UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number 811-07288
Franklin Strategic Mortgage Portfolio
(Exact name of registrant as specified in charter)
One Franklin Parkway, San Mateo, CA 94403-1906
(Address of principal executive offices) (Zip code)
Craig S. Tyle, One Franklin Parkway, San Mateo, CA 94403-1906
(Name and address of agent for service)
Registrant's telephone number, including area code: 650 312-2000
Date of fiscal year end: 9/30
Date of reporting period: 9/30/21
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.)
Include a copy of each notice transmitted to stockholders in reliance on Rule 30e-3 under the Act (17 CFR 270.30e-3) that contains disclosures specified by paragraph (c)(3) of that rule.
Not Applicable
.
ANNUAL
REPORT
AND
SHAREHOLDER
LETTER
Franklin
Strategic
Mortgage
Portfolio
September
30,
2021
Sign
up
for
electronic
delivery
at
franklintempleton.com/edelivery
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FDIC
Insured
May
Lose
Value
No
Bank
Guarantee
franklintempleton.com
Annual
Report
1
Shareholder
Letter
Dear
Shareholder:
During
the
12
months
ended
September
30,
2021,
the
U.S.
economy
continued
to
recover
from
the
COVID-19
pandemic.
Growth
accelerated
in
2021’s
first
half
as
the
reopening
of
businesses,
widespread
COVID-19
vaccinations
and
federal
assistance
programs
continued
to
boost
consumer
spending.
During
the
summer,
however,
investors
became
concerned
that
the
swiftly
spreading
Delta
variant
of
COVID-19
could
hinder
the
economic
recovery.
During
the
reporting
period,
the
U.S.
Federal
Reserve,
in
its
efforts
to
support
U.S.
economic
activity,
held
the
federal
funds
rate
unchanged
at
0.25%,
and
it
continued
broad
quantitative
easing
measures
to
bolster
credit
markets.
The
Federal
Reserve
also
adjusted
its
GDP
and
inflation
projections
higher
and
expected
to
begin
decreasing
its
asset
purchases
later
this
year,
while
delaying
any
interest
rate
increases
until
reaching
its
goal
of
maximum
U.S.
employment.
The
10-year
U.S.
Treasury
yield
was
0.69%
on
September
30,
2020,
and
it
increased
to
1.52%
by
the
end
of
September
2021.
In
this
environment,
investment-grade
bonds,
as
measured
by
the
Bloomberg
U.S.
Aggregate
Bond
Index,
posted
a
-0.90%
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
professionals
in
today’s
markets
and
encourage
investors
to
continue
to
seek
their
advice.
Amid
changing
markets
and
economic
conditions,
we
are
confident
investors
with
a
well-diversified
portfolio
and
a
patient,
long-term
outlook
should
be
well-positioned
for
the
years
ahead.
Franklin
Strategic
Mortgage
Portfolio’s
annual
report
includes
more
detail
about
prevailing
conditions
and
a
discussion
about
investment
decisions
during
the
period.
Please
remember
all
securities
markets
fluctuate,
as
do
mutual
fund
share
prices.
We
thank
you
for
investing
with
Franklin
Templeton,
welcome
your
questions
and
comments,
and
look
forward
to
serving
your
investment
needs
in
the
years
ahead.
Sincerely,
Sonal
Desai,
Ph.D.
Executive
Vice
President,
Chief
Investment
Officer
Franklin
Templeton
Fixed
Income
This
letter
reflects
our
analysis
and
opinions
as
of
September
30,
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
Annual
Report
2
Contents
Annual
Report
Franklin
Strategic
Mortgage
Portfolio
3
Performance
Summary
6
Your
Fund’s
Expenses
9
Financial
Highlights
and
Statement
of
Investments
10
Financial
Statements
21
Notes
to
Financial
Statements
25
Report
of
Independent
Registered
Public
Accounting
Firm
35
Tax
Information
36
Board
Members
and
Officers
37
Shareholder
Information
42
Visit
franklintempleton.com
for
fund
updates,
to
access
your
account,
or
to
find
helpful
financial
planning
tools.
3
franklintempleton.com
Annual
Report
ANNUAL
REPORT
Franklin
Strategic
Mortgage
Portfolio
This
annual
report
for
Franklin
Strategic
Mortgage
Portfolio
covers
the
fiscal
year
ended
September
30,
2021.
Your
Fund’s
Goal
and
Main
Investments
The
Fund
seeks
high
total
return
(a
combination
of
high
current
income
and
capital
appreciation)
relative
to
the
performance
of
the
general
mortgage
securities
market
by
investing
at
least
80%
of
its
net
assets
in
a
portfolio
of
mortgage
securities.
The
Fund
invests
substantially
in
mortgage
securities
that
are
issued
or
guaranteed
by
the
U.S.
government,
its
agencies
or
instrumentalities,
which
include
mortgage
pass-through
securities
representing
interests
in
“pools”
of
mortgage
loans
issued
or
guaranteed
by
the
Government
National
Mortgage
Association
(Ginnie
Mae),
Fannie
Mae
and
Freddie
Mac.
1
Performance
Overview
For
the
12
months
ended
September
30,
2021,
the
Fund’s
Class
A
shares
posted
a
-0.41%
cumulative
total
return.
In
comparison,
the
Fund’s
primary
benchmark,
the
Bloomberg
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
-0.43%
cumulative
total
return.
2
In
comparison,
the
Fund’s
secondary
benchmark,
the
FTSE
U.S.
Broad
Investment-Grade
(USBIG)
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
-0.50%
cumulative
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
U.S.
Aggregate
Bond
Index,
posted
a
-0.90%
total
return
for
the
12
months
ended
September
30,
2021.
2
As
the
U.S.
economy
continued
to
recover
from
the
novel
coronavirus
(COVID-19)
pandemic,
investor
appetite
for
risk
increased
and
inflation
concerns
rose.
Consequently,
lower-rated
bonds
posted
significantly
greater
returns
than
higher-rated
bonds,
while
shorter-term
bonds
generally
outperformed
longer-term
bonds,
which
tend
to
be
more
sensitive
to
inflation.
The
inflation
rate
surged
during
the
period
amid
increased
demand
and
supply-chain
bottlenecks,
with
the
price
pressures
coming
principally
from
the
areas
particularly
impacted
by
the
shutdown,
such
as
used
vehicles,
airfares,
semiconductors
and
energy.
In
an
effort
to
support
the
economy,
the
U.S.
Federal
Reserve
(Fed)
kept
the
federal
funds
target
rate
at
a
record-low
range
of
0.00%–0.25%.
The
Fed
also
maintained
quantitative
easing
measures
aimed
at
ensuring
credit
flows
to
borrowers
and
supporting
credit
markets
with
open-
ended
U.S.
Treasury
and
mortgage
bond
purchasing.
In
its
September
2021
meeting
statement,
the
Fed
indicated
that
it
soon
plans
to
reduce
its
purchases
of
U.S.
Treasury
and
mortgage-backed
securities
but
declined
to
provide
a
timetable.
The
Fed
also
maintained
that
it
views
inflation
as
partially
transitory,
and
that
further
employment
progress
was
needed
before
the
Fed
would
consider
raising
the
range
for
the
federal
funds
target
rate.
Portfolio
Composition
9/30/21
%
of
Total
Net
Assets
Mortgage-Backed
Securities
77.2%
Residential
Mortgage-Backed
Securities
13.3%
Asset-Backed
Securities
3.9%
Commercial
Mortgage-Backed
Securities
1.8%
Other
1.1%
Short-Term
Investments
&
Other
Net
Assets
2.7%
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.
Treasuries,
if
held
to
maturity,
offer
a
fixed
rate
of
return
and
a
fixed
principal
value;
their
interest
payments
and
principal
are
guaranteed.
The
indexes
are
unmanaged
and
include
reinvestment
of
any
income
or
distributions.
They
do
not
reflect
any
fees,
expenses
or
sales
charges.
One
cannot
invest
directly
in
an
index,
and
an
index
is
not
representative
of
the
Fund’s
portfolio.
See
www.franklintempletondatasources.com
for
additional
data
provider
information.
The
dollar
value,
number
of
shares
or
principal
amount,
and
names
of
all
portfolio
holdings
are
listed
in
the
Fund’s
Statement
of
Investments
(SOI).
The
SOI
begins
on
page
15
.
Franklin
Strategic
Mortgage
Portfolio
4
franklintempleton.com
Annual
Report
U.S.
Treasury
bonds,
as
measured
by
the
Bloomberg
U.S.
Treasury
Index,
posted
a
-3.30%
total
return
for
the
12-month
period.
2
The
10-year
U.S.
Treasury
yield
(which
moves
inversely
to
price)
was
near
historic
lows
as
the
period
began.
However,
yields
rose
thereafter
amid
many
investors’
increasing
inflation
expectations.
Mortgage-
backed
securities
(MBS),
as
measured
by
the
Bloomberg
MBS
Index,
posted
a
-0.43%
total
return
for
the
period,
as
low
interest
rates
accelerated
prepayments
from
mortgage
refinancing.
2
Fed
action
was
a
catalyst
for
the
recovery
in
the
corporate
bond
market,
which
advanced
overall
but
varied
significantly
based
on
credit
rating.
The
strengthening
economy
and
prospect
of
a
return
to
normal
conditions
tempered
concerns
about
credit
quality,
which
benefited
lower-rated
bonds.
In
this
environment,
high-yield
corporate
bonds,
as
represented
by
the
Bloomberg
U.S.
Corporate
High
Yield
Bond
Index,
posted
a
+11.28%
total
return,
outpacing
investment-grade
corporate
bonds,
as
represented
by
the
Bloomberg
U.S.
Corporate
Bond
Index,
which
nevertheless
posted
a
+1.74%
total
return.
2
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
In
the
months
leading
up
to
U.S.
presidential
election,
there
were
bouts
of
risk-off
sentiment
driven
largely
by
factors
such
as
a
resurgence
in
global
COVID-19
cases
and
the
political
impasse
regarding
additional
fiscal
stimulus.
Following
the
U.S.
presidential
election,
market
sentiment
remained
generally
positive
until
year-end.
As
financial
markets
settled
into
2021,
amid
a
stronger
than
expected
U.S.
economic
recovery
along
with
unprecedented
fiscal
stimulus,
inflation
concerns
took
center
stage.
U.S.
Treasury
yields
(UST)
surged
during
the
first
half
of
the
reporting
period,
peaking
at
1.74%
in
March
2021
before
trending
lower
and
ending
the
reporting
period
at
1.52%,
84
basis
points
(bps)
higher
year-over-year.
For
the
Bloomberg
indexes
in
which
the
Fund
invests,
total
return
performance
was
mixed
with
RMBS,
asset-backed
securities
(ABS)
and
CMBS
posting
positive
total
returns,
while
fixed-rate
agency
mortgage-backed
securities
(MBS)
and
U.S.
Treasuries
had
negative
total
returns.
On
an
excess
returns
basis,
all
sectors
posted
positive
excess
returns
over
the
12-month
period
and
outperformed
USTs
with
the
exception
of
MBS
and
Ginnie
Mae
(GNMA)
MBS.
Within
the
MBS
sectors,
Fannie
Mae
(FNMA)
and
Freddie
Mac
(FHLMC)
MBS
were
the
best
performers,
while
GNMA
MBS
lagged.
Conventional
15-year
MBS
outperformed
their
30-year
counterparts
and
the
conventional
30-year
MBS
sector
performed
better
than
the
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
2.5%
coupons
lagged.
The
U.S.
housing
market
remained
strong
with
significant
demand
for
homes
despite
a
large
increase
in
prices.
Supply
and
demand
imbalances
combined
with
mortgage
rates
still
near
historic
lows
should
continue
to
support
a
strong
housing
market.
The
Federal
Reserve
(Fed)
continued
to
support
the
MBS
market
through
its
sizable
quantitative
easing
(QE)
program.
Through
the
end
of
September
2021,
the
Fed
had
purchased
$2.49
trillion
of
agency
MBS
and
owned
more
than
a
third
of
the
agency
MBS
market.
Agency
MBS
net
issuance
year-
to-date
has
been
$472
billion
and
is
expected
to
reach
$721
billion
for
the
year.
The
Fed
continued
on
its
path
towards
tapering
its
current
level
of
asset
purchases,
changing
the
language
of
its
September
2021
meeting
statement
to
note
Franklin
Strategic
Mortgage
Portfolio
5
franklintempleton.com
Annual
Report
“a
moderation
in
the
pace
of
asset
purchases
may
soon
be
warranted”
so
long
as
economic
progress
continues
broadly
as
expected.
Based
on
this
statement,
and
the
comments
from
Fed
Chair
Jerome
Powell
during
the
September
2021
press
conference,
the
tapering
of
asset
purchases
is
likely
to
be
announced
in
November
and
is
likely
to
be
completed
around
mid-2022,
following
a
gradual
tapering
of
$10
billion
UST
and
$5
billion
MBS
purchases
per
month.
Prepayment
risk
is
expected
to
decline
over
the
next
quarter,
and
we
expect
origination
to
drop
over
the
winter
season.
We
believe
spreads
will
remain
rangebound,
with
seasonal
effects
offsetting
the
reduced
demand
from
tapering
of
purchases
by
the
Fed.
However,
spreads
could
start
widening
post
winter
as
origination
is
expected
to
seasonally
increase.
In
terms
of
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
held
an
underweight
allocation
to
1.5%
and
2.0%
coupons
and
an
overweight
in
2.5%,
through
4.5%
coupons.
The
portfolio
maintained
an
overweight
allocation
to
RMBS,
and
increased
exposure
over
the
period.
We
believe
the
fundamental
backdrop
for
mortgage
credit
remains
positive
and
should
bode
well
for
the
RMBS
sector
over
the
near
to
intermediate
terms.
We
increased
allocation
to
CMBS
and
remain
positioned
higher
in
the
capital
structure
in
transactions
with
solid
credit
fundamentals.
The
Fund’s
overweight
allocation
to
RMBS
was
a
significant
contributor
to
performance,
as
was
security
selection
in
agency
MBS.
Positive
return
contribution
from
a
slight
overweight
allocation
to
CMBS
more
than
offset
negative
security
selection
in
the
sector.
Additionally,
allocation
to
ARMS
benefited
returns,
while
our
underweight
allocation
to
MBS
was
a
slight
detractor.
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
September
30,
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
September
30,
2021
Franklin
Strategic
Mortgage
Portfolio
6
franklintempleton.com
Annual
Report
The
performance
tables
and
graphs
do
not
reflect
any
taxes
that
a
shareholder
would
pay
on
Fund
dividends,
capital
gain
distributions,
if
any,
or
any
realized
gains
on
the
sale
of
Fund
shares.
Total
return
reflects
reinvestment
of
the
Fund’s
dividends
and
capital
gain
distributions,
if
any,
and
any
unrealized
gains
or
losses.
Your
dividend
income
will
vary
depending
on
dividends
or
interest
paid
by
securities
in
the
Fund’s
portfolio,
adjusted
for
operating
expenses
of
each
class.
Capital
gain
distributions
are
net
profits
realized
from
the
sale
of
portfolio
securities.
Performance
as
of
9/30/21
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
1-Year
-0.41%
-4.12%
5-Year
+9.00%
+0.97%
10-Year
+29.93%
+2.26%
Advisor
6
1-Year
-0.16%
-0.16%
5-Year
+10.25%
+1.97%
10-Year
+33.09%
+2.90%
30-Day
Standardized
Yield
8
Share
Class
Distribution
Rate
7
(with
fee
waiver)
(without
fee
waiver)
A
1.51%
0.64%
0.26%
Advisor
1.82%
0.92%
0.52%
See
page
8
for
Performance
Summary
footnotes.
Franklin
Strategic
Mortgage
Portfolio
Performance
Summary
7
franklintempleton.com
Annual
Report
See
page
8
for
Performance
Summary
footnotes.
Total
Return
Index
Comparison
for
a
Hypothetical
$10,000
Investment
1
Total
return
represents
the
change
in
value
of
an
investment
over
the
periods
shown.
It
includes
any
applicable
maximum
sales
charge,
Fund
expenses,
account
fees
and
reinvested
distributions.
The
unmanaged
indexes
include
reinvestment
of
any
income
or
distributions.
They
differ
from
the
Fund
in
composition
and
do
not
pay
management
fees
or
expenses.
One
cannot
invest
directly
in
an
index.
Class
A
(10/1/11–9/30/21)
Advisor
Class
(10/1/11–9/30/21)
Franklin
Strategic
Mortgage
Portfolio
Performance
Summary
8
franklintempleton.com
Annual
Report
Each
class
of
shares
is
available
to
certain
eligible
investors
and
has
different
annual
fees
and
expenses,
as
described
in
the
prospectus.
All
investments
involve
risks,
including
possible
loss
of
principal.
The
Fund’s
share
price
and
yield
will
be
affected
by
interest
rate
movements
and
mortgage
prepayments.
During
periods
of
declining
interest
rates,
principal
prepayments
tend
to
increase
as
borrowers
refinance
their
mortgages
at
lower
rates;
therefore
the
Fund
may
be
forced
to
reinvest
returned
principal
at
lower
interest
rates,
reducing
income.
Bond
prices
generally
move
in
the
opposite
direction
of
interest
rates.
Thus,
as
prices
of
bonds
in
the
Fund
adjust
to
a
rise
in
interest
rates,
the
Fund’s
share
price
may
decline.
The
Fund
may
be
affected
by
issuers
that
fail
to
make
interest
payments
and
repay
principal
when
due.
Changes
in
the
financial
strength
of
a
bond
issuer
or
in
a
bond’s
credit
rating
may
affect
its
value.
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
30
days
of
September
and
the
maximum
offering
price
(NAV
for
Advisor
Class)
on
9/30/21.
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.
Source:
Morningstar.
The
Bloomberg
U.S.
Mortgage-Backed
(MBS)
Fixed
Rate
Index
is
the
fixed-rate
component
of
the
Bloomberg
U.S.
MBS
Index
and
includes
the
agency
mortgage-backed
pass-through
securities
of
Ginnie
Mae
(GNMA),
Fannie
Mae
(FNMA)
and
Freddie
Mac
(FHLMC).
The
FTSE
U.S.
Broad
Investment-Grade
(USBIG)
Mortgage
Index
comprises
30-
and
15-year
GNMA,
FNMA
and
FHLMC
securities,
as
well
as
FNMA
and
FHLMC
balloon
mortgages,
and
is
reconstituted
each
month
to
reflect
new
issuance
and
principal
pay-downs.
10.
Figures
are
as
stated
in
the
Fund’s
current
prospectus
and
may
differ
from
the
expense
ratios
disclosed
in
the
Your
Fund’s
Expenses
and
Financial
Highlights
sections
in
this
report.
In
periods
of
market
volatility,
assets
may
decline
significantly,
causing
total
annual
Fund
operating
expenses
to
become
higher
than
the
figures
shown.
See
www.franklintempletondatasources.com
for
additional
data
provider
information.
Distributions
(10/1/20–9/30/21)
Share
Class
Net
Investment
Income
A
$0.142057
A1
$0.165118
C
$0.105063
R6
$0.175230
Advisor
$0.165139
Total
Annual
Operating
Expenses
10
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
9
franklintempleton.com
Annual
Report
As
a
Fund
shareholder,
you
can
incur
two
types
of
costs:
(1)
transaction
costs,
including
sales
charges
(loads)
on
Fund
purchases
and
redemptions;
and
(2)
ongoing
Fund
costs,
including
management
fees,
distribution
and
service
(12b-1)
fees,
and
other
Fund
expenses.
All
mutual
funds
have
ongoing
costs,
sometimes
referred
to
as
operating
expenses.
The
table
below
shows
ongoing
costs
of
investing
in
the
Fund
and
can
help
you
understand
these
costs
and
compare
them
with
those
of
other
mutual
funds.
The
table
assumes
a
$1,000
investment
held
for
the
six
months
indicated.
Actual
Fund
Expenses
The
table
below
provides
information
about
actual
account
values
and
actual
expenses
in
the
columns
under
the
heading
“Actual.”
In
these
columns
the
Fund’s
actual
return,
which
includes
the
effect
of
Fund
expenses,
is
used
to
calculate
the
“Ending
Account
Value”
for
each
class
of
shares.
You
can
estimate
the
expenses
you
paid
during
the
period
by
following
these
steps
(
of
course,
your
account
value
and
expenses
will
differ
from
those
in
this
illustration
):
Divide
your
account
value
by
$1,000
(
if
your
account
had
an
$8,600
value,
then
$8,600
÷
$1,000
=
8.6
).
Then
multiply
the
result
by
the
number
in
the
row
for
your
class
of
shares
under
the
headings
“Actual”
and
“Expenses
Paid
During
Period”
(
if
Actual
Expenses
Paid
During
Period
were
$7.50,
then
8.6
x
$7.50
=$64.50
).
In
this
illustration,
the
actual
expenses
paid
this
period
are
$64.50.
Hypothetical
Example
for
Comparison
with
Other
Funds
Under
the
heading
“Hypothetical”
in
the
table,
information
is
provided
about
hypothetical
account
values
and
hypothetical
expenses
based
on
the
Fund’s
actual
expense
ratio
and
an
assumed
rate
of
return
of
5%
per
year
before
expenses,
which
is
not
the
Fund’s
actual
return.
This
information
may
not
be
used
to
estimate
the
actual
ending
account
balance
or
expenses
you
paid
for
the
period,
but
it
can
help
you
compare
ongoing
costs
of
investing
in
the
Fund
with
those
of
other
funds.
To
do
so,
compare
this
5%
hypothetical
example
for
the
class
of
shares
you
hold
with
the
5%
hypothetical
examples
that
appear
in
the
shareholder
reports
of
other
funds.
Please
note
that
expenses
shown
in
the
table
are
meant
to
highlight
ongoing
costs
and
do
not
reflect
any
transactional
costs.
Therefore,
information
under
the
heading
“Hypothetical”
is
useful
in
comparing
ongoing
costs
only,
and
will
not
help
you
compare
total
costs
of
owning
different
funds.
In
addition,
if
transactional
costs
were
included,
your
total
costs
would
have
been
higher.
1.
Expenses
are
equal
to
the
annualized
expense
ratio
for
the
six-month
period
as
indicated
above—in
the
far
right
column—multiplied
by
the
simple
average
account
value
over
the
period
indicated,
and
then
multiplied
by
183/365
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
4/1/21
Ending
Account
Value
9/30/21
Expenses
Paid
During
Period
4/1/21–9/30/21
1,2
Ending
Account
Value
9/30/21
Expenses
Paid
During
Period
4/1/21–9/30/21
1,2
a
Net
Annualized
Expense
Ratio
2
A
$1,000
$1,003.60
$4.94
$1,020.14
$4.98
0.98%
A1
$1,000
$1,003.70
$3.69
$1,021.39
$3.72
0.73%
C
$1,000
$1,001.50
$6.97
$1,018.10
$7.03
1.39%
R6
$1,000
$1,004.20
$3.09
$1,021.99
$3.11
0.61%
Advisor
$1,000
$1,003.70
$3.70
$1,021.37
$3.74
0.74%
Franklin
Strategic
Mortgage
Portfolio
Financial
Highlights
franklintempleton.com
Annual
Report
The
accompanying
notes
are
an
integral
part
of
these
financial
statements.
10
a
Year
Ended
September
30,
2021
2020
2019
2018
2017
Class
A
Per
share
operating
performance
(for
a
share
outstanding
throughout
the
year)
Net
asset
value,
beginning
of
year
...................
$9.31
$9.25
$8.93
$9.34
$9.57
Income
from
investment
operations
a
:
Net
investment
income
..........................
0.025
b
0.188
0.267
0.243
b
0.147
Net
realized
and
unrealized
gains
(losses)
...........
(0.063)
0.090
0.355
(0.359)
(0.106)
Total
from
investment
operations
....................
(0.038)
0.278
0.622
(0.116)
0.041
Less
distributions
from:
Net
investment
income
..........................
(0.142)
(0.218)
(0.302)
(0.294)
(0.267)
Tax
return
of
capital
............................
—
—
—
—
(0.004)
Total
distributions
...............................
(0.142)
(0.218)
(0.302)
(0.294)
(0.271)
Net
asset
value,
end
of
year
.......................
$9.13
$9.31
$9.25
$8.93
$9.34
Total
return
c
...................................
(0.41)%
3.05%
7.08%
(1.25)%
0.45%
Ratios
to
average
net
assets
Expenses
before
waiver
and
payments
by
affiliates
......
1.27%
1.31%
1.24%
1.21%
1.17%
Expenses
net
of
waiver
and
payments
by
affiliates
d
......
0.99%
1.00%
1.00%
1.06%
1.16%
Net
investment
income
...........................
0.27%
1.85%
2.93%
2.67%
1.82%
Supplemental
data
Net
assets,
end
of
year
(000’s)
.....................
$21,801
$24,153
$18,313
$16,303
$21,143
Portfolio
turnover
rate
............................
278.91%
249.94%
223.36%
243.65%
244.09%
Portfolio
turnover
rate
excluding
mortgage
dollar
rolls
e
....
85.26%
187.45%
139.83%
153.69%
111.62%
a
The
amount
shown
for
a
share
outstanding
throughout
the
period
may
not
correlate
with
the
Statement
of
Operations
for
the
period
due
to
the
timing
of
sales
and
repurchas-
es
of
the
Fund’s
shares
in
relation
to
income
earned
and/or
fluctuating
fair
value
of
the
investments
of
the
Fund.
b
Based
on
average
daily
shares
outstanding.
c
Total
return
does
not
reflect
sales
commissions
or
contingent
deferred
sales
charges,
if
applicable.
d
Benefit
of
expense
reduction
rounds
to
less
than
0.01%.
e
See
Note
1(d)
regarding
mortgage
dollar
rolls.
Franklin
Strategic
Mortgage
Portfolio
Financial
Highlights
franklintempleton.com
The
accompanying
notes
are
an
integral
part
of
these
financial
statements.
Annual
Report
11
a
Year
Ended
September
30,
2021
2020
2019
2018
2017
Class
A1
Per
share
operating
performance
(for
a
share
outstanding
throughout
the
year)
Net
asset
value,
beginning
of
year
...................
$9.31
$9.25
$8.94
$9.35
$9.58
Income
from
investment
operations
a
:
Net
investment
income
..........................
0.048
b
0.191
0.285
0.268
b
0.177
Net
realized
and
unrealized
gains
(losses)
...........
(0.063)
0.110
0.349
(0.360)
(0.113)
Total
from
investment
operations
....................
(0.015)
0.301
0.634
(0.092)
0.064
Less
distributions
from:
Net
investment
income
..........................
(0.165)
(0.241)
(0.324)
(0.318)
(0.289)
Tax
return
of
capital
............................
—
—
—
—
(0.005)
Total
distributions
...............................
(0.165)
(0.241)
(0.324)
(0.318)
(0.294)
Net
asset
value,
end
of
year
.......................
$9.13
$9.31
$9.25
$8.94
$9.35
Total
return
c
...................................
(0.16)%
3.30%
7.22%
(1.00)%
0.70%
Ratios
to
average
net
assets
Expenses
before
waiver
and
payments
by
affiliates
......
1.02%
1.05%
0.99%
0.96%
0.92%
Expenses
net
of
waiver
and
payments
by
affiliates
d
......
0.74%
0.75%
0.75%
0.81%
0.91%
Net
investment
income
...........................
0.52%
2.14%
3.18%
2.92%
2.07%
Supplemental
data
Net
assets,
end
of
year
(000’s)
.....................
$24,192
$27,530
$29,286
$32,802
$40,844
Portfolio
turnover
rate
............................
278.91%
249.94%
223.36%
243.65%
244.09%
Portfolio
turnover
rate
excluding
mortgage
dollar
rolls
e
....
85.26%
187.45%
139.83%
153.69%
111.62%
a
The
amount
shown
for
a
share
outstanding
throughout
the
period
may
not
correlate
with
the
Statement
of
Operations
for
the
period
due
to
the
timing
of
sales
and
repurchas-
es
of
the
Fund’s
shares
in
relation
to
income
earned
and/or
fluctuating
fair
value
of
the
investments
of
the
Fund.
b
Based
on
average
daily
shares
outstanding.
c
Total
return
does
not
reflect
sales
commissions
or
contingent
deferred
sales
charges,
if
applicable.
d
Benefit
of
expense
reduction
rounds
to
less
than
0.01%.
e
See
Note
1(d)
regarding
mortgage
dollar
rolls.
Franklin
Strategic
Mortgage
Portfolio
Financial
Highlights
franklintempleton.com
Annual
Report
The
accompanying
notes
are
an
integral
part
of
these
financial
statements.
12
a
Year
Ended
September
30,
2021
2020
2019
2018
2017
Class
C
Per
share
operating
performance
(for
a
share
outstanding
throughout
the
year)
Net
asset
value,
beginning
of
year
...................
$9.31
$9.25
$8.93
$9.34
$9.57
Income
from
investment
operations
a
:
Net
investment
income
(loss)
.....................
(0.013)
b
0.138
0.230
0.207
b
0.112
Net
realized
and
unrealized
gains
(losses)
...........
(0.062)
0.103
0.355
(0.359)
(0.109)
Total
from
investment
operations
....................
(0.075)
0.241
0.585
(0.152)
0.003
Less
distributions
from:
Net
investment
income
..........................
(0.105)
(0.181)
(0.265)
(0.258)
(0.229)
Tax
return
of
capital
............................
—
—
—
—
(0.004)
Total
distributions
...............................
(0.105)
(0.181)
(0.265)
(0.258)
(0.233)
Net
asset
value,
end
of
year
.......................
$9.13
$9.31
$9.25
$8.93
$9.34
Total
return
c
...................................
(0.81)%
2.64%
6.65%
(1.64)%
0.06%
Ratios
to
average
net
assets
Expenses
before
waiver
and
payments
by
affiliates
......
1.66%
1.70%
1.64%
1.61%
1.57%
Expenses
net
of
waiver
and
payments
by
affiliates
d
......
1.39%
1.40%
1.40%
1.46%
1.56%
Net
investment
income
(loss)
......................
(0.14)%
1.47%
2.53%
2.27%
1.42%
Supplemental
data
Net
assets,
end
of
year
(000’s)
.....................
$2,322
$3,960
$3,843
$4,513
$6,308
Portfolio
turnover
rate
............................
278.91%
249.94%
223.36%
243.65%
244.09%
Portfolio
turnover
rate
excluding
mortgage
dollar
rolls
e
....
85.26%
187.45%
139.83%
153.69%
111.62%
a
The
amount
shown
for
a
share
outstanding
throughout
the
period
may
not
correlate
with
the
Statement
of
Operations
for
the
period
due
to
the
timing
of
sales
and
repurchas-
es
of
the
Fund’s
shares
in
relation
to
income
earned
and/or
fluctuating
fair
value
of
the
investments
of
the
Fund.
b
Based
on
average
daily
shares
outstanding.
c
Total
return
does
not
reflect
sales
commissions
or
contingent
deferred
sales
charges,
if
applicable.
d
Benefit
of
expense
reduction
rounds
to
less
than
0.01%.
e
See
Note
1(d)
regarding
mortgage
dollar
rolls.
Franklin
Strategic
Mortgage
Portfolio
Financial
Highlights
franklintempleton.com
The
accompanying
notes
are
an
integral
part
of
these
financial
statements.
Annual
Report
13
a
Year
Ended
September
30,
Year
Ended
September
30,
2017
a
2021
2020
2019
2018
Class
R6
Per
share
operating
performance
(for
a
share
outstanding
throughout
the
year)
Net
asset
value,
beginning
of
year
...................
$9.29
$9.24
$8.92
$9.33
$9.38
Income
from
investment
operations
b
:
Net
investment
income
..........................
0.059
c
0.222
0.296
0.282
c
0.003
Net
realized
and
unrealized
gains
(losses)
...........
(0.054)
0.081
0.360
(0.363)
(0.002)
Total
from
investment
operations
....................
0.005
0.303
0.656
(0.081)
0.001
Less
distributions
from:
Net
investment
income
..........................
(0.175)
(0.253)
(0.336)
(0.329)
(0.050)
Tax
return
of
capital
............................
—
—
—
—
(0.001)
Total
distributions
...............................
(0.175)
(0.253)
(0.336)
(0.329)
(0.051)
Net
asset
value,
end
of
year
.......................
$9.12
$9.29
$9.24
$8.92
$9.33
Total
return
d
...................................
0.05%
3.33%
7.49%
(0.87)%
0.01%
Ratios
to
average
net
assets
Expenses
before
waiver
and
payments
by
affiliates
......
1.03%
1.07%
1.00%
1.01%
1.83%
Expenses
net
of
waiver
and
payments
by
affiliates
e
......
0.61%
0.62%
0.62%
0.69%
0.75%
Net
investment
income
...........................
0.64%
2.17%
3.31%
3.04%
2.23%
Supplemental
data
Net
assets,
end
of
year
(000’s)
.....................
$569
$559
$383
$432
$5
Portfolio
turnover
rate
............................
278.91%
249.94%
223.36%
243.65%
244.09%
Portfolio
turnover
rate
excluding
mortgage
dollar
rolls
f
....
85.26%
187.45%
139.83%
153.69%
111.62%
a
For
the
period
August
1,
2017
(effective
date)
to
September
30,
2017.
b
The
amount
shown
for
a
share
outstanding
throughout
the
period
may
not
correlate
with
the
Statement
of
Operations
for
the
period
due
to
the
timing
of
sales
and
repurchas-
es
of
the
Fund’s
shares
in
relation
to
income
earned
and/or
fluctuating
fair
value
of
the
investments
of
the
Fund.
c
Based
on
average
daily
shares
outstanding.
d
Total
return
is
not
annualized
for
periods
less
than
one
year.
e
Benefit
of
expense
reduction
rounds
to
less
than
0.01%.
f
See
Note
1(d)
regarding
mortgage
dollar
rolls.
Franklin
Strategic
Mortgage
Portfolio
Financial
Highlights
franklintempleton.com
Annual
Report
The
accompanying
notes
are
an
integral
part
of
these
financial
statements.
14
a
Year
Ended
September
30,
2021
2020
2019
2018
2017
Advisor
Class
Per
share
operating
performance
(for
a
share
outstanding
throughout
the
year)
Net
asset
value,
beginning
of
year
...................
$9.30
$9.24
$8.93
$9.33
$9.57
Income
from
investment
operations
a
:
Net
investment
income
..........................
0.048
b
0.192
0.284
0.268
b
0.187
Net
realized
and
unrealized
gains
(losses)
...........
(0.063)
0.109
0.350
(0.351)
(0.133)
Total
from
investment
operations
....................
(0.015)
0.301
0.634
(0.083)
0.054
Less
distributions
from:
Net
investment
income
..........................
(0.165)
(0.241)
(0.324)
(0.317)
(0.289)
Tax
return
of
capital
............................
—
—
—
—
(0.005)
Total
distributions
...............................
(0.165)
(0.241)
(0.324)
(0.317)
(0.294)
Net
asset
value,
end
of
year
.......................
$9.12
$9.30
$9.24
$8.93
$9.33
Total
return
....................................
(0.16)%
3.30%
7.23%
(1.00)%
0.70%
Ratios
to
average
net
assets
Expenses
before
waiver
and
payments
by
affiliates
......
1.03%
1.05%
0.99%
0.96%
0.92%
Expenses
net
of
waiver
and
payments
by
affiliates
c
......
0.74%
0.75%
0.75%
0.81%
0.91%
Net
investment
income
...........................
0.52%
2.14%
3.18%
2.92%
2.07%
Supplemental
data
Net
assets,
end
of
year
(000’s)
.....................
$7,982
$9,609
$10,907
$6,574
$7,632
Portfolio
turnover
rate
............................
278.91%
249.94%
223.36%
243.65%
244.09%
Portfolio
turnover
rate
excluding
mortgage
dollar
rolls
d
....
85.26%
187.45%
139.83%
153.69%
111.62%
a
The
amount
shown
for
a
share
outstanding
throughout
the
period
may
not
correlate
with
the
Statement
of
Operations
for
the
period
due
to
the
timing
of
sales
and
repurchas-
es
of
the
Fund’s
shares
in
relation
to
income
earned
and/or
fluctuating
fair
value
of
the
investments
of
the
Fund.
b
Based
on
average
daily
shares
outstanding.
c
Benefit
of
expense
reduction
rounds
to
less
than
0.01%.
d
See
Note
1(d)
regarding
mortgage
dollar
rolls.
Franklin
Strategic
Mortgage
Portfolio
Statement
of
Investments,
September
30,
2021
franklintempleton.com
The
accompanying
notes
are
an
integral
part
of
these
financial
statements.
Annual
Report
15
a
a
Principal
Amount
a
Value
a
a
a
a
a
Corporate
Bonds
0.2%
Equity
Real
Estate
Investment
Trusts
(REITs)
0.2%
American
Homes
4
Rent
LP
,
Senior
Note
,
4.25
%
,
2/15/28
.....................
$
100,000
$
113,311
Insurance
0.0%
†
a,b
Ambac
Assurance
Corp.
,
Sub.
Bond
,
144A,
5.1
%
,
Perpetual
...................
237
336
Total
Corporate
Bonds
(Cost
$99,855)
.........................................
113,647
U.S.
Government
and
Agency
Securities
0.9%
U.S.
Treasury
Bonds
,
4.75%,
2/15/37
...................................................
225,000
317,654
4.25%,
11/15/40
...................................................
131,000
180,089
Total
U.S.
Government
and
Agency
Securities
(Cost
$464,064)
....................
497,743
Asset-Backed
Securities
3.9%
Diversified
Financial
Services
3.6%
b
American
Homes
4
Rent
Trust
,
2015-SFR1
,
A
,
144A,
3.467
%
,
4/17/52
...........
141,883
149,909
b
CF
Hippolyta
LLC
,
2020-1,
A1,
144A,
1.69%,
7/15/60
.....................................
113,855
115,479
2021-1A,
A1,
144A,
1.53%,
3/15/61
....................................
99,414
100,150
c
CWABS,
Inc.
,
2004-1
,
M1
,
FRN
,
0.836
%
,
(
1-month
USD
LIBOR
+
0.75
%
),
3/25/34
..
16,250
16,250
b
FirstKey
Homes
Trust
,
2020-SFR2
,
A
,
144A,
1.266
%
,
10/19/37
.................
149,573
149,223
b,c
Invitation
Homes
Trust
,
2018-SFR4
,
A
,
144A,
FRN
,
1.184
%
,
(
1-month
USD
LIBOR
+
1.1
%
),
1/17/38
....................................................
175,947
176,541
b,d
Mill
City
Mortgage
Loan
Trust
,
2016-1,
A1,
144A,
FRN,
2.5%,
4/25/57
..................................
11,550
11,592
2018-2,
A1,
144A,
FRN,
3.5%,
5/25/58
..................................
83,806
85,574
2018-1,
A1,
144A,
FRN,
3.25%,
5/25/62
.................................
64,827
66,141
2018-4,
A1B,
144A,
FRN,
3.5%,
4/25/66
.................................
128,166
132,784
b
Towd
Point
Mortgage
Trust
,
d
2016-1,
A1,
144A,
FRN,
3.5%,
2/25/55
..................................
3,235
3,239
d
2016-3,
A1,
144A,
FRN,
2.25%,
4/25/56
.................................
23,438
23,515
d
2016-4,
A1,
144A,
FRN,
2.25%,
7/25/56
.................................
49,534
49,875
d
2016-5,
A1,
144A,
FRN,
2.5%,
10/25/56
.................................
132,791
134,773
d
2017-1,
A1,
144A,
FRN,
2.75%,
10/25/56
................................
96,045
97,390
c
2017-5,
A1,
144A,
FRN,
0.686%,
(1-month
USD
LIBOR
+
0.6%),
2/25/57
........
30,960
30,975
d
2017-2,
A1,
144A,
FRN,
2.75%,
4/25/57
.................................
25,671
26,013
d
2017-4,
A1,
144A,
FRN,
2.75%,
6/25/57
.................................
143,775
147,151
d
2018-1,
A1,
144A,
FRN,
3%,
1/25/58
...................................
38,802
39,641
d
2018-2,
A1,
144A,
FRN,
3.25%,
3/25/58
.................................
91,947
94,528
d
2019-1,
A1,
144A,
FRN,
3.705%,
3/25/58
................................
168,474
177,999
d
2018-6,
A1A,
144A,
FRN,
3.75%,
3/25/58
................................
66,823
68,524
d
2017-1,
A2,
144A,
FRN,
3.5%,
10/25/56
.................................
165,000
172,111
2,069,377
a
a
a
a
a
Thrifts
&
Mortgage
Finance
0.3%
d
Conseco
Finance
Corp.
,
1998-4
,
A7
,
FRN
,
6.87
%
,
4/01/30
....................
4,460
4,486
d
Conseco
Finance
Securitizations
Corp.
,
2002-2
,
M1
,
FRN
,
7.424
%
,
3/01/33
.......
148,828
155,520
160,006
a
a
a
a
a
Total
Asset-Backed
Securities
(Cost
$2,189,207)
................................
2,229,383
Franklin
Strategic
Mortgage
Portfolio
Statement
of
Investments
franklintempleton.com
Annual
Report
The
accompanying
notes
are
an
integral
part
of
these
financial
statements.
16
a
a
Principal
Amount
a
Value
a
a
a
a
a
Commercial
Mortgage-Backed
Securities
1.8%
Diversified
Financial
Services
1.7%
b,e
Anthracite
Ltd.
,
2004-HY1A
,
E
,
144A,
7.147
%
,
6/20/41
.......................
$
1,598,000
$
24
b,c
BX
Commercial
Mortgage
Trust
,
2020-FOX,
A,
144A,
FRN,
1.084%,
(1-month
USD
LIBOR
+
1%),
11/15/32
.......
159,135
159,652
2018-IND,
A,
144A,
FRN,
0.834%,
(1-month
USD
LIBOR
+
0.75%),
11/15/35
.....
27,164
27,205
2021-VOLT,
A,
144A,
FRN,
0.8%,
(1-month
USD
LIBOR
+
0.7%),
9/15/36
........
100,000
100,196
2019-XL,
A,
144A,
FRN,
1.004%,
(1-month
USD
LIBOR
+
0.92%),
10/15/36
......
150,224
150,660
2020-BXLP,
A,
144A,
FRN,
0.884%,
(1-month
USD
LIBOR
+
0.8%),
12/15/36
.....
184,319
184,671
b,c
Cold
Storage
Trust
,
2020-ICE5
,
A
,
144A,
FRN
,
0.984
%
,
(
1-month
USD
LIBOR
+
0.9
%
),
11/15/37
........................................................
324,387
325,414
d
Commercial
Mortgage
Trust
,
2006-GG7
,
AJ
,
FRN
,
6.214
%
,
7/10/38
..............
39,434
33,190
981,012
a
a
a
a
a
Thrifts
&
Mortgage
Finance
0.1%
c
FNMA
,
2007-1
,
NF
,
FRN
,
0.336
%
,
(
1-month
USD
LIBOR
+
0.25
%
),
2/25/37
........
44,810
44,894
Total
Commercial
Mortgage-Backed
Securities
(Cost
$1,074,076)
.................
1,025,906
Mortgage-Backed
Securities
77.2%
Federal
Home
Loan
Mortgage
Corp.
(FHLMC)
Fixed
Rate
13.6%
FHLMC
Gold
Pools,
30
Year,
4.5%,
1/01/49
................................
453,185
502,654
FHLMC
Gold
Pools,
30
Year,
4.5%,
4/01/40
................................
229,447
254,752
FHLMC
Gold
Pools,
30
Year,
5%,
10/01/33
-
2/01/39
.........................
160,842
183,168
FHLMC
Gold
Pools,
30
Year,
5.5%,
9/01/33
................................
18,745
21,443
FHLMC
Gold
Pools,
30
Year,
6%,
12/01/32
-
11/01/36
........................
53,381
61,177
FHLMC
Gold
Pools,
30
Year,
6.5%,
11/01/27
-
7/01/32
........................
25,379
28,542
FHLMC
Gold
Pools,
30
Year,
7.5%,
1/01/26
-
3/01/32
........................
52,860
55,494
FHLMC
Gold
Pools,
30
Year,
8%,
7/01/24
-
5/01/30
..........................
74,635
78,172
FHLMC
Gold
Pools,
30
Year,
9%,
9/01/30
.................................
5,598
5,623
FHLMC
Pool,
30
Year,
2.5%,
10/01/50
....................................
1,884,013
1,953,256
FHLMC
Pool,
30
Year,
3%,
2/01/50
......................................
392,973
418,548
FHLMC
Pool,
30
Year,
3%,
5/01/50
......................................
1,021,426
1,089,376
FHLMC
Pool,
30
Year,
3%,
8/01/50
......................................
800,273
854,513
FHLMC
Pool,
30
Year,
3.5%,
7/01/49
.....................................
1,244,906
1,340,327
FHLMC
Pool,
30
Year,
4%,
5/01/50
......................................
106,397
116,139
FHLMC
Pool,
30
Year,
4.5%,
10/01/48
....................................
701,648
779,536
7,742,720
f
Federal
National
Mortgage
Association
(FNMA)
Adjustable
Rate
0.9%
FNMA,
1.32%
-
4.75%,
(6-month
USD
LIBOR
+/-
MBS
Margin),
3/01/22
-
7/01/38
...
508,286
511,044
FNMA,
2.23%,
(6-month
H15BDI
+/-
MBS
Margin),
7/01/25
....................
1,865
1,868
512,912
Federal
National
Mortgage
Association
(FNMA)
Fixed
Rate
56.0%
FNMA,
3.5%,
7/01/56
................................................
663,602
723,665
FNMA,
15
Year,
2.5%,
3/01/29
.........................................
349,839
366,395
FNMA,
30
Year,
2.5%,
9/01/50
.........................................
2,030,536
2,117,468
FNMA,
30
Year,
2.5%,
9/01/50
.........................................
2,034,227
2,120,229
FNMA,
30
Year,
2.5%,
10/01/50
.........................................
817,159
846,823
FNMA,
30
Year,
3%,
11/01/48
..........................................
1,903,154
2,019,545
FNMA,
30
Year,
3%,
9/01/49
...........................................
330,480
349,964
FNMA,
30
Year,
3%,
9/01/49
...........................................
335,871
357,111
FNMA,
30
Year,
3%,
3/01/50
...........................................
446,157
471,089
FNMA,
30
Year,
3%,
7/01/50
...........................................
444,170
465,280
FNMA,
30
Year,
3%,
7/01/50
...........................................
1,122,229
1,198,852
FNMA,
30
Year,
3%,
8/01/50
...........................................
624,080
662,435
FNMA,
30
Year,
3%,
9/01/50
...........................................
633,055
671,579
Franklin
Strategic
Mortgage
Portfolio
Statement
of
Investments
franklintempleton.com
The
accompanying
notes
are
an
integral
part
of
these
financial
statements.
Annual
Report
17
a
a
Principal
Amount
a
Value
a
a
a
a
a
Mortgage-Backed
Securities
(continued)
Federal
National
Mortgage
Association
(FNMA)
Fixed
Rate
(continued)
FNMA,
30
Year,
3%,
9/01/50
...........................................
$
625,794
$
670,585
FNMA,
30
Year,
3.5%,
11/01/46
.........................................
461,317
499,662
FNMA,
30
Year,
3.5%,
8/01/49
.........................................
1,391,818
1,496,694
FNMA,
30
Year,
3.5%,
8/01/49
.........................................
435,597
466,761
FNMA,
30
Year,
3.5%,
9/01/49
.........................................
1,271,840
1,365,150
FNMA,
30
Year,
3.5%,
1/01/50
.........................................
328,905
355,657
FNMA,
30
Year,
3.5%,
2/01/50
.........................................
282,181
303,307
FNMA,
30
Year,
3.5%,
4/01/50
.........................................
457,167
496,022
FNMA,
30
Year,
3.5%,
11/01/50
.........................................
303,809
326,288
FNMA,
30
Year,
4%,
11/01/45
..........................................
2,415,877
2,643,086
FNMA,
30
Year,
4%,
9/01/49
...........................................
805,519
878,678
FNMA,
30
Year,
4.5%,
11/01/47
.........................................
638,551
702,785
FNMA,
30
Year,
5%,
4/01/34
...........................................
68,780
76,013
FNMA,
30
Year,
5.5%,
9/01/33
-
11/01/35
.................................
519,369
589,478
FNMA,
30
Year,
6%,
10/01/34
..........................................
235,605
277,468
FNMA,
30
Year,
6%,
12/01/23
-
8/01/35
...................................
348,782
398,986
FNMA,
30
Year,
6.5%,
12/01/27
-
8/01/32
.................................
252,391
284,808
FNMA,
30
Year,
7.5%,
8/01/25
-
5/01/32
..................................
11,844
13,770
FNMA,
30
Year,
8%,
1/01/25
-
7/01/31
....................................
19,162
21,963
FNMA,
30
Year,
9%,
8/01/24
-
4/01/25
....................................
512
549
FNMA,
30
Year,
9.5%,
11/01/29
-
4/01/30
.................................
21,390
21,753
g
FNMA,
Single-family,
15
Year,
2%,
10/25/36
...............................
4,941,000
5,089,037
g
FNMA,
Single-family,
30
Year,
2%,
10/25/51
...............................
2,207,000
2,213,121
g
FNMA,
Single-family,
30
Year,
2.5%,
10/25/51
..............................
284,000
292,842
31,854,898
Government
National
Mortgage
Association
(GNMA)
Fixed
Rate
6.7%
GNMA
I,
30
Year,
7%,
11/15/29
.........................................
1,650
1,918
GNMA
I,
30
Year,
8%,
11/15/25
-
12/15/26
.................................
5,053
5,407
GNMA
I,
Single-family,
30
Year,
6.5%,
1/15/24
-
9/15/32
......................
57,434
64,202
GNMA
I,
Single-family,
30
Year,
7%,
1/15/26
-
2/15/32
........................
8,353
8,681
GNMA
I,
Single-family,
30
Year,
7.5%,
10/15/23
-
10/15/29
.....................
14,840
15,353
GNMA
I,
Single-family,
30
Year,
8%,
1/15/22
-
9/15/27
........................
2,413
2,463
GNMA
I,
Single-family,
30
Year,
8.5%,
7/15/24
..............................
41
41
g
GNMA
II,
Single-family,
30
Year,
2%,
10/15/51
..............................
1,098,000
1,113,912
GNMA
II,
Single-family,
30
Year,
2.5%,
6/20/51
.............................
932,842
963,688
g
GNMA
II,
Single-family,
30
Year,
2.5%,
10/15/51
............................
1,441,000
1,487,664
GNMA
II,
Single-family,
30
Year,
6.5%,
1/20/26
-
1/20/33
......................
81,862
94,626
GNMA
II,
Single-family,
30
Year,
7.5%,
11/20/22
-
7/20/32
.....................
44,905
52,032
GNMA
II,
Single-family,
30
Year,
8%,
8/20/26
...............................
39
43
GNMA
II,
Single-family,
30
Year,
9%,
9/20/24
-
3/20/25
.......................
192
195
3,810,225
Total
Mortgage-Backed
Securities
(Cost
$43,533,401)
............................
43,920,755
Residential
Mortgage-Backed
Securities
13.3%
Capital
Markets
0.1%
c
Merrill
Lynch
Mortgage
Investors
Trust
,
2003-A
,
1A
,
FRN
,
0.826
%
,
(
1-month
USD
LIBOR
+
0.74
%
),
3/25/28
............................................
51,436
51,693
Diversified
Financial
Services
6.1%
c
American
Home
Mortgage
Investment
Trust
,
2005-1
,
6A
,
FRN
,
2.153
%
,
(
6-month
USD
LIBOR
+
2
%
),
6/25/45
..............................................
42,831
44,050
b
BRAVO
Residential
Funding
Trust
,
2019-1,
A1C,
144A,
3.5%,
3/25/58
.....................................
43,005
43,938
d
2019-2,
A3,
144A,
FRN,
3.5%,
10/25/44
.................................
78,043
81,232
Franklin
Strategic
Mortgage
Portfolio
Statement
of
Investments
franklintempleton.com
Annual
Report
The
accompanying
notes
are
an
integral
part
of
these
financial
statements.
18
a
a
Principal
Amount
a
Value
a
a
a
a
a
Residential
Mortgage-Backed
Securities
(continued)
Diversified
Financial
Services
(continued)
b
CIM
Trust
,
d
2019-INV1,
A1,
144A,
FRN,
4%,
2/25/49
................................
$
31,685
$
32,124
c
2019-INV2,
A11,
144A,
FRN,
1.034%,
(1-month
USD
LIBOR
+
0.95%),
5/25/49
...
91,193
91,317
d
2019-INV2,
A3,
144A,
FRN,
4%,
5/25/49
................................
57,452
58,682
d
2018-INV1,
A4,
144A,
FRN,
4%,
8/25/48
................................
36,406
37,250
b,d
Citigroup
Mortgage
Loan
Trust
,
2013-A
,
A
,
144A,
FRN
,
3
%
,
5/25/42
.............
6,336
6,343
b,c
Connecticut
Avenue
Securities
Trust
,
2019-R02,
1M2,
144A,
FRN,
2.386%,
(1-month
USD
LIBOR
+
2.3%),
8/25/31
....
113,487
114,325
2019-R03,
1M2,
144A,
FRN,
2.236%,
(1-month
USD
LIBOR
+
2.15%),
9/25/31
...
100,043
100,702
b,d
CSMC
Trust
,
2014-OAK1
,
1A1
,
144A,
FRN
,
3
%
,
11/25/29
.....................
41,921
42,799
b,c
FHLMC
STACR
REMIC
Trust
,
2020-DNA1,
M2,
144A,
FRN,
1.786%,
(1-month
USD
LIBOR
+
1.7%),
1/25/50
....
136,131
136,813
2020-HQA3,
M2,
144A,
FRN,
3.686%,
(1-month
USD
LIBOR
+
3.6%),
7/25/50
....
177,477
179,227
b,c
FHLMC
STACR
Trust
,
2019-DNA4
,
M2
,
144A,
FRN
,
2.036
%
,
(
1-month
USD
LIBOR
+
1.95
%
),
10/25/49
..................................................
246,519
247,642
b,d
Flagstar
Mortgage
Trust
,
2021-4,
A5,
144A,
FRN,
2.5%,
6/01/51
..................................
196,228
200,087
2021-2,
A6,
144A,
FRN,
2.5%,
4/25/51
..................................
221,293
225,700
b,d
GS
Mortgage-Backed
Securities
Trust
,
2021-PJ6
,
A8
,
144A,
FRN
,
2.5
%
,
11/25/51
...
243,090
248,635
b,d
J.P.
Morgan
Mortgage
Trust
,
2013-3,
A3,
144A,
FRN,
3.366%,
7/25/43
................................
80,716
82,669
2021-6,
A4,
144A,
FRN,
2.5%,
10/25/51
.................................
316,988
323,179
b
OBX
Trust
,
c
2018-1,
A2,
144A,
FRN,
0.736%,
(1-month
USD
LIBOR
+
0.65%),
6/25/57
.......
46,394
46,461
d
2021-J1,
A4,
144A,
FRN,
2.5%,
5/25/51
.................................
200,009
203,445
b,d,h
Provident
Funding
Associates
LLP
,
2021-J1
,
A3
,
144A,
FRN
,
2.5
%
,
2/20/49
........
150,000
152,648
b,d
Provident
Funding
Mortgage
Trust
,
2020-1
,
A3
,
144A,
FRN
,
3
%
,
2/25/50
..........
5,348
5,356
b,d
PSMC
Trust
,
2021-3
,
A3
,
144A,
FRN
,
2.5
%
,
8/25/51
.........................
290,000
295,075
b,d
Sequoia
Mortgage
Trust
,
2021-1,
A1,
144A,
FRN,
2.5%,
3/25/51
..................................
186,699
189,370
2021-6,
A4,
144A,
FRN,
2.5%,
10/25/51
.................................
250,000
255,313
3,444,382
a
a
a
a
a
Thrifts
&
Mortgage
Finance
7.1%
c
FHLMC
Structured
Agency
Credit
Risk
Debt
Notes
,
2013-DN2,
M2,
FRN,
4.336%,
(1-month
USD
LIBOR
+
4.25%),
11/25/23
........
112,231
115,605
2017-DNA2,
M2,
FRN,
3.536%,
(1-month
USD
LIBOR
+
3.45%),
10/25/29
.......
250,000
259,397
2017-DNA3,
M2,
FRN,
2.586%,
(1-month
USD
LIBOR
+
2.5%),
3/25/30
.........
250,000
256,673
2014-DN2,
M3,
FRN,
3.686%,
(1-month
USD
LIBOR
+
3.6%),
4/25/24
..........
174,678
178,448
2014-DN3,
M3,
FRN,
4.086%,
(1-month
USD
LIBOR
+
4%),
8/25/24
...........
58,313
59,791
2014-HQ1,
M3,
FRN,
4.186%,
(1-month
USD
LIBOR
+
4.1%),
8/25/24
..........
28,318
28,660
2014-DN4,
M3,
FRN,
4.636%,
(1-month
USD
LIBOR
+
4.55%),
10/25/24
........
100,561
103,687
2014-HQ3,
M3,
FRN,
4.836%,
(1-month
USD
LIBOR
+
4.75%),
10/25/24
........
15,083
15,217
2015-HQ2,
M3,
FRN,
3.336%,
(1-month
USD
LIBOR
+
3.25%),
5/25/25
.........
113,181
114,763
2016-DNA2,
M3,
FRN,
4.736%,
(1-month
USD
LIBOR
+
4.65%),
10/25/28
.......
159,728
165,961
2016-HQA2,
M3,
FRN,
5.236%,
(1-month
USD
LIBOR
+
5.15%),
11/25/28
.......
194,520
201,063
2016-DNA4,
M3,
FRN,
3.886%,
(1-month
USD
LIBOR
+
3.8%),
3/25/29
.........
220,233
228,096
c
FNMA
Connecticut
Avenue
Securities
,
2014-C04,
1M2,
FRN,
4.986%,
(1-month
USD
LIBOR
+
4.9%),
11/25/24
.........
105,083
109,113
2015-C01,
1M2,
FRN,
4.386%,
(1-month
USD
LIBOR
+
4.3%),
2/25/25
.........
129,304
132,095
2016-C01,
1M2,
FRN,
6.836%,
(1-month
USD
LIBOR
+
6.75%),
8/25/28
........
236,095
249,771
2016-C02,
1M2,
FRN,
6.086%,
(1-month
USD
LIBOR
+
6%),
9/25/28
...........
235,886
246,918
2016-C03,
1M2,
FRN,
5.386%,
(1-month
USD
LIBOR
+
5.3%),
10/25/28
........
236,186
248,311
2016-C04,
1M2,
FRN,
4.336%,
(1-month
USD
LIBOR
+
4.25%),
1/25/29
........
200,471
208,006
Franklin
Strategic
Mortgage
Portfolio
Statement
of
Investments
franklintempleton.com
The
accompanying
notes
are
an
integral
part
of
these
financial
statements.
Annual
Report
19
a
a
Principal
Amount
a
Value
a
a
a
a
a
Residential
Mortgage-Backed
Securities
(continued)
Thrifts
&
Mortgage
Finance
(continued)
c
FNMA
Connecticut
Avenue
Securities,
(continued)
2017-C05,
1M2,
FRN,
2.286%,
(1-month
USD
LIBOR
+
2.2%),
1/25/30
.........
$
176,872
$
180,928
2017-C06,
1M2,
FRN,
2.736%,
(1-month
USD
LIBOR
+
2.65%),
2/25/30
........
180,880
184,121
2014-C02,
2M2,
FRN,
2.686%,
(1-month
USD
LIBOR
+
2.6%),
5/25/24
.........
111,190
112,556
2014-C03,
2M2,
FRN,
2.986%,
(1-month
USD
LIBOR
+
2.9%),
7/25/24
.........
49,660
50,640
2016-C05,
2M2,
FRN,
4.536%,
(1-month
USD
LIBOR
+
4.45%),
1/25/29
........
95,377
99,007
2017-C02,
2M2,
FRN,
3.736%,
(1-month
USD
LIBOR
+
3.65%),
9/25/29
........
182,475
188,876
2013-C01,
M2,
FRN,
5.336%,
(1-month
USD
LIBOR
+
5.25%),
10/25/23
........
110,238
114,761
2014-C01,
M2,
FRN,
4.486%,
(1-month
USD
LIBOR
+
4.4%),
1/25/24
..........
111,252
115,288
b
Virginia
Housing
Development
Authority
,
2020-A
,
A
,
144A,
2.85
%
,
12/25/49
........
68,043
69,698
4,037,450
a
a
a
a
a
Total
Residential
Mortgage-Backed
Securities
(Cost
$7,587,741)
..................
7,533,525
Total
Long
Term
Investments
(Cost
$54,948,344)
................................
55,320,959
a
a
a
a
a
Short
Term
Investments
22.0%
U.S.
Government
and
Agency
Securities
18.0%
i
U.S.
Treasury
Bills
,
10/07/21
........................................................
4,200,000
4,199,977
10/14/21
........................................................
4,200,000
4,199,966
10/28/21
........................................................
1,800,000
1,799,918
10,199,861
Total
U.S.
Government
and
Agency
Securities
(Cost
$10,199,852)
.................
10,199,861
Shares
a
Money
Market
Funds
4.0%
j,k
Institutional
Fiduciary
Trust
-
Money
Market
Portfolio,
0.01%
...................
2,291,364
2,291,364
Total
Money
Market
Funds
(Cost
$2,291,364)
...................................
2,291,364
Total
Short
Term
Investments
(Cost
$12,491,216
)
................................
12,491,225
a
Total
Investments
(Cost
$67,439,560)
119.3%
...................................
$67,812,184
Other
Assets,
less
Liabilities
(19.3)%
..........................................
(10,946,126)
Net
Assets
100.0%
...........................................................
$56,866,058
†
Rounds
to
less
than
0.1%
of
net
assets.
a
Perpetual
security
with
no
stated
maturity
date.
b
Security
was
purchased
pursuant
to
Rule
144A
or
Regulation
S
under
the
Securities
Act
of
1933.
144A
securities
may
be
sold
in
transactions
exempt
from
registration
only
to
qualified
institutional
buyers
or
in
a
public
offering
registered
under
the
Securities
Act
of
1933.
Regulation
S
securities
cannot
be
sold
in
the
United
States
without
either
an
effective
registration
statement
filed
pursuant
to
the
Securities
Act
of
1933,
or
pursuant
to
an
exemption
from
registration.
At
September
30,
2021,
the
aggregate
value
of
these
securities
was
$6,471,315,
representing
11.4%
of
net
assets.
c
The
coupon
rate
shown
represents
the
rate
inclusive
of
any
caps
or
floors,
if
applicable,
in
effect
at
period
end.
d
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.
e
See
Note
7
regarding
defaulted
securities.
f
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).
g
Security
purchased
on
a
to-be-announced
(TBA)
basis.
See
Note
1(b).
Franklin
Strategic
Mortgage
Portfolio
Statement
of
Investments
franklintempleton.com
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accompanying
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part
of
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financial
statements.
20
At
September
30,
2021,
the
Fund
had
the
following futures
contracts
outstanding.
See
Note
1(c).
h
A
portion
or
all
of
the
security
purchased
on
a
delayed
delivery
basis.
See
Note
1(b).
i
The
security
was
issued
on
a
discount
basis
with
no
stated
coupon
rate.
j
See
Note
3(f)
regarding
investments
in
affiliated
management
investment
companies.
k
The
rate
shown
is
the
annualized
seven-day
effective
yield
at
period
end.
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
13
$
1,710,922
12/21/21
$
16,908
U.S.
Treasury
10
Year
Ultra
Notes
................
Long
10
1,452,500
12/21/21
(21,342)
U.S.
Treasury
2
Year
Notes
.....................
Long
1
220,055
12/31/21
(142)
U.S.
Treasury
5
Year
Notes
.....................
Long
37
4,541,461
12/31/21
(25,649)
U.S.
Treasury
Long
Bonds
.....................
Long
9
1,432,969
12/21/21
(28,630)
U.S.
Treasury
Ultra
Bonds
......................
Short
1
191,062
12/21/21
5,553
Total
Futures
Contracts
......................................................................
$(53,302)
*
As
of
period
end.
See
Abbreviations
on
page
34
.
Franklin
Strategic
Mortgage
Portfolio
Financial
Statements
Statement
of
Assets
and
Liabilities
September
30,
2021
franklintempleton.com
The
accompanying
notes
are
an
integral
part
of
these
financial
statements.
Annual
Report
21
Franklin
Strategic
Mortgage
Portfolio
Assets:
Investments
in
securities:
Cost
-
Unaffiliated
issuers
...................................................................
$65,148,196
Cost
-
Non-controlled
affiliates
(Note
3
f
)
........................................................
2,291,364
Value
-
Unaffiliated
issuers
..................................................................
$65,520,820
Value
-
Non-controlled
affiliates
(Note
3
f
)
........................................................
2,291,364
Cash
....................................................................................
85
Receivables:
Capital
shares
sold
........................................................................
50,481
Interest
.................................................................................
105,416
Deposits
with
brokers
for:
Futures
contracts
........................................................................
63,839
Variation
margin
on
futures
contracts
...........................................................
4,421
Other
assets
..............................................................................
6,862
Total
assets
..........................................................................
68,043,288
Liabilities:
Payables:
Investment
securities
purchased
..............................................................
10,408,057
Capital
shares
redeemed
...................................................................
609,204
Management
fees
.........................................................................
5,362
Distribution
fees
..........................................................................
5,787
Transfer
agent
fees
........................................................................
9,348
Distributions
to
shareholders
.................................................................
3,538
Accrued
expenses
and
other
liabilities
...........................................................
135,934
Total
liabilities
.........................................................................
11,177,230
Net
assets,
at
value
.................................................................
$56,866,058
Net
assets
consist
of:
Paid-in
capital
.............................................................................
$60,478,457
Total
distributable
earnings
(losses)
.............................................................
(3,612,399)
Net
assets,
at
value
.................................................................
$56,866,058
Franklin
Strategic
Mortgage
Portfolio
Financial
Statements
Statement
of
Assets
and
Liabilities
(continued)
September
30,
2021
franklintempleton.com
Annual
Report
The
accompanying
notes
are
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integral
part
of
these
financial
statements.
22
Franklin
Strategic
Mortgage
Portfolio
Class
A:
Net
assets,
at
value
.......................................................................
$21,800,872
Shares
outstanding
........................................................................
2,388,007
Net
asset
value
per
share
a
..................................................................
$9.13
Maximum
offering
price
per
share
(net
asset
value
per
share
÷
96.25%)
................................
$9.49
Class
A1:
Net
assets,
at
value
.......................................................................
$24,191,694
Shares
outstanding
........................................................................
2,648,464
Net
asset
value
per
share
a
..................................................................
$9.13
Maximum
offering
price
per
share
(net
asset
value
per
share
÷
96.25%)
................................
$9.49
Class
C:
Net
assets,
at
value
.......................................................................
$2,321,902
Shares
outstanding
........................................................................
254,294
Net
asset
value
and
maximum
offering
price
per
share
a
.............................................
$9.13
Class
R6:
Net
assets,
at
value
.......................................................................
$569,481
Shares
outstanding
........................................................................
62,459
Net
asset
value
and
maximum
offering
price
per
share
.............................................
$9.12
Advisor
Class:
Net
assets,
at
value
.......................................................................
$7,982,109
Shares
outstanding
........................................................................
875,053
Net
asset
value
and
maximum
offering
price
per
share
.............................................
$9.12
a
Redemption
price
is
equal
to
net
asset
value
less
contingent
deferred
sales
charges,
if
applicable.
Franklin
Strategic
Mortgage
Portfolio
Financial
Statements
Statement
of
Operations
for
the
year
ended
September
30,
2021
franklintempleton.com
The
accompanying
notes
are
an
integral
part
of
these
financial
statements.
Annual
Report
23
Franklin
Strategic
Mortgage
Portfolio
Investment
income:
Dividends:
Non-controlled
affiliates
(Note
3
f
)
.............................................................
$125
Interest:
Unaffiliated
issuers:
Paydown
gain
(loss)
.....................................................................
(723,829)
Paid
in
cash
a
...........................................................................
1,505,744
Total
investment
income
...................................................................
782,040
Expenses:
Management
fees
(Note
3
a
)
...................................................................
249,129
Distribution
fees:
(Note
3c
)
Class
A
................................................................................
59,226
Class
C
................................................................................
22,563
Transfer
agent
fees:
(Note
3e
)
Class
A
................................................................................
37,139
Class
A1
...............................................................................
40,598
Class
C
................................................................................
5,433
Class
R6
...............................................................................
805
Advisor
Class
............................................................................
13,668
Custodian
fees
(Note
4
)
......................................................................
2,493
Reports
to
shareholders
fees
..................................................................
27,745
Registration
and
filing
fees
....................................................................
98,631
Professional
fees
...........................................................................
119,995
Trustees'
fees
and
expenses
..................................................................
1,829
Other
....................................................................................
39,619
Total
expenses
.........................................................................
718,873
Expense
reductions
(Note
4
)
...............................................................
(1)
Expenses
waived/paid
by
affiliates
(Note
3
f
and
3
g
)
..............................................
(176,933)
Net
expenses
.........................................................................
541,939
Net
investment
income
................................................................
240,101
Realized
and
unrealized
gains
(losses):
Net
realized
gain
(loss)
from:
Investments:
Unaffiliated
issuers
......................................................................
(54,337)
Futures
contracts
.........................................................................
275,325
TBA
sale
commitments
.....................................................................
52,115
Net
realized
gain
(loss)
..................................................................
273,103
Net
change
in
unrealized
appreciation
(depreciation)
on:
Investments:
Unaffiliated
issuers
......................................................................
(617,752)
Futures
contracts
.........................................................................
(47,879)
Net
change
in
unrealized
appreciation
(depreciation)
............................................
(665,631)
Net
realized
and
unrealized
gain
(loss)
............................................................
(392,528)
Net
increase
(decrease)
in
net
assets
resulting
from
operations
..........................................
$(152,427)
a
Includes
amortization
of
premium
and
accretion
of
discount.
Franklin
Strategic
Mortgage
Portfolio
Financial
Statements
Statements
of
Changes
in
Net
Assets
franklintempleton.com
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24
Franklin
Strategic
Mortgage
Portfolio
Year
Ended
September
30,
2021
Year
Ended
September
30,
2020
Increase
(decrease)
in
net
assets:
Operations:
Net
investment
income
.................................................
$240,101
$1,465,728
Net
realized
gain
(loss)
.................................................
273,103
628,981
Net
change
in
unrealized
appreciation
(depreciation)
...........................
(665,631)
(186,481)
Net
increase
(decrease)
in
net
assets
resulting
from
operations
................
(152,427)
1,908,228
Distributions
to
shareholders:
Class
A
.............................................................
(364,293)
(467,449)
Class
A1
............................................................
(462,314)
(733,773)
Class
C
.............................................................
(39,313)
(76,504)
Class
R6
............................................................
(10,173)
(14,155)
Advisor
Class
........................................................
(155,357)
(264,418)
Total
distributions
to
shareholders
..........................................
(1,031,450)
(1,556,299)
Capital
share
transactions:
(Note
2
)
Class
A
.............................................................
(1,899,753)
5,713,303
Class
A1
............................................................
(2,844,265)
(1,919,968)
Class
C
.............................................................
(1,574,785)
91,588
Class
R6
............................................................
20,524
167,731
Advisor
Class
........................................................
(1,461,935)
(1,326,727)
Total
capital
share
transactions
............................................
(7,760,214)
2,725,927
Net
increase
(decrease)
in
net
assets
...................................
(8,944,091)
3,077,856
Net
assets:
Beginning
of
year
.......................................................
65,810,149
62,732,293
End
of
year
...........................................................
$56,866,058
$65,810,149
Franklin
Strategic
Mortgage
Portfolio
25
franklintempleton.com
Annual
Report
Notes
to
Financial
Statements
1.
Organization
and
Significant
Accounting
Policies
Franklin
Strategic
Mortgage
Portfolio (Trust)
is
registered
under
the
Investment
Company
Act
of
1940
(1940
Act)
as
an
open-end
management
investment
company,
consisting
of
one
fund,
Franklin
Strategic
Mortgage
Portfolio
(Fund)
and
applies
the
specialized
accounting
and
reporting
guidance
in
U.S.
Generally
Accepted
Accounting
Principles
(U.S.
GAAP).
The
Fund
offers
five
classes
of
shares:
Class
A,
Class
A1,
Class
C,
Class
R6
and
Advisor
Class.
Effective
August
2,
2021,
Class
C
shares
automatically
convert
to
Class
A
shares
after
they
have
been
held
for
8
years.
Prior
to
August
2,
2021,
Class
C
shares
converted
to
Class
A
shares
after
a
10-year
holding
period.
Each
class
of
shares
may
differ
by
its
initial
sales
load,
contingent
deferred
sales
charges,
voting
rights
on
matters
affecting
a
single
class,
its
exchange
privilege
and
fees
due
to
differing
arrangements
for
distribution
and
transfer
agent
fees.
The
following
summarizes
the Fund's
significant
accounting
policies.
a.
Financial
Instrument
Valuation
The
Fund's
investments
in
financial
instruments
are
carried
at
fair
value
daily.
Fair
value
is
the
price
that
would
be
received
to
sell
an
asset
or
paid
to
transfer
a
liability
in
an
orderly
transaction
between
market
participants
on
the
measurement
date.
The
Fund
calculates
the
net
asset
value
(NAV)
per
share
each business
day as
of
4
p.m.
Eastern
time
or
the
regularly
scheduled
close
of
the
New
York
Stock
Exchange
(NYSE),
whichever
is
earlier.
Under
compliance
policies
and
procedures
approved
by
the
Fund's
Board
of
Trustees
(the
Board),
the Fund's
administrator
has
responsibility
for
oversight
of
valuation,
including
leading
the
cross-functional
Valuation
Committee
(VC).
The
Fund
may
utilize
independent
pricing
services,
quotations
from
securities
and
financial
instrument
dealers,
and
other
market
sources
to
determine
fair
value.
Debt
securities
generally
trade
in
the
over-the-counter
(OTC)
market
rather
than
on
a
securities
exchange.
The
Fund's
pricing
services
use
multiple
valuation
techniques
to
determine
fair
value.
In
instances
where
sufficient
market
activity
exists,
the
pricing
services
may
utilize
a
market-based
approach
through
which
quotes
from
market
makers
are
used
to
determine
fair
value.
In
instances
where
sufficient
market
activity
may
not
exist
or
is
limited,
the
pricing
services
also
utilize
proprietary
valuation
models
which
may
consider
market
characteristics
such
as
benchmark
yield
curves,
credit
spreads,
estimated
default
rates,
anticipated
market
interest
rate
volatility,
coupon
rates,
anticipated
timing
of
principal
repayments,
underlying
collateral,
and
other
unique
security
features
in
order
to
estimate
the
relevant
cash
flows,
which
are
then
discounted
to
calculate
the
fair
value.
Derivative
financial
instruments
listed
on
an
exchange
are
valued
at
the
official
closing
price
of
the
day.
Investments
in open-end mutual
funds
are
valued
at
the
closing
NAV.
The
Fund
has
procedures
to
determine
the
fair
value
of
financial
instruments
for
which
market
prices
are
not
reliable
or
readily
available.
Under
these
procedures,
the Fund
primarily
employs
a
market-based
approach
which
may
use
related
or
comparable
assets
or
liabilities,
recent
transactions,
market
multiples,
book
values,
and
other
relevant
information
for
the
investment
to
determine
the
fair
value
of
the
investment.
An
income-based
valuation
approach
may
also
be
used
in
which
the
anticipated
future
cash
flows
of
the
investment
are
discounted
to
calculate
fair
value.
Discounts
may
also
be
applied
due
to
the
nature
or
duration
of
any
restrictions
on
the
disposition
of
the
investments.
Due
to
the
inherent
uncertainty
of
valuations
of
such
investments,
the
fair
values
may
differ
significantly
from
the
values
that
would
have
been
used
had
an
active
market
existed.
b.
Securities
Purchased
on
a
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.
c.
Derivative
Financial
Instruments
The
Fund invested
in
derivative
financial
instruments
in
order
to
manage
risk
or
gain
exposure
to
various
other
investments
or
markets.
Derivatives
are
financial
contracts
based
on
an
underlying
or
notional
amount,
require
no
initial
investment
or
an
initial
net
investment
that
is
smaller
than
would
normally
be
required
to
have
a
similar
response
to
changes
in
market
factors,
and
require
or
permit
net
Franklin
Strategic
Mortgage
Portfolio
Notes
to
Financial
Statements
26
franklintempleton.com
Annual
Report
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.
d.
Mortgage
Dollar
Rolls
The
Fund
enters
into
mortgage
dollar
rolls,
typically
on
a
TBA
basis.
Mortgage
dollar
rolls
are
agreements
between
the
Fund
and
a
financial
institution
where
the
Fund
sells
(or
buys)
mortgage-backed
securities
for
delivery
on
a
specified
date
and
simultaneously
contracts
to
repurchase
(or
sell)
substantially
similar
(same
type,
coupon,
and
maturity)
securities
at
a
future
date
and
at
a
predetermined
price.
Gains
or
losses
are
realized
on
the
initial
sale,
and
the
difference
between
the
repurchase
price
and
the
sale
price
is
recorded
as
an
unrealized
gain
or
loss
to
the
Fund
upon
entering
into
the
mortgage
dollar
roll.
In
addition,
the
Fund
may
invest
the
cash
proceeds
that
are
received
from
the
initial
sale.
During
the
period
between
the
sale
and
repurchase,
the
Fund
is
not
entitled
to
principal
and
interest
paid
on
the
mortgage
backed
securities.
Transactions
in
mortgage
dollar
rolls
are
accounted
for
as
purchases
and
sales
and
may
result
in
an
increase
to
the
Fund's
portfolio
turnover
rate.
The
risks
of
mortgage
dollar
roll
transactions
include
the
potential
inability
of
the
counterparty
to
fulfill
its
obligations.
e.
Income
and
Deferred
Taxes
It
is the Fund's
policy
to
qualify
as
a
regulated
investment
company
under
the
Internal
Revenue
Code. The Fund
intends
to
distribute
to
shareholders
substantially
all
of
its
taxable
income
and
net
realized
gains
to
relieve
it
from
federal
income
and excise
taxes.
As
a
result,
no
provision
for
U.S.
federal
income
taxes
is
required.
The
Fund
may
recognize
an
income
tax
liability
related
to
its
uncertain
tax
positions
under
U.S.
GAAP
when
the
uncertain
tax
position
has
a
less
than
50%
probability
that
it
will
be
sustained
upon
examination
by
the
tax
authorities
based
on
its
technical
merits.
As
of
September
30,
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.
f.
Security
Transactions,
Investment
Income,
Expenses
and
Distributions
Security
transactions
are
accounted
for
on
trade
date.
Realized
gains
and
losses
on
security
transactions
are
determined
on
a
specific
identification
basis.
Interest
income
and
estimated
expenses
are
accrued
daily.
Amortization
of
premium
and
accretion
of
discount
on
debt
securities
are
included
in
interest
income.
Paydown
gains
and
losses
are
recorded
separately
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.
1.
Organization
and
Significant
Accounting
Policies
(continued)
c.
Derivative
Financial
Instruments
(continued)
Franklin
Strategic
Mortgage
Portfolio
Notes
to
Financial
Statements
27
franklintempleton.com
Annual
Report
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.
g.
Accounting
Estimates
The
preparation
of
financial
statements
in
accordance
with
U.S.
GAAP
requires
management
to
make
estimates
and
assumptions
that
affect
the
reported
amounts
of
assets
and
liabilities
at
the
date
of
the
financial
statements
and
the
amounts
of
income
and
expenses
during
the
reporting
period.
Actual
results
could
differ
from
those
estimates.
h.
Guarantees
and
Indemnifications
Under
the
Fund's
organizational
documents,
its
officers
and
trustees
are
indemnified
by
the
Fund
against
certain
liabilities
arising
out
of
the
performance
of
their
duties
to
the
Fund.
Additionally,
in
the
normal
course
of
business,
the
Fund enters
into
contracts
with
service
providers
that
contain
general
indemnification
clauses.
The
Fund's
maximum
exposure
under
these
arrangements
is
unknown
as
this
would
involve
future
claims
that
may
be
made
against
the
Fund
that
have
not
yet
occurred.
Currently,
the
Fund
expects
the
risk
of
loss
to
be
remote.
2.
Shares
of
Beneficial
Interest
At
September
30,
2021,
there
were
an
unlimited
number
of
shares
authorized
(without
par
value).
Transactions
in
the
Fund’s
shares
were
as
follows:
Year
Ended
September
30,
2021
Year
Ended
September
30,
2020
Shares
Amount
Shares
Amount
Class
A
Shares:
Shares
sold
a
...................................
721,594
$6,676,453
1,217,338
$11,282,025
Shares
issued
in
reinvestment
of
distributions
..........
38,283
353,066
48,077
445,344
Shares
redeemed
...............................
(967,088)
(8,929,272)
(650,222)
(6,014,066)
Net
increase
(decrease)
..........................
(207,211)
$(1,899,753)
615,193
$5,713,303
Class
A1
Shares:
Shares
sold
...................................
198,635
$1,838,985
227,011
$2,109,187
Shares
issued
in
reinvestment
of
distributions
..........
47,497
438,185
74,833
693,377
Shares
redeemed
...............................
(554,164)
(5,121,435)
(510,027)
(4,722,532)
Net
increase
(decrease)
..........................
(308,032)
$(2,844,265)
(208,183)
$(1,919,968)
Class
C
Shares:
Shares
sold
...................................
71,864
$665,899
178,031
$1,646,733
Shares
issued
in
reinvestment
of
distributions
..........
4,207
38,817
7,919
73,342
Shares
redeemed
a
..............................
(247,198)
(2,279,501)
(176,057)
(1,628,487)
Net
increase
(decrease)
..........................
(171,127)
$(1,574,785)
9,893
$91,588
1.
Organization
and
Significant
Accounting
Policies
(continued)
f.
Security
Transactions,
Investment
Income,
Expenses
and
Distributions
(continued)
Franklin
Strategic
Mortgage
Portfolio
Notes
to
Financial
Statements
28
franklintempleton.com
Annual
Report
3.
Transactions
with
Affiliates
Franklin
Resources,
Inc.
is
the
holding
company
for
various
subsidiaries
that
together
are
referred
to
as
Franklin
Templeton.
Certain
officers
and
trustees
of
the
Fund
are
also
officers
and/or
directors
of
the
following
subsidiaries:
a.
Management
Fees
For
the
year
ended
September
30,
2021,
the
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
Year
Ended
September
30,
2021
Year
Ended
September
30,
2020
Shares
Amount
Shares
Amount
Class
R6
Shares:
Shares
sold
...................................
16,602
$152,711
54,969
$504,354
Shares
issued
in
reinvestment
of
distributions
..........
1,105
10,173
1,529
14,153
Shares
redeemed
...............................
(15,365)
(142,360)
(37,825)
(350,776)
Net
increase
(decrease)
..........................
2,342
$20,524
18,673
$167,731
Advisor
Class
Shares:
Shares
sold
...................................
195,824
$1,807,113
494,956
$4,579,523
Shares
issued
in
reinvestment
of
distributions
..........
15,137
139,453
27,704
256,284
Shares
redeemed
...............................
(369,145)
(3,408,501)
(669,850)
(6,162,534)
Net
increase
(decrease)
..........................
(158,184)
$(1,461,935)
(147,190)
$(1,326,727)
a
May
include
a
portion
of
Class
C
shares
that
were
automatically
converted
to
Class
A.
Subsidiary
Affiliation
Franklin
Advisers,
Inc.
(Advisers)
Investment
manager
Franklin
Templeton
Services,
LLC
(FT
Services)
Administrative
manager
Franklin
Distributors,
LLC
(Distributors)
(formerly
Franklin
Templeton
Distributors
Inc.)
Principal
underwriter
Franklin
Templeton
Investor
Services,
LLC
(Investor
Services)
Transfer
agent
Annualized
Fee
Rate
Net
Assets
0.400%
First
$250
million
0.380%
Over
$250
million,
up
to
and
including
$500
million
0.360%
In
excess
of
$500
million
2.
Shares
of
Beneficial
Interest
(continued)
Franklin
Strategic
Mortgage
Portfolio
Notes
to
Financial
Statements
29
franklintempleton.com
Annual
Report
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
year:
e.
Transfer
Agent
Fees
Each
class
of
shares pays
transfer
agent
fees
to
Investor
Services
for
its
performance
of
shareholder
servicing
obligations.
The
fees
are
based
on
an
annualized
asset
based
fee
of
0.02%
plus
a
transaction
based
fee.
In
addition,
each
class reimburses
Investor
Services
for
out
of
pocket
expenses
incurred
and,
except
for
Class
R6,
reimburses
shareholder
servicing
fees
paid
to
third
parties.
These
fees
are
allocated
daily
based
upon
their
relative
proportion
of
such
classes'
aggregate
net
assets.
Class
R6
pays
Investor
Services
transfer
agent
fees
specific
to
that
class.
For
the
year
ended
September
30,
2021,
the
Fund
paid
transfer
agent
fees
of
$97,643,
of
which $57,353
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
Fund
does
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
year
ended
September
30,
2021,
the
Fund
held
investments
in
affiliated
management
investment
companies
as
follows:
Class
A
....................................................................................
0.25%
Class
C
....................................................................................
0.65%
Sales
charges
retained
net
of
commissions
paid
to
unaffiliated
brokers/dealers
..............................
$1,129
CDSC
retained
..............................................................................
$3,082
3.
Transactions
with
Affiliates
(continued)
c.
Distribution
Fees
(continued)
Franklin
Strategic
Mortgage
Portfolio
Notes
to
Financial
Statements
30
franklintempleton.com
Annual
Report
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
year
ended
September
30,
2021,
the
custodian
fees
were
reduced
as
noted
in
the
Statement
of
Operations.
5.
Income
Taxes
For
tax
purposes,
capital
losses
may
be
carried
over
to
offset
future
capital
gains.
At
September
30,
2021,
the
capital
loss
carryforwards
were
as
follows:
The
tax
character
of
distributions
paid
during
the
years
ended
September
30,
2021
and
2020,
was
as
follows:
aa
Value
at
Beginning
of
Year
Purchases
Sales
Realized
Gain
(Loss)
Net
Change
in
Unrealized
Appreciation
(Depreciation)
Value
at
End
of
Year
Number
of
Shares
Held
at
End
of
Year
Investment
Income
a
a
a
a
a
a
a
a
Franklin
Strategic
Mortgage
Portfolio
Non-Controlled
Affiliates
Dividends
Institutional
Fiduciary
Trust
-
Money
Market
Portfolio,
0.01%
.
$2,589,379
$19,238,416
$(19,536,431)
$—
$—
$2,291,364
2,291,364
$125
Total
Affiliated
Securities
...
$2,589,379
$19,238,416
$(19,536,431)
$—
$—
$2,291,364
$125
Capital
loss
carryforwards
not
subject
to
expiration:
Short
term
................................................................................
$2,633,688
Long
term
................................................................................
1,320,632
Total
capital
loss
carryforwards
...............................................................
$3,954,320
2021
2020
Distributions
paid
from:
Ordinary
income
..........................................................
$1,031,450
$1,556,299
$1,031,450
$1,556,299
3.
Transactions
with
Affiliates
(continued)
f.
Investments
in
Affiliated
Management
Investment
Companies
(continued)
Franklin
Strategic
Mortgage
Portfolio
Notes
to
Financial
Statements
31
franklintempleton.com
Annual
Report
At
September
30,
2021,
the
cost
of
investments,
net
unrealized
appreciation
(depreciation)
and
undistributed
ordinary
income
for
income
tax
purposes
were
as
follows:
Differences
between
income
and/or
capital
gains
as
determined
on
a
book
basis
and
a
tax
basis
are
primarily
due
to
differing
treatments
of
paydown
losses
and
financial
futures
transactions.
6.
Investment
Transactions
Purchases
and
sales
of
investments
(excluding
short
term
securities)
for
the
year
ended
September
30,
2021,
aggregated
$168,516,599
and
$182,685,318,
respectively.
7.
Defaulted
Securities
The
Fund
held
a
defaulted
security
and/or
other
securities
for
which
the
income
has
been
deemed
uncollectible.
At
September
30,
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.
9.
Other
Derivative
Information
At
September
30,
2021,
the
Fund's
investments
in
derivative
contracts
are
reflected
in
the
Statement of
Assets
and
Liabilities
as
follows:
Cost
of
investments
..........................................................................
$67,416,678
Unrealized
appreciation
........................................................................
$912,682
Unrealized
depreciation
........................................................................
(570,478)
Net
unrealized
appreciation
(depreciation)
..........................................................
$342,204
Distributable
earnings:
Undistributed
ordinary
income
...................................................................
$8,556
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
$
22,461
a
Variation
margin
on
futures
contracts
$
75,763
a
Total
....................
$22,461
$75,763
5.
Income
Taxes
(continued)
Franklin
Strategic
Mortgage
Portfolio
Notes
to
Financial
Statements
32
franklintempleton.com
Annual
Report
For
the
year
ended
September
30,
2021,
the
effect
of
derivative
contracts
in
the
Statement
of
Operations
was
as
follows:
For
the
year
ended
September
30,
2021,
the
average
month
end
notional
amount
of
futures
contracts
represented
$8,546,599.
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
year
ended
September
30,
2021,
the Fund
did
not
use
the
Global
Credit
Facility.
11.
Fair
Value
Measurements
The
Fund
follows
a
fair
value
hierarchy
that
distinguishes
between
market
data
obtained
from
independent
sources
(observable
inputs)
and
the Fund's
own
market
assumptions
(unobservable
inputs).
These
inputs
are
used
in
determining
the
value
of
the
Fund's financial
instruments
and
are
summarized
in
the
following
fair
value
hierarchy:
Level
1
–
quoted
prices
in
active
markets
for
identical
financial
instruments
Level
2
–
other
significant
observable
inputs
(including
quoted
prices
for
similar
financial
instruments,
interest
rates,
prepayment
speed,
credit
risk,
etc.)
Level
3
–
significant
unobservable
inputs
(including
the
Fund's
own
assumptions
in
determining
the
fair
value
of
financial
instruments)
a
This
amount
reflects
the
cumulative
appreciation
(depreciation)
of
futures
contracts
as
reported
in
the
Statement
of
Investments.
Only
the
variation
margin
receivable/
payable
at
year
end
is
separately
reported
within
the
Statement
of
Assets
and
Liabilities.
Prior
variation
margin
movements
were
recorded
to
cash
upon
receipt
or
payment.
Derivative
Contracts
Not
Accounted
for
as
Hedging
Instruments
Statement
of
Operations
Location
Net
Realized
Gain
(Loss)
for
the
Year
Statement
of
Operations
Location
Net
Change
in
Unrealized
Appreciation
(Depreciation)
for
the
Year
Franklin
Strategic
Mortgage
Portfolio
Net
realized
gain
(loss)
from:
Net
change
in
unrealized
appreciation
(depreciation)
on:
Interest
rate
contracts
..........
Futures
contracts
$275,325
Futures
contracts
$(47,879)
Total
.......................
$275,325
$(47,879)
9.
Other
Derivative
Information
(continued)
Franklin
Strategic
Mortgage
Portfolio
Notes
to
Financial
Statements
33
franklintempleton.com
Annual
Report
The
input
levels
are
not
necessarily
an
indication
of
the
risk
or
liquidity
associated
with
financial
instruments
at
that
level.
A
summary
of
inputs
used
as
of
September
30,
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.
In
January
2021,
the
FASB
issued
ASU
No.
2021-01,
with
further
amendments
to
Topic
848.
The
amendments
in
the
ASUs
provide
optional
temporary
accounting
recognition
and 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
for
certain
LIBOR
settings
and
2023
for
the
remainder. The
ASUs
are
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
these
ASUs
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
........................
$
—
$
113,647
$
—
$
113,647
U.S.
Government
and
Agency
Securities
.......
—
497,743
—
497,743
Asset-Backed
Securities
..................
—
2,229,383
—
2,229,383
Commercial
Mortgage-Backed
Securities
......
—
1,025,906
—
1,025,906
Mortgage-Backed
Securities
................
—
43,920,755
—
43,920,755
Residential
Mortgage-Backed
Securities
......
—
7,533,525
—
7,533,525
Short
Term
Investments
...................
12,491,225
—
—
12,491,225
Total
Investments
in
Securities
...........
$12,491,225
$55,320,959
$—
$67,812,184
Other
Financial
Instruments:
Futures
contracts
........................
$
22,461
$
—
$
—
$
22,461
Total
Other
Financial
Instruments
.........
$22,461
$—
$—
$22,461
Liabilities:
Other
Financial
Instruments:
Futures
contracts
........................
$
75,763
$
—
$
—
$
75,763
a
For
detailed
categories,
see
the
accompanying
Statement
of
Investments.
11.
Fair
Value
Measurements
(continued)
Franklin
Strategic
Mortgage
Portfolio
Notes
to
Financial
Statements
34
franklintempleton.com
Annual
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
H15BDI
U.S.
Treasury
Bill
Auction
High
Discount
Rate
LIBOR
London
Inter-Bank
Offered
Rate
MBS
Mortgage-Backed
Security
Franklin
Strategic
Mortgage
Portfolio
Report
of
Independent
Registered
Public
Accounting
Firm
35
franklintempleton.com
Annual
Report
To
the
Board
of
Trustees
and
Shareholders
of
Franklin
Strategic
Mortgage
Portfolio
Opinion
on
the
Financial
Statements
We
have
audited
the
accompanying
statement
of
assets
and
liabilities,
including
the
statement
of
investments,
of
Franklin
Strategic
Mortgage
Portfolio
(the
"Fund")
as
of
September
30,
2021,
the
related
statement
of
operations
for
the
year
ended
September
30,
2021,
the
statement
of
changes
in
net
assets
for
each
of
the
two
years
in
the
period
ended
September
30,
2021,
including
the
related
notes,
and
the
financial
highlights
for
each
of
the
periods
indicated
therein
(collectively
referred
to
as
the
“financial
statements”).
In
our
opinion,
the
financial
statements
present
fairly,
in
all
material
respects,
the
financial
position
of
the
Fund
as
of
September
30,
2021,
the
results
of
its
operations
for
the
year
then
ended,
the
changes
in
its
net
assets
for
each
of
the
two
years
in
the
period
ended
September
30,
2021
and
the
financial
highlights
for
each
of
the
five
years
in
the
period
ended
September
30,
2021
in
conformity
with
accounting
principles
generally
accepted
in
the
United
States
of
America.
Basis
for
Opinion
These
financial
statements
are
the
responsibility
of
the
Fund’s
management.
Our
responsibility
is
to
express
an
opinion
on
the
Fund’s
financial
statements
based
on
our
audits.
We
are
a
public
accounting
firm
registered
with
the
Public
Company
Accounting
Oversight
Board
(United
States)
(PCAOB)
and
are
required
to
be
independent
with
respect
to
the
Fund
in
accordance
with
the
U.S.
federal
securities
laws
and
the
applicable
rules
and
regulations
of
the
Securities
and
Exchange
Commission
and
the
PCAOB.
We
conducted
our
audits
of
these
financial
statements
in
accordance
with
the
standards
of
the
PCAOB.
Those
standards
require
that
we
plan
and
perform
the
audit
to
obtain
reasonable
assurance
about
whether
the
financial
statements
are
free
of
material
misstatement,
whether
due
to
error
or
fraud.
Our
audits
included
performing
procedures
to
assess
the
risks
of
material
misstatement
of
the
financial
statements,
whether
due
to
error
or
fraud,
and
performing
procedures
that
respond
to
those
risks.
Such
procedures
included
examining,
on
a
test
basis,
evidence
regarding
the
amounts
and
disclosures
in
the
financial
statements.
Our
audits
also
included
evaluating
the
accounting
principles
used
and
significant
estimates
made
by
management,
as
well
as
evaluating
the
overall
presentation
of
the
financial
statements.
Our
procedures
included
confirmation
of
securities
owned
as
of
September
30,
2021
by
correspondence
with
the
custodian,
transfer
agent,
and
brokers;
when
replies
were
not
received
from
brokers,
we
performed
other
auditing
procedures.
We
believe
that
our
audits
provide
a
reasonable
basis
for
our
opinion.
PricewaterhouseCoopers
LLP
San
Francisco,
California
November
16,
2021
We
have
served
as
the
auditor
of
one
or
more
investment
companies
in
the
Franklin
Templeton
Group
of
Funds
since
1948.
Franklin
Strategic
Mortgage
Portfolio
Tax
Information
(unaudited)
36
franklintempleton.com
Annual
Report
By
mid-February,
tax
information
related
to
a
shareholder's
proportionate
share
of
distributions
paid
during
the
preceding
calendar
year
will
be
received,
if
applicable.
Please
also
refer
to
www.franklintempleton.com
for
per
share
tax
information
related
to
any
distributions
paid
during
the
preceding
calendar
year.
Shareholders
are
advised
to
consult
with
their
tax
advisors
for
further
information
on
the
treatment
of
these
amount
on
their
tax
returns.
The
following
tax
information
for
the
Fund
is
required
to
be
furnished
to
shareholders
with
respect
to
income
earned
and
distributions
paid
during
its
fiscal
year.
The
Fund
hereby
reports
the
following
amount,
or
if
subsequently
determined
to
be
different,
the
maximum
allowable
amount,
for
the
fiscal
year
ended
September
30,
2021:
Note
(1)
-
The
Law
varies
in
each
state
as
to
whether
and
what
percentage
of
dividend
income
attributable
to
Federal
obligations
is
exempt
from
state
income
tax.
Shareholders
are
advised
to
consult
with
their
tax
advisors
to
determine
if
any
portion
of
the
dividends
received
is
exempt
from
state
income
taxes.
Pursuant
to:
Amount
Interest-Related
Dividends
§871(k)(1)(C)
$1,039,371
Interest
from
Federal
Obligations
Note
(1)
$14,605
Franklin
Strategic
Mortgage
Portfolio
Board
Members
and
Officers
37
franklintempleton.com
Annual
Report
The
name,
year
of
birth
and
address
of
the
officers
and
board
members,
as
well
as
their
affiliations,
positions
held
with
the
Trust,
principal
occupations
during
at
least
the
past
five
years
and
number
of
U.S.
registered
portfolios
overseen
in
the
Franklin
Templeton
fund
complex,
are
shown
below.
Generally,
each
board
member
serves
until
that
person’s
successor
is
elected
and
qualified.
Independent
Board
Members
Name,
Year
of
Birth
and
Address
Position
Length
of
Time
Served
Number
of
Portfolios
in
Fund
Complex
Overseen
by
Board
Member*
Other
Directorships
Held
During
at
Least
the
Past
5
Years
Harris
J.
Ashton
(1932)
Trustee
Since
1992
122
Bar-S
Foods
(meat
packing
company)
(1981-2010).
One
Franklin
Parkway
San
Mateo,
CA
94403-1906
Principal
Occupation
During
at
Least
the
Past
5
Years:
Director
of
various
companies;
and
formerly
,
Director,
RBC
Holdings,
Inc.
(bank
holding
company)
(until
2002);
and
President,
Chief
Executive
Officer
and
Chairman
of
the
Board,
General
Host
Corporation
(nursery
and
craft
centers)
(until
1998).
Terrence
J.
Checki
(1945)
Trustee
Since
2017
104
Hess
Corporation
(exploration
of
oil
and
gas)
(2014-present).
One
Franklin
Parkway
San
Mateo,
CA
94403-1906
Principal
Occupation
During
at
Least
the
Past
5
Years:
Member
of
the
Council
on
Foreign
Relations
(1996-present);
Member
of
the
National
Committee
on
U.S.-China
Relations
(1999-present);
member
of
the
board
of
trustees
of
the
Economic
Club
of
New
York
(2013-present);
member
of
the
board
of
trustees
of
the
Foreign
Policy
Association
(2005-present);
member
of
the
board
of
directors
of
Council
of
the
Americas
(2007-present)
and
the
Tallberg
Foundation
(2018-present);
and
formerly
,
Executive
Vice
President
of
the
Federal
Reserve
Bank
of
New
York
and
Head
of
its
Emerging
Markets
and
Internal
Affairs
Group
and
Member
of
Management
Committee
(1995-2014);
and
Visiting
Fellow
at
the
Council
on
Foreign
Relations
(2014).
Mary
C.
Choksi
(1950)
Trustee
Since
2014
123
Omnicom
Group
Inc.
(advertising
and
marketing
communications
services)
(2011-present)
and
White
Mountains
Insurance
Group,
Ltd.
(holding
company)
(2017-present);
and
formerly
,
Avis
Budget
Group
Inc.
(car
rental)
(2007-2020).
One
Franklin
Parkway
San
Mateo,
CA
94403-1906
Principal
Occupation
During
at
Least
the
Past
5
Years:
Director
of
various
companies;
and
formerly
,
Founder
and
Senior
Advisor,
Strategic
Investment
Group
(investment
management
group)
(2015-2017);
Founding
Partner
and
Senior
Managing
Director,
Strategic
Investment
Group
(1987-2015);
Founding
Partner
and
Managing
Director,
Emerging
Markets
Management
LLC
(investment
management
firm)
(1987-2011);
and
Loan
Officer/Senior
Loan
Officer/Senior
Pension
Investment
Officer,
World
Bank
Group
(international
financial
institution)
(1977-1987).
Franklin
Strategic
Mortgage
Portfolio
38
franklintempleton.com
Annual
Report
Name,
Year
of
Birth
and
Address
Position
Length
of
Time
Served
Number
of
Portfolios
in
Fund
Complex
Overseen
by
Board
Member*
Other
Directorships
Held
During
at
Least
the
Past
5
Years
Edith
E.
Holiday
(1952)
Lead
Independent
Trustee
Trustee
since
2004
and
Lead
Independent
Trustee
since
2019
123
Hess
Corporation
(exploration
of
oil
and
gas)
(1993-present),
Santander
Consumer
USA
Holdings,
Inc.
(consumer
finance)
(2016-present);
Santander
Holdings
USA
(holding
company)
(2019-present);
and
formerly
,
Canadian
National
Railway
(railroad)
(2001-April
2021),
White
Mountains
Insurance
Group,
Ltd.
(holding
company)
(2004-May
2021),RTI
International
Metals,
Inc.
(manufacture
and
distribution
of
titanium)
(1999-2015)
and
H.J.
Heinz
Company
(processed
foods
and
allied
products)
(1994-2013).
One
Franklin
Parkway
San
Mateo,
CA
94403-1906
Principal
Occupation
During
at
Least
the
Past
5
Years:
Director
or
Trustee
of
various
companies
and
trusts;
and
formerly
,
Assistant
to
the
President
of
the
United
States
and
Secretary
of
the
Cabinet
(1990-1993);
General
Counsel
to
the
United
States
Treasury
Department
(1989-1990);
and
Counselor
to
the
Secretary
and
Assistant
Secretary
for
Public
Affairs
and
Public
Liaison-United
States
Treasury
Department
(1988-1989).
J.
Michael
Luttig
(1954)
Trustee
Since
2009
123
Boeing
Capital
Corporation
(aircraft
financing)
(2006-2010).
One
Franklin
Parkway
San
Mateo,
CA
94403-1906
Principal
Occupation
During
at
Least
the
Past
5
Years:
Private
investor;
and
formerly
,
Counselor
and
Senior
Advisor
to
the
Chairman,
CEO,
and
Board
of
Directors,
of
The
Boeing
Company
(aerospace
company),
and
member
of
the
Executive
Council
(May
2019-January
1,
2020);
Executive
Vice
President,
General
Counsel
and
member
of
the
Executive
Council,
The
Boeing
Company
(2006-2019);
and
Federal
Appeals
Court
Judge,
United
States
Court
of
Appeals
for
the
Fourth
Circuit
(1991-2006).
Larry
D.
Thompson
(1945)
Trustee
Since
2007
123
Formerly,
Graham
Holdings
Company
(education
and
media
organization)
(2011-May
2021);
The
Southern
Company
(energy
company)
(2014-2020;
previously
2010-2012)
and
Cbeyond,
Inc.
(business
communications
provider)
(2010-2012).
One
Franklin
Parkway
San
Mateo,
CA
94403-1906
Principal
Occupation
During
at
Least
the
Past
5
Years:
Director
of
various
companies;
Counsel,
Finch
McCranie,
LLP
(law
firm)
(2015-present);
John
A.
Sibley
Professor
of
Corporate
and
Business
Law,
University
of
Georgia
School
of
Law
(2015-present;
previously
2011-2012);
and
formerly
,
Independent
Compliance
Monitor
and
Auditor,
Volkswagen
AG
(manufacturer
of
automobiles
and
commercial
vehicles)
(2017-2020);
Executive
Vice
President
-
Government
Affairs,
General
Counsel
and
Corporate
Secretary,
PepsiCo,
Inc.
(consumer
products)
(2012-2014);
Senior
Vice
President
-
Government
Affairs,
General
Counsel
and
Secretary,
PepsiCo,
Inc.
(2004-2011);
Senior
Fellow
of
The
Brookings
Institution
(2003-2004);
Visiting
Professor,
University
of
Georgia
School
of
Law
(2004);
and
Deputy
Attorney
General,
U.S.
Department
of
Justice
(2001-2003).
Independent
Board
Members
(continued)
Franklin
Strategic
Mortgage
Portfolio
39
franklintempleton.com
Annual
Report
Interested
Board
Members
and
Officers
Name,
Year
of
Birth
and
Address
Position
Length
of
Time
Served
Number
of
Portfolios
in
Fund
Complex
Overseen
by
Board
Member*
Other
Directorships
Held
During
at
Least
the
Past
5
Years
Valerie
M.
Williams
(1956)
Trustee
Since
May
2021
104
Omnicom
Group,
Inc.
(advertising
and
marketing
communications
services)
(2016-present),
DTE
Energy
Co.
(gas
and
electric
utility)
(2018-present),
Devon
Energy
Corporation
(exploration
and
production
of
oil
and
gas)
(January
2021-present);
and
formerly
,
WPX
Energy,
Inc.
(exploration
and
production
of
oil
and
gas)
(2018-January
2021).
One
Franklin
Parkway
San
Mateo,
CA
94403-1906
Principal
Occupation
During
at
Least
the
Past
5
Years:
Director
of
various
companies;
and
formerly
,
Regional
Assurance
Managing
Partner,
Ernst
&
Young
LLP
(public
accounting)
(2005-2016),
various
roles
of
increasing
responsibility
at
Ernst
&
Young
(1981-2005).
**Gregory
E.
Johnson
(1961)
Trustee
Since
2013
134
None
One
Franklin
Parkway
San
Mateo,
CA
94403-1906
Principal
Occupation
During
at
Least
the
Past
5
Years:
Executive
Chairman,
Chairman
of
the
Board
and
Director,
Franklin
Resources,
Inc.;
officer
and/or
director
or
trustee,
as
the
case
may
be,
of
some
of
the
other
subsidiaries
of
Franklin
Resources,
Inc.
and
of
39
of
the
investment
companies
in
Franklin
Templeton;
Vice
Chairman,
Investment
Company
Institute;
and
formerly
,
Chief
Executive
Officer
(2013-2020)
and
President
(1994-2015),
Franklin
Resources,
Inc.
**Rupert
H.
Johnson,
Jr.
(1940)
Chairman
of
the
Board,
Trustee
and
Senior
Vice
President
Chairman
of
the
Board
since
2013,
Trustee
and
Senior
Vice
President
since
1988
123
None
One
Franklin
Parkway
San
Mateo,
CA
94403-1906
Principal
Occupation
During
at
Least
the
Past
5
Years:
Director
(Vice
Chairman),
Franklin
Resources,
Inc.;
Director,
Franklin
Advisers,
Inc.;
and
officer
and/or
director
or
trustee,
as
the
case
may
be,
of
some
of
the
other
subsidiaries
of
Franklin
Resources,
Inc.
and
of
37
of
the
investment
companies
in
Franklin
Templeton.
Alison
E.
Baur
(1964)
Vice
President
Since
2012
Not
Applicable
Not
Applicable
One
Franklin
Parkway
San
Mateo,
CA
94403-1906
Principal
Occupation
During
at
Least
the
Past
5
Years:
Deputy
General
Counsel,
Franklin
Templeton;
and
officer
of
some
of
the
other
subsidiaries
of
Franklin
Resources,
Inc.
and
of
44
of
the
investment
companies
in
Franklin
Templeton.
Breda
M.
Beckerle
(1958)
Chief
Compliance
Officer
Since
2020
Not
Applicable
Not
Applicable
280
Park
Avenue
New
York,
NY
10017
Principal
Occupation
During
at
Least
the
Past
5
Years:
Chief
Compliance
Officer,
Fiduciary
Investment
Management
International,
Inc.,
Franklin
Advisers,
Inc.,
Franklin
Mutual
Advisers,
LLC,
Franklin
Templeton
Institutional,
LLC;
and
officer
of
39
of
the
investment
companies
in
Franklin
Templeton.
Independent
Board
Members
(continued)
Franklin
Strategic
Mortgage
Portfolio
40
franklintempleton.com
Annual
Report
Name,
Year
of
Birth
and
Address
Position
Length
of
Time
Served
Number
of
Portfolios
in
Fund
Complex
Overseen
by
Board
Member*
Other
Directorships
Held
During
at
Least
the
Past
5
Years
Sonal
Desai,
Ph.D.
(1963)
President
and
Chief
Executive
Officer
–
Investment
Management
Since
2018
Not
Applicable
Not
Applicable
One
Franklin
Parkway
San
Mateo,
CA
94403-1906
Principal
Occupation
During
at
Least
the
Past
5
Years:
Director
and
Executive
Vice
President,
Franklin
Advisers,
Inc.;
Executive
Vice
President,
Franklin
Templeton
Institutional,
LLC;
and
officer
of
17
of
the
investment
companies
in
Franklin
Templeton.
Steven
J.
Gray
(1955)
Vice
President
and
Co-Secretary
Vice
President
since
2009
and
Co-Secretary
since
2019
Not
Applicable
Not
Applicable
One
Franklin
Parkway
San
Mateo,
CA
94403-1906
Principal
Occupation
During
at
Least
the
Past
5
Years:
Senior
Associate
General
Counsel,
Franklin
Templeton;
Vice
President,
FASA,
LLC;
Assistant
Secretary,
Franklin
Distributors,
LLC;
and
officer
of
44
of
the
investment
companies
in
Franklin
Templeton.
Matthew
T.
Hinkle
(1971)
Chief
Executive
Officer
–
Finance
and
Administration
Since
2017
Not
Applicable
Not
Applicable
One
Franklin
Parkway
San
Mateo,
CA
94403-1906
Principal
Occupation
During
at
Least
the
Past
5
Years:
Senior
Vice
President,
Franklin
Templeton
Services,
LLC;
officer
of
44
of
the
investment
companies
in
Franklin
Templeton;
and
formerly
,
Vice
President,
Global
Tax
(2012-April
2017)
and
Treasurer/Assistant
Treasurer,
Franklin
Templeton
(2009-2017).
Susan
Kerr
(1949)
Vice
President
–
AML
Compliance
Since
July
2021
Not
Applicable
Not
Applicable
620
Eighth
Avenue
New
York,
NY
10018
Principal
Occupation
During
at
Least
the
Past
5
Years:
Senior
Compliance
Analyst,
Global
Compliance,
Franklin
Chief
Anti-Money
Laundering
Compliance
Officer,
Legg
Mason
&
Co.
or
its
affiliates;
Anti
Money
Laundering
Compliance
Officer;
Senior
Compliance
Officer,
LMIS;
and
officer
of
41
of
the
investment
companies
in
Franklin
Templeton
Navid
J.
Tofigh
(1972)
Vice
President
Since
2015
Not
Applicable
Not
Applicable
One
Franklin
Parkway
San
Mateo,
CA
94403-1906
Principal
Occupation
During
at
Least
the
Past
5
Years:
Associate
General
Counsel
and
officer
of
44
of
the
investment
companies
in
Franklin
Templeton.
Craig
S.
Tyle
(1960)
Vice
President
Since
2005
Not
Applicable
Not
Applicable
One
Franklin
Parkway
San
Mateo,
CA
94403-1906
Principal
Occupation
During
at
Least
the
Past
5
Years:
General
Counsel
and
Executive
Vice
President,
Franklin
Resources,
Inc.;
and
officer
of
some
of
the
other
subsidiaries
of
Franklin
Resources,
Inc.
and
of
44
of
the
investment
companies
in
Franklin
Templeton.
Lori
A.
Weber
(1964)
Vice
President
and
Co-Secretary
Vice
President
since
2011
and
Co-Secretary
since
2019
Not
Applicable
Not
Applicable
300
S.E.
2nd
Street
Fort
Lauderdale,
FL
33301-
1923
Principal
Occupation
During
at
Least
the
Past
5
Years:
Senior
Associate
General
Counsel,
Franklin
Templeton;
Assistant
Secretary,
Franklin
Resources,
Inc.;
Vice
President
and
Secretary,
Templeton
Investment
Counsel,
LLC;
and
officer
of
44
of
the
investment
companies
in
Franklin
Templeton.
Interested
Board
Members
and
Officers
(continued)
Franklin
Strategic
Mortgage
Portfolio
41
franklintempleton.com
Annual
Report
*We
base
the
number
of
portfolios
on
each
separate
series
of
the
U.S.
registered
investment
companies
within
the
Franklin
Templeton
fund
complex.
These
portfolios
have
a
common
investment
manager
or
affiliated
investment
managers.
**Gregory
E.
Johnson
is
considered
to
be
an
interested
person
of
the
Fund
under
the
federal
securities
laws
due
to
his
position
as
an
officer
and
director
of
Franklin
Resources,
Inc.
(Resources),
which
is
the
parent
company
of
the
Fund’s
investment
manager
and
distributor.
Rupert
H.
Johnson,
Jr.
is
considered
to
be
an
interested
person
of
the
Fund
under
the
federal
securities
laws
due
to
his
position
as
an
officer
and
director
and
major
shareholder
of
Resources.
Note
1:
Rupert
H.
Johnson,
Jr.
is
the
uncle
of
Gregory
E.
Johnson.
Note
2:
Officer
information
is
current
as
of
the
date
of
this
report.
It
is
possible
that
after
this
date,
information
about
officers
may
change.
The
Sarbanes-Oxley
Act
of
2002
and
Rules
adopted
by
the
Securities
and
Exchange
Commission
require
the
Fund
to
disclose
whether
the
Fund’s
Audit
Committee
includes
at
least
one
member
who
is
an
audit
committee
financial
expert
within
the
meaning
of
such
Act
and
Rules.
The
Fund’s
Board
has
determined
that
there
is
at
least
one
such
financial
expert
on
the
Audit
Committee
and
has
designated
Mary
C.
Choksi
as
its
audit
committee
financial
expert.
The
Board
believes
that
Ms.
Choksi
qualifies
as
such
an
expert
in
view
of
her
extensive
business
background
and
experience.
She
served
as
a
director
of
Avis
Budget
Group,
Inc.
(2007
to
2020)
and
formerly,
Founder
and
Senior
Advisor,
Strategic
Investment
Group
(1987
to
2017).
Ms.
Choksi
has
been
a
Member
of
the
Fund’s
Audit
Committee
since
2014.
As
a
result
of
such
background
and
experience,
the
Board
believes
that
Ms.
Choksi
has
acquired
an
understanding
of
generally
accepted
accounting
principles
and
financial
statements,
the
general
application
of
such
principles
in
connection
with
the
accounting
estimates,
accruals
and
reserves,
and
analyzing
and
evaluating
financial
statements
that
present
a
breadth
and
level
of
complexity
of
accounting
issues
generally
comparable
to
those
of
the
Fund,
as
well
as
an
understanding
of
internal
controls
and
procedures
for
financial
reporting
and
an
understanding
of
audit
committee
functions.
Ms.
Choksi
is
an
independent
Board
member
as
that
term
is
defined
under
the
relevant
Securities
and
Exchange
Commission
Rules
and
Releases.
The
Statement
of
Additional
Information
(SAI)
includes
additional
information
about
the
board
members
and
is
available,
without
charge,
upon
request.
Shareholders
may
call
(800)
DIAL
BEN/342-5236
to
request
the
SAI.
Name,
Year
of
Birth
and
Address
Position
Length
of
Time
Served
Number
of
Portfolios
in
Fund
Complex
Overseen
by
Board
Member*
Other
Directorships
Held
During
at
Least
the
Past
5
Years
Jeffrey
W.
White
(1971)
Interim
Chief
Financial
Officer,
Chief
Accounting
Officer
and
Treasurer
Since
October
2021
Not
Applicable
Not
Applicable
One
Franklin
Parkway
San
Mateo,
CA
94403-1906
Principal
Occupation
During
at
Least
the
Past
5
Years:
Director,
Fund
Administration
&
Reporting;
officer
of
24
of
the
investment
companies
in
Franklin
Templeton;
and
formerly
,
Manager,
Fund
Administration
&
Reporting
(2009-2017).
Interested
Board
Members
and
Officers
(continued)
Franklin
Strategic
Mortgage
Portfolio
Shareholder
Information
42
franklintempleton.com
Annual
Report
Liquidity
Risk
Management
Program-
Funds
no
HLIM
Each
Fund
has
adopted
and
implemented
a
written
Liquidity
Risk
Management
Program
(the
“LRMP”)
as
required
by
Rule
22e-4
under
the
Investment
Company
Act
of
1940
(the
“Liquidity
Rule”).
The
LRMP
is
designed
to
assess
and
manage
each
Fund’s
liquidity
risk,
which
is
defined
as
the
risk
that
the
Fund
could
not
meet
requests
to
redeem
shares
issued
by
the
Fund
without
significant
dilution
of
remaining
investors’
interests
in
the
Fund.
In
accordance
with
the
Liquidity
Rule,
the
LRMP
includes
policies
and
procedures
that
provide
for:
(1)
assessment,
management,
and
review
(no
less
frequently
than
annually)
of
each
Fund’s
liquidity
risk;
(2)
classification
of
each
Fund’s
portfolio
holdings
into
one
of
four
liquidity
categories
(Highly
Liquid,
Moderately
Liquid,
Less
Liquid,
and
Illiquid);
(3)
for
Funds
that
do
not
primarily
hold
assets
that
are
Highly
Liquid,
establishing
and
maintaining
a
minimum
percentage
of
the
Fund’s
net
assets
in
Highly
Liquid
investments
(called
a
“Highly
Liquid
Investment
Minimum”
or
“HLIM”);
and
(4)
prohibiting
the
Fund’s
acquisition
of
Illiquid
investments
that
would
result
in
the
Fund
holding
more
than
15%
of
its
net
assets
in
Illiquid
assets.
The
LRMP
also
requires
reporting
to
the
Securities
and
Exchange
Commission
(“SEC”)
(on
a
non-public
basis)
and
to
the
Board
if
the
Fund’s
holdings
of
Illiquid
assets
exceed
15%
of
the
Fund’s
net
assets.
Funds
with
HLIMs
must
have
procedures
for
addressing
HLIM
shortfalls,
including
reporting
to
the
Board
and,
with
respect
to
HLIM
shortfalls
lasting
more
than
seven
consecutive
calendar
days,
reporting
to
the
SEC
(on
a
non-public
basis).
The
Director
of
Liquidity
Risk
within
the
Investment
Risk
Management
Group
(the
“IRMG”)
is
the
appointed
Administrator
of
the
LRMP.
The
IRMG
maintains
the
Investment
Liquidity
Committee
(the
“ILC”)
to
provide
oversight
and
administration
of
policies
and
procedures
governing
liquidity
risk
management
for
FT
products
and
portfolios.
The
ILC
includes
representatives
from
Franklin
Templeton’s
Risk,
Trading,
Global
Compliance,
Investment
Compliance,
Investment
Operations,
Valuation
Committee,
Product
Management
and
Global
Product
Strategy.
In
assessing
and
managing
each
Fund’s
liquidity
risk,
the
ILC
considers,
as
relevant,
a
variety
of
factors,
including
the
Fund’s
investment
strategy
and
the
liquidity
of
its
portfolio
investments
during
both
normal
and
reasonably
foreseeable
stressed
conditions;
its
short
and
long-term
cash
flow
projections;
and
its
cash
holdings
and
access
to
other
funding
sources
including
the
Funds’
interfund
lending
facility
and
line
of
credit.
Classification
of
the
Fund’s
portfolio
holdings
in
the
four
liquidity
categories
is
based
on
the
number
of
days
it
is
reasonably
expected
to
take
to
convert
the
investment
to
cash
(for
Highly
Liquid
and
Moderately
Liquid
holdings)
or
sell
or
dispose
of
the
investment
(for
Less
Liquid
and
Illiquid
investments),
in
current
market
conditions
without
significantly
changing
the
investment’s
market
value.
Each
Fund
primarily
holds
liquid
assets
that
are
defined
under
the
Liquidity
Rule
as
"Highly
Liquid
Investments,"
and
therefore
is
not
required
to
establish
an
HLIM.
Highly
Liquid
Investments
are
defined
as
cash
and
any
investment
reasonably
expected
to
be
convertible
to
cash
in
current
market
conditions
in
three
business
days
or
less
without
the
conversion
to
cash
significantly
changing
the
market
value
of
the
investment.
At
meetings
of
the
Funds’
Board
of
Trustees
held
in
May
2021,
the
Program
Administrator
provided
a
written
report
to
the
Board
addressing
the
adequacy
and
effectiveness
of
the
program
for
the
year
ended
December
31,
2020.
The
Program
Administrator
report
concluded
that
(i.)
the
LRMP,
as
adopted
and
implemented,
remains
reasonably
designed
to
assess
and
manage
each
Fund’s
liquidity
risk;
(ii.)
the
LRMP,
including
the
Highly
Liquid
Investment
Minimum
(“HLIM”)
where
applicable,
was
implemented
and
operated
effectively
to
achieve
the
goal
of
assessing
and
managing
each
Fund’s
liquidity
risk;
and
(iii.)
each
Fund
was
able
to
meet
requests
for
redemption
without
significant
dilution
of
remaining
investors’
interests
in
the
Fund.
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.
Franklin
Strategic
Mortgage
Portfolio
Shareholder
Information
43
franklintempleton.com
Annual
Report
Quarterly
Statement
of
Investments
The
Fund
files
a
complete
statement
of
investments
with
the
U.S.
Securities
and
Exchange
Commission
for
the
first
and
third
quarters
for
each
fiscal
year
as
an
exhibit
to
its
report
on
Form
N-PORT.
Shareholders
may
view
the
filed
Form
N-PORT
by
visiting
the
Commission’s
website
at
sec.
gov.
The
filed
form
may
also
be
viewed
and
copied
at
the
Commission’s
Public
Reference
Room
in
Washington,
DC.
Information
regarding
the
operations
of
the
Public
Reference
Room
may
be
obtained
by
calling
(800)
SEC-0330.
Householding
of
Reports
and
Prospectuses
You
will
receive,
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
A
11/21
©
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.
Annual
Report
and
Shareholder
Letter
Franklin
Strategic
Mortgage
Portfolio
Investment
Manager
Distributor
Shareholder
Services
Franklin
Advisers,
Inc.
Franklin
Distributors,
LLC
(800)
DIAL
BEN
®
/
342-5236
franklintempleton.com
(800)
632-2301
Item 2. Code of Ethics.
(a) The Registrant has adopted a code of ethics that applies to its principal executive officers and principal financial and accounting officer.
(c) N/A
(d) N/A
(f) Pursuant to Item 13(a)(1), the Registrant is attaching as an exhibit a copy of its code of ethics that applies to its principal executive officers and principal financial and accounting officer.
Item 3. Audit Committee Financial Expert.
(a)(1) The Registrant has an audit committee financial expert serving on its audit committee.
(2) The audit committee financial expert is Mary C. Choksi and she is "independent" as defined under the relevant Securities and Exchange Commission Rules and Releases.
Item 4.
Principal Accountant Fees and Services.
(a) Audit Fees
The aggregate fees paid to the principal accountant for professional services rendered by the principal accountant for the audit of the registrant’s annual financial statements or for services that are normally provided by the principal accountant in connection with statutory and regulatory filings or engagements were $35,845 for the fiscal year ended September 30, 2021 and $44,843 for the fiscal year ended September 30, 2020.
(b) Audit-Related Fees
There were no fees paid to the principal accountant for assurance and related services rendered by the principal accountant to the registrant that are reasonably related to the performance of the audit of the registrant's financial statements and are not reported under paragraph (a) of Item 4.
There were no fees paid to the principal accountant for assurance and related services rendered by the principal accountant to the registrant's investment adviser and any entity controlling, controlled by or under common control with the investment adviser that provides ongoing services to the registrant that are reasonably related to the performance of the audit of their financial statements.
(c) Tax Fees
There were no fees paid to the principal accountant for professional services rendered by the principal accountant to the registrant for tax compliance, tax advice and tax planning.
There were no fees paid to the principal accountant for professional services rendered by the principal accountant to the registrant’s investment adviser and any entity controlling, controlled by or under common control with the investment adviser that provides ongoing services to the registrant for tax compliance, tax advice and tax planning.
(d) All Other Fees
The aggregate fees paid to the principal accountant for products and services rendered by the principal accountant to the registrant not reported in paragraphs (a)-(c) of Item 4were $92 for the fiscal year ended September 30, 2021 and $0 for the fiscal year ended September 30, 2020. The services for which these fees were paid included review of materials provided to the fund Board in connection with the investment management contract renewal process and professional fees in connection with SOC 1 Reports.
The aggregate fees paid to the principal accountant for products and services rendered by the principal accountant to the registrant’s investment adviser and any entity controlling, controlled by or under common control with the investment adviser that provides ongoing services to the registrant not reported in paragraphs (a)-(c) of Item 4 were $37,812 for the fiscal year ended September 30, 2021 and $83,036 for the fiscal year ended September 30, 2020. The services for which these fees were paid included valuation services related to fair value engagement, the issuance of an Auditor’s Certificate for South Korean regulatory shareholders disclosures, benchmarking services in connection with the ICI TA Survey, assets under management certification, professional fees in connection with SOC 1 Reports, and professional fees in connection with determining the feasibility of a U.S. direct lending structure.
(e) (1) The registrant’s audit committee is directly responsible for approving the services to be provided by the auditors, including:
(i) pre-approval of all audit and audit related services;
(ii) pre-approval of all non-audit related services to be provided to the Fund by the auditors;
(iii) pre-approval of all non-audit related services to be provided to the registrant by the auditors to the registrant’s investment adviser or to any entity that controls, is controlled by or is under common control with the registrant’s investment adviser and that provides ongoing services to the registrant where the non-audit services relate directly to the operations or financial reporting of the registrant; and
(iv) establishment by the audit committee, if deemed necessary or appropriate, as an alternative to committee pre-approval of services to be provided by the auditors, as required by paragraphs (ii) and (iii) above, of policies and procedures to permit such services to be pre-approved by other means, such as through establishment of guidelines or by action of a designated member or members of the committee; provided the policies and procedures are detailed as to the particular service and the committee is informed of each service and such policies and procedures do not include delegation of audit committee responsibilities, as contemplated under the Securities Exchange Act of 1934, to management; subject, in the case of (ii) through (iv), to any waivers, exceptions or exemptions that may be available under applicable law or rules.
(e) (2) None of the services provided to the registrant described in paragraphs (b)-(d) of Item 4 were approved by the audit committee pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of regulation S-X.
(f) No disclosures are required by this Item 4(f).
(g) The aggregate non-audit fees paid to the principal accountant for services rendered by the principal accountant to the registrant and the registrant’s investment adviser and any entity controlling, controlled by or under common control with the investment adviser that provides ongoing services to the registrant were $37,904 for the fiscal year ended September 30, 2021 and $83,036 for the fiscal year ended September 30, 2020.
(h) The registrant’s audit committee of the board has considered whether the provision of non-audit services that were rendered to the registrant’s investment adviser (not including any sub-adviser whose role is primarily portfolio management and is subcontracted with or overseen by another investment adviser), and any entity controlling, controlled by, or under common control with the investment adviser that provides ongoing services to the registrant that were not pre-approved pursuant to paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X is compatible with maintaining the principal accountant’s independence.
Item 5. Audit Committee
of Listed Registrants. N/A
Item 6. Schedule of Investments. N/A
Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies. N/A
Item 8. Portfolio Managers of Closed-End Management Investment Companies. N/A
Item 9. Purchases of Equity Securities by Closed-End Management Investment Company and
Affiliated Purchasers. N/A
Item 10. Submission of Matters to a Vote of Security Holders.
There have been no changes to the procedures by which shareholders may recommend nominees to the Registrant's Board of Trustees that would require disclosure herein.
Item 11. Controls and Procedures.
(a) Evaluation of Disclosure Controls and Procedures
. The Registrant maintains disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed in the Registrant’s filings under the Securities Exchange Act of 1934, as amended, and the Investment Company Act of 1940 is recorded, processed, summarized and reported within the periods specified in the rules and forms of the Securities and Exchange Commission. Such information is accumulated and communicated to the Registrant’s management, including its principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. The Registrant’s management, including the principal executive officer and the principal financial officer, recognizes that any set of controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.
Within 90 days prior to the filing date of this Shareholder Report on Form N-CSR, the Registrant had carried out an evaluation, under the supervision and with the participation of the Registrant’s management, including the Registrant’s principal executive officer and the Registrant’s principal financial officer, of the effectiveness of the design and operation of the Registrant’s disclosure controls and procedures. Based on such evaluation, the Registrant’s principal executive officer and principal financial officer concluded that the Registrant’s disclosure controls and procedures are effective.
(b) Changes in Internal Controls
.
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
(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 Jeffrey W. White, Interim Chief Financial Officer, Chief Accounting Officer and Treasurer
(b)Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of
Matthew T. Hinkle
, Chief Executive Officer - Finance and Administration, and Jeffrey W. White, Interim Chief Financial Officer, Chief Accounting Officer and Treasurer
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
FRANKLIN STRATEGIC MORTGAGE PORTFOLIO
By S\MATTHEW T. HINKLE______________________
Matthew T. Hinkle
Chief Executive Officer – Finance and Administration
Date November
29, 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 November
29, 2021
By S\Jeffrey W. White________________________
Jeffrey W. White
Interim Chief Financial Officer, Chief Accounting Officer and Treasurer
Date November
29, 2021