ||||
h | Federal National Mortgage Association (FNMA) Adjustable Rate 1.4% | |||
FNMA, 3.209% - 4.625%, (6-month USD LIBOR +/- MBS Margin), 10/01/20 - 4/01/37 | 589,331 | 603,102 | ||
FNMA, 4.625% - 5.25%, (6-month USD LIBOR +/- MBS Margin), 1/01/22 - 7/01/38 | 226,542 | 230,390 | ||
833,492 | ||||
Federal National Mortgage Association (FNMA) Fixed Rate 38.0% | ||||
FNMA 15 Year, 2.50%, 12/01/34 | 1,589,486 | 1,603,465 | ||
FNMA 30 Year, 2.50%, 8/01/49 | 292,441 | 288,978 | ||
FNMA 30 Year, 3.00%, 9/01/48 | 3,217,449 | 3,293,899 | ||
FNMA 30 Year, 3.00%, 11/01/48 | 3,989,605 | 4,078,860 | ||
FNMA 30 Year, 3.00%, 10/01/49 | 3,318,670 | 3,366,086 | ||
FNMA 30 Year, 3.00%, 11/01/49 | 1,300,965 | 1,319,339 | ||
FNMA 30 Year, 3.00%, 12/01/49 | 1,555,748 | 1,577,720 | ||
FNMA 30 Year, 3.50%, 8/01/49 | 1,072,245 | 1,117,122 | ||
FNMA 30 Year, 3.50%, 7/01/56 | 954,242 | 1,003,834 | ||
FNMA 30 Year, 4.50%, 11/01/47 | 1,445,181 | 1,554,424 | ||
FNMA 30 Year, 4.50%, 5/01/48 | 1,304,603 | 1,399,819 | ||
FNMA 30 Year, 5.00%, 4/01/34 | 83,360 | 89,948 | ||
FNMA 30 Year, 5.50%, 9/01/33 - 11/01/33 | 510,673 | 558,345 | ||
FNMA 30 Year, 5.50%, 11/01/34 - 11/01/35 | 384,905 | 431,758 | ||
FNMA 30 Year, 6.00%, 12/01/23 - 10/01/34 | 279,093 | 318,874 | ||
FNMA 30 Year, 6.00%, 10/01/34 - 7/01/35 | 499,585 | 561,126 | ||
FNMA 30 Year, 6.00%, 8/01/35 | 64,547 | 71,328 | ||
FNMA 30 Year, 6.50%, 12/01/27 - 8/01/32 | 439,762 | 489,401 | ||
FNMA 30 Year, 7.50%, 8/01/25 - 5/01/32 | 17,572 | 20,172 | ||
FNMA 30 Year, 8.00%, 1/01/25 - 7/01/31 | 21,944 | 24,973 | ||
FNMA 30 Year, 8.50%, 11/01/26 - 11/01/28 | 105,698 | 110,279 | ||
FNMA 30 Year, 9.00%, 8/01/24 - 4/01/25 | 915 | 988 | ||
FNMA 30 Year, 9.50%, 11/01/21 - 4/01/30 | 27,809 | 28,562 | ||
FNMA 30 Year, 10.00%, 4/01/21 | 1,567 | 1,576 | ||
23,310,876 | ||||
Government National Mortgage Association (GNMA) Fixed Rate 22.0% | ||||
GNMA I SF 30 Year, 6.50%, 1/15/24 - 9/15/32 | 73,137 | 80,733 | ||
GNMA I SF 30 Year, 7.00%, 6/15/23 - 2/15/32 | 20,087 | 20,906 | ||
GNMA I SF 30 Year, 7.50%, 10/15/23 - 10/15/29 | 23,753 | 24,853 | ||
GNMA I SF 30 Year, 8.00%, 1/15/22 - 9/15/27 | 19,766 | 20,969 | ||
GNMA I SF 30 Year, 8.25%, 3/15/21 - 5/15/21 | 4,690 | 4,700 | ||
GNMA I SF 30 Year, 8.50%, 10/15/21 - 7/15/24 | 12,170 | 12,204 |
| 4
Franklin Strategic Mortgage Portfolio
Statement of Investments (unaudited)
Statement of Investments (unaudited)
Principal Amount* | Value | |||
Mortgage-Backed Securities (continued) | ||||
Government National Mortgage Association (GNMA) Fixed Rate (continued) | ||||
GNMA II SF 30 Year, 3.50%, 10/20/49 | $2,389,654 | $2,471,259 | ||
GNMA II SF 30 Year, 3.50%, 11/20/49 | 4,440,616 | 4,601,241 | ||
GNMA II SF 30 Year, 3.50%, 12/20/49 | 5,850,000 | 6,061,606 | ||
GNMA II SF 30 Year, 6.50%, 1/20/26 - 1/20/33 | 120,103 | 136,134 | ||
GNMA II SF 30 Year, 7.50%, 11/20/22 - 7/20/32 | 70,748 | 80,906 | ||
GNMA II SF 30 Year, 8.00%, 8/20/26 | 64 | 72 | ||
GNMA II SF 30 Year, 9.00%, 4/20/20 - 3/20/25 | 417 | 425 | ||
GNMA II SF 30 Year, 10.50%, 6/20/20 | 1 | 1 | ||
13,516,009 | ||||
Total Mortgage-Backed Securities (Cost $42,881,115) | 43,499,633 | |||
Total Investments before Short Term Investments (Cost $59,112,302) | 59,766,714 | |||
Shares | ||||
Short Term Investments (Cost $1,532,278) 2.5% | ||||
Money Market Funds 2.5% | ||||
i,j | Institutional Fiduciary Trust Money Market Portfolio, 1.26% | 1,532,278 | 1,532,278 | |
Total Investments (Cost $60,644,580) 100.0% | 61,298,992 | |||
Other Assets, less Liabilities 0.0%† | 4,746 | |||
Net Assets 100.0% | $61,303,738 |
†Rounds to less than 0.1% of net assets. |
*The principal amount is stated in U.S. dollars unless otherwise indicated. |
aSecurity was purchased pursuant to Rule 144A under the Securities Act of 1933 and may be sold in transactions exempt from registration only to qualified institutional buyers or in a public offering registered under the Securities Act of 1933. At December 31, 2019, the aggregate value of these securities was $6,779,774 , representing 11.1% of net assets. |
bThe coupon rate shown represents the rate at period end. |
cThe coupon rate shown represents the rate inclusive of any caps or floors, if applicable, in effect at period end. |
dFair valued using significant unobservable inputs. See Note 6 regarding fair value measurements. |
eDefaulted security or security for which income has been deemed uncollectible. |
fAdjustable 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. |
gInvestment in an interest-only security entitles holders to receive only the interest payment on the underlying instruments. The principal amount shown is the notional amount of the underlying instruments. |
hAdjustable 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). |
iSee Note 5 regarding investments in affiliated management investment companies. |
jThe rate shown is the annualized seven-day effective yield at period end. |
| 5
Franklin Strategic Mortgage Portfolio
Statement of Investments (unaudited)
Statement of Investments (unaudited)
At December 31, 2019, the Fund had the following futures contracts outstanding. See Note 3.
Futures Contracts
Description | Type | Number of Contracts | Notional Amount* | Expiration Date | Value/Unrealized Appreciation (Depreciation) |
Interest Rate Contracts | |||||
CME Ultra Long Term U.S. Treasury Bond | Short | 1 | $181,656 | 3/20/20 | $6,530 |
U.S. Treasury 2 Yr. Note | Long | 19 | 4,094,500 | 3/31/20 | (320) |
U.S. Treasury 30 Yr. Bond | Long | 2 | 311,813 | 3/20/20 | (7,128) |
U.S. Treasury 5 Yr. Note | Long | 12 | 1,423,312 | 3/31/20 | (4,515) |
Ultra 10 Yr. U.S. Treasury Note | Long | 10 | 1,407,031 | 3/20/20 | (17,201) |
Total Futures Contracts | $(22,634) |
*As of period end. |
See Abbreviations on page 9.
| 6
Franklin Strategic Mortgage Portfolio
Notes to Statement of Investments (unaudited)
1. ORGANIZATION
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).
2. 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 market rather than on a securities exchange. The Fund’s pricing services use multiple valuation techniques to determine fair value. In instances where sufficient market activity exists, the pricing services may utilize a market-based approach through which quotes from market makers are used to determine fair value. In instances where sufficient market activity may not exist or is limited, the pricing services also utilize proprietary valuation models which may consider market characteristics such as benchmark yield curves, credit spreads, estimated default rates, anticipated market interest rate volatility, coupon rates, anticipated timing of principal repayments, underlying collateral, and other unique security features in order to estimate the relevant cash flows, which are then discounted to calculate the fair value. Derivative financial instruments listed on an exchange are valued at the official closing price of the day.
Investments in open-end mutual funds are valued at the closing NAV.
The Fund has procedures to determine the fair value of financial instruments for which market prices are not reliable or readily available. Under these procedures, the Fund primarily employs a market-based approach which may use related or comparable assets or liabilities, recent transactions, market multiples, book values, and other relevant information for the investment to determine the fair value of the investment. An income-based valuation approach may also be used in which the anticipated future cash flows of the investment are discounted to calculate fair value. Discounts may also be applied due to the nature or duration of any restrictions on the disposition of the investments. Due to the inherent uncertainty of valuations of such investments, the fair values may differ significantly from the values that would have been used had an active market existed.
3. 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.
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.
| 7
Franklin Strategic Mortgage Portfolio
Notes to Statement of Investments (unaudited)
Notes to Statement of Investments (unaudited)
3. DERIVATIVE FINANCIAL INSTRUMENTS (continued)
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.
4. MORTGAGE DOLLAR ROLLS
The Fund enters into mortgage dollar rolls, typically on a to-be-announced 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.
5. INVESTMENTS IN AFFILIATED MANAGEMENT INVESTMENT COMPANIES
The Fund invests in one or more affiliated management investment companies for purposes other than exercising a controlling influence over the management or policies. During the period ended December 31, 2019, the Fund held investments in affiliated management investment companies as follows:
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 | Dividend Income | |
Non-Controlled Affiliates | ||||||||
Institutional Fiduciary Trust Money Market Portfolio, 1.26% | $3,132,672 | $5,213,688 | $(6,814,082) | $ — | $ — | $1,532,278 | 1,532,278 | $8,274 |
6. 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.
| 8
Franklin Strategic Mortgage Portfolio
Notes to Statement of Investments (unaudited)
A summary of inputs used as of December 31, 2019, in valuing the Fund’s assets and liabilities carried at fair value, is as follows:
Level 1 | Level 2 | Level 3 | Total | |
Assets: | ||||
Investments in Securities:a | ||||
Corporate Bonds | $— | $107,792 | $— | $107,792 |
U.S. Government and Agency Securities | — | 482,642 | — | 482,642 |
Asset-Backed Securities and Commercial Mortgage-Backed Securities | — | 15,676,484 | 163 | 15,676,647 |
Mortgage-Backed Securities | — | 43,499,633 | — | 43,499,633 |
Short Term Investments | 1,532,278 | — | — | 1,532,278 |
Total Investments in Securities | $1,532,278 | $59,766,551 | $163 | $61,298,992 |
Other Financial Instruments: | ||||
Futures Contracts | $6,530 | $— | $— | $6,530 |
Liabilities: | ||||
Other Financial Instruments: | ||||
Futures Contracts | $29,164 | $— | $— | $29,164 |
aFor detailed categories, see the accompanying Statement of Investments. |
A reconciliation of assets in which Level 3 inputs are used in determining fair value is presented when there are significant Level 3 financial instruments at the beginning and/or end of the period.
7. SUBSEQUENT EVENTS
The Fund has evaluated subsequent events through the issuance of the Statement of Investments and determined that no events have occurred that require disclosure.
Abbreviations
Counterparty | |
CME | Chicago Mercantile Exchange |
Currency | |
USD | United States Dollar |
Selected Portfolio | |
FRN | Floating Rate Note |
IO | Interest Only |
LIBOR | London InterBank Offered Rate |
SF | Single Family |
For additional information on the Fund’s significant accounting policies, please refer to the Fund’s most recent semiannual or annual shareholder report.
| 9