Franklin
Strategic
Mortgage
Portfolio
Statement
of
Investments
(unaudited),
December
31,
2020
See
Notes
to
Statement
of
Investments.
Quarterly
Statements
of
Investments
1
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
$
115,075
Insurance
0.0%
†
a,b
Ambac
Assurance
Corp.
,
Sub.
Bond
,
144A,
5.1
%
,
Perpetual
...................
237
328
b,c
Ambac
LSNI
LLC
,
Senior
Note
,
144A,
FRN
,
6
%
,
(
3-month
USD
LIBOR
+
5
%
),
2/12/23
869
866
1,194
Total
Corporate
Bonds
(Cost
$100,685)
........................................
116,269
U.S.
Government
and
Agency
Securities
0.8%
U.S.
Treasury
Bonds
,
4.75%,
2/15/37
...................................................
225,000
342,712
4.25%,
11/15/40
...................................................
131,000
196,530
Total
U.S.
Government
and
Agency
Securities
(Cost
$468,086)
....................
539,242
Asset-Backed
Securities
5.0%
Diversified
Financial
Services
4.6%
b
American
Homes
4
Rent
Trust
,
2015-SFR1
,
A
,
144A,
3.467
%
,
4/17/52
...........
144,345
155,329
b
CF
Hippolyta
LLC
,
2020-1
,
A1
,
144A,
1.69
%
,
7/15/60
........................
114,525
116,970
d
CWABS,
Inc.
,
2004-1
,
M1
,
FRN
,
0.898
%
,
(
1-month
USD
LIBOR
+
0.75
%
),
3/25/34
..
28,544
28,484
b
FirstKey
Homes
Trust
,
2020-SFR2
,
A
,
144A,
1.266
%
,
10/19/37
.................
150,000
151,086
b,d
Invitation
Homes
Trust
,
2018-SFR4
,
A
,
144A,
FRN
,
1.253
%
,
(
1-month
USD
LIBOR
+
1.1
%
),
1/17/38
....................................................
179,020
180,917
b,e
Mill
City
Mortgage
Loan
Trust
,
2016-1,
A1,
144A,
FRN,
2.5%,
4/25/57
..................................
39,152
39,571
2018-2,
A1,
144A,
FRN,
3.5%,
5/25/58
..................................
132,346
137,833
2018-1,
A1,
144A,
FRN,
3.25%,
5/25/62
.................................
96,396
99,839
2018-4,
A1B,
144A,
FRN,
3.5%,
4/25/66
.................................
167,433
178,377
b
Progress
Residential
Trust
,
2018-SFR2
,
A
,
144A,
3.712
%
,
8/17/35
..............
200,000
203,746
e
RASC
Trust
,
2004-KS8
,
AI6
,
FRN
,
4.79
%
,
9/25/34
...........................
23
23
b
Towd
Point
Mortgage
Trust
,
e
2015-2,
1A12,
144A,
FRN,
2.75%,
11/25/60
..............................
61,699
61,890
e
2016-1,
A1,
144A,
FRN,
3.5%,
2/25/55
..................................
56,338
56,856
e
2016-3,
A1,
144A,
FRN,
2.25%,
4/25/56
.................................
80,628
81,513
e
2016-4,
A1,
144A,
FRN,
2.25%,
7/25/56
.................................
102,916
104,559
e
2016-5,
A1,
144A,
FRN,
2.5%,
10/25/56
.................................
213,910
218,230
e
2017-1,
A1,
144A,
FRN,
2.75%,
10/25/56
................................
166,358
170,584
d
2017-5,
A1,
144A,
FRN,
0.748%,
(1-month
USD
LIBOR
+
0.6%),
2/25/57
........
48,260
48,130
e
2017-2,
A1,
144A,
FRN,
2.75%,
4/25/57
.................................
44,577
45,626
e
2017-4,
A1,
144A,
FRN,
2.75%,
6/25/57
.................................
201,619
209,226
e
2018-1,
A1,
144A,
FRN,
3%,
1/25/58
...................................
54,708
56,925
e
2018-2,
A1,
144A,
FRN,
3.25%,
3/25/58
.................................
121,617
127,442
e
2019-1,
A1,
144A,
FRN,
3.75%,
3/25/58
.................................
211,512
227,559
e
2018-6,
A1A,
144A,
FRN,
3.75%,
3/25/58
................................
99,410
104,905
e
2015-3,
A1B,
144A,
FRN,
3%,
3/25/54
..................................
17,669
17,756
e
2017-1,
A2,
144A,
FRN,
3.5%,
10/25/56
.................................
165,000
177,998
3,001,374
a
a
a
a
a
Thrifts
&
Mortgage
Finance
0.4%
e
Conseco
Finance
Corp.
,
1998-4,
A7,
FRN,
6.87%,
4/01/30
......................................
18,092
18,487
1998-6,
A8,
FRN,
6.66%,
6/01/30
......................................
22,995
23,255
Franklin
Strategic
Mortgage
Portfolio
Statement
of
Investments
(unaudited)
Quarterly
Statements
of
Investments
See
Notes
to
Statement
of
Investments.
2
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
.......
$
195,860
$
206,727
248,469
a
a
a
a
a
Total
Asset-Backed
Securities
(Cost
$3,155,706)
................................
3,249,843
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,
1.159%,
(1-month
USD
LIBOR
+
1%),
11/15/32
.......
165,000
165,760
2018-IND,
A,
144A,
FRN,
0.909%,
(1-month
USD
LIBOR
+
0.75%),
11/15/35
.....
55,222
55,330
2019-XL,
A,
144A,
FRN,
1.079%,
(1-month
USD
LIBOR
+
0.92%),
10/15/36
......
161,381
162,045
2020-BXLP,
A,
144A,
FRN,
0.959%,
(1-month
USD
LIBOR
+
0.8%),
12/15/36
.....
199,817
200,349
b,d
Cold
Storage
Trust
,
2020-ICE5
,
A
,
144A,
FRN
,
1.059
%
,
(
1-month
USD
LIBOR
+
0.9
%
),
11/15/37
........................................................
330,000
332,106
e
Commercial
Mortgage
Trust
,
2006-GG7
,
AJ
,
FRN
,
6.012
%
,
7/10/38
..............
39,746
35,781
951,395
a
a
a
a
a
Thrifts
&
Mortgage
Finance
0.1%
d
FNMA
,
2007-1
,
NF
,
FRN
,
0.398
%
,
(
1-month
USD
LIBOR
+
0.25
%
),
2/25/37
........
57,120
57,117
Total
Commercial
Mortgage-Backed
Securities
(Cost
$1,052,866)
.................
1,008,512
Mortgage-Backed
Securities
78.0%
Federal
Home
Loan
Mortgage
Corp.
(FHLMC)
Fixed
Rate
14.7%
FHLMC
Gold
Pools,
30
Year,
4.5%,
4/01/40
................................
332,545
373,582
FHLMC
Gold
Pools,
30
Year,
5%,
10/01/33
-
2/01/39
.........................
228,266
262,839
FHLMC
Gold
Pools,
30
Year,
5.5%,
9/01/33
................................
21,420
24,610
FHLMC
Gold
Pools,
30
Year,
6%,
7/01/28
-
11/01/36
.........................
66,098
76,986
FHLMC
Gold
Pools,
30
Year,
6.5%,
11/01/27
-
7/01/32
........................
33,877
38,003
FHLMC
Gold
Pools,
30
Year,
7.5%,
1/01/26
-
3/01/32
........................
55,734
58,830
FHLMC
Gold
Pools,
30
Year,
8%,
7/01/24
-
5/01/30
..........................
79,686
83,754
FHLMC
Gold
Pools,
30
Year,
9%,
9/01/30
.................................
7,145
7,243
FHLMC
Gold
Pools,
30
Year,
9.5%,
8/01/21
................................
48
48
FHLMC
Pool,
30
Year,
2.5%,
10/01/50
....................................
2,085,575
2,213,626
FHLMC
Pool,
30
Year,
3%,
2/01/50
......................................
503,326
538,921
FHLMC
Pool,
30
Year,
3%,
5/01/50
......................................
1,327,748
1,423,316
FHLMC
Pool,
30
Year,
3%,
8/01/50
......................................
913,000
985,693
FHLMC
Pool,
30
Year,
3.5%,
7/01/49
.....................................
1,948,100
2,099,854
FHLMC
Pool,
30
Year,
4%,
5/01/50
......................................
158,277
172,694
FHLMC
Pool,
30
Year,
4.5%,
10/01/48
....................................
999,123
1,112,313
9,472,312
g
Federal
National
Mortgage
Association
(FNMA)
Adjustable
Rate
1.0%
FNMA,
1.38%
-
4.75%,
(6-month
USD
LIBOR
+/-
MBS
Margin),
1/01/22
-
7/01/38
...
635,794
638,843
638,843
Federal
National
Mortgage
Association
(FNMA)
Fixed
Rate
56.1%
FNMA,
3.5%,
7/01/56
................................................
805,479
890,919
FNMA,
15
Year,
2.5%,
3/01/29
.........................................
462,253
483,050
FNMA,
30
Year,
2.5%,
9/01/50
.........................................
2,213,667
2,380,691
FNMA,
30
Year,
2.5%,
9/01/50
.........................................
2,203,229
2,357,026
FNMA,
30
Year,
2.5%,
10/01/50
.........................................
893,988
953,764
FNMA,
30
Year,
3%,
11/01/48
..........................................
2,789,473
2,951,197
FNMA,
30
Year,
3%,
9/01/49
...........................................
451,247
481,499
Franklin
Strategic
Mortgage
Portfolio
Statement
of
Investments
(unaudited)
See
Notes
to
Statement
of
Investments.
Quarterly
Statements
of
Investments
3
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
...........................................
$
464,130
$
495,209
FNMA,
30
Year,
3%,
3/01/50
...........................................
648,570
684,973
FNMA,
30
Year,
3%,
7/01/50
...........................................
675,522
710,574
FNMA,
30
Year,
3%,
7/01/50
...........................................
1,306,965
1,407,621
FNMA,
30
Year,
3.5%,
8/01/49
.........................................
2,118,805
2,280,854
FNMA,
30
Year,
3.5%,
8/01/49
.........................................
707,769
758,569
FNMA,
30
Year,
3.5%,
9/01/49
.........................................
2,030,241
2,171,911
FNMA,
30
Year,
3.5%,
1/01/50
.........................................
465,680
504,447
FNMA,
30
Year,
3.5%,
2/01/50
.........................................
438,980
473,723
FNMA,
30
Year,
4%,
11/01/45
..........................................
3,467,522
3,805,594
FNMA,
30
Year,
4.5%,
11/01/47
.........................................
967,515
1,075,978
FNMA,
30
Year,
5%,
4/01/34
...........................................
77,056
85,864
FNMA,
30
Year,
5.5%,
9/01/33
-
11/01/35
.................................
693,518
799,031
FNMA,
30
Year,
6%,
10/01/34
..........................................
273,719
326,952
FNMA,
30
Year,
6%,
10/01/34
..........................................
200,262
240,169
FNMA,
30
Year,
6%,
12/01/23
-
8/01/35
...................................
214,167
244,116
FNMA,
30
Year,
6.5%,
12/01/27
-
8/01/32
.................................
338,801
383,697
FNMA,
30
Year,
7.5%,
8/01/25
-
5/01/32
..................................
13,242
15,613
FNMA,
30
Year,
8%,
1/01/25
-
7/01/31
....................................
20,392
23,924
FNMA,
30
Year,
8.5%,
11/01/28
.........................................
2,798
2,804
FNMA,
30
Year,
9%,
8/01/24
-
4/01/25
....................................
662
722
FNMA,
30
Year,
9.5%,
11/01/21
-
4/01/30
.................................
23,902
24,442
h
FNMA,
Single-family,
15
Year,
1.5%,
1/25/36
...............................
1,730,000
1,779,885
h
FNMA,
Single-family,
15
Year,
2%,
1/25/36
................................
4,056,000
4,240,133
h
FNMA,
Single-family,
30
Year,
2%,
1/25/51
................................
3,036,000
3,153,523
36,188,474
Government
National
Mortgage
Association
(GNMA)
Fixed
Rate
6.2%
GNMA
I,
30
Year,
7%,
11/15/29
.........................................
1,961
2,319
GNMA
I,
30
Year,
8%,
11/15/25
-
12/15/26
.................................
7,220
7,900
GNMA
I,
Single-family,
30
Year,
6.5%,
1/15/24
-
9/15/32
......................
62,679
69,688
GNMA
I,
Single-family,
30
Year,
7%,
6/15/23
-
2/15/32
........................
14,148
14,586
GNMA
I,
Single-family,
30
Year,
7.5%,
10/15/23
-
10/15/29
.....................
19,151
20,135
GNMA
I,
Single-family,
30
Year,
8%,
1/15/22
-
9/15/27
........................
3,974
4,083
GNMA
I,
Single-family,
30
Year,
8.5%,
7/15/24
..............................
52
52
h
GNMA
II,
Single-family,
30
Year,
2%,
1/15/51
...............................
1,098,000
1,148,138
GNMA
II,
Single-family,
30
Year,
2.5%,
10/20/50
............................
994,298
1,053,566
h
GNMA
II,
Single-family,
30
Year,
2.5%,
1/15/51
.............................
1,441,000
1,525,265
GNMA
II,
Single-family,
30
Year,
6.5%,
1/20/26
-
1/20/33
......................
95,754
112,147
GNMA
II,
Single-family,
30
Year,
7.5%,
11/20/22
-
7/20/32
.....................
54,031
63,238
GNMA
II,
Single-family,
30
Year,
8%,
8/20/26
...............................
48
55
GNMA
II,
Single-family,
30
Year,
9%,
12/20/21
-
3/20/25
......................
256
262
4,021,434
Total
Mortgage-Backed
Securities
(Cost
$49,208,875)
............................
50,321,063
Residential
Mortgage-Backed
Securities
9.4%
Capital
Markets
0.1%
d
Merrill
Lynch
Mortgage
Investors
Trust
,
2003-A
,
1A
,
FRN
,
0.888
%
,
(
1-month
USD
LIBOR
+
0.74
%
),
3/25/28
............................................
60,142
58,895
Franklin
Strategic
Mortgage
Portfolio
Statement
of
Investments
(unaudited)
Quarterly
Statements
of
Investments
See
Notes
to
Statement
of
Investments.
4
a
a
Principal
Amount
a
Value
a
a
a
a
a
Residential
Mortgage-Backed
Securities
(continued)
Diversified
Financial
Services
2.1%
d
American
Home
Mortgage
Investment
Trust
,
2005-1
,
6A
,
FRN
,
2.254
%
,
(
6-month
USD
LIBOR
+
2
%
),
6/25/45
..............................................
$
57,390
$
58,469
b,d
Bellemeade
Re
Ltd.
,
2018-1A
,
M1B
,
144A,
FRN
,
1.748
%
,
(
1-month
USD
LIBOR
+
1.6
%
),
4/25/28
....................................................
63,472
63,406
b
BRAVO
Residential
Funding
Trust
,
2019-1,
A1C,
144A,
3.5%,
3/25/58
.....................................
82,958
85,752
e
2019-2,
A3,
144A,
FRN,
3.5%,
10/25/44
.................................
105,695
110,825
b
CIM
Trust
,
e
2019-INV1,
A1,
144A,
FRN,
4%,
2/25/49
................................
81,272
83,791
d
2019-INV2,
A11,
144A,
FRN,
1.1%,
(1-month
USD
LIBOR
+
0.95%),
5/25/49
.....
200,812
201,313
e
2019-INV2,
A3,
144A,
FRN,
4%,
5/25/49
................................
126,512
130,469
e
2018-INV1,
A4,
144A,
FRN,
4%,
8/25/48
................................
75,808
78,206
b,e
Citigroup
Mortgage
Loan
Trust
,
2013-A
,
A
,
144A,
FRN
,
3
%
,
5/25/42
.............
8,605
8,635
b,e
CSMC
Trust
,
2014-OAK1
,
1A1
,
144A,
FRN
,
3
%
,
11/25/29
.....................
68,344
70,092
b,e
Flagstar
Mortgage
Trust
,
2018-6RR
,
1A3
,
144A,
FRN
,
4
%
,
10/25/48
.............
33,420
33,696
b,e
J.P.
Morgan
Mortgage
Trust
,
2013-3
,
A3
,
144A,
FRN
,
3.383
%
,
7/25/43
...........
122,017
126,259
b,d
OBX
Trust
,
2018-1
,
A2
,
144A,
FRN
,
0.798
%
,
(
1-month
USD
LIBOR
+
0.65
%
),
6/25/57
61,770
61,705
b,e
Provident
Funding
Mortgage
Trust
,
2019-1,
A3,
144A,
FRN,
3%,
12/25/49
..................................
42,889
43,169
2020-1,
A3,
144A,
FRN,
3%,
2/25/50
...................................
50,611
51,196
b,d
Radnor
Re
Ltd.
,
2018-1
,
M1
,
144A,
FRN
,
1.548
%
,
(
1-month
USD
LIBOR
+
1.4
%
),
3/25/28
.........................................................
5,888
5,887
b,e
Sequoia
Mortgage
Trust
,
2016-2
,
A4
,
144A,
FRN
,
3.5
%
,
8/25/46
................
100,564
101,063
b,e
Wells
Fargo
Mortgage
Backed
Securities
Trust
,
2018-1
,
A3
,
144A,
FRN
,
3.5
%
,
7/25/47
35,765
36,076
1,350,009
a
a
a
a
a
Thrifts
&
Mortgage
Finance
7.2%
d
FHLMC
Structured
Agency
Credit
Risk
Debt
Notes
,
2013-DN2,
M2,
FRN,
4.398%,
(1-month
USD
LIBOR
+
4.25%),
11/25/23
........
154,350
154,023
2017-DNA1,
M2,
FRN,
3.398%,
(1-month
USD
LIBOR
+
3.25%),
7/25/29
........
240,330
247,053
2017-HQA1,
M2,
FRN,
3.698%,
(1-month
USD
LIBOR
+
3.55%),
8/25/29
........
212,946
219,533
2017-DNA2,
M2,
FRN,
3.598%,
(1-month
USD
LIBOR
+
3.45%),
10/25/29
.......
250,000
259,372
2017-DNA3,
M2,
FRN,
2.648%,
(1-month
USD
LIBOR
+
2.5%),
3/25/30
.........
250,000
254,549
2017-HQA3,
M2,
FRN,
2.498%,
(1-month
USD
LIBOR
+
2.35%),
4/25/30
........
182,386
185,821
2014-DN2,
M3,
FRN,
3.748%,
(1-month
USD
LIBOR
+
3.6%),
4/25/24
..........
243,815
243,057
2014-DN3,
M3,
FRN,
4.148%,
(1-month
USD
LIBOR
+
4%),
8/25/24
...........
102,845
105,317
2014-HQ1,
M3,
FRN,
4.248%,
(1-month
USD
LIBOR
+
4.1%),
8/25/24
..........
89,975
91,174
2014-DN4,
M3,
FRN,
4.698%,
(1-month
USD
LIBOR
+
4.55%),
10/25/24
........
188,256
193,803
2014-HQ3,
M3,
FRN,
4.898%,
(1-month
USD
LIBOR
+
4.75%),
10/25/24
........
66,311
67,176
2015-DN1,
M3,
FRN,
4.298%,
(1-month
USD
LIBOR
+
4.15%),
1/25/25
.........
35,763
36,161
2015-HQ1,
M3,
FRN,
3.948%,
(1-month
USD
LIBOR
+
3.8%),
3/25/25
..........
23,511
23,550
2015-HQ2,
M3,
FRN,
3.398%,
(1-month
USD
LIBOR
+
3.25%),
5/25/25
.........
239,090
244,290
2016-DNA2,
M3,
FRN,
4.798%,
(1-month
USD
LIBOR
+
4.65%),
10/25/28
.......
174,289
182,116
2016-HQA2,
M3,
FRN,
5.298%,
(1-month
USD
LIBOR
+
5.15%),
11/25/28
.......
214,892
223,699
d
FNMA
Connecticut
Avenue
Securities
,
2014-C04,
1M2,
FRN,
5.048%,
(1-month
USD
LIBOR
+
4.9%),
11/25/24
.........
155,850
160,516
2015-C01,
1M2,
FRN,
4.448%,
(1-month
USD
LIBOR
+
4.3%),
2/25/25
.........
212,773
217,763
2016-C04,
1M2,
FRN,
4.398%,
(1-month
USD
LIBOR
+
4.25%),
1/25/29
........
75,947
79,356
2017-C05,
1M2,
FRN,
2.348%,
(1-month
USD
LIBOR
+
2.2%),
1/25/30
.........
182,328
182,856
2017-C06,
1M2,
FRN,
2.798%,
(1-month
USD
LIBOR
+
2.65%),
2/25/30
........
186,114
187,378
2014-C02,
2M2,
FRN,
2.748%,
(1-month
USD
LIBOR
+
2.6%),
5/25/24
.........
187,189
186,242
2014-C03,
2M2,
FRN,
3.048%,
(1-month
USD
LIBOR
+
2.9%),
7/25/24
.........
90,014
90,529
2015-C01,
2M2,
FRN,
4.698%,
(1-month
USD
LIBOR
+
4.55%),
2/25/25
........
40,201
40,916
2016-C05,
2M2,
FRN,
4.598%,
(1-month
USD
LIBOR
+
4.45%),
1/25/29
........
98,761
103,218
Franklin
Strategic
Mortgage
Portfolio
Statement
of
Investments
(unaudited)
See
Notes
to
Statement
of
Investments.
Quarterly
Statements
of
Investments
5
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)
2017-C02,
2M2,
FRN,
3.798%,
(1-month
USD
LIBOR
+
3.65%),
9/25/29
........
$
187,705
$
192,784
2013-C01,
M2,
FRN,
5.398%,
(1-month
USD
LIBOR
+
5.25%),
10/25/23
........
178,707
183,485
2014-C01,
M2,
FRN,
4.548%,
(1-month
USD
LIBOR
+
4.4%),
1/25/24
..........
174,255
176,274
b
Virginia
Housing
Development
Authority
,
2020-A
,
A
,
144A,
2.85
%
,
12/25/49
........
92,232
96,180
4,628,191
a
a
a
a
a
Total
Residential
Mortgage-Backed
Securities
(Cost
$6,125,577)
..................
6,037,095
Total
Long
Term
Investments
(Cost
$60,111,795)
................................
61,272,024
a
a
a
a
a
Short
Term
Investments
24.7%
U.S.
Government
and
Agency
Securities
21.7%
i
U.S.
Treasury
Bills
,
1/07/21
.........................................................
4,500,000
4,499,993
3/11/21
.........................................................
4,755,000
4,754,433
3/25/21
.........................................................
4,755,000
4,754,313
14,008,739
Total
U.S.
Government
and
Agency
Securities
(Cost
$14,008,265)
.................
14,008,739
Shares
a
Money
Market
Funds
3.0%
j,k
Institutional
Fiduciary
Trust
-
Money
Market
Portfolio,
0%
......................
1,926,210
1,926,210
Total
Money
Market
Funds
(Cost
$1,926,210)
...................................
1,926,210
Total
Short
Term
Investments
(Cost
$15,934,475
)
................................
15,934,949
a
Total
Investments
(Cost
$76,046,270)
119.7%
...................................
$77,206,973
Other
Assets,
less
Liabilities
(19.7)%
..........................................
(12,736,835)
Net
Assets
100.0%
...........................................................
$64,470,138
†
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
December
31,
2020,
the
aggregate
value
of
these
securities
was
$5,277,395,
representing
8.2%
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
Defaulted
security
or
security
for
which
income
has
been
deemed
uncollectible.
g
Adjustable
Rate
Mortgage-Backed
Security
(ARM);
the
rate
shown
is
the
effective
rate
at
period
end.
ARM
rates
are
not
based
on
a
published
reference
rate
and
spread,
but
instead
pass-through
weighted
average
interest
income
inclusive
of
any
caps
or
floors,
if
applicable,
from
the
underlying
mortgage
loans
in
which
the
majority
of
mortgages
pay
interest
based
on
the
index
shown
at
their
designated
reset
dates
plus
a
spread,
less
the
applicable
servicing
and
guaranty
fee
(MBS
margin).
h
Security
purchased
on
a
to-be-announced
(TBA)
basis.
i
The
security
was
issued
on
a
discount
basis
with
no
stated
coupon
rate.
j
See
Note
6
regarding
investments
in
affiliated
management
investment
companies.
k
The
rate
shown
is
the
annualized
seven-day
effective
yield
at
period
end.
Franklin
Strategic
Mortgage
Portfolio
Statement
of
Investments
(unaudited)
Quarterly
Statements
of
Investments
See
Notes
to
Statement
of
Investments.
6
At
December
31,
2020,
the
Fund
had
the
following futures
contracts
outstanding.
See
Note
. 3
See
Abbreviations
on
page
9
.
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
14
$
1,933,094
3/22/21
$
(1,347)
U.S.
Treasury
10
Year
Ultra
Notes
................
Long
7
1,094,516
3/22/21
(994)
U.S.
Treasury
2
Year
Notes
.....................
Long
9
1,988,789
3/31/21
1,625
U.S.
Treasury
5
Year
Notes
.....................
Long
16
2,018,625
3/31/21
2,377
U.S.
Treasury
Long
Bonds
.....................
Short
12
2,078,250
3/22/21
14,233
U.S.
Treasury
Ultra
Bonds
......................
Short
2
427,125
3/22/21
2,560
Total
Futures
Contracts
......................................................................
$18,454
*
As
of
period
end.
Franklin
Strategic
Mortgage
Portfolio
7
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.
Franklin
Strategic
Mortgage
Portfolio
Notes
to
Statement
of
Investments
(unaudited)
8
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.
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.
6.
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,
2020,
the
Fund
held
investments
in
affiliated
management
investment
companies
as
follows:
7. 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:
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%
.........
$2,589,379
$3,637,326
$(4,300,495)
$—
$—
$1,926,210
1,926,210
$—
Total
Affiliated
Securities
....
$2,589,379
$3,637,326
$(4,300,495)
$—
$—
$1,926,210
$—
3.
Derivative
Financial
Instruments
(continued)
Franklin
Strategic
Mortgage
Portfolio
Notes
to
Statement
of
Investments
(unaudited)
9
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
December
31,
2020,
in
valuing
the
Fund's
assets
and
liabilities
carried
at
fair
value,
is
as
follows:
8.
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
Level
1
Level
2
Level
3
Total
Franklin
Strategic
Mortgage
Portfolio
Assets:
Investments
in
Securities:
a
Corporate
Bonds
........................
$
—
$
116,269
$
—
$
116,269
U.S.
Government
and
Agency
Securities
.......
—
539,242
—
539,242
Asset-Backed
Securities
..................
—
3,249,843
—
3,249,843
Commercial
Mortgage-Backed
Securities
......
—
1,008,512
—
1,008,512
Mortgage-Backed
Securities
................
—
50,321,063
—
50,321,063
Residential
Mortgage-Backed
Securities
......
—
6,037,095
—
6,037,095
Short
Term
Investments
...................
15,934,949
—
—
15,934,949
Total
Investments
in
Securities
...........
$15,934,949
$61,272,024
$—
$77,206,973
Other
Financial
Instruments:
Futures
contracts
........................
$
20,795
$
—
$
—
$
20,795
Total
Other
Financial
Instruments
.........
$20,795
$—
$—
$20,795
Liabilities:
Other
Financial
Instruments:
Futures
contracts
........................
$
2,341
$
—
$
—
$
2,341
$—
$—
$—
$—
a
For
detailed
categories,
see
the
accompanying
Statement
of
Investments.
Currency
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
7. Fair
Value
Measurements
(continued)
For
additional
information
on
the
Fund's
significant
accounting
policies,
please
refer
to
the Fund's
most
recent
semiannual
or
annual
shareholder
report.